UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission file number 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(915) 682-1119
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $0.50 par value:
1,610,133 shares outstanding at June 30, 2001
MEXCO ENERGY CORPORATION
Table of Contents
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PART I. FINANCIAL INFORMATION
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Consolidated Balance Sheets as of June 30, 2001 (Unaudited)
and March 31, 2001 3
Consolidated Statements of Operations (Unaudited) for the
three months ended June 30, 2001 and June 30, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the
three months ended June 30, 2001 and June 30, 2000 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION 11
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SIGNATURES 12
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Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 77,919 $ 378,816
Accounts receivable:
Oil and gas sales 313,735 489,217
Trade 6,481 1,074
Related parties 2,689 8,059
Prepaid expenses 108,947 74,342
------------- --------------
Total current assets 509,771 951,508
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 12,393,675 11,557,980
Office and computer equipment
and software 23,600 23,600
------------- --------------
12,417,275 11,581,580
Less accumulated depreciation,
depletion and amortization 7,662,923 7,571,728
------------- --------------
Property and equipment, net 4,754,352 4,009,852
------------- --------------
Total assets $ 5,264,123 $ 4,961,360
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 197,422 $ 77,776
Income taxes payable - 51,637
------------- --------------
Total current liabilities 197,422 129,413
Long-term debt 600,000 600,000
Deferred income tax liability 209,030 185,495
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; 1,621,387
shares issued 810,693 810,693
Additional paid in capital 2,912,464 2,900,097
Retained earnings 606,106 407,254
Treasury stock, at cost (71,592) (71,592)
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Total stockholders equity 4,257,671 4,046,452
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Total liabilities and stockholders
equity $ 5,264,123 $ 4,961,360
============= ==============
The accompanying note is an integral part
of the consolidated financial statements.
Page 3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended June 30, 2001 and 2000
(Unaudited)
2001 2000
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Operating revenue:
Oil and gas sales $ 594,751 $ 592,807
Other 1,708 1,470
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Total operating revenue 596,459 594,277
Operating costs and expenses:
Oil and gas production 157,403 91,293
Depreciation, depletion and amortization 91,196 112,000
General and administrative 114,167 85,042
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Total operating costs and expenses 362,766 288,335
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233,693 305,942
Other income and (expenses):
Interest income 257 316
Interest expense (10,529) (27,822)
------------- --------------
Net other income and expenses (10,272) (27,506)
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Income (loss) before income taxes 223,421 278,436
Income tax expense 24,569 -
------------- --------------
Net income (loss) $ 198,852 $ 278,436
============= ==============
Net income (loss) per share:
Basic $ 0.12 $ 0.17
Diluted $ 0.12 $ 0.17
Weighted average shares outstanding:
Basic 1,610,133 1,623,293
Diluted 1,610,133 1,623,293
The accompanying note is an integral part
of the consolidated financial statements.
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended June 30, 2001 and 2000
(Unaudited)
2001 2000
------------- --------------
Cash flows from operating activities:
Net income $ 198,852 $ 278,436
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes 23,535 -
Stock-based compensation 12,367 -
Depreciation, depletion and
amortization 91,196 112,000
(Increase) decrease in
accounts receivable 175,445 (90,382)
Increase (decrease) in
accounts payable 13,222 (14,908)
Increase in prepaid assets (34,605) (9,095)
Decrease in income taxes payable (51,637) -
------------- --------------
Net cash provided by operating
activities 428,375 276,051
Cash flows from investing activities:
Additions to property and equipment (729,272) (208,150)
Net cash used in investing ------------- --------------
activities (729,272) (208,150)
Cash flows from financing activities:
Principal payments on long-term debt - (50,000)
------------- --------------
Net cash used in financing activities - (50,000)
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Net increase (decrease) in cash (300,897) 17,901
Cash, beginning of the period 378,816 97,712
------------- --------------
Cash, end of period $ 77,919 $ 115,613
============= ==============
Interest paid $ 11,688 $ 27,775
Income taxes paid $ 53,664 $ -
The accompanying note is an integral part
of the consolidated financial statements.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A. Organization and Significant Accounting Policies
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Organization and Basis of Presentation
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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, (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 several properties in which it owns an interest.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company and its wholly owned subsidiary as of June 30,
2001, and the results of its operations and cash flows for the interim periods
ended June 30, 2001 and 2000. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year. The accounting policies followed by the Company are set forth in more
detail in Note A of the "Notes to Consolidated Financial Statements" in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Form
10-K.
Principles of Consolidation
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The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiary. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Income Taxes
- ------------
During the quarter ended June 30, 2001 the Company's tax provision was less
than expected at statutory rates because of statutory depletion in excess of
cost basis and the effect of graduated rates. During the quarter ended June 30,
2000 the Company had no provision for income taxes due to a reduction in
valuation allowance for deferred tax assets.
Page 6
MEXCO ENERGY CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
- --------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MDA") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements, other than statements of historical fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
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 gas
reserves with low cost operations.
For the first three months of fiscal 2002, cash flow from operations was
$428,375, which included the effects of a decrease in accounts receivable and an
increase in accounts payable. Net cash flow was a negative $300,897. Cash of
$729,272 was used for additions to property and equipment.
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 has
authorized the use of up to $250,000 to repurchase shares of the Company's
common stock.
During fiscal 2000, the Company entered into an exploration agreement relating
to non-producing acreage in Pecos County, Texas. Approximately 3,795 gross acres
and 432 net acres have been leased and a 3-D seismic survey covering 23 square
miles has been completed at a cost to the Company of approximately $155,000. Two
test wells were drilled on this acreage. The first test well has been
temporarily abandoned at a cost to the Company of approximately $85,000. The
second test well has been drilled, plugged and abandoned at a cost to the
Company of approximately $44,000. Pending further evaluation of the information
gathered from these wells, additional wells may be drilled on these prospects.
The Company owns approximate working interests in these prospects ranging from
10.41% to 15.51% and a third party conducts operations.
Page 7
Effective September 1, 2000, the Company acquired three producing properties in
Pecos County, Texas for $198,000 cash, adjusted for revenues and expenses
through September 28, 2000, the date of closing. The Company owns working
interests ranging from 97% to 99% and, as operator of the six producing wells on
these properties, is evaluating the workover, recompletion and re-entry
potential of these properties. Operating cash flow from these properties was
approximately $91,000 for the nine months ended June 30, 2001. In January and
again in May and June 2001, workovers were performed on three of these producing
wells, increasing production at a total cost to the Company of approximately
$66,000.
Effective September 1, 2000, the Company leased 159 gross non-producing acres in
Pecos County, Texas, in which it retained a 96% working interest, at a cost of
approximately $27,500. In June 2001, the Company re-entered an abandoned well on
this acreage which will be completed in August 2001 at an estimated cost of
$115,000. The performance of this well will be determined after hookup of the
well to a gas gathering facility which is pending.
On September 5, 2000, the Company acquired a 50% working interest and operating
rights in approximately 107 gross non-producing acres in Coke County, Texas for
approximately $11,400. The recompletion of the well on this acreage, which began
on January 31, 2001, was unsuccessful and the well has been abandoned, at a cost
to the Company to date of approximately $23,000.
On October 31, 2000, the Company acquired a 12.5% working interest in 400 gross
non-producing acres in Nolan County, Texas for $11,750. A third party operator
completed an oil well was on this acreage in May 2001 at a cost to the Company
of approximately $55,000.
Effective December 1, 2000, the Company acquired a 1.345% royalty interest in
proven acreage in Limestone County, Texas for cash of $33,000. A replacement
well was successfully completed on this acreage in February 2001.
Effective January 1, 2001, the Company acquired royalty interests totaling
0.209% in producing acreage in Ward County, Texas for $65,700. There are
presently two producing gas wells on this acreage.
On April 30, 2001, the Company acquired a 0.0164% royalty interest in a
producing gas unit containing 9,538 acres in Reagan and Upton Counties for
$12,500.
In April 2001, the Company acquired additional joint venture interests in
properties located in various counties and states for $174,000, adjusted for
revenues and expenses from January 1, 2001, the effective date, through April
29, 2001, date of closing.
In May 2001, the Company acquired a 12.5% working interest and 9.375% net
revenue interest in 8,934 acres in Edwards County, Texas for $125,400. The
initial test well was drilled on this acreage by a third party operator. In July
2001, this well was completed, fraced, and is currently being evaluated.
Page 8
In June 2001, the Company assumed operations and acquired an approximate 88.35%
working interest and 62.7285% net revenue interest in a producing gas well in
Hutchinson County, Texas for $36,860, adjusted for revenues and expenses from
April 1, 2001, the effective date. The Company also acquired non-operated
working interests, ranging from .8512% to 3.75% with net revenue interests
ranging from .6816% to 3.267%, in 21 producing and 7 inactive wells in Limestone
and Freestone Counties, Texas for $200,000, adjusted for revenues and expenses
from April 1, 2001, the effective date.
The Company is reviewing several other projects in which it may participate. The
cost of such projects would be funded, to the extent possible, with existing
cash balances and cash flow from operations. The remainder may be funded through
borrowings on its bank credit facility discussed below.
At June 30, 2001, the Company had working capital of approximately $312,000
compared to working capital of approximately $822,000 at March 31, 2001, a
decrease of $510,000, due primarily to lower oil and gas prices and increased
expenditures.
The Company's revolving credit agreement with Bank of America, N.A. ("Bank"),
was amended to provide for a credit facility of $5,000,000, subject to a
borrowing base determination. The borrowing base was increased to $3,500,000,
with scheduled monthly reductions of the available borrowing base of $49,000 per
month beginning September 5, 2001, and the maturity date was extended to August
15, 2003. As of June 30, 2001, the balance outstanding under this agreement was
$600,000. No required principal payments are anticipated for fiscal 2002. 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 (6.75% at June 30, 2001).
This agreement generally restricts the Company's ability to transfer assets or
control of the Company, incur debt, extend credit, change the nature of the
Company's business, substantially change management personnel or pay dividends.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the current fiscal year.
Results of Operations - Three Months Ended June 30, 2001 and 2000
- -----------------------------------------------------------------
Net income decreased from $278,436 for the quarter ended June 30, 2000 to
$198,852 for the quarter ended June 30, 2001, a decrease of $79,584 or 29%.
Individual categories of income and expense are discussed below.
Page 9
Oil and gas sales increased from $592,807 for the first quarter of fiscal 2001
to $594,751 for the same period of fiscal 2002. This increase of $1,944 resulted
primarily from higher gas prices and increased production from property
acquisitions discussed above, offset in part by declines in production and lower
oil prices. Oil and gas production quantities were 4,757 barrels ("bbls") and
142,807 thousand cubic feet ("mcf") for the first quarter of fiscal 2001 and
4,492 bbls and 111,253 mcf for fiscal 2002, a decrease of 265 bbls, or 6%, and a
decrease of 31,554 mcf, or 22%. Average gas prices increased from $3.25 per mcf
for the first quarter of fiscal 2001 to $4.35 per mcf for fiscal 2002, while
average oil prices decreased from $26.90 per bbl for fiscal 2001 to $24.69 per
bbl for fiscal 2002.
Production costs increased from $91,293 for the first quarter of fiscal 2001 to
$157,403 for the same period of fiscal 2002, an increase of $66,110 or 72%. This
increase is primarily due to nonrecurring remedial repairs in fiscal 2002.
General and administrative expenses increased from $85,042 for the first quarter
of fiscal 2001 to $114,167 for the same period of fiscal 2002, an increase of
$29,125 or 34%. Increases in consulting, engineering and geological costs
($5,437), salary costs and contract services ($5,095), franchise taxes ($2,865),
and legal fees ($2,854), and compensation related to stock options granted to
consultants ($12,367) account for this.
Depreciation, depletion and amortization based on production and other methods
decreased from $112,000 for the first quarter of fiscal 2001 to $91,196 for the
same period of fiscal 2002, a decrease of $20,804 or 19% due primarily to
increased reserve amounts resulting from higher gas prices.
Interest expense decreased from $27,822 for the first quarter of fiscal 2001 to
$10,529 for the same period of fiscal 2002, a decrease of $17,293 or 62%, due
primarily to lower interest rates and decreased borrowings outstanding.
Quantitative and Qualitative Disclosures About Market Risk
All of the Company's financial instruments are for purposes other than
trading.
Interest Rate Risk. The following table summarizes fiscal year maturities
for the Company's variable rate bank debt, which is tied to prime rate. If the
interest rate on the Company's bank debt increases or decreases by one
percentage point, the Company's annual pretax income would change by $6,000.
2002 2003 2004
--------- --------- ---------
Variable rate bank debt $ - $ 600,000 $ -
Credit Risk. Credit risk is the risk of loss as a result of nonperformance
by counterparties 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 uncollateralized. At June 30, 2001, the Company's
largest credit risk associated with any single purchaser was $43,043. The
Company has not experienced any significant credit losses.
Page 10
Volatility of Oil and Gas Prices. The Company's revenues, operating results
and future rate of growth are dependent upon the prices received for oil and
gas. Historically, the markets for oil and gas have been volatile and are likely
to continue to be so in the future. Various factors beyond the control of the
Company affect the price of oil and gas, including but not limited to worldwide
and domestic supplies of oil and gas, the ability of the members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, political instability or armed conflict in
oil-producing regions, the price and level of foreign imports, the level of
consumer demand, the price and availability of alternative fuels, the
availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulation and the overall economic environment. Any significant
decline in prices would adversely affect the Company's revenues and operating
income and may require a reduction in the carrying value of the Company's oil
and gas properties. If the average oil price for the first three months of
fiscal 2002 had increased or decreased by one cent per barrel, the Company's
pretax income would have changed by $45. If the average gas price for the first
three months of fiscal 2002 had increased or decreased by one cent per mcf, the
Company's pretax income would have changed by $1,113.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
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None.
Item 2. Changes in securities
----------------------
None.
Item 3. Defaults upon senior securities
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None.
Item 4. Submission of matters to a vote of security holders
---------------------------------------------------
None.
Item 5. Other Information
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None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None.
Page 11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated: August 13, 2001 /s/Nicholas C. Taylor
----------------------------------
Nicholas C. Taylor
President
Dated: August 13, 2001 /s/Tamala L. McComic
----------------------------------
Tamala L. McComic
Controller and Assistant Secretary
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