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