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, 1998
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: 1,623,289 shares outstanding at October 30, 1998
MEXCO ENERGY CORPORATION
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and March 31, 1998 3
Consolidated Statements of Operations (Unaudited) for the three and
six month periods ended September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows (Unaudited) for the six month
periods ended September 30, 1998 and September 30, 1997 6
Note to Unaudited Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1998 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................... $ 135,204 $ 241,348
Accounts receivable:
Oil and gas sales .......................... 197,973 199,427
Related parties ............................ 2,958 8,473
Prepaid Expenses ............................. 21,191 15,185
------------ ------------
Total current assets ....................... 357,326 464,433
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged ............ 10,278,534 9,915,701
Office and computer equipment and software ... 21,874 20,252
------------ ------------
10,300,408 9,935,953
Less accumulated depreciation, depletion
and amortization ........................... 6,522,710 5,857,900
------------ ------------
Property and equipment, net ................ 3,777,698 4,078,053
------------ ------------
Total assets ................................... $ 4,135,024 $ 4,542,486
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............ $ 296,000 $ 322,000
Accounts payable and accrued expenses ........ 118,627 121,131
------------ ------------
Total current liabilities .................. 414,627 443,131
Long-term debt ................................. 1,526,000 1,500,000
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;
1,623,289 shares issued and outstanding .... 811,644 811,644
Additional paid in capital ................... 2,875,399 2,875,399
Retained earnings (deficit) .................. (1,492,646) (1,087,688)
------------ ------------
Total stockholders' equity ................. 2,194,397 2,599,355
------------ ------------
Total liabilities and stockholders' equity ..... $ 4,135,024 $ 4,542,486
============ ============
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 September 30, 1998 and 1997
(Unaudited)
1998 1997
--------- ---------
Operating revenue:
Oil and gas sales ............................ $ 376,602 $ 499,536
Property operator fees ....................... 1,044 1,278
Other ........................................ 1,268 722
--------- ---------
Total operating revenue ................. 378,914 501,536
Operating costs and expenses:
Oil and gas production ....................... 192,059 166,469
Depreciation, depletion and amortization ..... 168,464 210,658
General and administrative ................... 59,793 45,625
--------- ---------
Total operating costs and expenses ...... 420,316 422,752
Other income and (expenses):
Interest income .............................. 1,842 629
Interest expense ............................. (39,871) (27,259)
--------- ---------
Net other income and expenses ........... (38,029) (26,630)
--------- ---------
Income before income taxes ......................... (79,431) 52,154
Income tax expense ................................. -- 8,233
--------- ---------
Net income ......................................... $ (79,431) $ 43,921
========= =========
Net income per share:
Basic ................................. $ (0.05) $ 0.03
Diluted ............................... $ (0.05) $ 0.03
Weighted average shares outstanding:
Basic .................................... 1,623,289 1,623,229
Diluted .................................. 1,623,289 1,623,229
The accompanying note is an integral part
of the consolidated financial statements.
Page 4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Operating revenue:
Oil and gas sales .......................... $ 826,097 $ 954,239
Property operator fees ..................... 2,087 2,556
Other ...................................... 2,196 1,285
----------- -----------
Total operating revenue ............... 830,380 958,080
Operating costs and expenses:
Oil and gas production ..................... 368,442 294,370
Depreciation, depletion and amortization ... 664,809 402,030
General and administrative ................. 126,208 117,997
----------- -----------
Total operating costs and expenses .... 1,159,459 814,397
Other income and (expenses):
Interest income ............................ 3,140 900
Interest expense ........................... (79,019) (58,824)
----------- -----------
Net other income and expenses ......... (75,879) (57,924)
----------- -----------
Income before income tax expense ................. (404,958) 85,759
Income tax expense ............................... -- 17,205
----------- -----------
Net income ....................................... $ (404,958) $ 68,554
=========== ===========
Net income per share:
Basic ................................. $ (0.25) $ 0.04
Diluted ............................... $ (0.25) $ 0.04
Weighted average shares outstanding:
Basic .................................... 1,623,289 1,566,398
Diluted .................................. 1,623,289 1,566,398
The accompanying note is an integral part
of the consolidated financial statements.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income (loss) .............................. $ (404,958) $ 68,554
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred income taxes ...................... -- 30,632
Depreciation, depletion and amortization ... 664,809 402,030
Decrease in accounts receivable ............ 6,969 71,277
Increase (decrease) in accounts payable .... 39,570 (31,520)
Increase in prepaid assets ................. (6,006) (2,490)
Decrease in income taxes payable ........... -- (38,158)
----------- -----------
Net cash provided by operating activities .. 300,384 500,325
Cash flows from investing activities:
Additions to property and equipment ............ (406,528) (1,592,073)
----------- -----------
Net cash used in investing activities ...... (406,528) (1,592,073)
Cash flows from financing activities:
Proceeds from issuance of common stock ......... -- 1,000,000
Long-term borrowings ........................... -- 685,000
Principal payments on long-term debt ........... -- (500,000)
----------- -----------
Net cash provided by financing activities .. -- 1,185,000
Net increase (decrease) in cash .................. (106,144) 93,252
Cash, beginning of the period .................... 241,348 40,813
----------- -----------
Cash, end of period .............................. $ 135,204 $ 134,065
=========== ===========
Interest paid .................................... $ 65,820 $ 58,970
Income taxes paid ................................ $ -- $ 24,731
Non-cash investing and financing activities:
Included in trade accounts payable at September 30, 1998 are capital costs
attributable to oil and gas properties of $40,976. Included in trade accounts
payable at March 31, 1998 are purchases of oil and gas properties totaling
$83,050.
The accompanying note is an integral part
of the consolidated financial statements.
Page 6
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 (the "Company"), a Colorado corporation, was
organized in 1972 and maintains its principal office in Midland, Texas. The
Company and Forman Energy Corporation ("Forman"), its wholly owned subsidiary,
are engaged in the acquisition, exploration, development and production of oil
and gas. While the Company owns producing properties and undeveloped acreage in
twelve states, the majority of its activities are centered in the Permian Basin
of West Texas.
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.
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, 1998, and the results of its operations and cash flows for the
interim periods ended September 30, 1998 and 1997. 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.
INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average number
of shares outstanding during the periods presented. There were no common stock
equivalents outstanding as of September 30, 1997. Common stock equivalents
(options) are excluded at September 30, 1998, since their inclusion would have
an antidilutive effect on loss per share.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share" which
requires changes in the computation and reporting of earnings per share. This
pronouncement, which becomes effective for periods ending after December 15,
1997, provides for the presentation of basic earnings per share, computed
without regard to options, warrants, and other stock equivalents, and diluted
earnings per share, which gives effect to these potential dilutive common shares
when they have a dilutive effect on earnings per share.
Page 7
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.
In the first half of fiscal 1999, net cash flow was a negative $106,144. Cash
flow from operations was $300,384, which included the positive effects of an
increase of $39,570 in accounts payable and a decrease of $6,969 in accounts
receivable. Cash flow of $406,528 was used for additions to property and
equipment.
During the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999,
the Company participated in the drilling and completion of four wells with an
approximate 10% working and 8% net revenue interest in the Viejos Field, Pecos
County, Texas at a total cost of approximately $280,000. Expenditures
attributable to these wells were approximately $180,000 during fiscal 1999. In
September 1998, one of these wells was proposed as a water injection well and is
being converted at an estimated cost to the Company of $10,000.
In September 1998, the Company, as operator, successfully re-entered a gas well
in Pecos County, Texas at a cost of approximately $104,000. Additional capital
costs associated with this well of approximately $15,000 are anticipated during
the third quarter of fiscal 1999. Funds for this project were provided out of
cash flow from operations and existing cash balances. A pipeline connection is
expected to be available by the middle of December 1998. The Company owns a 100%
working interest and an approximate 75% net revenue interest in this well.
Although there have been favorable initial potential tests of the well, the
Company will be unable to determine the production capacity of this gas well
until production history is available.
The Company is reviewing several other re-entry projects in which it may
participate. The estimated cost of these projects to the Company is
approximately $200,000, part of which the Company may fund through borrowings on
its bank credit facility discussed below. The remainder would be funded by cash
flow from operations.
At September 30, 1998, the Company had negative working capital of $57,301
compared to working capital of $21,302 at March 31, 1998, a net decrease of
$78,603. This is due primarily to the adverse impact on revenue of lower oil
prices during the first half of fiscal 1999.
The Company has a revolving credit agreement with NationsBank of Texas, N.A.
("Bank") which provides for a credit facility of $3,000,000. The credit facility
was amended on August 15, 1998 to increase the borrowing base to $2,085,000,
with scheduled monthly reductions of $43,000 per month beginning September 5,
1998 and to extend the maturity date to August 15, 2000. 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 (8.25% at September 30, 1998). 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. As of September 30,
1998, the balance outstanding under this agreement was $1,822,000.
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 foreseeable future.
YEAR 2000 ISSUE
The Company is in the process of conducting an assessment of the business risks
associated with the new century. These risks relate to the problem present in
certain software and embedded logic control devices to recognize the change in
the century. If not corrected, the year 2000 could cause such devices and
software to fail or create erroneous results.
The Company's accounting software vendor is currently modifying its software to
accurately handle the new century, with all necessary changes scheduled to be
completed by the end of 1998, at no additional cost to the Company. Therefore,
the Company does not expect to incur any material expense associated with its
own information systems.
With respect to the risks related to the Company's customers, suppliers and
financial institutions, the Company has initiated formal communications to
mitigate or prevent the potential impact on the Company's operations and
financial condition. The assessment of the extent of risk, related to the
Company's operations and financial condition, should be substantially complete
by the end of 1998. Until the assessment is complete, the Company can not
reasonably conclude that the exposure related to the Year 2000 will not
materially affect the future financial results, condition or reporting of the
Company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income decreased from $43,921 for the three months ended September 30, 1997,
to a net loss of $79,431 for the same period in fiscal 1999. Individual
categories of income and expense are discussed below.
Oil and gas sales decreased from $499,536 for the second quarter of fiscal 1998
to $376,602 for the same period of fiscal 1999. This decrease of $122,934 or 25%
resulted from decreased oil and gas prices and decreased oil production due to
normal production declines, offset in part by increased gas production
attributable to wells discussed above. Oil and gas production quantities were
12,204 bbls and 117,438 mcf for the second quarter of fiscal 1999 and 16,024
bbls and 97,561 mcf for fiscal 1998, a decrease of 3,820 bbls or 24% and an
increase of 19,877 mcf, or 20%. Average gas prices decreased from $2.09 per mcf
for the second quarter of fiscal 1998 to $1.94 per mcf for fiscal 1999, while
average oil prices decreased from $18.47 per bbl for fiscal 1998 to $12.20 per
bbl for fiscal 1999.
Production costs increased from $166,469 for the second quarter of fiscal 1998
to $192,059 for the same period of fiscal 1999, an increase of $25,590, or 15%.
This increase was primarily due to additional operating expenses attributable to
wells drilled and remedial work done on existing properties.
General and administrative expenses were $59,793 for the second quarter of
fiscal 1999 and $45,625 for the second quarter of fiscal 1998, an increase of
$14,168, or 31%. This increase was primarily due to increased salary and benefit
costs of $18,412, offset in part by a reduction in accounting fees of $6,725.
Depreciation, depletion and amortization based on production and other methods
decreased from $210,658 for the second quarter of fiscal 1998 to $168,464 for
the same period of fiscal 1999, a decrease of $42,194 or 20%. This decrease was
due primarily to prior full cost ceiling write-downs of oil and gas properties,
which resulted from lower reserve estimates. Lower product prices have had a
significant impact on the determination of reserve quantity estimates.
Interest expense increased from $27,259 for the second quarter of fiscal 1998 to
$39,871 for the same period of fiscal 1999, an increase of $12,612 or 46%, due
to increased borrowings outstanding under the loan agreement.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income decreased from $68,554 for the six months ended September 30, 1997 to
a net loss of $404,958 for the first half of fiscal 1999. Individual categories
of income and expenses are discussed below.
Oil and gas sales decreased from $954,239 for the first six months of fiscal
1998 to $826,097 for the same period of fiscal 1999. This decrease of $128,142
or 13% resulted from lower oil prices and decreased oil production due to normal
production declines, offset in part by increased gas production from wells
drilled. Average gas prices remained relatively stable when comparing these
interim periods. Oil and gas production quantities were 30,873 bbls and 194,219
mcf for the first six months of fiscal 1998 and 26,404 bbls and 243,823 mcf for
fiscal 1999, a decrease of 4,469 bbls or 14% and an increase of 49,604 mcf or
26%. Average gas prices were $2.00 per mcf for the first six months of fiscal
1998 and $2.03 per mcf for fiscal 1999, while average oil prices decreased from
$18.31 per bbl for fiscal 1998 to $12.59 per bbl for fiscal 1999.
Production costs increased from $294,370 for the first six months of fiscal 1998
to $368,442 for the same period of fiscal 1999, an increase of $74,072 or 25%.
This increase was primarily due to additional operating expenses attributable to
new wells drilled and remedial work done on existing properties.
General and administrative expenses increased from $117,997 for the first six
months of fiscal 1998 to $126,208 for the same period of fiscal 1999, an
increase of $8,211 or 7%. This increase was primarily due to increased salary
and benefit costs of $21,122, offset in part by a reduction in accounting fees
of $15,525.
Depreciation, depletion and amortization based on production and other methods
increased from $402,030 for the first six months of fiscal 1998 to $664,809 for
the same period of fiscal 1999, an increase of $262,779 or 65%, due primarily to
a full cost ceiling write-down of $288,393. Lower product prices have had a
significant impact on the determination of reserve quantity estimates.
Interest expense increased from $58,824 for the first six months of fiscal 1998
to $79,019 for the same period of fiscal 1999, an increase of $20,195 or 34%,
due to additional borrowings outstanding under the loan agreement.
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 15, 1998, 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 seven directors nominated by the Board of Directors was elected with
1,194,150 votes for and none against out of a total of 1,623,289 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, Gerald
R. Martin, and Donna Gail Yanko were duly elected to serve as directors until
the next annual meeting and until the election of their respective successors.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
None.
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 11, 1998 Nicholas C. Taylor
-----------------------
Nicholas C. Taylor,
President and Treasurer