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, 1998
Commission file number 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(915) 682-1119
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
Common Stock, $0.50 par value: 1,623,289 shares outstanding at February 1, 1999
<PAGE>
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of December 31, 1998 (Unaudited)
and March 31, 1998 ........................................................ 3
Consolidated Statements of Operations (Unaudited) for the three and nine
month periods ended December 31, 1998 and December 31, 1997 ............... 4
Consolidated Statements of Cash Flows (Unaudited) for the nine month
periods ended December 31, 1998 and December 31, 1997 ..................... 6
Note to Unaudited Consolidated Financial Statements ....................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 8
PART II. OTHER INFORMATION ............................................... 11
SIGNATURES ................................................................ 12
Page 2
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................... $ 129,085 $ 241,348
Accounts receivable:
Oil and gas sales .......................... 153,571 199,427
Related parties ............................ 2,575 8,473
Prepaid Expenses ............................. 17,625 15,185
------------ ------------
Total current assets ....................... 302,856 464,433
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged ............ 10,348,231 9,915,701
Office and computer equipment and software ... 21,874 20,252
------------ ------------
10,370,105 9,935,953
Less accumulated depreciation, depletion
and amortization ........................... 6,697,137 5,857,900
------------ ------------
Property and equipment, net ................ 3,672,968 4,078,053
------------ ------------
Total assets ................................... $ 3,975,824 $ 4,542,486
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............ $ 425,000 $ 322,000
Accounts payable and accrued expenses ........ 40,675 121,131
------------ ------------
Total current liabilities .................. 465,675 443,131
Long-term debt ................................. 1,397,000 1,500,000
Stockholders' equity:
Preferred stock, par value $1 per share;
10,000,000 shares authorized; none issued .. -- --
Common stock, par value $0.50 per share;
40,000,000 shares authorized;
1,623,289 shares issued and outstanding .... 811,644 811,644
Additional paid in capital ................... 2,875,399 2,875,399
Retained earnings (deficit) .................. (1,573,894) (1,087,688)
------------ ------------
Total stockholders' equity ................. 2,113,149 2,599,355
------------ ------------
Total liabilities and stockholders' equity ..... $ 3,975,824 $ 4,542,486
============ ============
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 December 31, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Operating revenue:
Oil and gas sales ............................ $ 329,541 $ 733,812
Property operator fees ....................... 1,043 1,278
Other ........................................ 77 9,819
----------- -----------
Total operating revenue .................... 330,661 744,909
Operating costs and expenses:
Oil and gas production ....................... 154,809 226,649
Depreciation, depletion and amortization ..... 174,428 268,052
General and administrative ................... 47,451 41,434
----------- -----------
Total operating costs and expenses ......... 376,688 536,135
Other income and (expenses):
Interest income .............................. 1,740 42
Interest expense ............................. (36,961) (39,468)
----------- -----------
Net other income and expenses .............. (35,221) (39,426)
----------- -----------
Income before income taxes ..................... (81,248) 169,348
Income tax expense ............................. -- 58,379
----------- -----------
Net income ..................................... $ (81,248) $ 110,969
=========== ===========
Net income per share:
Basic ........................................ $ (0.05) $ 0.07
Diluted ...................................... $ (0.05) $ 0.07
Weighted average shares outstanding:
Basic ........................................ 1,623,289 1,623,229
Diluted ...................................... 1,623,289 1,623,229
The accompanying note is an integral part
of the consolidated financial statements.
Page 4
<PAGE>
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months ended December 31, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Operating revenue:
Oil and gas sales ............................ $ 1,155,638 $ 1,688,051
Property operator fees ....................... 3,130 3,834
Other ........................................ 2,273 11,104
----------- -----------
Total operating revenue .................... 1,161,041 1,702,989
Operating costs and expenses:
Oil and gas production ....................... 523,251 521,019
Depreciation, depletion and amortization ..... 839,237 670,082
General and administrative ................... 173,659 159,431
----------- -----------
Total operating costs and expenses ......... 1,536,147 1,350,532
Other income and (expenses):
Interest income .............................. 4,880 942
Interest expense ............................. (115,980) (98,292)
----------- -----------
Net other income and expenses .............. (111,100) (97,350)
----------- -----------
Income before income tax expense ............... (486,206) 255,107
Income tax expense ............................. -- 75,584
----------- -----------
Net income ..................................... $ (486,206) $ 179,523
=========== ===========
Net income per share:
Basic ........................................ $ (0.30) $ 0.11
Diluted ...................................... $ (0.30) $ 0.11
Weighted average shares outstanding:
Basic ........................................ 1,623,289 1,585,411
Diluted ...................................... 1,623,289 1,585,411
The accompanying note is an integral part
of the consolidated financial statements.
Page 5
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended December 31, 1998 and 1997
(Unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income (loss) .............................. $ (486,206) $ 179,523
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Deferred income taxes ...................... -- 74,663
Depreciation, depletion and amortization ... 839,237 670,082
(Increase) decrease in accounts receivable . 51,754 (22,287)
Decrease in accounts payable ............... (1,657) (65,947)
Increase in prepaid assets ................. (2,440) (1,245)
Decrease in income taxes payable ........... -- (23,810)
----------- -----------
Net cash provided by operating activities 400,688 810,979
Cash flows from investing activities:
Additions to property and equipment ............ (512,951) (1,890,401)
----------- -----------
Net cash used in investing activities .... (512,951) (1,890,401)
Cash flows from financing activities:
Proceeds from issuance of common stock ......... -- 1,000,000
Long-term borrowings ........................... -- 685,000
Principal payments on long-term debt ........... -- (500,000)
----------- -----------
Net cash provided by financing activities -- 1,185,000
Net increase (decrease) in cash .................. (112,263) 105,578
Cash, beginning of the period .................... 241,348 40,813
----------- -----------
Cash, end of period .............................. $ 129,085 $ 146,391
=========== ===========
Interest paid .................................... $ 103,285 $ 97,897
Income taxes paid ................................ $ -- $ 24,731
Non-cash investing and financing activities:
Included in trade accounts payable at December 31, 1998 are capital costs
attributable to oil and gas properties of $4,251. Included in trade accounts
payable at March 31, 1998 are purchases of oil and gas properties totaling
$83,050.
The accompanying note is an integral part
of the consolidated financial statements.
Page 6
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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 December
31, 1998, and the results of its operations and cash flows for the interim
periods ended December 31, 1998 and 1997. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for a full year. The accounting policies followed by the Company are set forth
in more detail in Note A of the "Notes to Consolidated Financial Statements" in
the Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the Form
10-K.
Income (loss) Per Common Share
- ------------------------------
Net income (loss) per common share is based on the weighted average number
of shares outstanding during the periods presented. There were no common stock
equivalents outstanding as of December 31, 1997. Common stock equivalents
(options) are excluded at December 31, 1998, since their inclusion would have an
antidilutive effect on loss per share.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share" which
requires changes in the computation and reporting of earnings per share. This
pronouncement, which becomes effective for periods ending after December 15,
1997, provides for the presentation of basic earnings per share, computed
without regard to options, warrants, and other stock equivalents, and diluted
earnings per share, which gives effect to these potential dilutive common shares
when they have a dilutive effect on earnings per share.
Page 7
<PAGE>
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 nine months of fiscal 1999, cash flow from operations was
$400,688, which included the positive effect of a decrease of $51,754 in
accounts receivable, and net cash flow was a negative $112,263. Cash of $512,951
was used for additions to property and equipment.
During the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999,
the Company participated in the drilling and completion of five wells in the
Viejos Field, Pecos County, Texas at a total cost to the Company of
approximately $280,000, with an approximate 10% working and 8% net revenue
interest. Expenditures attributable to these wells were approximately $180,000
during fiscal 1999. In September 1998, one of the producing wells was proposed
as a water injection well at an estimated future cost to the Company of $10,000.
In September 1998, the Company, as operator, successfully re-entered a gas well
in Pecos County, Texas at a cost to the Company of approximately $109,000.
Additional capital costs associated with this well of approximately $3,000 are
anticipated during the fourth quarter of fiscal 1999. 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 an approximate 75% net revenue interest in this well.
Although there have been favorable initial production tests of the well, the
Company will be unable to determine the production capacity of this gas well
until further production history is available.
Due to costly downhole mechanical problems and low oil prices, a marginal well,
in which the Company owns a 100 percent working interest and is the operator,
will be plugged in the fourth quarter of fiscal 1999. The cost to the Company is
estimated at $10,000, net of equipment salvage. This well was producing
approximately 4 bbls of oil per day before it was shut in.
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.
Page 8
<PAGE>
At December 31, 1998, the Company had negative working capital of $162,819
compared to working capital of $21,302 at March 31, 1998, a net decrease of
$184,121. This is due primarily to additional current maturities of bank debt as
well as decreased revenue from lower oil and gas prices during fiscal 1999.
The Company has a revolving credit agreement with NationsBank of Texas, N.A.
("Bank") which provides for a credit facility of $3,000,000, subject to a
borrowing base determination. The credit facility was amended on August 15, 1998
to increase the borrowing base to $2,085,000, with scheduled monthly reductions
of $43,000 per month beginning September 5, 1998 and to extend the maturity date
to August 15, 2000. The borrowing base is subject to redetermination on or about
August 1, of each year. Amounts borrowed under this agreement are collateralized
by the common stock of Forman and the Company's oil and gas properties. Interest
under this agreement is payable monthly at prime rate (7.75% at December 31,
1998). This agreement generally restricts the Company's ability to transfer
assets or control of the Company, incur debt, extend credit, change the nature
of the Company's business, substantially change management personnel or pay
dividends. As of December 31, 1998, the balance outstanding under this agreement
was $1,822,000.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the foreseeable future.
Year 2000 Issue
- ---------------
The Company is in the process of conducting an assessment of the business risks
associated with the new century. These risks relate to the 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.
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 35 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.
Page 9
<PAGE>
Results of Operations - Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------
Net income decreased from $110,969 for the three months ended December 31, 1997,
to a net loss of $81,248 for the same period in fiscal 1999. Individual
categories of income and expense are discussed below.
Oil and gas sales decreased from $733,812 for the third quarter of fiscal 1998
to $329,541 for the same period of fiscal 1999. This decrease of $404,271 or 55%
resulted from decreased prices and decreased production due primarily to normal
production declines. Oil and gas production quantities were 12,367 bbls and
106,762 mcf for the third quarter of fiscal 1999 and 19,296 bbls and 126,186 mcf
for fiscal 1998, a decrease of 6,929 bbls, or 36%, and a decrease of 19,424 mcf,
or 15%. Average gas prices decreased from $2.98 per mcf for the third quarter of
fiscal 1998 to $1.74 per mcf for fiscal 1999, while average oil prices decreased
from $18.54 per bbl for fiscal 1998 to $11.60 per bbl for fiscal 1999.
Production costs decreased from $226,649 for the third quarter of fiscal 1998 to
$154,809 for the same period of fiscal 1999, a decrease of $71,840, or 32%. This
decrease was primarily due to the decline in production taxes and remedial work
done.
General and administrative expenses were $47,451 for the third quarter of fiscal
1999 and $41,434 for the third quarter of fiscal 1998, an increase of $6,017, or
15%. This increase was primarily due to increased salary and benefit costs of
$21,283, offset in part by a reduction in contract services of $6,349 and legal
fees of $8,663.
Depreciation, depletion and amortization based on production and other methods
decreased from $268,052 for the third quarter of fiscal 1998 to $174,428 for the
same period of fiscal 1999, a decrease of $93,624 or 35%. This decrease was due
to prior full cost ceiling write-downs of oil and gas properties, which resulted
from lower reserve estimates, and lower production quantities. Lower product
prices have had a significant impact on the determination of reserve quantity
estimates.
Interest expense decreased from $39,468 for the third quarter of fiscal 1998 to
$36,961 for the same period of fiscal 1999, a decrease of $2,507 or 6%, due to
lower interest rates.
Results of Operations-Nine Months Ended December 31, 1998 and 1997
- ------------------------------------------------------------------
Net income decreased from $179,523 for the nine months ended December 31, 1997
to a net loss of $486,206 for the same period of fiscal 1999. Individual
categories of income and expenses are discussed below.
Oil and gas sales decreased from $1,688,051 for the first nine months of fiscal
1998 to $1,155,638 for the same period of fiscal 1999. This decrease of $532,413
or 32% resulted from lower oil and gas prices and decreased oil production due
to normal production declines, offset in part by increased gas production from
wells drilled. Oil and gas production quantities were 50,169 bbls and 320,405
mcf for the first nine months of fiscal 1998 and 38,778 bbls and 350,578 mcf for
fiscal 1999, a decrease of 11,391 bbls or 23% and an increase of 30,173 mcf or
9%. Average gas prices decreased from $2.39 per mcf for the first nine months of
fiscal 1998 to $1.94 per mcf for fiscal 1999, while average oil prices decreased
from $18.40 per bbl for fiscal 1998 to $12.27 per bbl for fiscal 1999.
Production costs remained relatively stable for these interim periods, with
$521,019 for the first nine months of fiscal 1998 and $523,251 for the same
period of fiscal 1999.
Page 10
<PAGE>
General and administrative expenses increased from $159,431 for the first nine
months of fiscal 1998 to $173,659 for the same period of fiscal 1999, an
increase of $14,228 or 9%. This increase was primarily due to increased salary
and benefit costs of $42,405, franchise taxes of $13,354, and director fees of
$6,100, offset in part by a reduction in accounting fees of $16,100, contract
services of $12,080 and legal fees of $21,204.
Depreciation, depletion and amortization based on production and other methods
increased from $670,082 for the first nine months of fiscal 1998 to $839,237 for
the same period of fiscal 1999, an increase of $169,155 or 25%, due primarily to
a full cost ceiling write-down of $288,393. Lower product prices have had a
significant impact on the determination of reserve quantity estimates.
Interest expense increased from $98,292 for the first nine months of fiscal 1998
to $115,980 for the same period of fiscal 1999, an increase of $17,688 or 18%,
due to additional borrowings outstanding under the loan agreement.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal proceedings
None.
Item 2 .Changes in securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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: February 11, 1999 Nicholas C. Taylor
-------------------------------------------
Nicholas C. Taylor, President and Treasurer
Page 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 129,085
<SECURITIES> 0
<RECEIVABLES> 156,146
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 302,856
<PP&E> 10,370,105
<DEPRECIATION> 6,697,137
<TOTAL-ASSETS> 3,975,824
<CURRENT-LIABILITIES> 465,675
<BONDS> 0
0
0
<COMMON> 811,644
<OTHER-SE> 1,301,505
<TOTAL-LIABILITY-AND-EQUITY> 3,975,824
<SALES> 1,155,638
<TOTAL-REVENUES> 1,165,921
<CGS> 523,251
<TOTAL-COSTS> 523,251
<OTHER-EXPENSES> 1,128,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,980
<INCOME-PRETAX> (486,206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (486,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (486,206)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
