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, 2000
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:
1,623,293 shares outstanding at June 30, 2000
<PAGE>
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and March 31, 2000 3
Consolidated Statements of Operations (Unaudited) for the
three month periods ended June 30, 2000 and June 30, 1999 4
Consolidated Statements of Cash Flows (Unaudited) for the
three month periods ended June 30, 2000 and June 30, 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION 11
SIGNATURES 12
2
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2000 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 115,613 $ 97,712
Accounts receivable:
Oil and gas sales 363,199 255,121
Trade 770 2,070
Related parties 1,709 18,105
Other 5,000 5,000
Prepaid expenses 24,884 15,789
------------ ------------
Total current assets 511,175 393,797
Property and equipment, at cost:
Oil and gas properties and equipment,
using full cost method, pledged 10,821,488 10,630,903
Office and computer equipment
and software 22,586 22,586
------------ ------------
10,844,074 10,653,489
Less accumulated depreciation,
depletion and amortization 7,305,967 7,193,967
------------ ------------
Property and equipment, net 3,538,107 3,459,522
------------ ------------
Total assets $ 4,049,282 $ 3,853,319
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 53,618 $ 86,091
Current portion of long-term debt -- --
------------ ------------
Total current liabilities 53,618 86,091
Long-term debt 1,150,000 1,200,000
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; 1,623,293
and 1,623,289 shares issued and
outstanding as of June 30, 2000 and
March 31, 2000, respectively 811,646 811,644
Additional paid in capital 2,875,397 2,875,399
Retained earnings (deficit) (841,379) (1,119,815)
------------ ------------
Total stockholders' equity 2,845,664 2,567,228
------------ ------------
Total liabilities and stockholders'
equity $ 4,049,282 $ 3,853,319
============ ============
The accompanying note is an integral part
of the consolidated financial statements.
3
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
----------- -----------
Operating revenue:
Oil and gas sales $ 592,807 $ 332,502
Other 1,470 1,151
----------- -----------
Total operating revenue 594,277 333,653
Operating costs and expenses:
Oil and gas production 91,293 175,109
Depreciation, depletion and amortization 112,000 106,298
General and administrative 85,042 62,910
----------- -----------
Total operating costs and expenses 288,335 344,317
----------- -----------
305,942 (10,664)
Other income and (expenses):
Interest income 316 433
Interest expense (27,822) (25,692)
----------- -----------
Net other income and expenses (27,506) (25,259)
----------- -----------
Income (loss) before income taxes 278,436 (35,923)
Income tax expense -- --
----------- -----------
Net income (loss) $ 278,436 $ (35,923)
=========== ===========
Net income (loss) per share:
Basic $ 0.17 $ (0.02)
Diluted $ 0.17 $ (0.02)
Weighted average shares outstanding:
Basic 1,623,293 1,623,289
Diluted 1,623,293 1,623,289
The accompanying note is an integral part
of the consolidated financial statements.
4
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months ended June 30, 2000 and 1999
(Unaudited)
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 278,436 $ (35,923)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 112,000 106,298
Increase in accounts receivable (90,382) (15,823)
Decrease in accounts payable (14,908) (31,434)
Increase in prepaid assets (9,095) (6,674)
--------- ---------
Net cash provided by operating
activities 276,051 16,444
Cash flows from investing activities:
Additions to property and equipment (208,150) (93,537)
Sale of property and equipment -- 597,337
--------- ---------
Net cash provided by (used in)
investing activities (208,150) 503,800
Cash flows from financing activities:
Long-term borrowings -- 100,000
Principal payments on long-term debt (50,000) (643,000)
--------- ---------
Net cash used in financing activities (50,000) (543,000)
--------- ---------
Net increase (decrease) in cash 17,901 (22,756)
Cash, beginning of the period 97,712 96,198
--------- ---------
Cash, end of period $ 115,613 $ 73,442
========= =========
Interest paid $ 27,775 $ 29,085
Income taxes paid $ -- $ --
Non-cash investing and financing activities:
Included in trade accounts payable at June 30, 2000 are capital costs
attributable to oil and gas properties of $7,126.
The accompanying note is an integral part
of the consolidated financial statements.
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, (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 several properties in which it owns an interest.
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,
2000, and the results of its operations and cash flows for the interim periods
ended June 30, 2000 and 1999. 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.
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.
Stock Options
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," whereby compensation costs are recognized only in situations
where stock compensatory plans award intrinsic value to recipients at the date
of grant. On March 31, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation" an interpretation of APB Opinion No. 25, which
requires the Company to recognize compensation costs related to stock options
granted to independent consultants in accordance with FASB Statement No. 123,
6
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MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
"Accounting for Stock-Based Compensation". The provisions of this Interpretation
are effective July 1, 2000 and apply to new awards granted after December 15,
1998. The effects of applying this Interpretation will be recognized only on a
prospective basis for those previous awards to independent consultants, and
accordingly, no adjustments will be made upon initial application to financial
statements for periods prior to July 1, 2000. Compensation cost measured upon
application of this Interpretation that is attributable to periods subsequent to
July 1, 2000, will be recognized.
Income Taxes
During the quarter ended June 30, 2000 the Company had no provision for
income taxes due to a reduction in valuation allowance for deferred tax assets.
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.
The Company's focus is on increasing profit margins while concentrating on gas
reserves with low cost operations.
For the first three months of fiscal 2001, cash flow from operations was
$276,051, which included the effects of an increase in accounts receivable and a
decrease in accounts payable. Net cash flow was $17,901. Cash of $208,150 was
used for additions to property and equipment. Cash of $50,000 reduced bank debt.
In April 1999 and July 1999, the Company acquired interests in non-producing and
producing acreage in Schleicher County, Texas and assumed operations of two
producing gas wells at a cost of approximately $66,000 and $138,000,
respectively. Funds for these acquisitions were provided by the credit facility
discussed below, cash flow from operations and existing cash balances. In
September, the Company re-worked one of these producing wells and increased the
Company's average daily production from the well from 5 mcf to approximately 239
mcf, which is declining as the reservoir is depleted over time, at a cost of to
the Company of approximately $15,000. Operating cash flow from these two wells
was approximately $113,508 and $33,430 for the twelve months and three months
ended June 30, 2000, respectively. In February 2000, the Company, as operator,
completed the re-entry of a gas well on this non-producing acreage at a cost to
the Company of approximately $189,000. Funds were provided from cash flow from
operations and existing cash balances. Operating cash flow from this re-entry
was approximately $25,000 and $17,000 for the five months and three months ended
June 30, 2000, respectively. The Company owns approximate working interests in
these wells ranging from 67% to 97%.
8
<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.
Operating cash flow from this well was approximately $14,000 and $4,000 for the
twelve months and three months ended June 30, 2000, respectively.
The Company has entered into an exploration agreement relating to non-producing
acreage in Pecos County, Texas. Approximately 3,795 gross acres and 432 net
acres have been leased and a 3-D seismic survey covering 23 square miles has
been completed at a cost to the Company of approximately $151,000 as of June 30,
2000. Two test wells will be drilled on this acreage. The Company prepaid
drilling costs of $42,875 in July, and the first test well commenced drilling
August 1, 2000. The total cost of this well to the Company is estimated at
$61,250. Depending on the results of this well and the next test well, a number
of wells may be drilled on these prospects. The Company owns approximate working
interests in these prospects ranging from 10.41% to 15.51% and a third party has
assumed operations. Funds to date for this project have been provided by cash
flows from operations.
The Company is reviewing several other 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, 2000, the Company had working capital of approximately $458,000
compared to working capital of approximately $308,000 at March 31, 2000, an
increase of $150,000. This is due primarily to higher oil and gas prices and
increased production.
The Company has a revolving credit agreement with Bank of America, 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, 1999
to increase the borrowing base to $2,200,000, with scheduled monthly reductions
of the available borrowing base of $28,000 per month beginning September 5,
1999, and extend the maturity date to August 15, 2001. As of June 30, 2000, the
balance outstanding under this agreement was $1,150,000 and the borrowing base
was $1,870,000. No required principal payments are anticipated for fiscal 2001.
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 (9.5%
at June 30, 2000). 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.
9
<PAGE>
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 June 30, 2000 and 1999
-----------------------------------------------------------------
Net income for the quarter ended June 30, 2000 was $278,436. 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 increased from $332,502 for the first quarter of fiscal 2000
to $592,807 for the same period of fiscal 2001. This increase of $260,305 or 78%
resulted primarily from higher oil and gas prices and increased production
attributable to property acquisitions and the re-entry of a gas well discussed
above as well as remedial work done. Oil and gas production quantities were
4,104 barrels ("bbls") and 134,743 thousand cubic feet ("mcf") for the first
quarter of fiscal 2000 and 4,757 bbls and 142,807 mcf for fiscal 2001, an
increase of 653 bbls, or 16%, and an increase of 8,064 mcf, or 6%. Average gas
prices increased from $1.98 per mcf for the first quarter of fiscal 2000 to
$3.25 per mcf for fiscal 2001, while average oil prices increased from $15.97
per bbl for fiscal 2000 to $26.90 per bbl for fiscal 2001.
Production costs decreased from $175,109 for the first quarter of fiscal 2000 to
$91,293 for the same period of fiscal 2001, a decrease of $83,816 or 48%.
Nonrecurring remedial repairs and plugging costs in fiscal 2000 account for this
decrease.
General and administrative expenses increased from $62,910 for the first quarter
of fiscal 2000 to $85,042 for the same period of fiscal 2001, an increase of
$22,132 or 35%. Increases in salary costs and contract services ($11,394), and
increases and changes in the timing of engineering services ($12,454) account
for this.
Depreciation, depletion and amortization based on production and other methods
decreased from $106,298 for the first quarter of fiscal 2000 to $112,000 for the
same period of fiscal 2001, an increase of $5,702 or 5%.
Interest expense increased from $25,692 for the first quarter of fiscal 2000 to
$27,822 for the same period of fiscal 2001, an increase of $2,130 or 8%, due
primarily to higher interest rates, offset in part by decreased borrowings
outstanding.
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 change by $11,500.
10
<PAGE>
2001 2002 2003
---------- ---------- ----------
Variable rate bank debt $ -- $1,150,000 $ --
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, 2000, the Company's
largest credit risk associated with any single purchaser was $72,070. 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 three months of
fiscal 2001 had increased or decreased by one cent per barrel, the Company's
pretax income would have changed by $48. If the average gas price for the first
three months of fiscal 2001 had increased or decreased by one cent per mcf, the
Company's pretax income would have changed by $1,428.
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.
11
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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 9, 2000 /s/ Nicholas C. Taylor
------------------------------
Nicholas C. Taylor
President
Dated: August 9, 2000 /s/ Linda J. Crass
------------------------------
Linda J. Crass
Treasurer, Controller, and
Assistant Secretary
12
