UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1998 Commission File No. 0-6694
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0627918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 W. TEXAS AVENUE, SUITE 1101 79701
MIDLAND, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (915) 682-1119
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $.50 par value None
Indicate by check-mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
------ --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or an amendment to this Form 10-K. [_]
The aggregate market value of the common stock of the Registrant held by non-
affiliates was approximately $1,646,573 based upon the closing bid price of the
registrant's common stock as of June 3, 1998.
As of June 3, 1998 the registrant had outstanding 1,623,289 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 601 of Regulation S-K with respect to this
Form 10-K has either been included or omitted because of non-applicability.
The index to the Exhibits is located on page 22 herein.
2
PART I
ITEM NO. 1. BUSINESS
--------
Mexco Energy Corporation (the "Company"), a Colorado corporation, was
organized in 1972, and maintains its principal office at 214 W. Texas, Suite
1101, Midland, Texas. Since its incorporation, the Company has been engaged in
the acquisition, exploration and development of oil and gas properties located
in the United States. The bulk of its activities are, and have been since its
incorporation, conducted in the State of Texas.
The Company's corporate name was formerly Miller Oil Company. In 1980 the
shareholders of the Company amended the Articles of Incorporation ("Articles")
of the Company to change the corporate name to Mexco Energy Corporation. Also
at that time, the shareholders of the Company approved amendments to the
Articles resulting in a one-for-fifty reverse stock split of the Company's
common stock ($0.50 par value). The corporate name change and reverse stock
split became effective April 30, 1980.
The Company's operations are not divided into industry segments. Since its
inception, the Company's entire business has been acquiring, and developing oil
and gas properties and producing oil and gas within the oil and gas industry.
All sales of oil and gas are to unaffiliated customers. See the Company's
financial statements and notes thereto for an account of the Company's past
operating results attributable to its oil and gas operations.
The Company acquires interests in producing and non-producing oil and gas
leases purchased from landowners and leaseholders in areas considered favorable
for oil and gas exploration and production by the Company. In addition, oil and
gas prospects are acquired by joining with other oil and gas operators in
drilling prospects which such third parties have generated. The Company employs
a combination of the above methods of obtaining producing acreage and related
prospects. In recent years, the Company has placed primary emphasis on
evaluation and purchase of producing oil and gas properties.
As of March 31, 1998, the Company held leasehold rights covering in excess
of 214,112 gross acres (3,871 net acres), all of which have producing oil and
gas wells located thereon. The Company is the operator of five (5) of the
producing wells in which it owns an interest and other companies operate one
thousand five hundred thirty-six (1,536) of the remaining producing wells.
Approximately 74% of the Company's present value discounted at ten percent
per annum of future net revenues of total proved reserves is concentrated in
three (3) principal fields, the Lazy JL, Viejos and Gomez fields. See Note L of
the Notes to Financial Statements herein. The Company owns 3,964 gross (1,512
net) acres in the Lazy JL Field located in Garza County, Texas. The Company owns
2,594 gross (197 net) acres in the Viejos Field and 14,476 gross (72 net) acres
in the Gomez Field both fields located in Pecos County, Texas.
The Company's oil and gas activities involve oil and gas drilling, which
carries high risk including the risk that no commercial oil or gas production
will be obtained. The cost of drilling, completing and operating wells is often
uncertain. Further, drilling may be curtailed or delayed as a result of many
factors, including title problems, weather conditions, delivery delays, and
shortage of pipe and equipment.
3
The Company is subject to all the risks inherent in the exploration for,
and development and production of, oil and gas, including blowouts, fires, and
other casualties. The Company maintains insurance coverage but losses can occur
from uninsured risks or in amounts in excess of existing insurance coverage.
The occurrence of an event which is not insured or not fully insured could have
an adverse impact upon the Company.
The oil and gas industry in which the Company is engaged is a highly
competitive and speculative business. Competitors include well-capitalized oil
and gas companies and other companies having financial and other resources
greater than those of the Company. The Company's ability to locate and produce
oil and gas reserves is essential to the ultimate realization of income and
value from the Company's properties and, therefore, may be considered to be a
raw material essential to the Company's business. The availability of drilling
rigs, fuel, tubular goods and other drilling and production equipment is also
essential to the Company's business. The Company relies on the acquisition of
leases and other oil and gas interests on which to explore for, develop and/or
produce oil and gas. The availability of such property is essential to the
Company's continuing business.
Crude oil and condensate produced from the properties in which the Company
owns an interest are sold to oil companies and pipeline companies at prices
posted by the principal purchasers in the Company's producing area. As of March
31, 1998 the principal purchasers (percentage purchased) of the Company's crude
oil production were Navajo Crude Oil Marketing Company (62%) and Sun Refining
and Marketing Company (12%).
Natural gas obtained from the properties in which the Company has an
interest is sold pursuant to contracts negotiated between operators of producing
wells and purchasers of natural gas (subject to the Natural Gas Policy Act). As
of March 31, 1998 the principal purchasers (percentage purchased) of the
Company's natural gas production were approximately: Aquila Southwest Pipeline
Corporation (32%) and Chevron USA Production Company (12%). The Company does not
believe that the loss of any of these purchasers would have a material impact on
Company's business because of the demand for oil, gas and casinghead gas
production. Oil and gas production is transported by trucks and pipelines,
respectively. The Company does not own any bulk storage facilities or
pipelines.
As of March 31, 1998, the Company employed two full-time and one part-time
persons. The Company believes that relations with these employees are generally
satisfactory. The Company's employees are not covered by collective bargaining
arrangements.
The Company, by nature of its oil and gas operations, is subject to
compliance with federal, state and local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. At the present time, however, such compliance does not require any
substantial capital expenditures, does not materially affect the Company's
earnings and in the Company's opinion will not materially affect future
operations.
The Company is not engaged in operations in foreign countries, and no
portion of sales or revenues is derived from customers in foreign countries.
4
ITEM NO. 2. PROPERTIES
----------
Office Facilities
- - -----------------
The Company occupies its principal offices at 214 W. Texas, Suite 1101,
Midland, Texas pursuant to a lease which terminates in less than one (1) year.
Oil and Gas Properties and Reserves
- - -----------------------------------
The Company owns and operates 100% of four (4) producing oil wells and one
(1) well which is currently shut-in. The Company also owns partial interests in
an additional one thousand five hundred forty-two (1,542) wells located in the
states of Texas, New Mexico, Oklahoma, Louisiana, Arkansas, Wyoming, Kansas,
Colorado, Alabama, Montana, North Dakota and Utah. Of the wells, one thousand
five hundred thirty-seven (1,537) are producing. The Company operates one (1)
water injection well and owns partial interests in two additional injection
wells. Additional information concerning these properties and the oil and gas
reserves of the Company is provided as follows.
Oil and Gas Properties
- - ----------------------
The following table indicates the net oil and gas production of the Company
in each of the last five (5) years, all of which is located within the United
States.
Year Oil (Bbls) Gas (MCF)
---- ---------- ---------
1998 63,800 432,343
1997 39,363 236,034
1996 29,058 186,419
1995 21,844 140,010
1994 13,390 77,126
The following table indicates the Company's total gross and net productive
oil and gas wells and the total gross and net producing acreage as of March 31,
1998.
Wells Producing
--------------------------- --------------
Oil Gas Acreage (a)
------------- ------------ --------------
Gross Net Gross Net Gross Net
----- ------ ----- ----- ------- -----
Texas 1,086 22.078 81 1.472 89,642 3,469
New Mexico 64 .331 41 .237 16,954 172
Oklahoma 12 .050 51 .171 36,358 126
Wyoming 7 .040 10 .020 4,750 21
Louisiana 48 .013 10 .010 20,469 25
Arkansas 1 .001 - - 320 -
Kansas 3 .010 13 .040 9,160 27
Colorado - - 2 .010 240 -
Alabama 5 .010 - - 800 2
Montana 21 .020 - - 7,189 4
North Dakota 86 .080 - - 24,464 16
Utah 6 .010 - - 3,766 9
----- ------ --- ----- ------- -----
TOTALS 1,339 22.643 208 1.960 214,112 3,871
5
(a) A gross well or acre is one in which an interest is owned. A net well or
acre indicates the percentage of interest of the gross well or acre owned by
the Company.
(b) Of these wells, one is shut in pending evaluation and two are shut in
pending possible conversion to water injection wells.
The following table sets forth the results of the drilling activity by the
Company for the years ended March 31, 1998, 1997 and 1996.
Net Net Net Net
Gross Productive Dry Productive Dry/(1)/
Year Wells Exploratory Exploratory Development Development
- - ---- ----- ----------- ----------- ----------- -----------
1998 8 0 0 2.560 .881
1997 12 0 .167 2.550 0
1996 9 0 .063 .815 0
- - -------------
/(1)/ Of the net dry development wells, 2 gross wells (.776 net) were converted
to injection wells.
The following table presents, for the periods indicated, the average sales
price per unit and average production costs per unit attributable to the
Company's interest in producing oil and gas properties.
Year Ended March 31,
----------------------
1998 1997 1996
------ ------ ------
Average sales price
per product:
Oil (per bbl.) $17.70 $22.09 $17.45
Gas (per MCF) 2.22 2.47 1.57
Average production costs per
barrel equivalent (gas con-
verted to barrel equivalent
to 6 MCF per barrel of oil) 4.88 4.41 4.54
Production cost per dollar
of sales .32 .24 .35
Oil and Gas Reserves
- - --------------------
See Note L of the Notes to Financial Statements herein for information
regarding the estimated quantities of proved oil and gas reserves owned by the
Company. The oil and gas reserves have been estimated in accordance with
regulations promulgated by the Securities and Exchange Commission.
The following table indicates estimates by the Company's Independent
Petroleum Engineers, T. Scott Hickman & Associates, Inc., of Midland, Texas, of
the availability to the
6
Company of proved oil and gas reserves, all of which are located in the United
States. For 1998, T. Scott Hickman & Associates, Inc. has estimated 245,860
barrels of oil and 3,196,594 MCF of gas for a combined $3,892,533 of future net
revenue discounted at ten percent (10%) per annum. According to SEC guidelines
no provisions were made for changes in product prices and costs; therefore, the
Company does not believe that these estimates of reserves and future net
revenues fully reflect potential future revenue values. Estimates of oil and gas
reserves are projections based on engineering information and data. There are
uncertainties inherent in the interpretation of such data, and there can be no
assurance that the reserves set forth below will be ultimately realized.
Proved Developed and Undeveloped Reserves
-----------------------------------------
Present Worth of
Future Net Revenues
Oil (bbls) Gas (MCF) Discounted at 10%
---------- --------- -------------------
March 31, 1998 245,860 3,196,594 $3,892,533
March 31, 1997 436,289 2,956,219 $5,320,610
March 31, 1996 424,737 1,920,107 $4,627,526
Except for a sharp decline in crude oil prices, no major discovery or other
favorable or adverse event has caused a material change in the estimated proved
reserves since March 31, 1998 except for the increase in the Company's proved
oil and gas reserves as of March 31, 1998 due primarily to purchases and
development of producing properties and except for normal production declines,
price and related adjustments.
The Company has not filed any oil or gas reserve estimates or included any
such estimates in reports to any other federal or foreign governmental authority
or agency within the past twelve (12) months.
The Company has no foreign operations and has no agreements with foreign
governments.
As of March 31, 1998, the Company was participating in the drilling of five
(5) wells, four (4) of which have subsequently been successfully completed.
There were no other operations of material importance to Company such as
waterfloods and pressure maintenance projects being installed by the Company,
except a pilot two injection well water flood projection in the Lazy JL Field,
Garza County, Texas and commencement of planning for a gas recycling operation
in the Viejos Field, Pecos County, Texas.
Title to Oil and Gas Properties
- - -------------------------------
Substantially all of the Company's properties are currently mortgaged under
a deed of trust to secure funding through a revolving line of credit. The
Company's properties are generally subject to the customary royalty and
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and minor encumbrances, easements and
restrictions. The Company believes that none of such burdens materially detract
from the value
7
of such properties or materially interferes with their use in the operation of
the Company's business.
As is common industry practice, little or no investigation of title is made
at the time of acquisition of undeveloped properties, other than preliminary
review of local mineral records. Title investigations, in most cases including
obtaining a title opinion of local counsel, are made before commencement of
drilling operations. The Company believes that its methods of investigating
title to its properties are consistent with practices customary in the oil and
gas industry in connection with the acquisition of such properties, and that
such practices are adequately designed to enable it to acquire good title to
such properties.
Undeveloped Acreage
- - -------------------
The Company currently does not own any material inventory of non-productive
acreage in partially developed prospects except those located in the Viejos
Devonian Field of Pecos County, Texas and the Lazy JL Spraberry Field of Garza
County, Texas. The Company owns from 8.31% to 12.02% working and royalty
interests (net revenue interests 6.42% to 9.01%) in the Viejos Field of Pecos
County, Texas, consisting of 2,594 gross acres and twenty (20) wells.
The Company owns from 35% to 45% working interests (net revenue interests
from 26.25% to 33.84%) in twenty-three (23) wells in the Lazy JL (Lower
Spraberry) Field of Garza County, Texas, consisting of 3,964 gross acres. The
Company is unable to determine the extent of future development, if any, in
these two (2) fields.
ITEM NO. 3. LEGAL PROCEEDINGS
-----------------
The Company is not involved in any pending or threatened legal proceedings.
ITEM NO. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter has been submitted to a vote of security holders during the fourth
quarter of the fiscal year being reported upon.
8
PART II
-------
ITEM NO. 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS.
-------
"Common Stock"
- - --------------
The Company's common stock is traded in the over-the-counter market. The
high and low bid quotations for the calendar periods indicated are shown on the
following table.
Bid Price
----------------
High Low
---- ---
1998 April - June 1997 $5.50 $5.50
July - September 1997 7.50 5.50
October - December 1997 7.75 7.50
January - March 1998 7.75 7.50
1997 April - June 1996 $4.50 $3.50
July - September 1996 4.25 3.50
October - December 1996 4.50 4.50
January - March 1997 5.50 5.50
Bid quotations representing prices between dealers do not include retail
mark up, mark down or commissions, and do not necessarily represent actual
transactions.
Number of Shareholders
- - ----------------------
As of March 31, 1998, there were approximately 1,443 shareholders of record
of the Company's common stock.
Dividends
- - ---------
The Company has not paid any dividends on its common stock, and the payment
of any dividends at a future date would be dependent upon the earnings,
financial condition and capital needs of the Company at such time. Payment of
dividends is currently restricted by the terms of the Company's bank loan
agreement.
9
ITEM NO. 6. SELECTED FINANCIAL DATA
-----------------------
Years Ended March 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
Oil & gas income $ 2,090,117 $1,453,124 $ 798,589 $ 543,267 $ 374,322
Proceeds from settlement of
litigation - - - - 1,160,933
Administrative service charges and
reimbursements 5,112 5,009 7,380 10,123 26,553
Other income 13,230 7,774 28,104 20,531 18,071
Net income (loss) (1,323,657) 377,867 200,606 104,843 1,028,718
Net Income (loss) per share - basic ( .83) .27 .15 .09 .88
Net Income (loss) per share - diluted ( .83) .27 .15 .09 .88
Net Income (loss) from continuing
operations (1,323,657) 377,867 200,606 104,843 1,028,718
Net Income (loss) from continuing
operations per share ( .83) .27 .15 .09 .88
EBITDA/(1)/ $ 1,252,539 1,006,119 474,697 285,548 1,308,300
Operating Cash flow/(1)/ 1,118,566 866,931 396,409 255,649 1,302,760
Total Assets $ 4,542,486 5,109,199 2,612,039 1,951,896 1,868,369
Total Long-Term Debt 1,822,000 1,637,000 - - -
Weighted average shares
outstanding 1,594,752 1,423,229 1,342,628 1,173,229 1,173,229
Dividends - - - - -
/(1)/ EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization. Management of the Company
believes that EBITDA and operating cash flow may provide additional
information about the Company's ability to meet its future
requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures
commonly used in the oil and gas industry and should not be
considered in isolation or as a substitute for net income, operating
income, cash flows from operating activities or any other measure of
financial performance presented in accordance with generally accepted
accounting principles or as a measure of the Company's profitability
or liquidity.
10
ITEM NO. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Liquidity and Capital Resources and Commitments
- - -----------------------------------------------
As indicated by the Statements of Cash Flows for the past three fiscal
years, the Company has funded its operations, acquisitions, exploration and
development expenditures from cash generated by operating activities, bank
borrowings and issuance of common stock.
The Company has a $3,000,000 revolving line of credit with a borrowing base
of $2,200,000 which is reduced by $50,000 each month throughout the term of the
loan. The loan is reviewed by the bank annually and matures on August 15, 1999.
The Company currently has outstanding borrowings of $1,822,000 against the line.
At the current level of borrowing principal payments will be due beginning
September 5, 1998. The obligations under the loan agreement are secured by
substantially all of the oil and gas properties of the Company and the stock of
its subsidiary. The loan agreement contains certain covenants relating to the
financial condition of the Company. Interest is payable monthly at the prime
rate as established by the bank.
The Company also has a letter of credit with NationsBank of Texas, N.A.,
Midland, Texas, which provides for unsecured borrowings up to $25,000 in lieu of
a plugging bond with the Railroad Commission covering properties operated by the
Company.
During the first quarter, the Company increased capital by $1,000,000 from
the issuance of 200,000 shares of common stock at $5.00 per share through a
private placement. $500,000 of these proceeds were used to reduce the principal
borrowings under the line of credit and the remaining proceeds were used for
property acquisitions and drilling activity.
The Company believes that it will have sufficient capital available from
borrowings along with cash flows from operations to fund any future capital
expenditures and to meet its financial obligations.
In past years, the oil and gas industry from time to time has suffered
because of price decreases for oil. An oversupply of petroleum in both the
domestic and international markets appeared to be the reason for the price
decline. The Company is unable to predict price changes or the possible effects
on the Company at this time. Past changes in tax laws and the decline in oil
prices have had the effect industry-wide of limiting funds available for oil and
gas exploration.
Results of Operations
- - ---------------------
Business Segment
----------------
The Company only has a single line of business which is oil and gas
acquisition, exploration and production.
11
Fiscal 1998 Compared to Fiscal 1997
-----------------------------------
During the year the Company participated in the successful drilling and
completion of six (6) producing wells (each with approximately 43% working
interest and 32% net revenue interest) in the Lazy JL Field, Garza County,
Texas. The Company also participated in the drilling of one (1) well which has
been converted to a water injection well and one (1) well which is currently
shut in pending possible conversion to a water injection well or a salt water
disposal well.
A decrease in working capital of $124,061 for fiscal 1998, compared to a
decrease of $124,050 for fiscal 1997 was the result of increased acquisition,
drilling and development costs.
Gross revenue from oil and gas production increased in 1998 compared to
1997 by $636,993 (44%). Revenues increased due to the increase in oil and gas
production from acquisition and development of oil and gas properties. The
average 1998 price for crude oil is $17.70 per barrel compared to the 1997 price
of $22.09. Average prices received per MCF of gas for 1998 and 1997 were $2.22
and $2.47, respectively.
Production costs increased $316,760 (91%) from 1997. Of this increase,
$43,920 is attributable to increased production taxes relating to the increase
in production and revenues as stated above with the remaining $272,840 being
attributable to increased operating expenses due to the acquisition and
development of new wells in 1998.
Interest income decreased $5,045 (70%) due to the reduced funds invested in
a money market account.
Other income increased $10,501 primarily due to the recovery of a bad debt.
Overall, costs and expenses increased in 1998 by $2,851,280 (300%).
Depreciation, depletion and amortization increased in 1998 as compared to 1997
by $2,330,923 (488%) primarily due to an impairment of oil and gas properties
which resulted from significantly lower oil prices and the related downward
adjustment of estimated reserves. General and administrative expenses increased
$79,372 (70%) primarily due to increased salaries, legal fees, accounting fees
and engineering costs.
Fiscal 1997 Compared to Fiscal 1996
-----------------------------------
The Company participated in the drilling of twelve (12) gross (2.717 net)
wells, of which nine (9) were productive oil wells in fiscal 1997 and one well
which has been converted to a water injection well.
A decrease in working capital of $124,050 for fiscal 1997, compared to an
increase of $20,300 for fiscal 1996 was the result of increased acquisition,
drilling and development costs.
Gross revenue from oil and gas production increased in 1997 compared to
1996 by $654,535 (82%) and the Company reflected net earnings of $377,867 which
is an increase of $177,261 (88%). Revenues increased due to the increase in oil
and gas production from acquisition and development of oil and gas properties
and the increase in oil and gas prices during
12
the current year. The average 1997 price for crude oil is $22.09 per barrel
compared to the 1996 price of $17.45. Average prices received per MCF of gas
for 1997 and 1996 were $2.47 and $1.57, respectively.
Administrative services income and reimbursement to the Company decreased
$2,371 (32%) due to the plugging and abandonment of two operated wells during
the prior year.
Production costs increased $73,873 (27%) from 1996. Of this increase,
$37,897 is attributable to increased production taxes relating to the increase
in production and revenues as stated above with the remaining $35,976 being
attributable to increased operating expenses due to the acquisition and
development of new wells in 1997. Production costs per barrel equivalent
actually declined by 3%.
Interest income decreased $10,120 (59%) due to the reduced funds invested
in a money market account.
Overall, costs and expenses increased in 1997 by $328,637 (53%).
Depreciation, depletion and amortization increased in 1997 as compared to 1996
by $215,438 (82%) due to increased production, acquisition and development of
oil and gas properties. General and administrative expenses increased $26,539
(31%) primarily due to increased salaries, legal fees, accounting fees and
engineering costs.
Other Matters
- - -------------
Forwarding-Looking Statements
-----------------------------
Certain statements in this Form 10-K may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements, other than statements
of historical facts, included in this Form 10-K that address activities, events
or developments that the Company expects, projects, believes or anticipates will
or may occur in the future, including such matters as oil and gas reserves,
future drilling and operations, future production of oil and gas, future net
cash flows, future capital expenditures and other such matters, are forward-
looking statements. These statements are based on certain assumptions and
analysis made by management of the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
including general economic and business conditions, prices of oil and gas, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company, changes in laws or regulations and other factors, many of which are
beyond the control of the Company.
Recently Issued Accounting Standards
------------------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 128, Earnings Per Share, during the quarter ended December 31,
1997. Since the Company has only Common Stock outstanding the adoption had no
effect on the Company's financial statements at March 31, 1998.
13
Year 2000 Issue
---------------
The Company's third-party software vendor is currently modifying the system
to accurately handle the year 2000 issue with all necessary changes scheduled to
be completed by December 31, 1998. There will be no additional costs to the
Company for these modifications as the updates are included in the monthly
support contract. Therefore, the Company has determined that the year 2000
issues directly related to its information systems will not have a material
impact on its business, operations, nor its financial position. The Company
cannot determine the effect, if any, that the year 2000 issues will have on its
vendors, customers, other businesses and governmental entities.
ITEM NO. 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
The Company is not subject to market risk as to currency exchange since the
Company does not deal in foreign currency. The Company also has not dealt in
derivatives. However, the Company is subject to significant changes in
connection with sales of crude oil and natural gas.
ITEM NO. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - --------------------------------------------------------
See Index to Financial Statements elsewhere herein.
ITEM NO. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
--------------------
There were no changes or disagreements.
14
PART III
--------
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- - --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers, Directors
and greater than ten percent (10%) shareholders are required by SEC regulation
to furnish the Company with copies of all Section 16(a) forms they file.
Ownership of and transactions in Company stock by executive officers and
Directors of the Company are required to be reported to the Securities and
Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of
1934. On June 24, 1998, Terry L. Cox and Donna Gail Yanko each filed a Form 4
to report stock options which were granted on April 2, 1998. Also on June 24,
1998 Thomas R. Craddick, Thomas Graham, Jr., Jack D. Ladd and Gerald Martin each
filed a Form 3 to report the initial number of shares owned upon their election
as directors. Thomas Graham, Jr. also reported stock options which were granted
on April 2, 1998 on his Form 3.
ITEM NO. 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Name Age Position
---- --- --------
Thomas R. Craddick 54 Director
William G. Duncan, Jr. 55 Director
Thomas Graham, Jr. 64 Chairman of the Board of Directors
Jack D. Ladd 48 Director
Gerald R. Martin 52 Director
Nicholas C. Taylor 60 Director, President and Treasurer
Donna Gail Yanko 54 Director, Vice President and Secretary
On March 2, 1998, the above persons were elected to serve on the Board of
Directors for a term of one year and until their successors are duly elected and
qualified.
The following is a brief account of the business experience during the last
five years of each director and executive officer:
Thomas R. Craddick, 54, was elected to the Board of Directors of the
------------------
Company in 1997 and is a member of the Compensation Committee. Since 1968 to
the present, Mr. Craddick has served as State Representative for the State of
Texas. Throughout his tenure of the past 15 sessions of the Legislature,
Representative Craddick has served on various committees and conferences, most
recently serving on the Legislative Budget Board, Legislative Audit Committee,
the State Affairs Committee and the Revenue & Public Education Funding, Select
Committee, along with serving as Chairman of the House Ways and Means Committee
and Chairman of the Republican Legislative Caucus. For more than the past five
years Mr. Craddick has been Sales Representative for Mustang Mud, Inc., as well
as the owner of Craddick Properties and Owner and President of Craddick, Inc.
both of which invest in oil and gas properties and real estate.
15
William G. Duncan, 55, since April 1995, has been the President of
-----------------
Southeastern Financial Services, Louisville, Kentucky, prior to which he had
served as Senior Vice President and Chief Investment Officer since October 1991.
For the previous twenty-five (25) years, he held several positions at Liberty
National Bank and Trust Company, Louisville, Kentucky, serving as Senior Vice
President and Manager of the bank's Personal Trust Investment Section, member of
Liberty's Trust Executive Committee, and several positions in Liberty's
Commercial Banking Division. Mr. Duncan was appointed to the position of
Director on July 22, 1994, after the resignation of Thomas Graham, Jr. to become
a United States Ambassador, and was elected a Director in 1994.
Thomas Graham, Jr., 64, was appointed Chairman of the Board of Directors by
------------------
the Directors of the Company, effective July 1997, having served as a director
from 1990 through 1994. From 1994 through May 1997, Mr. Graham served as a
United States Ambassador. For more than five years prior thereto, Mr. Graham
served as the General Counsel, United States Arms Control and Disarmament
Agency, as well as Acting Director and as Acting Deputy Director of such agency
successively, in 1993 and 1994. He has served as President of the Lawyers
Alliance for World Security since mid 1997.
Jack D. Ladd, 48, was elected to the Board of Directors of the Company in
------------
1997 and is a member of the Compensation Committee. Mr. Ladd is currently a
shareholder of the law firm of Stubbeman, McRae, Sealy, Laughlin & Browder, Inc.
Mr. Ladd is also a partner in various real estate partnerships, an arbitrator
for the National Association of Securities Dealers, and a mediator certified by
the Attorney Mediation Institute. Mr. Ladd has served as a director and
advisory director of other oil and gas corporations.
Gerald R. Martin, 52, co-founded River Hill Capital, LLC in June 1996. The
----------------
prior twenty-three (23) years, Mr. Martin had worked for J.J.B. Hilliard, W. L.
Lyons, Inc., seventeen (17) years were spent as Senior Vice President of
Investment Banking. Mr. Martin has experience as a financial consultant or
advisor to several local government agencies and non-profit organizations
including Louisville Water Company and Louisville's Municipal Transit System.
In December 1996, he completed fifteen years of volunteer service as Vice
Chairman of the Board of Commissioners of the Housing Assistance Corporation
(LHAC). Mr. Martin is a director of Orr Safety Corporation and National
Healthcare Services, Inc., both in Louisville. He was elected to the Board of
Directors of the Company in 1997 and is a member of the Compensation Committee.
Nicholas C. Taylor, 60, was elected President, Treasurer and Director of
------------------
the Company in 1983 and serves in such capacities on a part time basis, as
required. From 1974 to 1993, he was a director and shareholder of the law firm
of Stubbeman, McRae, Sealy, Laughlin & Browder, Inc., Midland, Texas, and a
partner of the predecessor firm. Since 1993 he has been engaged in the practice
of law and investments, primarily in oil and gas. In 1995 he was appointed by
the Governor of Texas to serve as a member and currently serves as Chairman of
the State Securities Board.
Donna Gail Yanko, 54, has worked as part-time administrative assistant to
----------------
the President and controlling shareholder for the past nine years. She served as
Assistant Secretary of the Company from 1986 to 1992 and was elected a Director
and appointed Vice President of the Company in 1990 and Secretary in 1992.
16
ITEM NO. 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth all cash compensation received by the
executive officers and directors of the Company as a group setting forth
individually executive officers and directors who received in excess of $60,000,
including cash bonuses.
Summary Compensation Table/(1)/
-------------------------------
Name and
Principal Position Year Salary
-------------------- ---- -------
5 Officers & 1998 $44,825
Directors 1997 $52,381
as a group 1996 $38,400
- - ------------
/(1)/ Directors are paid $100 per meeting of which there were five (5) for the
period.
ITEM NO. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth as of March 31, 1998 the owners of five
percent (5%) or more of its common stock:
(1) Title (2) Name and (3) Amount and (4) Percent
of Class Address of Nature of Beneficial of Class
Beneficial Owner Ownership
- - ----------------------------------------------------------------------------
Common Nicholas C. Taylor/(1)/ 1,110,770/(2)/ 68.43%
214 West Texas
Suite 1101
Midland, TX 79701
Common Howard E. Cox, Jr. 194,000 11.95%
One Federal Street
26th Floor
Boston, MA 02110
- - -------------
/(1)/ Mr. Taylor, by virtue of his share of ownership, may be deemed to be a
"parent" of the Company as defined under Rule 405 promulgated by the
Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933 as amended (the "Securities Act").
/(2)/ Includes 1,079,770 shares which are held by Mr. and Mrs. Taylor as
community property and 31,000 shares held as custodian for their minor
daughter. Mr. and Mrs. Taylor disclaim any beneficial ownership of 46,000
shares owned by each of their two adult children.
17
The information set forth below shows as of June 1, 1998, all shares of the
Company's common stock beneficially or indirectly owned by all directors, and
all directors and officers as a group.
The following table sets forth the ownership of executive officers and
directors of the Company.
(1) Title (2) Name and (3) Amount and (4) Percent
of class Address of Nature of Bene- of Class
Beneficial Owner ficial Ownership
- - ---------------------------------------------------------------------
Common Nicholas C. Taylor 1,110,770/(1)/ 68.43%
Thomas Graham, Jr. 77,000 4.74%
Gerald R. Martin 15,040 .93%
Donna Gail Yanko 7,340 .45%
Thomas R. Craddick 5,000 .31%
Jack D. Ladd 1,478 .09%
Terry L. Cox 200 .01%
All Directors and
Officers as a Group 1,215,828 74.90%
- - ------------
/(1)/ Includes 1,079,770 shares which are held by Mr. and Mrs. Taylor as
community property and 31,000 shares held as custodian for their minor
daughter. Mr. and Mrs. Taylor disclaim any beneficial ownership of 46,000
shares owned by each of their two adult children.
ITEM NO. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company's principal shareholder owns working interests varying from
93.75% to 100% in certain wells which it operates. The Company operates these
wells on a contract basis charging the same or greater administrative fees as
the previous operator. See Note I of the Notes to Financial Statements.
18
PART IV
-------
ITEM NO. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions
under which they are required or because the information is
included in the financial statements or notes thereto.
3. Exhibits
The exhibits and financial statement schedules filed as a part of
this report are listed below according to the number assigned to it in
the exhibit table of Item 601 of Regulation S-K:
(3)(i) Articles of Incorporation - See exhibit E-1.
(ii) Bylaws - incorporated by reference to the Company's Annual
Report to the Securities and Exchange Commission on Form
10K dated June 23, 1995.
(4) Instruments defining the rights of security holders,
including indentures - None.
(9) Voting Trust Agreement - None, consequently, omitted.
(10) Material Contracts:
Stock Option Plan - incorporated by reference to the
Amendment to Schedule 14C Information Statement filed on
August 13, 1997.
Bank Line of Credit - See Exhibit E-2.
(11) Statement regarding computation of per share earnings -Not
Applicable.
(12) Statement regarding computation of ratios - Not
Applicable.
19
(13) Annual Report to security holders, Form 10-Q or quarterly
report to security holders - Not Applicable.
(18) Letter regarding change in accounting principles - No
change during fiscal 1998.
(19) Previously unfiled documents - No documents have been
executed or in effect during the reporting period which
should have been filed, consequently, this exhibit has
been omitted.
(22) Subsidiaries of the Company -
Name of Subsidiary: Forman Energy Corporation
Other Name Under Which Subsidiary Conducts Business: None
Jurisdiction of Incorporation: New York
(23) Published report regarding matters submitted to vote of
security holders - None, consequently omitted.
(24) Consent of experts - Not applicable.
(25) Power of Attorney - There are no signatures contained
within this report pursuant to a power of attorney,
consequently, this exhibit has been omitted.
(28) Additional Exhibits - None.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the last quarter of
the period covered by this report.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
By: /s/ Nicholas C. Taylor
-----------------------------
Nicholas C. Taylor, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Nicholas C. Taylor President, June 24, 1998
- - ------------------------- Treasurer,
Nicholas C. Taylor Director
/s/ Donna Gail Yanko Vice President, June 24, 1998
- - ------------------------- Director
Donna Gail Yanko
/s/ Jack D. Ladd Director June 24, 1998
- - -------------------------
Jack D. Ladd
/s/ Thomas R. Craddick Director June 24, 1998
- - -------------------------
Thomas R. Craddick
/s/ Terry L. Cox Controller June 24, 1998
- - ------------------------
Terry L. Cox
21
EXHIBIT INDEX
-------------
Number Exhibit Page
- - ------ ------- ----
(1) *
(2) *
(3)(i) Articles of Incorporation E-1
(ii) Bylaws **
(4) Instruments defining the rights of security
holders, including indentures Omit
(5) *
(6) *
(7) *
(8) *
(9) Voting Trust Agreement Omit
(10) Material Contracts
(a) Stock Option Plan ***
(b) Bank Line of Credit E-2
(11) Statement regarding computation of per
share earnings Omit
(12) Statement regarding computation of ratios Omit
(13) Annual Report to security holders, Form 10-Q,
or quarterly report to security holders Omit
(14) *
(15) *
(16) *
(17) *
(18) Letter regarding change in accounting
principles Omit
(19) Previously unfiled documents Omit
(20) *
(21) *
(22) Subsidiaries of the Company Omit
(23) Published report regarding matters submitted
to vote of security holders Omit
(24) Consent of experts Omit
(25) Power of Attorney Omit
(26) *
(27) *
(28) Additional Exhibits Omit
* This exhibit is not required to be filed in accordance with Item 601 of
Regulation S-K.
** Incorporated by reference to the Company's Annual Report to the Securities
& Exchange Commission on Form 10-K, dated June 23, 1995.
*** Incorporated by reference to the Amendment to Schedule 14C Information
Statement filed on August 13, 1998.
22
MEXCO ENERGY CORPORATION & SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
--------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 1998, 1997, AND 1996 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED MARCH 31, 1998, 1997, AND 1996 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 1998, 1997, AND 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
Mexco Energy Corporation
We have audited the accompanying consolidated balance sheets of Mexco Energy
Corporation and Subsidiary, as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mexco Energy
Corporation and Subsidiary, as of March 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
May 15, 1998
F-2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS 1998 1997
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 241,348 $ 40,813
Accounts receivable, including $8,473 in 1998 and $6,042 in 1997
from a related party (note I) 207,900 291,254
Prepaid expenses 15,185 -
----------- ----------
Total current assets 464,433 332,067
PROPERTY AND EQUIPMENT - AT COST (notes F and L)
Oil and gas properties, using the full cost method of
accounting 9,915,701 7,819,986
Other 20,252 6,293
----------- ----------
9,935,953 7,826,279
Less accumulated depreciation, depletion, and amortization 5,857,900 3,049,147
----------- ----------
4,078,053 4,777,132
----------- ----------
$ 4,542,486 $5,109,199
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 121,131 $ 167,913
Income taxes payable - 40,093
Current maturities of bank line of credit (note C) 322,000 -
----------- ----------
Total current liabilities 443,131 208,006
BANK LINE OF CREDIT, less current maturities (note C) 1,500,000 1,637,000
DEFERRED INCOME TAXES (note D) - 341,181
----------- ----------
Total liabilities 1,943,131 2,186,187
STOCKHOLDERS' EQUITY
Common stock - $.50 par value; authorized, 40,000,000
shares in 1998 and 5,000,000 shares in 1997; issued and outstanding,
1,623,289 shares in 1998 and 1,423,229 shares in 1997 (note G) 811,644 711,614
Preferred stock - $1.00 par value; authorized, 10,000,000 shares in
1998 (note G) - -
Additional paid-in capital 2,875,399 1,975,429
Retained earnings (accumulated deficit) (1,087,688) 235,969
----------- ----------
2,599,355 2,923,012
----------- ----------
$ 4,542,486 $5,109,199
=========== ==========
The accompanying notes are an integral part of these statements.
F-3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1998 1997 1996
------------ ---------- ----------
Revenues
Oil and gas $ 2,090,117 $1,453,124 $ 798,589
Administrative service charges and reimbursements 5,112 5,009 7,380
Interest 2,121 7,166 17,285
Other income 11,109 608 10,819
----------- ---------- ----------
2,108,459 1,465,907 834,073
Costs and expenses
Production 663,525 346,765 272,892
Depreciation, depletion, and amortization (note F) 2,808,753 477,830 262,392
General and administrative 192,395 113,023 86,484
Interest 137,012 12,787 -
----------- ---------- ----------
3,801,685 950,405 621,768
----------- ---------- ----------
Earnings (loss) before income taxes (1,693,226) 515,502 212,305
Income tax expense (benefit) (note D) (369,569) 137,635 11,699
----------- ---------- ----------
NET EARNINGS (LOSS) $(1,323,657) $ 377,867 $ 200,606
=========== ========== ==========
Basic and diluted earnings (loss) per share $(.83) $.27 $.15
=========== ========== ==========
Weighted average outstanding shares, basic and diluted 1,594,752 1,423,229 1,342,628
=========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended March 31, 1998, 1997, and 1996
Retained
Common stock Additional earnings Total
---------------------- paid-in (accumulated stockholders'
Shares Amount capital deficit) equity
------------ -------- ------------ -------------- ------------
Balance at April 1, 1995 1,173,229 $586,614 $1,600,429 $ (342,504) $ 1,844,539
Net earnings - - - 200,606 200,606
Issuance of common stock 250,000 125,000 375,000 - 500,000
--------- -------- ---------- ----------- -----------
Balance at March 31, 1996 1,423,229 711,614 1,975,429 (141,898) 2,545,145
Net earnings - - - 377,867 377,867
--------- -------- ---------- ----------- -----------
Balance at March 31, 1997 1,423,229 711,614 1,975,429 235,969 2,923,012
Net loss - - - (1,323,657) (1,323,657)
Issuance of common stock (note G) 200,060 100,030 899,970 - 1,000,000
--------- -------- ---------- ----------- -----------
Balance at March 31, 1998 1,623,289 $811,644 $2,875,399 $(1,087,688) $ 2,599,355
========= ======== ========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
1998 1997 1996
------------ ------------ ----------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Cash received from oil and gas operations $ 2,178,583 $ 1,275,462 $ 769,367
Cash paid for oil and gas operating expenses (713,690) (293,332) (276,430)
Cash paid for general and administrative expenses (194,554) (113,023) (86,484)
Interest received 2,121 7,166 17,285
Interest paid (140,272) (7,298) -
Income taxes paid (24,731) (2,652) (38,148)
Other receipts 11,109 608 10,819
----------- ----------- ---------
Net cash provided by operating activities 1,118,566 866,931 396,409
Cash flows from investing activities
Capital expenditures for oil and gas properties (2,089,136) (1,294,556) (969,271)
Proceeds from sale of assets 64 32,449 24,000
Payments for purchase of other property (13,959) (3,791) -
Payments for purchase of Forman Energy Corporation - (1,369,332) -
----------- ----------- ---------
Net cash used in investing activities (2,103,031) (2,635,230) (945,271)
Cash flows from financing activities
Borrowings 685,000 1,637,000 -
Payments on debt (500,000) - -
Proceeds from issuance of common stock 1,000,000 - 500,000
----------- ----------- ---------
Net cash provided by financing activities 1,185,000 1,637,000 500,000
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 200,535 (131,299) (48,862)
Cash and cash equivalents at beginning of year 40,813 172,112 220,974
----------- ----------- ---------
Cash and cash equivalents at end of year $ 241,348 $ 40,813 $ 172,112
=========== =========== =========
F-6
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended March 31,
1998 1997 1996
------------ ---------- ----------
Reconciliation of Net Earnings (Loss) to Net Cash
Provided by Operating Activities
Net earnings (loss) $(1,323,657) $ 377,867 $200,606
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Depreciation, depletion, and amortization 2,808,753 477,830 262,392
Deferred income taxes (341,181) 94,890 2,573
(Increase) decrease in
Accounts receivable 83,354 (182,671) (36,602)
Recoverable income taxes - - 9,126
Prepaid expenses (15,185) - 1,350
Increase (decrease) in
Accounts payable (53,425) 58,922 (4,888)
Income taxes payable (40,093) 40,093 (38,148)
----------- --------- --------
Net cash provided by operating activities $ 1,118,566 $ 866,931 $396,409
=========== ========= ========
Noncash investing and financing activities:
- - ------------------------------------------
Included in trade accounts payable at March 31, 1998 are purchases of oil and
gas properties totaling $83,050.
Included in trade accounts payable at March 31, 1997 are purchases of oil and
gas properties and a liability related to the Forman Energy Corporation
acquisition totaling $76,407.
The purchase of Forman Energy Corporation on February 25, 1997 resulted in the
assumption of a deferred tax liability and account payable as follows:
Assets acquired $1,591,000
Cash paid 1,369,000
----------
Liabilities assumed $ 222,000
==========
The accompanying notes are an integral part of these statements.
F-7
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997, and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
The major operations of Mexco Energy Corporation and Subsidiary (the
"Company") consist of exploration, production, and sale of crude oil and
natural gas in the United States with an area of concentration in Texas.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Principles of Consolidation
---------------------------
The Company consolidates the accounts of its wholly-owned subsidiary
Forman Energy Corporation ("Forman"), eliminating all intercompany
balances and transactions.
2. Oil and Gas Properties
----------------------
The full cost method of accounting is used to account for oil and gas
properties. Under this method of accounting, all costs incident to the
acquisition, exploration, and development of properties (both developed
and undeveloped), including costs of abandoned leaseholds, lease
rentals, unproductive wells, and well drilling and equipment costs, are
capitalized. Costs are amortized using the units-of-production method
based primarily on estimates of reserve quantities. Due to uncertainties
inherent in this estimation process, it is at least reasonably possible
that reserve quantities will be revised significantly in the near term.
If the Company's unamortized costs exceed the cost center ceiling
(defined as the sum of the present value, discounted at 10%, of
estimated unescalated future net revenues from proved reserves, less
related income tax effects), the excess is charged to expense in the
year in which the excess occurs. Generally, no gains or losses are
recognized on the sale or disposition of oil and gas properties.
3. Depreciation
------------
Depreciation of office furniture, fixtures, and equipment is provided on
the straight-line method over estimated useful lives of five to ten
years.
4. Production Costs and Administrative Service Arrangements
--------------------------------------------------------
Production costs include lease operating expenses and production taxes.
Reimbursements related to administrative service arrangements are
recorded as revenues.
5. Earnings (Loss) Per Share
-------------------------
Basic and diluted earnings (loss) per share are calculated using the
weighted average number of shares outstanding during each year. Basic
and diluted earnings (loss) per share are the same for all periods
presented.
6. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less and money market funds to be cash
equivalents.
F-8
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
6. Cash and Cash Equivalents - Continued
-------------------------------------
The Company maintains its cash in bank deposit accounts and money market
funds, some of which are not federally insured. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk.
7. Income Taxes
------------
The Company accounts for income taxes using the liability method. Under
the liability method of accounting for income taxes, deferred taxes are
recognized for the tax consequences of temporary differences by applying
enacted tax rates applicable to future years to differences between the
carrying amounts and the tax bases of existing assets and liabilities.
8. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates based on management's
knowledge and experience. Due to their prospective nature, actual
results could differ from those estimates.
NOTE B - BUSINESS COMBINATION
On February 25, 1997, Mexco acquired Forman who is engaged in the
exploration, production, and sale of crude oil and natural gas. The
acquisition has been accounted for using the purchase method, and the
operations of the acquired company are included subsequent to February
1, 1997. The purchase price of approximately $1,591,000 was allocated to
the assets, primarily oil and gas properties, acquired on the basis of
their estimated fair value.
The following summarized pro forma, unaudited, information assumes the
acquisition of Forman had occurred on April 1, 1995:
Year ended March 31,
----------------------
1997 1996
---------- ----------
Revenues $1,831,031 $1,151,912
Net earnings 476,948 107,993
Basic and diluted earnings per share .34 .08
F-9
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE C - BANK LINE OF CREDIT
The Company has a $3,000,000 revolving line of credit with NationsBank
of Texas, N.A. at March 31, 1998. The borrowing base of the line is
reduced by $50,000 each month beginning in February 1998 and continuing
throughout the term of the loan. At March 31, 1998, the borrowing base
is $2,100,000. The line of credit may be drawn down through August 15,
1999. Required principal payments will begin in September 1998 based on
the current level of debt. The required payments for the year ended
March 31, 1999 are reflected as a current liability in the financial
statements. Interest is payable monthly at prime rate (8.5% at March 31,
1998) as established by the bank. The line of credit is collateralized
by the common stock of Forman and oil and gas properties.
NOTE D - INCOME TAXES
Income tax expense (benefit) for years ended March 31 is as follows:
1998 1997 1996
---------- -------- --------
Current expense (benefit)
Federal $ (28,388) $ 40,994 $ 9,126
State - 1,751 -
--------- -------- --------
(28,388) 42,745 9,126
Deferred expense (benefit)
Federal (301,814) 83,941 2,150
State (39,367) 10,949 423
--------- -------- --------
(341,181) 94,890 2,573
--------- -------- --------
$(369,569) $137,635 $11,699
========= ======== ========
The income tax provision reconciled to the tax computed at the statutory
federal rate for years ended March 31 is as follows:
1998 1997 1996
---------- --------- ---------
Tax expense (benefit) at statutory rate $(575,697) $175,271 $ 72,184
Increase (decrease) in valuation allowance 135,890 (3,072) (5,806)
State income taxes - 8,215 1,461
Prior year overaccrual (28,388) (4,794) (16,308)
Effect of graduated rates 130,450 (41,241) (34,194)
Other (31,824) 3,256 (5,638)
--------- -------- --------
$(369,569) $137,635 $ 11,699
========= ======== ========
F-10
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE D - INCOME TAXES - CONTINUED
Amounts of deferred tax assets, valuation allowance, and liabilities at
March 31 are as follows:
1998 1997
---------- ----------
Deferred tax assets
Percentage depletion carryforwards $ 142,218 $ 97,794
Net operating loss carryforwards 101,780 -
Valuation allowance (135,890) -
--------- ---------
108,108 97,794
Deferred tax liabilities
Excess financial accounting bases over tax bases of property
and equipment (108,108) (438,975)
--------- ---------
Net deferred tax assets (liabilities) $ - $(341,181)
========= =========
Increase (decrease) in valuation allowance for the year $ 135,890 $ (3,072)
========= =========
As of March 31, 1998, the Company has statutory depletion carryforwards
of approximately $547,000 which do not expire and operating loss
carryforwards of approximately $391,000 that expire in 2018.
NOTE E - SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates exclusively within the United States in the onshore
exploration and production of oil and gas. In the normal course of
business, the Company extends credit to customers in the oil and gas
industry and therefore has significant credit risk in this sector of the
economy. Historically, the Company has not had significant bad debts
and, as such, no allowance for doubtful accounts has been provided in
the accompanying financial statements.
Customers which accounted for 10% or more of revenues are as follows:
Year ended March 31,
-----------------------
1998 1997 1996
------- ------ ------
Navajo Crude Oil Marketing Company 33% 46% 40%
Sun Refining and Marketing Company - 10% 13%
Aquila Southwest Pipeline Corporation 15% 24% -
The Company does not believe the loss of any of the above customers
would result in any material adverse effect on its business.
F-11
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE F - OIL AND GAS COSTS
The costs related to the oil and gas activities of the Company were
incurred as follows:
Year ended March 31,
------------------------------
1998 1997 1996
---------- -------- --------
Property acquisition costs $ 751,160 $562,363 $650,496
Development costs $1,261,569 $808,600 $318,775
The Company had the following aggregate capitalized costs relating to
the Company's oil and gas property activities at March 31:
1998 1997 1996
---------- ---------- ----------
Proved oil and gas properties $9,854,099 $7,698,866 $4,900,230
Unproved oil and gas properties 61,602 121,120 -
Less accumulated depreciation, depletion, and
amortization 5,853,458 3,046,602 2,569,291
---------- ---------- ----------
$4,062,243 $4,773,384 $2,330,939
========== ========== ==========
Depreciation, depletion, and amortization expense, which included a full
cost ceiling write-down of approximately $1,742,000 recorded in the
fourth quarter of the year ended March 31, 1998 due to declines in oil
and gas prices. Depreciation, depletion, and amortization amounted to
$20.66, $6.02, and $4.35 per equivalent barrel of production for the
years ended March 31, 1998, 1997, and 1996, respectively.
NOTE G - STOCKHOLDERS' EQUITY
In May 1997, the Company completed a private placement consisting of
200,000 shares of common stock at $5.00 per share. The proceeds of
$1,000,000 were used to pay down debt and finance property acquisitions.
In September 1997, the shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized shares
from 5,000,000 shares of common stock to 40,000,000 shares of common
stock and 10,000,000 shares of preferred stock. The common stockholders
maintain the exclusive right to vote for the election of directors and
for all other purposes. The preferred stock may be issued in a series
with certain rights as determined by the Board of Directors.
NOTE H - EMPLOYEE BENEFIT PLAN
The Company adopted an employee incentive stock plan effective September
15, 1997. Under the plan, 350,000 shares are available for distribution.
Awards, granted at the discretion of a committee of the Board, include
stock options or restricted stock. Stock options may be an incentive
stock option or a nonqualified stock option. The exercise price of each
option will not be less than the market price of the Company's stock on
the date of grant. The maximum term of the options is ten years.
Restricted stock may be granted with a condition to attain a specified
goal. The purchase price will be at least $5.00 per share of restricted
stock. The awards of restricted stock must be accepted within sixty days
and will vest as determined by agreement. Holders of restricted stock
have all rights of a shareholder of the Company. At March 31, 1998, no
stock or stock options had been granted under the plan.
F-12
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE I - RELATED PARTY TRANSACTIONS
The Company serves as operator of properties in which the majority
stockholder has interests and, in that capacity, bills the majority
stockholder for lease operating expenses on a monthly basis subject to
usual trade terms. The billings totaled approximately $50,097, $112,657,
and $106,198 for the years ended March 31, 1998, 1997, and 1996,
respectively. Accounts receivable include $8,473 and $6,042 due from the
majority stockholder at March 31, 1998 and 1997, respectively.
NOTE J - FINANCIAL INSTRUMENTS
The following table includes estimated fair value information as of
March 31, 1998 and 1997, as required by Statement of Financial
Accounting Standards ("SFAS") No. 107. Such information, which pertains
to the Company's financial instruments, is based on the requirements set
forth in that Statement and does not purport to represent the aggregate
net fair value of the Company. All of the financial instruments are held
for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.
Cash and Cash Equivalents - The carrying amount approximates fair value
-------------------------
because of the contractual right to receive the deposits upon demand.
Bank Line of Credit - The carrying amount approximates fair value
-------------------
because floating interest rates approximate current market rates.
Financial instruments and the estimated fair values are as follows:
March 31, 1998
--------------------------------------------
Carrying amount of Estimated fair value of
assets (liabilities) assets (liabilities)
-------------------- -----------------------
Cash and cash equivalents $ 241,348 $ 241,348
Bank line of credit 1,822,000 1,822,000
March 31, 1997
--------------------------------------------
Carrying amount of Estimated fair value of
assets (liabilities) assets (liabilities)
-------------------- -----------------------
Cash and cash equivalents $ 40,813 $ 40,813
Bank line of credit (1,637,000) (1,637,000)
NOTE K - SUBSEQUENT EVENT
On April 2, 1998, the Board of Directors granted stock options for
40,000 shares of common stock at $7.75 per share which vest at 25% on
each annual anniversary date and expire ten years from date of grant.
The Company will account for the options under the intrinsic value
method pursuant to APB Opinion 25.
F-13
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE L - OIL AND GAS RESERVE DATA (UNAUDITED)
In accordance with SFAS No. 69 and Securities and Exchange Commission
("SEC") rules and regulations, the following information is presented
with regard to the Company's proved oil and gas reserves, all of which
are located in the United States. Information for oil is presented in
barrels ("Bbls") and for gas in thousand cubic feet ("Mcf").
The SEC has adopted SFAS No. 69 disclosure guidelines for oil and gas
producers. These rules require the Company to include as a supplement to
the basic financial statements a standardized measure of discounted
future net cash flows relating to proved oil and gas reserves.
The standardized measure, in management's opinion, should be examined
with caution. The basis for these disclosures is an independent
petroleum engineer's reserve study which contains imprecise estimates of
quantities and rates of production of reserves. Revision of prior year
estimates can have a significant impact on the results. Also,
exploration costs in one year may lead to significant discoveries in
later years and may significantly change previous estimates of proved
reserves and their valuation. Values of unproved properties and
anticipated future price and cost increases or decreases are not
considered. Therefore, the standardized measure is not necessarily a
"best estimate" of the fair value of the Company's oil and gas
properties or of future net cash flows.
The following summaries of changes in reserves and standardized measure
of discounted future net cash flows were prepared from estimates of
proved reserves developed by independent petroleum engineers.
Summary of Changes in Proved Reserves
(Unaudited)
1998 1997 1996
--------------------- --------------------- --------------------
Bbls Mcf Bbls Mcf Bbls Mcf
--------- ---------- --------- ---------- -------- ----------
Proved developed and undeveloped
reserves
Beginning of year 436,000 2,956,000 425,000 1,920,000 207,000 1,567,000
Revision of previous estimates (132,000) 268,000 (113,000) 411,000 11,000 29,000
Purchase of minerals in place 6,000 405,000 89,000 902,000 111,000 352,000
Extensions and discoveries - - 75,000 83,000 126,000 217,000
Production (64,000) (432,000) (40,000) (236,000) (29,000) (188,000)
Sales of minerals in place - - - (124,000) (1,000) (57,000)
-------- --------- -------- --------- ------- ---------
End of year 246,000 3,197,000 436,000 2,956,000 425,000 1,920,000
======== ========= ======== ========= ======= =========
Proved developed reserves
Beginning of year 281,000 2,400,000 209,000 1,593,000 183,000 1,472,000
End of year 219,000 2,941,000 281,000 2,400,000 209,000 1,593,000
F-14
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE L - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(Unaudited)
March 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Future oil and gas revenues $ 9,794,000 $13,901,000 $12,239,000
Future production and development costs (3,791,000) (5,678,000) (4,576,000)
Future income tax expense (612,000) (1,348,000) (740,000)
----------- ----------- -----------
Future net cash flows 5,391,000 6,875,000 6,923,000
Discounted at 10% for estimated timing of cash flows (1,896,000) (2,427,000) (2,742,000)
----------- ----------- -----------
Standardized measure of discounted future net cash flows $ 3,495,000 $ 4,448,000 $ 4,181,000
=========== =========== ===========
Changes in Standardized Measure of Discounted Future Net Cash Flows
Related to Proved Oil and Gas Reserves
(Unaudited)
Year ended March 31,
--------------------------------------------
1998 1997 1996
------------- ------------- --------------
Sales and transfers of oil and gas produced, net of
production costs $(1,427,000) $(1,106,000) $(526,000)
Net changes in prices and production costs (519,000) (582,000) 734,000
Extensions and discoveries, less related costs - 678,000 954,000
Revisions of previous quantity estimates (428,000) (237,000) 95,000
Accretion of discount 532,000 463,000 203,000
Net change due to purchases and sales of minerals in place 456,000 1,338,000 1,150,000
Net change in income taxes 475,000 (425,000) (254,000)
Other (42,000) 138,000 (11,000)
---------- ---------- -----------
Net increase (decrease) (953,000) 267,000 2,345,000
Balance at beginning of year 4,448,000 4,181,000 1,836,000
---------- ---------- -----------
Balance at end of year $3,495,000 $4,448,000 $ 4,181,000
========== ========== ===========
F-15