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 September 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 November 7, 2002
MEXCO ENERGY CORPORATION
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Balance Sheets as of September 30, 2002
(Unaudited) and March 31, 2002 3
Consolidated Statements of Operations (Unaudited) for
the three and six months ended September 30, 2002 and
September 30, 2001 4
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended September 30, 2002 and
September 30, 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 13
- ---------------------------
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 14
- ----------
CERIFICATIONS 15
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Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2002 2002
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 37,541 $ 44,958
Accounts receivable:
Oil and gas sales 278,250 229,257
Trade 72,269 49,644
Related parties 1,380 523
Income taxes receivable 52,015 104,030
Prepaid expenses 33,449 24,124
------------ ------------
Total current assets 474,904 452,536
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 14,685,100 13,886,798
Office and computer equipment
and software 31,600 28,781
------------ ------------
14,716,700 13,915,579
Less accumulated depreciation,
depletion and amortization 8,266,647 8,020,150
------------ ------------
Property and equipment, net 6,450,053 5,895,429
------------ ------------
Total assets $ 6,924,957 $ 6,347,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 314,476 $ 105,332
------------ ------------
Total current liabilities 314,476 105,332
Long-term debt 2,030,000 1,710,000
Deferred income tax liability 299,997 256,591
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 September 30, 2002 and
March 31,2002 883,283 883,283
Additional paid in capital 3,628,373 3,599,045
Retained earnings (108,786) (206,286)
Treasury stock, at cost (29,244 shares) (122,386) --
------------ ------------
Total stockholders' equity 4,280,484 4,276,042
------------ ------------
Total liabilities and stockholders'
equity $ 6,924,957 $ 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 and Six Months ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
2002 2001 2002 2001
---------------------------- ----------------------------
Operating revenue:
Oil and gas sales $ 512,180 $ 434,798 $ 1,056,830 $ 1,029,549
Other 2,838 2,723 9,452 4,431
------------ ------------ ------------ ------------
Total operating revenue 515,018 437,521 1,066,282 1,033,980
Operating costs and expenses:
Oil and gas production 232,605 213,702 389,209 371,105
Depreciation, depletion
and amortization 122,975 114,634 246,498 205,830
General and administrative 107,755 76,137 246,763 190,304
------------ ------------ ------------ ------------
Total operating costs
and expenses 463,335 404,473 882,470 767,239
------------ ------------ ------------ ------------
51,683 33,048 183,812 266,741
Other income and (expenses):
Interest income 118 1,413 244 1,670
Interest expense (22,297) (12,185) (43,146) (22,713)
------------ ------------ ------------ ------------
Net other income and expenses (22,179) (10,772) (42,902) (21,043)
------------ ------------ ------------ ------------
Income before income taxes 29,504 22,276 140,910 245,698
Income tax expense (current) -- -- -- --
Income tax expense (deferred) 9,146 48,288 43,406 72,857
------------ ------------ ------------ ------------
Net income $ 20,358 ($ 26,012) $ 97,504 $ 172,841
============ ============ ============ ============
Net income per share:
Basic $ 0.01 ($ 0.01) $ 0.06 $ 0.10
Diluted $ 0.01 ($ 0.01) $ 0.06 $ 0.10
Weighted average shares outstanding:
Basic 1,737,329 1,771,146 1,745,787 1,771,146
Diluted 1,739,900 1,771,146 1,750,440 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 Six Months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from operating activities:
Net income $ 97,504 $ 172,841
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 43,406 83,834
Stock-based compensation 29,325 24,736
Depreciation, depletion and
amortization 246,498 205,830
(Increase) decrease in
accounts receivable (20,462) 211,452
Increase in accounts payable
and accrued expenses 95,556 167,120
(Increase)decrease in prepaid expenses (9,325) 32,682
Increase(decrease)in income taxes payable -- (51,637)
------------ ------------
Net cash provided by operating
activities 482,502 846,858
Cash flows from investing activities:
Additions to property and equipment (687,533) (1,589,934)
------------ ------------
Net cash used in investing
activities (687,533) (1,589,934)
Cash flows from financing activities:
Acquisition of treasury stock (122,386) --
Principal borrowings on
long-term debt 320,000 400,000
------------ ------------
Net cash provided by financing activities 197,614 400,000
------------ ------------
Net decrease in cash (7,417) (343,076)
Cash, beginning of the period 44,958 378,816
------------ ------------
Cash, end of period $ 37,541 $ 35,740
============ ============
Interest paid $ 42,239 $ 22,654
Income taxes paid $ -- $ 66,668
The accompanying note is an integral part
of the consolidated financial statements.
Page 4
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 only of normal
recurring accruals) necessary to present fairly the financial position of the
Company and its wholly owned subsidiary as of September 30, 2002, and the
results of its operations and cash flows for the interim periods ended September
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 three and six-month periods ended September 30, 2002 and 2001.
Page 6
Three Months Ended Six Months Ended
September 30 September 30
2002 2001 2002 2001
--------------------- ---------------------
Weighted average number of
common shares outstanding 1,737,329 1,771,146 1,745,787 1,771,146
Incremental shares from the
assumed exercise of dilutive
stock options 2,571 -- 4,653 --
--------- --------- --------- ---------
Dilutive potential common shares 1,739,900 1,771,146 1,750,440 1,771,146
Options to purchase 200,000 and 210,000 shares outstanding at September 30,
2002 and September 30, 2001, respectively, were not included in the computation
of diluted net income per share because either (i) the exercise price of the
options was greater than the average market price of the common stock of the
Company, or (ii) the Company had a net loss from continuing operations and,
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 or six months ended
September 30, 2002 due to a tax loss carryforward of approximately $283,000 from
the year ending March 31, 2002. During the quarter ended September 30, 2002, 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.
For the quarter ended September 30, 2001, income tax expense is higher than
statutory rates due to a correction of a prior quarter estimate.
Stockholders' Equity
- --------------------
During the quarter ended September 30, 2002, the board of directors authorized
the purchase of 300 shares of the Company's common stock totaling $1,860 for
treasury. Through the end of the second quarter, the Company has used $122,386
and purchased 29,244 shares of its common stock for treasury.
Long Term Liabilities
- ---------------------
On November 12, 2002, the Company's revolving credit agreement with Bank of
America, N.A. ("Bank"), which originally matured on August 15, 2003, was
extended for one year. The financial statements were prepared using this
extended date of maturity, August 15, 2004.
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 September 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 currently
does not exist.
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
Page 7
beginning after June 15, 2002, with earlier application encouraged. As of
September 30, 2002, the Company expects no impact to the financial statements,
upon adoption.
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 from the adoption of this pronouncement.
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." SFAS No. 145, which is effective for fiscal years beginning after
May 15, 2002, most significantly, 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 from the adoption of this pronouncement.
In June 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.
MEXCO ENERGY CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statements Regarding 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"). Forward-looking statements can be identified with words and
phrases such as "believes," "expects," "anticipates," "should," "estimates,"
"foresees" or other words and phrases of similar meaning. Forward-looking
statements appear throughout this Form 10-Q and include statements regarding our
plans, beliefs or current expectations with respect to, among other things:
profitability, planned capital expenditures; estimates of oil and gas
production, estimates of future oil and gas prices; estimates of oil and gas
reserves; our future financial condition or results of operations; and our
business strategy and other plans and objectives for future operations.
Forward-looking statements involve
Page 8
known and unknown risks and uncertainties that could cause actual results to
differ materially from those contained in any forward-looking statement. While
the Company has made assumptions that it believes are reasonable, the
assumptions that support our forward-looking statements are based upon
information that is currently available and is subject to change. All
forward-looking statements in the Form 10-Q are qualified in their entirety by
the cautionary statement contained in this section. The Company does not
undertake to update, revise or correct any of the forward-looking information.
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 six months of fiscal 2003, cash flow from operations was $482,502
compared to $846,858 for the first six months of fiscal 2002. The cash flow from
operations for the first six months of fiscal 2003 included the effects of an
increase in deferred income taxes, prepaid expenses and accounts receivable.
Cash of $687,533 was used for additions to property and equipment and cash of
$122,386 was used to acquire treasury stock, of which $320,000 came from
borrowings. Accordingly, net cash decreased $7,417.
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 the end of the second quarter, the Company has used $122,386 and
purchased 29,244 shares of its common stock for treasury.
In March 2002, the Company acquired 867 gross acres, 605 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 estimate significant proven undeveloped reserves to
this acreage. Development of these properties has begun in fiscal 2003 with the
re-entry of 4 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 $164,000 and is currently on production at
initial rates of 10 barrels ("bbls") of oil per day. The third and fourth
re-entries have been completed at an approximate cost to the Company of $275,000
and are currently on production at combined initial rates of 12 bbls of oil per
day and 47 thousand cubic feet of gas ("mcf") per day. Additional opportunities
are being evaluated in this area.
During the second quarter the Company participated in the drilling of two wells
by outside operators. One well is an offset to a well the Company currently has
an interest in, located in Nolan County. The well has been completed and is
currently on production. The combined production of the two wells in Nolan
County initially was approximately 100 bbls of oil per day and 100 mcf of gas
per day. The Company has a 12.5% working interest and a 9.75% net revenue
interest in each well. The approximate cost to the Company for the new well was
$21,000. Additional opportunities are being evaluated in this area. The second
well, in Reeves County, is a sidetrack from an existing wellbore. The well is
completed and currently producing approximately 2 million cubic feet ("mmcf")
per day. The Company has a 4% working
Page 9
interest and a 3% net revenue interest in this well. The approximate cost to the
Company was $32,000.
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 September 30, 2002, the Company had working capital of approximately $160,428
compared to working capital of approximately $347,204 at March 31, 2002, a
decrease of $186,776, due primarily to an increase in accounts payable and
accrued liabilities.
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 originally 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 was
originally August 15, 2003. On November 12, 2002, the maturity date was extended
to August 15, 2004. The borrowing base was re-determined on September 10, 2002
and increased to $2,586,000 with monthly commitment reductions of $33,150. As of
September 30, 2002, the balance outstanding under this agreement was $2,030,000.
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, 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 September 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 September 30, 2002 and 2001
- ----------------------------------------------------------------------
Net income increased from a net loss of $26,012 for the quarter ended September
30, 2001 to a profit of $20,358 for the quarter ended September 30, 2002.
Individual categories of income and expense are discussed below.
Oil and gas sales increased from $434,798 for the second quarter of fiscal 2002
to $512,180 for the same period of fiscal 2003. This increase of 18% or $77,382
resulted from higher oil and gas prices and increased oil and gas production.
Average gas prices increased from $2.76 per mcf for the second quarter of fiscal
2002 to $2.89 per mcf for the same period of fiscal 2003, while average oil
prices increased from $24.80 per bbl for the first quarter of fiscal 2002 to
$26.15 for the same period of fiscal 2003. Oil and gas production quantities
were 5,074 barrels ("bbls") and 111,840 thousand cubic feet ("mcf") for the
second quarter of fiscal 2002 and 5,295 bbls and 129,428 mcf for the same period
of fiscal 2003, an increase of 4% and 16%, respectively.
Production costs increased 9% from $213,702 for the second quarter of fiscal
2002 to $232,605 for the same period of fiscal 2003. This was the result of an
increased number of repairs to operated wells during the quarter.
Page 10
General and administrative expenses increased 42% from $76,137 for the second
quarter of fiscal 2002 to $107,755 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 7%, from $114,634 for the second quarter of fiscal 2002 to $122,975
for the same period of fiscal 2003 primarily due to a greater amount of reserves
attributable to proved undeveloped properties with significant development costs
and increased production during the second quarter.
Interest expense increased 83% from $12,185 for the second quarter of fiscal
2002 to $22,297 for the same period of fiscal 2003, due to increased borrowings.
Results of Operations - Six Months Ended September 30, 2002 and September 30,
- --------------------------------------------------------------------------------
2001
- ----
Net income decreased 44%, from a net profit of $172,841 for the six months ended
September 30, 2001 to a net profit of $97,504 for the six months ended September
30, 2002. Individual categories of income and expense are discussed below.
Oil and gas sales increased 3% from $1,029,549 for the six months ended
September 30, 2001 to $1,056,830 for the same period of fiscal 2003, primarily
because of increased production. Average gas prices decreased from $3.55 per mcf
for the first six months of fiscal 2002 to $2.92 per mcf for fiscal 2003, and
average oil prices increased from $24.77 per bbl for the first six months of
fiscal 2002 to $24.94 for fiscal 2003. Oil and gas production quantities were
9,566 bbls and 223,093 mcf for the first six months of fiscal 2002 and 11,267
bbls and 265,297 for fiscal 2003, an increase of 18% and 19%, respectively.
Production costs increased 5% from $371,105 for the six months ended September
30, 2002 to $389,209 for the same period of fiscal 2003. This was the result of
an increased number of wells and repairs to operated wells during the second
quarter.
Depreciation, depletion and amortization based on production and other methods
increased 20%, from $205,830 for the first six months of fiscal 2002 to $246,498
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 90% from $22,713 for the first six months of fiscal
2002 to $43,146 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 September 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 currently
does not exist.
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
September 30, 2002, the Company expects no impact to the financial statements,
upon adoption.
Page 11
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 from the adoption of this pronouncement.
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." SFAS No. 145, which is effective for fiscal years beginning after
May 15, 2002, most significantly, 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 from the adoption of this pronouncement.
In June 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.
ITEM 3. 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 September 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 September 30, 2002, the Company had an outstanding loan balance of $2,030,000
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 $20,030, 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 uncollateralized. At September 30, 2002, the Company's
largest credit risk associated with any single purchaser was $59,575. The
Company has not experienced any significant credit losses.
Page 12
Volatility of Oil and Gas Prices. The Company's revenues, operating results and
future rate of growth are highly dependent upon the prevailing market prices of,
and demand for, oil and natural gas. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are
beyond our control. These factors include the level of global demand for
petroleum products, foreign supply of oil and gas, the establishment of and
compliance with production quotas by oil exporting countries, weather
conditions, the price and availability of alternative fuels, and overall
economic conditions, both foreign and domestic. The Company cannot predict
future oil and gas prices with any degree of certainty. Sustained weakness in
oil and gas prices may adversely affect our ability to obtain capital for our
exploration and development activities and may require a reduction in the
carrying value of the Company's oil and gas properties. Similarly, an
improvement in oil and gas prices can have a favorable impact on the Company's
financial condition, results of operations and capital resources.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (its principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of a date within 90 days prior to the date of
filing of this quarterly report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
it in reports filed or submitted by it under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and includes controls and
procedures designed to ensure that information required to be disclosed by it in
such reports is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
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
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Page 14
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 September 30, 2002.
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: November 12, 2002 /s/ Nicholas C. Taylor
----------------------------------
Nicholas C. Taylor
President
Dated: November 12, 2002 /s/ Tamala L. McComic
----------------------------------
Tamala L. McComic
Treasurer, Controller and Assistant Secretary
Page 14
CERTIFICATIONS
I, Nicholas C. Taylor, President and Chief Executive Officer of Mexco Energy
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of this Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
Page 15
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 12, 2002 /s/ Nicholas C. Taylor
----------------------------------
Nicholas C. Taylor
President and Director
I, Tamala L. McComic, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mexco Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of this Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 12, 2002 /s/ Tamala L. McComic
----------------------------------
Tamala L. McComic
Treasurer, Controller and Assistant Secretary