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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000 Commission File No. 0-6694
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 W. Texas Avenue, Suite 1101 79701
Midland, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (915) 682-1119
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock, $0.50 par value None
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 twelve (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 ninety (90) days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or an amendment to this Form 10-K. [ ]
As of May 30, 2000, the aggregate market value of the registrant's common
stock held by non-affiliates (using the closing bid price of $4.375) was
approximately $989,857.
The number of shares outstanding of the registrant's common stock as of May
30, 2000 was 1,623,293.
DOCUMENTS INCORPORATED BY REFERENCE Part III of this Report is incorporated
by reference from the Registrant's Information Statement relating to its Annual
Meeting of Stockholders to be held on September 29, 2000. Such Information
Statement will be filed with the Commission not later than July 31, 2000.
TABLE OF CONTENTS
PART 1
Item 1. Business ......................................................... 3
Item 2. Properties........................................................ 6
Item 3. Legal Proceedings................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................... 9
Item 6. Selected Financial Data........................................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
Item 8. Financial Statements and Supplementary Data....................... 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............................. 30
PART III
Item 10. Directors and Executive Officers of the Registrant................ 30
Item 11. Executive Compensation............................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 30
Item 13. Certain Relationships and Related Transactions.................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 30
Signatures ...............................................................32
2
PART I
ITEM 1. BUSINESS
General
Mexco Energy Corporation, a Colorado corporation, (the "Company", which
reference shall include the Company's wholly-owned subsidiary) is an independent
oil and gas company engaged in the acquisition, exploration and development of
oil and gas properties located in the United States. Incorporated in April 1972
under the name Miller Oil Company, the Company changed its name to Mexco Energy
Corporation effective April 30, 1980. At that time, the shareholders of the
Company also approved amendments to the Articles of Incorporation resulting in a
one-for-fifty reverse stock split of the Company's common stock.
On February 25, 1997 Mexco Energy Corporation acquired all of the issued
and outstanding stock of Forman Energy Corporation, a New York corporation also
engaged in oil and gas exploration and development.
Since its inception, the Company has been engaged in acquiring and
developing oil and gas properties and the exploration for and production of oil
and gas within the United States. The Company continues to focus on the
exploration for and development of natural gas and crude oil resources, as well
as increased profit margins through reductions in operating costs. The Company's
long-term strategy is to increase production and profits, while increasing its
concentration on gas reserves.
While the Company owns oil and gas properties in other states, the majority
of its activities are centered in West Texas. The Company acquires interests in
producing and non-producing oil and gas leases from landowners and leaseholders
in areas considered favorable for oil and gas exploration, development and
production. In addition, the Company may acquire oil and gas interests by
joining in oil and gas drilling prospects generated by third parties. The
Company may employ a combination of the above methods of obtaining producing
acreage and prospects. In recent years, the Company has placed primary emphasis
on the evaluation and purchase of producing oil and gas properties and re-entry
prospects.
Oil and Gas Operations
As of March 31, 2000, gas reserves constituted approximately 85% of the
Company's total proved reserves and approximately 75% of the Company's revenues
for fiscal 2000. Revenues from oil and gas royalty interests accounted for
approximately 16% of the Company's revenues for fiscal 2000.
VIEJOS GAS FIELD properties, encompassing 2,583 gross acres, 156 net acres,
18 gross wells and 1.27 net wells in Pecos County, Texas, account for
approximately 24% of the Company's discounted future net cash flows from proved
reserves as of March 31, 2000, and for fiscal 2000, approximately 34% of
revenues and 21% of production costs.
GOMEZ GAS FIELD properties, encompassing 13,847 gross acres, 73 net acres,
24 gross wells and .11 net wells in Pecos County, Texas, account for
approximately 18% of the Company's discounted future net cash flows from proved
reserves as of March 31, 2000, and for fiscal 2000, approximately 13% of
revenues and 7% of production costs.
The Company owns interests in and operates 10 producing wells and one
shut-in well. The Company owns partial interests in an additional 1,395
producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana,
Arkansas, Wyoming, Kansas, Colorado, Alabama, Montana and North Dakota.
Additional information concerning these properties and the oil and gas reserves
3
of the Company is provided below.
The following table indicates the Company's oil and gas production in each
of the last five years, all of which is located within the United States:
Year Oil(Bbls) Gas(MCF)
---- --------- --------
2000................................... 19,334 540,793
1999................................... 49,573 482,948
1998................................... 63,800 432,343
1997................................... 39,363 236,034
1996................................... 29,058 186,419
Competition
The oil and gas industry is a highly competitive business. Competition for
oil and gas reserve acquisitions is significant. The Company may compete with
major oil and gas companies, other independent oil and gas companies and
individual producers and operators with significantly larger financial and other
resources. Competitive factors include price, contract terms, and types and
quality of service, including pipeline distribution. The price for oil and gas
is widely followed and is generally subject to worldwide market factors.
Major Customers
The Company had sales to the following companies that amounted to 10% or
more of revenues for the year ended March 31:
2000 1999 1998
---- ---- ----
Koch Midstream Services Company 35% 30% -
Navajo Crude Oil Marketing Company - 25% 33%
Aquila Southwest Pipeline Corporation - - 15%
Regulation
The Company's exploration, development, production and marketing operations
are subject to extensive rules and regulations by federal, state and local
authorities. Numerous federal, state and local departments and agencies have
issued rules and regulations, binding on the oil and gas industry, some of which
carry substantial penalties for noncompliance. State statutes and regulations
require permits for drilling operations, bonds and reports concerning
operations. Most states also have statutes and regulations governing
conservation and safety matters, including the unitization and pooling of oil
and gas properties, the establishment of maximum rates of production from oil
and gas wells and the spacing of such wells. Such statutes and regulations may
limit the rate at which oil and gas otherwise could be produced from the
Company's properties. The regulatory burden on the oil and gas industry
increases its cost of doing business and, consequently, affects its
profitability.
Currently there are no laws that regulate the price for sales of production
by the Company. However, the rates charged and terms and conditions for the
movement of gas in interstate commerce through certain intrastate pipelines and
production area hubs are subject to regulation under the Natural Gas Policy Act
of 1978 ("NGPA"). The construction of pipelines and hubs are, to a limited
extent, also subject to regulation under the Natural Gas Act of 1938 ("NGA").
The NGA also establishes comprehensive controls over interstate pipelines,
including the transportation in interstate commerce. While these NGA controls do
not apply directly to the Company, their effect on natural gas markets can be
significant in terms of competition and cost of transportation services. The
Federal Energy Regulatory Commission ("FERC") administers the NGA and NGPA.
4
FERC has taken significant steps to increase competition in the sale,
purchase, storage and transportation of natural gas. FERC's regulatory programs
generally allow more accurate and timely price signals from the consumer to the
producer. Nonetheless, the ability to respond to market forces can and does add
to price volatility, inter-fuel competition and pressure on the value of
transportation and other services.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, FERC, state regulatory
bodies and the courts. Several proposals that might affect the natural gas
industry are pending before FERC. The Company cannot predict when or if any such
proposals will become effective and their effect, if any, on the Company's
operations. Historically, the natural gas industry has been heavily regulated
and there is no assurance that the less stringent regulatory approach recently
pursued by FERC, Congress and the states will continue indefinitely into the
future.
Environmental
The Company, by nature of its oil and gas operations, is subject extensive
federal, state and local environmental laws and regulations governing the
protection of the environment. The Company is in compliance, in all material
respects, with applicable environmental requirements. Although future
environmental obligations are not expected to have a material impact on the
results of operations or financial condition of the Company, there can be no
assurance that future developments, such as increasingly stringent environmental
laws or enforcement thereof, will not cause the Company to incur material
environmental liabilities or costs.
Insurance
The Company is subject to all the risks inherent in the exploration for,
and development and production of oil and gas including blowouts, fires and
other casualties. The Company maintains insurance coverage customary for
operations of a similar nature, but losses could arise from uninsured risks or
in amounts in excess of existing insurance coverage.
Employees
As of March 31, 2000, the Company had one full-time and three part-time
employees. The Company believes that relations with these employees are
generally satisfactory. The Company's employees are not covered by collective
bargaining arrangements. From time to time, the Company utilizes the services of
independent contractors to perform various field and other services. Experienced
personnel are available in all disciplines should the need to hire additional
staff arise.
Office Facilities
The Company maintains its principal offices at 214 W. Texas, Suite 1101,
Midland, Texas pursuant to a month to month lease.
Title to Oil and Gas Properties
The Company believes that its methods of investigating title to its
properties are consistent with practices customary in the oil and gas industry,
and that such practices are adequately designed to enable it to acquire good
title to such properties. The Company's properties may be subject to one or more
royalty, overriding royalty, carried and other similar interests and contractual
arrangements customary in the industry. Substantially all of the Company's
properties are currently mortgaged under a deed of trust to secure funding
through a revolving line of credit.
5
ITEM 2. PROPERTIES
Oil and Natural Gas Reserves
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the SEC and Financial Accounting Standards Board. The
estimates as of March 31, 2000 and 1999 are based on evaluations prepared by Joe
C. Neal and Associates, Petroleum Consultants. The estimates as of March 31,
1998 are based on evaluations prepared by T. Scott Hickman and Associates, Inc.,
Petroleum Engineers. For information concerning costs incurred by the Company
for oil and gas operations, net revenues from oil and gas production, estimated
future net revenues attributable to the Company's oil and gas reserves, present
value of future net revenues discounted at 10% and changes therein, see Notes to
the Company's consolidated financial statements. The Company emphasizes that
reserve estimates are inherently imprecise and there can be no assurance that
the reserves set forth below will be ultimately realized.
In estimating reserves as of March 31, 2000, average prices of $27.74 per
barrel for oil and $2.47 per mcf (million cubic feet) for gas were used, which
were the average actual prices in effect for the Company's production.
The Company has not filed any oil or gas reserve estimates or included any
such estimates in reports to any other federal or foreign governmental authority
or agency within the past twelve months.
The estimated proved oil and gas reserves and present value of estimated
future net revenues from proved oil and gas reserves for the Company in the
periods ended March 31 are summarized below.
PROVED RESERVES
March 31,
-----------------------------------
2000 1999 1998
---------- ---------- ----------
Oil (Bbls):
Proved developed - Producing .......... 138,839 193,970 213,939
Proved developed - Non-producing ...... -- -- 5,176
Proved undeveloped .................... -- -- 26,745
---------- ---------- ----------
Total ............................... 138,839 193,970 245,860
========== ========== ==========
Natural gas (Mcf):
Proved developed - Producing .......... 4,165,396 3,182,342 2,769,794
Proved developed - Non-producing ...... 589,951 1,011,971 170,738
Proved undeveloped .................... -- -- 256,062
---------- ---------- ----------
Total ............................... 4,755,347 4,194,313 3,196,594
========== ========== ==========
Present value of estimated future
net revenues before income taxes ...... $6,144,644 $3,485,196 $3,892,533
========== ========== ==========
The preceding tables should be read in connection with the following
definitions:
Proved Reserves. Estimated quantities of oil and gas, based on geologic and
engineering data, appear with reasonable certainty to be economically
recoverable in future years from known reservoirs under existing economic and
operating conditions.
Proved Developed Reserves. Proved oil and gas reserves expected to be
6
recovered through existing wells with existing equipment and operating methods.
Developed reserves include both producing and non-producing reserves. Producing
reserves are those reserves expected to be recovered from existing completion
intervals producing as of the date of the reserve report. Non-producing reserves
are currently shut-in awaiting a pipeline connection or in reservoirs behind the
casing or at minor depths above or below the producing zone and are considered
recoverable by production either from wells in the field, by successful
drill-stem tests, or by core analysis. Non-producing reserves require only
moderate expense for recovery.
Proved Undeveloped Reserves. Proved oil and gas reserves expected to be
recovered from additional wells yet to be drilled or from existing wells where a
relatively major expenditure is required for completion.
Productive wells and acreage
Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Wells that are
completed in more than one producing zone are counted as one well. The following
table indicates the Company's productive wells as of March 31, 2000:
Gross Net
----- -----
Oil........................................ 1,248 11
Gas........................................ 199 4
----- -----
Total Productive Wells................. 1,447 15
===== =====
Undeveloped acreage includes leased acres 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 or not such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned. A net
acre is deemed to exist when the sum of fractional ownership interests in gross
acres equals one. The number of net acres is the sum of the fractional interests
owned in gross acres. As of March 31, 2000 the only material undeveloped acreage
the Company owned was approximately 1,128 gross and 355 net acres in the state
of Texas.
The following table sets forth the approximate developed acreage in which
the Company held a leasehold mineral or other interest at March 31, 2000.
Developed Acres
---------------------------
Gross Net
------- -------
Texas .................................. 82,870 1,828
New Mexico ............................. 16,554 145
North Dakota ........................... 23,999 16
Louisiana .............................. 21,961 28
Oklahoma ............................... 36,161 122
Montana ................................ 7,189 4
Kansas ................................. 7,240 21
Wyoming ................................ 1,798 4
Colorado ............................... 1,040 1
Alabama ................................ 640 1
Arkansas ............................... 320 --
------- -------
Total .................................. 199,772 2,170
======= =======
7
Drilling Activities
The following table sets forth the drilling activity of the Company for the
years ended March 31, 2000, 1999 and 1998.
Years ended March 31,
-----------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- -----
Exploratory Wells
Productive 1 .01 - - - -
Nonproductive - - - - - -
----- ----- ----- ----- ----- -----
Total 1 .01 - - - -
===== ===== ===== ===== ===== =====
Development Wells
Productive 1 .6 8 1.9 7 2.6
Nonproductive - - - - 1 .9
----- ----- ----- ----- ----- -----
Total 1 .6 8 1.9 8 3.5
===== ===== ===== ===== ===== =====
Net Production, Unit Prices and Costs
The following table summarizes the net oil and natural gas production for
the Company, the average sales price per barrel of oil and per mcf of natural
gas produced and the average production (lifting) cost per unit of production
for the years ended March 31, 2000, 1999 and 1998.
Year Ended March 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Oil (a):
Production (Bbls) ..................... 19,334 49,573 63,800
Revenue ............................... $ 416,405 $ 600,285 $1,129,331
Average Bbls per day .................. 53 136 175
Average sales price per Bbl ........... $ 21.54 $ 12.11 $ 17.70
Gas (b):
Production (Mcf) ...................... 540,793 482,948 432,343
Revenue ............................... $1,262,556 $ 903,338 $ 960,786
Average Mcf per day ................... 1,478 1,323 1,185
Average sales price per Mcf ........... $ 2.33 $ 1.87 $ 2.22
Production cost:
Production cost ....................... $ 542,789 $ 644,563 $ 663,525
Equivalent Bbls (c) ................... 109,466 130,064 135,857
Production cost per equivalent Bbl .... $ 4.96 $ 4.96 $ 4.88
Production cost per sales dollar ...... $ 0.32 $ 0.43 $ 0.32
Total oil and gas revenues .............. $1,678,961 $1,503,623 $2,090,117
(a) Includes condensate.
(b) Includes natural gas products.
(c) Gas production is converted to equivalent bbls at the rate of 6 mcf per bbl,
representing the estimated relative energy content of natural gas to oil.
ITEM 3. LEGAL PROCEEDINGS
The Company is a plaintiff in two class action lawsuits against gas
purchasers involving contract price disputes. The Company does not expect any
expenses of a material nature to arise from these class action claims. While
8
recoveries from these lawsuits could be substantial, the ultimate outcome is
uncertain.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter ended March 31, 2000.
Executive Officers of the Registrant
The following table sets forth certain information concerning the executive
officers of the Company as of March 31, 2000.
Name Age Position
- ------------------ --- ---------------------------------------------
Nicholas C. Taylor 62 President and Chief Executive Officer
Donna Gail Yanko 56 Vice President and Corporate Secretary
Linda J. Crass 45 Treasurer, Controller and Assistant Secretary
Set forth below is a description of the backgrounds of each executive
officer of the Company, including employment history for at least the last five
years.
Nicholas C. Taylor was elected President, Treasurer and Director of the
Company in April 1983 and continues to serve as President and Director on a part
time basis, as required. Mr. Taylor served as Treasurer until March 1999. From
July 1993 to the present, Mr. Taylor has been involved in the independent
practice of law and other business activities. For more than the prior 19 years,
he was a director and shareholder of the law firm of Stubbeman, McRae, Sealy,
Laughlin & Browder, Inc., Midland, Texas, and a partner of the predecessor firm.
In 1995, he was appointed by the Governor of Texas and serves as Chairman of the
three member State Securities Board.
Donna Gail Yanko has worked as part-time administrative assistant to the
Chief Executive Officer and as Assistant Secretary of the Company until June
1992 when she was appointed Corporate Secretary. Mrs. Yanko was appointed to the
position of Vice President and elected to the Board of Directors of the Company
in 1990.
Linda J. Crass has been Controller for the Company since July 1998. Ms.
Crass was appointed Assistant Secretary of the Company in August 1998 and
Treasurer in March 1999. From 1996 to 1998 Ms. Crass was employed by Titan
Exploration, Inc. in various accounting positions. From 1989 to 1996, Ms. Crass
served as Controller for Midland Resources, Inc.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market under
the symbol MEXC. The registrar and transfer agent is American Securities
Transfer & Trust, P.O. Box 1596, Denver, Colorado, 80201 (Tel: 303-986-5400). As
of March 31, 2000 the Company had 1,404 shareholders of record and 1,623,289
shares outstanding.
9
PRICE RANGE OF COMMON STOCK
Bid Price
-----------------------------
High Low
------- -------
2000: (1)
April - June 1999 7 11/16 7 5/8
July - September 1999 7 1/2 5 1/2
October - December 1999 5 1/2 5
January - March 2000 5 4 7/8
1999: (1)
April - June 1998 7 3/4 7 3/4
July - September 1998 7 3/4 7 3/4
October - December 1998 7 3/4 7 1/2
January - March 1999 7 11/16 7 1/2
(1) Reflects high and low bid information received from National Quotation
Bureau, LLC.
(2) These bid quotations represent prices between dealers, without retail
markup, markdown or commissions, and do not reflect actual transactions.
(3) On May 30, 2000, the bid price was 4 3/8.
The Company has not paid any dividends on its common stock, and it is the
present policy of the Company not to do so, but to retain its earnings for
future growth and business activities. The Company is also subject to certain
loan covenants including restrictions on payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended March 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------
Statement of Operations:
Operating revenues $ 1,686,266 $ 1,510,005 $ 2,106,338 $ 1,458,741 $ 816,788
Operating income (loss) 498,384 (281,099) (1,558,335) 521,123 195,020
Other income (expense) (104,737) (144,675) (134,891) (5,621) 17,285
Net income (loss) 393,647 (425,774) (1,323,657) 377,867 200,606
Net Income (loss) per
share - basic 0.24 (0.26) (0.83) 0.27 0.15
Net Income (loss) per
share - diluted 0.24 (0.26) (0.83) 0.27 0.15
Weighted average shares
outstanding 1,623,289 1,623,289 1,594,752 1,423,229 1,342,628
Balance Sheet:
Property and equipment, net $ 3,459,522 $ 3,749,400 $ 4,078,053 $ 4,777,132 $ 2,331,344
Total assets 3,853,319 4,043,015 4,542,486 5,109,199 2,612,039
Total debt 1,200,000 1,784,000 1,822,000 1,637,000 --
Stockholders' equity 2,567,228 2,173,581 2,599,355 2,923,012 2,545,145
Cash Flow:
Cash provided by operations $ 722,088 $ 532,171 $ 1,118,566 $ 866,931 $ 396,409
EBITDA(1) $ 927,326 $ 635,260 $ 1,252,539 $ 1,006,119 $ 474,697
(1) EBITDA (as used herein) represents earnings before interest expense, income
taxes, depreciation, depletion and amortization. Management of the Company
10
believes that EBITDA may provide additional information about the Company's
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA is a financial measure commonly
used in the oil and gas industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of the Company's profitability or liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements and the notes
thereto included in Item 8 of this report.
Liquidity and Capital Resources and Commitments
Historically, the Company has funded its operations, acquisitions,
exploration and development expenditures from cash generated by operating
activities, bank borrowings and issuance of common stock.
In fiscal 2000, the Company used cash provided by operations, bank
borrowings and existing cash balances to fund its oil and gas property
acquisitions and development. Working capital as of March 31, 2000 was $307,706.
In April 1999, as part of the Company's focus on increasing profits and
concentrating on gas reserves with lower cost operations, the Company sold all
of its oil and gas interests in Lazy JL field properties located in Garza
County, Texas for $600,000 cash, adjusted for revenues and expenses from the
effective date of February 1, 1999 through the date of closing. The sales
proceeds were used to reduce the Company's outstanding debt under its credit
facility with the Bank.
In April and July 1999, the Company acquired interests in non-producing and
producing acreage and assumed operations of two producing gas wells in
Schleicher County, Texas at a cost to the Company of approximately $204,000.
Funds for these acquisitions were provided by the credit facility discussed
below. In September 1999, the Company re-worked one of the producing wells and
increased the Company's average daily production from this well from 5 mcf to
239 mcf at a cost to the Company of approximately $15,000. In February 2000, the
Company, as operator, successfully completed the re-entry of a gas well on this
acreage at a cost to the Company of approximately $189,000. Funds were provided
out of cash flow from operations and existing cash balances. The Company owns
approximate working interests in these wells ranging from 67% to 97%. Operating
cash flow from these wells was approximately $88,000 for the nine months ended
March 31, 2000.
In July 1999, the Company acquired royalty interests in a producing gas
well in Winkler County, Texas at a cost to the Company of approximately $94,000.
Funds for this acquisition were provided by the credit facility discussed below.
Operating cash flow from this well was approximately $10,000 for the eight
months ended March 31, 2000.
The Company has entered into an exploration agreement relating to
non-producing acreage in Pecos County, Texas. Approximately 3,689 gross acres
and 306 net acres have been leased and a 3-D seismic survey covering 23 square
miles has been completed at a cost to the Company of approximately $146,000 as
of May 31, 2000. Two test wells will be drilled on this acreage. The first test
well is planned within the next sixty days at an estimated cost to the Company
11
of $60,000. Depending on the results of the wells drilled, as many as 21 wells
may be drilled on this prospect. The Company owns approximate working interests
in this prospect ranging from 10% to 16% and a third party has assumed property
operations. Funds to date for this project have been provided by cash flow from
operations.
The Company is reviewing several other projects in which it may
participate. The costs of such projects would be funded, to the extent possible,
from existing cash balances and cash flow from operations. The remainder may be
funded through borrowings on the credit facility discussed below.
The Company has a revolving credit agreement with Bank of America, N.A.
("Bank"), formerly NationsBank of Texas, which provides for a credit facility of
$3,000,000, subject to a borrowing base determination. The credit facility was
amended on August 15, 1999 to increase the borrowing base to $2,200,000, with
scheduled monthly reductions of the available borrowing base of $28,000
beginning September 5, 1999, and to extend the maturity date to August 15, 2001.
As of March 31, 2000, the borrowing base was $1,954,000. The balance outstanding
under this credit facility was $1,200,000 and $1,784,000 at March 31, 2000 and
1999, respectively. The borrowing base is subject to redetermination on or about
August 1, each year. Interest under this agreement is payable monthly at prime
rate (9% at March 31, 2000 and 7.75% at March 31, 1999). This agreement
generally restricts the Company's ability to transfer assets or control of the
Company, incur debt, extend credit, change the nature of the Company's business,
substantially change management personnel or pay dividends. The credit facility
is secured by substantially all of the Company's oil and gas properties and the
common stock of its subsidiary.
The Company also has a letter of credit outstanding under the Bank credit
facility discussed above, which provides for borrowings up to $50,000 in lieu of
a plugging bond with the Railroad Commission covering properties operated by the
Company.
Crude oil and natural gas prices have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
believes the Company can maintain adequate liquidity for the next fiscal year.
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
Oil and gas sales increased from $1,503,623 in 1999 to $1,678,961 in 2000,
an increase of $175,338 or 12%. This increase was primarily due to increased oil
and gas prices and increased production from the acquisition and development of
gas properties, offset in part by the sale of the Lazy JL properties and normal
production declines. The sale of the Lazy JL properties accounts for a decrease
for fiscal 2000 as compared to fiscal 1999 of $335,532 in oil and gas sales,
26,673 bbls and 4,345 mcf. The average oil price increased from $12.11 in 1999
to $21.54 per bbl in 2000, an increase of $9.43 per bbl or 78%. The average gas
price increased from $1.87 in 1999 to $2.33 per mcf in 2000, an increase of
$0.46 per mcf or 25%. Oil production decreased from 49,573 bbls in 1999 to
19,334 bbls in 2000, a decrease of 30,239 bbls or 61%. Gas production increased
from 482,948 mcf in 1999 to 540,793 mcf in 2000, an increase of 57,845 mcf or
12%.
Production costs decreased from $644,563 in 1999 to $542,789 in 2000, a
decrease of $101,774 or 16%. The sale of the Lazy JL properties accounts for a
reduction in production costs for fiscal 2000 as compared to fiscal 1999 of
$238,072, while property acquisitions and development, and remedial repairs
increased production costs.
12
Depreciation, depletion and amortization decreased from $909,965 in 1999 to
$426,102 in 2000, a decrease of $483,863 or 53%, due primarily to an impairment
of oil and gas properties in the first quarter of fiscal 1999 of $288,393.
General and administrative expenses decreased from $236,576 in 1999 to
$218,991 in 2000, a decrease of $17,585 or 7%.
Interest expense decreased from $151,069 in 1999 to $107,577 in 2000, a
decrease of $43,492 or 29%. This decrease was primarily attributable to a
reduction in amounts borrowed during 2000.
Fiscal 1999 Compared to Fiscal 1998
Oil and gas sales decreased from $2,090,117 in 1998 to $1,503,623 in 1999,
a decrease of $586,494 or 28%. This decrease was primarily attributable to the
decline in oil and gas prices and oil production during the year, offset in part
by increased gas production from the acquisition and development of oil and gas
properties. The average oil price decreased from $17.70 in 1998 to $12.11 per
bbl in 1999, a decrease of $5.59 per bbl or 32%. The average gas price decreased
from $2.22 in 1998 to $1.87 per mcf in 1999, a decrease of $0.35 per mcf or 16%.
Oil production decreased from 63,800 bbls in 1998 to 49,573 bbls in 1999, a
decrease of 14,227 bbls or 22%. Gas production increased from 432,343 mcf in
1998 to 482,948 mcf in 1999, an increase of 50,605 mcf or 12%.
Other revenues decreased from $16,221 in 1998 to $6,382 in 1999, a decrease
of $9,839 or 61%, primarily due to the recovery of a bad debt in 1998. There was
no such item in 1999.
Production costs decreased from $663,525 in 1998 to $644,563 in 1999, a
decrease of $18,962 or 3%.
Depreciation, depletion and amortization decreased from $2,808,753 in 1998
to $909,965 in 1999, a decrease of $1,898,788 or 68%, due primarily to an
impairment of oil and gas properties in 1998 of $1,742,386. There was an
additional impairment of oil and gas properties in the first quarter of fiscal
1999 of $288,393.
General and administrative expenses increased from $192,395 in 1998 to
$236,576 in 1999, an increase of $44,181 or 23%. This increase was primarily
attributable to increased salaries and benefits ($55,402), franchise taxes
($14,328), engineering and geological costs ($11,186), officers' and directors'
insurance ($6,708), and director fees ($6,700), offset in part by decreases in
legal fees ($22,671), accounting fees ($16,625) and contract services ($12,407).
Interest expense increased from $137,012 in 1998 to $151,069 in 1999, an
increase of $14,057 or 10%. This increase was attributable to increased
borrowing during 1999, offset in part by lower interest rates.
Other Matters
Forward Looking Statements
Certain statements in this Form 10-K may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements, other than statements
of historical facts, included in this Form 10-K that address activities, events
or developments that the Company expects, projects, believes or anticipates will
or may occur in the future, including such matters as oil and gas reserves,
future drilling and operations, future production of oil and gas, future net
cash flows, future capital expenditures and other such matters, are
forward-looking statements. These statements are based on certain assumptions
13
and analysis made by management of the Company in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
including general economic and business conditions, prices of oil and gas, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company, changes in laws or regulations and other factors, many of which are
beyond the control of the Company.
Risk Factors
All of the Company's financial instruments are for purposes other than
trading.
Interest Rate Risk. The following table summarizes maturities for the
Company's variable rate bank debt, which is tied to prime rate. If the interest
rate on the Company's bank debt increases or decreases by one percentage point,
the Company's annual pretax income would change by $12,000.
Year ended March 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
Variable rate bank debt $ - $ - $1,200,000
========== ========== ==========
Credit Risk. Credit risk is the risk of loss as a result of nonperformance
by counter-parties of their contractual obligations. The Company's primary
credit risk is related to oil and gas production sold to various purchasers and
the receivables are generally not collateralized. At March 31, 2000, the
Company's largest credit risk associated with any single purchaser was $38,640.
The Company has not experienced any significant credit losses.
Volatility of Oil and Gas Prices. The Company's revenues, operating results
and future rate of growth are dependent upon the prices received for oil and
gas. Historically, the markets for oil and gas have been volatile and are likely
to continue to be so in the future. Various factors beyond the control of the
Company affect the price of oil and gas, including but not limited to 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-producing regions, the price and level of foreign imports, the level of
consumer demand, the price and availability of alternative fuels, the
availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulation and the overall economic environment. Any significant
decline in prices would adversely affect the Company's revenues and operating
income and may require a reduction in the carrying value of the Company's oil
and gas properties. If the average oil price had increased or decreased by one
cent per barrel for fiscal 2000, the Company's pretax income would have changed
by $193. If the average gas price had increased or decreased by one cent per mcf
for fiscal 2000, the Company's pretax income would have changed by $5,408.
Uncertainty of Reserve Information and Future Net Revenue Estimates.
Estimates of oil and gas reserves, by necessity, are projections based on
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 gas that are difficult to
measure. Estimates of economically recoverable oil and gas reserves and of
future net cash flows depend upon a number of variable factors and assumptions,
such as future production, oil and gas prices, operating costs, development
14
costs and remedial costs, all of which may vary considerably from actual
results. As a result, estimates of the economically recoverable quantities of
oil and gas and of future net cash flows expected therefrom may vary
substantially. Moreover, there can be no assurance that the Company's reserves
will ultimately be produced or that any undeveloped reserves will be developed.
Reserve Replacement Risk. The Company's future success depends upon its
ability to find, develop or acquire additional, economically recoverable oil and
gas reserves. The proved reserves of the Company will generally decline as
reserves are depleted, except to the extent the Company can find, develop or
acquire replacement reserves.
Drilling and Operating Risks. Drilling and operating activities are subject
to many risks, including well blowouts, cratering, fires, releases of toxic
gases and other environmental hazards and risks, any of which could result in
substantial losses to the Company. In addition, the Company incurs the risk that
no commercially productive reservoirs will be encountered and there is no
assurance that the Company will recover all or any portion of its investment in
wells drilled or re-entered.
Marketability of Production. The marketability of the Company's production
depends in part on the availability, proximity and capacity of natural gas
gathering systems, pipelines and processing facilities. Federal and state
regulation of oil and gas production and transportation, tax and energy
policies, changes in supply and demand and general economic conditions could all
affect the Company's ability to produce and market its oil and gas.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants..................... 16
Consolidated Balance Sheets............................................ 17
Consolidated Statements of Operations.................................. 18
Consolidated Statements of Stockholders' Equity........................ 19
Consolidated Statements of Cash Flows.................................. 20
Notes to Consolidated Financial Statements............................. 21
15
Report of Independent Certified Public Accountants
Board of Directors
Mexco Energy Corporation
We have audited the accompanying consolidated balance sheets of Mexco Energy
Corporation and Subsidiary, as of March 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2000. 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 generally accepted auditing
standards. 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 consolidated financial position of Mexco Energy
Corporation and Subsidiary, as of March 31, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended March 31, 2000 in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
May 12, 2000
16
Mexco Energy Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
As of March 31,
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 97,712 $ 96,198
Accounts receivable:
Oil and gas sales 255,121 179,269
Trade 2,070 --
Related parties 18,105 3,780
Other 5,000 --
Prepaid expenses 15,789 14,368
------------ ------------
Total current assets 393,797 293,615
Property and equipment, at cost
Oil and gas properties, using
the full cost method 10,630,903 10,495,391
Other 22,586 21,874
------------ ------------
10,653,489 10,517,265
Less accumulated depreciation,
depletion, and amortization 7,193,967 6,767,865
------------ ------------
Property and equipment, net 3,459,522 3,749,400
------------ ------------
$ 3,853,319 $ 4,043,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 86,091 $ 85,434
Current maturities of long-term debt -- 516,000
------------ ------------
Total current liabilities 86,091 601,434
Long-term debt 1,200,000 1,268,000
------------ ------------
Total liabilities 1,286,091 1,869,434
Stockholders' equity
Common stock - $0.50 par value;
40,000,000 shares authorized;
1,623,289 shares issued and outstanding 811,644 811,644
Preferred stock - $1.00 par value;
10,000,000 shares authorized -- --
Additional paid-in capital 2,875,399 2,875,399
Accumulated deficit (1,119,815) (1,513,462)
------------ ------------
Total stockholders' equity 2,567,228 2,173,581
------------ ------------
$ 3,853,319 $ 4,043,015
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
17
Mexco Energy Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
2000 1999 1998
----------- ----------- -----------
Operating revenues:
Oil and gas $ 1,678,961 $ 1,503,623 $ 2,090,117
Other 7,305 6,382 16,221
----------- ----------- -----------
Total operating revenues 1,686,266 1,510,005 2,106,338
Operating expenses:
Production 542,789 644,563 663,525
Depreciation, depletion
and amortization 426,102 909,965 2,808,753
General and administrative 218,991 236,576 192,395
----------- ----------- -----------
Total operating expenses 1,187,882 1,791,104 3,664,673
----------- ----------- -----------
498,384 (281,099) (1,558,335)
Other income (expense):
Interest income 2,840 6,394 2,121
Interest expense (107,577) (151,069) (137,012)
----------- ----------- -----------
Net other expense (104,737) (144,675) (134,891)
----------- ----------- -----------
Earnings (loss) before income taxes 393,647 (425,774) (1,693,226)
Income tax expense (benefit) -- -- (369,569)
----------- ----------- -----------
Net earnings (loss) $ 393,647 $ (425,774) $(1,323,657)
=========== =========== ===========
Basic and diluted
earnings (loss) per share $ 0.24 $ (0.26) $ (0.83)
=========== =========== ===========
Weighted average outstanding shares,
basic and diluted 1,623,289 1,623,289 1,594,752
=========== =========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
18
Mexco Energy Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 2000, 1999, and 1998
Retained
Additional earnings Total
Common stock paid-in (accumulated Stockholders'
Shares Amount capital deficit) equity
--------- ----------- ----------- ------------ ------------
Balance at April 1, 1997 1,423,229 $ 711,614 $ 1,975,429 $ 235,969 $ 2,923,012
Net loss -- -- -- (1,323,657) (1,323,657)
Issuance of common stock 200,060 100,030 899,970 -- 1,000,000
--------- ----------- ----------- ------------ ------------
Balance at March 31, 1998 1,623,289 811,644 2,875,399 (1,087,688) 2,599,355
Net loss -- -- -- (425,774) (425,774)
--------- ----------- ----------- ------------ ------------
Balance at March 31, 1999 1,623,289 811,644 2,875,399 (1,513,462) 2,173,581
Net earnings -- -- -- 393,647 393,647
--------- ----------- ----------- ------------ ------------
Balance at March 31, 2000 1,623,289 $ 811,644 $ 2,875,399 $ (1,119,815) $ 2,567,228
========= =========== =========== ============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
19
Mexco Energy Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net earnings (loss) $ 393,647 $ (425,774) $(1,323,657)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Deferred income taxes -- -- (341,181)
Depreciation, depletion and amortization 426,102 909,965 2,808,753
(Increase) decrease in accounts receivable (97,247) 24,851 83,354
Increase (decrease) in accounts payable 1,007 22,312 (53,425)
(Increase) decrease in prepaid assets (1,421) 817 (15,185)
Decrease in income taxes payable -- -- (40,093)
----------- ----------- -----------
Net cash provided by operating activities 722,088 532,171 1,118,566
Cash flows from investing activities:
Additions to oil and gas properties (803,554) (643,377) (2,089,136)
Proceeds from sale of assets 667,692 5,678 64
Additions to other property and equipment (712) (1,622) (13,959)
----------- ----------- -----------
Net cash used in investing activities (136,574) (639,321) (2,103,031)
Cash flows from financing activities:
Borrowings 248,174 -- 685,000
Principal payments on long-term debt (832,174) (38,000) (500,000)
Proceeds from issuance of common stock -- -- 1,000,000
----------- ----------- -----------
Net cash (used in) provided by
financing activities (584,000) (38,000) 1,185,000
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 1,514 (145,150) 200,535
Cash and cash equivalents
at beginning of year 96,198 241,348 40,813
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 97,712 $ 96,198 $ 241,348
=========== =========== ===========
Interest paid $ 109,255 $ 138,586 $ 140,272
Income taxes paid $ -- $ -- $ 24,731
Non-cash investing and financing activities:
Included in trade accounts payable at March 31:
Acquisition and development costs of oil and
gas properties $ 24,691 $ 25,041 $ 83,050
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
20
Mexco Energy Corporation and Subsidiary
Notes to Consolidated Financial Statements
NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Mexco Energy Corporation and its wholly-owned subsidiary, Forman
Energy Corporation (collectively, the "Company") are engaged in the
acquisition, exploration, development and production of domestic oil and
gas and owns producing properties and undeveloped acreage in eleven states.
The majority of the Company's activities are centered in West Texas.
Although most of the Company's oil and gas interests are operated by
others, the Company operates several properties in which it owns an
interest.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Mexco Energy Corporation and its wholly-owned subsidiary.
All significant inter-company balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments purchased with maturities of three months or less and money
market funds to be cash equivalents. The Company maintains its cash in bank
deposit accounts and money market funds, some of which are not federally
insured. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk.
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 the acquisition, exploration, and development of properties
(successful or not), including leasehold acquisition costs, geological and
geophysical costs, lease rentals, exploratory and developmental drilling
and equipment costs, are capitalized. Costs are amortized using the
units-of-production method based upon estimates of proved oil and gas
reserves. If unamortized costs, less related deferred income taxes, exceed
the sum of the present value, discounted at 10%, of estimated future net
revenues from proved reserves, less related income tax effects, the excess
is charged to expense. Generally, no gains or losses are recognized on the
sale or disposition of oil and gas properties.
Other Property and Equipment. Provisions for depreciation of office
furniture and equipment are computed on the straight-line method based on
estimated useful lives of five to ten years.
Earnings (Loss) Per Common Share. Basic earnings (loss) per share is
computed using the weighted-average number of shares outstanding during the
period. Diluted earnings (loss) per share is determined using the
weighted-average number of common shares outstanding during the period,
adjusted for the dilutive effect of potential common shares, consisting of
shares that might be issued upon exercise of common stock options. In
periods where losses are reported, the weighted-average number of common
shares outstanding excludes potential common shares, because their
inclusion would be anti-dilutive. There were no potential common stocks
outstanding for March 31, 1998. Potential common stocks are excluded for
March 31, 1999, as their inclusion would have an anti-dilutive effect on
loss per share. Potential common stocks are excluded for March 31, 2000
because the exercise price of the options was greater than the average
21
market price of the common shares and, therefore, the effect would be
anti-dilutive.
Income Taxes. The Company recognizes deferred tax assets and liabilities
for the future tax consequences of temporary differences between the
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
applicable to the years in which those differences are expected to be
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in net income in the period that includes the
enactment date.
Environmental. The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their
future economic benefit. Liabilities for expenditures of a non-capital
nature are recorded when environmental assessment and/or remediation is
probable and the costs can be reasonably estimated. There were no
significant environmental expenditures or liabilities for the years ended
March 31, 2000, 1999 or 1998.
Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the amounts reported in the these
financial statements. Although Management believes its estimates and
assumptions are reasonable, actual results may differ materially from those
estimates. Significant estimates affecting these financial statements
include the estimated quantities of proved oil and gas reserves and the
related present value of estimated future net cash flows.
Stock Options. The Company accounts for employee stock option grants in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," whereby compensation costs are
recognized only in situations where stock compensatory plans award
intrinsic value to recipients at the date of grant. On March 31, 2000, the
Financial Accounting Standards Board ("FASB") issued FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation"
an interpretation of APB Opinion No. 25, which requires the Company to
recognize compensation costs related to stock options granted to
independent consultants in accordance with FASB Statement No. 123,
"Accounting for Stock-Based Compensation". The provisions of this
Interpretation are effective July 1, 2000 and apply to new awards granted
after December 15, 1998. The effects of applying this Interpretation will
be recognized only on a prospective basis for those previous awards to
independent consultants, and accordingly, no adjustments will be made upon
initial application to financial statements for periods prior to July 1,
2000. Compensation cost measured upon application of this Interpretation
that is attributable to periods subsequent to July 1, 2000, will be
recognized.
Financial Instruments. Cash and money market funds, stated at cost, are
available upon demand and approximate fair value. Interest rates associated
with the Company's long-term debt are linked to current market rates. As a
result, management believes that the carrying amount approximates the fair
value of the Company's credit facilities. All financial instruments are
held for purposes other than trading.
22
NOTE B - DEBT
The Company has a revolving credit agreement with Bank of America,
N.A., formerly NationsBank of Texas, N.A., which provides for a credit
facility of $3,000,000, subject to a borrowing base determination. The
credit facility was amended on August 15, 1999 to increase the borrowing
base to $2,200,000, with scheduled monthly reductions of the available
borrowing base of $28,000 beginning September 5, 1999, and to extend the
maturity date to August 15, 2001. At March 31, 2000, the borrowing base was
$1,954,000. The borrowing base is subject to redetermination on or about
August 1, each year. There are no current amounts due under the facility at
March 31, 2000. Interest under this agreement is payable monthly at prime
rate (9% at March 31, 2000 and 7.75% at March 31, 1999). The balance
outstanding under this credit facility was $1,200,000 and $1,784,000 at
March 31, 2000 and 1999, respectively. A letter of credit for $50,000, in
lieu of a plugging bond with the Texas Railroad Commission covering
properties operated by the Company, is also outstanding under the facility.
Amounts borrowed under this agreement are secured by substantially all
of the Company's oil and gas properties and the common stock of its
subsidiary. The agreement generally restricts the Company's ability to
transfer assets or control of the Company, incur debt, extend credit,
change the nature of the Company's business, substantially change
management or pay dividends.
NOTE C - INCOME TAXES
Components of income tax expense (benefit) for years ended March 31
are as follows:
2000 1999 1998
------------ ------------ ------------
Current: Federal $ - $ - $ (28,388)
State - - -
------------ ------------ ------------
- - (28,388)
Deferred: Federal - - (301,814)
State - - (39,367)
------------ ------------ ------------
- - (341,181)
------------ ------------ ------------
Income tax benefit $ - $ - $ (369,569)
============ ============ ============
Deferred tax assets, valuation allowance, and liabilities at March 31
are as follows:
2000 1999
--------- ---------
Deferred tax assets:
Percentage depletion carryforwards $ 213,365 $ 169,271
Net operating loss carryforwards 224,713 230,763
Valuation allowance (196,469) (271,818)
--------- ---------
241,609 128,216
Deferred tax liabilities:
Excess financial accounting bases over
tax bases of property and equipment (241,609) (128,216)
--------- ---------
Net deferred tax assets (liabilities) $ -- $ --
========= =========
Increase (decrease) in valuation allowance
for the year $ (75,349) $ 135,928
========= =========
23
As of March 31, 2000, the Company has statutory depletion
carryforwards of approximately $821,000, which do not expire, and operating
loss carryforwards of approximately $864,000, which if not utilized begin
to expire in 2018.
A reconciliation of the provision for income taxes to income taxes
computed using the federal statutory rate for years ended March 31 follows:
2000 1999 1998
--------- --------- ---------
Tax expense (benefit) at statutory rate $ 133,840 $(144,763) $(575,697)
Increase (decrease) in valuation allowance (75,349) 135,928 135,890
State income taxes -- -- --
Prior year over accrual -- -- (28,388)
Effect of graduated rates (31,492) 34,062 130,450
Other (26,999) (25,227) (31,824)
--------- --------- ---------
$ -- $ -- $(369,569)
========= ========= =========
NOTE D - MAJOR CUSTOMERS
The Company operates exclusively within the United States and its
revenues and operating income are derived predominately from the oil and
gas industry. Oil and gas production is sold to various purchasers and the
receivables are unsecured. Historically, the Company has not experienced
significant credit losses on its oil and gas accounts and management is of
the opinion that significant credit risk does not exist. Management is of
the opinion that the loss of any one purchaser would not have an adverse
effect on the ability of the Company to sell its oil and gas production.
In fiscal 2000, one purchaser accounted for 35% of revenues. In fiscal
1999, two purchasers accounted for 30% and 25%, respectively, of revenues.
In fiscal 1998, two purchasers accounted for 33% and 15%, respectively, of
revenues.
NOTE E - OIL AND GAS COSTS
The costs related to the oil and gas activities of the Company were
incurred as follows:
Year ended March 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Property acquisition costs $ 334,611 $ 207,325 $ 751,160
Development costs $ 468,943 $ 436,052 $1,261,569
The Company had the following aggregate capitalized costs relating to
the Company's oil and gas property activities at March 31:
2000 1999 1998
---------- ---------- ----------
Proved oil and gas properties $10,531,259 $10,331,594 $9,854,099
Unproved oil and gas properties 99,644 163,797 61,602
---------- ---------- ----------
10,630,903 10,495,391 9,915,701
Less accumulated depreciation,
depletion, and amortization 7,181,648 6,759,416 5,853,458
---------- ---------- ----------
$3,449,255 $3,735,975 $4,062,243
========== ========== ==========
24
On April, 21, 1999, the Company sold all of its oil and gas interests
in Lazy JL field properties located in Garza County, Texas for $600,000
cash, adjusted for revenues and expenses from the effective date of
February 1, 1999 through the date of closing. The sales proceeds were used
to reduce the Company's outstanding debt under its line of credit with Bank
of America.
Depreciation, depletion, and amortization expense included a full cost
ceiling write-down of $288,393 for the first quarter of fiscal 1999 and
$1,742,386 for the fourth quarter of fiscal 1998 due to declines in oil and
gas prices and the related downward adjustment of estimated reserves.
Depreciation, depletion, and amortization amounted to $3.86, $6.97 and
$20.66 per equivalent barrel of production for the years ended March 31,
2000, 1999, and 1998, respectively.
NOTE F - STOCKHOLDERS' EQUITY
In May 1997, the Company completed a private placement of 200,000
shares of common stock at $5.00 per share. The proceeds of $1,000,000 were
used to reduce debt and finance property acquisitions.
In September 1997, the shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized shares from
5,000,000 shares of common stock to 40,000,000 shares of common stock and
10,000,000 shares of preferred stock. The common stockholders maintain the
exclusive right to vote for the election of directors and for all other
purposes. The preferred stock may be issued in a series with certain rights
as determined by the Board of Directors.
NOTE G - EMPLOYEE BENEFIT PLAN
The Company adopted an employee incentive stock plan effective
September 15, 1997. Under the plan, 350,000 shares are available for
distribution. Awards, granted at the discretion of the compensation
committee of the Board of Directors, include stock options or restricted
stock. Stock options may be an incentive stock option or a nonqualified
stock option. Options to purchase common stock under the plan are granted
at the fair market value of the common stock at the date of grant, become
exercisable to the extent of 25% of the shares optioned on each of four
anniversaries of the date of grant, expire ten years from the date of
grant, and are subject to forfeiture if employment terminates. Restricted
stock may be granted with a condition to attain a specified goal. The
purchase price will be at least $5.00 per share of restricted stock. The
awards of restricted stock must be accepted within sixty days and will vest
as determined by agreement. Holders of restricted stock have all rights of
a shareholder of the Company.
During fiscal 2000, options for 90,000 shares were granted. Of these
20,000 options were granted to contract consultants and 30,000 options were
granted to outside directors. The exercise price of all options granted
equaled or exceeded the market price of the stock on the date of grant.
25
Additional information with respect to the Plan's stock option
activity is as follows:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding, at March 31, 1998 - $ -
Granted 100,000 7.63
Exercised - -
Forfeited (10,000) 7.75
--------- --------------
Options outstanding, at March 31, 1999 90,000 7.61
Granted 90,000 5.25
Exercised - -
Forfeited - -
--------- --------------
Options outstanding, at March 31, 2000 180,000 $ 6.43
========= ==============
Options exercisable at March 31, 1999 - $ -
Options exercisable at March 31, 2000 22,500 $ 7.61
Weighted average grant date fair value of stock options granted during
fiscal 1999 and 2000 was $4.04 and $2.65, respectively. These amounts were
determined using the Black-Scholes option-pricing model, which values
options based on the stock price at the grant date, the expected life of
the option, the estimated volatility of the stock, the expected dividend
payments, and the risk-free interest rate over the expected life of the
option. The assumptions used in the Black-Scholes model were as follows for
stock options granted in fiscal 1999 and 2000:
2000 1999
-------- --------
Expected volatility 29.40% 27.89%
Expected dividend yield 0.00% 0.00%
Risk-free rate of return 6.43% 5.72%
Expected life of options 10 years 10 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following tables summarize information about stock options
outstanding and exercisable at March 31, 2000:
26
Stock Options Outstanding
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Average
Exercise Prices Outstanding Life in Years Exercise Price
--------------- ----------- ---------------- --------------
$7.50-$7.75 90,000 8.56 $7.61
$5.25 90,000 9.97 $5.25
-----------
180,000
===========
Stock Options Exercisable
Number of Weighted
Range of Shares Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- --------------
$7.50-$7.75 22,500 $7.61
Since the Company applies the intrinsic value method in accounting for
its stock option plan, it generally records no compensation cost for its
stock options (Note A). If compensation cost for the Company's stock option
plan had been determined based on the fair value at the grant dates for
awards under the plan, net earnings (loss), basic earnings (loss) per
common share and diluted earnings (loss) per common share would have been
as follows:
2000 1999
--------- ---------
Net earnings (loss):
As reported $ 393,647 $(425,774)
Pro forma $ 291,027 $(477,189)
Basic earnings (loss) per share:
As reported $ 0.24 $ (0.26)
Pro forma $ 0.18 $ (0.29)
Diluted earnings (loss) per share:
As reported $ 0.24 $ (0.26)
Pro forma $ 0.18 $ (0.29)
NOTE H - RELATED PARTY TRANSACTIONS
The Company serves as operator of properties in which the majority
stockholder has interests and bills the majority stockholder for lease
operating expenses on a monthly basis subject to usual trade terms. The
billings totaled $56,775, $21,981 and $50,097 for the years ended March 31,
2000, 1999, and 1998, respectively.
Effective January 1, 2000, the Company entered into an agreement with
the husband of an officer and director of the Company to provide geological
consulting services for one year. Amounts paid under this contract for the
year ended March 31, 2000 totaled $8,386.
NOTE I - OIL AND GAS RESERVE DATA (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with
the guidelines established by the Securities and Exchange Commission and
Financial Accounting Standards Board. These guidelines require that reserve
27
estimates be prepared under existing economic and operating conditions,
with no provision for price and cost escalators, except by contractual
agreement. The estimates as of March 31, 1999 and 2000 are based on
evaluations prepared by Joe C. Neal and Associates, Petroleum Consultants.
The estimates as of March 31, 1998 are based on evaluations prepared by T.
Scott Hickman and Associates, Inc., Petroleum Engineers.
Management emphasizes that reserve estimates are inherently imprecise
and are expected to change as new information becomes available and as
economic conditions in the industry change. The following estimates of
proved reserves quantities and related standardized measure of discounted
net cash flow are estimates only, and do not purport to reflect realizable
values or fair market values of the Company's reserves.
CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):
2000 1999 1998
--------------------- --------------------- ---------------------
Bbls Mcf Bbls Mcf Bbls Mcf
------- --------- ------- --------- ------- ---------
Proved reserves, beginning of year 194,000 4,194,000 246,000 3,197,000 436,000 2,956,000
Revision of previous estimates 13,000 (471,000) (2,000) 348,000 (132,000) 268,000
Purchase of minerals in place 3,000 1,403,000 -- 939,000 6,000 405,000
Extensions and discoveries 1,000 174,000 -- 193,000 -- --
Production (19,000) (541,000) (50,000) (483,000) (64,000) (432,000)
Sales of minerals in place (53,000) (4,000) -- -- -- --
------- --------- ------- --------- ------- ---------
Proved reserves, end of year 139,000 4,755,000 194,000 4,194,000 246,000 3,197,000
PROVED DEVELOPED RESERVES (UNAUDITED):
Beginning of year 194,000 4,194,000 219,000 2,941,000 281,000 2,400,000
End of year 139,000 4,755,000 194,000 4,194,000 219,000 2,941,000
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES (UNAUDITED):
March 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Future cash inflows $15,590,000 $ 8,994,000 $ 9,794,000
Future production and
development costs (4,414,000) (2,989,000) (3,791,000)
Future income taxes (a) (2,249,000) (715,000) (612,000)
----------- ----------- -----------
Future net cash flows 8,927,000 5,290,000 5,391,000
Annual 10% discount for
estimated timing of cash flows (4,019,000) (2,220,000) (1,896,000)
----------- ----------- -----------
Standardized measure of
discounted future net cash flows $ 4,908,000 $ 3,070,000 $ 3,495,000
=========== =========== ===========
(a) Future income taxes are computed using effective tax rates on future net
cash flows before income taxes less the tax bases of the oil and gas
properties.
28
CHANGES IN STANDARIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVES (UNAUDITED):
Year ended March 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Sales of oil and gas produced,
net of production costs $(1,136,000) $ (859,000) $(1,427,000)
Net changes in price and
production costs 2,310,000 (1,255,000) (519,000)
Changes in previously estimated
development costs 22,000 296,000 --
Revisions of quantity estimates (281,000) 389,000 (428,000)
Net change due to purchases and
sales of minerals in place 1,164,000 527,000 456,000
Extensions and discoveries,
less related costs 187,000 81,000 --
Net change in income taxes (821,000) (18,000) 475,000
Accretion of discount 349,000 389,000 532,000
Changes in timing of estimated
cash flows and other 44,000 25,000 (42,000)
----------- ----------- -----------
Changes in standardized measure 1,838,000 (425,000) (953,000)
Standardized measure, beginning of year 3,070,000 3,495,000 4,448,000
----------- ----------- -----------
Standardized measure, end of year $ 4,908,000 $ 3,070,000 $ 3,495,000
=========== =========== ===========
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required regarding Directors of the Registrant and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the Company's Information Statement for its
Annual Meeting of Stockholders, which will be filed with the Commission not
later than July 31, 1999.
Pursuant to Item 401(b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in this item is incorporated by reference
from the Company's Information Statement for its Annual Meeting of
Stockholders, which will be filed with the Commission not later than July
31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this item is incorporated by reference
from the Company's Information Statement for its Annual Meeting of
Stockholders, which will be filed with the Commission not later than July
31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this item is incorporated by reference
from the Company's Information Statement for its Annual Meeting of
Stockholders, which will be filed with the Commission not later than July
31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules.
See "Index to Consolidated Financial Statements" set forth in Item 8
of this Form 10-K.
No schedules are required to be filed because of the absence of
conditions under which they would be required or because the required
information is set forth in the financial statements or notes thereto
referred to above.
30
(a) 3. Exhibits.
Exhibit
Number
3.1 Articles of Incorporation (incorporated by reference to the Company's
Annual Report on Form 10-K dated June 24, 1998).
3.2 Bylaws (incorporated by reference to the Company's Annual Report on Form
10K dated June 23, 1995).
10.1 Stock Option Plan (incorporated by reference to the Amendment to Schedule
14C Information Statement filed on August 13, 1997).
10.2 Bank Line of Credit (incorporated by reference to the Company's Annual
Report on Form 10-K dated June 24, 1998).
10.3 Partial Assignment, Bill of Sale and Conveyance between Mexco Energy
Corporation and Shenandoah Petroleum Corporation dated April 21, 1999
(previously filed as exhibit 10.1 and incorporated by reference to Form 8-K
dated April 21, 1999).
21 Subsidiaries of the Company (incorporated by reference to the Company's
Annual Report on Form 10-K dated Jun 24, 1998).
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter
ended March 31, 2000.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
Registrant
By: /s/ Nicholas C. Taylor
-------------------------------------
Nicholas C. Taylor
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of June 14, 2000, by the following persons on
behalf of the Company and in the capacity indicated.
/s/ Nicholas C. Taylor
---------------------------------------
Nicholas C. Taylor
President, Chief Executive Officer
and Director
/s/ Donna Gail Yanko
---------------------------------------
Donna Gail Yanko
Vice President, Operations
and Director
/s/ Linda J. Crass
---------------------------------------
Linda J. Crass
Controller, Treasurer
and Assistant Secretary
/s/ Thomas Graham, Jr.
---------------------------------------
Thomas Graham, Jr.
Chairman of the Board of Directors
/s/ Thomas R. Craddick
---------------------------------------
Thomas R. Craddick
Director
/s/ William G. Duncan, Jr.
---------------------------------------
William G. Duncan, Jr.
Director
/s/ Jack D. Ladd
---------------------------------------
Jack D. Ladd
Director
32
INDEX TO EXHIBITS
Exhibit
Number Exhibit Page
------- -------------------------------------------------------- ----
3.1** Articles of Incorporation.
3.2* Bylaws.
10.1*** Stock Option Plan.
10.2** Bank Line of Credit.
10.3**** Partial Assignment, Bill of Sale and Conveyance between
Mexco Energy Corporation and Shenandoah Petroleum
Corporation dated April 21, 1999.
21** Subsidiaries of the Company.
* Incorporated by reference to the Company's Annual Report on Form 10-K dated
June 23, 1995.
** Incorporated by reference to the Company's Annual Report on Form 10-K dated
June 24, 1998.
*** Incorporated by reference to the Amendment to Schedule 14C Information
Statement filed on August 13, 1998.
**** Previously filed as exhibit 10.1 and incorporated by reference to Form 8-K
dated April 21, 1999.
33