UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(432) 682-1119
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $0.50 par value:
1,736,041 shares outstanding at November 11, 2003
MEXCO ENERGY CORPORATION
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Consolidated Balance Sheets as of September 30, 2003
(Unaudited) and March 31, 2003 3
Consolidated Statements of Operations (Unaudited) for
the three and six months ended September 30, 2003 and
September 30, 2002 4
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended September 30, 2003 and
September 30, 2002 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 14
- -----------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 15
- ----------
Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30 March 31,
2003 2003
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 72,428 $ 68,547
Accounts receivable:
Oil and gas sales 383,159 560,297
Trade 45,657 17,617
Related parties -- 3,475
Prepaid expenses 37,247 10,043
------------ ------------
Total current assets 538,491 659,979
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 16,361,940 15,656,928
Office and computer equipment
and software 34,542 33,708
------------ ------------
16,396,482 15,690,636
Less accumulated depreciation,
depletion and amortization 9,050,289 8,661,977
------------ ------------
Property and equipment, net 7,346,193 7,028,659
------------ ------------
Total assets $ 7,884,684 $ 7,688,638
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 122,349 $ 93,434
Current portion of long-term debt -- 116,280
Obligations under capital leases 18,418 61,086
------------ ------------
Total current liabilities 140,767 270,800
Long-term debt 1,750,000 2,033,720
Asset retirement obligation 375,529 --
Deferred income tax liability 474,435 427,730
Stockholders' equity:
Preferred stock, par value $1 per share;
10,000,000 shares authorized;
none issued -- --
Common stock, par value $0.50 per share;
40,000,000 shares authorized; 1,766,566
shares issued 883,283 883,283
Additional paid in capital 3,755,110 3,734,119
Retained earnings 634,481 466,522
Treasury stock, at cost (30,525 and
30,244 shares, respectively) (128,921) (127,536)
------------ ------------
Total stockholders' equity 5,143,953 4,956,388
------------ ------------
Total liabilities and stockholders'
equity $ 7,884,684 $ 7,688,638
============ ============
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
2003 2002 2003 2002
----------------------------- -----------------------------
Operating revenue:
Oil and gas sales $ 768,852 $ 512,180 $ 1,535,912 $ 1,056,830
Other 1,859 2,838 3,125 9,452
------------ ------------ ------------ ------------
Total operating revenue 770,711 515,018 1,539,037 1,066,282
Operating costs and expenses:
Oil and gas production 241,168 232,605 509,860 389,209
Accretion expense 5,912 -- 11,736 --
Depreciation, depletion
and amortization 170,695 122,975 336,914 246,498
General and administrative 156,644 107,755 272,622 246,763
------------ ------------ ------------ ------------
Total operating costs
and expenses 574,419 463,335 1,131,132 882,470
------------ ------------ ------------ ------------
202,204 51,683 419,641 183,812
Other income and (expenses):
Interest income 55 118 117 244
Interest expense (20,860) (22,297) (45,140) (43,146)
------------ ------------ ------------ ------------
Net other income and expenses (20,805) (22,179) (45,023) (42,902)
------------ ------------ ------------ ------------
Income before income taxes 175,487 29,504 362,882 140,910
Income tax expense (deferred) 57,017 9,146 92,652 43,406
------------ ------------ ------------ ------------
Income before cumulative effect
of accounting change 118,470 20,358 270,230 97,504
Cumulative effect of accounting
change, net of tax -- -- (102,267) --
------------ ------------ ------------ ------------
Net income $ 118,470 $ 20,358 $ 167,963 $ 97,504
============ ============ ============ ============
Net income (loss) per common share:
Basic:
Income before cumulative effect
of accounting change $ 0.07 $ 0.01 $ 0.16 $ 0.06
Cumulative effect, net of tax $ -- $ -- $ (0.06) $ --
Net income $ 0.07 $ 0.01 $ 0.10 $ 0.06
Diluted:
Income before cumulative effect
of accounting change $ 0.06 $ 0.01 $ 0.15 $ 0.06
Cumulative effect, net of tax $ -- $ -- $ (0.06) $ --
Net income $ 0.06 $ 0.01 $ 0.09 $ 0.06
Pro forma amounts assuming, the new
method of accounting for asset retirement
obligations is applied retroactively:
Net Income $ 118,470 $ 15,074 $ 270,230 $ 86,936
Basic earnings per share $ 0.07 $ 0.01 $ 0.16 $ 0.05
Diluted earnings per share $ 0.06 $ 0.01 $ 0.15 $ 0.05
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 167,963 $ 97,504
Cumulative effect of accounting change,
net of tax 102,267 --
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 92,651 43,406
Stock-based compensation 20,991 29,325
Depreciation, depletion and
amortization 336,914 246,498
Accretion of asset retirement obligations 11,736 --
(Increase) decrease in
accounts receivable 152,572 (20,462)
Increase in prepaid expenses (27,204) (9,325)
Increase in accounts payable
and accrued expenses 20,253 95,556
------------ ------------
Net cash provided by operating
activities 878,143 482,502
Cash flows from investing activities:
Additions to property and equipment (430,209) (687,533)
------------ ------------
Net cash used in investing
activities (430,209) (687,533)
Cash flows from financing activities:
Acquisition of treasury stock (1,385) (122,386)
Reduction of capital lease obligations (42,668) --
Reduction in long-term debt (400,000) --
Proceeds from long-term debt -- 320,000
------------ ------------
Net cash (used in) provided by
financing activities (444,053) 197,614
------------ ------------
Net increase(decrease) in cash 3,881 (7,417)
Cash, beginning of the period 68,547 44,958
Cash, end of period $ 72,428 $ 37,541
============ ============
Interest paid $ 47,138 $ 42,239
Income taxes paid $ -- $ --
THE ACCOMPANYING NOTE IS AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A. Organization and Significant Accounting Policies
- ------- ------------------------------------------------
Organization and Basis of Presentation
- --------------------------------------
Mexco Energy Corporation, a Colorado corporation, was organized in 1972 and
maintains its principal office in Midland, Texas. The Company and its wholly
owned subsidiary, Forman Energy Corporation, a New York corporation,
(collectively the "Company") are engaged in the acquisition, exploration,
development and production of oil and gas. While the Company owns producing
properties and undeveloped acreage in eleven states, the majority of its
activities are centered in the Permian Basin of West Texas. Although most of the
Company's oil and gas interests are operated by others, the Company operates a
number of properties in which it owns an interest.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals
except for the cumulative effect of a change in accounting principle in fiscal
2004) necessary to present fairly the financial position of the Company and its
wholly owned subsidiary as of September 30, 2003, and the results of its
operations and cash flows for the interim periods ended September 30, 2003 and
2002. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for a full year. The accounting
policies followed by the Company are set forth in more detail in Note A of the
"Notes to Consolidated Financial Statements" in the Company's annual report on
Form 10-K filed with the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted in this Form 10-Q pursuant to the rules
and regulations of the Securities and Exchange Commission. However, the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Form
10-K.
Principles of Consolidation
- ---------------------------
The accompanying consolidated balance sheets include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the amounts reported in 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.
Page 6
Stock-based Compensation
- ------------------------
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), 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. For
the quarter ending September 30, 2003, the Company recognized $9,011 related to
these stock options for independent consultants.
The following pro forma information, as required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by Statement of Financial Accounting Standards No. 148 ("SFAS
148"), presents net income and earnings per share information as if the stock
options issued had been determined based on the fair value at the grant dates
for all employee awards under the plan:
Three Months Ended Six Months Ended
September 30 September 30
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 118,470 $ 20,358 $ 167,963 $ 97,504
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax $ (25,667) $ (20,194) $ (40,066) $ (31,923)
---------- ---------- ---------- ----------
Net income, pro forma $ 92,803 $ 164 $ 127,897 $ 65,581
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.07 $ 0.01 $ 0.16 $ 0.06
Pro forma $ 0.05 $ 0.00 $ 0.07 $ 0.04
Diluted earnings per share:
As reported $ 0.06 $ 0.01 $ 0.15 $ 0.06
Pro forma $ 0.05 $ 0.00 $ 0.07 $ 0.04
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the plugging and
abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April
1, 2003. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recorded in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The change resulted in a cumulative effect to net income of ($102,267) net of
tax, or ($0.06) per share. Additionally, the Company recorded an asset
retirement obligation liability of $358,419 and an increase to net properties
and equipment and other assets of $210,206 upon adoption of SFAS No. 143.
The asset retirement obligation, which is included on the Consolidated Balance
Sheet was $375,529 at September 30, 2003. Accretion expense during the first six
months of fiscal 2004 was $11,736.
Page 7
The following table provides a rollforward of the asset retirement obligations
for the six months ended September 30, 2003:
Carrying amount of asset retirement obligations as of
April 1, 2003 $ 358,419
Liabilities incurred $ 15,347
Liabilities settled $ (9,973)
Accretion expense $ 11,736
Revisions in estimated cash flows $ 0
----------
Carrying amount of asset retirement obligations as of
September 30, 2003 $ 375,529
==========
Oil and Gas Costs
- -----------------
The cost 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 this fiscal year. Costs excluded from
amortization at September 30, 2003 total $673,890. No impairment exists for this
property at September 30, 2003.
Earnings Per Share
- ------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares (stock options) outstanding
during the period. The following is a reconciliation of the number of shares
used in the calculation of basic earnings per share and diluted earnings per
share for the three and six-month periods ended September 30, 2003 and 2002.
Three Months Ended Six Months Ended
September 30 September 30
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of
common shares outstanding 1,736,041 1,737,329 1,736,054 1,745,787
Incremental shares from the
assumed exercise of dilutive
stock options 98,006 2,571 67,102 4,653
--------- --------- --------- ---------
Dilutive potential common shares 1,834,047 1,739,900 1,803,156 1,750,440
Options to purchase 70,000 shares at an average exercise price of $7.61 and
200,000 shares at an average exercise price of $6.45 outstanding at September
30, 2003 and September 30, 2002, respectively, were not included in the
computation of diluted net income per share because the exercise price of the
options was greater than the average market price of the common stock of the
Company.
Income Taxes
- ------------
There is no current income tax expense for the three or six months ended
September 30, 2003 due to a tax loss carryforward of approximately $139,000 from
the year ending March 31, 2003. There is no current income tax expense for the
Page 8
three or six months ended September 30, 2002 due a tax loss carryforward of
approximately $283,000 from the year ending March 31, 2002.
Stockholders' Equity
- --------------------
During the six month period ended September 30, 2003, the Company paid $1,385 to
purchase 281 shares of its common stock for treasury.
Long Term Liabilities
- ---------------------
On October 1, 2003, the Company's revolving credit agreement with Bank of
America, N.A. ("Bank"), with an original maturity date of August 15, 2004, was
extended for four months to December 15, 2004. The financial statements were
prepared using this extended date of maturity, December 15, 2004.
Long term debt consists of 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 based determination. On November 15, 2002, the borrowing base was
re-determined and reduced to $2,526,744 with monthly commitment reductions of
$30,814 beginning on December 5, 2002. As of September 30, 2003, the balance
outstanding under this agreement was $1,750,000. No principal payments are
required through September 30, 2004 to comply with the monthly commitment
reductions. Amounts borrowed under this agreement are collateralized by the
common stock of the Company's wholly owned subsidiary and all oil and gas
properties.
The asset retirement obligation as of September 30, 2003 represents the present
value of the Company's estimated asset retirement obligations under SFAS 143.
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 with a balance of $81,182 and accumulated amortization of $8,544
on September 30, 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 compressor under a bargain purchase option of $1. The lease
obligation associated with these three compressors was $18,418 on September 30,
2003, all of which is a current liability. Total payments required for these
three leases will be $19,343, of which $925 represents interest.
Open Disclosure Issues with the Securities and Exchange Commission
- ------------------------------------------------------------------
The Company is aware that the Staff of the SEC, in consultation with the Staff
of the Financial Accounting Standards Board, is considering certain
implementation issues in the application of provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations, and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No.
142), to companies in the extractive industries, including oil and gas
companies. The Staff of the SEC is considering whether SFAS No. 142 requires
registrants to reclassify costs associated with mineral rights, including both
proved and unproved leasehold acquisition costs, as intangible assets in the
balance sheet, apart from other capitalized oil and gas property costs.
Historically, the Company and all other oil and gas companies have included the
cost of these oil and gas leasehold interests as part of oil and gas properties.
The Staff is also considering whether SFAS No. 142 requires registrants to
provide the additional
Page 9
disclosures prescribed by SFAS No. 142 for intangible assets for costs
associated with mineral rights.
The reclassification of these amounts would not affect the method in which such
costs are amortized or the manner in which the Company assesses impairment of
capitalized costs. As a result, net income would not be affected by the
reclassification.
MEXCO ENERGY CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statements Regarding Forward-Looking Statements
- ----------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements can be identified with words and
phrases such as "believes," "expects," "anticipates," "should," "estimates,"
"foresees" or other words and phrases of similar meaning. Forward-looking
statements appear throughout this Form 10-Q and include statements regarding
Company plans, beliefs or current expectations with respect to, among other
things: profitability, planned capital expenditures; estimates of oil and gas
production, estimates of future oil and gas prices; estimates of oil and gas
reserves; future financial condition or results of operations; and business
strategy and other plans and objectives for future operations. Forward-looking
statements involve known and unknown risks and uncertainties that could cause
actual results to differ materially from those contained in any forward-looking
statement. While the Company has made assumptions that it believes are
reasonable, the assumptions that support its forward-looking statements are
based upon information that is currently available and is subject to change. All
forward-looking statements in the Form 10-Q are qualified in their entirety by
the cautionary statement contained in this section. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's sources of funding have been from operating
activities, bank financing and the issuance of common stock.
The Company's focus is on increasing profit margins while concentrating on
obtaining gas reserves with low cost operations by acquiring and developing
primarily gas properties with potential for long-lived production.
For the first six months of fiscal 2004, cash flow from operations was $878,143
compared to $482,502 for the first six months of fiscal 2003. This increase was
primarily due to higher net income, principally as a result of higher oil and
gas prices. The cash flow from operations for the first six months of fiscal
2004 included the effects of an increase in accounts payable and accrued
expenses and a decrease in accounts receivable. Cash of $430,209 was used for
additions to property and equipment and cash of $400,000 was used to reduce
long-term debt. Accordingly, net cash increased $3,881.
The Company has acquired and is reviewing several projects for future
participation. The cost of such projects would be funded to the extent possible,
with existing cash balances and cash flow from operations. The remaining may be
funded through borrowings on the bank credit facility discussed below.
Page 10
At September 30, 2003, the Company had working capital of approximately $397,724
compared to working capital of approximately $389,179 at March 31, 2003, an
increase of $8,545.
The Company's revolving credit agreement with Bank of America, N.A. ("Bank"),
was amended to provide for a credit facility of $5,000,000, subject to a
borrowing base determination. On November 15, 2002, the maturity date of this
credit agreement, which was originally August 15, 2003, was extended for one
year. The borrowing base was re-determined on this date and set at $2,526,744
with monthly commitment reductions of $30,814 beginning on December 5, 2002. On
October 1, 2003 the credit agreement was extended to December 15, 2004. As of
September 30, 2003, the balance outstanding under this agreement was $1,750,000.
No principal payments 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 (4.00% at September 30, 2003). This agreement
generally restricts the Company's ability to transfer assets or control of the
Company, incur debt, extend credit, change the nature of the Company's business,
substantially change management personnel or pay cash dividends.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the current fiscal year.
Results of Operations - Three Months Ended September 30, 2003 and 2002
- ----------------------------------------------------------------------
Net income increased from a net profit of $20,358 for the quarter ended
September 30, 2002 to a net profit of $118,470 for the quarter ended September
30, 2003. Individual categories of income and expense are discussed below.
Oil and gas sales increased from $512,180 for the second quarter of fiscal 2003
to $768,852 for the same period of fiscal 2004. This increase of 50% or $256,672
resulted primarily from higher oil and gas prices. Average gas prices increased
from $2.89 per mcf for the second quarter of fiscal 2003 to $4.73 per mcf for
the same period of fiscal 2004, while average oil prices increased from $26.15
per bbl for the first quarter of fiscal 2003 to $28.66 for the same period of
fiscal 2004. Oil and gas production quantities were 5,295 barrels ("bbls") and
129,428 thousand cubic feet ("mcf") for the second quarter of fiscal 2003 and
5,627 bbls and 128,560 mcf for the same period of fiscal 2004, an increase of 6%
in oil production and a decrease of 1% in gas production.
Production costs increased 4% from $232,605 for the second quarter of fiscal
2003 to $241,168 for the same period of fiscal 2004. This was primarily due to
the effects that higher oil and gas prices had on production taxes and an
increase in repairs and maintenance to operated wells during the quarter.
General and administrative expenses increased 45% from $107,755 for the second
quarter of fiscal 2003 to $156,644 for the same period of fiscal 2004. This is
primarily the result of an increase in financial consulting and fees associated
with the Company's listing on the American Stock Exchange during the quarter.
Page 11
Depreciation, depletion and amortization based on production and other methods
increased 39%, from $122,975 for the second quarter of fiscal 2003 to $170,695
for the same period of fiscal 2004 primarily due to a decrease in company
reserves.
Interest expense decreased 6% from $22,297 for the second quarter of fiscal 2003
to $20,860 for the same period of fiscal 2004 primarily as a result of lower
interest rates and lesser borrowings.
Results of Operations - Six Months Ended September 30, 2003 and September 30,
- --------------------------------------------------------------------------------
2002
- ----
Net income increased 72%, from a net profit of $97,504 for the six months ended
September 30, 2002 to a net profit of $167,963 for the six months ended
September 30, 2003. Individual categories of income and expense are discussed
below.
Oil and gas sales increased 45% from $1,056,830 for the six months ended
September 30, 2003 to $1,535,912 for the same period of fiscal 2004, primarily
because of increased prices. Average gas prices increased from $2.92 per mcf for
the first six months of fiscal 2003 to $4.82 per mcf for fiscal 2004, and
average oil prices increased from $24.94 per bbl for the first six months of
fiscal 2003 to $27.79 for fiscal 2004. Oil and gas production quantities were
11,267 bbls and 265,297 mcf for the first six months of fiscal 2003 and 11,141
bbls and 254,209 for fiscal 2004, a decrease of 1% and 4%, respectively.
Production costs increased 31% from $389,209 for the six months ended September
30, 2003 to $509,860 for the same period of fiscal 2004. This was primarily due
to the effects that higher oil and gas prices had on production taxes and an
increase in repairs and maintenance to operated wells during the first and
second quarters of fiscal 2004.
Depreciation, depletion and amortization based on production and other methods
increased 37%, from $246,498 for the first six months of fiscal 2003 to $336,914
for the same period of fiscal 2004 primarily due to a decrease in company
reserves.
Interest expense increased 5% from $43,146 for the first six months of fiscal
2003 to $45,140 for the same period of fiscal 2004.
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the plugging and
abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April
1, 2003. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recorded in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The change resulted in a cumulative effect to net income of ($102,267) net of
tax, or ($0.06) per share. Additionally, the Company recorded an asset
retirement obligation liability of $358,419 and an increase to net properties
and equipment and other assets of $210,206 upon adoption of SFAS No. 143.
The asset retirement obligation, which is included on the Consolidated Balance
Sheet was $375,529 at September 30, 2003. Accretion expense during the first six
months of fiscal 2004 was $11,736.
Open Disclosure Issues with the Securities and Exchange Commission
- ------------------------------------------------------------------
The Company is aware that the Staff of the SEC, in consultation with the Staff
of the Financial Accounting Standards Board, is considering certain
implementation issues in the application of provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations, and Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No.
142), to companies in the extractive industries, including oil and gas
companies. The Staff of the SEC is considering whether SFAS No. 142 requires
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registrants to reclassify costs associated with mineral rights, including both
proved and unproved leasehold acquisition costs, as intangible assets in the
balance sheet, apart from other capitalized oil and gas property costs.
Historically, the Company and all other oil and gas companies have included the
cost of these oil and gas leasehold interests as part of oil and gas properties.
The Staff is also considering whether SFAS No. 142 requires registrants to
provide the additional disclosures prescribed by SFAS No. 142 for intangible
assets for costs associated with mineral rights.
The reclassification of these amounts would not affect the method in which such
costs are amortized or the manner in which the Company assesses impairment of
capitalized costs. As a result, net income would not be affected by the
reclassification.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary sources of market risk for the Company include fluctuations in
commodity prices and interest rate fluctuations. At September 30, 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.
At September 30, 2003, the Company had an outstanding loan balance of $1,750,000
under its $5.0 million revolving credit agreement, which bears interest at the
prime rate, which varies from time to time. If the interest rate on the
Company's bank debt increases or decreases by one percentage point, the
Company's annual pretax income would change by $17,500, based on the outstanding
balance.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance by
other parties of their contractual obligations. The Company's primary credit
risk is related to oil and gas production sold to various purchasers and the
receivables generally are uncollateralized. At September 30, 2003, the Company's
largest credit risk associated with any single purchaser was $65,121. 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 highly dependent upon the prevailing market prices of,
and demand for, oil and natural gas. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are
beyond our control. These factors include the level of global demand for
petroleum products, foreign supply of oil and gas, the establishment of and
compliance with production quotas by oil exporting countries, weather
conditions, the price and availability of alternative fuels, and overall
economic conditions, both foreign and domestic. The Company cannot predict
future oil and gas prices with any degree of certainty. Sustained weakness in
oil and gas prices may adversely affect our ability to obtain capital for our
exploration and development activities and may require a reduction in the
carrying value of the Company's oil and gas properties. Similarly, an
improvement in oil and gas prices can have a favorable impact on the Company's
financial condition, results of operations and capital resources.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (its principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of a date within 90 days prior to the date of
filing of this quarterly report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
it in reports filed or submitted by it under the Securities Exchange Act of
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1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and includes controls and
procedures designed to ensure that information required to be disclosed by it in
such reports is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
-----------------
None.
Item 2. Changes in securities
---------------------
Refer to Note A in Notes to Consolidated Financial Statements under
the heading Stockholders' Equity.
Item 3. Defaults upon senior securities
-------------------------------
None.
Item 4. Submission or matters to a vote of security holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
On September 8, 2003, the Common Stock, $0.50 par value, of the
Company was listed and commenced trading on the American Stock
Exchange under the ticker symbol MXC.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
31.1 Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K - No reports on Form 8-K were filed during
the quarter ended September 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated: November 12, 2003 /s/ Nicholas C. Taylor
-------------------------------
Nicholas C. Taylor
President
Dated: November 12, 2003 /s/ Tamala L. McComic
-------------------------------
Tamala L. McComic
Vice President, Treasurer, and
Assistant Secretary
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