10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2000 - or - [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____________ to _________________. Commission File No. 0-17267 MALLON RESOURCES CORPORATION (Exact name of registrant as specified in its charter) COLORADO 84-1095959 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 999 18th Street, Suite 1700 Denver, Colorado 80202 (Address of principal executive offices) (303) 293-2333 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period of time registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 9, 2000, 7,886,643 shares of registrant's common stock, par value $0.01 per share, were outstanding. PART I - FINANCIAL INFORMATION Item 1 -- Financial Statements MALLON RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
June 30, December 31, 2000 1999 (Unaudited) Current assets: Cash and cash equivalents $ 1,610 $ 1,230 Accounts receivable: Oil and gas sales 1,673 1,315 Joint interest participants, net of allowance of $43 and $43, respectively 341 559 Related parties -- 53 Other 3 153 Inventories 219 200 Other 167 83 Total current assets 4,013 3,593 Property and equipment: Oil and gas properties, full cost method 112,262 103,315 Natural gas processing plant 8,407 8,341 Other property and equipment 1,104 1,084 121,773 112,740 Less accumulated depreciation, depletion and amortization (55,608) (53,428) 66,165 59,312 Notes receivable 14 84 Debt issuance costs 1,652 1,885 Other, net 276 552 Total Assets $ 72,120 $ 65,426 ======== ========
(Continued on following page) The accompanying notes are an integral part of these consolidated financial statements. MALLON RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS - Continued (In thousands, except share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31, 2000 1999 (Unaudited) Current liabilities: Trade accounts payable $ 4,588 $ 4,883 Undistributed revenue 915 934 Accrued taxes and expenses 48 55 Current portion of long-term debt 427 399 Convertible note payable - related party 552 -- Total current liabilities 6,530 6,271 Long-term debt, net of unamortized discount of $2,814 and $3,146, respectively 44,785 34,874 Total liabilities 51,315 41,145 Commitments and contingencies (Note 6) Series B Mandatorily Redeemable Convertible Preferred Stock, $0.01 par value, 500,000 shares authorized, 80,000 and 135,200 shares issued and outstanding, respectively, liquidation preference and mandatory redemption of $800 and $1,352, respectively 794 1,341 Mandatorily Redeemable Common Stock, $0.01 par value, 420,000 shares authorized, issued and outstanding, mandatory redemption of $5,250 3,649 3,450 Shareholders' equity: Common Stock, $0.01 par value, 25,000,000 shares authorized; 7,458,976 and 7,413,300 shares issued and outstanding, respectively 75 74 Additional paid-in capital 77,805 77,013 Accumulated deficit (58,644) (54,914) Notes receivable from related party shareholders (2,776) (2,683) Accounts receivable from shareholders (98) -- Total shareholders' equity 16,362 19,490 Total Liabilities and Shareholders' Equity $ 72,120 $ 65,426 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. MALLON RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
For the Three Months For the Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Revenues: Oil and gas sales $ 3,180 $ 2,913 $ 7,100 $ 5,933 Interest and other 71 27 133 45 3,251 2,940 7,233 5,978 Costs and expenses: Oil and gas production 1,543 1,175 3,206 2,520 Depreciation, depletion and amortization 1,278 1,051 2,719 2,357 General and administrative 856 582 2,046 1,282 Interest and other 1,470 604 2,789 1,162 5,147 3,412 10,760 7,321 Net loss (1,896) (472) (3,527) (1,343) Dividends on preferred stock and accretion (20) (30) (50) (60) Accretion of mandatorily redeemable common stock (101) -- (199) -- Net loss attributable to common shareholders $(2,017) $ (502) $(3,776) $(1,403) ======= ======= ======= ======= Basic: Net loss attributable to common shareholders $ (0.26) $ (0.07) $ (0.48) $ (0.20) ======= ======= ======= ======= Weighted average shares outstanding 7,855 7,025 7,854 7,024 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. MALLON RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
For the Six Months Ended June 30, 2000 1999 Cash flows from operating activities: Net loss $(3,527) $(1,343) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 2,719 2,357 Accrued interest expense added to long-term debt 2,021 -- Accrued interest income added to notes receivable from related party shareholders (93) -- Amortization of discount on long-term debt 332 -- Stock compensation expense 413 55 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 283 117 Inventory and other assets (108) (170) Increase (decrease) in: Trade accounts payable and undistributed revenue (314) (2,071) Accrued taxes and expenses (6) 160 Deferred revenue -- (455) Net cash provided by (used in) operating activities 1,720 (1,350) Cash flows from investing activities: Additions to property and equipment (9,022) (3,866) Decrease in notes receivable 70 6 Net cash used in investing activities (8,952) (3,860) Cash flows from financing activities: Proceeds from long-term debt 7,780 5,280 Payments of long-term debt (195) (654) Proceeds from stock option and warrants exercises 68 55 Payment of preferred dividends (45) (54) Other 4 -- Net cash provided by financing activities 7,612 4,627 Net increase (decrease) in cash and cash equivalents 380 (583) Cash and cash equivalents, beginning of period 1,230 1,733 Cash and cash equivalents, end of period $ 1,610 $ 1,150 ======= =======
(Continued) The accompanying notes are an integral part of these consolidated financial statements. MALLON RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) (Continued)
For the Six Months Ended June 30, 2000 1999 Supplemental cash flow information: Cash paid for interest $ 400 $ 1,086 ======= ======= Non-cash transactions: Issuance of common stock in exchange for oil and gas properties purchased from officers and directors $ 119 $ -- ======= ======= Issuance of common stock in exchange for accounts receivable from shareholders $ 98 $ -- ======= =======
The accompanying notes are an integral part of these consolidated financial statements. MALLON RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ___________ Note 1. GENERAL Mallon Resources Corporation (the "Company") engages in oil and gas exploration and production through its wholly-owned subsidiary, Mallon Oil Company ("Mallon Oil"), whose oil and gas operations are conducted primarily in the State of New Mexico. The Company operates its business and reports its operations as one business segment. All significant inter-company balances and transactions have been eliminated from the consolidated financial statements. These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Form 10-K. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the presentation used in 2000. Note 2. Long-term Debt Long-term debt consists of the following:
June 30, December 31, 2000 1999 Note payable to Aquila Energy Capital Corporation, due 2003 $42,692 $32,890 Less unamortized discount (effective rate of 13.7%) (2,814) (3,146) 39,878 29,744 Lease obligation to Universal Compression, Inc. 5,203 5,390 8.5% unsecured note payable to Bank One, Colorado, N.A., due 2002 131 139 45,212 35,273 Less current portion (427) (399) Total $44,785 $34,874 ======= =======
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. At June 30, 2000, the Company had drawn $42.7 million, including accrued interest, under the Aquila Credit Agreement. The borrowing base is subject to redetermination annually on or before April 30. Aquila delayed its April 2000 redetermination until certain wells drilled by the Company during the first four months of 2000 were completed and their reserves evaluated. The Company had delayed its completion of the wells pending receipt of approval from the Jicarilla Apache Tribe to commingle gas from different zones. The approval was received in April 2000. In July 2000, Aquila agreed to increase the amount available under the agreement from the initial amount of $45.7 million to approximately $52.4 million. In connection with the increase in the borrowing base, Mallon agreed to issue to Aquila an additional 70,000 shares of common stock. Mallon had previously issued to Aquila 420,000 shares of common stock in September 1999 in connection with the establishment of the credit facility. Aquila has the one-time right to require Mallon to purchase all 490,000 shares from Aquila at $12.50 per share during the 30-day period beginning September 9, 2003. Principal payments on the four-year loan are based on the Company's cash flow from operations, as defined, less advances for the Company's development program. As of June 30, 2000, the advances exceeded cash flow from operations and the Company had not made any principal payments. During the six months ended June 30, 2000, the Company repaid $187,000 of lease obligation to Universal Compression and $8,000 of unsecured note payable to Bank One. Note 3. Earnings (Loss) per Share Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if the Company's outstanding stock options and warrants were exercised (calculated using the treasury stock method) or if the Company's Series B Mandatorily Redeemable Convertible Preferred Stock were converted to common stock. The consolidated statements of operations for the six months ended June 30, 2000 and 1999 reflect only basic earnings per share because the Company was in a loss position for all periods presented and all common stock equivalents are anti-dilutive. Note 4. Recent Pronouncements 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. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." This Interpretation clarifies (a) the definition of employee for purposes of applying APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. The Company believes the adoption of this Interpretation will not have a material impact on the Company's financial position and results of operations. Note 5. Mandatorily Redeemable Convertible Preferred Stock In April 2000, the Company redeemed 55,200 shares of its Series B Mandatorily Redeemable Convertible Preferred Stock at the mandatory redemption price of $10 per share by issuing a convertible promissory note for $552,000 to the Series B holder, a company in which one of Mallon's directors is also a director. Interest on the note accrues at 11.3% and is payable quarterly beginning on June 30, 2000. The note and all unpaid accrued interest is payable in full on April 15, 2001. The holder of the note may at any time cause any part of the unpaid principal and accrued interest due to be converted into shares of the Company's common stock using the same conversion price applicable to the remaining Series B Preferred Stock shares, currently $10.28. After this transaction, 80,000 shares of Series B Preferred Stock remain outstanding, all of which the Company is required to redeem in April 2001. Note 6. Commitments and Contingencies In April 1999, Mallon Oil filed a civil action to collect approximately $265,000 of unpaid joint-interest billings from Wadi Petroleum, Inc. relating to certain oil and gas properties operated by the Company. In April 2000, the Company settled the matter for a payment to the Company of $150,000 and the assignment to the Company of certain oil and gas properties. Note 7. Oil and Gas Properties In April 2000, the Government of Costa Rica awarded the Company a concession to explore for oil and natural gas on approximately 2.3 million acres in the northeast quadrant of Costa Rica. The concession acreage is contained in six large contiguous onshore acreage blocks. The Company has completed an environmental assessment of its proposed operations, and expects approval by the end of August 2000. The Company expects to sign final contracts thereafter. The work program will require the expenditure of $8.8 million (including the drilling of six wells) over a three-year period, with a possible extension of three more years. In June 2000, effective January 1, 2000, the Company purchased additional working interests in certain wells from two of the Company's officers and one of its directors in exchange for forgiveness of $56,000 of joint interest participants accounts receivable, 14,800 shares of common stock valued at $119,000 and $3,000 in cash. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in understanding our consolidated financial position at June 30, 2000 and December 31, 1999, results of operations for the three and six months ended June 30, 2000 and 1999 and cash flows for the six months ended June 30, 2000 and 1999. Our Consolidated Financial Statements and notes thereto 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, advances from our fixed-term credit facility, 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 the first half of 2000, our capitalized costs incurred in oil and gas producing activities were $8.9 million. Our 2000 capital expenditure budget is $23.4 million. During the first half of 2000, we drilled 18 wells of the total 50 wells we plan to drill during the year. Eight wells drilled were completed and put on production, nine were completing and the remaining well was a dry hole. We expect to fund our capital requirements for the next 12 months out of cash flow from operations, borrowings, and a possible equity offering as described below. Although we drilled 14 wells during first quarter 2000, we delayed completing 13 of them pending approval of commingling by the Jicarilla Apache Tribe, which owns the land covering most of our acreage in our East Blanco Field. The approval was granted in April 2000 and we were able to begin completion operations in May. Most of our wells in the East Blanco Field contain three or more pay zones at depths ranging from 1,200 to 4,000 feet. Prior to the approval of our request to commingle, wells in the field were limited to producing from no more than two zones at a time. By commingling the gas production from multiple zones, we should be able to substantially increase initial production rates and reduce drilling, completion and operating costs, which would in turn increase the value of our reserves. Subsequent to June 30, 2000, we completed five more wells and placed them on production. In September 1999, we established a credit agreement with Aquila Energy Capital Corporation (the "Aquila Credit Agreement"). The initial amount available under the agreement was $45.7 million. As of August 4, 2000, we had drawn $44.9 million, including accrued interest, under the Aquila Credit Agreement. The amount available under the Aquila Credit Agreement may be increased to as much as $60 million as new reserves are added through our development drilling program. The borrowing base is subject to redetermination annually on or before April 30. Aquila delayed its April 2000 redetermination until certain wells we drilled during the first four months of 2000 were completed and their reserves evaluated. We had delayed completion of the wells pending receipt of approval from the Jicarilla Apache Tribe to commingle gas from different zones as discussed above. In July 2000, Aquila agreed to increase the amount available under the credit agreement by $6.7 million, making the total available $52.4 million. 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 are based on the Company's cash flow from operations, as defined, less advances for the Company's development program. As of June 30, 2000, the advances exceeded cash flow from operations and the Company had not made any principal payments. We do not anticipate making any principal payments for the remainder of this year because we expect drilling expenditures to equal or surpass defined cash flow from operations during that period. The Aquila Credit Agreement is secured by substantially all of our oil and gas properties. Interest on the Aquila Credit Agreement 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, as defined, from the sale of all of our oil and gas production. In addition, we also issued to Aquila 420,000 shares of common stock in September 1999. In conjunction with the increase in the borrowing base in July 2000, we agreed to issue to Aquila an additional 70,000 shares of common stock. Aquila also has a one-time right to require us to purchase all 490,000 of our common shares from Aquila at $12.50 per share during the 30-day period beginning September 9, 2003. In April 2000, the Government of Costa Rica awarded us a concession to explore for oil and natural gas on approximately 2.3 million acres in the northeast quadrant of Costa Rica. The concession acreage is contained in six large contiguous onshore acreage blocks. We have completed an environmental assessment of our proposed operations and expect approval by the end of August 2000. We expect to sign final contracts thereafter. The work program will require the expenditure of $8.8 million (including the drilling of six wells) over a three-year period, with a possible extension of three more years. We are currently considering options to secure additional capital to continue our active drilling and development program through 2000, in the event that our borrowing base under the Aquila Credit Agreement becomes insufficient. The options include the issuance of preferred or other equity securities. However, there is no assurance that we will be able to obtain additional funding. 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 an imputed rate of 12.8%. We made principal payments totaling $187,000 to Universal Compression during the first half of 2000. 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.We repaid $8,000 of this loan during first quarter 2000. Under the mandatory redemption feature of our Series B Mandatorily Redeemable Convertible Preferred Stock we were required to redeem 55,200 shares in April 2000, and will be required to redeem the remaining 80,000 shares in April 2001. The mandatory redemption price is $10.00 per share, plus any accrued but unpaid dividends. We made the April 2000 redemption by issuing a convertible promissory note for $552,000. Interest on the note accrues at 11.3% and is payable quarterly beginning on June 30, 2000. The note and all unpaid accrued interest is payable in full on April 15, 2001. The holder of the note may at any time cause any part of the unpaid principal and accrued interest due to be converted into shares of Mallon's common stock, using the same conversion price applicable to the remaining Series B Preferred Stock shares, currently $10.28. 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. Results of Operations
For the Three Months For the Six Months Ended June 30, Ended June 30, (In thousands, except per unit data) 2000 1999 2000 1999 Results of Operations from Oil and Gas Producing Activities: Oil and gas sales $ 3,180 $ 2,913 $ 7,100 $ 5,933 Production tax and marketing expense 574 411 1,131 856 Lease operating expense 969 764 2,075 1,664 Depletion 1,060 941 2,311 2,152 Depreciation 78 68 122 135 Net Production: Oil (MBbl) 41 44 84 91 Natural gas (MMcf) 1,218 1,303 2,662 2,989 MMcfe 1,464 1,567 3,166 3,535 Average Sales Price Realized (1): Oil (per Bbl) $ 24.27 $ 15.89 $ 24.05 $ 13.64 Natural gas (per Mcf) 1.79 1.70 1.91 1.57 Per Mcfe 2.17 1.86 2.24 1.68 Average Cost Data (per Mcfe): Production tax and marketing expense $ 0.39 $ 0.26 $ 0.36 $ 0.24 Lease operating expense 0.66 0.49 0.65 0.47 Depletion 0.72 0.60 0.73 0.61 Depreciation 0.05 0.04 0.04 0.04 _________________ (1) Includes effects of hedging.
Three and Six Months Ended June 30, 2000 Compared to June 30, 1999 Revenues. Total revenues increased 11% to $3,251,000 for the three months ended June 30, 2000 from $2,940,000 for the three months ended June 30, 1999 and increased 21% to $7,233,000 for the six months ended June 30, 2000 from $5,978,000 for the six months ended June 30, 1999. Oil and gas sales increased 9% to $3,180,000 for the 2000 quarter compared $2,913,000 for the 1999 quarter. Higher oil and gas prices were somewhat offset by lower oil and gas production. Oil and gas sales increased 20% to $7,100,000 for the six months ended June 30, 2000 from $5,933,000 for the six months ended June 30, 1999, due to higher oil and gas prices which were somewhat offset by lower oil and gas production. Average oil prices realized per barrel increased 53% to $24.27 in second quarter 2000 from $15.89 for second quarter 1999 and average gas prices realized per Mcf increased 5% to $1.79 in the 2000 quarter from $1.70 in the 1999 quarter. Average oil prices realized per barrel increased 76% to $24.05 for the six months ended June 30, 2000, from $13.64 for the comparable 1999 period, and average gas prices realized per Mcf increased 22% to $1.91 in the 2000 period from $1.57 for the six months ended June 30, 1999. Oil production decreased 7% to 41,000 barrels in the 2000 quarter from 44,000 barrels in the 1999 quarter and gas production decreased 7% to 1,218,000 Mcf in the 2000 quarter from 1,303,000 in the 1999 quarter. Oil production decreased 8%, to 84,000 barrels for the six months ended June 30, 2000 from 91,000 barrels for the six months ended June 30, 1999, and gas production decreased 11% to 2,662,000 Mcf for the six months ended June 30, 2000 from 2,989,000 Mcf for the same period a year ago. The oil production decreases are due to natural declines. We have been focusing on drilling gas wells. The gas production declines are due to the planned delay in new well completions pending approval of commingling, as discussed above. Oil and Gas Production Expenses. Oil and gas production expenses, including production tax and marketing expenses, increased 31% to $1,543,000 for the three months ended June 30, 2000 from $1,175,000 for the 1999 quarter, and increased 27% to $3,206,000 for the six months ended June 30, 2000 from $2,520,000 for the comparable 1999 period, due to new wells coming on line as a result of our drilling program. Per Mcfe, oil and gas production expense, including production tax and marketing expense, increased $0.30, or 40%, to $1.05 for the 2000 quarter from $0.75 for the 1999 quarter. Production tax and marketing expense per Mcfe increased $0.13, or 50%, for the 2000 quarter from the 1999 quarter because of higher oil and gas prices. LOE per Mcfe increased 35% to $0.66 in the 2000 quarter from $0.49 for the 1999 quarter. Oil and gas production expenses per Mcfe increased $0.30, or 42%, to $1.01 for the six months ended June 30, 2000 from $0.71 for the six months ended June 30, 1999. Production tax and marketing expense increased $0.12 per Mcfe, or 50%, during the six months ended June 30, 2000 as a result of higher oil and gas prices. LOE per Mcfe for the six months ended June 30, 2000 increased 38% to $0.65 from $0.47 for the 1999 period. The increase in LOE per Mcfe in the 2000 periods is partially due to lower production and partially due to increased personnel and increases in salary, compression and workover costs. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the three months ended June 30, 2000 increased 22% to $1,278,000 from $1,051,000 in the 1999 quarter, and increased 15% to $2,719,000 for the six months ended June 30, 2000 from $2,357,000 for the six months ended June 30, 1999. Depletion per Mcfe increased 20% to $0.72 for the fiscal 2000 quarter from $0.60 for the fiscal 1999 quarter and increased 20% to $0.73 for the six months ended June 30, 2000 from $0.61 for the six months ended June 30, 1999 due to a higher ratio of increases in capital expenditures to increases in reserves. General and Administrative Expenses. Net general and administrative expenses for the quarter ended June 30, 2000 increased 47% to $856,000 from $582,000 in the 1999 quarter, and increased 60% to $2,046,000 for the six months ended June 30, 2000 from $1,282,000 for the same period in 1999 as a result of the issuance of employee stock options with a below market strike price and increased costs for contract and consulting services related to special projects. Interest and Other Expenses. Interest and other expenses for the quarter ended June 30, 2000 increased 143% to $1,470,000 from $604,000 for the 1999 quarter and increased 140% to $2,789,000 for the six months ended June 30, 2000 from $1,162,000 for the six months ended June 30, 1999. The increase was primarily due to a higher outstanding debt balance and higher interest rates in the 2000 periods. Income Taxes. The Company incurred net operating losses ("NOLs") for U.S. Federal income tax purposes in 2000 and 1999, which can be carried forward to offset future taxable income. Statement of Financial Accounting Standards No. 109 requires that a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company's ability to realize the benefit of its deferred tax asset will depend on the generation of future taxable income through profitable operations and the expansion of the Company's oil and gas producing activities. The market and capital risks associated with achieving the above requirement are considerable, resulting in the Company's decision to provide a valuation allowance equal to the net deferred tax asset. Accordingly, the Company did not recognize any tax benefit in the consolidated statements of operations for the three and six months ended June 30, 2000 and 1999. Net Loss. Net loss for the three months ended June 30, 2000 increased 302% to $1,896,000 from $472,000 for the three months ended June 30, 1999, and increased 163% to $3,527,000 for the six months ended June 30, 2000 from $1,343,000 for the same period a year ago, as a result of the factors discussed above. The Company paid the 8% dividend of $16,000 and $27,000 on its Series B Mandatorily Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and realized accretion of $4,000 and $3,000 in the three month periods ended June 30, 2000 and 1999, respectively. The Company paid dividends of $43,000 and $54,000 and realized accretion of $7,000 and $13,000 during the six month periods ended June 30, 2000 and 1999, respectively. Net loss attributable to common shareholders for the three months ended June 30, 2000 increased 302% to $2,017,000 from $502,000 for the three months ended June 30, 1999, and increased 169% to $3,776,000 for the six months ended June 30, 2000 from $1,403,000 for the six months ended June 30, 1999. 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 Aquila Credit Agreement, 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 ($1,658,000) and $183,000 in second quarter 2000 and 1999, respectively and recognized hedging (losses) gains of $(2,186,000) and $379,000 in the six months ended June 30, 2000 and 1999, respectively. These amounts are included in oil and gas sales in our consolidated statements of operations. Miscellaneous Our operations are significantly affected by certain provisions of the Internal Revenue Code 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 business. The preceding information contains forward-looking statements, the realization of which cannot be assured. Actual results may differ significantly from those forecast. When evaluating us, our operations, or our expectations, the reader should bear in mind that we and our operations are subject to numerous risks and uncertainties. Among these are risks related to the oil and gas business generally (including operating risks and hazards and the regulations imposed thereon), risks and uncertainties related to the volatility of the prices of oil and gas, uncertainties related to the estimation of reserves of oil and gas and the value of such reserves, uncertainties relating to geologic models and evaluations, the effects of competition and extensive environmental regulation, and other factors, many of which are necessarily beyond our control. These and other risk factors that affect our business are discussed in our 1999 Form 10-K. Item 3 - Quantitative and Qualitative Disclosures about Market Risk We use commodity derivative financial instruments, including swaps, to reduce the effect of natural gas and crude oil price volatility on a portion of our natural gas and crude oil production. Commodity swap agreements are generally used to fix a price at the natural gas or crude oil market location or to fix a price differential between a benchmark price of natural gas and crude oil and the price of gas or crude oil 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 June 30, 2000. The fair value of these instruments reflected below is the estimated amount that we would receive (or pay) to settle the contracts as of June 30, 2000. 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.
Natural Gas: Fixed Price Year MMBtu per MMBtu Fair Value 2000 2,700,000 $ 2.02 $(5,666,000) 2001 1,452,000 $ 2.55 (1,582,000) 2002 1,188,000 $ 2.55 (602,000) 2003 996,000 $ 2.55 (302,000) 2004 852,000 $ 2.55 (197,000) Crude Oil: 2000 42,000 $18.73 - $19.68 $ (499,000) 2001 60,000 $17.38 - $18.61 (495,000) 2002 60,000 $17.40 (340,000) 2003 48,000 $17.40 (181,000) 2004 48,000 $17.40 (115,000)
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 $(137,000). PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting on July 18, 2000. The seven individuals listed below were elected as directors. The votes cast were as follows: With respect to the election of directors:
BROKER NAME FOR AGAINST ABSTAIN NON-VOTES George O. Mallon, Jr. 3,015,417 401,406 4,947 -0- Kevin M. Fitzgerald 3,416,315 508 4,947 -0- Roy K. Ross 3,416,315 508 4,947 -0- Roger R. Mitchell 3,416,315 508 4,947 -0- Frank Douglass 3,416,315 508 4,947 -0- Francis J. Reinhardt, Jr. 3,416,315 508 4,947 -0- Peter H. Blum 2,660,115 756,708 4,947 -0-
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None. (b) Reports on Form 8-K: During second quarter 2000, the Company filed Periodic Reports of Form 8-K dated April 11, 2000 and April 17, 2000. Each Report related to an "Item 5. Other Events" matter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MALLON RESOURCES CORPORATION Registrant Date: August 14, 2000 By: /s/ Roy K. Ross Roy K. Ross Executive Vice President Date: August 14, 2000 By: /s/ Alfonso R. Lopez Alfonso R. Lopez Vice President, Finance/Corporate Treasurer