-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAGxrDwNmVFflwmMqYY1zbnwDhadVdBnqUKneWNr4Acw1SnApV8yVg+Br2NbOyfq dOig9PAvJrRs9rlXdfqfNA== 0001144204-04-009256.txt : 20040629 0001144204-04-009256.hdr.sgml : 20040629 20040629172549 ACCESSION NUMBER: 0001144204-04-009256 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEXCO ENERGY CORP CENTRAL INDEX KEY: 0000066418 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840627918 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31785 FILM NUMBER: 04889451 BUSINESS ADDRESS: STREET 1: 214 W TEXAS AVENUE STREET 2: SUITE 1101 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156821119 MAIL ADDRESS: STREET 1: 214 W TEXAS AVENUE STREET 2: SUITE 1101 CITY: MIDLAND STATE: TX ZIP: 79701 FORMER COMPANY: FORMER CONFORMED NAME: MILLER OIL CO DATE OF NAME CHANGE: 19800702 10-K 1 v04255_10k.txt 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, 2004 Commission File No. 0-6694 MEXCO ENERGY CORPORATION (Exact name of registrant as specified in its charter) COLORADO 84-0627918 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 214 W. TEXAS AVENUE, SUITE 1101 79701 MIDLAND, TEXAS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (432) 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, $0.50 par value American Stock Exchange 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] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] As of June 24, 2004, the aggregate market value of the registrant's common stock held by non-affiliates (using the last price at which a common equity was sold ($6.80)) was approximately $3,488,148. The number of shares outstanding of the registrant's common stock as of June 24, 2004 was 1,736,041. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement relating to the 2004 Annual Meeting of Shareholders to be held on September 14, 2004, have been incorporated by reference in Part III of this Form 10-K. Such Proxy Statement will be filed with the Commission not later than July 30, 2004. TABLE OF CONTENTS PART 1 Item 1. Business .......................................................... 3 Item 2. Properties......................................................... 7 Item 3. Legal Proceedings.................................................. 10 Item 4. Submission of Matters to a Vote of Security Holders................ 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................ 11 Item 6. Selected Financial Data............................................ 12 Item 6A. Selected Quarterly Financial Data.................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 19 Item 8. Financial Statements and Supplementary Data........................ 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............................... 38 Item 9A. Controls and Procedures............................................ 38 PART III Item 10. Directors and Executive Officers of the Registrant................. 39 Item 11. Executive Compensation............................................. 39 Item 12. Security Ownership of Certain Beneficial Owners and Management..... 39 Item 13. Certain Relationships and Related Transactions..................... 39 Item 14. Principal Accountant Fees and Services............................. 39 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 40 Signatures ............................................................... 40 2 PART I ITEM 1. BUSINESS General Mexco Energy Corporation, a Colorado corporation, (the "Company", which reference shall include the Company's wholly-owned subsidiary) is an independent oil and gas company engaged in the acquisition, exploration and development of oil and gas properties located in the United States. Incorporated in April 1972 under the name Miller Oil Company, the Company changed its name to Mexco Energy Corporation effective April 30, 1980. At that 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 of Forman Energy Corporation, a New York corporation also engaged in oil and gas exploration and development. Since its inception, the Company has been engaged in acquiring and developing oil and gas properties and the exploration for and production of oil and gas within the United States. The Company primarily focuses on the exploration for and development of natural gas 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 on gas reserves. While the Company owns oil and gas properties in other states, the majority of its activities are centered in West Texas. The Company acquires interests in producing and non-producing oil and gas leases from landowners and leaseholders in areas considered favorable for oil and gas exploration, development and production. In addition, the Company may acquire oil and gas interests by joining in oil and gas drilling prospects generated by third parties. The Company may employ a combination of the above methods of obtaining producing acreage and prospects. In recent years, the Company has placed primary emphasis on the evaluation and purchase of producing oil and gas properties, both working and royalty interests, and re-entry prospects that could have a potentially meaningful impact on Company reserves. OIL AND GAS OPERATIONS As of March 31, 2004, gas reserves constituted approximately 91% of the Company's total proved reserves and approximately 74% of the Company's revenues for fiscal 2004. Revenues from oil and gas royalty interests accounted for approximately 17% of the Company's revenues for fiscal 2004. VIEJOS GAS FIELD properties, encompassing 2,583 gross acres, 156 net acres, 18 gross wells and 1.27 net wells in Pecos County, Texas, account for approximately 6% of the Company's discounted future net cash flows from proved reserves as of March 31, 2004, and for fiscal 2004, approximately 20% of revenues and 10% of production costs. GOMEZ GAS FIELD properties, encompassing 13,847 gross acres, 73 net acres, 24 gross wells and .11 net wells in Pecos County, Texas, account for approximately 12% of the Company's discounted future net cash flows from proved reserves as of March 31, 2004, and for fiscal 2004, approximately 12% of revenues and 6% of production costs. EL CINCO GAS FIELD properties, encompassing 1,713 gross acres, 1,237 net acres, 9 gross producing wells and 6.6 net wells in Pecos County, Texas, account for approximately 53% of the Company's discounted future net cash flows from proved reserves as of March 31, 2004. This is a multi-pay area where most of the leases have potential reserves in two zones. Of this amount approximately 36% of the Company's discounted future net cash flows from proved reserves are attributable to proven undeveloped reserves which will be developed through re-entry of existing wells and new drilling. For fiscal 2004, these properties accounted for approximately 18% of revenues and 24% of production costs. 3 The Company owns interests in and operates 22 producing wells and two shut-in wells. The Company owns partial interests in an additional 1,704 producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana, Arkansas, Wyoming, Kansas, Colorado, Montana and North Dakota. Additional information concerning these properties and the oil and gas reserves of the Company is provided below. The following table indicates the Company's oil and gas production in each of the last five years, all of which is located within the United States: Year Oil(Bbls) Gas (Mcf) ---- --------- --------- 2004...................................... 20,279 487,564 2003...................................... 23,391 538,787 2002...................................... 21,139 467,013 2001...................................... 18,545 503,773 2000...................................... 19,334 540,793 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. Some of these competitors have financial and personnel resources substantially in excess of those available to the Company and, therefore, the Company may be placed at a competitive disadvantage. 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. The Company's ability to acquire and develop additional properties in the future will depend upon its ability to conduct operations, to evaluate and select suitable properties, and to consummate transactions in this highly competitive environment in a timely manner. MAJOR CUSTOMERS The Company had sales to the following company that amounted to 10% or more of revenues for the year ended March 31: 2004 2003 2002 ---- ---- ---- Sid Richardson Energy Services, Co. (formerly Koch Midstream Services Company) 29% 28% 24% Because a ready market exists for the Company's oil and gas production, the Company does not believe the loss of any individual customer would have a material adverse effect on its financial position or results of operations. RISK FACTORS There are many factors that affect the Company's business and results of operations, some of which are beyond the Company's control. The following is a description of some of the important factors that may cause results of operations in future periods to differ materially from those currently expected or desired. 4 Oil and gas prices are volatile and could adversely affect the Company's revenues, cash flow, liquidity and reserve estimates. The Company cannot predict future oil and natural gas prices with any certainty. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile. Factors that can cause price fluctuations include changes in supply and demand, weather conditions, the price and availability of alternative fuels, political and economic conditions in oil producing countries, and other factors that are beyond the Company's control. Natural gas prices affect the Company more than oil prices because most of the Company's production and reserves are natural gas. Prices also affect the amount of cash flow available for capital expenditures and the Company's ability to borrow money or raise additional capital. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved reserves. Price increases may permit additional quantities of reserves to be produced economically, and price decreases may render uneconomic the production of reserves previously classified as proved. Thus, the Company may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance. Lower oil and gas prices increase the risk of ceiling limitation write-downs. The Company uses the full cost method to account for oil and gas operations. Accordingly, the Company capitalizes the cost to acquire, explore for and develop crude oil and natural gas properties. Under the full cost accounting rules, the net capitalized cost of crude oil and natural gas properties may not exceed a "ceiling limit" which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10% plus the lower of cost or fair market value of unproved properties. If net capitalized costs of oil and natural gas properties exceed the ceiling limit, the Company must charge the amount of the excess to earnings. This charge does not impact cash flow from operating activities, but does reduce stockholders' equity and earnings. The risk that the Company will be required to write down the carrying value of oil and natural gas properties increases when oil and natural gas prices are low. Estimates of proved reserves and the estimated future net revenue from such reserves are uncertain and inherently imprecise. The process of estimating oil and gas reserves is complex and requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. The interpretation of such data is a subjective process dependent upon the quality of the data and the decision-making and judgment of reservoir engineers. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves, which may in turn adversely affect the Company's cash flow, results of operations and the availability of capital resources. One should not assume that the present value of proved reserves is equal to the current fair market value of the Company's estimated oil and gas reserves. In accordance with the requirements of the Securities and Exchange Commission ("SEC"), the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than those as of the date of the estimate. The timing of both the production and the expenses with respect to the development and production of oil and gas properties will affect the timing of future net cash flows from proved reserves and their present value. 5 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 statutes 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 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. Because these rules and regulations are frequently amended or reinterpreted, the Company is not able to predict the future cost or impact of complying with such laws. 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 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 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. 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 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; therefore, there is no assurance that the less stringent regulatory approach recently pursued by FERC and Congress will continue. ENVIRONMENTAL The Company, by nature of its oil and gas operations, is subject to extensive federal, state and local environmental laws and regulations controlling the generation, use, storage, and discharge of materials into the environment or otherwise relating to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may 6 require the acquisition of a permit before drilling or production commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within protected areas, restrict the rate of oil and gas production, require remedial actions to prevent pollution from former operations and impose substantial liabilities for pollution resulting from the Company's operations. In addition, these laws and regulations may impose substantial liabilities and penalties for the Company's failure to comply with them or for any contamination resulting from the Company's operations. The Company believes it is in compliance, in all material respects, with applicable environmental requirements. The Company does not believe costs relating to these laws and regulations have had a material adverse effect on the Company's operations or financial condition in the past. As these laws and regulations become more stringent and complex, there is no assurance that changes in or additions to laws or regulations regarding the protection of the environment will not have such an impact in the future. 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 could arise from uninsured risks or in amounts in excess of existing insurance coverage. EMPLOYEES As of March 31, 2004, the Company had two full-time and three part-time 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 maintains its principal offices at 214 W. Texas, Suite 1101, Midland, Texas pursuant to a month to month lease. TITLE TO OIL AND GAS PROPERTIES The Company believes that its methods of investigating title to its properties are consistent with practices customary in the oil and gas industry, 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 non-cost bearing interests and contractual arrangements customary in the industry. Substantially all of the Company's properties are currently mortgaged under a deed of trust to secure funding through a revolving line of credit. ITEM 2. PROPERTIES OIL AND NATURAL GAS RESERVES 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 SEC and Financial Accounting Standards Board. The estimates as of March 31, 2004, 2003 and 2002 are based on evaluations prepared 7 by Joe C. Neal and Associates, Petroleum Consultants. 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, present value of future net revenues discounted at 10% and changes therein, see Notes to the Company's consolidated financial statements. The Company emphasizes that reserve estimates are inherently imprecise and there can be no assurance that the reserves set forth below will be ultimately realized. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will most likely vary from the assumptions and estimates. Any significant variance could materially affect the estimated quantities and value of Company oil and gas reserves, which in turn may adversely affect the Company's cash flow, results of operations and the availability of capital resources. In accordance with applicable financial accounting and reporting standards of the SEC, the estimates of our proved reserves and the present value of proved reserves set forth herein are made using oil and gas sales prices estimated to be in affect as of the date of such reserve estimates and are held constant throughout the life of the properties. Actual future prices and costs may be materially higher or lower than those as of the date of the estimate. The timing of both the production and the expenses with respect to the development and production of oil and gas properties will affect the timing of future net cash flows from proved reserves and their present value. The Company has not filed any other oil or gas reserve estimates or included any such estimates in reports to other federal or foreign governmental authority or agency within the last twelve months. The estimated proved oil and gas reserves 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, ----------------------------------------------------- 2004 2003 2002 -------------- -------------- ------------- Oil (Bbls): Proved developed - Producing 75,455 93,199 143,003 Proved developed - Non-producing 1,386 1,386 1,404 Proved undeveloped 55,613 55,564 92,900 ------------- ------------- ------------- Total 132,454 150,149 237,307 ============= ============= ============= Natural gas (Mcf): Proved developed - Producing 3,207,186 3,451,880 3,822,715 Proved developed - Non-producing 1,067,010 1,065,902 1,336,190 Proved undeveloped 3,643,116 3,413,846 5,023,328 ------------- ------------- ------------- Total 7,917,312 7,931,628 10,182,233 ============= ============= ============= Present value of estimated future net revenues before income taxes $19,127,440 $20,772,830 $11,925,260 ============= ============= =============
The preceding tables should be read in connection with the following definitions: PROVED RESERVES. Estimated quantities of oil and gas, 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. 8 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 those reserves expected to be 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 recoverable 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 be recovered from additional wells yet to be drilled or from existing wells where a relatively major expenditure is required for completion. PRODUCTIVE WELLS AND ACREAGE Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections. Wells that are completed in more than one producing zone are counted as one well. The following table indicates the Company's productive wells as of March 31, 2004: Gross Net ----- --- Oil........................................ 1,321 14 Gas........................................ 405 12 ----- ---- Total Productive Wells................. 1,726 26 ===== ==== Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. A gross acre is an acre in which an interest is owned. A net acre is deemed to exist when the sum of fractional ownership interests in gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres. As of March 31, 2004 material undeveloped acreage owned by the Company was approximately 11,350 gross and 3,699 net acres which is in Texas and North Dakota. The following table sets forth the approximate developed acreage in which the Company held a leasehold mineral or other interest at March 31, 2004. Developed Acres --------------------- Gross Net --------------------- Texas......................................... 122,178 4,831 New Mexico.................................... 18,034 150 North Dakota.................................. 26,159 24 Louisiana..................................... 25,879 31 Oklahoma...................................... 39,122 168 Montana....................................... 9,788 5 Kansas........................................ 7,240 21 Wyoming....................................... 2,338 4 Colorado...................................... 1,200 1 Arkansas...................................... 320 - ------- ----- Total......................................... 252,258 5,235 ======= ===== 9 DRILLING ACTIVITIES The following table sets forth the drilling activity of the Company for the years ended March 31, 2004, 2003 and 2002. Years ended March 31, --------------------------------------------------------- 2004 2003 2002 --------------- --------------- --------------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Exploratory Wells Productive 9 .03 2 .01 2 .01 Nonproductive 2 .30 1 .07 1 .09 --- ---- --- ---- --- ---- Total 11 .33 3 .08 3 .10 === ==== === ==== === ==== Development Wells Productive 12 .02 10 .17 12 .13 Nonproductive -- -- -- -- -- -- --- ---- --- ---- --- ---- Total 12 .02 10 .17 12 .13 === ==== === ==== === ==== The information contained in the foregoing table should not be considered indicative of future drilling performance, nor should it be assumed that there is any necessary correlation between the number of productive wells drilled and the amount of oil and gas that may ultimately be recovered by the company. NET PRODUCTION, UNIT PRICES AND COSTS The following table summarizes the net oil and natural gas production for the Company, the average sales price per barrel of oil and per thousand cubic feet ("mcf") of natural gas produced and the average production (lifting) cost per unit of production for the years ended March 31, 2004, 2003 and 2002.
Year Ended March 31, ------------------------------------------ 2004 2003 2002 ------------- ------------ ------------ Oil (a): Production (Bbls) 20,278 23,391 21,139 Revenue $ 588,089 $ 640,685 $ 456,108 Average Bbls per day 56 64 58 Average sales price per Bbl $ 29.00 $ 27.39 $ 21.58 Gas (b): Production (Mcf) 487,564 538,787 467,013 Revenue $ 2,321,864 $ 2,041,074 $ 1,312,452 Average Mcf per day 1,336 1,476 1,279 Average sales price per Mcf $ 4.76 $ 3.79 $ 2.81 Production cost: Production cost $ 942,093 $ 848,513 $ 648,820 Equivalent Mcf (c) 609,232 679,133 593,847 Production cost per equivalent Mcf $ 1.55 $ 1.25 $ 1.09 Production cost per sales dollar $ 0.32 $ 0.32 $ 0.37 Total oil and gas revenues $ 2,909,953 $ 2,681,759 $ 1,768,560
(a) Includes condensate. (b) Includes natural gas products. (c) Oil production is converted to equivalent mcf at the rate of 6 mcf per barrel ("bbl"), representing the estimated relative energy content of natural gas to oil. ITEM 3. LEGAL PROCEEDINGS There are no pending or threatened legal proceedings involving the Company. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter ended March 31, 2004. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the executive officers of the Company as of March 31, 2004. Name Age Position ------------------- ----- --------------------------------------------- Nicholas C. Taylor 66 President and Chief Executive Officer Donna Gail Yanko 59 Vice President and Corporate Secretary Tamala L. McComic 35 Vice President, Treasurer, and Asst 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 April 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 the prior 19 years, 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. In 1995 he was appointed by the Governor of Texas to the State Securities Board through January 2001. In addition to serving as chairman for four years, he continued to serve as a member until 2004. Donna Gail Yanko 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. Tamala L. McComic became Controller for the Company in July 2001. She was appointed Assistant Secretary of the Company in August 2001 and Treasurer in September 2001. From 1994 to 2001 Mrs. McComic was Regional Controller and Credit Manager for Transit Mix Concrete & Materials Company, a subsidiary of Trinity Industries, Inc. In May 2003, Mrs. McComic was appointed Vice President, Chief Financial Officer and continues to serve as Treasurer and Assistant Secretary. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In September 2003, the Company's common stock began trading on the American Stock Exchange under the symbol "MXC". Prior to September 2003, the Company's common stock was traded on the over-the-counter market bulletin board under the symbol "MEXC". The registrar and transfer agent is Computershare Trust Company, Inc., P.O. Box 1596, Denver, Colorado, 80201 (Tel: 303-262-0600). As of March 31, 2004 the Company had approximately 1,400 shareholders of record and 1,766,566 shares issued. 11 PRICE RANGE OF COMMON STOCK High Low ---- --- 2004: April - June 2003 (1) $ 7.75 $ 4.00 July - September 5, 2003(1) 7.00 6.50 September 5 - 30, 2003 (2) 7.90 7.50 October - December 2003 (2) 8.50 7.85 January - March 2004 (2) 8.50 7.55 2003: (1) April - June 2002 6.00 3.80 July - September 2002 6.00 2.50 October - December 2002 3.00 2.25 January - March 2003 4.80 2.85 (1) Reflects high and low bid information received from Pink Sheets LLC, formerly National Quotation Bureau, LLC. These bid quotations represent prices between dealers, without retail markup, markdown or commissions, and do not reflect actual transactions. (2) Reflects the high and low sales prices for the Company's Common Stock, as reported on the American Stock Exchange. On June 24, 2004, the closing price was $6.80. DIVIDENDS On February 1, 2002 the Company's board of directors declared a stock dividend consisting of shares of par value $0.50 common stock of the Company in the amount of ten percent (10%) of the outstanding shares, or 1 share for each 10 shares held by all stockholders of record of the Company as of February 15, 2002, with any resulting fractional share dividends to be rounded up or down to the nearest whole number of shares and issued the stock dividend accordingly. The payable date for this dividend was February 28, 2002 and resulted in an additional 160,566 shares of stock issued and outstanding. The Company has never paid any cash dividends on its Common Stock, and the board of directors does not currently anticipate paying any cash dividends to the common stockholders in the foreseeable future. In addition, under the terms of the current loan agreement the Company is subject to restrictions on dividends payments. ITEM 6. SELECTED FINANCIAL DATA
Years Ended March 31, ----------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------- Statement of Operations: Operating revenues $ 2,915,355 $ 2,949,113 $ 1,778,583 $ 3,099,966 $ 1,686,266 Operating income 785,739 926,277 252,101 1,881,776 498,384 Other income (expense) (82,766) (95,357) (54,706) (92,160) (104,737) Net income $ 429,846 $ 672,808 $ 189,291 $ 1,539,458 $ 393,647 Net income per share - basic (1)(2) $ 0.25 $ 0.39 $ 0.11 $ 0.86 $ 0.22 Net income per share - diluted (1)(2) $ 0.24 $ 0.39 $ 0.11 $ 0.86 $ 0.22 Weighted average shares outstanding - basic (1) 1,736,047 1,741,462 1,768,314 1,784,825 1,785,618 Weighted average shares outstanding - diluted (1) 1,802,300 1,746,831 1,768,579 1,787,503 1,785,618 Balance Sheet: Property and equipment, net $ 7,647,284 $ 7,028,659 $ 5,895,429 $ 4,009,852 $ 3,749,400 Total assets 8,172,464 7,688,638 6,347,965 4,961,360 4,043,015 Total debt 1,700,000 2,150,000 1,710,000 600,000 1,200,000 Stockholders' equity $ 5,435,219 $ 4,956,388 $ 4,276,042 $ 4,046,452 $ 2,567,228 Cash Flow: Cash provided by operations $ 1,517,479 $ 1,369,690 $ 899,977 $ 1,903,345 $ 722,088
12 (1) Amounts have been adjusted to reflect the 10% stock dividend effected on February 1, 2002. (2) Year 2004 includes a cumulative effect of change in accounting principle (Cumulative Effect) loss of $0.06 related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Asset Retirement Obligations. ITEM 6A. SELECTED QUARTERLY FINANCIAL DATA
FISCAL 2004 ------------------------------------------------------------------- 4TH QTR 3RD QTR 2ND QTR 1ST QTR ---------------- --------------- ---------------- -------------- Net sales $ 723,258 $ 650,783 $ 768,852 $ 767,060 Gross profit $ 528,920 $ 412,888 $ 527,684 $ 498,368 Net income before cumulative effect $ 204,628 $ 57,255 $ 118,470 $ 151,760 Net income per share-basic (2) $ 0.12 $ 0.03 $ 0.07 $ 0.03 Net income per share-diluted (2) $ 0.12 $ 0.03 $ 0.06 $ 0.03 FISCAL 2003 ------------------------------------------------------------------- 4TH QTR 3RD QTR 2ND QTR 1ST QTR ---------------- --------------- ---------------- -------------- Net sales $ 956,890 $ 668,039 $ 512,180 $ 544,650 Gross profit $ 730,662 $ 434,963 $ 279,575 $ 388,046 Net income $ 336,588 $ 238,718 $ 20,356 $ 77,146 Net income per share-basic(1) $ 0.19 $ 0.14 $ 0.01 $ 0.04 Net income per share-diluted(1) $ 0.19 $ 0.14 $ 0.01 $ 0.04
(1) Amounts have been adjusted to reflect the 10% stock dividend effected on February 1, 2002. (2) First quarter of fiscal 2004 includes a cumulative effect of change in accounting principle (Cumulative Effect) loss of $0.06 related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Asset Retirement Obligations. ITEM 7. MANAGEMENT'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 10 of this report. LIQUIDITY AND CAPITAL RESOURCES AND 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 2004, the Company primarily used cash provided by operations ($1,517,479) and borrowings on the line of credit ($320,000) to fund oil and gas property acquisitions and development ($982,872). The Company had a working capital deficit of $15,506 as of March 31, 2004 due primarily to current portion of long term debt. For fiscal 2002, the board of directors authorized the use of up to $250,000 to repurchase shares of the Company's common stock. During fiscal year 2002, the Company repurchased 22,533 shares, at an aggregate cost of $91,231. Of such shares, 18,400 shares were reissued in exchange for oil and gas lease rights representing 368 net acres valued at approximately $83,000. The remaining 4,133 shares were cancelled. In fiscal 2003, the board of directors once again authorized the use of up to $250,000 to repurchase shares of the Company's common stock. During fiscal year 2003, the Company repurchased 30,244 shares, at an aggregate cost of $127,536 for the treasury account. During fiscal 2004, the Company repurchased 281 shares, at an aggregate cost of $1,389 for the treasury account. 13 In December, 2002, the Company entered into a participation agreement with Falcon Bay Exploration, LLC exercising its right to purchase at an aggregate cash price of $597,301, the acreage and seismic data on the first of four such prospects referred to in the exploration agreement between the Company and Falcon Bay Exploration, LLC. This information is contained in Form 8-K filed by the Company on December 6, 2002. During fiscal year 2004, the Company purchased a one-quarter interest in leases and/or options on leases in Stark County, North Dakota covering 4920 gross acres for approximately $107,000. A director and employee of Mexco Energy Corporation, will receive a 1.5% ORRI on any wells drilled on this acreage. During fiscal year 2004, the Company purchased partially developed royalty interests in Jackson Parish, Louisiana for approximately $80,000. These properties, operated by Anadarko Petroleum Corporation in the Lower Cotton Valley formation, currently contain 11 producing wells and an additional 2 permitted and/or drilling wells. In March 2004 the Company purchased additional partially developed royalty interests in Jackson Parish, Louisiana and interests in Limestone County, Texas for approximately $224,000. The properties in Limestone County, operated by XTO Energy, Inc., are in the Cotton Valley formation and contain 23 producing wells and an additional 6 permitted and/or drilling wells. This acreage contains approximately 100 potential undrilled locations on 40 acre spacing. The property in Louisiana, operated by Anadarko and producing from the Lower Cotton Valley formation, contains 3 producing wells and an additional 5 permitted and/or drilling wells. These royalty purchases advanced the Company's primary goal of acquiring natural gas reserves. In March 2004, the Company signed an agreement in Moscow, Russia to begin a preliminary feasibility study for exploration and development of natural gas reserves in Russia. A team of U.S. and Russia experts commenced a feasibility study of a number of undeveloped natural gas fields located in the vicinity of Gasprom pipelines which serve Russia. Mexco Energy Corporation has set up OBTX LLC, a Delaware limited liability company, in which Mexco owns a 90% interest with the remaining 10% interest split equally among three individuals, one of which is Arden Grover, a director of Mexco Energy Corporation. OBTX, LLC, plans to participate in any Russian ventures entered into and own a 50% interest. The Company is reviewing several other projects in which it may participate. The cost of such projects would be funded, to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the credit facility. See Note B of Notes to Consolidated Financial Statements for a description of the Company's revolving credit agreement with Bank of America, N.A. Crude oil and natural gas prices have fluctuated significantly in recent years as well as in recent months. Fluctuations in price have a significant impact on the Company's financial condition and liquidity. However, management believes the Company can maintain adequate liquidity for the next fiscal year. RESULTS OF OPERATIONS FISCAL 2004 COMPARED TO FISCAL 2003 Oil and gas sales increased from $2,681,759 in 2003 to $2,909,953 in 2004, an increase of $228,194 or 9%. This increase was attributable to an increase in oil and gas prices during the year. The average oil price increased from $27.39 14 per bbl in 2003 to $29.00 per bbl in 2004, an increase of $1.61 per bbl or 6%. The average gas price increased from $3.79 in 2003 to $4.76 per mcf in 2004, an increase of $.97 per mcf or 26%. Oil production decreased from 23,391 bbls in 2003 to 20,279 bbls in 2004, a decrease of 3,112 bbls or 13%. Gas production decreased from 538,787 mcf in 2003 to 487,564 mcf in 2004, a decrease of 51,223 mcf or 10%. Such decreases primarily were due to normal decline in production. Other income decreased from $267,354 in 2003 to $5,402 in 2004, a decrease of $261,952. This decrease is the result of the proceeds received ($254,862) from the settlement of a class action lawsuit against a gas purchaser involving contract price disputes in fiscal 2003. Production costs increased from $848,513 in 2003 to $942,093 in 2004, an increase of $93,580 or 11%. This is primarily attributable to an increased number of repairs on operated properties during the year. Depreciation, depletion and amortization decreased from $641,827 in 2003 to $633,443 in 2004, a decrease of $8,384 or 1%, due primarily to a decrease in production. There was no impairment of oil and gas properties in fiscal 2003 or 2004. General and administrative expenses decreased from $532,496 in 2003 to $529,834 in 2004, a decrease of $2,662 or 0.5%. This decrease was primarily attributable to the decreased cost of consulting expenses during the year. Interest expense decreased from $96,337 in 2003 to $83,530 in 2004, a decrease of $12,807 or 13%. This decrease was attributable to decreased borrowings during the current fiscal year. FISCAL 2003 COMPARED TO FISCAL 2002 Oil and gas sales increased from $1,768,560 in 2002 to $2,681,759 in 2003, an increase of $913,199 or 52%. This increase was attributable to both an increase in production and an increase in oil and gas prices during the year. The average oil price increased from $21.58 per bbl in 2002 to $27.39 per bbl in 2003, an increase of $5.81 per bbl or 27%. The average gas price increased from $2.81 in 2002 to $3.79 per mcf in 2003, an increase of $.98 per mcf or 35%. Oil production increased from 21,139 bbls in 2002 to 23,391 bbls in 2003, an increase of 2,252 bbls or 11%. Gas production increased from 467,013 mcf in 2002 to 538,787 mcf in 2003, an increase of 71,774 mcf or 15%. Other income increased from $10,023 in 2002 to $267,354 in 2003, an increase of $257,331. This increase is the result of the proceeds received ($254,862) from the settlement of a class action lawsuit against a gas purchaser involving contract price disputes. Production costs increased from $648,820 in 2002 to $848,513 in 2003, an increase of $199,633 or 31%. This is primarily attributable to an increased number of repairs on operated properties during the year. Depreciation, depletion and amortization increased from $448,422 in 2002 to $641,827 in 2003, an increase of $193,405 or 43%, due primarily to the downward revisions of proved undeveloped reserves in the El Cinco Field. There was no impairment of oil and gas properties in fiscal 2002 or 2003. General and administrative expenses increased from $429,240 in 2002 to $532,496 in 2003, an increase of $103,256 or 24%. This increase was primarily attributable to the increased cost of consulting expenses relating to the settlement of the lawsuit which was settled during the fiscal year ($101,945) and an increase in compensation related to stock options granted to consultants ($12,792). 15 Interest expense increased from $57,161 in 2002 to $96,337 in 2003, an increase of $39,176 or 69%. This increase was attributable to additional borrowings during the current fiscal year. ALTERNATIVE CAPITAL RESOURCES Although the Company primarily has used cash from operating activities and funding from the line of credit as its primary capital resources, the Company has in the past, and could in the future, use alternative capital resources. These could include the sale of assets and/or issuances of common stock through a public offering. The Company could also obtain funds through a private placement. CONTRACTUAL OBLIGATIONS The Company has no off-balance sheet debt or unrecorded obligations and has not guaranteed the debt of any other party. The following table summarizes the Company's future payments it is obligated to make based on agreements in place as of March 31, 2004:
Payments Due In: ------------------------------------------------------- Total one year 1-3 years 3 year ---------- -------- ---------- ------ Contractual obligations: Secured bank line of credit $1,700,000 $443,378 $1,256,622 --
These amounts represent the balances outstanding under the bank line of credit. These repayments assume that interest will be paid on a monthly basis and that no additional funds will be drawn. OTHER MATTERS FORWARD 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-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. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. 16 The following represents those policies that management believes are particularly important to the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain. Full Cost Method of Accounting for Crude Oil and Natural Gas Activities. SEC Regulation S-X defines the financial accounting and reporting standards for companies engaged in crude oil and natural gas activities. Two methods are prescribed: the successful efforts method and the full cost method. The Company has chosen to follow the full cost method under which all costs associated with property acquisition, exploration and development are capitalized. The Company also capitalizes internal costs that can be directly identified with acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. Under the successful efforts method, geological and geophysical costs and costs of carrying and retaining undeveloped properties are charged to expense as incurred. Costs of drilling exploratory wells that do not result in proved reserves are charged to expense. Depreciation, depletion, amortization and impairment of crude oil and natural gas properties are generally calculated on a well by well or lease or field basis versus the "full cost" pool basis. Additionally, gain or loss is generally recognized on all sales of crude oil and natural gas properties under the successful efforts method. As a result the Company's financial statements will differ from companies that apply the successful efforts method since the Company will generally reflect a higher level of capitalized costs as well as a higher depreciation, depletion and amortization rate on Company crude oil and natural gas properties. At the time it was adopted, management believed that the full cost method would be preferable, as earnings tend to be less volatile than under the successful efforts method. However, the full cost method makes the Company susceptible to significant non-cash charges during times of volatile commodity prices because the full cost pool may be impaired when prices are low. These charges are not recoverable when prices return to higher levels. The Company's crude oil and natural gas reserves have a relatively long life. However, temporary drops in commodity prices can have a material impact on Company business including impact from the full cost method of accounting. Under full cost accounting rules, the net capitalized cost of crude oil and natural gas properties may not exceed a "ceiling limit" which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%, plus the lower of cost or fair market value of unproved properties. If net capitalized costs of crude oil and natural gas properties exceed the ceiling limit, the Company must charge the amount of the excess to earnings. This is called a "ceiling limitation write-down." This charge does not impact cash flow from operating activities, but does reduce the Company stockholders' equity and reported earnings. The risk that the Company will be required to write down the carrying value of crude oil and natural gas properties increases when crude oil and natural gas prices are depressed or volatile. In addition, write-downs may occur if the Company experiences substantial downward adjustments to its estimated proved reserves or if purchasers cancel long-term contracts for natural gas production. An expense recorded in one period may not be reversed in a subsequent period even though higher crude oil and natural gas prices may have increased the ceiling applicable to the subsequent period. 17 Estimates of the Company's proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a function of: o the quality and quantity of available data; o the interpretation of that data; o the accuracy of various mandated economic assumptions; o and the judgment of the persons preparing the estimate. The Company's proved reserve information included in this Report was based on evaluations prepared by independent petroleum engineers. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate. It should not be assumed that the present value of future net cash flows is the current market value of the Company's estimated proved reserves. In accordance with SEC requirements, the Company based the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. The estimates of proved reserves materially impact DD&A expense. If the estimates of proved reserves decline, the rate at which the Company records DD&A expense will increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost fields. Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that it is reasonably possible that estimates of proved crude oil and natural gas revenues could significantly change in the future. Revenue Recognition. The Company recognizes crude oil and natural gas revenue from its interest in producing wells as crude oil and natural gas is sold from those wells, net of royalties. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, income is recorded based on the Company's net revenue interest in production taken for delivery. The Company had no material gas imbalances. Asset Retirement Obligations. The estimated costs of restoration and removal of facilities are accrued. The fair value of a liability for an asset's retirement obligation is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated by the units of production method. 18 If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. For all periods presented, the Company has included estimated future costs of abandonment and dismantlement in the full cost amortization base and amortize these costs as a component of the Company's depletion expense. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISK FACTORS All of the Company's financial instruments are for purposes other than trading. At March 31, 2004, the Company had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas. INTEREST RATE RISK. The Company's variable rate bank debt is tied to prime rate. If the interest rate on the Company's bank debt increases or decreases by one percentage point, the Company's annual pretax income would change by $17,000. CREDIT RISK. Credit risk is the risk of loss as a result of nonperformance by counter-parties of their contractual obligations. The Company's primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized. At March 31, 2004 the Company's largest credit risk associated with any single purchaser was $116,008. The Company has not experienced any significant credit losses. VOLATILITY OF OIL AND GAS PRICES. The Company's revenues, operating results and future rate of growth are dependent upon the prices received for oil and gas. These market prices tend to fluctuate significantly in response to factors beyond the Company's control. The prices the Company receives for its crude oil production are based on global market conditions. The continued terror threats in the Middle East, the continuing political crisis in Venezuela (a major oil exporter), and actions of OPEC and its maintenance of production constraints, as well as other economic, political, and environment factors will continue to affect world supply. Natural gas prices fluctuate significantly in response to numerous factors including the U.S. economic environment, North American weather patterns, other factors affecting demand such as substitute fuels, the impact of drilling levels on natural gas supply, and the environmental and access issues that limit future drilling activities for the industry. Historically, the markets for oil and gas have been volatile and are likely to continue to be so in the future. Various factors beyond the control of the Company affect the price of oil and gas, including but not limited to worldwide and domestic supplies of oil and gas, the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls, political instability or armed conflict in oil-producing regions, the price and level of foreign imports, the level of consumer demand, the price and availability of alternative fuels, the availability of pipeline capacity, weather conditions, domestic and foreign governmental regulation and the overall economic environment. Any significant decline in prices would adversely affect the Company's revenues and operating income and may require a reduction in the carrying value of the Company's oil and gas properties. If the average oil price had increased or decreased by one cent per barrel for fiscal 2004, the Company's pretax income would have changed by $203. If the average gas price had increased or decreased by one cent per mcf for fiscal 2004, the Company's pretax income would have changed by $4,876. 19 UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES. Estimates of oil and gas reserves, by necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. Estimates of economically recoverable oil and gas reserves and of future 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 may vary considerably from actual results. As a result, estimates of the economically recoverable quantities of oil and gas 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. As required by the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. RESERVE REPLACEMENT RISK. The Company's future success depends upon its ability to find, develop or acquire additional, economically recoverable oil and gas reserves. The proved reserves of the Company will generally decline as reserves are depleted, except to the extent the Company can find, develop or acquire replacement reserves. One offset to the obvious benefits afforded by higher product prices especially for small to mid-cap companies in this industry, is that quality domestic oil and gas reserves are becoming harder to find. Reserves to be produced from undiscovered reservoirs appear to be smaller, and the risks to find these reserves are greater. Reports from the Energy Information Administration indicate that on-shore domestic finding costs are on the rise, and that the average reserves added per well are declining. DRILLING AND OPERATING RISKS. Drilling and operating activities are subject to many risks, including availability of workover and drilling rigs, well blowouts, cratering, explosions, fires, formations with abnormal pressures, pollution, releases of toxic gases and other environmental hazards and risks. Any of these operating hazards could result in substantial losses to the Company. In addition, the Company incurs the risk that no commercially productive reservoirs will be encountered and there 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 Company's production depends in part on the availability, proximity and capacity of natural gas gathering systems, pipelines and processing facilities. Federal and state regulation of oil and gas production and transportation, tax and energy policies, changes in supply and demand and general economic conditions could all affect the Company's ability to produce and market its oil and gas. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm................ 21 Consolidated Balance Sheets............................................ 22 Consolidated Statements of Operations.................................. 23 Consolidated Statements of Changes in Stockholders' Equity............. 24 Consolidated Statements of Cash Flows.................................. 25 Notes to Consolidated Financial Statements............................. 26 20 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- Board of Directors and Shareholders Mexco Energy Corporation We have audited the accompanying consolidated balance sheets of Mexco Energy Corporation and Subsidiary as of March 31, 2004 and 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mexco Energy Corporation and Subsidiary as of March 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note D to the financial statements, effective April 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, and changed its method of accounting for asset retirement obligations. GRANT THORNTON LLP Oklahoma City, Oklahoma May 23, 2004 21 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS As of March 31,
ASSETS 2004 2003 ---------- ---------- Current assets Cash and cash equivalents $ 92,795 $ 68,547 Accounts receivable: Oil and gas sales 396,902 560,297 Trade 3,101 17,617 Related parties -- 3,475 Prepaid costs and expenses 32,382 10,043 ---------- ---------- Total current assets 525,180 659,979 Property and equipment, at cost Oil and gas properties, using the full cost method ($858,602 and $673,690 excluded from amortization in 2004 and 2003, respectively) 16,959,560 15,656,928 Other 34,542 33,708 ---------- ---------- 16,994,102 15,690,636 Less accumulated depreciation, depletion, and amortization 9,346,818 8,661,977 ---------- ---------- Property and equipment, net 7,647,284 7,028,659 ---------- ---------- $8,172,464 $7,688,638 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable - trade $ 97,308 $ 93,434 Lease obligation payable -- 61,086 Current portion of long-term debt 443,378 116,280 ---------- ---------- Total current liabilities 540,686 270,800 Long-term debt 1,256,622 2,033,720 Asset retirement obligation 420,665 -- Deferred income tax liability 519,272 427,730 Commitments and contingencies (Notes B, E, G and H) -- -- Stockholders' equity Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding -- -- Common stock - $0.50 par value; 40,000,000 shares authorized; 1,766,566 shares issued 883,283 883,283 Additional paid-in capital 3,784,493 3,734,119 Retained earnings 896,368 466,522 Treasury stock, at cost (128,925) (127,536) ---------- ---------- Total stockholders' equity 5,435,219 4,956,388 ---------- ---------- $8,172,464 $7,688,638 ========== ==========
The accompanying notes to the consolidated financial statements are an integral part of these statements. 22 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Year ended March 31,
2004 2003 2002 ----------- ----------- ----------- Operating revenues: Oil and gas $ 2,909,953 $ 2,681,759 $ 1,768,560 Other 5,402 267,354 10,023 ----------- ----------- ----------- Total operating revenues 2,915,355 2,949,113 1,778,583 Operating expenses: Production 942,093 848,513 648,820 Accretion of asset retirement obligation 24,246 -- -- Depreciation, depletion, and amortization 633,443 641,827 448,422 General and administrative 529,834 532,496 429,240 ----------- ----------- ----------- Total operating expenses 2,129,616 2,022,836 1,526,482 ----------- ----------- ----------- 785,739 926,277 252,101 Other income (expense): Interest income 764 981 2,455 Interest expense (83,530) (96,337) (57,161) ----------- ----------- ----------- Net other expense (82,766) (95,356) (54,706) ----------- ----------- ----------- Earnings before income taxes and cumulative effect of accounting change 702,973 830,921 197,395 Income tax expense: Current 33,371 (13,026) (62,992) Deferred 137,489 171,139 71,096 ----------- ----------- ----------- 170,860 158,113 8,104 ----------- ----------- ----------- Income before cumulative effect of accounting change 532,113 672,808 189,291 Cumulative effect of accounting change, net of tax (102,267) -- -- ----------- ----------- ----------- Net income $ 429,846 $ 672,808 $ 189,291 =========== =========== =========== Net income per common share: Basic: Income before cumulative effect of accounting change $ 0.31 $ 0.39 $ 0.11 Cumulative effect, net of tax $ (0.06) $ -- $ -- Net income $ 0.25 $ 0.39 $ 0.11 Diluted: Income before cumulative effect of accounting change $ 0.30 $ 0.39 $ 0.11 Cumulative effect, net of tax $ (0.06) $ -- $ -- Net income $ 0.24 $ 0.39 $ 0.11 Pro forma amounts assuming, the new method of accounting for asset retirement obligations is applied retroactively: Net income $ 532,113 $ 651,669 $ 170,780 Basic net income per share $ 0.31 $ 0.37 $ 0.10 Diluted net income per share $ 0.30 $ 0.37 $ 0.10
The accompanying notes to the consolidated financial statements are an integral part of these statements. 23 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Common Stock Additional Earnings Stockholders' Treasury Paid-In (Accumulated Total Par Value Stock Capital Deficit) Equity ------------- -------- ---------- ------------ ---------- Balance, April 1, 2001 $ 810,693 $ (71,592) $2,900,097 $ 407,254 $4,046,452 Net earnings -- -- -- 189,291 189,291 10% stock dividend 80,283 -- 722,548 (802,831) -- Purchase of stock -- (91,231) -- -- (91,231) Issuance of stock for property -- 72,576 10,224 -- 82,800 Retirement of stock (7,693) 90,247 (82,554) -- -- Stock based compensation -- -- 48,730 -- 48,730 ------------- -------- ---------- ------------ ---------- Balance, March 31, 2002 883,283 -- 3,599,045 (206,286) 4,276,042 Net earnings -- -- -- 672,808 672,808 Purchase of stock -- (127,536) -- -- (127,536) Issuance of warrants for acreage -- -- 73,552 -- 73,552 Stock based compensation -- -- 61,522 -- 61,522 ------------- -------- ---------- ------------ ---------- Balance, March 31, 2003 883,283 (127,536) 3,734,119 466,522 4,956,388 Net earnings -- -- -- 429,846 429,846 Purchase of stock -- (1,389) -- -- (1,389) Profits from sale of stock by insider -- -- 2,950 -- 2,950 Stock based compensation -- -- 47,424 -- 47,424 ------------- -------- ---------- ------------ ---------- Balance, March 31, 2004 $ 883,283 $(128,925) $3,784,493 $ 896,368 $5,435,219 ============= ========== ========== ============ ========== Share Activity 2004 2003 2002 ---------- ------------ ---------- Common stock issued At beginning of year 1,766,566 1,766,566 1,621,387 Issued -- -- 160,566 Cancelled -- -- (15,387) ---------- ------------ ---------- At end of year 1,766,566 1,766,566 1,766,566 Held in treasury At beginning of year (30,244) -- (11,254) Acquisitions (281) (30,244) (22,533) Issued for property -- -- 18,400 Cancellation, returned to unissued -- -- 15,387 ---------- ------------ ---------- At end of year (30,525) (30,244) -- ---------- ------------ ---------- Common shares outstanding at end of year 1,736,041 1,736,322 1,766,566 ========== ============ ==========
The accompanying notes to the consolidated financial statements are an integral part of these statements. 24 MEXCO ENERGY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended March 31,
2004 2003 2002 Cash flows from operating activities: ---------- ----------- ----------- Net earnings $ 429,846 $ 672,808 $ 189,291 Cumulative effect of accounting change 102,267 -- -- Adjustments to reconcile net income to net cash provided by operating activities: Increase in deferred income taxes 137,489 171,139 71,096 Stock-based compensation 47,424 61,522 48,730 Depreciation, depletion, and amortization 633,443 641,827 448,422 Accretion of asset retirement obligations 24,246 -- -- (Increase) decrease in accounts receivable 181,386 (193,089) 114,896 (Increase) decrease in prepaid expenses (22,340) 14,080 50,215 Decrease in income taxes payable -- -- (51,637) Increase (decrease) in accounts payable and accrued expenses (16,282) 1,403 28,964 Net cash provided by operating activities 1,517,479 1,369,690 899,977 Cash flows from investing activities: Additions to oil and gas properties (982,872) (1,628,695) (2,247,423) Additions to other property and equipment (834) (4,927) (5,181) Net cash used in investing activities (983,706) (1,633,622) (2,252,604) Cash flows from financing activities: Acquisition of treasury stock (1,389) (127,536) (91,231) Profits from sale of stock by insider 2,950 -- -- Reduction of capital lease obligations (61,086) (24,943) -- Reduction of long-term debt (770,000) (470,000) (50,000) Proceeds from long term debt 320,000 910,000 1,160,000 Net cash (used in) provided by financing activities (509,525) 287,521 1,018,769 Net increase (decrease) in cash and cash equivalents 24,248 23,589 (333,858) Cash and cash equivalents at beginning of year 68,547 44,958 378,816 Cash and cash equivalents at end of year $ 92,795 $ 68,547 $ 44,958 Interest paid $ 83,196 $ 94,792 $ 55,022 Income taxes paid (recovered) $ 50,000 $ (117,056) $ 92,675 Supplemental Disclosure of Non-cash investing and financing activities: Issuance of common stock in exchange for oil and gas properties $ -- $ -- $ 82,800 Fair value of warrants issued for oil and gas properties $ -- $ 73,552 $ -- Acquisition of equipment under capital leases $ -- $ 81,182 $ --
The accompanying notes to the consolidated financial statements are an integral part of these statements. 25 NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Mexco Energy Corporation and its wholly owned subsidiary, Forman Energy Corporation (collectively, the "Company") are engaged in the acquisition, exploration, development, and production of domestic oil and gas and owns producing properties and undeveloped acreage in 11 states. The majority of the Company's activities are centered in West Texas. Although most of the Company's oil and gas interests are operated by others, the Company operates several properties in which it owns an interest. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents. The Company considers all highly liquid debt instruments purchased with maturities of three months or less and money market funds to be cash equivalents. 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. 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. All capitalized costs of oil and gas properties (excluding certain unevaluated property costs), including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved 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. Asset Retirement Obligations ("ARO"). The Company has significant obligations to plug and abandon natural gas and crude oil wells and related equipment at the end of oil and gas production operations. The Company records the fair value of a liability for an ARO in the period in which it is incurred and a corresponding increase in the carrying amount of the related asset. Subsequently, the asset retirement costs included in the carrying amount of the related asset are allocated to expense using the units of production method. In addition, increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statement of Operations. Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. The Company uses the present value of estimated cash flows related to its ARO to determine the fair value. Inherent in the present value 26 calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the related asset. 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. Income Per Common Share. Basic income per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares (stock options and warrants) outstanding during the period. In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive. The following is a reconciliation of the number of shares used in the calculation of basic income per share and diluted income per share for the periods ended March 31: 2004 2003 2002 --------- --------- --------- Weighted average number of common shares outstanding, basic 1,736,047 1,741,462 1,768,314 Incremental shares from the assumed exercise of dilutive stock options 66,253 5,369 265 --------- --------- --------- Dilutive potential common shares 1,802,300 1,746,831 1,768,579 ========= ========= ========= Outstanding options and warrants to purchase 10,000, 388,500 and 200,000 shares at March 31, 2004, 2003, and 2002, respectively, were not included in the computation of diluted net earnings per share because the exercise price of the options or warrants was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. Stock Dividend. On February 1, 2002, the Company declared a 10% stock dividend to shareholders of record on February 15, 2002. On February 28, 2002, the Company issued 160,566 shares of common stock in conjunction with this dividend. Accordingly, amounts equal to the fair market value of the additional shares issued have been charged to retained earnings and credited to common stock and additional paid-in capital. All references in the consolidated financial statements to weighted average number of shares and earnings per common share amounts have been adjusted to reflect the stock dividend on a retroactive basis. Income Taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences between 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. 27 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 economic benefit. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. There were no significant environmental expenditures or liabilities for the years ended March 31, 2004, 2003, or 2002. Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the these financial statements. Although management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. Significant estimates affecting these financial statements include the estimated quantities of proved oil and gas reserves, the related present value of estimated future net cash flows and the future development, dismantlement and abandonment costs. Revenue Recognition and Gas Balancing. Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred. Sales are to credit-worthy energy purchasers with payments generally received within 60 days of transportation from the well site. The Company has historically had little, if any, uncollectible oil and gas receivables; therefore, an allowance for uncollectible accounts is not required. Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when the Company's excess takes of natural gas volumes exceed its estimated remaining recoverable reserves (over produced). No receivables are recorded for those wells where the Company has taken less than its ownership share of gas production (under produced). The Company has no significant gas imbalances. Stock Options and Warrants. The Company accounts for employee stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," as amended by Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25. The Company applies the intrinsic value method in accounting for its employee stock options and records no compensation costs for its stock option awards to employees. The Company recognizes compensation cost related to stock options awarded to independent consultants based on fair value of the options at date of grant. If compensation cost for the Company's stock option plan had been determined based on the fair value at the grant dates for all employee awards under the plan, net income, basic income per common share, and diluted income per common share would have been as follows: 2004 2003 2002 ---- ---- ---- Net income, as reported $ 429,846 $ 672,808 $ 189,291 Deduct: Stock-based employee compensation expense determined under fair value based method (SFAS 123), net of tax $ (86,070) $ (63,133) $ (50,066) ---------- ---------- ----------- Net income, pro forma $ 343,776 $ 609,675 $ 139,225 ========== ========== ========== Basic income per share: As reported (1) $ 0.25 $ 0.39 $ 0.11 Pro forma (1) $ 0.20 $ 0.35 $ 0.08 Diluted income per share: As reported (1) $ 0.24 $ 0.39 $ 0.11 Pro forma (1) $ 0.19 $ 0.35 $ 0.08 28 (1) Amounts have been adjusted to reflect the 10% stock dividend effected on February 1, 2002. 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. NOTE B - DEBT The Company has a revolving credit agreement with Bank of America, N.A. ("Bank"), which provides for a credit facility of $5,000,000, subject to a borrowing base determination. On December 15, 2003 the credit agreement was amended with a maturity date of August 15, 2005. The borrowing base was redetermined on this date and set at $1,938,372 with monthly commitment reductions of $45,450 beginning on January 5, 2004. As of March 31, 2004, the balance outstanding under this agreement was $1,700,000. Principal payments of $443,378 are anticipated to be required for fiscal 2005 to comply with the monthly commitment reductions. A letter of credit for $50,000, in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operates, is also outstanding under the facility. The borrowing base is subject to redetermination on or about August 1, of each year. Amounts borrowed under this agreement are collateralized by the common stock of Forman and the Company's oil and gas properties. Interest under this agreement is payable monthly at prime rate (4.00% and 4.25% at March 31, 2004 and 2003, 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 cash dividends. NOTE C - OTHER INCOME During the third quarter of fiscal 2003 the Company received proceeds of $254,862, before expenses of $101,945, resulted from the settlement of a class action lawsuit against a gas purchaser involving contract price disputes. NOTE D - ASSET RETIREMENT OBLIGATIONS The Company's asset retirement obligations relate to the plugging and abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April 1, 2003. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recorded in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The change resulted in a cumulative effect charge to net income of ($102,267) net of tax, or ($0.06) per share. Additionally, the Company recorded an asset retirement obligation liability of $358,419 and an increase to net properties and equipment and other assets of $210,206 upon adoption of SFAS No. 143. The asset retirement obligation, which is included on the Consolidated Balance Sheet was $420,665 at March 31, 2004. Accretion expense for fiscal 2004 was $24,246. 29 The asset retirement obligation was $358,419 and $336,543 for fiscal years ending March 31, 2003 and 2002, assuming SFAS No. 143 had been adopted as of April 1, 2001. The following table provides a rollforward of the asset retirement obligation for the fiscal year ended March 31, 2004. Carrying amount of asset retirement obligations as of April 1, 2003 $358,419 Liabilities incurred 48,321 Liabilities settled (10,321) Accretion expense 24,246 Revisions in estimated cash flows 0 -------- Carrying amount of asset retirement obligations as of March 31, 2004 $420,665 ======== NOTE E - CAPITAL LEASE OBLIGATIONS During fiscal 2003, the Company began leasing three gas compressors under separate agreements that are classified as capital leases. The cost of the equipment under the capital leases is included in the balance sheet as property and equipment and was $81,182 on March 31, 2004 and 2003. The accumulated amortization associated with these leases was $10,726 and $5,796 on March 31, 2004 and 2003, respectively. Amortization of assets under capital leases is included in depreciation expense. The lease obligation associated with these three compressors was $61,086 on March 31, 2003. As of March 31, 2004 the Company has fulfilled its obligation of the lease agreements and received title to the compressors. NOTE F - INCOME TAXES Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. Significant components of net deferred tax assets (liabilities) at March 31 are as follows: 2004 2003 ----------- --------- Percentage depletion carryforwards $ 442,907 $ 403,344 Vacation accrual 2,636 1,334 Deferred compensation 56,536 41,835 Asset retirement obligation 130,406 -- Other 1,777 -- Net operating loss carryforwards -- 43,927 ----------- --------- 634,262 490,440 Deferred tax liabilities: Excess financial accounting bases over tax bases of property and equipment (1,153,534) (918,170) ----------- --------- Net deferred tax liabilities $ (519,272) $(427,730) =========== ========= As of March 31, 2004, the Company has statutory depletion carryforwards of approximately $1,428,000, which do not expire. 30 A reconciliation of the provision for income taxes to income taxes computed using the federal statutory rate for years ended March 31 follows: 2004 2003 2002 ---------- ---------- --------- Tax expense at statutory rate $ 239,011 $ 282,513 $ 67,114 Depletion in excess of basis (39,563) (86,170) (58,513) Effect of graduated rates (21,089) (24,928) (5,922) Revision of prior year estimates -- (13,026) 7,657 Other (7,499) (276) (2,232) ---------- ---------- --------- $ 170,860 $ 158,113 $ 8,104 ========== ========== ========= Effective tax rate 24% 19% 4% ========== ========== ========= NOTE G - EXPLORATION AGREEMENT On December 5, 2002, the Company entered into an exploration agreement with Falcon Bay Operating, LLC. Pursuant to such agreement, the Company has obtained the right to purchase and inventory seismic data and acreage in shallow water areas of Texas and Louisiana. In consideration for the right to obtain four such prospects, the Company has issued warrants to purchase 107,500 shares of common stock at an exercise price of $5.00 per share. Such warrants are exercisable for a period of two years from date of grant. Additional warrants, exercisable at the same exercise price and exercisable for two years, would be issued covering 322,500 shares upon exercise of the Company's right to participate in a total of four prospects. NOTE H - FEASIBILITY STUDY In March 2004, the Company signed an agreement in Moscow, Russia to begin a preliminary feasibility study for exploration and development of natural gas reserves in Russia. A team of U.S. and Russia experts commenced a feasibility study of a number of undeveloped natural gas fields located in the vicinity of Gasprom pipelines which serve Russia. The Company has formed OBTX LLC, a Delaware limited liability company, in which it owns a 90% interest with the remaining 10% interest split equally among three individuals, one of which is Arden Grover, a director of the Company. OBTX, LLC, plans to participate in any Russian ventures entered into and own a 50% interest. The Company's geological and related costs associated with the feasibility study total $41,596 through March 31, 2004, which has been capitalized. NOTE I - MAJOR CUSTOMERS Currently, the Company operates exclusively within the United States and its revenues and operating income are derived predominately from the oil and gas industry. Oil and gas production is sold to various purchasers and the receivables are unsecured. Historically, the Company has not experienced significant credit losses on its oil and gas accounts and management is of the opinion that significant credit risk does not exist. Management is of the opinion that the loss of any one purchaser would not have an adverse effect on the ability of the Company to sell its oil and gas production. In fiscal 2004, 2003, and 2002, one purchaser accounted for 29%, 28%, and 24%, respectively, of revenues. At March 31, 2004, accounts receivable from the purchaser was approximately 29% of accrued oil and gas sales. 31 NOTE J - OIL AND GAS COSTS The costs related to the oil and gas activities of the Company were incurred as follows: Year ended March 31, ---------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Property acquisition costs Proved $ 339,519 $ 64,090 $ 649,021 Unproved U.S. $ 184,912 $ 673,690 $ 280,745 Unproved Russia $ 41,596 $ -- $ -- Exploration costs $ 4,757 $ 55,543 $ 46,907 Development costs $ 453,684 $ 990,106 $1,353,553 The Russian costs in 2004 were for the feasibility study referred to in Note H to the Company's financial statements. The Company had the following aggregate capitalized costs relating to the Company's oil and gas property activities at March 31: 2004 2003 2002 ----------- ----------- ----------- Proved oil and gas properties $15,758,031 $14,596,072 $13,462,406 Unproved oil and gas properties: subject to amortization 342,927 387,166 424,392 not subject to amortization-U.S. 817,006 673,690 -- not subject to amortization-Russia 41,596 -- -- ----------- ----------- ----------- 16,959,560 15,656,928 13,886,798 Less accumulated depreciation, depletion, and amortization 9,320,174 8,637,902 7,999,539 ----------- ----------- ----------- $ 7,639,386 $ 7,019,026 $ 5,887,259 =========== =========== =========== The cost of certain oil and gas leases that the Company has acquired, but not evaluated have been excluded in computing amortization of the full cost pool. The Company will begin to amortize these properties when the projects are evaluated, which is currently estimated to be within the following year. Costs excluded from amortization at March 31, 2004 total $858,602. No impairment exists for these properties at March 31, 2004 based on geological studies. Depreciation, depletion, and amortization amounted to $6.24, $5.64 and $4.49 per equivalent barrel of production for the years ended March 31, 2004, 2003, and 2002, respectively. NOTE K - STOCKHOLDERS' EQUITY In fiscal 2002, the board of directors authorized the use of up to $250,000 to repurchase shares of the Company's common stock. During fiscal 2002, the Company repurchased 22,533 shares, at an aggregate cost of $91,231. Of such shares, 18,400 were reissued in exchange for oil and gas lease rights representing 368 net acres valued at $83,000. The remaining 4,133 shares along with the 11,254 shares of stock held in the treasury account from fiscal year ending March 31, 2001 were cancelled. On February 28, 2002, the Company distributed 160,566 shares of common stock in connection with a 10% stock dividend. As a result of the stock dividend, par value of outstanding common stock was increased by 32 $80,283, additional paid-in capital was increased by $722,548, and retained earnings was decreased by $802,831. In fiscal 2003, the board of directors authorized the use of up to $250,000 to repurchase shares of the Company's common stock. During fiscal 2003, the Company repurchased 30,244 shares at an aggregate cost of $127,536 for the treasury account. For the fiscal 2004, the board of directors repurchased 281 shares at an aggregate cost of $1,389 for the treasury account. During the last quarter of fiscal 2004, the Chairman of the board paid the Company $2,950, representing profits on stock sold which he held less than six months. Such payment was made in accordance with Section 16(b) of the Securities Exchange Act of 1934. NOTE L - STOCK OPTIONS AND WARRANTS 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 the compensation committee of the board of directors, include stock options of restricted stock. Stock options may be an incentive stock option or a nonqualified stock option. Options to purchase common stock under the plan are granted at the fair market value of the common stock at the date of grant, become exercisable to the extent of 25% of the shares optioned on each of four anniversaries of the date of grant, expire ten years from the date of grant, and are subject to forfeiture if employment terminates. Restricted stock awards 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 60 days and will vest as determined by agreement. Holders of restricted stock have all rights of a shareholder of the Company. During fiscal 2004, options for 49,000 shares were granted. Of these, 10,000 options were granted to contract consultants. The exercise price of all options granted equaled or exceeded the market price of the stock on the date of grant. Additional information with respect to the Plan's stock option activity for options issued to employees and directors is as follows: Weighted Number Average of Shares Exercise Price --------- -------------- Options outstanding, at April 1, 2001 170,000 $ 6.49 Granted 20,000 4.00 Exercised -- -- Forfeited (40,000) 6.81 --------- -------------- Options outstanding, at March 31, 2002 150,000 6.07 Granted 31,000 4.00 Exercised -- -- Forfeited -- -- --------- -------------- Options outstanding, at March 31, 2003 181,000 5.71 Granted 39,000 6.00 Exercised -- -- Forfeited -- -- --------- -------------- Options outstanding, at March 31, 2004 220,000 $ 5.76 ========= ============== Options exercisable at March 31, 2002 72,500 $ 6.57 Options exercisable at March 31, 2003 110,000 $ 6.40 Options exercisable at March 31, 2004 140,250 $ 6.11 33 Weighted average grant date fair value of stock options granted to employees and directors during fiscal 2004, 2003, and 2002 were $4.82, $3.72 and $1.30, respectively. These values were determined using a Binomial option-pricing model. The model values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The Company considers the binomial model more accurate than the Black-Scholes model, in that it recognizes the ability to exercise before expiration once an option is vested. The assumptions used in the Binomial models were as follows for stock options granted in fiscal 2004, 2003 and 2002: 2004 2003 2002 ------- ------- ------- Expected volatility 67.46% 134.07% 27.24% Expected dividend yield 0.00% 0.00% 0.00% Risk-free rate of return 3.40% 5.40% 4.79% Expected life of options 7 years 7 years 7 years The option valuation models were 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. The following tables summarize information about employee and directors stock options outstanding and exercisable at March 31, 2004: Stock Options Outstanding Weighted Average Number of Remaining Weighted Range of Shares Contractual Average Exercise Prices Outstanding Life in Years Exercise Price --------------- ----------- ---------------- --------------- $7.50-$7.75 50,000 4.55 $7.60 $6.00 39,000 9.27 $6.00 $6.75 20,000 6.81 $6.75 $5.25 60,000 5.97 $5.25 $4.00 51,000 7.87 $4.00 ----------- 220,000 Stock Options Exercisable Number of Weighted Range of Shares Average Exercise Prices Exercisable Exercise Price --------------- ----------- -------------- $7.50-$7.75 50,000 $7.60 $6.75 15,000 $6.75 $5.25 60,000 $5.25 $4.00 15,250 $4.00 34 Since the Company applies the intrinsic value method in accounting for its employee stock options, it generally records no compensation cost for its stock option awards to employees. The Company recognizes expense related to stock options awarded to independent consultants and contractors based on fair value of the options at date of grant. Additional information with respect to stock option and warrant activity for options and warrants granted to outside consultants and contractors is as follows: Weighted Number Average of Shares Exercise Price --------- -------------- Options outstanding, at April 1, 2001 70,000 $ 6.57 Granted 10,000 4.00 Exercised -- -- Forfeited -- -- --------- -------------- Options outstanding, at March 31, 2002 80,000 6.25 Granted 127,500 4.84 Exercised -- -- Forfeited -- -- --------- -------------- Options outstanding, at March 31, 2003 207,500 5.39 Granted 10,000 7.00 Exercised -- -- Forfeited -- -- --------- -------------- Options outstanding, at March 31, 2004 217,500 $ 5.83 ========= ============== Options exercisable at March 31, 2002 32,500 $ 6.69 Options exercisable at March 31, 2003 160,000 $ 5.50 Options exercisable at March 31, 2004 180,000 $ 5.48 Weighted average grant date fair value of stock options and warrants granted to outside consultants and contractors during fiscal 2004, 2003, and 2002 were $5.46, $1.16 and $1.26, respectively. These values were determined using a Binomial option-pricing model. The model values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Binomial models were as follows for stock options granted in fiscal 2004, 2003 and 2002: 2004 2003 2002 ------- ------- ------- Expected volatility 62.52% 90.09% 27.23% Expected dividend yield 0.00% 0.00% 0.00% Risk-free rate of return 3.81% 2.39% 4.52% Expected life of options 7 years 3 years 7 years The option valuation models were 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. The following tables summarize information about outside consultants and contractors stock options and warrants outstanding and exercisable at March 31, 2004: 35 Stock Options/Warrants Outstanding Weighted Average Number of Remaining Weighted Range of Shares Contractual Average Exercise Prices Outstanding Life in Years Exercise Price --------------- ----------- ---------------- -------------- $7.50-$7.75 20,000 4.46 $7.63 $7.00 10,000 9.64 $7.00 $6.75 30,000 6.81 $6.75 $5.25 20,000 5.97 $5.25 $5.00 107,500 0.68 $5.00 $4.00 30,000 7.96 $4.00 ----------- 217,500 Stock Options/Warrants Exercisable Number of Weighted Range of Shares Average Exercise Prices Exercisable Exercise Price --------------- ----------- -------------- $7.50-$7.75 20,000 $7.63 $6.75 22,500 $6.75 $5.25 20,000 $5.25 $5.00 107,500 $5.00 $4.00 10,000 $4.00 The Company recognizes expense related to stock options awarded to independent consultants based on fair value of the options at date of grant. Total expense related to these awards was $47,424 and $61,522 for fiscal 2004 and 2003, respectively. The Company capitalizes fair value of warrants as part of the leasehold cost of the acreage acquired in connection with the issuance of the warrants. NOTE M - RELATED PARTY TRANSACTIONS The Company served as operator of properties in which the majority stockholder had interests and billed the majority stockholder for lease operating expenses and shared office expenditures on a monthly basis subject to usual trade terms. The billings totaled $43,827 for the year ended March 31, 2002. All of such properties were sold in October 2001. The only related party transactions for the years ended March 31, 2004 and 2003 relate to shared office expenditures. The total billed for years ended March 31, 2004 and 2003 was $18,118 and $10,016, respectively. Effective January 1, 2000, the Company entered into an agreement with the husband of an officer and director of the Company to provide geological consulting services. Amounts paid under this contract were $8,094, $19,251 and $23,627 for the years ended March 31, 2004, 2003, and 2002, respectively. During the year ending March 31, 2004, a member of the board of directors, also a Company employee, entered into an agreement with Deepwater Resources, L.P. and Gary Martin, whereby he receives a 1.5% overriding royalty on certain leases related to the Lodgepole Prospect in Stark County, North Dakota. In January 2004, the Company purchased a one-quarter interest in these leases and/or options to lease. During the year ending March 31, 2003, a member of the board of directors, also a Company employee, entered into an agreement with Falcon Bay, LLC, whereby he receives a commission from Falcon Bay Operating, LLC for any transactions consummated between Falcon Bay Operating, LLC and the Company in the course of the Exploration Agreement. 36 During the year ending March 31, 2002, the Company entered into two transactions, respectively, with a Company director and employee and a trust related to but not controlled by said director and employee. In the first transaction, the Company purchased oil and gas lease rights representing 369 net acres for cash consideration of $83,000. In the second transaction, the Company exchanged 18,400 shares of its $.50 par value common stock for oil and gas lease rights representing 368 net acres with a value of approximately $83,000. Such acreage is available for exploration and production of oil and gas. NOTE M - 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 SEC and FASB. These guidelines require that reserve estimates be prepared under existing economic and operating conditions at year-end, with no provision for price and cost escalators, except by contractual agreement. The estimates as of March 31, 2004, 2003, and 2002 are based on evaluations prepared by Joe C. Neal and Associates, Petroleum Consultants. Management emphasizes that reserve estimates are inherently imprecise and are expected to change as new information becomes available and as economic conditions in the industry change. The following estimates of proved reserves quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):
2004 2003 2002 ---------------------- ----------------------- ----------------------- Bbls Mcf Bbls Mcf Bbls Mcf ------- --------- ------- ---------- -------- ---------- Proved reserves, beginning of year 150,000 7,931,000 237,000 10,182,000 235,000 6,345,000 Revision of previous estimates 2,000 214,000 (66,000) (1,746,000) (70,000) (1,204,000) Purchase of minerals in place -- 260,000 -- 22,000 55,000 2,864,000 Extensions and discoveries -- -- 2,000 12,000 38,000 2,644,000 Production (20,000) (488,000) (23,000) (539,000) (21,000) (467,000) ------- --------- ------- ---------- -------- ---------- Proved reserves, end of year 132,000 7,917,000 150,000 7,931,000 237,000 10,182,000 ======= ========= ======= ========== ======== ========== PROVED DEVELOPED RESERVES (UNAUDITED): Beginning of year 94,000 4,518,000 144,000 5,159,000 235,000 6,337,000 End of year 77,000 4,274,000 94,000 4,518,000 144,000 5,159,000
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED):
March 31, -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Future cash inflows $ 46,230,000 $ 49,820,000 $ 36,005,000 Future production and development costs (12,225,000) (13,284,000) (12,217,000) Future income taxes (a) (7,761,000) (8,444,000) (5,228,000) ------------ ------------ ------------
37
Future net cash flows 26,244,000 28,092,000 18,560,000 Annual 10% discount for estimated timing of cash flows (11,482,000) (12,120,000) (9,256,000) ------------ ------------ ------------ Standardized measure of discounted future net cash flows $ 14,762,000 $ 15,972,000 $ 9,304,000 ============ ============ ============
(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 and effects of statutory depletion. CHANGES IN STANDARIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES (UNAUDITED):
Year ended March 31, --------------------------------------------- 2004 2003 2002 ------------ ----------- ------------ Sales of oil and gas produced, net of production costs (1,968,000) $(1,833,000) $ (1,120,000) Net changes in price and production costs (1,697,000) 12,946,000 (7,145,000) Changes in previously estimated development costs -- 512,000 (59,000) Revisions of quantity estimates 524,000 (5,103,000) (1,862,000) Net change due to purchases and sales of minerals in place 681,000 77,000 3,685,000 Extensions and discoveries, less related costs -- 87,000 2,121,000 Net change in income taxes 436,000 (2,180,000) 1,183,000 Accretion of discount 2,077,000 1,193,000 1,599,000 Changes in timing of estimated cash flows and other (1,263,000) 969,000 (1,283,000) ------------ ----------- ------------ Changes in standardized measure (1,210,000) 6,668,000 (2,881,000) Standardized measure, beginning of year 15,972,000 9,304,000 12,185,000 ------------ ----------- ------------ Standardized measure, end of year $14,762,000 $15,972,000 $ 9,304,000 ============ =========== ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 9A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures and have determined that such disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K. 38 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required regarding Directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the SEC not later than July 30, 2004. 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 11. EXECUTIVE COMPENSATION The information required in this item is incorporated by reference from the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the SEC not later than July 30, 2004. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in this item is incorporated by reference from the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the SEC not later than July 30, 2004. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in this item is incorporated by reference from the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the SEC not later than July 30, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required in this item is incorporated by reference from the Company's Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the SEC not later than July 30, 2004. 39 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and 2. Financial Statements and Schedules. See "Index to Consolidated 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. (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 adopted December 5, 2002. 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). 21 Subsidiaries of the Company (incorporated by reference to the Company's Annual Report on Form 10-K dated June 24, 1998). 31.1 Certification by the President and Chief Executive Officer of the Company pursuant to Rule 13a -- 14(a) of the Securities Exchange Act of 1934. 31.2 Certification of the Chief Financial Officer of the Company pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. A report on Form 8-K, dated March 24, 2004, was filed by the Company for the year ended March 31, 2004 under Item 5 to provide public disclosure of an agreement to begin a preliminary feasibility study for exploration and development of natural gas reserves in Russia. 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 29, 2004, by the following persons on behalf of the Company and in the capacity indicated. 40 /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/ Tamala L. McComic - --------------------------------------------- Tamala L. McComic Vice President, 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/ Arden Grover - --------------------------------------------- Arden Grover Director /s/ Jack D. Ladd - --------------------------------------------- Jack D. Ladd Director 41 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. 21* Subsidiaries of the Company. 31.1 Certification by the President and Chief Executive Officer of the Company pursuant to Rule 13a -- 14(a) of the Securities Exchange Act of 1934. 31.2 Certification of the Chief Financial Officer of the Company pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 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. *** Filed with the Company's Annual Report on Form 10-K dated June 29, 2004. EX-31.1 2 v04255_ex31-1.txt Exhibit 31.1 I, Nicholas C. Taylor, certify that: 1. I have reviewed this annual report on Form 10-K of Mexco Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. June 29, 2004 /s/ Nicholas C. Taylor - ------------------------------ ---------------------------- Nicholas C. Taylor President EX-31.2 3 v04255_ex31-2.txt Exhibit 31.2 I, Tamala L. McComic, certify that: 1. I have reviewed this annual report on Form 10-K of Mexco Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. June 29, 2004 /s/ Tamala L. McComic -------------------------------- Tamala L. McComic Vice President, Treasurer, and Assistant Secretary EX-32.1 4 v04255_ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Mexco Energy Corporation (the "Company") on Form 10-K for the year ending March 31, 2004, as filed with the SEC on the date hereof (the "Report"), I, Nicholas C. Taylor, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 29, 2004 /s/ Nicholas C. Taylor --------------------------- President and Chief Executive Officer EX-32.2 5 v04255_ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Mexco Energy Corporation (the "Company") on Form 10-K for the year ending March 31, 2004, as filed with the SEC on the date hereof (the "Report"), I, Nicholas C. Taylor, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 29, 2004 /s/ Tamala L. McComic ----------------------------------- Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----