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 December 31, 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 February 11, 2004
<Page>
MEXCO ENERGY CORPORATION
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Balance Sheets as of December
31, 2003 (Unaudited) and March 31, 2003 3
Consolidated Statements of Operations
(Unaudited) for the three and nine months
ended December 31, 2003 and December 31,
2002 4
Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
December 31, 2003 and December 31, 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 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
- ---------------------------
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
- ----------
CERTIFICATIONS 16
- --------------------------------------------------------------------------------
Page 2
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
December 31, March 31,
2003 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 77,285 $ 68,547
Accounts receivable:
Oil and gas sales 367,803 560,297
Trade 9,092 17,617
Related parties 2,433 3,475
Prepaid expenses 24,745 10,043
------------ ------------
Total current assets 481,358 659,979
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 16,559,257 15,656,928
Office and computer equipment
and software 34,542 33,708
------------ ------------
16,593,799 15,690,636
Less accumulated depreciation,
depletion and amortization 9,212,997 8,661,977
------------ ------------
Property and equipment, net 7,380,802 7,028,659
------------ ------------
Total assets $ 7,862,160 $ 7,688,638
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 66,592 $ 93,434
Current portion of long-term debt 277,028 116,280
Income tax payable 16,322 --
Obligations under capital leases 2,715 61,086
------------ ------------
Total current liabilities 362,657 270,800
Long-term debt 1,392,972 2,033,720
Asset retirement obligation 391,250 --
Deferred income tax liability 502,149 427,730
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 3,767,034 3,734,119
Retained earnings 691,736 466,522
Treasury stock, at cost (30,525 and
30,244 shares, respectively) (128,921) (127,536)
------------ ------------
Total stockholders' equity 5,213,132 4,956,388
------------ ------------
Total liabilities and stockholders'
equity $ 7,862,160 $ 7,688,638
============ ============
</Table>
The accompanying note is an integral part
of the consolidated financial statements.
Page 3
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months ended December 31, 2003 and 2002
(Unaudited)
<Table>
<Caption>
Three Months Ended Nine Months Ended
December 31 December 31
2003 2002 2003 2002
----------------------------- -----------------------------
Operating revenue:
Oil and gas sales $ 650,783 $ 668,039 $ 2,186,694 $ 1,724,869
Other 1,178 256,440 4,304 265,891
----------- ----------- ----------- -----------
Total operating revenue 651,961 924,479 2,190,998 1,990,760
Operating costs and expenses:
Oil and gas production 237,895 233,077 747,755 622,286
Accretion expense 6,068 -- 17,804 --
Depreciation, depletion
and amortization 162,709 136,788 499,623
383,286
General and administrative 121,719 203,623 394,341 450,387
----------- ----------- ----------- -----------
Total operating costs
and expenses 528,391 573,488 1,659,523 1,455,959
----------- ----------- ----------- -----------
123,570 350,991 531,475 534,801
Other income and (expenses):
Interest income 53 89 170 333
Interest expense (22,332) (24,932) (67,473) (68,078)
----------- ----------- ----------- -----------
Net other income and expenses (22,279) (24,843) (67,303) (67,745)
----------- ----------- ----------- -----------
Income before income taxes 101,291 326,148 464,172 467,056
Income tax expense(benefit)-current 16,322 (13,026) 16,322
(13,026)
Income tax expense-deferred 27,714 101,105 120,365 144,511
----------- ----------- ----------- -----------
Income before cumulative effect
of accounting change 57,255 238,069 327,485 335,571
Cumulative effect of accounting
change, net of tax -- -- (102,267) --
----------- ----------- ----------- -----------
Net income $ 57,255 $ 238,069 $ 225,218 $ 335,571
=========== =========== =========== ===========
Net income (loss) per common share:
Basic:
Income before cumulative effect
of accounting change $ 0.03 $ 0.14 $ 0.19 $ 0.19
Cumulative effect, net of tax $ -- $ -- $ (0.06) $ --
Net income $ 0.03 $ 0.14 $ 0.13 $ 0.19
Diluted:
Income before cumulative effect
of accounting change $ 0.03 $ 0.14 $ 0.18 $ 0.19
Cumulative effect, net of tax $ -- $ -- $ (0.06) $ --
Net income $ 0.03 $ 0.14 $ 0.12 $ 0.19
Pro forma amounts assuming, the new
method of accounting for asset retirement
obligations is applied retroactively:
Net Income $ 57,255 $ 232,785 $ 327,485 $ 319,719
Basic earnings per share $ 0.03 $ 0.13 $ 0.19 $ 0.18
Diluted earnings per share $ 0.03 $ 0.13 $ 0.18 $ 0.18
</Table>
The accompanying note is an integral part
of the consolidated financial statements.
Page 4
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended December 31, 2003 and 2002
(Unaudited)
<Table>
<Caption>
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 225,218 $ 335,571
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 120,365 144,511
Stock-based compensation 32,915 46,457
Depreciation, depletion and
amortization 499,623 383,286
Accretion of asset retirement obligations 17,804 --
(Increase) decrease in
accounts receivable 202,061 (23,209)
Increase in prepaid expenses (14,703) (5,861)
Increase in income taxes payable 16,322 --
Increase (decrease) in accounts payable
and accrued expenses (25,643) 7,704
----------- -----------
Net cash provided by operating
activities 1,176,229 888,459
Cash flows from investing activities:
Additions to property and equipment (627,735) (1,491,700)
----------- -----------
Net cash used in investing
activities (627,735) (1,491,700)
Cash flows from financing activities:
Acquisition of treasury stock (1,385) (122,386)
Reduction of capital lease obligations (58,371) (7,150)
Reduction in long-term debt (480,000) (150,000)
Proceeds from long-term debt -- 910,000
----------- -----------
Net cash (used in) provided by
financing activities (539,756) 630,464
----------- -----------
Net increase in cash 8,738 27,223
Cash, beginning of the period 68,547 44,958
----------- -----------
Cash, end of period $ 77,285 $ 72,181
=========== ===========
Interest paid $ 69,473 $ 66,033
Income taxes paid $ -- $ --
Supplemental Disclosure of Non-Cash Investing
and financing activities
Fair value of warrants issued for
oil and gas properties $ -- $ 73,551
Acquisition of equipment under capital leases $ -- $ 56,930
</Table>
The accompanying note is an integral part
of the consolidated financial statements.
Page 5
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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 December 31, 2003, and the results of its
operations and cash flows for the interim periods ended December 31, 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 financial statements 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
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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. The
Company awarded options to purchase 10,000 shares of its common stock to a
consultant during the current quarter. For the quarter ending December 31, 2003,
the Company recognized $11,924 related to stock options for all 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 compensation
costs for stock options issued had been determined based on the fair value at
the grant dates for all employee awards under the plan:
<Table>
<Caption>
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 57,255 $ 238,069 $ 225,218 $ 335,571
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax $ (25,563) $ (17,475) $ (61,578) $ (46,933)
--------- --------- --------- ---------
Net income, pro forma $ 31,692 $ 220,594 $ 163,640 $ 288,638
========= ========= ========= =========
Basic earnings per share:
As reported $ 0.03 $ 0.14 $ 0.13 $ 0.19
Pro forma $ 0.02 $ 0.13 $ 0.09 $ 0.17
Diluted earnings per share:
As reported $ 0.03 $ 0.14 $ 0.12 $ 0.19
Pro forma $ 0.02 $ 0.13 $ 0.09 $ 0.17
</Table>
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 $391,250 at December 31, 2003. Accretion expense during the first nine
months of fiscal 2004 was $17,804.
Page 7
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The following table provides a rollforward of the asset retirement obligations
for the nine months ended December 31, 2003:
Carrying amount of asset retirement obligations as of
April 1, 2003 $ 358,419
Liabilities incurred $ 25,348
Liabilities settled $ (10,321)
Accretion expense $ 17,804
Revisions in estimated cash flows $ 0
---------
Carrying amount of asset retirement obligations as of
December 31, 2003 $ 391,250
=========
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 in 2004. Costs excluded from amortization at
December 31, 2003 total $673,890. No impairment exists for this property at
December 31, 2003. The Company has also begun preliminary negotiations to
develop gas properties in Russia. Costs through December 31, 2003 total $19,955,
which have also been excluded from amortization.
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 nine-month periods ended December 31, 2003 and 2002.
Three Months Ended Nine Months Ended
December 31 December 31
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of
common shares outstanding 1,736,041 1,737,322 1,736,049 1,742,955
Incremental shares from the
assumed exercise of dilutive
stock options 130,809 -- 88,338 3,102
--------- --------- --------- ---------
Dilutive potential common shares 1,866,850 1,737,322 1,824,387 1,746,057
Options and warrants to purchase 10,000 shares at an average exercise
price of $7.00 and 388,500 shares at an average exercise price of $5.54
outstanding for the three months ended December 31, 2003 and December 31, 2002,
Page 8
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respectively, and options and warrants to purchase 200,000 shares at an average
exercise price of $7.36 and 428,500 shares at an average exercise price of $5.39
for the nine month period ended December 31, 2003 and December 31, 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, and, therefore, the effect
would be antidilutive.
Income Taxes
There is $16,322 of current income tax expense for the three months ended
December 31, 2003. This resulted after applying the tax loss carryforward of
approximately $139,000 from the year ending March 31, 2003 to current taxable
income for the three months ended December 31, 2003. The current income tax
benefit of $13,026 for the three months ended December 31, 2002 represents a
refund received from prior income taxes paid in 1997. There is no additional
current income tax expense for the three or nine months ended December 31, 2002
due to a tax loss carryforward of approximately $283,000 from the year ending
March 31, 2002.
Stockholders' Equity
During the nine month period ended December 31, 2003, the Company paid $1,385 to
purchase 281 shares of its common stock for treasury.
Long Term Liabilities
On December 15, 2003, the Company's revolving credit agreement with Bank of
America, N.A. ("Bank"), with an original maturity date of August 15, 2004, was
renewed with a maturity date of August 15, 2005.
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 December 15, 2003, the borrowing base was
re-determined and reduced to $1,938,372 with monthly commitment reductions of
$45,450 beginning on January 5, 2004. As of December 31, 2003, the balance
outstanding under this agreement was $1,670,000. Principal payments of $277,028
will be required through December 31, 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 December 31, 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 $9,784
on December 31, 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. Two of these lease
agreements reached the end of their term during the third quarter and the
Company received title to these compressors. The lease obligation associated
with the third compressor was $2,715 on December 31, 2003, all of which is a
current liability. Total payments required for this lease will be $2,795, of
which $80 represents interest.
Page 9
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Lawsuit Settlement
During the third quarter of fiscal 2003, the Company received proceeds of
$254,862 from the settlement of a class action lawsuit against a gas purchaser
involving contract price disputes.
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 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.
Page 10
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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 nine months of fiscal 2004, cash flow from operations was
$1,176,229 compared to $888,459 for the first nine months of fiscal 2003. The
cash flow from operations for the first nine months of fiscal 2004 included the
effects of a decrease in accounts payable and accrued expenses and a decrease in
accounts receivable. Cash of $627,735 was used for additions to property and
equipment and cash of $480,000 was used to reduce long-term debt. Accordingly,
net cash increased $8,738.
During the quarter, the Company purchased partially developed royalty interest
in Jackson Parish, Louisiana for $80,000. These properties, operated by Anadarko
Petroleum Corporation in the Lower Cotton Valley formation, contain 8 producing
wells and an additional 3 permitted and/or drilling wells. This purchase
advances the Company's primary goal of acquiring natural gas reserves.
During the quarter, the Company began to explore the opportunity to develop gas
reserves in Russia and through December 31, 2003 has invested $19,955 in this
project.
In January 2004, the Company paid $214,124 for 50% interest in oil, gas and
mineral leases and/or options to acquire approximately 4,940 net acres in Stark
County, North Dakota. The Company is in the process of selling one-half of its
interest in this acreage, retaining a 2.5% overriding royalty interest
proportionately reduced. The primary objective of this project is the Lodgepole
formation at a depth of approximately 10,000'.
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.
At December 31, 2003, the Company had working capital of approximately $118,701
compared to working capital of approximately $389,179 at March 31, 2003, a
decrease of $270,478 primarily as a result of a decrease in accounts receivable
and an increase in the current portion of long-term debt.
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 December 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. On
December 15, 2003 the credit agreement was amended with a maturity date of
August 15, 2005. The borrowing base was redetermined on this date and set at
$1,938,372 with monthly commitment reductions of $45,450 beginning on January 5,
2004. As of December 31, 2003, the balance outstanding under this agreement was
$1,670,000. Principal payments of $277,028 will be required through December 31,
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
Page 11
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Forman and the Company's oil and gas properties. Interest under this agreement
is payable monthly at prime rate (4.00% at December 31, 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 next 12 months.
Results of Operations - Three Months Ended December 31, 2003 and 2002
Net income decreased from a net profit of $238,069 for the quarter ended
December 31, 2002 to a net profit of $57,255 for the quarter ended December 31,
2003. Individual categories of income and expense are discussed below.
Oil and gas sales decreased from $668,039 for the third quarter of fiscal 2003
to $650,783 for the same period of fiscal 2004. This decrease of 3% or $17,256
resulted from a decrease in oil and gas production and was partially offset by
higher oil and gas prices. Average gas prices increased from $3.69 per mcf for
the third quarter of fiscal 2003 to $4.36 per mcf for the same period of fiscal
2004, while average oil prices increased from $26.48 per bbl for the third
quarter of fiscal 2003 to $28.04 for the same period of fiscal 2004. Oil and gas
production quantities were 5,712 barrels ("bbls") and 139,882 thousand cubic
feet ("mcf") for the third quarter of fiscal 2003 and 4,347 bbls and 121,350 mcf
for the same period of fiscal 2004, a decrease of 24% in oil production and a
decrease of 13% in gas production.
Other income decreased from $256,440 for the third quarter of fiscal 2003 to
$1,178 for the same period of fiscal 2004. This was the result of the settlement
of a class action lawsuit against a gas purchaser involving contract price
disputes. The net proceeds to the Company for settlement were $254,862 received
in the third quarter of fiscal 2003.
Production costs increased 2% from $233,077 for the third quarter of fiscal 2003
to $237,895 for the same period of fiscal 2004. This was primarily due to an
increased number of repairs and maintenance to operated wells during the quarter
and higher ad valorem taxes.
General and administrative expenses decreased 40% from $203,623 for the third
quarter of fiscal 2003 to $121,719 for the same period of fiscal 2004. This is
primarily the result of consulting services incurred in relation to the lawsuit
settlement during the third quarter of fiscal 2003.
Depreciation, depletion and amortization based on production and other methods
increased 19%, from $136,788 for the third quarter of fiscal 2003 to $162,709
for the same period of fiscal 2004 primarily due to a decrease in Company
reserves.
Interest expense decreased 10% from $24,932 for the third quarter of fiscal 2003
to $22,332 for the same period of fiscal 2004. This is primarily the result of
lesser borrowings combined with a lower interest rate.
Results of Operations - Nine Months Ended December 31, 2003 and December 31,
2002
Net income decreased 33%, from a net profit of $335,571 for the nine months
ended December 31, 2002 to a net profit of $225,218 for the nine months ended
December 31, 2003. Individual categories of income and expense are discussed
below.
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Oil and gas sales increased 27% from $1,724,869 for the nine months ended
December 31, 2002 to $2,186,694 for the same period of fiscal 2004, primarily
because of increased prices. Average gas prices increased from $3.19 per mcf for
the first nine months of fiscal 2003 to $4.67 per mcf for fiscal 2004, and
average oil prices increased from $25.46 per bbl for the first nine months of
fiscal 2003 to $27.86 for fiscal 2004. Oil and gas production quantities were
16,979 bbls and 405,179 mcf for the first nine months of fiscal 2003 and 15,492
bbls and 375,559 for fiscal 2004, a decrease of 9% and 7%, respectively.
Production costs increased 20% from $622,286 for the nine months ended December
31, 2003 to $747,755 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
increased number repairs and maintenance to operated wells during fiscal 2004.
Depreciation, depletion and amortization based on production and other methods
increased 30%, from $383,286 for the first nine months of fiscal 2003 to
$499,623 for the same period of fiscal 2004 primarily due to a decrease in
Company reserves.
Interest expense decreased 1% from $68,078 for the first nine months of fiscal
2003 to $67,473 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 $391,250 at December 31, 2003. Accretion expense during the first nine
months of fiscal 2004 was $17,804.
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 disclosures prescribed by SFAS No. 142 for intangible
assets for costs associated with mineral rights.
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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 December 31, 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 December 31, 2003, the Company had an outstanding loan balance of $1,670,000
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 $16,700, 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 December 31, 2003, the Company's
largest credit risk associated with any single purchaser was $89,169. 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
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.
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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 February 3, 2004 the Chairman of the Board paid the Company $1,075
and further payment of $1,875 will be made, representing profits on
stock sold which was held less than six months. Such payment was made
in accordance with Section 16(b) of the Securities Exchange Act of
1934.
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 December 31, 2003.
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: February 11, 2004 /s/ Nicholas C. Taylor
--------------------------------------------------
Nicholas C. Taylor
President
Dated: February 11, 2004 /s/ Tamala L. McComic
--------------------------------------------------
Tamala L. McComic
Vice President, Treasurer, and Assistant Secretary
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