UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 19981999 Commission File No. 0-6694
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADOColorado 84-0627918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
214 W. TEXAS AVENUE, SUITETexas Avenue, Suite 1101 79701
MIDLAND, TEXASMidland, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (915) 682-1119
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $.50$0.50 par value None
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 twelve (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 ninety (90) days. Yes X[X] No ------ --------[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or an amendment to this Form 10-K. [_]
The[ ]
As of May 27, 1999, the aggregate market value of the registrant's common
stock of the Registrant held by non-
affiliates was approximately $1,646,573 based uponnon-affiliates (using the closing bid price of $7.625) was
approximately $1,851,098.
The number of shares outstanding of the registrant's common stock as of June 3, 1998.
As of June 3, 1998 the registrant had outstanding 1,623,289 shares of common
stock.
May
27, 1999 was 1,623,289.
DOCUMENTS INCORPORATED BY REFERENCE
The information requiredPart III of this Report is incorporated by reference from the Registrant's
Information Statement relating to its Annual Meeting of Stockholders to be held
on September 15, 1999. Such Information Statement will be filed with the
Commission not later than July 29, 1999.
TABLE OF CONTENTS
PART 1
Item 6011. Business ......................................................... 3
Item 2. Properties ....................................................... 7
Item 3. Legal Proceedings ................................................ 10
Item 4. Submission of Regulation S-KMatters to a Vote of Security Holders .............. 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters ..................................... 10
Item 6. Selected Financial Data .......................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 12
Item 8. Financial Statements and Supplementary Data ...................... 16
Item 9. Changes in and Disagreements with respect to thisAccountants on
Accounting and Financial Disclosures ............................. 31
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 31
Item 11. Executive Compensation ........................................... 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................... 31
Item 13. Certain Relationships and Related Transactions ................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 10-K has either been included or omitted because of non-applicability.
The index to the Exhibits is located on page 22 herein.8-K ...................................................... 31
Signatures ................................................................ 33
2
PART I
ITEM NO.Item 1. BUSINESS
--------Business
Mexco Energy Corporation, (the "Company"), a Colorado corporation, was
organized in 1972,(the "Company", which
reference shall include the Company's wholly-owned subsidiary) is an independent
oil and maintains its principal office at 214 W. Texas, Suite
1101, Midland, Texas. Since its incorporation, the Company has beengas company engaged in the acquisition, exploration and development of
oil and gas properties located in the United States. The bulk of its activities are, and have been since its
incorporation, conductedIncorporated in April 1972
under the State of Texas.
The Company's corporate name was formerly Miller Oil Company. In 1980 the
shareholders ofCompany, the Company amended the Articles of Incorporation ("Articles")
of the Company to change the corporatechanged its name to Mexco Energy
Corporation. Also
at thatCorporation effective April 30, 1980. At the same time, the shareholders of the
Company also approved amendments to the Articles of Incorporation resulting in a
one-for-fifty reverse stock split of the Company's common stock.
On February 25, 1997 Mexco Energy Corporation acquired all of the issued
and outstanding stock ($0.50 par value). The corporate name changeof Forman Energy Corporation, a New York corporation also
engaged in the oil and reverse stock
split became effective April 30, 1980.
The Company's operations are not divided into industry segments.gas industry.
Since its inception, the Company's entire businessCompany has been engaged in acquiring and
developing oil and gas properties and producingthe exploration for and production of oil
and gas within the United States. The Company continues to focus on the
exploration for and development of natural gas and crude oil resources, as well
as increased profit margins through reductions in operating costs. The Company's
long-term strategy is to increase production and profits, while increasing its
concentration of gas reserves.
While the Company owns oil and gas industry.
All salesproperties in other states, the majority
of oil and gasits activities are to unaffiliated customers. See the Company's
financial statements and notes thereto for an account of the Company's past
operating results attributable to its oil and gas operations.centered in West Texas. The Company acquires interests in
producing and non-producing oil and gas leases purchased from landowners and leaseholders
in areas considered favorable for oil and gas exploration, development and
production by the Company.production. In addition, the Company may acquire oil and gas prospects are acquiredinterests by
joining with otherin third party generated oil and gas operators in
drilling prospects which such third parties have generated.prospects. The Company employsmay
employ a combination of the above methods of obtaining producing acreage and
related prospects. In recent years, the Company has placed primary emphasis on
the evaluation and purchase of producing oil and gas properties.properties and re-entry
prospects.
OIL AND GAS OPERATIONS
As of March 31, 1999, gas reserves constituted approximately 78% of the
Company's total proved reserves and approximately 60% of the Company's oil and
gas revenues for fiscal 1999. With the sale of the Lazy JL field discussed
below, gas reserves constitute approximately 83% of the Company's proved
reserves. Revenues from oil and gas royalty interests accounted for
approximately 16% of the Company's oil and gas revenues for fiscal 1999.
LAZY JL OIL FIELD properties, encompassing 3,964 gross and 1,512 net acres
in Garza County, Texas, account for approximately 5% of the Company's discounted
future net cash flows from proved reserves as of March 31, 1999, and for fiscal
1999, approximately 23% of oil and gas revenues and 39% of production costs. 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 these
properties in April 1999. With an effective date of February 1, 1999, the sales
price was $600,000. The sales proceeds were used to reduce the Company's bank
debt.
GOMEZ GAS FIELD properties, encompassing 14,476 gross and 72 net acres in
Pecos County, Texas, account for approximately 22% of the Company's discounted
future net cash flows from proved reserves as of March 31, 1999, and for fiscal
1999, approximately 12% of oil and gas revenues and 5% of production costs.
3
VIEJOS GAS FIELD properties, encompassing 2,594 gross and 197 net acres in
Pecos County, Texas, account for approximately 20% of the Company's discounted
future net cash flows from proved reserves as of March 31, 1999, and for fiscal
1999, approximately 30% of oil and gas revenues and 19% of production costs.
In September 1998, the Company, held leasehold rights coveringas operator, successfully re-entered a gas
well in excessPecos County, Texas at a cost to the Company of 214,112 gross acres (3,871approximately $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 acres), allrevenue interest in this
well.
In March 1999, the Company, as operator, successfully re-entered a second
gas well in Pecos County, Texas at a cost to the Company of approximately
$67,000. 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% net revenue interest in
this well.
The Company owns interests in and operates seven producing wells and one
well that is shut in. The Company also owns partial interests in an additional
1,592 producing wells located in the states of Texas, New Mexico, Oklahoma,
Louisiana, Arkansas, Wyoming, Kansas, Colorado, Alabama, Montana, North Dakota
and Utah. The Company operates one water injection well and owns partial
interests in three additional injection wells. Additional information concerning
these properties and the oil and gas reserves of the Company is provided below.
The following table summarizes the net oil and natural gas production for
the Company, the average sales price per barrel of oil and per mcf of natural
gas produced and the average production (lifting) cost per unit of production
for the years ended March 31, 1999, 1998 and 1997.
PRODUCTION, PRICE AND COST DATA
Year Ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Oil (a):
Production (Bbls) ....................... 49,573 63,800 39,363
Revenue ................................. $ 600,285 $1,129,331 $ 869,337
Average Bbls per day .................... 136 175 108
Average sales price per Bbl ............. $ 12.11 $ 17.70 $ 22.09
Gas (b):
Production (Mcf) ........................ 482,948 432,343 236,034
Revenue ................................. $ 903,338 $ 960,786 $ 583,787
Average Mcf per day ..................... 1,323 1,185 647
Average sales price per Mcf ............. $ 1.87 $ 2.22 $ 2.47
Production cost:
Production cost ......................... $ 644,563 $ 663,525 $ 346,765
Equivalent Bbls (c) ..................... 130,064 135,857 78,702
Production cost per equivalent Bbl ...... $ 4.96 $ 4.88 $ 4.41
Production cost per sales dollar ........ $ 0.43 $ 0.32 $ 0.24
Total oil and gas revenues .............. $1,503,623 $2,090,117 $1,453,124
4
(a) Includes condensate.
(b) Includes natural gas products.
(c) Gas production is converted to equivalent bbls at the rate of 6 mcf per bbl,
representing the estimated relative energy content of natural gas to oil.
COMPETITION
The oil and gas industry is a highly competitive business. Competition for
oil and gas reserve acquisitions is significant. The Company may compete with
major oil and gas companies, other independent oil and gas companies and
individual producers and operators with significantly larger financial and other
resources. Competitive factors include price, contract terms, and types and
quality of service, including pipeline distribution. The price for oil and gas
is widely followed and is generally subject to worldwide market factors.
MAJOR CUSTOMERS
The Company had sales to the following companies that amounted to 10% or
more of revenues for the year ended March 31:
1999 1998 1997
---- ---- ----
Koch Midstream Services Company .............. 30% -- --
Navajo Crude Oil Marketing Company ........... 25% 33% 46%
Aquila Southwest Pipeline Corporation ........ -- 15% 24%
Sun Refining and Marketing Company ........... -- -- 10%
REGULATION
The Company's exploration, development, production and marketing operations
are subject to extensive rules and regulations by federal, state and local
authorities. Numerous federal, state and local departments and agencies have
issued rules and regulations, binding on the oil and gas industry, some of which
carry substantial penalties for noncompliance. State statutes and regulations
require permits for drilling operations, bonds and reports concerning
operations. Most states also have producingstatutes and regulations governing
conservation and safety matters, including the unitization and pooling of oil
and gas properties, the establishment of maximum rates of production from oil
and gas wells located thereon.and the spacing of such wells. Such statutes and regulations may
limit the rate at which oil and gas otherwise could be produced from the
Company's properties. The regulatory burden on the oil and gas industry
increases its cost of doing business and, consequently, affects its
profitability.
Currently there are no laws that regulate the price for sales of production
by the Company. However, the rates charged and terms and conditions for the
movement of gas in interstate commerce through certain of its intrastate
pipelines and production area hubs are subject to regulation under the Natural
Gas Policy Act of 1978 ("NGPA"). The construction of pipelines and hubs are, to
a limited extent, also subject to regulation under the Natural Gas Act of 1938
("NGA"). The NGA also establishes comprehensive controls over interstate
pipelines, including the transportation and resale of gas in interstate
commerce. While these NGA controls do not apply directly to the Company, their
effect on natural gas markets can be significant in terms of competition and
cost of transportation services. The Federal Energy Regulatory Commission
("FERC") administers the NGA and NGPA.
5
FERC has taken significant steps to increase competition in the sale,
purchase, storage and transportation of natural gas. FERC's regulatory programs
generally allow more accurate and timely price signals from the consumer to the
producer. Nonetheless, the ability to respond to market forces can and does add
to price volatility, inter-fuel competition and pressure on the value of
transportation and other services.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, FERC, state regulatory
bodies and the courts. Several proposals that might affect the natural gas
industry are pending before Congress and the FERC. The Company cannot predict
when or if any such proposals will become effective and their effect, if any, on
the Company's operations. Historically, the natural gas industry has been
heavily regulated and there is no assurance that the less stringent regulatory
approach recently pursued by FERC, Congress and the states will continue
indefinitely into the future.
ENVIRONMENTAL
The Company, by nature of its oil and gas operations, is subject extensive
federal, state and local environmental laws and regulations governing the
protection of the environment. The Company is in compliance, in all material
respects, with applicable environmental requirements. Although future
environmental obligations are not expected to have a material impact on the
operatorresults of five (5)operations or financial condition of the producing wells in which it owns an interest and other companies operate one
thousand five hundred thirty-six (1,536) ofCompany, there can be no
assurance that future developments, such as increasingly stringent environmental
laws or enforcement thereof, will not cause the remaining producing wells.
Approximately 74% of the Company's present value discounted at ten percent
per annum of future net revenues of total proved reserves is concentrated in
three (3) principal fields, the Lazy JL, Viejos and Gomez fields. See Note L of
the NotesCompany to Financial Statements herein. The Company owns 3,964 gross (1,512
net) acres in the Lazy JL Field located in Garza County, Texas. The Company owns
2,594 gross (197 net) acres in the Viejos Field and 14,476 gross (72 net) acres
in the Gomez Field both fields located in Pecos County, Texas.
The Company's oil and gas activities involve oil and gas drilling, which
carries high risk including the risk that no commercial oil or gas production
will be obtained. The cost of drilling, completing and operating wells is often
uncertain. Further, drilling may be curtailed or delayed as a result of many
factors, including title problems, weather conditions, delivery delays, and
shortage of pipe and equipment.
3
incur material
environmental costs.
INSURANCE
The Company is subject to all the risks inherent in the exploration for,
and development and production of oil and gas including blowouts, fires and
other casualties. The Company maintains insurance coverage customary for
operations of a similar nature, but losses can occurcould arise from uninsured risks or
in amounts in excess of existing insurance coverage.
The occurrence of an event which is not insured or not fully insured could have
an adverse impact upon the Company.
The oil and gas industry in which the Company is engaged is a highly
competitive and speculative business. Competitors include well-capitalized oil
and gas companies and other companies having financial and other resources
greater than those of the Company. The Company's ability to locate and produce
oil and gas reserves is essential to the ultimate realization of income and
value from the Company's properties and, therefore, may be considered to be a
raw material essential to the Company's business. The availability of drilling
rigs, fuel, tubular goods and other drilling and production equipment is also
essential to the Company's business. The Company relies on the acquisition of
leases and other oil and gas interests on which to explore for, develop and/or
produce oil and gas. The availability of such property is essential to the
Company's continuing business.
Crude oil and condensate produced from the properties in which the Company
owns an interest are sold to oil companies and pipeline companies at prices
posted by the principal purchasers in the Company's producing area.EMPLOYEES
As of March 31, 1998 the principal purchasers (percentage purchased) of the Company's crude
oil production were Navajo Crude Oil Marketing Company (62%) and Sun Refining
and Marketing Company (12%).
Natural gas obtained from the properties in which1999, the Company has an
interest is sold pursuant to contracts negotiated between operators of producing
wells and purchasers of natural gas (subject to the Natural Gas Policy Act). As
of March 31, 1998 the principal purchasers (percentage purchased) of the
Company's natural gas production were approximately: Aquila Southwest Pipeline
Corporation (32%) and Chevron USA Production Company (12%). The Company does not
believe that the loss of any of these purchasers would have a material impact on
Company's business because of the demand for oil, gas and casinghead gas
production. Oil and gas production is transported by trucks and pipelines,
respectively. The Company does not own any bulk storage facilities or
pipelines.
As of March 31, 1998, the Company employedhad two full-time and onethree part-time
persons.employees. The Company believes that relations with these employees are
generally satisfactory. The Company's employees are not covered by collective
bargaining arrangements. From time to time, the Company utilizes the services of
independent contractors to perform various field and other services. Experienced
personnel are available in all disciplines should the need to hire additional
staff arise.
OFFICE FACILITIES
The Company by nature of its oil and gas operations, is subject to
compliance with federal, state and local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. At the present time, however, such compliance does not require any
substantial capital expenditures, does not materially affect the Company's
earnings and in the Company's opinion will not materially affect future
operations.
The Company is not engaged in operations in foreign countries, and no
portion of sales or revenues is derived from customers in foreign countries.
4
ITEM NO. 2. PROPERTIES
----------
Office Facilities
- - -----------------
The Company occupiesmaintains its principal offices at 214 W. Texas, Suite 1101,
Midland, Texas pursuant to a lease which terminatesmonth to month lease.
The following table sets forth certain information concerning the executive
officers of the Company as of March 31, 1999.
6
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
Nicholas C. Taylor 61 President and Chief Executive Officer
Donna Gail Yanko 55 Vice President, Operations and Corporate Secretary
Linda J. Crass 44 Treasurer, Controller and Assistant Secretary
Set forth below is a description of the backgrounds of each executive
officer of the Company, including employment history for at least the last five
years.
Nicholas C. Taylor was elected President, Treasurer and Director of the
Company in lessApril 1983 and continues to serve as President and Director on a part
time basis, as required. Mr. Taylor served as Treasurer until March 1999. From
July 1993 to the present, Mr. Taylor has been involved in the independent
practice of law and other business activities. For more than one (1) year.
Oilthe prior 19 years,
he was a director and Gasshareholder of the law firm of Stubbeman, McRae, Sealy,
Laughlin & Browder, Inc., Midland, Texas, and a partner of the predecessor firm.
In 1995 he was appointed by the Governor of Texas and serves as Chairman of the
three member State Securities Board.
Donna Gail Yanko has worked as part-time administrative assistant to the
Chief Executive Officer and as Assistant Secretary of the Company until June
1992 when she was appointed Corporate Secretary. Mrs. Yanko was appointed to the
position of Vice President and elected to the Board of Directors of the Company
in 1990.
Linda J. Crass has been Controller for the Company since July 1998 and was
appointed Assistant Secretary in August 1998. In March 1999, Ms. Crass was
appointed Treasurer of the Company and continues to serve as Assistant
Secretary. From 1996 to 1998, Ms. Crass was employed in various accounting
positions by Titan Exploration, Inc.. From 1989 to 1996, Ms. Crass served as
Controller for Midland Resources, Inc.
Item No. 2. Properties
and Reserves
- - -----------------------------------TITLE TO OIL AND GAS PROPERTIES
The Company owns and operates 100%believes that its methods of four (4) producing oil wells and one
(1) well which is currently shut-in. The Company also owns partial interestsinvestigating title to its
properties are consistent with practices customary in
an additional one thousand five hundred forty-two (1,542) wells located in the
states of Texas, New Mexico, Oklahoma, Louisiana, Arkansas, Wyoming, Kansas,
Colorado, Alabama, Montana, North Dakota and Utah. Of the wells, one thousand
five hundred thirty-seven (1,537) are producing. The Company operates one (1)
water injection well and owns partial interests in two additional injection
wells. Additional information concerning these properties and the oil and gas reservesindustry,
and that such practices are adequately designed to enable it to acquire good
title to such properties. The Company's properties may be subject to one or more
royalty, overriding royalty, carried and other similar interests and contractual
arrangements customary in the industry. Substantially all of the Company is provided as follows.
Oil and Gas Properties
- - ----------------------Company's
properties are currently mortgaged under a deed of trust to secure funding
through a revolving line of credit.
The following table indicates the net oil and gas production of the Company
in each of the last five (5) years, all of which is located within the United
States.
Year Oil (Bbls) Gas (MCF)
---- ---------- ---------
7
OIL AND GAS PRODUCTION
Year Oil (Bbls) Gas (MCF)
---- ---------- ---------
1999 49,573 482,948
1998 63,800 432,343
1997 39,363 236,034
1996 29,058 186,419
1995 21,844 140,010
1994 13,390 77,126
The following table indicates the Company's total gross and net productive
oil and gas wells and the total gross and net producing acreage as of March 31,
1998.
Wells Producing
--------------------------- --------------
Oil Gas Acreage (a)
------------- ------------ --------------
Gross Net Gross Net Gross Net
----- ------ ----- ----- ------- -----
Texas 1,086 22.078 81 1.472 89,642 3,469
New Mexico 64 .331 41 .237 16,954 172
Oklahoma 12 .050 51 .171 36,358 126
Wyoming 7 .040 10 .020 4,750 21
Louisiana 48 .013 10 .010 20,469 25
Arkansas 1 .001 - - 320 -
Kansas 3 .010 13 .040 9,160 27
Colorado - - 2 .010 240 -
Alabama 5 .010 - - 800 2
Montana 21 .020 - - 7,189 4
North Dakota 86 .080 - - 24,464 16
Utah 6 .010 - - 3,766 9
----- ------ --- ----- ------- -----
TOTALS 1,339 22.643 208 1.960 214,112 3,871
5
1999.
ACREAGE AND PRODUCING WELL SUMMARY
Wells
-------------------------------- Producing
Oil Gas Acreage
--------------- -------------- -----------------
Gross Net Gross Net Gross Net
----- ------ ----- ----- ------- -----
Texas ................. 1,108 16.946 80 2.092 88,581 2,439
New Mexico ............ 59 .292 42 .190 15,834 128
Oklahoma .............. 13 .050 54 .177 37,622 126
Wyoming ............... 7 .041 17 .026 7,270 26
Louisiana ............. 49 .015 13 .023 21,789 34
Arkansas .............. 1 .001 -- -- 320 --
Kansas ................ 3 .005 13 .039 9,160 27
Colorado .............. -- -- 7 .007 1,040 1
Alabama ............... 4 .008 -- -- 640 1
Montana ............... 21 .018 -- -- 7,189 4
North Dakota .......... 95 .083 -- -- 25,744 16
Utah .................. 6 .012 -- -- 3,806 9
----- ------ --- ----- ------- -----
TOTALS ................ 1,366 17.471 226 2.554 218,995 2,811
===== ====== === ===== ======= =====
(a) A gross well or acre is one in which an interest is owned. A net well or
acre indicates the percentage of interest of thea gross well or acre owned by
the Company.
(b) Of these wells, one iswas shut in pending evaluation and two are shut in
pending possible conversion to water injection wells.a pipeline connection. A pipeline
connection was made on April 20, 1999.
The following table sets forth the results of the drilling activity by the
Company for the years ended March 31, 1999, 1998 1997 and 1996.1997.
DRILLING ACTIVITY
Net Net Net Net
Gross Productive Dry Productive Dry/(1)/Dry
Year Wells Exploratory Exploratory Development Development
- - ---- ----- ----------- ----------- ----------- -----------
1999 8 0 0 1.86 0
1998 8 0 0 2.560 .8812.56 .88
1997 12 0 .167 2.550.17 2.55 0
1996 9 0 .063 .815 0
- - -------------
/(1)/ Of the net dry development wells, 2 gross wells (.776 net) were converted
to injection wells.8
PROVED RESERVES
The following table presents, for the periods indicated, the average sales
price per unit and average production costs per unit attributable to the
Company's interest in producing oil and gas properties.
Year Ended March 31,
----------------------
1998 1997 1996
------ ------ ------
Average sales price
per product:
Oil (per bbl.) $17.70 $22.09 $17.45
Gas (per MCF) 2.22 2.47 1.57
Average production costs per
barrel equivalent (gas con-
verted to barrel equivalent
to 6 MCF per barrel of oil) 4.88 4.41 4.54
Production cost per dollar
of sales .32 .24 .35
Oil and Gas Reserves
- - --------------------
See Note Lestimates of the Notes to Financial Statements herein for information
regarding the estimated quantities ofCompany's proved oil and gas reserves, ownedwhich are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Company.SEC and Financial Accounting Standards Board. The
estimates as of March 31, 1999 are based on evaluations prepared by Joe C. Neal
and Associates, Petroleum Consultants. The estimates as of March 31, 1998 and
1997 are based on evaluations prepared by T. Scott Hickman and Associates, Inc.,
Petroleum Engineers. For information concerning costs incurred by the Company
for oil and gas operations, net revenues from oil and gas production, estimated
future net revenues attributable to the Company's oil and gas reserves, have been estimated in accordance with
regulations promulgated by the Securities and Exchange Commission.
The following table indicates estimates by the Company's Independent
Petroleum Engineers, T. Scott Hickman & Associates, Inc., of Midland, Texas, of
the availability to the
6
Company of proved oil and gas reserves, all of which are located in the United
States. For 1998, T. Scott Hickman & Associates, Inc. has estimated 245,860
barrels of oil and 3,196,594 MCF of gas for a combined $3,892,533present
value of future net revenuerevenues discounted at ten percent (10%) per annum. According10% and changes therein, see Notes to
SEC guidelines
no provisions were made for changes in product prices and costs; therefore, the Company's consolidated financial statements. The Company does not believeemphasizes that
thesereserve estimates of reserves and future net
revenues fully reflect potential future revenue values. Estimates of oil and gas
reserves are projections based on engineering information and data. There are
uncertainties inherent in the interpretation of such data,inherently imprecise and there can be no assurance that
the reserves set forth below will be ultimately realized.
Proved Developed and Undeveloped Reserves
-----------------------------------------
Present Worth of
Future Net Revenues
Oil (bbls) Gas (MCF) Discounted at 10%
---------- --------- -------------------
March 31, 1998 245,860 3,196,594 $3,892,533
March 31, 1997 436,289 2,956,219 $5,320,610
March 31, 1996 424,737 1,920,107 $4,627,526
Except for a sharp decline in crude oil prices, no major discovery or other
favorable or adverse event has caused a material change in the estimated proved
reserves since March 31, 1998 except for the increase in the Company's proved
oil and gasIn estimating reserves as of March 31, 1998 due primarily to purchases1999, average prices of $14.36 per
barrel for oil and development of producing properties and except$1.48 per mcf for normal production declines,
price and related adjustments.gas were used, which were the average
actual prices in effect for the Company's production.
The Company has not filed any oil or gas reserve estimates or included any
such estimates in reports to any other federal or foreign governmental authority
or agency within the past twelve (12) months.
The Company has no foreign operations and has no agreements with foreign
governments.
As of March 31, 1998, the Company was participating in the drilling of five
(5) wells, four (4) of which have subsequently been successfully completed.
There were no other operations of material importance to Company such as
waterfloods and pressure maintenance projects being installed by the Company,
except a pilot two injection well water flood projection in the Lazy JL Field,
Garza County, Texas and commencement of planning for a gas recycling operation
in the Viejos Field, Pecos County, Texas.
Title to Oil and Gas Properties
- - -------------------------------
Substantially all of the Company's properties are currently mortgaged under
a deed of trust to secure funding through a revolving line of credit. The
Company's properties are generally subject to the customary royalty and
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and minor encumbrances, easements and
restrictions. The Company believes that none of such burdens materially detract
from the value
7
of such properties or materially interferes with their use in the operation of
the Company's business.
As is common industry practice, little or no investigation of title is made
at the time of acquisition of undeveloped properties, other than preliminary
review of local mineral records. Title investigations, in most cases including
obtaining a title opinion of local counsel, are made before commencement of
drilling operations. The Company believes that its methods of investigating
title to its properties are consistent with practices customary in theestimated proved oil and gas industryreserves and present value of estimated
future net revenues from proved oil and gas reserves for the Company in the
periods ended March 31 are summarized below.
PROVED RESERVES
March 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Oil (Bbls):
Proved developed - Producing ............ 193,970 213,939 280,894
Proved developed - Non-producing ........ -- 5,176 --
Proved undeveloped ...................... -- 26,745 155,395
--------- --------- ---------
Total ............................ 193,970 245,860 436,289
========= ========= =========
Natural gas (Mcf):
Proved developed - Producing ............ 3,182,342 2,769,794 2,399,539
Proved developed - Non-producing ........ 1,011,971 170,738 --
Proved undeveloped ...................... -- 256,062 556,680
--------- --------- ---------
Total ............................ 4,194,313 3,196,594 2,956,219
========= ========= =========
Present value of estimated future
net revenues before income taxes ...... $3,485,196 $3,892,533 $5,320,610
========== ========== ==========
The preceding tables should be read in connection with the acquisitionfollowing
definitions:
PROVED RESERVES
Estimated quantities of such properties,oil and that
such practicesgas, based on geologic and engineering
data, appear with reasonable certainty to be economically recoverable in future
years from known reservoirs under existing economic and operating conditions.
9
PROVED DEVELOPED RESERVES
Proved oil and gas reserves expected to be recovered through existing wells
with existing equipment and operating methods. Developed reserves include both
producing and non-producing reserves. Producing reserves are adequately designedthose reserves
expected to enable itbe recovered from existing completion intervals producing as of the
date of the reserve report. Non-producing reserves are currently shut-in
awaiting a pipeline connection or in reservoirs behind the casing or at minor
depths above or below the producing zone and are considered by production either
from wells in the field, by successful drill-stem tests, or by core analysis.
Non-producing reserves require only moderate expense for recovery.
PROVED UNDEVELOPED RESERVES
Proved oil and gas reserves expected to acquire good titlebe recovered from additional wells
yet to such properties.
Undeveloped Acreage
- - -------------------be drilled or from existing wells where a relatively major expenditure is
required for completion.
UNDEVELOPED ACREAGE
The Company currently does not own any material inventory of non-productive
acreage except in a partially developed prospects except thoseprospect located in the Viejos Devonian
Field of Pecos County, Texas and the Lazy JL Spraberry Field of Garza County, Texas. The Company owns from 8.31% to 12.02% working and
royalty interests (net revenue interests 6.42% to 9.01%) in the Viejos Field of
Pecos County, Texas, consisting of 2,594 gross acres and twenty (20)20 wells.
The Company owns from 35% to 45% working interests (net revenue interests
from 26.25% to 33.84%) in twenty-three (23) wells in the Lazy JL (Lower
Spraberry) Field of Garza County, Texas, consisting of 3,964 gross acres. The Company
is unable to determine the extent of future development, if any, in these two (2) fields.
ITEM NO.this field.
Item No. 3. LEGAL PROCEEDINGS
-----------------Legal Proceedings
The Company is a plaintiff in a class action lawsuit against a gas
purchaser involving a contract price dispute. The Company does not involved inexpect any
pending or threatened legal proceedings.
ITEM NO.expenses of a material nature to arise from this class action claim. The
ultimate outcome is uncertain.
Item No. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter has beenSubmission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year being reported upon.
8
ended March 31, 1999.
PART II
-------
ITEM NO.Item No. 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS.
-------
"Common Stock"
- - --------------Market For Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is traded in the over-the-counter market.market under
the symbol MEXC. The registrar and transfer agent is American Securities
Transfer & Trust, Denver, Colorado. As of March 31, 1999 the Company had 1,423
shareholders of record and 1,623,289 shares outstanding.
10
PRICE RANGE OF COMMON STOCK
Bid Price
---------------------
High Low
------- -----
1999: (1)
April - June 1998 ........................ 7 3/4 7 3/4
July - September 1998 .................... 7 3/4 7 3/4
October - December 1998 .................. 7 3/4 7 1/2
January - March 1999 ..................... 7 11/16 7 1/2
1998: (1)
April - June 1997 ........................ 5 1/2 5 1/2
July - September 1997 .................... 7 1/2 5 1/2
October - December 1997 .................. 7 3/4 7 1/2
January - March 1998 ..................... 7 3/4 7 1/2
(1) Reflects high and low bid information received from National Quotation
Bureau, LLC.
(2) These bid quotations for the calendar periods indicated are shown on the
following table.
Bid Price
----------------
High Low
---- ---
1998 April - June 1997 $5.50 $5.50
July - September 1997 7.50 5.50
October - December 1997 7.75 7.50
January - March 1998 7.75 7.50
1997 April - June 1996 $4.50 $3.50
July - September 1996 4.25 3.50
October - December 1996 4.50 4.50
January - March 1997 5.50 5.50
Bid quotations representingrepresent prices between dealers, do not includewithout retail
mark up, mark downmarkup, markdown or commissions, and do not necessarily representreflect actual transactions.
Number of Shareholders
- - ----------------------
As of March 31, 1998, there were approximately 1,443 shareholders of record
of(3) On May 27, 1999, the Company's common stock.
Dividends
- - ---------bid price was 7 5/8.
The Company has not paid any dividends on its common stock, and it is the
payment
of any dividends at a future date would be dependent upon the earnings,
financial condition and capital needspresent policy of the Company at such time. Paymentnot to do so, but to retain its earnings for
future growth and business activities. The Company is also subject to certain
loan covenants which include restrictions on payment of dividends is currently restricted by the terms of the Company's bank loan
agreement.
9
ITEM NO.dividends.
Item No. 6. SELECTED FINANCIAL DATA
-----------------------Selected Financial Data
Years Ended March 31,
------------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
1994
----------- ---------- ---------- ---------- --------------------- ----------- ----------- -----------
Oil & gasStatement of Operations Data:
Operating revenues .............................. $ 1,510,005 $ 2,106,338 $ 1,458,741 $ 816,788 $ 558,587
Operating income $ 2,090,117 $1,453,124 $ 798,589 $ 543,267 $ 374,322
Proceeds from settlement of
litigation - - - - 1,160,933
Administrative service charges and
reimbursements 5,112 5,009 7,380 10,123 26,553(loss) ......................... (281,099) (1,558,335) 521,123 195,020 99,491
Other income 13,230 7,774 28,104 20,531 18,071(expense) .......................... (144,675) (134,891) (5,621) 17,285 15,334
Net income (loss) ............................... (425,774) (1,323,657) 377,867 200,606 104,843 1,028,718
Net Income (loss) per share - basic ( .83) .27 .15 .09 .88............. (0.26) (0.83) 0.27 0.15 0.09
Net Income (loss) per share - diluted ( .83) .27 .15 .09 .88
Net Income (loss) from continuing
operations (1,323,657) 377,867 200,606 104,843 1,028,718
Net Income (loss) from continuing
operations per share ( .83) .27 .15 .09 .88
EBITDA/(1)/........... (0.26) (0.83) 0.27 0.15 0.09
Weighted average shares outstanding ............. 1,623,289 1,594,752 1,423,229 1,342,628 1,173,229
Balance Sheet Data:
Properties and equipment, net ................... $ 1,252,539 1,006,119 474,697 285,548 1,308,300
Operating Cash flow/(1)/ 1,118,566 866,931 396,409 255,649 1,302,7603,749,400 $ 4,078,053 $ 4,777,132 $ 2,331,344 $ 1,648,465
Total Assets $assets .................................... 4,043,015 4,542,486 5,109,199 2,612,039 1,951,896
1,868,369
Total Long-Term Debtdebt ...................................... 1,784,000 1,822,000 1,637,000 - - -
Weighted average shares
outstanding 1,594,752 1,423,229 1,342,628 1,173,229 1,173,229
Dividends - - - - --- --
Stockholders' equity ............................ 2,173,581 2,599,355 2,923,012 2,545,145 1,844,539
Cash Flow Data:
Cash provided by operations ..................... $ 532,171 $ 1,118,566 $ 866,931 $ 396,409 $ 255,649
EBITDA(1) ....................................... $ 635,260 $ 1,252,539 $ 1,006,119 $ 474,697 $ 285,548
/(1)/(1) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization. Management of the Company
believes that EBITDA and operating cash flow may provide additional information about the Company's
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA and operating cash flow areis a financial measuresmeasure commonly
used in the oil and gas industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of the Company's profitability or liquidity.
1011
ITEM NO.Item No. 7. MANAGEMENT'S DISCUSSIONManagement's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements and the notes
thereto included in Item 8 of this report.
LIQUIDITY AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITIONCAPITAL RESOURCES AND RESULTS OF OPERATIONS
-----------------------------------
Liquidity and Capital Resources and Commitments
- - -----------------------------------------------
As indicated by the Statements of Cash Flows for the past three fiscal
years,COMMITMENTS
Historically, the Company has funded its operations, acquisitions,
exploration and development expenditures from cash generated by operating
activities, bank borrowings and issuance of common stock.
In fiscal 1999, the Company used cash provided by operations and existing
cash balances to fund its oil and gas property acquisitions and development.
Working capital as of March 31, 1999 was a negative $307,819 due to current
maturities of outstanding bank debt of $516,000. On April 21, 1999, the Company
sold all of its oil and gas interests in Lazy JL field properties located in
Garza County, Texas for $600,000 cash, adjusted for revenues and expenses from
the effective date of February 1, 1999 through the date of closing. The sales
proceeds were used to reduce the Company's outstanding debt under its line of
credit with Bank of America.
The Company has a revolving credit agreement with Bank of America, formerly
NationsBank of Texas, which provides for a credit facility of $3,000,000,
revolving line of credit withsubject to a borrowing base of $2,200,000 which is reduced by $50,000 each month throughout the term of the
loan.determination. The loan is reviewed by the bank annually and maturescredit facility was amended on
August 15, 1999.
The Company currently has outstanding borrowings1998 to increase the borrowing base to $2,085,000, with scheduled
monthly reductions of $1,822,000 against the line.
At the current level of borrowing principal payments will be due$43,000 beginning September 5, 1998.1998, and to extend the
maturity date to August 15, 2000. At March 31, 1999, the borrowing base was
$1,784,000. On April 21, 1999, with the sale of the Lazy JL field properties,
the borrowing base was $1,639,107. The obligationsborrowing base is subject to
redetermination on or about August 1, each year. Interest under this agreement
is payable monthly at prime rate (7.75% at March 31, 1999 and 8.5% at March 31,
1998). The balance outstanding under this credit facility was $1,784,000 and
$1,822,000 at March 31, 1999 and 1998, respectively. This agreement generally
restricts the loan agreement areCompany'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. The credit facility
is secured by substantially all of the Company's oil and gas properties of the Company and the
common stock of itsit's subsidiary. The loan agreement contains certain covenants relating to the
financial condition of the Company. Interest is payable monthly at the prime
rate as established by the bank.
The Company also has a letter of credit with NationsBankBank of Texas, N.A.,America, Midland,
Texas, which provides for unsecured borrowings up to $25,000 in lieu of a
plugging bond with the Railroad Commission covering properties operated by the
Company.
During the first quarter of fiscal 1998, the Company increased capital by
$1,000,000 from the issuance of 200,000 shares of common stock at $5.00 per
share through a private placement. $500,000Proceeds of these proceeds$500,000 were used to reduce the
principal borrowings under the line of credit and the remaining proceeds werecredit. The remainder was used for
property acquisitions and drilling activity.
The Company believes that it will have sufficient capital available from
borrowings along with cash flows from operations to fund any future capital
expenditures and to meet its financial obligations.
In past years, theCrude oil and natural gas industry from time to time has suffered
because ofprices have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price decreases for oil. An oversupply of petroleum in both the
domestic and international markets appeared to be the reason for the price
decline. The Company is unable to predict price changes or the possible effectshave a significant
impact on the Company's financial condition and liquidity. However, management
believes the Company at this time. Past changescan maintain adequate liquidity for future needs.
RESULTS OF OPERATIONS
12
FISCAL 1999 COMPARED TO FISCAL 1998
Oil and gas sales decreased from $2,090,117 in tax laws and1998 to $1,503,623 in 1999,
a decrease of $586,494 or 28%. This decrease was primarily attributable to the
decline in oil and gas prices have hadand oil production during the effect industry-wideyear, offset in part
by increased gas production from the acquisition and development of limiting funds available for oil and gas
exploration.
Resultsproperties. The average oil price decreased from $17.70 in 1998 to $12.11 per
bbl in 1999, a decrease of Operations
- - ---------------------
Business Segment
----------------$5.59 per bbl or 32%. The Company only hasaverage gas price decreased
from $2.22 in 1998 to $1.87 per mcf in 1999, a single linedecrease of business which is$0.35 per mcf or 16%.
Oil production decreased from 63,800 bbls in 1998 to 49,573 bbls in 1999, a
decrease of 14,227 bbls or 22%. Gas production increased from 432,343 mcf in
1998 to 482,948 mcf in 1999, an increase of 50,605 mcf or 12%.
Other revenues decreased from $16,221 in 1998 to $6,382 in 1999, a decrease
of $9,839 or 61%, primarily due to the recovery of a bad debt in 1998. There was
no such item in 1999.
Production costs decreased from $663,525 in 1998 to $644,563 in 1999, a
decrease of $18,962 or 3%.
Depreciation, depletion and amortization decreased from $2,808,753 in 1998
to $909,965 in 1999, a decrease of $1,898,788 or 68%, due primarily to an
impairment of oil and gas acquisition, exploration and production.
11
Fiscalproperties in 1998 Compared to Fiscal 1997
-----------------------------------
During the year the Company participated in the successful drilling and
completion of six (6) producing wells (each with approximately 43% working
interest and 32% net revenue interest) in the Lazy JL Field, Garza County,
Texas. The Company also participated in the drilling$1,742,386. There was an
additional impairment of one (1) well which has
been converted to a water injection well and one (1) well which is currently
shut in pending possible conversion to a water injection well or a salt water
disposal well.
A decrease in working capital of $124,061 for fiscal 1998, compared to a
decrease of $124,050 for fiscal 1997 was the result of increased acquisition,
drilling and development costs.
Gross revenue from oil and gas productionproperties in the first quarter of fiscal
1999 of $288,393.
General and administrative expenses increased from $192,395 in 1998 compared to
$236,576 in 1999, an increase of $44,181 or 23%. This increase was primarily
attributable to increased salaries and benefits ($55,402), franchise taxes
($14,328), engineering and geological costs ($11,186), officers' and directors'
insurance ($6,708), and director fees ($6,700), offset in part by decreases in
legal fees ($22,671), accounting fees ($16,625) and contract services ($12,407).
Interest income increased from $2,121 in 1998 to $6,394 in 1999, an
increase of $4,273, due to the increased funds invested in a money market
account.
Interest expense increased from $137,012 in 1998 to $151,069 in 1999, an
increase of $14,057 or 10%. This increase was attributable to increased
borrowing during 1999, offset in part by lower interest rates.
FISCAL 1998 COMPARED TO FISCAL 1997
byOil and gas sales increased from $1,453,124 in 1997 to $2,090,117 in 1998,
an increase of $636,993 (44%)or 44%. Revenues increasedThis increase was primarily due to the increase
in oil and gas production from the acquisition and development of oil and gas
properties.properties, offset in part by declining oil and gas prices. The average 1998oil
price for crude oil isdecreased from $22.09 in 1997 to $17.70 per barrel comparedbbl in 1998, a decrease of
$4.39 per bbl or 20%. The average gas price decreased from $2.47 in 1997 to
the$2.22 per mcf in 1998, a decrease of $0.25 per mcf or 10%. Oil production
increased from 39,363 bbls in 1997 priceto 63,800 bbls in 1998, an increase of $22.09. Average prices received per MCF24,437
bbls or 62%. Gas production increased from 236,034 mcf in 1997 to 432,343 mcf in
1998, an increase of gas for 1998 and 1997 were $2.22
and $2.47, respectively.196,309 mcf or 83%.
Production costs increased from $346,765 in 1997 to $663,525 in 1998, an
increase of $316,760 (91%) from 1997.or 91%. Of this increase, $43,920 is attributable to
increased production taxes relating to the increase in productionoil and revenues as stated abovegas sales with
the remaining $272,840 being attributable to increased operating expenses due to the
acquisition and development of new wellsoil and gas properties and the related increase
in production in 1998.
Interest income decreased $5,045 (70%) due13
Other revenues increased from $5,617 in 1997 to the reduced funds invested$16,221 in a money market account.
Other income increased $10,5011998, an
increase of $10,604, primarily due to the recovery of a bad debt.
Overall, costs and expenses increased in 1998 by $2,851,280 (300%).
Depreciation, depletion and amortization increased from $477,830 in 1998 as compared1997 to
$2,808,753 in 1997, byan increase of $2,330,923 (488%)or 488%, primarily due to an
impairment of oil and gas properties of $1,742,386 which resulted from
significantly lower oil prices and the related downward adjustment of estimated
reserves. General and administrative expenses increased
$79,372 (70%) primarily due to increased salaries, legal fees, accounting fees
and engineering costs.
Fiscal 1997 Compared to Fiscal 1996
-----------------------------------
The Company participated in the drilling of twelve (12) gross (2.717 net)
wells, of which nine (9) were productive oil wells in fiscal 1997 and one well
which has been converted to a water injection well.
A decrease in working capital of $124,050 for fiscal 1997, compared to an
increase of $20,300 for fiscal 1996 was the result of increased acquisition,
drilling and development costs.
Gross revenue from oil and gas production increased in 1997 compared to
1996 by $654,535 (82%) and the Company reflected net earnings of $377,867 which
is an increase of $177,261 (88%). Revenues increased due to the increase in oil
and gas production from acquisition and development of oil and gas properties in 1998 also
contributed to this increase.
General and theadministrative expenses increased from $113,023 in 1997 to
$192,395 in 1998, an increase in oil and gas prices during
12
the current year. The average 1997 price for crude oil is $22.09 per barrel
compared to the 1996 price of $17.45. Average prices received per MCF of gas
for 1997 and 1996 were $2.47 and $1.57, respectively.
Administrative services income and reimbursement to the Company decreased
$2,371 (32%) due to the plugging and abandonment of two operated wells during
the prior year.
Production costs increased $73,873 (27%) from 1996. Of this$79,372 or 70%. This increase $37,897 iswas primarily
attributable to increased production taxes relating to the increase
in productionengineering and revenues as stated above with the remaining $35,976 being
attributable to increased operating expenses due to the acquisitiongeological costs ($19,731), legal fees
($16,875), accounting fees ($15,375) and development of new wells in 1997. Production costs per barrel equivalent
actually declined by 3%contract and consulting services
($14,582).
Interest income decreased $10,120 (59%)from $7,166 in 1997 to $2,121 in 1998, a decrease
of $5,045 or 70%, due to the reduced funds invested in a money market account.
Overall, costs and expensesInterest expense increased from $12,787 in 1997 by $328,637 (53%).
Depreciation, depletion and amortization increasedto $137,012 in 1997 as compared to 1996
by $215,438 (82%)1998, an
increase of $124,225, due to increased production, acquisitionborrowings and developmenttime outstanding under the
bank line of oil and gas properties. General and administrative expenses increased $26,539
(31%) primarily due to increased salaries, legal fees, accounting fees and
engineering costs.
Other Matters
- - -------------
Forwarding-Looking Statements
-----------------------------credit.
OTHER MATTERS
FORWARDING-LOOKING STATEMENTS
Certain statements in this Form 10-K may be deemed to be "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 facts, included in this Form 10-K that address activities, events
or developments that the Company expects, projects, believes or anticipates will
or may occur in the future, including such matters as oil and gas reserves,
future drilling and operations, future production of oil and gas, future net
cash flows, future capital expenditures and other such matters, are
forward-
lookingforward-looking statements. These statements are based on certain assumptions
and analysis made by management of the Company in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
including general economic and business conditions, prices of oil and gas, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company, changes in laws or regulations and other factors, many of which are
beyond the control of the Company.
Recently Issued Accounting Standards
------------------------------------YEAR 2000 ISSUE
The Company adoptedis conducting an assessment of the provisionsbusiness risks associated
with the new century. These risks relate to the inability of Statement of Financial Accounting
Standard No. 128, Earnings Per Share, duringcertain software
and embedded logic control devices to distinguish between the quarter ended December 31,
1997. Sinceyear 1900 and the
Company has only Common Stock outstandingyear 2000. If not corrected, the adoption had no
effect on the Company's financial statements at March 31, 1998.
13year 2000 could cause such devices and software
to fail or create erroneous results.
14
Year 2000 Issue
---------------
The Company's third-partyaccounting software vendor is currently modifying the systemhas modified its software to
accurately handle the year 2000 issue with all necessary changes scheduled to
be completed by December 31, 1998. There will benew century, at no additional costscost to the Company.
Therefore, the Company does not expect to incur any material expense or risk
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 50 percent complete, and is scheduled
for these modifications as the updates are includedcompletion by September 30, 1999.
The failure to correct, on a timely basis, a material Year 2000 problem
could result in an interruption in the monthly
support contract. Therefore,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 has determined thatcannot ascertain at this time
whether the yearconsequences of Year 2000 issues directly related to its information systemsfailures will not have a material impact on
its business, operations, nor its financial position. The Company
cannot determine the effect, if any, that the year 2000 issues will have on its
vendors, customers, other businesses and governmental entities.
ITEM NO. 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
The Company is not subject to market risk as to currency exchange since the
Company does not deal in foreign currency. The Company also has not dealt in
derivatives. However, the Company is subject to significant changes in
connection with sales of crude oil and natural gas.
ITEM NO. 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - --------------------------------------------------------
See Index to Financial Statements elsewhere herein.
ITEM NO. 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
--------------------
There were no changes or disagreements.
14
PART III
--------
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- - --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent
(10%) of a registered classfuture financial results, liquidity, condition or reporting.
RISK FACTORS
All of the Company's equity securities,financial instruments are for purposes other than
trading.
Interest Rate Risk. The following table summarizes maturities for the
Company's variable rate bank debt, which is tied to file withprime rate. If the Securitiesinterest
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 $17,840.
1999 2000
--------- ----------
Variable rate bank debt $ 516,000 $1,268,000
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 Exchange Commissiongas production sold to various purchasers and the
National Associationreceivables are generally uncollateralized. At March 31, 1999, the Company's
largest credit risk associated with any single purchaser was $27,510. The
Company has not experienced any significant credit losses.
Volatility of Securities
Dealers, Inc. initial reportsOil and Gas Prices. The Company's revenues, operating results
and future rate of ownershipgrowth are dependent upon the prices received for oil and
reports of changesgas. Historically, the markets for oil and gas have been volatile and are likely
to continue to be so in ownership
of Common Stock and other equity securities of the Company. Officers, Directors
and greater than ten percent (10%) shareholders are required by SEC regulation
to furnishfuture. Various factors beyond the Company with copies of all Section 16(a) forms they file.
Ownership of and transactions in Company stock by executive officers and
Directorscontrol of the
Company are requiredaffect the price of oil and gas, including but not limited to be reported toworldwide
and domestic supplies of oil and gas, the Securities and
Exchange Commission pursuant to Section 16(a)ability of the Securities Exchange Act of
1934. On June 24, 1998, Terry L. Cox and Donna Gail Yanko each filed a Form 4
to report stock options which were granted on April 2, 1998. Also on June 24,
1998 Thomas R. Craddick, Thomas Graham, Jr., Jack D. Ladd and Gerald Martin each
filed a Form 3 to report the initial number of shares owned upon their election
as directors. Thomas Graham, Jr. also reported stock options which were granted
on April 2, 1998 on his Form 3.
ITEM NO. 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Name Age Position
---- --- --------
Thomas R. Craddick 54 Director
William G. Duncan, Jr. 55 Director
Thomas Graham, Jr. 64 Chairmanmembers of the
BoardOrganization of Directors
Jack D. Ladd 48 Director
Gerald R. Martin 52 Director
Nicholas C. Taylor 60 Director, PresidentPetroleum Exporting Countries to agree to and Treasurer
Donna Gail Yanko 54 Director, Vice Presidentmaintain oil price
and Secretary
On March 2, 1998,production controls, political instability or armed conflict in
oil-producing regions, the above persons were elected to serve onprice and level of foreign imports, the Boardlevel of
Directors forconsumer 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 term of one year and until their successors are duly elected and
qualified.
The following is a brief accountreduction in the carrying value of the business experience duringCompany's oil
and gas properties. If the last
five yearsaverage oil price for fiscal 1999 had increased or
decreased by one cent, the Company's pretax loss would have decreased or
increased by $496. If the average gas price for fiscal 1999 had increased or
decreased by one cent, the Company's pretax loss would have decreased or
increased by $4,829. 15
Uncertainty of each directorReserve Information and executive officer:
Thomas R. Craddick, 54, was elected toFuture Net Revenue Estimates.
Estimates of oil and gas reserves, by necessity, are projections based on
engineering data, and there are uncertainties inherent in the Boardinterpretation of
Directors of the
------------------
Company in 1997 and is a member of the Compensation Committee. Since 1968 to
the present, Mr. Craddick has served as State Representative for the State of
Texas. Throughout his tenure of the past 15 sessions of the Legislature,
Representative Craddick has served on various committees and conferences, most
recently serving on the Legislative Budget Board, Legislative Audit Committee,
the State Affairs Committee and the Revenue & Public Education Funding, Select
Committee, along with serving as Chairman of the House Ways and Means Committee
and Chairman of the Republican Legislative Caucus. For more than the past five
years Mr. Craddick has been Sales Representative for Mustang Mud, Inc.,such data as well as the ownerprojection of Craddick Propertiesfuture rates of production and Owner and Presidentthe timing
of Craddick, Inc.
bothdevelopment expenditures. Reserve engineering is a subjective process of
which invest inestimating underground accumulations of oil and gas propertiesthat are difficult to
measure. Estimates of economically recoverable oil and real estate.
15
William G. Duncan, 55, since April 1995, has been the Presidentgas reserves and of
-----------------
Southeastern Financial Services, Louisville, Kentucky, prior tofuture net cash flows depend upon a number of variable factors and assumptions,
such as future production, oil and gas prices, operating costs, development
costs and remedial costs, all of which he had
served as Senior Vice President and Chief Investment Officer since October 1991.
For the previous twenty-five (25) years, he held several positions at Liberty
National Bank and Trust Company, Louisville, Kentucky, serving as Senior Vice
President and Managermay vary considerably from actual
results. As a result, estimates of the bank's Personal Trust Investment Section, membereconomically recoverable quantities of
Liberty's Trust Executive Committee,oil and several positions in Liberty's
Commercial Banking Division. Mr. Duncan was appointedgas and of future net cash flows expected therefrom may vary
substantially. Moreover, there can be no assurance that the Company's reserves
will ultimately be produced or that any undeveloped reserves will be developed.
Reserve Replacement Risk. The Company's future success depends upon its
ability to the position of
Director on July 22, 1994, after the resignation of Thomas Graham, Jr. to become
a United States Ambassador,find, develop or acquire additional, economically recoverable oil and
was elected a Director in 1994.
Thomas Graham, Jr., 64, was appointed Chairman of the Board of Directors by
------------------
the Directorsgas reserves. The proved reserves of the Company effective July 1997, having servedwill generally decline as
a director
from 1990 through 1994. From 1994 through May 1997, Mr. Graham served as a
United States Ambassador. For more than five years prior thereto, Mr. Graham
served asreserves are depleted, except to the General Counsel, United States Arms Controlextent the Company can find, develop or
acquire replacement reserves.
Drilling and Disarmament
Agency, asOperating Risks. Drilling and operating activities are subject
to many risks, including well as Acting Directorblow outs, cratering, fires, releases of toxic
gases and as Acting Deputy Directorother environmental hazards and risks, any of such agency
successively,which could result in
1993substantial losses to the Company. In addition, the Company incurs the risk that
no commercially productive reservoirs will be encountered and 1994. He has served as Presidentthere is no
assurance that the Company will recover all or any portion of its investment in
wells drilled or re-entered.
Marketability of Production. The marketability of the Lawyers
Alliance for World Security since mid 1997.
Jack D. Ladd, 48, was elected toCompany's production
depends in part on the Boardavailability, proximity and capacity of Directorsnatural gas
gathering systems, pipelines and processing facilities. Federal and state
regulation of the Company in
------------
1997 and is a member of the Compensation Committee. Mr. Ladd is currently a
shareholder of the law firm of Stubbeman, McRae, Sealy, Laughlin & Browder, Inc.
Mr. Ladd is also a partner in various real estate partnerships, an arbitrator
for the National Association of Securities Dealers, and a mediator certified by
the Attorney Mediation Institute. Mr. Ladd has served as a director and
advisory director of other oil and gas corporations.
Gerald R. Martin, 52, co-founded River Hill Capital, LLCproduction and transportation, tax and energy
policies, changes in June 1996. The
----------------
prior twenty-three (23) years, Mr. Martin had worked for J.J.B. Hilliard, W. L.
Lyons, Inc., seventeen (17) years were spent as Senior Vice President of
Investment Banking. Mr. Martin has experience as a financial consultant or
advisorsupply and demand and general economic conditions could all
affect the Company's ability to several local government agenciesproduce and non-profit organizations
including Louisville Water Company and Louisville's Municipal Transit System.
In December 1996, he completed fifteen years of volunteer service as Vice
Chairman of the Board of Commissioners of the Housing Assistance Corporation
(LHAC). Mr. Martin is a director of Orr Safety Corporation and National
Healthcare Services, Inc., both in Louisville. He was elected to the Board of
Directors of the Company in 1997 and is a member of the Compensation Committee.
Nicholas C. Taylor, 60, was elected President, Treasurer and Director of
------------------
the Company in 1983 and serves in such capacities on a part time basis, as
required. From 1974 to 1993, he was a director and shareholder of the law firm
of Stubbeman, McRae, Sealy, Laughlin & Browder, Inc., Midland, Texas, and a
partner of the predecessor firm. Since 1993 he has been engaged in the practice
of law and investments, primarily inmarket its oil and gas.
In 1995 he was appointed by
the GovernorItem No. 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of TexasIndependent Certified Public Accountants .............. 17
Consolidated Balance Sheets ..................................... 18
Consolidated Statements of Operations ........................... 19
Consolidated Statements of Stockholders' Equity ................. 20
Consolidated Statements of Cash Flows ........................... 21
Notes to serve as a member and currently serves as Chairman of
the State Securities Board.
Donna Gail Yanko, 54, has worked as part-time administrative assistant to
----------------
the President and controlling shareholder for the past nine years. She served as
Assistant Secretary of the Company from 1986 to 1992 and was elected a Director
and appointed Vice President of the Company in 1990 and Secretary in 1992.Consolidated Financial Statements ...................... 22
16
ITEM NO. 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth all cash compensation received by the
executive officers and directorsReport of the Company as a group setting forth
individually executive officers and directors who received in excess of $60,000,
including cash bonuses.
Summary Compensation Table/(1)/
-------------------------------
Name and
Principal Position Year Salary
-------------------- ---- -------
5 Officers & 1998 $44,825
Directors 1997 $52,381
as a group 1996 $38,400
- - ------------
/(1)/ Directors are paid $100 per meeting of which there were five (5) for the
period.
ITEM NO. 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth as of March 31, 1998 the owners of five
percent (5%) or more of its common stock:
(1) Title (2) Name and (3) Amount and (4) Percent
of Class Address of Nature of Beneficial of Class
Beneficial Owner Ownership
- - ----------------------------------------------------------------------------
Common Nicholas C. Taylor/(1)/ 1,110,770/(2)/ 68.43%
214 West Texas
Suite 1101
Midland, TX 79701
Common Howard E. Cox, Jr. 194,000 11.95%
One Federal Street
26th Floor
Boston, MA 02110
- - -------------
/(1)/ Mr. Taylor, by virtue of his share of ownership, may be deemed to be a
"parent" of the Company as defined under Rule 405 promulgated by the
Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933 as amended (the "Securities Act").
/(2)/ Includes 1,079,770 shares which are held by Mr. and Mrs. Taylor as
community property and 31,000 shares held as custodian for their minor
daughter. Mr. and Mrs. Taylor disclaim any beneficial ownership of 46,000
shares owned by each of their two adult children.
17
The information set forth below shows as of June 1, 1998, all shares of the
Company's common stock beneficially or indirectly owned by all directors, and
all directors and officers as a group.
The following table sets forth the ownership of executive officers and
directors of the Company.
(1) Title (2) Name and (3) Amount and (4) Percent
of class Address of Nature of Bene- of Class
Beneficial Owner ficial Ownership
- - ---------------------------------------------------------------------
Common Nicholas C. Taylor 1,110,770/(1)/ 68.43%
Thomas Graham, Jr. 77,000 4.74%
Gerald R. Martin 15,040 .93%
Donna Gail Yanko 7,340 .45%
Thomas R. Craddick 5,000 .31%
Jack D. Ladd 1,478 .09%
Terry L. Cox 200 .01%
All Directors and
Officers as a Group 1,215,828 74.90%
- - ------------
/(1)/ Includes 1,079,770 shares which are held by Mr. and Mrs. Taylor as
community property and 31,000 shares held as custodian for their minor
daughter. Mr. and Mrs. Taylor disclaim any beneficial ownership of 46,000
shares owned by each of their two adult children.
ITEM NO. 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company's principal shareholder owns working interests varying from
93.75% to 100% in certain wells which it operates. The Company operates these
wells on a contract basis charging the same or greater administrative fees as
the previous operator. See Note I of the Notes to Financial Statements.
18
PART IV
-------
ITEM NO. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions
under which they are required or because the information is
included in the financial statements or notes thereto.
3. Exhibits
The exhibits and financial statement schedules filed as a part of
this report are listed below according to the number assigned to it in
the exhibit table of Item 601 of Regulation S-K:
(3)(i) Articles of Incorporation - See exhibit E-1.
(ii) Bylaws - incorporated by reference to the Company's Annual
Report to the Securities and Exchange Commission on Form
10K dated June 23, 1995.
(4) Instruments defining the rights of security holders,
including indentures - None.
(9) Voting Trust Agreement - None, consequently, omitted.
(10) Material Contracts:
Stock Option Plan - incorporated by reference to the
Amendment to Schedule 14C Information Statement filed on
August 13, 1997.
Bank Line of Credit - See Exhibit E-2.
(11) Statement regarding computation of per share earnings -Not
Applicable.
(12) Statement regarding computation of ratios - Not
Applicable.
19
(13) Annual Report to security holders, Form 10-Q or quarterly
report to security holders - Not Applicable.
(18) Letter regarding change in accounting principles - No
change during fiscal 1998.
(19) Previously unfiled documents - No documents have been
executed or in effect during the reporting period which
should have been filed, consequently, this exhibit has
been omitted.
(22) Subsidiaries of the Company -
Name of Subsidiary: Forman Energy Corporation
Other Name Under Which Subsidiary Conducts Business: None
Jurisdiction of Incorporation: New York
(23) Published report regarding matters submitted to vote of
security holders - None, consequently omitted.
(24) Consent of experts - Not applicable.
(25) Power of Attorney - There are no signatures contained
within this report pursuant to a power of attorney,
consequently, this exhibit has been omitted.
(28) Additional Exhibits - None.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the last quarter of
the period covered by this report.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
By: /s/ Nicholas C. Taylor
-----------------------------
Nicholas C. Taylor, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Nicholas C. Taylor President, June 24, 1998
- - ------------------------- Treasurer,
Nicholas C. Taylor Director
/s/ Donna Gail Yanko Vice President, June 24, 1998
- - ------------------------- Director
Donna Gail Yanko
/s/ Jack D. Ladd Director June 24, 1998
- - -------------------------
Jack D. Ladd
/s/ Thomas R. Craddick Director June 24, 1998
- - -------------------------
Thomas R. Craddick
/s/ Terry L. Cox Controller June 24, 1998
- - ------------------------
Terry L. Cox
21
EXHIBIT INDEX
-------------
Number Exhibit Page
- - ------ ------- ----
(1) *
(2) *
(3)(i) Articles of Incorporation E-1
(ii) Bylaws **
(4) Instruments defining the rights of security
holders, including indentures Omit
(5) *
(6) *
(7) *
(8) *
(9) Voting Trust Agreement Omit
(10) Material Contracts
(a) Stock Option Plan ***
(b) Bank Line of Credit E-2
(11) Statement regarding computation of per
share earnings Omit
(12) Statement regarding computation of ratios Omit
(13) Annual Report to security holders, Form 10-Q,
or quarterly report to security holders Omit
(14) *
(15) *
(16) *
(17) *
(18) Letter regarding change in accounting
principles Omit
(19) Previously unfiled documents Omit
(20) *
(21) *
(22) Subsidiaries of the Company Omit
(23) Published report regarding matters submitted
to vote of security holders Omit
(24) Consent of experts Omit
(25) Power of Attorney Omit
(26) *
(27) *
(28) Additional Exhibits Omit
* This exhibit is not required to be filed in accordance with Item 601 of
Regulation S-K.
** Incorporated by reference to the Company's Annual Report to the Securities
& Exchange Commission on Form 10-K, dated June 23, 1995.
*** Incorporated by reference to the Amendment to Schedule 14C Information
Statement filed on August 13, 1998.
22
MEXCO ENERGY CORPORATION & SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
--------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 1998, 1997, AND 1996 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED MARCH 31, 1998, 1997, AND 1996 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 1998, 1997, AND 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------Independent Certified Public Accountants
Board of Directors
Mexco Energy Corporation
We have audited the accompanying consolidated balance sheets of Mexco Energy
Corporation and Subsidiary, as of March 31, 19981999 and 1997,1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1998.1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mexco Energy
Corporation and Subsidiary, as of March 31, 19981999 and 1997,1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended March 31, 19981999 in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
May 15, 1998
F-214, 1999
17
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of March 31,
ASSETS 1998 1997
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 241,348 $ 40,813
Accounts receivable, including $8,473 in 1998 and $6,042 in 1997
from a related party (note I) 207,900 291,254
Prepaid expenses 15,185 -
----------- ----------
Total current assets 464,433 332,067
PROPERTY AND EQUIPMENT - AT COST (notes F and L)
Oil and gas properties, using the full cost method of
accounting 9,915,701 7,819,986
Other 20,252 6,293
----------- ----------
9,935,953 7,826,279
Less accumulated depreciation, depletion, and amortization 5,857,900 3,049,147
----------- ----------
4,078,053 4,777,132
----------- ----------
$ 4,542,486 $5,109,199
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 121,131 $ 167,913
Income taxes payable - 40,093
Current maturities of bank line of credit (note C) 322,000 -
----------- ----------
Total current liabilities 443,131 208,006
BANK LINE OF CREDIT, less current maturities (note C) 1,500,000 1,637,000
DEFERRED INCOME TAXES (note D) - 341,181
----------- ----------
Total liabilities 1,943,131 2,186,187
STOCKHOLDERS' EQUITY
Common stock - $.50 par value; authorized, 40,000,000
shares in 1998 and 5,000,000 shares in 1997; issued and outstanding,
1,623,289 shares in 1998 and 1,423,229 shares in 1997 (note G) 811,644 711,614
Preferred stock - $1.00 par value; authorized, 10,000,000 shares in
1998 (note G) - -
Additional paid-in capital 2,875,399 1,975,429
Retained earnings (accumulated deficit) (1,087,688) 235,969
----------- ----------
2,599,355 2,923,012
----------- ----------
$ 4,542,486 $5,109,199
=========== ==========
1999 1998
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 96,198 $ 241,348
Accounts receivable:
Oil and gas sales 179,269 199,427
Related parties (note I) 3,780 8,473
Prepaid expenses 14,368 15,185
------------ ------------
Total current assets 293,615 464,433
Property and equipment, at cost
(notes C, F and K)
Oil and gas properties,
using the full cost method 10,495,391 9,915,701
Other 21,874 20,252
------------ ------------
10,517,265 9,935,953
Less accumulated depreciation,
depletion, and amortization 6,767,865 5,857,900
------------ ------------
Property and equipment, net 3,749,400 4,078,053
------------ ------------
Total assets $ 4,043,015 $ 4,542,486
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 85,434 $ 121,131
Current maturities of long term debt (note C) 516,000 322,000
------------ ------------
Total current liabilities 601,434 443,131
Long term debt (note C) 1,268,000 1,500,000
------------ ------------
Total liabilities 1,869,434 1,943,131
Stockholders' equity
Common stock - $0.50 par value; 40,000,000
shares authorized; 1,623,289 shares issued
and outstanding (note G) 811,644 811,644
Preferred stock - $1.00 par value;
10,000,000 shares authorized (note G) -- --
Additional paid-in capital 2,875,399 2,875,399
Accumulated deficit (1,513,462) (1,087,688)
------------ ------------
Total stockholders' equity 2,173,581 2,599,355
------------ ------------
Total liabilities and stockholders' equity $ 4,043,015 $ 4,542,486
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-318
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1998 1997 1996
------------ ---------- ----------
Revenues
Oil and gas $ 2,090,117 $1,453,124 $ 798,589
Administrative service charges and reimbursements 5,112 5,009 7,380
Interest 2,121 7,166 17,285
Other income 11,109 608 10,819
----------- ---------- ----------
2,108,459 1,465,907 834,073
Costs and expenses
Production 663,525 346,765 272,892
Depreciation, depletion, and amortization (note F) 2,808,753 477,830 262,392
General and administrative 192,395 113,023 86,484
Interest 137,012 12,787 -
----------- ---------- ----------
3,801,685 950,405 621,768
----------- ---------- ----------
Earnings (loss) before income taxes (1,693,226) 515,502 212,305
Income tax expense (benefit) (note D) (369,569) 137,635 11,699
----------- ---------- ----------
NET EARNINGS (LOSS) $(1,323,657) $ 377,867 $ 200,6061999 1998 1997
----------- ----------- -----------
Operating revenues:
Oil and gas $ 1,503,623 $ 2,090,117 $ 1,453,124
Other 6,382 16,221 5,617
----------- ----------- -----------
Total operating revenues 1,510,005 2,106,338 1,458,741
Operating expenses:
Production 644,563 663,525 346,765
Depreciation, depletion,
and amortization (note F) 909,965 2,808,753 477,830
General and administrative 236,576 192,395 113,023
----------- ----------- -----------
Total operating expenses 1,791,104 3,664,673 937,618
----------- ----------- -----------
(281,099) (1,558,335) 521,123
Other income (expense):
Interest income 6,394 2,121 7,166
Interest expense (151,069) (137,012) (12,787)
----------- ----------- -----------
Net other expense (144,675) (134,891) (5,621)
----------- ----------- -----------
Earnings (loss) before income taxes (425,774) (1,693,226) 515,502
Income tax expense (benefit) (note D) -- (369,569) 137,635
----------- ----------- -----------
Net earnings (loss) $ (425,774) $(1,323,657) $ 377,867
=========== =========== ===========
Basic and diluted earnings
(loss) per share $ (0.26) $ (0.83) $ 0.27
=========== =========== ===========
Weighted average outstanding
shares, basic and diluted 1,623,289 1,594,752 1,423,229
=========== =========== =========== ========== ==========
Basic and diluted earnings (loss) per share $(.83) $.27 $.15
=========== ========== ==========
Weighted average outstanding shares, basic and diluted 1,594,752 1,423,229 1,342,628
=========== ========== ==========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-419
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1999, 1998, 1997, and 19961997
Retained
Common stock Additional earnings Total
----------------------Common stock paid-in (accumulated stockholders'Stockholders'
Shares Amount capital deficit) equity
------------ -------- ------------ -------------- --------------------- ----------- ----------- ----------- -----------
Balance at April 1, 1995 1,173,229 $586,614 $1,600,429 $ (342,504) $ 1,844,539
Net earnings - - - 200,606 200,606
Issuance of common stock 250,000 125,000 375,000 - 500,000
--------- -------- ---------- ----------- -----------
Balance at March 31, 1996 1,423,229 $ 711,614 $ 1,975,429 $ (141,898) $ 2,545,145
Net earnings - - --- -- -- 377,867 377,867
--------- -------- --------------------- ----------- ----------- -----------
Balance at March 31, 1997 1,423,229 711,614 1,975,429 235,969 2,923,012
Net loss - - --- -- -- (1,323,657) (1,323,657)
Issuance of common stock (note G) 200,060 100,030 899,970 --- 1,000,000
--------- -------- --------------------- ----------- ----------- -----------
Balance at March 31, 1998 1,623,289 $811,644 $2,875,399 $(1,087,688)811,644 2,875,399 (1,087,688) 2,599,355
Net loss -- -- -- (425,774) (425,774)
--------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 1,623,289 $ 2,599,355811,644 $ 2,875,399 $(1,513,462) $ 2,173,581
========= ======== ===================== =========== =========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
F-5these statements.
20
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (note A)
Year ended March 31,
1999 1998 1997
1996
------------ ------------ --------------------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Cash received from oil and gas operations $ 2,178,583 $ 1,275,462 $ 769,367
Cash paid for oil and gas operating expenses (713,690) (293,332) (276,430)
Cash paid for general and administrative expenses (194,554) (113,023) (86,484)
Interest received 2,121 7,166 17,285
Interest paid (140,272) (7,298) -
Income taxes paid (24,731) (2,652) (38,148)
Other receipts 11,109 608 10,819
----------- ----------- ---------
Net cash provided by operating activities 1,118,566 866,931 396,409
Cash flows from investing activities
Capital expenditures for oil and gas properties (2,089,136) (1,294,556) (969,271)
Proceeds from sale of assets 64 32,449 24,000
Payments for purchase of other property (13,959) (3,791) -
Payments for purchase of Forman Energy Corporation - (1,369,332) -
----------- ----------- ---------
Net cash used in investing activities (2,103,031) (2,635,230) (945,271)
Cash flows from financing activities
Borrowings 685,000 1,637,000 -
Payments on debt (500,000) - -
Proceeds from issuance of common stock 1,000,000 - 500,000
----------- ----------- ---------
Net cash provided by financing activities 1,185,000 1,637,000 500,000
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 200,535 (131,299) (48,862)
Cash and cash equivalents at beginning of year 40,813 172,112 220,974
----------- ----------- ---------
Cash and cash equivalents at end of year $ 241,348 $ 40,813 $ 172,112
=========== =========== =========
F-6
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended March 31,
1998 1997 1996
------------ ---------- ----------
Reconciliation of Net Earnings (Loss) to Net Cash
Provided by Operating Activitiesactivities:
Net earnings (loss) $ (425,774) $(1,323,657) $ 377,867 $200,606
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activitiesactivities:
Deferred income taxes -- (341,181) 94,890
Depreciation, depletion and amortization 909,965 2,808,753 477,830 262,392
Deferred income taxes (341,181) 94,890 2,573
(Increase) decrease in Accountsaccounts receivable 24,851 83,354 (182,671) (36,602)
Recoverable income taxes - - 9,126
Prepaid expenses (15,185) - 1,350
Increase (decrease) in Accountsaccounts payable 22,312 (53,425) 58,922
(4,888)
Income(Increase) decrease in prepaid assets 817 (15,185) --
Increase (decrease) in income taxes payable -- (40,093) 40,093
(38,148)
----------- --------- ------------------- -----------
Net cash provided by operating activities 532,171 1,118,566 866,931
Cash flows used in investing activities:
Additions to oil and gas properties (643,377) (2,089,136) (1,294,556)
Proceeds from sale of assets 5,678 64 32,449
Additions to other property and equipment (1,622) (13,959) (3,791)
Acquisition of Forman Energy Corporation -- -- (1,369,332)
----------- ----------- -----------
Net cash used in investing activities (639,321) (2,103,031) (2,635,230)
Cash flows (used in) provided by financing activities:
Borrowings -- 685,000 1,637,000
Principal payments on long-term debt (38,000) (500,000) --
Proceeds from issuance of common stock -- 1,000,000 --
----------- ----------- -----------
Net cash (used in) provided by financing activities (38,000) 1,185,000 1,637,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (145,150) 200,535 (131,299)
Cash and cash equivalents at beginning of year 241,348 40,813 172,112
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,118,56696,198 $ 866,931 $396,409241,348 $ 40,813
=========== ========= =================== ===========
Interest paid $ 138,586 $ 140,272 $ 7,298
Income taxes paid $ -- $ 24,731 $ 2,652
Non-cash investing and financing activities:
Included in trade accounts payable at March 31:
Acquisition and development costs of oil and gas properties $ 25,041 $ 83,050 $ 76,407
Noncash investing and financing activities:
- - ------------------------------------------
Included in trade accounts payable at March 31, 1998 are purchases of oil and
gas properties totaling $83,050.
Included in trade accounts payable at March 31, 1997 are purchases of oil and
gas properties and a liability related to the Forman Energy Corporation
acquisition totaling $76,407.
The purchase of Forman Energy Corporation on February 25, 1997 resulted in the
assumption of a deferred tax liability and account payable as follows:
Assets acquired $1,591,000
Cash paid 1,369,000
----------
Liabilities assumed $ 222,000
==========
Assets acquired $ 1,591,000
Cash paid 1,369,000
------------
Liabilities assumed $ 222,000
============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-721
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997, and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES
The major operations ofNATURE OF OPERATIONS
Mexco Energy Corporation and Subsidiary (the
"Company") consist of exploration, production, and sale of crude oil and
natural gas in the United States with an area of concentration in Texas.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Principles of Consolidation
---------------------------
The Company consolidates the accounts of its wholly-owned subsidiary, Forman Energy
Corporation ("Forman"(collectively, the "Company"), eliminating all intercompany
balances is engaged in the acquisition,
exploration, development and transactions.
2. Oil and Gas Properties
----------------------
The full cost methodproduction of accounting is used to account fordomestic oil and gas properties. Under this methodand owns
producing properties and undeveloped acreage in twelve states. The majority of accounting, all costs incident to the
acquisition, exploration, and development of properties (both developed
and undeveloped), including costs of abandoned leaseholds, lease
rentals, unproductive wells, and well drilling and equipment costs, are
capitalized. Costs are amortized using the units-of-production method
based primarily on estimates of reserve quantities. Due to uncertainties
inherent in this estimation process, it is at least reasonably possible
that reserve quantities will be revised significantly in the near term.
If
the Company's unamortized costs exceed the cost center ceiling
(defined as the sumactivities are centered in West Texas. Although most of the
present value, discounted at 10%, of
estimated unescalated future net revenues from proved reserves, less
related income tax effects), the excess is charged to expense in the
year in which the excess occurs. Generally, no gains or losses are
recognized on the sale or disposition ofCompany's oil and gas properties.
3. Depreciation
------------
Depreciationinterests are operated by others, the Company does operate
several properties in which it owns an interest.
SIGNIFICANT ACCOUNTING POLICIES
Principles of office furniture, fixtures,Consolidation. The consolidated financial statements include the
accounts of Mexco Energy Corporation and equipment is provided on
the straight-line method over estimated useful lives of five to ten
years.
4. Production Costsits wholly-owned subsidiary. All
significant inter-company balances and Administrative Service Arrangements
--------------------------------------------------------
Production costs include lease operating expenses and production taxes.
Reimbursements related to administrative service arrangements are
recorded as revenues.
5. Earnings (Loss) Per Share
-------------------------
Basic and diluted earnings (loss) per share are calculated using the
weighted average number of shares outstanding during each year. Basic
and diluted earnings (loss) per share are the same for all periods
presented.
6.transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
-------------------------Equivalents. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less and money market
funds to be cash equivalents.
F-8
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997, and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
6. Cash and Cash Equivalents - Continued
------------------------------------- The Company maintains its cash in bank deposit
accounts and money market funds, some of which are not federally insured. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk.
7.Oil and Gas Properties. Oil and gas properties are accounted for using the full
cost method of accounting. Under this method, all costs associated with the
acquisition, exploration, and development of properties (successful or not),
including leasehold acquisition costs, geological and geophysical costs, lease
rentals, exploratory and developmental drilling and equipment costs, are
capitalized. Costs are amortized using the units-of-production method based upon
estimates of proved oil and gas reserves. If unamortized costs, less related
deferred income taxes, exceed the sum of the present value, discounted at 10%,
of estimated future net revenues from proved reserves, less related income tax
effects, the excess is charged to expense. Generally, no gains or losses are
recognized on the sale or disposition of oil and gas properties.
Other Property and Equipment. Provisions for depreciation of office furniture
and equipment are computed on the straight-line method based on estimated useful
lives of five to ten years.
Earnings (Loss) Per Common Share. Net earnings (loss) per share is calculated
using the weighted average number of shares outstanding during each year
presented. There were no potential common stocks outstanding for March 31, 1997
or 1998. Potential common stocks (options) are excluded for March 31, 1999 as
their inclusion would have an antidilutive effect on loss per share.
Income Taxes
------------Taxes. The Company accountsrecognizes deferred tax assets and liabilities for income taxes using the
liability method. Under
the liability method of accounting for income taxes, deferred taxes are
recognized for thefuture tax consequences of temporary differences by applyingbetween the carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applicable to the years in
which those differences are expected to be settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in net income in
the period that includes the enactment date.
22
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A (CONTINUED)
Environmental. The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future years to differences between the
carrying amountseconomic
benefit. Liabilities for expenditures of a non-capital nature are recorded when
environmental assessment and/or remediation is probable and the tax bases of existing assets and liabilities.
8.costs can be
reasonably estimated. There were no significant environmental expenditures or
liabilities for the years ended March 31, 1999, 1998 or 1997.
Use of Estimates
----------------Estimates. In preparing financial statements in conformity with generally
accepted accounting principles, management makesis required to make estimates based on management's
knowledge and
experience. Due to their prospective nature,assumptions that affect the amounts reported in the these financial statements.
Although Management believes its estimates and assumptions are reasonable,
actual results couldmay 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 therefrom.
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. The Financial Accounting Standards Board has issued a
proposed Interpretation of APB Opinion 25, which may require the Company to
recognize compensation costs related to stock options granted to outside
directors and independent consultants. The final Interpretation is expected in
1999. If adopted, the Interpretation would apply to events that occur after
December 15, 1998.
Financial Instruments. Cash and money market funds, stated at cost, are
available upon demand and approximate fair value. Interest rates associated with
the Company's long-term debt are linked to current market rates. As a result,
management believes that the carrying amount approximates the fair value of the
Company's credit facilities. All financial instruments are held for purposes
other than trading.
Reclassifications. Certain reclassifications have been made to the 1997 and 1998
financial statements to conform to the 1999 presentation. For the year ended
March 31, 1999, the Company has presented its Statement of Cash Flows using the
indirect method. The Statements of Cash Flows for prior years have been restated
using the same presentation.
NOTE B - BUSINESS COMBINATION
On February 25, 1997, Mexcothe Company acquired Forman who is engaged in the
exploration, production, and sale of crude oil and natural gas.Energy Corporation. The
acquisition has been accounted for usingunder the purchase method of accounting, and
the operations of the acquired company are included subsequent to February 1,
1997. The purchase price of approximately $1,591,000 was allocated to the
assets, primarily oil and gas properties, acquired on the basis of their
estimated fair value.
The following summarized pro forma, unaudited, information assumes the
acquisition of Forman had occurred on April 1, 1995:
Year ended March 31,
----------------------
1997 1996
---------- ----------
Revenues $1,831,031 $1,151,912
Net earnings 476,948 107,993
Basic and diluted earnings per share .34 .08
F-923
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
March 31, 1998, 1997, and 1996
NOTE C - BANK LINE OF CREDITB (CONTINUED)
The Company has a $3,000,000 revolving line of credit with NationsBank
of Texas, N.A. at March 31, 1998. The borrowing base of the line is
reduced by $50,000 each month beginning in February 1998 and continuing
throughout the term of the loan. At March 31, 1998, the borrowing base
is $2,100,000. The line of credit may be drawn down through August 15,
1999. Required principal payments will begin in September 1998 based on
the current level of debt. The required paymentsfollowing summarized pro forma, unaudited information for the year
ended March 31, 1997 assumes the acquisition of Forman had occurred on April 1,
1996:
Revenues $1,831,031
Net earnings 476,948
Basic and diluted earnings per share .34
NOTE C - DEBT
The Company has a revolving credit agreement with Bank of America, N.A.,
formerly NationsBank of Texas, N.A., 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 beginning September 5, 1998, and to
extend the maturity date to August 15, 2000. At March 31, 1999, the borrowing
base was $1,784,000. On April 2, 1999, with the sale of the Lazy JL field
properties, the borrowing base was $1,639,107 and sales proceeds of $600,000
were used to reduce the outstanding debt. The borrowing base is subject to
redetermination on or about August 1, each year. Current amounts due under the
facility of $516,000 and $322,000 at March 31, 1999 and 1998, respectively, are
reflected as a current liability in the financial statements. Interest under this agreement is payable
monthly at prime rate (8.5%(7.75% at March 31, 1999 and 8.5% at March 31, 1998) as established. The
balance outstanding under this credit facility was $1,784,000 and $1,822,000 at
March 31, 1999 and 1998, respectively. 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. The credit facility is secured by
substantially all of the bank. The line of credit is collateralized
byCompany's oil and gas properties and the common stock
of Forman and oil and gas properties.it's subsidiary.
The Company also has a letter of credit with Bank of America providing for
unsecured borrowings up to $25,000 in lieu of a plugging bond with the Texas
Railroad Commission covering properties operated by the Company.
NOTE D - INCOME TAXES
IncomeComponents of income tax expense (benefit) for years ended March 31 isare as
follows:
1998 1997 1996
---------- -------- --------
Current expense (benefit)
Federal $ (28,388) $ 40,994 $ 9,126
State - 1,751 -
--------- -------- --------
(28,388) 42,745 9,126
Deferred expense (benefit)
Federal (301,814) 83,941 2,150
State (39,367) 10,949 423
--------- -------- --------
(341,181) 94,890 2,573
--------- -------- --------
$(369,569) $137,635 $11,699
========= ======== ========
The income1999 1998 1997
--------- --------- ---------
Current:
Federal ................... $ -- $ (28,388) $ 40,994
State ..................... -- -- 1,751
--------- --------- ---------
-- (28,388) 42,745
Deferred:
Federal ................... -- (301,814) 83,941
State ..................... -- (39,367) 10,949
--------- --------- ---------
-- (341,181) 94,890
--------- --------- ---------
Income tax provision reconciled to the tax computed at the statutory
federal rate for years ended March 31 is as follows:
1998 1997 1996
---------- --------- ---------
Tax expense (benefit) at statutory rate $(575,697) $175,271 $ 72,184
Increase (decrease) in valuation allowance 135,890 (3,072) (5,806)
State income taxes - 8,215 1,461
Prior year overaccrual (28,388) (4,794) (16,308)
Effect of graduated rates 130,450 (41,241) (34,194)
Other (31,824) 3,256 (5,638)
--------- -------- --------
$(369,569) $137,635 $ 11,699
========= ======== ========
F-10expense (benefit) ...... $ -- $(369,569) $ 137,635
========= ========= =========
24
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
March 31, 1998, 1997, and 1996
NOTE D - INCOME TAXES - CONTINUED
Amounts of deferredD. (CONTINUED)
Deferred tax assets, valuation allowance, and liabilities at March 31 are
as follows:
1998 1997
---------- ----------
Deferred tax assets
Percentage depletion carryforwards $ 142,218 $ 97,794
Net operating loss carryforwards 101,780 -
Valuation allowance (135,890) -
--------- ---------
108,108 97,794
Deferred tax liabilities
Excess financial accounting bases over tax bases of property
and equipment (108,108) (438,975)
--------- ---------
Net deferred tax assets (liabilities) $ - $(341,181)1999 1998
Deferred tax assets:
Percentage depletion carryforwards ........... $ 169,271 $ 142,218
Net operating loss carryforwards ............. 230,763 101,780
Valuation allowance .......................... (271,818) (135,890)
--------- ---------
128,216 108,108
Deferred tax liabilities:
Excess financial accounting bases over
tax bases of property and equipment ........ (128,216) (108,108)
--------- ---------
Net deferred tax assets (liabilities) .... $ -- $ --
========= =========
Increase (decrease) in valuation allowance
for the year ................................. $ 135,928 $ 135,890
========= =========
Increase (decrease) in valuation allowance for the year $ 135,890 $ (3,072)
========= =========
As of March 31, 1998,1999, the Company has statutory depletion carryforwards of
approximately $547,000$651,000, which do not expire, and operating loss carryforwards of
approximately $391,000 that$888,000, which if not utilized begin to expire in 2018.
A reconciliation of the provision for income taxes to income taxes computed
using the federal statutory rate for years ended March 31 follows:
1999 1998 1997
--------- --------- ---------
Tax expense (benefit) at statutory rate .. $(144,763) $(575,697) $ 175,271
Increase (decrease) in valuation allowance 135,928 135,890 (3,072)
State income taxes ....................... -- -- 8,215
Prior year over accrual .................. -- (28,388) (4,794)
Effect of graduated rates ................ 34,062 130,450 (41,241)
Other .................................... (25,227) (31,824) 3,256
--------- --------- ---------
$ -- $(369,569) $ 137,635
========= ========= =========
NOTE E - SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates exclusively within the United States in the onshore
exploration and production of oilit's revenues
and gas. In the normal course of
business, the Company extends credit to customers inoperating income are derived predominately from the oil and gas industryindustry.
Oil and therefore has significant credit risk in this sector ofgas production is sold to various purchasers and the economy.receivables are
unsecured. Historically, the Company has not hadexperienced significant bad debtscredit
losses on its oil and as such, no allowance for doubtfulgas accounts has been provided inand management is of the accompanying financial statements.
Customers which accounted for 10% or more of revenues are as follows:
Year ended March 31,
-----------------------
1998 1997 1996
------- ------ ------
Navajo Crude Oil Marketing Company 33% 46% 40%
Sun Refining and Marketing Company - 10% 13%
Aquila Southwest Pipeline Corporation 15% 24% -
The Companyopinion that
significant credit risk does not believeexist. Management is of the opinion that the
loss of any of the above customersone purchaser would result in any materialnot have an adverse effect on the ability of the
Company to sell its business.
F-11oil and gas production.
25
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
March 31,NOTE E. (CONTINUED)
In fiscal 1999, two purchasers accounted for 30% and 25%, respectively, of
revenues. In fiscal 1998, two purchasers accounted for 33% and 15%,
respectively, of revenues. In fiscal 1997, three purchasers accounted for 46%,
24% and 199610%, respectively, of revenues.
NOTE F - OIL AND GAS COSTS
The costs related to the oil and gas activities of the Company were
incurred as follows:
Year ended March 31,
------------------------------
1998 1997 1996
---------- -------- --------
Property acquisition costs $ 751,160 $562,363 $650,496
Development costs $1,261,569 $808,600 $318,775
Year ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Property acquisition costs $ 207,325 $ 751,160 $ 562,363
Development costs $ 436,052 $1,261,569 $ 808,600
The Company had the following aggregate capitalized costs relating to the
Company's oil and gas property activities at March 31:
1998 1997 1996
---------- ---------- ----------
Proved oil and gas properties $9,854,099 $7,698,866 $4,900,230
Unproved oil and gas properties 61,602 121,120 -
Less accumulated depreciation, depletion, and
amortization 5,853,458 3,046,602 2,569,291
---------- ---------- ----------
$4,062,243 $4,773,384 $2,330,939
========== ========== ==========
1999 1998 1997
----------- ----------- -----------
Proved oil and gas properties $10,331,594 $ 9,854,099 $ 7,698,866
Unproved oil and gas properties 163,797 61,602 121,120
----------- ----------- -----------
10,495,391 9,915,701 7,819,986
Less accumulated depreciation,
depletion, and amortization 6,759,416 5,853,458 3,046,602
----------- ----------- -----------
$ 3,735,975 $ 4,062,243 $ 4,773,384
=========== =========== ===========
Depreciation, depletion, and amortization expense which included a full cost
ceiling write-down of approximately $1,742,000 recorded in$288,393 for the first quarter of fiscal 1999 and
$1,742,386 for the fourth quarter of the year ended March 31,fiscal 1998 due to declines in oil and gas
prices.prices and the related downward adjustment of estimated reserves. Depreciation,
depletion, and amortization amounted to $6.97, $20.66 $6.02, and $4.35$6.02 per equivalent
barrel of production for the years ended March 31, 1999, 1998, 1997, and 1996,1997,
respectively.
NOTE G - STOCKHOLDERS' EQUITY
In May 1997, the Company completed a private placement consisting of 200,000 shares of
common stock at $5.00 per share. The proceeds of $1,000,000 were used to pay downreduce
debt and finance property acquisitions.
In September 1997, the shareholders approved an amendment to the Articles
of Incorporation to increase the number of authorized shares from 5,000,000
shares of common stock to 40,000,000 shares of common stock and 10,000,000
shares of preferred stock. The common stockholders maintain the exclusive right
to vote for the election of directors and for all other purposes. The preferred
stock may be issued in a series with certain rights as determined by the Board
of Directors.
26
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - EMPLOYEE BENEFITBENEEFIT PLAN
The Company adopted an employee incentive stock plan effective September
15, 1997. Under the plan, 350,000 shares are available for distribution. Awards,
granted at the discretion of athe compensation committee of the Board of
Directors, include stock options or restricted stock. Stock options may be an
incentive stock option or a nonqualified stock option. The exercise price of each
option will not be less thanOptions to purchase
common stock under the plan are granted at the fair market pricevalue of the Company'scommon
stock onat the date of grant. The maximum termgrant, become exercisable to the extent of 25% of the
options isshares optioned on each of four anniversaries of the date of grant, expire ten
years.years from the date of grant, and are subject to forfeiture if employment
terminates. Restricted stock may be granted with a condition to attain a
specified goal. The purchase price will be at least $5.00 per share of
restricted stock. The awards of restricted stock must be accepted within sixty
days and will vest as determined by agreement. Holders of restricted stock have
all rights of a shareholder of the Company.
AtDuring fiscal 1999, 100,000 options were granted. Of these 20,000 options
were granted to a consultant and 10,000 options were granted to an outside
director. As of March 31, 1998, no1999 there were 90,000 options outstanding under this
plan with exercise prices ranging from $7.50 to $7.75. The exercise price of all
options granted equaled or exceeded the market price of the stock oron the date of
grant.
The summary of the status of the Company's stock option plan at March 31,
1999 and the changes during the year then ended is presented below:
Weighted
Company Average
Shares Exercise Price
------- --------------
Options outstanding, beginning of year -- $ --
Options granted 100,000 7.63
Options forfeited 10,000 7.75
Options exercised -- --
------- --------------
Options outstanding, end of year 90,000 $ 7.61
======= ==============
No options were exercisable at March 31, 1999. At April 2, 1999, 7,500
options were exercisable with an exercise price of $7.75.
Weighted average grant date fair value of stock options had been granted, underwas $4.04
for 1999, calculated in accordance with the plan.
F-12Black-Scholes option pricing model,
using the following weighted average assumptions:
Expected volatility 27.89%
Expected dividend yield 0%
Expected option term 10 years
Risk-free rate of return 5.72%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
27
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
March 31, 1998, 1997,NOTE H. (CONTINUED)
Options to purchase common stock outstanding were as follows:
Number outstanding 90,000
Range of exercise prices $7.50-$7.75
Weighted average exercise price $7.61
Weighted average years to expiration 9.56
Since the Company applies the intrinsic value method in accounting for its
stock option plan, it generally records no compensation cost for its stock
options (note A). If compensation cost for the Company's stock option plan had
been determined based on the fair value at the grant dates for awards under the
plan, the Company's net loss would have been increased by $51,415 in fiscal
1999. Basic and 1996diluted loss per share would have been increased by $0.03 per
share in fiscal 1999.
NOTE I - RELATED PARTY TRANSACTIONS
The Company serves as operator of properties in which the majority
stockholder has interests and in that capacity, bills the majority stockholder for lease operating
expenses on a monthly basis subject to usual trade terms. The billings totaled
approximately$21,981, $50,097 $112,657,
and $106,198$112,657 for the years ended March 31, 1998, 1997, and 1996,
respectively. Accounts receivable include $8,473 and $6,042 due from the
majority stockholder at March 31,1999, 1998, and
1997, respectively.
NOTE J - FINANCIAL INSTRUMENTSSUBSEQUENT EVENT
On April 21, 1999, the Company sold all of its oil and gas interests in
Lazy JL field properties located in Garza County, Texas for $600,000 cash,
adjusted for revenues and expenses from the effective date of February 1, 1999
through the date of closing. The following table includes estimated fair value informationsales proceeds were used to reduce the
Company's outstanding debt under its line of credit with Bank of America.
NOTE K - OIL AND GAS RESERVE DATA (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are
located entirely within the United States, were prepared in accordance with the
guidelines established by the Securities and Exchange Commission and Financial
Accounting Standards Board. These guidelines require that reserve estimates be
prepared under existing economic and operating conditions, with no provision for
price and cost escalators, except by contractual agreement. The estimates as of
March 31, 1999 are based on evaluations prepared by Joe C. Neal and Associates,
Petroleum Consultants. The estimates as of March 31, 1998 and 1997 as required by Statement of Financial
Accounting Standards ("SFAS") No. 107. Such information, which pertains
to the Company's financial instruments, isare based on
evaluations prepared by T. Scott Hickman and Associates, Inc., Petroleum
Engineers.
Management emphasizes that reserve estimates are inherently imprecise and
are expected to change as new information becomes available and as economic
conditions in the requirements set
forth in that Statementindustry change. The following estimates of proved reserves
quantities and doesrelated standardized measure of discounted net cash flow are
estimates only, and do not purport to represent the aggregate
netreflect realizable values or fair valuemarket
values of the Company. All of the financial instruments are held
for purposes other than trading.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.
Cash and Cash Equivalents - The carrying amount approximates fair value
-------------------------
because of the contractual right to receive the deposits upon demand.
Bank Line of Credit - The carrying amount approximates fair value
-------------------
because floating interest rates approximate current market rates.
Financial instruments and the estimated fair values are as follows:
March 31, 1998
--------------------------------------------
Carrying amount of Estimated fair value of
assets (liabilities) assets (liabilities)
-------------------- -----------------------
Cash and cash equivalents $ 241,348 $ 241,348
Bank line of credit 1,822,000 1,822,000
March 31, 1997
--------------------------------------------
Carrying amount of Estimated fair value of
assets (liabilities) assets (liabilities)
-------------------- -----------------------
Cash and cash equivalents $ 40,813 $ 40,813
Bank line of credit (1,637,000) (1,637,000)
NOTE K - SUBSEQUENT EVENT
On April 2, 1998, the Board of Directors granted stock options for
40,000 shares of common stock at $7.75 per share which vest at 25% on
each annual anniversary date and expire ten years from date of grant.
The Company will account for the options under the intrinsic value
method pursuant to APB Opinion 25.
F-13Company's reserves.
28
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
March 31, 1998, 1997, and 1996
NOTE L - OIL AND GASK. (CONTINUED)
CHANGES IN PROVED RESERVE DATAQUANTITIES (UNAUDITED)
In accordance with SFAS No. 69 and Securities and Exchange Commission
("SEC") rules and regulations, the following information is presented
with regard to the Company's proved oil and gas reserves, all of which
are located in the United States. Information for oil is presented in
barrels ("Bbls") and for gas in thousand cubic feet ("Mcf").
The SEC has adopted SFAS No. 69 disclosure guidelines for oil and gas
producers. These rules require the Company to include as a supplement to
the basic financial statements a standardized measure of discounted
future net cash flows relating to proved oil and gas reserves.
The standardized measure, in management's opinion, should be examined
with caution. The basis for these disclosures is an independent
petroleum engineer's reserve study which contains imprecise estimates of
quantities and rates of production of reserves. Revision of prior year
estimates can have a significant impact on the results. Also,
exploration costs in one year may lead to significant discoveries in
later years and may significantly change previous estimates of proved
reserves and their valuation. Values of unproved properties and
anticipated future price and cost increases or decreases are not
considered. Therefore, the standardized measure is not necessarily a
"best estimate" of the fair value of the Company's oil and gas
properties or of future net cash flows.
The following summaries of changes in reserves and standardized measure
of discounted future net cash flows were prepared from estimates of
proved reserves developed by independent petroleum engineers.
Summary of Changes in Proved Reserves
(Unaudited):
1999 1998 1997
1996
--------------------- --------------------- -----------------------------------------
Bbls Mcf Bbls Mcf Bbls Mcf
------- --------- ----------------- --------- ---------- -------- ----------------- ---------
Proved developed and undeveloped
reserves, Beginning of year 436,000 2,956,000 425,000 1,920,000 207,000 1,567,000
Revision of previous estimates (132,000) 268,000 (113,000) 411,000 11,000 29,000
Purchase of minerals in place 6,000 405,000 89,000 902,000 111,000 352,000
Extensions and discoveries - - 75,000 83,000 126,000 217,000
Production (64,000) (432,000) (40,000) (236,000) (29,000) (188,000)
Sales of minerals in place - - - (124,000) (1,000) (57,000)
-------- --------- -------- --------- ------- ---------
Endbeginning of year 246,000 3,197,000 436,000 2,956,000 425,000 1,920,000
======== ========= ========Revision of previous estimates (2,000) 348,000 (132,000) 268,000 (113,000) 411,000
Purchase of minerals in place -- 939,000 6,000 405,000 89,000 902,000
Extensions and discoveries -- 193,000 -- -- 75,000 83,000
Production (50,000) (483,000) (64,000) (432,000) (40,000) (236,000)
Sales of minerals in place -- -- -- -- -- (124,000)
------- --------- ------- --------- ------- ---------
Proved reserves, end of year 194,000 4,194,000 246,000 3,197,000 436,000 2,956,000
======= ========= ======= ========= Proved developed reserves======= =========
PROVED DEVELOPED RESERVES (UNAUDITED):
Beginning of year 219,000 2,941,000 281,000 2,400,000 209,000 1,593,000
183,000 1,472,000
End of year 194,000 4,194,000 219,000 2,941,000 281,000 2,400,000 209,000 1,593,000
F-14STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES (UNAUDITED):
March 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Future cash inflows $ 8,994,000 $ 9,794,000 $ 13,901,000
Future production and
development costs (2,989,000) (3,791,000) (5,678,000)
Future income taxes (a) (715,000) (612,000) (1,348,000)
------------ ------------ ------------
Future net cash flows 5,290,000 5,391,000 6,875,000
Annual 10% discount for
estimated timing of cash flows (2,220,000) (1,896,000) (2,427,000)
------------ ------------ ------------
Standardized measure of
discounted future net cash flows $ 3,070,000 $ 3,495,000 $ 4,448,000
============ ============ ============
(a) Future income taxes are computed using effective tax rates on future net
cash flows before income taxes less the tax bases of the oil and gas
properties.
29
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUEDNOTE K. (CONTINUED)
CHANGES IN STANDARIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVES (UNAUDITED):
Year ended March 31,
1999 1998 1997
----------- ----------- -----------
Sales of oil and 1996
NOTE L - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED
Standardized Measuregas produced,
net of Discounted Futureproduction costs $ (859,000) $(1,427,000) $(1,106,000)
Net Cash Flows
Relatingchanges in price and
production costs (1,255,000) (519,000) (582,000)
Previously estimated development
costs 296,000 -- --
Revisions of quantity estimates 389,000 (428,000) (237,000)
Net change due to Proved Oilpurchases
and Gas Reserves
(Unaudited)
March 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Future oil and gas revenues $ 9,794,000 $13,901,000 $12,239,000
Future production and development costs (3,791,000) (5,678,000) (4,576,000)
Future income tax expense (612,000) (1,348,000) (740,000)
----------- ----------- -----------
Future net cash flows 5,391,000 6,875,000 6,923,000
Discounted at 10% forsales of minerals in place 527,000 456,000 1,338,000
Extensions and discoveries, less
related costs 81,000 -- 678,000
Net change in income taxes (18,000) 475,000 (425,000)
Accretion of discount 389,000 532,000 463,000
Changes in timing of estimated timing of cash flows (1,896,000) (2,427,000) (2,742,000)
----------- ----------- -----------
Standardized measure of discounted future net
cash flows and other 25,000 (42,000) 138,000
----------- ----------- -----------
Changes in standardized measure (425,000) (953,000) 267,000
Standardized measure, beginning of year 3,495,000 4,448,000 4,181,000
----------- ----------- -----------
Standardized measure, end of year $ 3,070,000 $ 3,495,000 $ 4,448,000 $ 4,181,000
=========== =========== ===========
30
Item No. 9. Changes in Standardized Measureand Disagreements With Accountants on Accounting and
Financial Disclosures
None.
PART III
Item No. 10. Directors and Executive Officers of Discounted Future Net Cash Flowsthe Registrant
The information required regarding Directors of the Registrant and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the Company's Information Statement for its Annual
Meeting of Stockholders, which will be filed with the Commission not later than
July 29, 1999.
Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I of
this report.
Item No. 11. Executive Compensation
The information required in this item is incorporated by reference from the
Company's Information Statement for its Annual Meeting of Stockholders, which
will be filed with the Commission not later than July 29, 1999.
Item No. 12. Security Ownership of Certain Beneficial Owners and Management
The information required in this item is incorporated by reference from the
Company's Information Statement for its Annual Meeting of Stockholders, which
will be filed with the Commission not later than July 29, 1999.
Item No. 13. Certain Relationships and Related Transactions
The information required in this item is incorporated by reference from the
Company's Information Statement for its Annual Meeting of Stockholders, which
will be filed with the Commission not later than July 29, 1999.
PART IV
Item No. 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Schedules.
See "Index to Proved OilConsolidated Financial Statements" set forth in Item 8 of
this Form 10-K.
No schedules are required to be filed because of the absence of conditions
under which they would be required or because the required information is set
forth in the financial statements or notes thereto referred to above.
31
(a) 3. Exhibits.
Exhibit
Number
3.1 Articles of Incorporation (incorporated by reference to the Company's
Annual Report on Form 10-K dated June 24, 1998).
3.2 Bylaws (incorporated by reference to the Company's Annual Report on Form
10K dated June 23, 1995).
10.1 Stock Option Plan (incorporated by reference to the Amendment to Schedule
14C Information Statement filed on August 13, 1997).
10.2 Bank Line of Credit (incorporated by reference to the Company's Annual
Report on Form 10-K dated June 24, 1998).
10.3 Partial Assignment, Bill of Sale and Gas Reserves
(Unaudited)
Year ended March 31,
--------------------------------------------
1998 1997 1996
------------- ------------- --------------
Sales and transfers of oil and gas produced, net of
production costs $(1,427,000) $(1,106,000) $(526,000)
Net changes in prices and production costs (519,000) (582,000) 734,000
Extensions and discoveries, less related costs - 678,000 954,000
Revisions of previous quantity estimates (428,000) (237,000) 95,000
Accretion of discount 532,000 463,000 203,000
Net change due to purchases and sales of minerals in place 456,000 1,338,000 1,150,000
Net change in income taxes 475,000 (425,000) (254,000)
Other (42,000) 138,000 (11,000)
---------- ---------- -----------
Net increase (decrease) (953,000) 267,000 2,345,000
Balance at beginning of year 4,448,000 4,181,000 1,836,000
---------- ---------- -----------
Balance at end of year $3,495,000 $4,448,000 $ 4,181,000
========== ========== ===========
F-15Conveyance between Mexco Energy
Corporation and Shenandoah Petroleum Corporation dated April 21, 1999
(previously filed as exhibit 10.1 and incorporated by reference to Form 8-K
dated April 21, 1999).
21 Subsidiaries of the Company (incorporated by reference to the Company's
Annual Report on Form 10-K dated Jun 24, 1998).
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter ended
March 31, 1999. A report on Form 8-K dated April 21, 1999 was filed under Item
2. Disposition of Assets.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
Registrant
By: /s/ Nicholas C. Taylor
-------------------------------------------------
Nicholas C. Taylor
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of June 15, 1999, by the following persons on
behalf of the Company and in the capacity indicated.
/s/ Nicholas C. Taylor
---------------------------------------------------
Nicholas C. Taylor
President, Chief Executive Officer and Director
/s/ Donna Gail Yanko
---------------------------------------------------
Donna Gail Yanko
Vice President, Operations and Director
/s/ Linda J. Crass
---------------------------------------------------
Linda J. Crass
Controller, Treasurer and Assistant Secretary
/s/ Thomas Graham, Jr.
---------------------------------------------------
Thomas Graham, Jr.
Chairman of the Board of Directors
/s/ Thomas R. Craddick
---------------------------------------------------
Thomas R. Craddick
Director
/s/ William G. Duncan, Jr.
---------------------------------------------------
William G. Duncan, Jr.
Director
/s/ Jack D. Ladd
---------------------------------------------------
Jack D. Ladd
Director
/s/ Gerald R. Martin
---------------------------------------------------
Gerald R. Martin
Director
33
INDEX TO EXHIBITS
Exhibit
Number Exhibit Page
------ ------------------------------------------------------- ----
3.1** Articles of Incorporation.
3.2* Bylaws.
10.1*** Stock Option Plan.
10.2** Bank Line of Credit.
10.3**** Partial Assignment, Bill of Sale and Conveyance between
Mexco Energy Corporation and Shenandoah Petroleum
Corporation dated April 21, 1999.
21** Subsidiaries of the Company.
* Incorporated by reference to the Company's Annual Report on Form 10-K dated
June 23, 1995.
** Incorporated by reference to the Company's Annual Report on Form 10-K dated
June 24, 1998.
*** Incorporated by reference to the Amendment to Schedule 14C Information
Statement filed on August 13, 1998.
**** Previously filed as exhibit 10.1 and incorporated by reference to Form 8-K
dated April 21, 1999.