MEXCO ENERGY CORP — M&A Activity 1997

May 12, 1997

SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-KA CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 25, 1997 ------------------- MEXCO ENERGY CORPORATION ------------------------ (Exact name of registrant as specified in charter) Colorado 0-6694 84-0627918 - - ---------------------------- ---------------- ------------------- (State or other jurisdiction (Commission No.) (IRS Employer of incorporation Identification No.) 214 W. Texas, Suite 1101, Midland, Texas 79701 - - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (915) 682-1119 ---------------- MEXCO ENERGY CORPORATION Index ITEM 2. ACQUISITION.................................................. 3 ITEM 7.(b) PRO FORMA COMBINED FINANCIAL STATEMENTS...................... 4 Pro Forma Combined Balance Sheet as of December 31, 1996..... 5 Pro Forma Combined Statement of Operations for the year ended March 31, 1996....................................... 6 Pro Forma Combined Statement of Operations for the nine months ended December 31, 1996............................. 7 Notes to Pro Forma Financial Statements...................... 8 2 ITEM 2. ACQUISITION ----------- (a) On February 25, 1997 the Registrant purchased all of the issued and outstanding 90 shares of common stock of Forman Energy Corporation, a New York corporation, for cash in the amount of $1,397,000. The value of the stock was based on the Estimated Fair Market Value Opinion provided by the engineering firm of T. Scott Hickman & Associates, Inc. of Midland, Texas. Virtually all of the assets of Forman Energy Corporation consist of oil and gas properties located in the United States. Funding for the acquisition has been provided by NationsBank of Texas through a revolving line of credit in the amount of $1,750,000 collateralized by a deed of trust covering substantially all of the Registrant's properties and pledge of the stock of Forman Energy Corporation. (b) Assets of the acquired company include partial interests in lease and well equipment associated with various working interests in producing oil and gas properties and interests of approximately 1% to 3% in numerous oil and gas partnerships. These assets will continue to be used in the same manner. 3 ITEM 7. (b) PRO FORMA COMBINED FINANCIAL STATEMENTS - UNAUDITED - - --------------------------------------------------------------- The following unaudited pro forma financial statements have been prepared to give effect to the Company's historical financial statements of the acquisition of Forman Energy Corporation ("Forman") as if the transaction had been consummated on the balance sheet date for the pro forma combined balance sheet and at the beginning of the earliest period presented in the pro forma combined statements of operations. The unaudited pro forma combined financial statements are not necessarily indicative of the financial results that would have ocurred if the Company had purchased Forman at the times indicated. In addition, future results may vary significantly from the results reflected in the accompanying pro forma combined financial statements because of normal declines, changes in product prices, and the success of future exploration and development activities, among other factors. 4 MEXCO ENERGY CORPORATION PRO FORMA COMBINED BALANCE SHEET (UNAUDITED) December 31, 1996 ASSETS ------

The accompanying notes are an integral part of these financial statements. 5 MEXCO ENERGY CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) For The Years Ended

The accompanying notes are an integral part of these financial statements. 6 MEXCO ENERGY CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) For The Nine Months Ended December 31, 1996

The accompanying notes are an integral part of these financial statements. 7 MEXCO ENERGY CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION On February 25, 1997, Mexco Energy Corporation (the "Registrant"), purchased the stock of Forman Energy Corporation ("Forman") for the sum of $1,397,000. Forman was previously a sub-chapter "S" corporation and as a result of the purchase Mexco has assumed a deferred tax liability of $179,873. The accompanying pro forma combined balance sheet has been presented as if the purchase of Forman ocurred on December 31, 1996 and the accompanying pro forma combined statements of operations for the year ended March 31, 1996 and the nine months ended December 31, 1996 have been prepared as if the purchase of Forman was consummated at the beginning of the periods presented. NOTE B - PRO FORMA ADJUSTMENTS Pro forma adjustments are necessary to reflect the balance sheet and statements of operations of the Registrant assuming the purchase of Forman was consummated at the beginning of the periods presented. The accompanying pro forma balance sheet and statements of operations reflect the following adjustments: (a) To record the purchase of Forman Energy Corporation for $1,397,000 plus closing adjustments of $27,550 and deferred tax liability of $179,873. (b) To eliminate acquisition equity and record shareholder distribution as of December 31, 1996. (c) To record interest expense on bank borrowings for the acquisition of Forman Energy Corporation using the current interest rate of 8.25%. (d) To record deferred tax liability. (e) To record estimated income tax expense at consolidated effective rate. NOTE C - The following tables contain certain oil and gas disclosures reflecting the pro forma combined oil and gas activities. Estimates for Forman are based on reserves for the year ended December 31, 1995. Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) ---------------------------------------------------------------

8 MEXCO ENERGY CORPORATION NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited)

Changes in Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves (Unaudited)

The foregoing tables do not include estimates for additional properties acquired by the Company during the year. 9 Signatures - - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEXCO ENERGY CORPORATION (A Colorado Corporation) /s/ Nicholas C. Taylor --------------------------- Nicholas C. Taylor, President and Treasurer Date: May 8, 1997 10 FORMAN ENERGY CORPORATION Index ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................ F-2 Financial Statements of Business Acquired - Forman Energy Corporation..................................................... F-3 Balance Sheets as of December 31, 1996 and 1995................... F-3 Statements of Operations for the years ended December 31, 1996 and 1995........................................................ F-4 Statement of Stockholders' Equity for the years ended December 31, 1996 and 1995...................................... F-5 Statements of Cash Flows for the years ended December 31, 1996 and 1995........................................................ F-6 Notes to Financial Statements..................................... F-7 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- Board of Directors Forman Energy Corporation We have audited the accompanying balance sheets of Forman Energy Corporation, as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Forman Energy Corporation, as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Oklahoma City, Oklahoma April 18, 1997 F-2 FORMAN ENERGY CORPORATION BALANCE SHEETS December 31,

The accompanying notes are an integral part of these statements. F-3 FORMAN ENERGY CORPORATION STATEMENTS OF OPERATIONS Year ended December 31,

The accompanying notes are an integral part of these statements. F-4 FORMAN ENERGY CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY Years ended December 31, 1996 and 1995

The accompanying notes are an integral part of this statement. F-5 FORMAN ENERGY CORPORATION STATEMENTS OF CASH FLOWS Year ended December 31,

During 1996, the Company acquired oil and gas properties of $27,687 through trade accounts payable. The accompanying notes are an integral part of these statements. F-6 FORMAN ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES The major operations of Forman Energy Corporation (the "Company") consist of exploration, production, and sale of crude oil and natural gas in the United States with an area of concentration in Texas. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. 1. Investments in Oil and Gas Partnerships --------------------------------------- Investments in oil and gas partnerships where the Company has minor partnership interests (generally 1% to 3%) and has no influence over partnership operating or financial policies are accounted for using the cost method. Under this method, all capital calls are recorded as additions to the partnership investments and partnership distributions are recognized as earnings. Since the Company does not have estimates of reserves for the interests, these costs are depleted using an estimated composite rate for the properties and the investments are subject to an overall impairment test based on estimated future cash flows of the interests. 2. Oil and Gas Properties ---------------------- The full cost method of accounting is used to account for oil and gas properties. Under this method of accounting, all costs incident to the acquisition, exploration, and development of properties (both developed and undeveloped), including costs of abandoned leaseholds, lease rentals, unproductive wells, and well drilling and equipment costs, are capitalized. Costs are amortized using the units-of-production method. The units-of- production method is based primarily on estimates of reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised significantly in the near term. If the Company's unamortized costs exceed the cost center ceiling (defined as the sum of the present value, discounted at 10%, of estimated unescalated future net revenues from proved reserves, less related income tax effects), the excess is charged to expense in the year in which the excess occurs. Generally, no gains or losses are recognized on the sale or disposition of oil and gas properties. 3. Production Costs ---------------- Production costs include lease operating expenses and production taxes. 4. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. The Company maintains its cash in bank deposit accounts and money market funds which, at times, may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk. 5. Use of Estimates ---------------- In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates based on management's knowledge and experience. Due to their prospective nature, actual results could differ from those estimates. F-7 FORMAN ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED 6. Income Taxes ------------ In accordance with the Company's election under Subchapter S of the Internal Revenue Code, corporate taxable income is generally treated as passing directly through to the stockholders and is not subject to income taxes at the corporate level. NOTE B - OIL AND GAS COSTS The costs related to the oil and gas activities of the Company were incurred as follows:

The Company had the following aggregate capitalized costs relating to the Company's oil and gas property activities at December 31:

NOTE C - IMPAIRMENT OF INVESTMENTS The Company recognized an impairment loss for its investments in oil and gas partnerships of approximately $86,000 for the year ended December 31, 1995. The amount of impairment loss was based on the estimated discounted future cash flows of the partnership interests. NOTE D - SUBSEQUENT EVENT On February 25, 1997, the Company was purchased by Mexco Energy Corporation ("Mexco") for approximately $1,397,000. In connection with the sale, the Company became jointly liable for a revolving line of credit payable from Mexco to a bank of $1,750,000. Interest is payable monthly at prime rate established by the bank. The loan is collateralized by oil and gas properties of Mexco and the Company's common stock and matures July 15, 1998. NOTE E - OIL AND GAS RESERVE DATA (UNAUDITED) In accordance with Statement of Financial Accounting Standards ("SFAS") No. 69 and Securities and Exchange Commission ("SEC") rules and regulations, the following information is presented with regard to the Company's proved oil and gas reserves, all of which are located in the United States. Information for oil is presented in barrels ("Bbls") and for gas in thousand cubic feet ("Mcf"). F-8 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED The SEC has adopted SFAS No. 69, Accounting Guidelines for Oil and Gas Producers. These rules require the Company to include as a supplement to the basic financial statements a standardized measure of discounted future net cash flows relating to proved oil and gas reserves. The standardized measure, in management's opinion, should be examined with caution. The basis for these disclosures is an independent petroleum engineer's reserve study which contains imprecise estimates of quantities and rates of production of reserves. Revision of prior year estimates can have a significant impact on the results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Values of unproved properties and anticipated future price and cost increases or decreases are not considered. Therefore, the standardized measure is not necessarily a "best estimate" of the fair value of the Company's oil and gas properties or of future net cash flows. The following summaries of changes in reserves and standardized measure of discounted future net cash flows were prepared from estimates of proved reserves developed by independent petroleum engineers and do not include amounts which may be attributable to the Company's cost basis investments. No future income tax expenses were calculated as the Company is not a taxpaying entity. Summary of Changes in Proved Reserves (Unaudited)

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited)

F-9 FORMAN ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - OIL AND GAS RESERVE DATA (UNAUDITED) - CONTINUED Changes in Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves (Unaudited)

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