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 June 30, 1999
Commission file number 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(915) 682-1119
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
Common Stock, $0.50 par value: 1,623,289 shares outstanding at July 30, 1999
<PAGE>
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Operations (Unaudited) for the three
month periods ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows (Unaudited) for the three month
periods ended June 30, 1999 and June 30, 1998 5
Note to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION 11
SIGNATURES 12
Page 2
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1999 1999
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 73,442 $ 96,198
Accounts receivable:
Oil and gas sales 193,456 179,269
Related parties 5,416 3,780
Prepaid expenses 21,042 14,368
------------ ------------
Total current assets 293,356 293,615
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 9,969,021 10,495,391
Office and computer equipment and software 21,874 21,874
------------ ------------
9,990,895 10,517,265
Less accumulated depreciation, depletion
and amortization 6,874,163 6,767,865
------------ ------------
Property and equipment, net 3,116,732 3,749,400
------------ ------------
Total assets $ 3,410,088 $ 4,043,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 253,893 $ 516,000
Accounts payable and accrued expenses 31,430 85,434
------------ ------------
Total current liabilities 285,323 601,434
Long-term debt 987,107 1,268,000
Stockholders' equity:
Preferred stock, par value $1 per share;
10,000,000 shares authorized; none issued -- --
Common stock, par value $0.50 per share;
40,000,000 shares authorized;
1,623,289 shares issued and outstanding 811,644 811,644
Additional paid in capital 2,875,399 2,875,399
Retained earnings (deficit) (1,549,385) (1,513,462)
------------ ------------
Total stockholders' equity 2,137,658 2,173,581
------------ ------------
Total liabilities and stockholders' equity $ 3,410,088 $ 4,043,015
============ ============
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 Months ended June 30, 1999 and 1998
(Unaudited)
1999 1998
----------- -----------
Operating revenue:
Oil and gas sales $ 332,502 $ 449,495
Property operator fees 1,075 1,043
Other 76 928
----------- -----------
Total operating revenue 333,653 451,466
Operating costs and expenses:
Oil and gas production 175,109 176,383
Depreciation, depletion and amortization 106,298 496,345
General and administrative 62,910 66,415
----------- -----------
Total operating costs and expenses 344,317 739,143
Other income and (expenses):
Interest income 433 1,298
Interest expense (25,692) (39,148)
----------- -----------
Net other income and expenses (25,259) (37,850)
----------- -----------
Income before income taxes (35,923) (325,527)
Income tax expense -- --
----------- -----------
Net income $ (35,923) $ (325,527)
=========== ===========
Net income per share:
Basic $ (0.02) $ (0.20)
Diluted $ (0.02) $ (0.20)
Weighted average shares outstanding:
Basic 1,623,289 1,623,289
Diluted 1,623,289 1,623,289
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 Three Months ended June 30, 1999 and 1998
(Unaudited)
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (35,923) $(325,527)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization 106,298 496,345
Increase in accounts receivable (15,823) (4,412)
Increase (decrease) in accounts payable (31,434) 9,558
Increase in prepaid assets (6,674) (12,970)
--------- ---------
Net cash provided by operating activities 16,444 162,994
Cash flows from investing activities:
Additions to property and equipment (93,537) (279,400)
Sale of property and equipment 597,337 --
--------- ---------
Net cash provided by (used in) investing activities 503,800 (279,400)
Cash flows from financing activities:
Long-term borrowings 100,000 --
Principal payments on long-term debt (643,000) --
--------- ---------
Net cash used in financing activities (543,000) --
--------- ---------
Net decrease in cash (22,756) (116,406)
Cash, beginning of the period 96,198 241,348
--------- ---------
Cash, end of period $ 73,442 $ 124,942
========= =========
Interest paid $ 29,085 $ 39,148
Income taxes paid $ -- $ --
Non-cash investing and financing activities:
Included in trade accounts payable at June 30, 1999 are capital costs
attributable to oil and gas properties of $2,471.
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 (the "Company"), a Colorado corporation, was
organized in 1972 and maintains its principal office in Midland, Texas. The
Company and Forman Energy Corporation ("Forman"), its wholly owned subsidiary,
are engaged in the acquisition, exploration, development and production of oil
and gas. While the Company owns producing properties and undeveloped acreage in
twelve states, the majority of its activities are centered in the Permian Basin
of West Texas.
Principles of Consolidation
The accompanying consolidated balance sheets include the accounts of the
Company and its wholly owned subsidiary. All significant inter-company accounts
and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company and its wholly owned subsidiary as of June 30,
1999, and the results of its operations and cash flows for the interim periods
ended June 30, 1999 and 1998. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year. The accounting policies followed by the Company are set forth in more
detail in Note A of the "Notes to Consolidated Financial Statements" in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Form
10-K.
Page 6
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MDA") contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements, other than statements of historical fact
included in MD&A, including statements regarding the Company's operating
strategy, plans, objectives and beliefs of management for future operations,
planned capital expenditures and acquisitions are forward-looking statements.
Although the Company believes that the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such assumptions will prove to be correct.
Liquidity and Capital Resources
Historically, the Company's sources of funding have been from operating
activities, bank financing and the issuance of common stock.
For the first quarter of fiscal 1999, cash flow from operations was $16,444,
which included the effects of an increase in accounts receivable and a decrease
in accounts payable. Net cash flow was a negative $22,756. Cash of $93,537 was
used for additions to property and equipment. Sales of the Lazy JL Field
properties and salvaged equipment provided funds of $597,337.
In September 1998, the Company, as operator, re-entered a gas well in Pecos
County, Texas at a cost of approximately $112,000. Funds for this project were
provided out of cash flow from operations and existing cash balances. A pipeline
connection was made on January 29, 1999. The Company owns a 100% working
interest and a 75.375% net revenue interest in this well. Cash flow from this
well was approximately $9,200 for the first three months of fiscal 2000.
In March 1999, the Company, as operator, re-entered a second gas well in Pecos
County, Texas at a cost to the Company of approximately $72,000. Funds for this
project were provided out of cash flow from operations and existing cash
balances. A pipeline connection was made on April 20, 1999. The Company owns a
97% working interest and a 70.325%. Cash flow from this well was approximately
$2,800 for the first three months of fiscal 2000. The Company installed a
plunger lift system in July 1999 at a cost of approximately $6,000.
As part of the Company's focus on increasing profit margins and concentrating on
gas reserves with low cost operations, the Company closed the sale of its Lazy
JL oil field properties in April 1999 for $584,365. The Company used the sales
proceeds to reduce its debt under the credit facility discussed below.
In April 1999, the Company acquired interests in non-producing acreage in
Schleicher County, Texas at a cost of approximately $66,000. Funds were provided
out of cash flow from operations and existing cash balances. The Company is
presently reviewing several gas re-entry prospects on this acreage.
In June 1999, the Company abandoned the Inez Fasken lease in Midland County,
Texas. Plugging costs, net of salvage, were approximately $22,000. The Company
sold equipment salvaged from this lease for $12,972.
Page 7
<PAGE>
In July 1999, the Company acquired royalty interests in a producing gas well in
Winkler County, Texas at a cost to the Company of approximately $94,000. Funds
for this acquisition were provided by its credit facility discussed below.
In July 1999, the Company acquired working interests in and assumed operations
of two producing gas wells in Schleicher County, Texas at a cost to the Company
of approximately $133,000. Funds for this acquisition were provided by its
credit facility discussed below.
The Company is reviewing several other re-entry projects in which it may
participate. The cost of such projects would be funded, to the extent possible,
with existing cash balances and cash flow from operations. The remainder may be
funded through borrowings on its bank credit facility discussed below.
At June 30, 1999, the Company had working capital of approximately $8,000
compared to negative working capital of approximately $308,000 at March 31,
1999, an increase of $316,000. This is due primarily to a reduction in current
maturities of bank debt.
The Company has a revolving credit agreement with NationsBank of Texas, N.A.
("Bank") which provides for a credit facility of $3,000,000, subject to a
borrowing base determination. The credit facility was amended on April 21, 1999
to increase the borrowing base to $1,639,107, with scheduled monthly reductions
of $43,000 per month beginning May 5, 1999. The maturity date of this loan is
August 15, 2000. The borrowing base is subject to redetermination on or about
August 1, of each year. The Bank is presently reviewing the borrowing base and
anticipates a determination and a one-year extension of the maturity date by
August 15, 1999. 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 (7.75% at June 30, 1999). This
agreement generally restricts the Company's ability to transfer assets or
control of the Company, incur debt, extend credit, change the nature of the
Company's business, substantially change management personnel or pay dividends.
As of June 30, 1999, the balance outstanding under this agreement was
$1,241,000.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the foreseeable future.
Year 2000 Issue
The Company is in the process of conducting an assessment of the business risks
associated with the new century. These risks relate to the inability of certain
software and embedded logic control devices to distinguish between the year 1900
and the year 2000. If not corrected, the year 2000 could cause such devices and
software to fail or create erroneous results.
The Company's accounting software vendor has modified its software to accurately
handle the new century, at no additional cost to the Company. Therefore, the
Company does not expect to incur any material expense associated with its own
information systems.
Page 8
<PAGE>
To mitigate or prevent the risk related to the Company's customers and
suppliers, formal communications have been initiated with key third parties in
an attempt to ascertain their ability to continue to meet their obligations to
the Company and the potential impact on the Company's operations and financial
condition. The responses received are being evaluated, and the Company may
choose to use alternative sources of supply, markets or develop other
contingency plans. The process of evaluating third party Year 2000 readiness
began in November 1998, is approximately 75 percent complete, and is scheduled
for completion by September 30, 1999.
The failure to correct, on a timely basis, a material Year 2000 problem could
result in an interruption in the Company's operations or business activities.
Such interruptions could have a material adverse affect on Company's results of
operations, liquidity and financial condition. Due to the inherent uncertainty
associated with the Year 2000 issue, particularly as it relates to third party
Year 2000 readiness, the Company cannot ascertain at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
future financial results, liquidity, condition or reporting.
Results of Operations - Three Months Ended June 30, 1999 and 1998
The net loss for the quarter ended June 30, 1998 was $325,527, which included a
full cost ceiling write-down of $288,393. The net loss for the quarter ended
June 30, 1999 was $35,923. Individual categories of income and expense are
discussed below.
Oil and gas sales decreased from $449,495 for the first quarter of fiscal 1999
to $332,502 for the same period of fiscal 2000. This decrease of $116,993 or 26%
resulted primarily from decreased oil production. The sale of Lazy JL properties
accounts for a decrease for the first quarter of fiscal 2000 as compared to
fiscal 1999 of $99,977 in oil and gas sales, 7,355 bbls and 1,970 mcf. Normal
production declines, down time due to remedial work and the abandonment of the
Inez Fasken lease are other factors that account for declines in production. Oil
and gas production quantities were 4,104 bbls and 134,743 mcf for the first
quarter of fiscal 2000 and 14,206 bbls and 126,734 mcf for fiscal 1999, a
decrease of 10,102 bbls, or 71%, and an increase of 8,009 mcf, or 6%. The two
gas re-entries discussed previously account for increases in gas production of
16,044 mcf for the first quarter of fiscal 2000. Average gas prices decreased
from $2.10 per mcf for the first quarter of fiscal 1999 to $1.98 per mcf for
fiscal 2000, while average oil prices increased from $12.91 per bbl for fiscal
1999 to $15.97 per bbl for fiscal 2000.
Production costs decreased from $176,383 for the first quarter of fiscal 1999 to
$175,109 for the same period of fiscal 2000, a decrease of $1,274. The sale of
Lazy JL properties reduced production costs for the first quarter of 2000 as
compared to fiscal 1999 by $84,016, while major remedial repairs, plugging costs
and costs associated with new wells increased production costs.
General and administrative expenses decreased from $66,415 for the first quarter
of fiscal 1999 to $62,910 for the same period of fiscal 2000, a decrease of
$3,505. This decrease was primarily due to reductions in engineering fees of
$10,079 and franchise taxes of $5,237, offset in part by increased salary and
benefit costs of $11,837.
Depreciation, depletion and amortization based on production and other methods
decreased from $496,345 for the first quarter of fiscal 1999 to $106,298 for the
same period of fiscal 2000, a decrease of $390,047 or 79%. This decrease was
primarily due to a full cost ceiling write-down in the first quarter of fiscal
1999 of $288,393 and the sale of Lazy JL properties.
Interest expense decreased from $39,148 for the first quarter of fiscal 1999 to
$25,692 for the same period of fiscal 2000, a decrease of $13,456 or 34%, due to
lower interest rates and reduced borrowings.
Page 9
<PAGE>
MEXCO ENERGY CORPORATION AND SUBSIDIARY
Quantitative and Qualitative Disclosures About Market Risk
All of the Company's financial instruments are for purposes other than trading.
Interest Rate Risk. The following table summarizes fiscal year maturities
for the Company's variable rate bank debt, which is tied to prime rate. If the
interest rate on the Company's bank debt increases or decreases by one
percentage point, the Company's annual pretax income would decrease or increase
by $12,410.
2000 2001 2002
--------- --------- ---------
Variable rate bank debt $ 124,893 $ 516,000 $ 600,107
Credit Risk. Credit risk is the risk of loss as a result of nonperformance
by counterparties of their contractual obligations. The Company's primary credit
risk is related to oil and gas production sold to various purchasers and the
receivables are generally uncollateralized. At June 30, 1999, the Company's
largest credit risk associated with any single purchaser was $45,677. The
Company has not experienced any significant credit losses.
Volatility of Oil and Gas Prices. The Company's revenues, operating results
and future rate of growth are dependent upon the prices received for oil and
gas. Historically, the markets for oil and gas have been volatile and are likely
to continue to be so in the future. Various factors beyond the control of the
Company affect the price of oil and gas, including but not limited to worldwide
and domestic supplies of oil and gas, the ability of the members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, political instability or armed conflict in
oil-producing regions, the price and level of foreign imports, the level of
consumer demand, the price and availability of alternative fuels, the
availability of pipeline capacity, weather conditions, domestic and foreign
governmental regulation and the overall economic environment. Any significant
decline in prices would adversely affect the Company's revenues and operating
income and may require a reduction in the carrying value of the Company's oil
and gas properties. If the average oil price for the first quarter of fiscal
2000 had increased or decreased by one cent, the Company's pretax loss would
have decreased or increased by $41. If the average gas price for the first
quarter of fiscal 2000 had increased or decreased by one cent, the Company's
pretax loss would have decreased or increased by $1,347.
Page 10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None.
Item 2. Changes in securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A report on Form 8-K dated April 21, 1999 was filed under Item 2.
Disposition of Assets. A report on Form 8-K dated June 17, 1999 was filed
under Item 1. Changes in Control of Registrant and Item 2. Acquisition or
Disposition of Assets.
Page 11
<PAGE>
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: August 11, 1999 Nicholas C. Taylor
-----------------------------
Nicholas C. Taylor, President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 73,442
<SECURITIES> 0
<RECEIVABLES> 198,872
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 293,356
<PP&E> 9,990,895
<DEPRECIATION> 6,874,163
<TOTAL-ASSETS> 3,410,088
<CURRENT-LIABILITIES> 285,323
<BONDS> 0
0
0
<COMMON> 811,644
<OTHER-SE> 1,326,014
<TOTAL-LIABILITY-AND-EQUITY> 3,410,088
<SALES> 332,502
<TOTAL-REVENUES> 334,086
<CGS> 175,109
<TOTAL-COSTS> 175,109
<OTHER-EXPENSES> 194,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,692
<INCOME-PRETAX> (35,923)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,923)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
