UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(915) 682-1119
(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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $0.50 par value:
1,737,322 shares outstanding at July 31, 2002
MEXCO ENERGY CORPORATION
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Balance Sheets as of June 30, 2002
(Unaudited) and March 31, 2002 3
Consolidated Statements of Operations (Unaudited) for
the three months ended June 30, 2002 and June 30, 2001 4
Consolidated Statements of Cash Flows (Unaudited) for
the three months ended June 30, 2002 and June 30, 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION 11
- ---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 12
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Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2002 2002
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 118,094 $ 44,958
Accounts receivable:
Oil and gas sales 270,589 229,257
Trade 19,336 49,644
Related parties 1,938 523
Income taxes receivable 104,030 104,030
Prepaid expenses 41,507 24,124
------------ ------------
Total current assets 555,494 452,536
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 13,973,434 13,886,798
Office and computer equipment
and software 28,781 28,781
------------ ------------
14,002,215 13,915,579
Less accumulated depreciation,
depletion and amortization 8,143,673 8,020,150
------------ ------------
Property and equipment, net 5,858,542 5,895,429
------------ ------------
Total assets $ 6,414,036 $ 6,347,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 108,930 $ 105,332
------------ ------------
Total current liabilities 108,930 105,332
Long-term debt 1,770,000 1,710,000
Deferred income tax liability 290,851 256,591
Stockholders' equity:
Preferred stock, par value $1 per share;
10,000,000 shares authorized;
none issued -- --
Common stock, par value $0.50 per share;
40,000,000 shares authorized; 1,766,566
shares issued June 30, 2002 and
March 31,2002 883,283 883,283
Additional paid in capital 3,610,642 3,599,045
Retained earnings (129,144) (206,286)
Treasury stock, at cost (120,526) --
------------ ------------
Total stockholders' equity 4,244,255 4,276,042
------------ ------------
Total liabilities and stockholders'
equity $ 6,414,036 $ 6,347,965
============ ============
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Operating revenue:
Oil and gas sales $ 544,650 $ 594,751
Other 6,614 1,708
------------ ------------
Total operating revenue 551,264 596,459
Operating costs and expenses:
Oil and gas production 156,604 157,403
Depreciation, depletion and amortization 123,523 91,196
General and administrative 139,008 114,167
------------ ------------
Total operating costs and expenses 419,135 362,766
------------ ------------
132,129 233,693
Other income and (expenses):
Interest income 126 257
Interest expense (20,849) (10,529)
------------ ------------
Net other income and expenses (20,723) (10,272)
------------ ------------
Income before income taxes 111,406 223,421
Income tax expense (current) -- 1,034
Income tax expense (deferred) 34,260 23,535
------------ ------------
Net income $ 77,146 $ 198,852
============ ============
Net income per share:
Basic $ 0.04 $ 0.11
Diluted $ 0.04 $ 0.11
Weighted average shares outstanding:
Basic 1,754,338 1,771,146
Diluted 1,764,744 1,771,146
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
---------- ----------
Cash flows from operating activities:
Net income $ 77,146 $ 198,852
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 34,260 23,535
Stock-based compensation 11,597 12,367
Depreciation, depletion and
amortization 123,523 91,196
(Increase) decrease in
accounts receivable (12,439) 175,445
Increase (decrease) in accounts
payable and accrued expenses 3,598 13,222
Decrease (increase) in prepaid expenses (17,387) (34,605)
Increase(decrease)in income taxes payable -- (51,637)
---------- ----------
Net cash provided by operating
activities 220,298 428,375
Cash flows from investing activities:
Additions to property and equipment (86,636) (729,272)
---------- ----------
Net cash used in investing
activities (86,636) (729,272)
Cash flows from financing activities:
Repurchase of common stock (120,526) --
Principal borrowings on
long-term debt 60,000 --
---------- ----------
Net cash used in financing activities (60,526) --
---------- ----------
Net increase (decrease) in cash 73,136 (300,897)
Cash, beginning of the period 44,958 378,816
---------- ----------
Cash, end of period $ 118,094 $ 77,919
========== ==========
Interest paid $ 20,476 $ 11,688
Income taxes paid $ -- $ 53,664
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A. Organization and Significant Accounting Policies
- ------- ------------------------------------------------
Organization and Basis of Presentation
--------------------------------------
Mexco Energy Corporation, a Colorado corporation, was organized in 1972 and
maintains its principal office in Midland, Texas. The Company and its wholly
owned subsidiary, Forman Energy Corporation, a New York corporation,
(collectively the "Company") are engaged in the acquisition, exploration,
development and production of oil and gas. While the Company owns producing
properties and undeveloped acreage in eleven states, the majority of its
activities are centered in the Permian Basin of West Texas. Although most of the
Company's oil and gas interests are operated by others, the Company operates a
number of properties in which it owns an interest.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of the Company and
its wholly owned subsidiary as of June 30, 2002, and the results of its
operations and cash flows for the interim periods ended June 30, 2002 and 2001.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for a full year. The accounting
policies followed by the Company are set forth in more detail in Note A of the
"Notes to Consolidated Financial Statements" in the Company's annual report on
Form 10-K filed with the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, the disclosures herein are adequate
to make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Form 10-K.
Principles of Consolidation
- ---------------------------
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Earnings Per Share
- ------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares (stock options) outstanding
during the period. The following is a reconciliation of the number of shares
used in the calculation of basic earnings per share and diluted earnings per
share for the periods ended June 30, 2002 and 2001.
Page 6
Three Months Ended
June 30
-----------------------
2002 2001
--------- ---------
Weighted average number of
common shares outstanding 1,754,338 1,771,146
Incremental shares from the
assumed exercise of dilutive
stock options 10,406 0
--------- ---------
Dilutive potential common shares 1,764,744 1,771,146
Options to purchase 200,000 and 240,000 shares outstanding at June 30, 2002
and June 30, 2001, respectively, were not included in the computation of diluted
net income per share because the exercise price of the options was greater than
the average market price of the common stock of the Company, therefore, the
effect would be antidilutive.
Weighted average number of common shares outstanding and earnings per share
have been adjusted to reflect the 10% stock dividend effected on February 1,
2002.
Income Taxes
- ------------
There is no current income tax expense for the three months ended June 30,
2002 due to a tax loss carryforward of approximately $283,000 from the year
ending March 31, 2002. During the quarters ended June 30, 2002 and 2001, the
Company's tax provisions were less than expected at statutory rates because of
statutory depletion in excess of cost basis and the effect of graduated rates.
Stockholders' Equity
- --------------------
During the quarter ended June 30, 2002, the board of directors authorized the
purchase of 28,944 shares of the Company's common stock totaling $120,526 for
the treasury account.
MEXCO ENERGY CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "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 fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
Page 7
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's sources of funding have been from operating
activities, bank financing and the issuance of common stock.
The Company's focus is on increasing profit margins while concentrating on
obtaining gas reserves with low cost operations by acquiring and developing
primarily gas properties with potential for long-lived production.
For the first three months of fiscal 2003, cash flow from operations was
$220,298 compared to $428,375 for the first three months of fiscal 2002. The
cash flow from operations for the first three months of fiscal 2003 included the
effects of an increase in deferred income taxes, prepaid expenses and accounts
receivable. Cash of $86,636 was used for additions to property and equipment and
cash of $120,526 was used to repurchase the Company's stock, of which $60,000
came from borrowings. Accordingly, net cash increased $73,136.
In fiscal 2002, the board of directors authorized the use of up to $250,000 to
repurchase shares of the Company's stock. During fiscal 2002, the Company
repurchased 22,533 shares, at an aggregate cost of $91,231. Of these shares
18,400 were reissued in exchange for oil and gas lease rights representing 368
net mineral acres valued at approximately $83,000. The remaining 4,133 shares
were cancelled. For fiscal 2003, the board of directors has authorized the use
of up to $250,000 to repurchase shares of the Company's common stock of which,
through July 31, the Company has used $122,386 and purchased 29,244 shares of
its common stock for the treasury account.
In March 2002, the Company acquired 867.40 gross acres, 605.01 net acres in
Pecos County, Texas for approximately $107,000. The Company had possible 5
re-entries and 4 proven undeveloped drilling locations on this acreage. An
engineering study by reservoir engineers credit significant proven undeveloped
reserves to this acreage. Development of these properties has begun in fiscal
2003 with the re-entry of 2 abandoned wellbores. One of these wellbores was
re-entered at an approximate cost to the Company of $45,000 and is currently
shut-in due to mechanical problems with the casing. The second re-entry was
completed at an approximate cost to the Company of $103,500 and is currently
being evaluated. A third re-entry has been completed and is currently being
tested.
The Company has acquired and also is reviewing several other projects for future
participation. The cost of such projects would be funded, to the extent
possible, with existing cash balances and cash flow from operations. The
remainder may be funded through borrowings on the bank credit facility discussed
below.
At June 30, 2002, the Company had working capital of approximately $446,564
compared to working capital of approximately $347,204 at March 31, 2002, an
increase of $99,360, due primarily to an increase in accounts receivable,
prepaid expenses and net income.
The Company's revolving credit agreement with Bank of America, N.A. ("Bank"),
was amended to provide for a credit facility of $5,000,000, subject to a
borrowing base determination. The borrowing base was decreased to $2,200,000,
with scheduled monthly reductions of the available borrowing base of $25,581 per
month beginning September 5, 2002, and the maturity date is August 15, 2003. As
of June 30, 2002, the balance outstanding under this agreement was $1,770,000.
No principal payments are anticipated to be required for fiscal 2003. A letter
of credit for $50,000, in lieu of a plugging bond with the Texas Railroad
Commission covering the properties the Company operates,
Page 8
is also outstanding under the facility. The borrowing base is subject to
redetermination on or about August 1, of each year. Amounts borrowed under this
agreement are collateralized by the common stock of Forman and the Company's oil
and gas properties. Interest under this agreement is payable monthly at prime
rate (4.75% at June 30, 2002). 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 cash dividends.
The prices of natural gas and crude oil 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
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the current fiscal year.
Results of Operations - Three Months Ended June 30, 2002 and 2001
- -----------------------------------------------------------------
Net income decreased 61%, from $198,852 for the quarter ended June 30, 2001 to
$77,146 for the quarter ended June 30, 2002. Individual categories of income and
expense are discussed below.
Oil and gas sales decreased from $594,751 for the first quarter of fiscal 2002
to $544,650 for the same period of fiscal 2003. This decrease of $50,101
resulted from lower oil and gas prices. Average gas prices decreased from $4.35
per mcf for the first quarter of fiscal 2002 to $2.96 per mcf for the same
period of fiscal 2003, while average oil prices decreased from $24.69 per bbl
for the first quarter of fiscal 2002 to $23.87 for the same period of fiscal
2003. Oil and gas production quantities were 4,492 barrels ("bbls") and 111,253
thousand cubic feet ("mcf") for the first quarter of fiscal 2002 and 5,972 bbls
and 135,870 mcf for the same period of fiscal 2003, an increase of 33% and 22%,
respectively.
Production costs decreased 1% from $157,403 for the first quarter of fiscal 2002
to $156,604 for the same period of fiscal 2003.
General and administrative expenses increased 22% from $114,167 for the first
quarter of fiscal 2002 to $139,008 for the same period of fiscal 2003. This is
primarily the result of an increase in financial consulting, engineering, land
and geological services during the quarter.
Depreciation, depletion and amortization based on production and other methods
increased 35%, from $91,196 for the first quarter of fiscal 2002 to $123,523 for
the same period of fiscal 2003 primarily due to a greater amount of reserves
attributable to proved undeveloped properties with significant development
costs.
Interest expense increased 98% from $10,529 for the first quarter of fiscal 2002
to $20,849 for the same period of fiscal 2003, due to increased borrowings.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets". Statement 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method and Statement 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. As of June 30, 2002 there is
no impact on the Company's financial statements, as no business combinations
have been entered into, thus the potential for associated goodwill does not
currently exist.
Page 9
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-type
costs associated with asset retirements. The standard is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged. As of
June 30, 2002, the Company expects no impact to the financial statements, upon
adoption, as we have not incurred any obligations associated with asset
retirements.
On October 3, 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement supercedes FAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed" and eliminates the requirement of Statement 121 to
allocate goodwill to long-lived assets to be tested for impairment. Statement
144 also describes a probability-weighted cash flow estimation approach to deal
with situations in which alternative courses of action to recover the carrying
amount of a long-lived asset are under consideration or a range is estimated for
the amount of possible future cash flows. The statement also establishes a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption encouraged. There is no current impact to the Company's financial
statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Most significantly, this Statement eliminates the requirement
under Statement 4 to aggregate all gains and losses from extinguishments of
debt, and if material, be classified as an extraordinary item. As a result,
gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria in Opinion 30. Applying the
provisions of Opinion 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary item. There is no
current impact to the Company's financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company expects no impact to its
financial statement as the Company does not anticipate exiting or disposing of
any of its activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary sources of market risk for the Company include fluctuations in
commodity prices and interest rate fluctuations. At June 30, 2002, the Company
had not entered into any hedge arrangements, commodity swap agreements,
commodity futures, options or other similar agreements relating to crude oil and
natural gas.
At June 30, 2002, the Company had an outstanding loan balance of $1,770,000
under its $5.0 million revolving credit agreement, which bears interest at the
prime rate, which varies from time to time. 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 $17,700, based on the outstanding
balance.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance
by other 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 generally are
Page 10
uncollateralized. At June 30, 2002, the Company's largest credit risk associated
with any single purchaser was $59,029. 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.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
-----------------
None.
Item 2. Changes in securities
---------------------
Refer to Note A in Notes to Consolidated Financial Statements under
the heading Stockholders' Equity.
Item 3. Defaults upon senior securities
-------------------------------
None.
Item 4. Submission or matters to a vote of security holders
---------------------------------------------------
The Annual Meeting of shareholders of Mexco Energy Corporation was
held on August 8, 2002. At the meeting, the shareholders voted on the
election of directors and the ratification of the selection of
independent auditors. The following seven nominees were each elected
to the Board for a one-year term: Thomas Graham, Jr., Thomas Craddick,
William G. Duncan, Arden Grover, Jack Ladd, Nicholas C. Taylor and
Donna Gail Yanko. Additionally, the appointment of Grant Thornton LLP
as independent auditors for the Company for the fiscal year ending
March 31, 2003 was ratified.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended June 30, 2002.
Page 11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated: August 12, 2002 /s/ Nicholas C. Taylor
-------------------------------------
Nicholas C. Taylor
President
Dated: August 12, 2002 /s/ Tamala L. McComic
-------------------------------------
Tamala L. McComic
Treasurer, Controller and
Assistant Secretary
Page 12