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, 2003 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: (432) 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 [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.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 June 26, 2003, the aggregate market value of the registrant's common
stock held by non-affiliates (using the closing bid price of $7.75) was
approximately $3,956,088.
The number of shares outstanding of the registrant's common stock as of
June 26, 2003 was 1,736,041.
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 August 14, 2003. Such Information Statement will be filed with the Commission
not later than July 30, 2003.
TABLE OF CONTENTS
PART I
Item 1. Business ........................................................ 3
Item 2. Properties....................................................... 7
Item 3. Legal Proceedings................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................. 11
Item 6. Selected Financial Data.......................................... 12
Item 6A. Selected Quarterly Financial Data................................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 15
Item 8. Financial Statements and Supplementary Data...................... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures............................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant............... 34
Item 11. Executive Compensation........................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management... 34
Item 13. Certain Relationships and Related Transactions................... 35
Item 14. Controls and Procedures.......................................... 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 35
Signatures................................................................. 36
Certifications............................................................. 38
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 primarily focuses on the
exploration for and development of natural gas 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 that could have a potentially meaningful impact on Company reserves.
OIL AND GAS OPERATIONS
As of March 31, 2003, gas reserves constituted approximately 90% of the
Company's total proved reserves and approximately 76% of the Company's revenues
for fiscal 2003. Revenues from oil and gas royalty interests accounted for
approximately 15% of the Company's revenues for fiscal 2003.
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 6% of the Company's discounted future net cash flows from proved
reserves as of March 31, 2003, and for fiscal 2003, approximately 21% of
revenues and 12% 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 17% of the Company's discounted future net cash flows from proved
reserves as of March 31, 2003, and for fiscal 2003, approximately 11% of
revenues and 6% of production costs.
EL CINCO GAS FIELD properties, encompassing 1,873 gross acres, 1,349 net
acres, 10 gross producing wells and 7.36 net wells in Pecos County, Texas,
account for approximately 48% of the Company's discounted future net cash flows
from proved reserves as of March 31, 2003. This is a
3
multi-pay area where most of the leases have potential reserves in two zones. Of
this amount approximately 33% of the Company's discounted future net cash flows
from proved reserves are attributable to proven undeveloped reserves which will
be developed primarily through re-entry of existing wells.
The Company owns interests in and operates 22 producing wells and two
shut-in wells. The Company owns partial interests in an additional 1,572
producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana,
Arkansas, Wyoming, Kansas, Colorado, Montana and North Dakota. Additional
information concerning these properties and the oil and gas reserves 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)
---- --------- ---------
2003....................... 23,391 538,787
2002....................... 21,139 467,013
2001....................... 18,545 503,773
2000....................... 19,334 540,793
1999....................... 49,573 482,948
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. Some of these competitors have financial and
personnel resources substantially in excess of those available to the Company
and, therefore, the Company may be placed at a competitive disadvantage.
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. Our ability to
acquire and develop additional properties in the future will depend upon our
ability to conduct operations, to evaluate and select suitable properties, and
to consummate transactions in this highly competitive environment in a timely
manner.
MAJOR CUSTOMERS
The Company had sales to the following company that amounted to 10% or more
of revenues for the year ended March 31:
2003 2002 2001
---- ---- ----
Sid Richardson Energy Services, Co.
(formerly Koch Midstream Services Company) 26% 24% 39%
Because a ready market exists for the Company's oil and gas production, the
Company does not believe the loss of any individual customer would have a
material adverse effect on its financial position or results of operations.
RISK FACTORS
There are many factors that affect the Company's business and results of
operations, some of which are beyond our control. The following is a description
of some of the important factors that may cause results of operations in future
periods to differ materially from those currently expected or desired.
Oil and gas prices are volatile and could adversely affect our revenues, cash
flow, liquidity and reserve estimates. The Company cannot predict
4
future oil and natural gas prices with any certainty. Historically, the markets
for oil and gas have been volatile, and they are likely to continue to be
volatile. Factors that can cause price fluctuations include changes in supply
and demand, weather conditions, the price and availability of alternative fuels,
political and economic conditions in oil producing countries, and other factors
that are beyond our control. Natural gas prices affect the Company more than oil
prices because most of the Company's production and reserves are natural gas.
Prices also affect the amount of cash flow available for capital
expenditures and the Company's ability to borrow money or raise additional
capital. Lower prices may also reduce the amount of crude oil and natural gas
than can be produced economically. Changes in oil and gas prices impact both
estimated future net revenue and the estimated quantity of proved reserves.
Price increases may permit additional quantities of reserves to be produced
economically, and price decreases may render uneconomic the production of
reserves previously classified as proved. Thus, the Company may experience
material increases or decreases in reserve quantities solely as a result of
price changes and not as a result of drilling or well performance.
Lower oil and gas prices increase the risk of ceiling limitation
write-downs. The Company uses the full cost method to account for oil and gas
operations. Accordingly, the Company capitalizes the cost to acquire, explore
for and develop crude oil and natural gas properties. Under the full cost
accounting rules, the net capitalized cost of crude oil and natural gas
properties may not exceed a "ceiling limit" which is based upon the present
value of estimated future net cash flows from proved reserves, discounted at 10%
plus the lower of cost or fair market value of unproved properties. If net
capitalized costs of oil and natural gas properties exceed the ceiling limit,
the Company must charge the amount of the excess to earnings. This charge does
not impact cash flow from operating activities, but does reduce stockholders'
equity and earnings. The risk that the Company will be required to write down
the carrying value of oil and natural gas properties increases when oil and
natural gas prices are low.
Estimates of proved reserves and the estimated future net revenue from such
reserves are uncertain and inherently imprecise. The process of estimating oil
and gas reserves is complex and requires significant decisions and assumptions
in the evaluation of available geological, geophysical, engineering and economic
data for each reservoir. The interpretation of such data is a subjective process
dependent upon the quality of the data and the decision-making and judgment of
reservoir engineers
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from those estimated. Any significant variance
could materially affect the estimated quantities and present value of reserves,
which may in turn adversely affect our cash flow, results of operations and the
availability of capital resources.
One should not assume that the present value of proved reserves is equal to
the current fair market value of the Company's estimated oil and gas reserves.
In accordance with the requirements of the "Securities and Exchange Commission",
the estimated discounted future net cash flows from proved reserves are
generally based on prices and costs as of the date of the estimate. Actual
future prices and costs may be materially higher or lower than those as of the
date of the estimate. The timing of both the production and the expenses with
respect to the development and production of oil and gas properties will effect
the timing of future net cash flows from proved reserves and their present
value.
5
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. Because these rules and regulations are frequently amended or
reinterpreted, the Company is not able to predict the future cost or impact of
complying with such laws.
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.
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;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by FERC and Congress will continue.
ENVIRONMENTAL
The Company, by nature of its oil and gas operations, is subject to
extensive federal, state and local environmental laws and regulations
controlling the generation, use, storage, and discharge of materials into the
environment or otherwise relating to the protection of the environment. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws, which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. These laws and regulations may
require the acquisition of a permit before drilling or production commences,
6
restrict the types, quantities and concentration of various substances that can
be released into the environment in connection with drilling and production
activities, limit or prohibit construction or drilling activities on certain
lands lying within protected areas, restrict the rate of oil and gas production,
require remedial actions to prevent pollution from former operations and impose
substantial liabilities for pollution resulting from the Company's operations.
In addition, these laws and regulations may impose substantial liabilities and
penalties for the Company's failure to comply with them or for any contamination
resulting from the Company's operations. The Company believes it is in
compliance, in all material respects, with applicable environmental
requirements. The Company does not believe costs relating to these laws and
regulations have had a material adverse effect on the Company's operations or
financial condition in the past. As these laws and regulations become more
stringent and complex, there is no assurance that changes in or additions to
laws or regulations regarding the protection of the environment will not have
such an impact in the future.
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, 2003, the Company had two 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 non-cost bearing
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.
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, 2003, 2002 and 2001 are based on evaluations prepared
by Joe C. Neal and Associates, Petroleum Consultants. For information concerning
costs incurred by the
7
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. Actual future production, oil and gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves will most likely vary from the assumptions and estimates. Any
significant variance could materially affect the estimated quantities and value
of our oil and gas reserves, which in turn may adversely affect the Company's
cash flow, results of operations and the availability of capital resources.
In accordance with applicable financial accounting and reporting standards
of the Securities and Exchange Commission, the estimates of our proved reserves
and the present value of proved reserves set forth herein are made using oil and
gas sales prices estimated to be in effect as of the date of such reserve
estimates and are held constant throughout the life of the properties. Actual
future prices and costs may be materially higher or lower than those as of the
date of the estimate. The timing of both the production and the expenses with
respect to the development and production of oil and gas properties will effect
the timing of future net cash flows from proved reserves and their present
value.
The Company has not filed any other oil or gas reserve estimates or
included any such estimates in reports to other federal or foreign governmental
authority or agency within the last 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,
2003 2002 2001
------------ ------------ ------------
Oil (Bbls):
Proved developed - Producing 93,199 143,003 145,954
Proved developed - Non-producing 1,386 1,404 88,700
Proved undeveloped 55,564 92,900 --
------------ ------------ ------------
Total 150,149 237,307 234,654
============ ============ ============
Natural gas (Mcf):
Proved developed - Producing 3,451,880 3,822,715 4,447,379
Proved developed - Non-producing 1,065,902 1,336,190 1,889,833
Proved undeveloped 3,413,846 5,023,328 8,234
------------ ------------ ------------
Total 7,931,628 10,182,233 6,345,446
============ ============ ============
Present value of estimated future
net revenues before income taxes $ 20,772,830 $ 11,925,260 $ 15,988,820
============ ============ ============
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
8
to be 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, 2003:
Gross Net
------- -----
Oil........................................ 1,268 14
Gas........................................ 326 11
------- -----
Total Productive Wells................... 1,594 25
======= =====
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, 2003 material undeveloped acreage owned by
the Company was approximately 8,018 gross and 2,983 net acres all of which is 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, 2003.
Developed Acres
------------------------
Gross Net
------------------------
Texas................................ 114,273 4,993
New Mexico........................... 17,154 147
North Dakota......................... 23,999 18
Louisiana............................ 22,601 28
Oklahoma............................. 39,002 137
Montana.............................. 7,508 4
Kansas............................... 7,240 21
Wyoming.............................. 2,078 4
Colorado............................. 1,040 1
Arkansas............................. 320 --
-------- -------
Total................................ 235,215 5,353
======== =======
9
DRILLING ACTIVITIES
The following table sets forth the drilling activity of the Company for the
years ended March 31, 2003, 2002 and 2001.
Years ended March 31,
--------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Gross Net Gross Net Gross Net
------ ------ ------ ------ ------ ------
Exploratory Wells
Productive 2 .01 2 .01 1 .08
Nonproductive 1 .07 1 .09 2 .48
------ ------ ------ ------ ------ ------
Total 3 .08 3 .10 3 .56
====== ====== ====== ====== ====== ======
Development Wells
Productive 10 .17 12 .13 1 .02
Nonproductive -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total 10 .17 12 .13 1 .02
====== ====== ====== ====== ====== ======
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, 2003, 2002 and 2001.
Year Ended March 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Oil (a):
Production (Bbls) 23,391 21,139 18,545
Revenue $ 640,685 $ 456,108 $ 531,751
Average Bbls per day 64 58 51
Average sales price per Bbl $ 27.39 $ 21.58 $ 28.67
Gas (b):
Production (Mcf) 538,787 467,013 503,773
Revenue $2,041,074 $1,312,452 $2,560,459
Average Mcf per day 1,476 1,279 1,380
Average sales price per Mcf $ 3.79 $ 2.81 $ 5.08
Production cost:
Production cost $ 848,513 $ 648,820 $ 526,032
Equivalent Mcf (c) 679,133 593,847 615,043
Production cost per equivalent Mcf $ 1.25 $ 1.09 $ 0.86
Production cost per sales dollar $ 0.32 $ 0.37 $ 0.17
Total oil and gas revenues $2,681,759 $1,768,560 $3,092,210
(a) Includes condensate.
(b) Includes natural gas products.
(c) Oil production is converted to equivalent mcf 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 named plaintiff in one class action lawsuit against a gas
purchaser involving contract price disputes. The Company does not expect any
expenses of a material nature to arise from this class action claim. No amounts
have been accrued for this item in the Company's consolidated financial
statement for the year ended March 31, 2003. During the third quarter of fiscal
2003, the Company received proceeds of $254,862 before expenses of $101,945,
from the settlement of a class action lawsuit against a gas purchaser involving
contract price disputes.
10
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, 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company as of March 31, 2003.
Name Age Position
------------------- --- ---------------------------------------------
Nicholas C. Taylor 65 President and Chief Executive Officer
Donna Gail Yanko 58 Vice President and Corporate Secretary
Tamala L. McComic 34 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 to the State Securities Board
through January 2001. In addition to serving as chairman for four years, he
continues to serve as a member pending the appointment of his successor.
Donna Gail Yanko 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.
Tamala L. McComic has been Controller for the Company since July 2001. She
was appointed Assistant Secretary of the Company in August 2001 and Treasurer in
September 2001. From 1994 to 2001 Mrs. McComic was Regional Controller and
Credit Manager for Transit Mix Concrete & Materials Company, a subsidiary of
Trinity Industries, Inc. In May 2003, Mrs. McComic was appointed Vice President,
Chief Financial Officer and continues to serve as Treasurer and Assistant
Secretary.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market
bulletin board under the symbol MEXC. The registrar and transfer agent is
Computershare Investor Services, Inc., P.O. Box 1596, Denver, Colorado, 80201
(Tel: 303-262-0600). As of March 31, 2003 the Company had 1,406 shareholders of
record and 1,766,566 shares outstanding.
11
PRICE RANGE OF COMMON STOCK
Bid Price
-------------------
High Low
------ ------
2003: (1)
April - June 2002 $ 6.00 $ 3.80
July - September 2002 6.00 2.50
October - December 2002 3.00 2.25
January - March 2003 4.80 2.85
2002: (1)
April - June 2001 4.10 3.00
July - September 2001 4.10 3.71
October - December 2001 4.50 2.85
January - March 2002 4.50 3.50
(1) Reflects high and low bid information received from Pink Sheets LLC,
formerly National Quotation Bureau, LLC. These bid quotations represent
prices between dealers, without retail markup, markdown or commissions, and
do not reflect actual transactions.
On June 26, 2003, the bid price was $7.75.
On February 1, 2002 the Company's Board of Directors declared a stock
dividend consisting of shares of par value $0.50 common stock of the
Company in the amount of ten percent (10%) of the outstanding shares, or 1
share for each 10 shares held by all stockholders of record of the Company
as of February 15, 2002, with any resulting fractional share dividends to
be rounded up or down to the nearest whole number of shares and issued the
stock dividend accordingly. The payable date for this dividend was February
28, 2002 and resulted in an additional 160,566 shares of stock issued and
outstanding.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended March 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------
Statement of Operations:
Operating revenues $ 2,949,113 $ 1,778,583 $ 3,099,966 $ 1,686,266 $ 1,510,005
Operating income (loss) 926,277 252,101 1,881,776 498,384 (281,099)
Other income (expense) (95,357) (54,706) (92,160) (104,737) (144,675)
Net income (loss) $ 672,808 $ 189,291 $ 1,539,458 $ 393,647 $ (425,774)
Net income (loss) per
share - basic (1) $ 0.39 $ 0.11 $ 0.86 $ 0.22 $ (0.24)
Net Income (loss) per
share - diluted (1) $ 0.39 $ 0.11 $ 0.86 $ 0.22 $ (0.24)
Weighted average shares
outstanding - basic (1) 1,741,462 1,768,314 1,784,825 1,785,618 1,785,618
Weighted average shares
outstanding - diluted (1) 1,746,831 1,768,579 1,787,503 1,785,618 1,785,618
Balance Sheet:
Property and equipment, net $ 7,028,659 $ 5,895,429 $ 4,009,852 $ 3,749,400 $ 3,749,400
Total assets 7,688,638 6,347,965 4,961,360 4,043,015 4,043,015
Total debt 2,150,000 1,710,000 600,000 1,200,000 1,784,000
Stockholders' equity $ 4,956,388 $ 4,276,042 $ 4,046,452 $ 2,567,228 $ 2,173,581
Cash Flow:
Cash provided by operations $ 1,369,690 $ 899,977 $ 1,903,345 $ 722,088 $ 532,171
(1) Amounts have been adjusted to reflect the 10% stock dividend effected on
February 1, 2002.
12
ITEM 6A. SELECTED QUARTERLY FINANCIAL DATA
FISCAL 2003
4TH QTR 3RD QTR 2ND QTR 1ST QTR
---------- ---------- ---------- ----------
Net sales $ 956,890 $ 668,039 $ 512,180 $ 544,650
Gross profit $ 730,662 $ 434,963 $ 279,575 $ 388,046
Net income $ 336,588 $ 238,718 $ 20,356 $ 77,146
Net income per share-basic $ 0.19 $ 0.14 $ 0.01 $ 0.04
Net income per share-diluted $ 0.19 $ 0.14 $ 0.01 $ 0.04
FISCAL 2002
4TH QTR 3RD QTR 2ND QTR 1ST QTR
---------- ---------- ---------- ----------
Net sales $ 409,058 $ 329,953 $ 434,798 $ 594,751
Gross profit $ 261,890 $ 199,406 $ 221,096 $ 437,348
Net income $ 48,988 $ (32,538) $ (26,012) $ 198,852
Net income per share-basic(1) $ 0.03 $ (0.02) $ (0.01) $ 0.11
Net income per share-diluted(1) $ 0.03 $ (0.02) $ (0.01) $ 0.11
(1) Amounts have been adjusted to reflect the 10% stock dividend effected on
February 1, 2002.
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 10 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 2003, the Company primarily used cash provided by operations
($1,369,690) and borrowings on the line of credit ($910,000) to fund oil and gas
property acquisitions and development ($1,628,695). Working capital as of March
31, 2003 was $389,179.
In fiscal 2001, the board of directors authorized the purchase of up to
25,000 shares of the Company's common stock, and the Company repurchased 13,160
shares, at an aggregate cost of $84,934. For fiscal 2002, the board of directors
authorized the use of up to $250,000 to repurchase shares of the Company's
common stock. During fiscal year 2002, the Company repurchased 22,533 shares, at
an aggregate cost of $91,231. Of such shares, 18,400 shares were reissued in
exchange for oil and gas lease rights representing 368 net acres valued at
approximately $83,000. The remaining 4,133 shares were cancelled. In fiscal
2003, the board of directors once again authorized the use of up to $250,000 to
repurchase shares of the Company's common stock. During fiscal year 2003, the
Company repurchased 30,244 shares, at an aggregate cost of $127,536 for the
treasury account.
In December, 2002, the Company entered into a participation agreement with
Falcon Bay Exploration, LLC exercising its right to purchase at an aggregate
cash price of $597,301, the acreage and seismic data on the first of four such
prospects referred to in the exploration agreement between the Company and
Falcon Bay Exploration, LLC. This information is contained in Form 8-K filed by
the Company on December 6, 2002.
13
The Company is reviewing several other projects in which it may
participate. The cost 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. See Note B of Notes to
Consolidated Financial Statements for a description of the Company's revolving
credit agreement with Bank of America, N.A.
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 2003 COMPARED TO FISCAL 2002
Oil and gas sales increased from $1,768,560 in 2002 to $2,681,759 in 2003,
an increase of $913,199 or 52%. This increase was attributable to both an
increase in production and an increase in oil and gas prices during the year.
The average oil price increased from $21.58 per bbl in 2002 to $27.39 per bbl in
2003, an increase of $5.81 per bbl or 27%. The average gas price increased from
$2.81 in 2002 to $3.79 per mcf in 2003, an increase of $.98 per mcf or 35%. Oil
production increased from 21,139 bbls in 2002 to 23,391 bbls in 2003, an
increase of 2,252 bbls or 11%. Gas production increased from 467,013 mcf in 2002
to 538,787 mcf in 2003, an increase of 71,774 mcf or 15%.
Other income increased from $10,023 in 2002 to $267,354 in 2003, an
increase of $257,331. This increase is the result of the proceeds received
($254,862) from the settlement of a class action lawsuit against a gas purchaser
involving contract price disputes.
Production costs increased from $648,820 in 2002 to $848,513 in 2003, an
increase of $199,633 or 31%. This is primarily attributable to an increased
number of repairs on operated properties during the year.
Depreciation, depletion and amortization increased from $448,422 in 2002 to
$641,827 in 2003, an increase of $193,405 or 43%, due primarily to the downward
revisions of proved undeveloped reserves in the El Cinco Field. There was no
impairment of oil and gas properties in fiscal 2002 or 2003.
General and administrative expenses increased from $429,240 in 2002 to
$532,496 in 2003, an increase of $103,256 or 24%. This increase was primarily
attributable to the increased cost of consulting expenses relating to the
settlement of the lawsuit which was settled during the fiscal year ($101,945)
and an increase in compensation related to stock options granted to consultants
($12,792).
Interest expense increased from $57,161 in 2002 to $96,337 in 2003, an
increase of $39,176 or 69%. This increase was attributable to additional
borrowings during the current fiscal year.
FISCAL 2002 COMPARED TO FISCAL 2001
Oil and gas sales decreased from $3,092,210 in 2001 to $1,768,560 in 2002,
a decrease of $1,323,650 or 43%. This decrease was primarily attributable to the
decrease in oil and gas prices during the year. The average oil price decreased
from $28.67 in 2001 to $21.58 per bbl in 2002, a decrease of $7.09 per bbl or
25%. The average gas price decreased from $5.08 in 2001 to $2.81 per mcf in
2002, a decrease of $2.27 per mcf or 45%. Oil production increased from 18,545
bbls in 2001
14
to 21,139 bbls in 2002, an increase of 2,594 bbls or 14%. Gas production
decreased from 503,773 mcf in 2001 to 467,013 mcf in 2002, a decrease of 36,760
mcf or 7%.
Production costs increased from $526,032 in 2001 to $648,820 in 2002, an
increase of $122,788 or 23%. This is primarily attributable to the increased
number of working interests the Company acquired during the fiscal year as well
as repairs on operated properties.
Depreciation, depletion and amortization increased from $377,761 in 2001 to
$448,422 in 2002, an increase of $70,661 or 19%, due primarily to lower gas
prices and a large amount of reserves attributable to acquired properties which
require a significant amount of development costs. There was no impairment of
oil and gas properties in fiscal 2001 or 2002.
General and administrative expenses increased from $314,397 in 2001 to
$429,240 in 2002, an increase of $114,843 or 37%. This increase was primarily
attributable to increased cost of shareholder maintenance related to the 10%
stock dividend issued ($28,200), increases in financial consulting fees
($20,000), engineering ($13,000), land and geological services ($18,000), and
compensation related to stock options granted to consultants ($24,000).
Interest expense decreased from $95,999 in 2001 to $57,161 in 2002, a
decrease of $38,838 or 40%. This decrease was primarily attributable to lower
interest rates during 2002.
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
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK FACTORS
All of the Company's financial instruments are for purposes other than
trading. At March 31, 2003, 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.
INTEREST RATE RISK. The following table summarizes maturities for
15
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 $21,500.
Year ended March 31,
--------------------------------------
2003 2004 2005
---------- ---------- ----------
Variable rate bank debt $ -- $2,150,000 $ --
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, 2003 the
Company's largest credit risk associated with any single purchaser was $138,657.
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. These market prices tend to fluctuate significantly in response to factors
beyond the Company's control. The prices the Company receives for its crude oil
production are based on global market conditions. The continued terror threats
in the Middle East, the continuing economic crisis in Venezuela (a major oil
exporter), and actions of OPEC and its maintenance of production constraints, as
well as other economic, political, and environment factors will continue to
affect world supply. Natural gas prices fluctuate significantly in response to
numerous factors including the U.S. economic environment, North American weather
patterns, other factors affecting demand such as substitute fuels, the impact of
drilling levels on natural gas supply, and the environmental and access issues
that limit future drilling activities for the industry. 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 2003, the Company's
pretax income would have changed by $234. If the average gas price had increased
or decreased by one cent per mcf for fiscal 2003, the Company's pretax income
would have changed by $5,388.
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
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.
As required by the SEC, the
16
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate, while actual future
prices and costs may be materially higher or lower.
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 availability of workover and drilling rigs, well
blowouts, cratering, explosions, fires, formations with abnormal pressures,
pollution, releases of toxic gases and other environmental hazards and risks.
Any of these operating hazards 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...................... 18
Consolidated Balance Sheets............................................. 19
Consolidated Statements of Operations................................... 20
Consolidated Statements of Changes in Stockholders' Equity.............. 21
Consolidated Statements of Cash Flows................................... 22
Notes to Consolidated Financial Statements.............................. 23
17
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, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mexco Energy
Corporation and Subsidiary as of March 31, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2003 in conformity with accounting principles generally accepted
in the United States of America.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
May 23, 2003
18
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of March 31,
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 68,547 $ 44,958
Accounts receivable:
Oil and gas sales 560,297 229,257
Trade 17,617 49,644
Related parties 3,475 523
Income taxes receivable -- 104,030
Prepaid costs and expenses 10,043 24,124
------------ ------------
Total current assets 659,979 452,536
Property and equipment, at cost
Oil and gas properties, using
the full cost method ($673,690
excluded from amortization in 2003) 15,656,928 13,886,798
Other 33,708 28,781
------------ ------------
15,690,636 13,915,579
Less accumulated depreciation,
depletion, and amortization 8,661,977 8,020,150
------------ ------------
Property and equipment, net 7,028,659 5,895,429
------------ ------------
$ 7,688,638 $ 6,347,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 93,434 $ 105,332
Lease obligation payable 61,086 --
Current portion of long-term debt 116,280 --
------------ ------------
Total current liabilities 270,800 105,332
Long-term debt 2,033,720 1,710,000
Deferred income tax liability 427,730 256,591
Stockholders' equity
Preferred stock - $1.00 par value;
10,000,000 shares authorized -- --
Common stock - $0.50 par value;
40,000,000 shares authorized;
1,766,566 shares issued 883,283 883,283
Additional paid-in capital 3,734,119 3,599,045
Retained earnings (accumulated deficit) 466,522 (206,286)
Treasury stock, at cost (127,536) --
------------ ------------
Total stockholders' equity 4,956,388 4,276,042
------------ ------------
$ 7,688,638 $ 6,347,965
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
19
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
2003 2002 2001
------------ ------------ ------------
Operating revenues:
Oil and gas $ 2,681,759 $ 1,768,560 $ 3,092,210
Other 267,354 10,023 7,756
------------ ------------ ------------
Total operating revenues 2,949,113 1,778,583 3,099,966
Operating expenses:
Production 848,513 648,820 526,032
Depreciation, depletion,
and amortization 641,827 448,422 377,761
General and administrative 532,496 429,240 314,397
------------ ------------ ------------
Total operating expenses 2,022,836 1,526,482 1,218,190
------------ ------------ ------------
926,277 252,101 1,881,776
Other income (expense):
Interest income 981 2,455 3,839
Interest expense (96,337) (57,161) (95,999)
------------ ------------ ------------
Net other expense (95,356) (54,706) (92,160)
------------ ------------ ------------
Earnings before income taxes 830,921 197,395 1,789,616
Income tax expense:
Current (13,026) (62,992) 64,663
Deferred 171,139 71,096 185,495
------------ ------------ ------------
158,113 8,104 250,158
------------ ------------ ------------
Net earnings $ 672,808 $ 189,291 $ 1,539,458
============ ============ ============
Net earnings per share:
Basic $ 0.39 $ 0.11 $ 0.86
Diluted $ 0.39 $ 0.11 $ 0.86
Weighted average outstanding shares:
Basic 1,741,462 1,768,314 1,784,825
Diluted 1,746,831 1,768,579 1,787,503
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
20
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained
Additional Earnings Total
Common Stock Treasury Paid-In (Accumulated Stockholders'
Par Value Stock Capital Deficit) Equity
------------ ------------ ------------ ------------ ------------
Balance, April 1, 2000 $ 811,644 -- $ 2,875,399 $ (1,119,815) $ 2,567,228
Net earnings -- -- -- 1,539,458 1,539,458
Issuance of stock 2 -- (2) -- --
Retirement of stock (953) -- -- (12,389) (13,342)
Stock based
compensation -- -- 24,700 -- 24,700
Purchase of stock -- (71,592) -- -- (71,592)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 $ 810,693 $ (71,592) $ 2,900,097 $ 407,254 $ 4,046,452
Net earnings -- -- -- 189,291 189,291
10% stock dividend 80,283 -- 722,548 (802,831) --
Purchase of stock -- (91,231) -- -- (91,231)
Issuance of stock
for property -- 72,576 10,224 -- 82,800
Retirement of stock (7,693) 90,247 (82,554) -- --
Stock based
compensation -- -- 48,730 -- 48,730
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2002 $ 883,283 $ -- $ 3,599,045 $ (206,286) $ 4,276,042
Net earnings -- -- -- 672,808 672,808
Purchase of stock -- (127,536) -- -- (127,536)
Issuance of warrants
for acreage -- -- 73,552 -- 73,552
Stock based
compensation -- -- 61,522 -- 61,522
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2003 $ 883,283 $ (127,536) $ 3,734,119 $ 466,522 $ 4,956,388
============ ============ ============ ============ ============
Share Activity
--------------
2003 2002 2001
---------- ---------- ----------
Common stock issued
At beginning of year 1,766,566 1,621,387 1,623,289
Issued -- 160,566 4
Cancelled -- (15,387) (1,906)
---------- ---------- ----------
At end of year 1,766,566 1,766,566 1,621,387
Held in treasury
At beginning of year -- (11,254) --
Acquisitions (30,244) (22,533) (11,254)
Issued for property -- 18,400 --
Cancellation, returned to
unissued -- 15,387 --
---------- ---------- ----------
At end of year (30,244) -- (11,254)
---------- ---------- ----------
Common shares outstanding at end
of year 1,736,322 1,766,566 1,610,133
========== ========== ==========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
21
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $ 672,808 $ 189,291 $ 1,539,458
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Deferred income taxes 171,139 71,096 185,495
Stock-based compensation 61,522 48,730 24,700
Depreciation, depletion, and amortization 641,827 448,422 377,761
(Increase) decrease in accounts receivable (193,089) 114,896 (218,054)
Increase in accounts payable 1,403 28,964 901
(Increase) decrease in prepaid assets 14,080 50,215 (58,553)
Increase(decrease) in income taxes payable -- (51,637) 51,637
------------ ------------ ------------
Net cash provided by operating activities 1,369,690 899,977 1,903,345
Cash flows from investing activities:
Additions to oil and gas properties (1,628,695) (2,247,423) (936,293)
Additions to other property and equipment (4,927) (5,181) (1,014)
------------ ------------ ------------
Net cash used in investing activities (1,633,622) (2,252,604) (937,307)
Cash flows from financing activities:
Borrowings 910,000 1,160,000 --
Principal payments on long-term debt (470,000) (50,000) (600,000)
Payments of capital lease obligations (24,943) -- --
Purchases of common stock (127,536) (91,231) (84,934)
------------ ------------ ------------
Net cash (used in) provided by
financing activities 287,521 1,018,769 (684,934)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 23,589 (333,858) 281,104
Cash and cash equivalents
at beginning of year 44,958 378,816 97,712
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 68,547 $ 44,958 $ 378,816
============ ============ ============
Interest paid $ 94,792 $ 55,022 $ 99,044
Income taxes paid (recovered) $ (117,056) $ 92,675 $ --
Supplemental Disclosure of Non-cash investing
and financing activities:
Issuance of common stock in exchange
for oil and gas properties $ -- $ 82,800 $ --
Fair value of warrants issued for
oil and gas properties $ 73,552 $ -- $ --
Acquisition of equipment under capital leases $ 81,182 $ -- $ --
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
22
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 11 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 intercompany 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. All capitalized costs of oil and gas properties (excluding certain
unevaluated property costs), including the estimated future costs to develop
proved reserves, are amortized on the unit-of-production method using estimates
of proved 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 Per Common Share. Basic earnings per share is computed by dividing net
earnings by the weighted average number of shares outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of common shares and dilutive potential common shares (stock
options and warrants) outstanding during the period. 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. 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
March 31:
23
2003 2002 2001
---------- ---------- ----------
Weighted average number
of common shares
outstanding, basic 1,741,462 1,768,314 1,784,825
Incremental shares from
the assumed exercise of
dilutive stock options 5,369 265 2,678
---------- ---------- ----------
Dilutive potential common
shares 1,746,831 1,768,579 1,787,503
========== ========== ==========
Outstanding options and warrants to purchase 388,500, 200,000 and 150,000 shares
at March 31, 2003, 2002, and 2001, respectively, were not included in the
computation of diluted net earnings per share because the exercise price of the
options or warrants was greater than the average market price of the common
shares and, therefore, the effect would be anti-dilutive.
Stock Dividend. On February 1, 2002, the Company declared a 10% stock dividend
to shareholders of record on February 15, 2002. On February 28, 2002, the
Company issued 160,566 shares of common stock in conjunction with this dividend.
Accordingly, amounts equal to the fair market value of the additional shares
issued have been charged to retained earnings and credited to common stock and
additional paid-in capital. All references in the consolidated financial
statements to weighted average number of shares and earnings per common share
amounts have been adjusted to reflect the stock dividend on a retroactive basis.
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, 2003, 2002, or 2001.
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.
Revenue Recognition and Gas Balancing. Oil and gas sales and resulting
receivables are recognized when the product is delivered to the purchaser and
title has transferred. Sales are to credit-worthy major energy purchasers with
payments generally received within 60 days of transportation from the well site.
The Company has historically had little, if any, uncollectible receivables;
therefore, an allowance for uncollectible accounts is not required. Gas
imbalances are accounted for under the sales method whereby revenues are
recognized based on production
24
sold. A liability is recorded when the Company's excess takes of natural gas
volumes exceed its estimated remaining recoverable reserves (over produced). No
receivables are recorded for those wells where the Company has taken less than
its ownership share of gas production (under produced). The Company has no
significant gas imbalances.
Stock Options and Warrants. The Company accounts for employee stock option
grants in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," as amended by Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion No.
25. The Company applies the intrinsic value method in accounting for its
employee stock options and records no compensation costs for its stock option
awards to employees. The Company recognizes compensation cost related to stock
options awarded to independent consultants based on fair value of the options at
date of grant.
If compensation cost for the Company's stock option plan had been determined
based on the fair value at the grant dates for all employee awards under the
plan, net earnings, basic earnings per common share, and diluted earnings per
common share would have been as follows:
2003 2002 2001
------------ ------------ ------------
Net income, as reported $ 672,808 $ 189,291 $ 1,539,458
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax $ (63,133) $ (50,066) $ (79,622)
------------ ------------ ------------
Net income, pro forma $ 609,675 $ 139,225 $ 1,459,836
============ ============ ============
Basic earnings per share:
As reported (1) $ 0.39 $ 0.11 $ 0.86
Pro forma (1) $ 0.35 $ 0.08 $ 0.82
Diluted earnings per share:
As reported (1) $ 0.39 $ 0.11 $ 0.86
Pro forma (1) $ 0.35 $ 0.08 $ 0.82
(1) Amounts have been adjusted to reflect the 10% stock dividend effected
on February 1, 2002.
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.
Reclassifications. Certain reclassifications have been made to the 2001
and 2002 financial statements to conform with the 2003 presentation.
Recent Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding increase in
the carrying amount of the related long-lived asset. Subsequently, the asset
retirement cost should be allocated to expense using a systematic and rational
method. SFAS No. 143 is effective
25
for fiscal years beginning after June 15, 2002. The Company is required and
plans to adopt the provisions of SFAS 143 for the quarter ending June 30, 2003.
To accomplish this, the Company must identify all legal obligations for asset
retirement obligations and determine the fair value of these obligations on the
date of adoption. The determination of fair value is complex and requires the
Company to gather market information and develop cash flow models. Due to these
complexities, the Company has not completed all of the computations necessary to
adopt SFAS No. 143 and the effects of adoption may materially increase the
Company's liabilities, and may have a material effect on its results of
operations.
NOTE B - DEBT
The Company has a revolving credit agreement with Bank of America, N.A.
("Bank"), which provides 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. The borrowing base was re-determined on September
10, 2002 and increased to $2,586,000 with monthly commitment reductions of
$33,150. On November 15, 2002, the maturity date was extended to August 15,
2004. The borrowing base was re-determined on this date and reduced to
$2,526,755 with monthly commitment reductions of $30,814 beginning on December
5, 2002. As of March 31, 2003, the balance outstanding under this agreement was
$2,150,000. Principal payments of $116,280 are anticipated to be required for
fiscal 2004 to comply with the monthly commitment reductions. 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 (4.25% and 4.75% at March 31,
2003 and 2002, respectively). 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.
NOTE C - OTHER INCOME
During the third quarter of fiscal 2003, the Company received proceeds of
$254,862 before expenses of $101,945, from the settlement of a class action law
suit against a gas purchaser involving contract price dispute.
NOTE D - CAPITAL LEASE OBLIGATIONS
During fiscal 2003, the Company began leasing three gas compressors under
separate agreements that are classified as capital leases. The cost of the
equipment under the capital leases is included in the balance sheet as property
and equipment and was $81,182 with accumulated amortization of $5,796 on March
31, 2003. Amortization of assets under capital leases is included in
depreciation expense. The lease agreements are each for a 12-month period with
equal monthly payments. At the end of the term, the Company will receive title
to the compressors under bargain purchase options of $1. The lease obligation
associated with these three compressors was $61,086 on March 31, 2003, all of
which is a current liability. Total payments required for these three leases
will be $67,366, of which $6,280 represents interest.
26
NOTE E - INCOME TAXES
Deferred tax assets and liabilities at March 31 are as follows:
2003 2002
---------- ----------
Deferred tax assets:
Percentage depletion carryforwards $ 403,344 $ 317,174
Vacation accrual 1,334 691
Deferred compensation 41,835 22,763
Net operating loss carryforwards 43,927 87,481
---------- ----------
490,440 428,109
Deferred tax liabilities:
Excess financial accounting bases over
tax bases of property and equipment (918,170) (684,700)
---------- ----------
Net deferred tax liabilities $ (427,730) $ (256,591)
========== ==========
As of March 31, 2003, the Company has a net operating loss carryforward of
approximately $141,700, which expires in 2022, and statutory depletion
carryforwards of approximately $1,301,000, which do not expire.
A reconciliation of the provision for income taxes to income taxes computed
using the federal statutory rate for years ended March 31 follows:
2003 2002 2001
---------- ---------- ----------
Tax expense at statutory rate $ 282,513 $ 67,114 $ 608,469
Decrease in valuation allowance -- -- (196,469)
Depletion in excess of basis (86,170) (58,513) (80,864)
Effect of graduated rates (24,928) (5,922) (53,688)
Revision of prior year estimates (13,026) 7,657 --
Other (276) (2,232) (27,290)
---------- ---------- ----------
$ 158,113 $ 8,104 $ 250,158
========== ========== ==========
Effective tax rate 19% 4% 14%
========== ========== ==========
NOTE F - EXPLORATION AGREEMENT
On December 5, 2002, the Company entered into an exploration agreement with
Falcon Bay Operating, LLC. Pursuant to such agreement, the Company has obtained
the right to purchase and inventory seismic data and acreage in shallow water
areas of Texas and Louisiana. In consideration for the right to obtain four such
prospects, the Company has issued warrants to purchase 107,500 shares of common
stock at an exercise price of $5.00 per share. Such warrants are exercisable for
a period of two years from date of grant. Additional warrants, exercisable at
the same exercise price and exercisable for two years, would be issued covering
322,500 shares upon exercise of the Company's right to participate in a total of
four prospects.
NOTE G - 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
27
effect on the ability of the Company to sell its oil and gas production.
In fiscal 2003, 2002, and 2001, one purchaser accounted for 28%, 24%, and 39%,
respectively, of revenues. At March 31, 2003, accounts receivable from the
purchaser was approximately 25% of accrued oil and gas sales.
NOTE H - OIL AND GAS COSTS
The costs related to the oil and gas activities of the Company were incurred as
follows:
Year ended March 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Property acquisition costs
Proved $ 64,090 $ 649,021 $ 267,589
Unproved $ 673,690 $ 280,745 $ 177,305
Exploration costs $ 55,543 $ 46,907 $ 34,995
Development costs $ 990,106 $1,353,553 $ 456,404
The Company had the following aggregate capitalized costs relating to the
Company's oil and gas property activities at March 31:
2003 2002 2001
------------ ------------ ------------
Proved oil and gas properties $ 14,596,072 $ 13,462,406 $ 11,309,873
Unproved oil and gas properties:
subject to amortization 387,166 424,392 248,107
not subject to amortization
(acquired in 2003) 673,690 -- --
------------ ------------ ------------
15,656,928 13,886,798 11,557,980
Less accumulated depreciation,
depletion, and amortization 8,637,902 7,999,539 7,555,356
------------ ------------ ------------
$ 7,019,026 $ 5,887,259 $ 4,002,624
============ ============ ============
The costs of a certain oil and gas lease that the Company has acquired, but
not evaluated has been excluded in computing amortization of the full cost
pool. The Company will begin to amortize this property when the project is
evaluated, which is currently estimated to be within the following year.
Costs excluded from amortization at March 31, 2003 total $673,690. No
impairment exists for this property at March 31, 2003.
Depreciation, depletion, and amortization amounted to $5.64, $4.49, and
$3.65 per equivalent barrel of production for the years ended March 31,
2003, 2002, and 2001, respectively.
NOTE I - STOCKHOLDERS' EQUITY
In fiscal 2001, the board of directors authorized the purchase of up to 25,000
shares of the Company's common stock. For fiscal 2002, the board of directors
has authorized the use of up to $250,000 to repurchase shares of the Company's
common stock. During fiscal 2001, the Company repurchased 13,160 shares, at an
aggregate cost of $84,934. During fiscal 2002, the Company repurchased 22,533
shares, at an aggregate cost of $91,231. Of such shares, 18,400 were reissued in
exchange for oil and gas lease rights representing 368 net acres valued at
$83,000. The remaining 4,133 shares along with the 11,254 shares of stock held
in the treasury account from
28
fiscal year ending March 31, 2001 were cancelled. On February 28, 2002, the
Company distributed 160,566 shares of common stock in connection with a 10%
stock dividend. As a result of the stock dividend, par value of outstanding
common stock was increased by $80,283, additional paid-in capital was increased
by $722,548, and retained earnings was decreased by $802,831. In fiscal 2003,
the board of directors authorized the use of up to $250,000 to repurchase shares
of the Company's common stock. During fiscal 2003, the Company repurchased
30,244 shares at an aggregate cost of $127,536 for the treasury account.
NOTE J - STOCK OPTIONS AND WARRANTS
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 of 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 awards 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 60 days
and will vest as determined by agreement. Holders of restricted stock have all
rights of a shareholder of the Company.
During fiscal 2003, options for 51,000 shares were granted. Of these, 20,000
options were granted to contract consultants. The exercise price of all options
granted equaled or exceeded the market price of the stock on the date of grant.
Also during fiscal 2003, warrants for 107,500 shares were issued pursuant to the
Falcon Bay Exploration Agreement.
Additional information with respect to the Plan's stock option activity for
options issued to employees and directors is as follows:
Weighted
Number Average
of Shares Exercise Price
---------- ----------
Options outstanding, at April 1, 2000 140,000 $ 6.27
Granted 30,000 6.75
Exercised -- --
Forfeited -- --
---------- ----------
Options outstanding, at March 31, 2001 170,000 $ 6.49
Granted 20,000 4.00
Exercised -- --
Forfeited (40,000) 6.81
---------- ----------
Options outstanding, at March 31, 2002 150,000 6.07
Granted 31,000 4.00
Exercised -- --
Forfeited -- --
---------- ----------
Options outstanding, at March 31, 2003 181,000 $ 5.71
========== ==========
Options exercisable at March 31, 2001 52,500 $ 6.82
Options exercisable at March 31, 2002 72,500 $ 6.57
Options exercisable at March 31, 2003 110,000 $ 6.40
Weighted average grant date fair value of stock options granted to
29
employees and directors during fiscal 2003, 2002, and 2001 were $3.72, $1.30,
and $2.33, respectively. These values were determined using a Binomial
option-pricing model. The model 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 Company considers the binomial model more
accurate than the Black-Scholes model, in that it recognizes the ability to
exercise before expiration once an option is vested, and began to use the
Binomial model in fiscal 2001. The assumptions used in the Binomial models were
as follows for stock options granted in fiscal 2003, 2002 and 2001:
2003 2002 2001
-------- -------- --------
Expected volatility 134.07% 27.24% 29.86%
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free rate of return 5.40% 4.79% 5.25%
Expected life of options 7 years 7 years 10 years
The option valuation models were 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.
The following tables summarize information about employee and directors
stock options outstanding and exercisable at March 31, 2003:
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 50,000 5.55 $7.60
$6.75 20,000 7.81 $6.75
$5.25 60,000 6.97 $5.25
$4.00 51,000 8.87 $4.00
-----------
181,000
Stock Options Exercisable
Number of Weighted
Range of Shares Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- --------------
$7.50-$7.75 50,000 $7.60
$6.75 10,000 $6.75
$5.25 45,000 $5.25
$4.00 5,000 $4.00
Since the Company applies the intrinsic value method in accounting for its
employee stock options, it generally records no compensation cost for its
stock option awards to employees. The Company recognizes
30
expense related to stock options awarded to independent consultants and
contractors based on fair value of the options at date of grant. Additional
information with respect to stock option and warrant activity for options
and warrants granted to outside consultants and contractors is as follows:
Weighted
Number Average
of Shares Exercise Price
---------- ----------
Options outstanding, at April 1, 2000 40,000 $ 6.44
Granted 30,000 6.75
Exercised -- --
Forfeited -- --
---------- ----------
Options outstanding, at March 31, 2001 70,000 $ 6.57
Granted 10,000 4.00
Exercised -- --
Forfeited -- $ --
---------- ----------
Options outstanding, at March 31, 2002 80,000 6.25
Granted 127,500 4.84
Exercised -- --
Forfeited -- --
---------- ----------
Options outstanding, at March 31, 2003 207,500 $ 5.39
========== ==========
Options exercisable at March 31, 2001 15,000 $ 6.83
Options exercisable at March 31, 2002 32,500 $ 6.69
Options exercisable at March 31, 2003 160,000 $ 5.50
Weighted average grant date fair value of stock options and warrants
granted to outside consultants and contractors during fiscal 2003, 2002,
and 2001 were $1.16, $1.26, and $2.33, respectively. These values were
determined using a Binomial option-pricing model. The model 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 Binomial models were as follows for
stock options granted in fiscal 2003, 2002 and 2001:
2003 2002 2001
-------- -------- --------
Expected volatility 90.09% 27.23% 29.86%
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free rate of return 2.39% 4.52% 5.25%
Expected life of options 3 years 7 years 10 years
The option valuation models were 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.
The following tables summarize information about outside consultants and
contractors stock options and warrants outstanding and exercisable at March 31,
2003:
31
Stock Options/Warrants Outstanding
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Average
Exercise Prices Outstanding Life in Years Exercise Price
--------------- ----------- ------------- --------------
$7.50-$7.75 20,000 5.46 $7.63
$6.75 30,000 7.81 $6.75
$5.25 20,000 6.97 $5.25
$5.00 107,500 1.68 $5.00
$4.00 30,000 8.96 $4.00
-----------
207,500
Stock Options/Warrants Exercisable
Number of Weighted
Range of Shares Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- --------------
$7.50-$7.75 20,000 $7.63
$6.75 15,000 $6.75
$5.25 15,000 $5.25
$5.00 107,500 $5.00
$4.00 2,500 $4.00
The Company recognizes expense related to stock options awarded to
independent consultants based on fair value of the options at date of
grant. Total expense related to these awards for fiscal 2003 was $61,522.
The fair value of the warrants are capitalized as part of the leasehold
cost of the acreage acquired in connection with the issuance of the
warrants.
NOTE K - RELATED PARTY TRANSACTIONS
The Company served as operator of properties in which the majority stockholder
had interests and billed the majority stockholder for lease operating expenses
and shared office expenditures on a monthly basis subject to usual trade terms.
The billings totaled $43,827 and $37,884 for the years ended March 31, 2002, and
2001, respectively. All of such properties were sold in October 2001. The only
related party transactions for the year ended March 31, 2003 relate to shared
office expenditures. The total billed for year ended March 31, 2003 was $10,016.
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. Amounts paid under this contract were $19,251, $23,627, and
$25,787 for the years ended March 31, 2003, 2002, and 2001, respectively.
During the year ending March 31, 2003, a member of the Board of Directors and a
Company employee entered into an agreement with Falcon Bay, LLC, whereby he
receives a commission from Falcon Bay Operating, LLC for any transactions
consummated between Falcon Bay Operating, LLC and the Company in the course of
the Exploration Agreement.
During the year ending March 31, 2002, the Company entered into two
transactions, respectively, with a Company director and employee and a trust
related to but not controlled by said director and employee. In the first
transaction, the Company purchased oil and gas lease rights representing 369 net
acres for cash consideration of $83,000. In the second transaction, the Company
exchanged 18,400 shares of its $.50 par value common stock for oil and gas lease
rights representing 368 net acres
32
with a value of approximately $83,000. Such acreage is available for exploration
and production of oil and gas.
NOTE L - 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 FASB. These
guidelines require that reserve estimates be prepared under existing economic
and operating conditions at year-end, with no provision for price and cost
escalators, except by contractual agreement. The estimates as of March 31, 2003,
2002, and 2001 are based on evaluations prepared by Joe C. Neal and Associates,
Petroleum Consultants.
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):
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Bbls Mcf Bbls Mcf Bbls Mcf
------------ ------------ ------------ ------------ ------------ ------------
Proved reserves,
beginning of year 237,000 10,182,000 235,000 6,345,000 139,000 4,755,000
Revision of previous
estimates (66,000) (1,746,000) (70,000) (1,204,000) (15,000) (10,000)
Purchase of minerals
in place -- 22,000 55,000 2,864,000 108,000 1,706,000
Extensions and
discoveries 2,000 12,000 38,000 2,644,000 21,000 398,000
Production (23,000) (539,000) (21,000) (467,000) (18,000) (504,000)
Sales of minerals
in place -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Proved reserves,
end of year 150,000 7,931,000 237,000 10,182,000 235,000 6,345,000
============ ============ ============ ============ ============ ============
PROVED DEVELOPED RESERVES (UNAUDITED):
Beginning of year 144,000 5,159,000 235,000 6,337,000 139,000 4,755,000
End of year 94,000 4,518,000 144,000 5,159,000 235,000 6,337,000
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES (UNAUDITED):
March 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Future cash inflows $ 49,820,000 $ 36,005,000 $ 40,179,000
Future production and
development costs (13,284,000) (12,217,000) (9,988,000)
Future income taxes (a) (8,444,000) (5,228,000) (7,182,000)
------------ ------------ ------------
Future net cash flows 28,092,000 18,560,000 23,009,000
Annual 10% discount for
estimated timing of cash flows (12,120,000) (9,256,000) (10,824,000)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 15,972,000 $ 9,304,000 $ 12,185,000
============ ============ ============
(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 and effects of statutory depletion.
33
CHANGES IN STANDARIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVES (UNAUDITED):
Year ended March 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales of oil and gas produced,
net of production costs $ (1,833,000) $ (1,120,000) $ (2,566,000)
Net changes in price and production costs 12,946,000 (7,145,000) 5,104,000
Changes in previously estimated
development costs 512,000 (59,000) (20,000)
Revisions of quantity estimates (5,103,000) (1,862,000) (148,000)
Net change due to purchases and sales of
minerals in place 77,000 3,685,000 5,939,000
Extensions and discoveries,
less related costs 87,000 2,121,000 975,000
Net change in income taxes (2,180,000) 1,183,000 (2,567,000)
Accretion of discount 1,193,000 1,599,000 614,000
Changes in timing of estimated cash
flows and other 969,000 (1,283,000) (54,000)
------------ ------------ ------------
Changes in standardized measure 6,668,000 (2,881,000) 7,277,000
Standardized measure, beginning of year 9,304,000 12,185,000 4,908,000
------------ ------------ ------------
Standardized measure, end of year $ 15,972,000 $ 9,304,000 $ 12,185,000
============ ============ ============
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 30, 2003.
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 30, 2003.
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 30, 2003.
34
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 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In September 2002, the Board of Directors adopted a policy designed to
establish disclosure controls and procedures that are adequate to provide
reasonable assurance that we will be able to collect, process and disclose both
financial and non-financial information, on a timely basis, in our reports to
the SEC and other communications with our stockholders. Disclosure controls and
procedures include all processes necessary to ensure that material information
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and form, and is accumulated and communicated to
our management, including our chief executive and chief financial officers, to
allow timely decisions regarding required disclosures.
With respect to our disclosure controls and procedures:
o We have evaluated the effectiveness of our disclosure controls and
procedures within 90 days prior to the filing of this report;
o This evaluation was conducted under the supervision and with the
participation of our management, including our chief executive and
chief financial officers; and
o It is the conclusion of our chief executive and chief financial
officers that these disclosure controls and procedures operate such
that material information flows to the appropriate collection and
disclosure points in a timely manner and are effective in ensuring
that material information is accumulated and communicated to our
management and is made known to the chief executive and chief
financial officers, particularly during the period in which this
report was prepared, as appropriate to allow timely decisions
regarding required disclosures.
Changes in Internal Controls
There were no significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date the
controls were evaluated. No significant deficiencies or material weaknesses were
identified in the evaluation of our internal controls and therefore no
corrective actions have been taken.
PART IV
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ITEM 15. 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.
35
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.
(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 adopted December 5, 2002.
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).
21 Subsidiaries of the Company (incorporated by reference to the
Company's Annual Report on Form 10-K dated June 24, 1998).
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.
A report on Form 8-K, dated December 5, 2002, was filed by the
Company for the year ended March 31, 2003 under Item 5. Other Events.
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 26, 2003, 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/ Tamala L. McComic
- ----------------------------------
Tamala L. McComic
Vice President, Treasurer
and Assistant Secretary
/s/ Thomas Graham, Jr.
- ----------------------------------
Thomas Graham, Jr.
Chairman of the Board of Directors
36
/s/ Thomas R. Craddick
- ----------------------------------
Thomas R. Craddick
Director
/s/ William G. Duncan, Jr.
- ----------------------------------
William G. Duncan, Jr.
Director
/s/ Arden Grover
- ----------------------------------
Arden Grover
Director
/s/ Jack D. Ladd
- ----------------------------------
Jack D. Ladd
Director
37
I, Nicholas C. Taylor, certify that:
1. I have reviewed this annual report on Form 10-K of Mexco Energy
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual 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.
June 26, 2003 /s/ Nicholas C. Taylor
------------------------------
Nicholas C. Taylor
President
38
I, Tamala L. McComic, certify that:
1. I have reviewed this annual report on Form 10-K of Mexco Energy
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual 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.
June 26, 2003 /s/ Tamala L. McComic
------------------------------
Tamala L. McComic
Vice President, Treasurer,
and Assistant Secretary
39
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.
21* Subsidiaries of the Company.
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.
* 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.
*** Filed with the Company's Annual Report on Form 10-K dated June 26, 2003.
40