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, 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 September 30, 2001
MEXCO ENERGY CORPORATION
Table of Contents
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 2001
(Unaudited) and March 31, 2001 3
Consolidated Statements of Operations (Unaudited) for the
three and six month periods ended September 30, 2001 and
September 30, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for
the six month periods ended September 30, 2000 and
September 30, 2001 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 9
PART II. OTHER INFORMATION 10
SIGNATURES 12
2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2001 2001
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,740 $ 378,816
Accounts receivable:
Oil and gas sales 253,681 489,217
Trade 28,404 1,074
Related parties 4,813 8,059
Prepaid expenses 41,660 74,342
------------ ------------
Total current assets 364,298 951,508
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 13,057,694 11,557,980
Office and computer equipment
and software 25,300 23,600
------------ ------------
13,082,994 11,581,580
Less accumulated depreciation,
depletion and amortization 7,777,558 7,571,728
------------ ------------
Property and equipment, net 5,305,436 4,009,852
------------ ------------
Total assets $ 5,669,734 $ 4,961,360
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 156,378 $ 77,776
Income taxes payable - 51,637
------------- ------------
Total current liabilities 156,378 129,413
Long-term debt 1,000,000 600,000
Deferred income tax liability 269,329 185,495
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 2,924,831 2,900,097
Retained earnings 580,095 407,254
Treasury stock, at cost (71,592) (71,592)
------------- ------------
Total stockholders' equity 4,244,027 4,046,452
------------- ------------
Total liabilities and stockholders'
equity $ 5,669,734 $ 4,961,360
============= ============
The accompanying note is an integral part
of the consolidated financial statements.
3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months ended September 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
-------------------- ----------------------
2001 2000 2001 2000
--------- --------- ---------- -----------
Operating revenue:
Oil and gas sales $434,798 $ 712,243 $1,029,549 $1,305,050
Other 2,723 3,069 4,431 4,539
-------- --------- ---------- ----------
Total operating revenue 437,521 715,312 1,033,980 1,309,589
Operating costs and expenses:
Oil and gas production 213,702 149,841 371,105 241,134
Depreciation, depletion
and amortization 114,634 103,677 205,830 215,677
General and administrative 76,137 78,561 190,304 163,603
-------- --------- ---------- ----------
Total operating costs
and expenses 404,473 332,079 767,239 620,414
-------- --------- ---------- ----------
33,048 383,233 266,741 689,175
Other income and (expenses):
Interest income 1,413 1,540 1,670 1,856
Interest expense (12,185) (27,472) (22,713) (55,294)
-------- --------- ---------- ----------
Net other income and expenses (10,772) (25,932) (21,043) (53,438)
-------- --------- ---------- ----------
Income before income taxes 22,276 357,301 245,698 635,737
Income tax expense 48,288 - 72,857 -
-------- --------- ---------- ----------
Net income (loss) ($ 26,012) $ 357,301 $ 172,841 $ 635,737
======== ========= ========== ==========
Net income (loss) per share:
Basic ($0.02) $ 0.22 $ 0.11 $ 0.39
Diluted ($0.02) $ 0.22 $ 0.11 $ 0.39
Weighted average shares outstanding:
Basic 1,610,133 1,623,293 1,610,133 1,623,293
Diluted 1,610,133 1,623,293 1,610,133 1,623,293
The accompanying note is an integral part
of the consolidated financial statements.
4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended September 30, 2001 and 2000
(Unaudited)
2001 2000
----------- ---------
Cash flows from operating activities:
Net income $ 172,841 $ 635,737
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 83,834 -
Stock-based compensation 24,736 6,142
Depreciation, depletion and
amortization 205,830 215,677
(Increase) decrease in
accounts receivable 211,452 (151,604)
Increase (decrease) in accounts
payable and accrued expenses 167,120 14,505
Decrease (increase) in prepaid expenses 32,682 (9,295)
Decrease in income taxes payable (51,637) -
---------- ---------
Net cash provided by operating
activities 846,858 711,162
Cash flows from investing activities:
Additions to property and equipment (1,589,934) (533,393)
---------- ---------
Net cash used in investing
activities (1,589,934) (533,393)
Cash flows from financing activities:
Principal (payments) borrowings on
long-term debt 400,000 (100,000)
---------- ---------
Net cash used in financing activities 400,000 (100,000)
---------- ---------
Net increase (decrease) in cash (343,076) 77,769
Cash, beginning of the period 378,816 97,712
---------- ---------
Cash, end of period $ 35,740 $ 175,481
========== =========
Interest paid $ 22,654 $ 55,114
Income taxes paid $ 66,668 $ -
The accompanying note is an integral part
of the consolidated financial statements.
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, (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
September 30, 2001, and the results of its operations and cash flows for the
interim periods ended September 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 Companys annual report on Form 10-K filed with the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission.
However, the disclosures herein are adequate to make the information presented
not misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Form
10-K.
Principles of Consolidation
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiary. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Income Taxes
During the quarter ended September 30, 2000 the Company had no provision
for income taxes due to a reduction in valuation allowance for deferred tax
assets. For the quarter ended September 30, 2001 income tax expense is higher
than statutory rates due to a correction of a prior quarter estimate.
6
MEXCO ENERGY CORPORATION AND SUBSIDIARY
Management's Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Managements Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements, other than statements of historical fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
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 by acquiring and developing primarily gas
properties with potential for long-lived production.
For the first six months of fiscal 2002, cash flow from operations was $846,860
compared to $711,162 for the first six months of fiscal 2001. This included the
effects of an increase in deferred income taxes, a decrease in accounts
receivable and an increase in accounts payable. Cash of $1,589,934 was used for
additions to property and equipment. Accordingly, net cash flow was a negative
$343,074.
As of 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%. Net operating cash flow from these properties
was approximately $86,000 for the twelve months ended September 30, 2001. Since
January 2001, workovers were performed on four of these producing wells,
increasing production at a total cost to the Company of approximately $161,000.
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 $153,000. The Company re-entered a plugged well and commenced gas
production in August 2001.
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 (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 and completed and fraced at a cost to the
Company of approximately $119,000. The well is shut-in and currently waiting on
construction of a pipeline at an estimated cost of $25,000 to the Companys
interest. The Company plans to participate in the drilling of an additional well
in Edwards County in the next 60 to 90 days.
7
The Company 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 as
of April 1, 2001.
The Company has acquired and also is reviewing several other projects for future
participation. The cost of such projects would be funded, to the extent
possible, with existing cash balances and cash flow from operations. The
remainder may be funded through borrowings on the bank credit facility discussed
below.
At September 30, 2001, the Company had working capital of approximately $207,920
compared to working capital of approximately $822,095 at March 31, 2001, a
decrease of $614,175, due primarily to acquisitions, development of properties
and lower oil and gas
prices.
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 September 30, 2001, the balance outstanding under this agreement
was $1,000,000. No principal payments are anticipated to be required 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 Companys oil and gas
properties. Interest under this agreement is payable monthly at prime rate
(6.00% at September 30, 2001). This agreement generally restricts the Companys
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 September 30, 2001 and 2000
Net income decreased 107%, from $357,301 for the quarter ended September 30,
2000 to ($26,012) for the quarter ended September 30, 2001. Individual
categories of income and expense are discussed below.
Oil and gas sales decreased from $712,243 for the second quarter of fiscal 2001
to $434,798 for the same period of fiscal 2002. This decrease of $277,445
resulted primarily from lower oil and gas prices. Average gas prices decreased
from $4.42 per mcf for the second quarter of fiscal 2001 to $2.76 per mcf for
fiscal 2002, while average oil prices decreased from $30.55 per bbl for fiscal
2001 to $24.80 for fiscal 2002. Oil and gas production quantities were 4,357
barrels ("bbls")and 131,098 thousand cubic feet ("mcf") for the second quarter
of fiscal 2001 and 5,074 bbls and 111,840 mcf for fiscal 2002, an increase of
16% and a decrease of 15%, respectively.
Production costs increased 43% from $149,841 for the second quarter of fiscal
2001 to $213,702 for the same period of fiscal 2002, primarily due to
nonrecurring expenses on acquired wells in fiscal 2002.
8
General and administrative expenses decreased 3% from $78,561 for the second
quarter of fiscal 2001 to $76,137 for the same period of fiscal 2002.
Depreciation, depletion and amortization based on production and other methods
increased 11%, from $103,677 for the second quarter of fiscal 2001 to $114,634
for the same period of fiscal 2002.
Interest expense decreased 56% from $27,472 for the second quarter of fiscal
2001 to $12,185 for the same period of fiscal 2002, due primarily to lower
interest rates and decreased borrowings outstanding.
There was no provision for income tax expense for the second quarter of fiscal
2001 due to a reduction in valuation allowance for deferred tax assets. For the
same period of fiscal 2002 income tax expense was 48,288, which is higher than
statutory rates, due to a correction of the first quarter estimate.
Results of Operations - Six Months Ended September 30, 2001 and 2000
Net income decreased 73% from $635,737 for the six months ended September 30,
2000 to $172,841 for the six months ended September 30, 2001. Individual
categories of income and expense are discussed below.
Oil and gas sales decreased 21% from $1,305,050 for the first six months of
fiscal 2001 to $1,029,549 for the same period of fiscal 2002, primarily because
of lower oil and gas prices and decreased gas production. Average gas prices
decreased from $3.81 per mcf for the first six months of fiscal 2001 to $3.55
per mcf for fiscal 2002, and average oil prices decreased from $28.64 per bbl
for fiscal 2001 to $24.77 per bbl for fiscal 2002. Oil and gas production
quantities were 9,114 bbls and 273,905 mcf for the first six months of fiscal
2001 and 9,566 bbls and 223,093 mcf for fiscal 2002, an increase of 5% and a
decrease of 19%, respectively.
Production costs increased 54% from $241,134 for the first six months of fiscal
2001 to $371,105 for the same period of fiscal 2002. Non-recurring expenses on
acquired properties and other operating expenses to increase production on
producing properties primarily account for this increase.
General and administrative expenses increased 16% from $163,603 for the first
six months of fiscal 2001 to $190,304 for the same period of fiscal 2002 due to
increases in salary costs and contract services, franchise taxes, and
compensation related to stock options granted to consultants.
Depreciation, depletion and amortization, based on production and other methods
of depreciation, decreased 5% from $215,677 for the first six months of fiscal
2001 to $205,830 for the same period of fiscal 2002.
Interest expense decreased 59% from $55,294 for the first six months of fiscal
2001 to $22,713 for the same period of fiscal 2002, 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 $10,000.
9
2002 2003 2004
---------- ---------- -------------
Variable rate bank debt $ - $1,000,000 $ -
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, 2001, the Company's
largest credit risk associated with any single purchaser was $27,719. The
Company has not experienced any significant credit losses.
Volatility of Oil and Gas Prices. The Company's revenues, operating results and
future rate of growth are dependent upon the prices received for oil and gas.
Historically, the markets for oil and gas have been volatile and are likely to
continue to be so in the future. Various factors beyond the control of the
Company affect the price of oil and gas, including but not limited to worldwide
and domestic supplies of oil and gas, the ability of the members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, political instability or armed conflict in
oil-producing regions, the price and level of foreign imports, the level of
consumer demand, the price and availability of alternative fuels, the
availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulation and the overall economic environment. Any significant
decline in prices would adversely affect the Company's revenues and operating
income and may require a reduction in the carrying value of the Company's oil
and gas properties. If the average oil price for the first six months of fiscal
2002 had increased or decreased by one cent per barrel, the Company's pretax
income for such period would have changed by $96. If the average gas price for
the first six months of fiscal 2002 had increased or decreased by one cent per
mcf, the Company's pretax income would have changed by $2,231.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None.
Item 2. Changes in securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
On September 27, 2001, the Annual Meeting of the Shareholders of the
Company was held in Midland, Texas, for the purpose of electing a Board of
Directors. Each of the six directors nominated by the Board of Directors was
elected with 940,688 votes for and none against out of a total of 1,610,133
shares of common stock of the Company issued and outstanding. William G. Duncan,
Jr., Thomas Graham, Jr., Nicholas C. Taylor, Thomas R. Craddick, Jack D. Ladd
and Donna Gail Yanko were duly elected to serve as directors until the next
annual meeting and until the election of their respective successors.
10
Item 5. Other Information
Immediately subsequent to the above-described Annual Meeting of
Shareholders, the directors increased the authorized number of directors to
seven and appointed Arden R. Grover of Midland, Texas to fill such vacancy.
Item 6. Exhibits and Reports on Form 8-K
None.
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: November 9, 2001 /s/Nicholas C. Taylor
-----------------------------------
Nicholas C. Taylor
President
Dated: November 9, 2001 /s/Tamala L. McComic
-----------------------------------
Tamala L. McComic
Treasurer, Controller and Assistant
Secretary
12