SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ------------ to
-------------
Commission file number 0-5704
MAYNARD OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-1362284
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8080 N. Central Expressway, Suite 660, Dallas, TX 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214)891-8880
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.10 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ x ]
While it is difficult to determine the number of shares owned by non-
affiliates (within the meaning of the term under the applicable
regulations of the Securities and Exchange Commission), the Registrant
estimates that the aggregate market value of its Common Stock held by
non-affiliates on March 17, 1998 was $21,257,000 (based upon an estimate
that 43.5% of the shares are so owned by non-affiliates and upon the
closing price for the Common Stock as reported by NASDAQ (NMS)).
The number of shares outstanding of the Registrant's $.10 par value
common stock as of March 17, 1998 was 4,889,450 shares.
The following documents are incorporated into this Form 10-K by
reference:
Proxy Statement for Annual Meeting of Stockholders to be held on
May 20, 1998 - Part III of Form 10K.
PART I.
ITEM 1. BUSINESS
THE COMPANY
Maynard Oil Company is a Delaware corporation which was organized in
1971 to continue the oil and gas operations conducted on an individual
basis by its founders, including Mr. James G. Maynard, its Chairman of
the Board and Chief Executive Officer. The Company's principal executive
office is located at 8080 N. Central Expressway, Suite 660, Dallas, Texas
75206, and its telephone number is (214) 891-8880. Unless the context
requires otherwise, as used herein, the term "Company" refers to Maynard
Oil Company and its subsidiaries.
The Company's principal line of business is the production and sale
of, and exploration and development of, crude oil and natural gas. The
Company's oil and gas operations are conducted exclusively in the United
States, primarily in the states of Texas and Oklahoma.
OIL AND GAS OPERATIONS
The Company is an independent oil and gas company, engaged primarily
in the production and exploration phases of the oil and gas business.
Company operations include acquiring, exploring, developing, and
operating crude oil and natural gas properties.
The Company seeks to accomplish its overall goal of increasing
hydrocarbon reserves and cash flow by selectively acquiring and
exploiting producing oil and gas properties. When possible, the Company
acquires producing properties on which it can act as operator, and thus,
supervise production and development activities. Although the Company
was unsuccessful during 1997 in its quest for significant reserve
acquisitions, the year did bring the opportunity to build cash reserves
for additional acquisitions in future years.
The availability of a ready market for the sale of oil and gas from
the Company's wells depends on numerous factors beyond the control of the
Company, including the amount of domestic production, the importation of
oil, the proximity of the Company's property to natural gas pipelines and
the capacity of such pipelines, the market for other competitive fuels,
fluctuations in seasonal demand, and governmental regulations relative to
hydrocarbon production and pricing. The production of oil and gas is
also subject to the laws of supply and demand, and therefore, is subject
to purchaser cutbacks and price reductions during periods of oversupply.
At December 31, 1997, approximately 77% of the Company's estimated proved
reserves and 1997 production, were attributable to crude (net equivalent
barrel "NEB" uses a conversion ratio of six thousand cubic feet of gas
(MCF) to one net equivalent barrel of oil) and consequently, the Company
is primarily impacted by oil markets.
The market price for natural gas has fluctuated significantly from
month to month and year to year for the past several years. The Company
cannot predict gas price movements with any certainty.
During the year ended December 31, 1997, three customers, Total
Petroleum, Koch Oil Company and Amoco Production Company, accounted for
approximately 20%, 18% and 14%, respectively, of consolidated revenues.
The Company does not believe it would be adversely affected by the loss
of any of its oil or gas purchasers.
Except for curtailed exploration and production activity
occasionally experienced in severe weather and normal curtailments of gas
sales in summer months, the Company does not consider its business to be
seasonal and does not carry significant amounts of inventory.
During 1997, a total of fourteen wells were drilled, five
exploratory wells, and nine development wells. Below is a brief
description of the work completed during the year and the results
thereof.
Four of the nine development wells were drilled on projects which
are owned 100% by the Company. The four fields involved are Shafter Lake
and Fullerton (both in Andrews County, Texas), Block 31 (Crane County,
Texas) and Teas (Garza County, Texas). Two of these four wells were
productive oil wells, which together tested at the rate of 79 barrels of
oil per day (BOPD), another was a service well in an active waterflood
unit, and the fourth resulted in a non-commercial well.
Of the remaining five development wells, one was a lease line
cooperative well being drilled to extend a secondary recovery project at
Shafter Lake in Andrews County, Texas and two others were infill wells
drilled on the Claytonville Unit in Fisher County, Texas. Two additional
development wells were drilled and completed as gas wells by Chevron in
the Knox Field of Grady County, Oklahoma where the Company owns a working
interest of 10.5%.
Five exploratory wells were drilled in 1997, four of which were dry
holes, while the fifth is a test drilled in Johnston County, Oklahoma
that is currently being evaluated for completion.
GENERAL
The oil and gas business involves intense competition in all of its
phases and, because of its size, the Company is not a significant
competitive factor in the industry. In its efforts to acquire property
rights, the Company competes with many companies having access to
substantially greater financial resources and larger technical staffs.
The Company's oil and gas exploration effort often involves
exploratory drilling on unproven acreage involving high risks. There is
no assurance that any oil or gas production will be obtained, or that
such production, if obtained, will be profitable. The cost of drilling,
completing and operating wells is often uncertain. Drilling may be
curtailed or delayed as a result of many factors, including title
problems, weather conditions, delivery delays, and shortages of pipe and
equipment.
The Company's operations are subject to potential hazards, inherent
in the exploration for and production of hydrocarbons, including blowouts
and fires. These and other events can cause a suspension of drilling
operations, severe damage to equipment or surrounding property, personal
injury, and perhaps even a loss of life. The Company may be subject to
liability for pollution and other damages and is subject to statutes and
regulations relating to environmental and other matters. While the
Company maintains insurance against certain of these risks, there are
certain risks against which it cannot insure, or which it may elect not
to insure due to premium costs, or for other reasons. Substantial
uninsured liabilities to third parties may be incurred.
The oil and gas operations of the Company are subject to local,
state and federal environmental regulations. To date, compliance with
these regulations by the Company has had no material effect on the
Company's capital expenditures. The Company is unable to assess or
predict at this time the impact that compliance with such environmental
regulations may have on its future capital expenditures, earnings and
competitive position. The Company presently estimates that it will not
make any material capital expenditures for environmental control
facilities for its fiscal year ending December 31, 1998.
Many facets of the Company's operations are subject to governmental
regulations. All of the Company's oil and gas properties are located in
states in which oil and gas production is regulated by state production
and conservation laws and regulations. These laws and regulations in
many instances also require permits for the drilling of wells, the
spacing of wells, prevention of waste, conservation of oil and natural
gas and various other requirements.
The Company's activities are subject to taxation at all levels of
government, including taxes on income, severance of minerals, and
payroll. Laws governing taxation, protection of the environment, crude
oil and natural gas operations and production, and other crucial areas
are all subject to modification at any time.
At March 17, 1998 the Company employed approximately 35 persons,
including one geologist and five petroleum engineers.
ITEM 2. PROPERTIES
The Company's executive offices are presently located at 8080 N.
Central Expressway, Suite 660, Dallas, Texas occupying approximately
11,300 square feet of space under a lease agreement which expires in
April, 2000.
The Company's principal property holdings consist of leasehold
interests in oil and gas properties located in the United States,
primarily in Oklahoma and Texas. The leaseholds are continued in force
so long as production from lands under lease is maintained. The Company
believes that it has satisfactory title to its oil and gas properties.
Such properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes, and other
burdens and minor encumbrances, easements, and restrictions. The Company
believes that such burdens do not materially detract from the value of
the properties or materially interfere with their use in the operation of
the Company's business. The Company has pledged certain of its oil and
gas properties to secure its term loan.
ESTIMATED PROVED RESERVES,
FUTURE NET REVENUES AND PRESENT VALUE
Reflected below are the estimated quantities of proved developed and
undeveloped reserves of crude oil and natural gas owned by the Company as
of December 31, 1997, 1996, and 1995. Such reserve information has been
prepared by the Company's staff of petroleum engineers and audited by the
independent petroleum consulting firm of Netherland, Sewell, and
Associates, Inc. No reserve reports with respect to the Company's proved
net oil or gas reserves were filed with any federal authority or agency
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Oil(MB Gas(MMCF) Oil(MB) Gas(MMCF) Oil(MB) Gas(MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved Developed 6,761.9 12,001.6 8,650.0 13,442.2 8,712.8 18,214.8
Proved Undeveloped 386.5 733.3 324.4 1,143.0 159.7 649.2
Total Proved Reserves 7,148.4 12,734.9 8,974.4 14,585.2 8,872.5 18,864.0
</TABLE>
The following table summarizes the future net revenues, using
current prices and costs as of the dates indicated, as well as the
present value, discounted at 10%, of such future net revenues from
estimated production of proved reserves of crude oil and natural gas as
of December 31, 1997, 1996, and 1995. Oil and gas prices used in the
tabulation of the amounts below are based on the price received for each
lease at December 31, of the appropriate year. The weighted average
prices at December 31, 1997, 1996, and 1995 respectively, used in the
estimates were $15.72, $24.66, and $18.13 per barrel of oil and $2.05,
$3.59, and $1.65 per mcf of natural gas. Lease and well operating costs
are based upon actual operating expense records.
<TABLE>
<CAPTION>
December 31
1997 1996 1995
Future Present Future Present Future Present
Net Value Net Value Net Value
Expressed in 000's Revenue @ 10% Revenue @ 10% Revenue @ 10%
<S> <C> <C> <C> <C> <C> <C>
Proved Developed $59,789 $41,357 $152,508 $98,184 $96,297 $65,235
Proved Undeveloped 2,848 1,203 8,101 4,026 2,478 1,075
Total Proved Reserves $62,637 $42,560 $160,609 $102,210 $98,775 $66,310
</TABLE>
Amounts presented in the tables above are before the effects of taxes.
PRODUCTION, SALES PRICES AND COSTS
The following table sets forth the Company's net oil and gas
production, average sales prices and production costs for the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
December 31
1997 1996 1995
Production:
<S> <C> <C> <C>
Oil (MB) 1,106.0 1,212.4 957.9
Gas (MMCF) 1,957.1 2,890.1 2,720.4
Average Sales Prices:
Oil (per BBL) $19.38 $20.39 $16.98
Gas (per MCF) $ 2.58 $ 2.03 $ 1.57
Average Production Costs:
Per net equivalent barrel of oil (1)(2) $ 7.07 $ 5.95 $ 5.98
(1) Six MCF of gas equals one net equivalent barrel ("NEB").
(2) Production costs are comprised of severance and advalorem taxes, if
applicable, and lease operating expenses, which include workover
costs.
</TABLE>
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1997, the Company owned an interest in
approximately 1,131 gross (291.7 net) wells, of which 1,102 gross (285.8
net) are oil wells and 29 gross (5.9 net) are gas wells, located on
approximately 29,140 gross (12,786 net) producing acres.
UNDEVELOPED ACREAGE
The following table sets forth the Company's gross and net
undeveloped acreage as of December 31, 1997.
Undeveloped Acreage
Gross Net
----- -----
Colorado . . . . . . . . . . . . . . . . 80 10
Louisiana . . . . . . . . . . . . . . . . 80 40
North Dakota . . . . . . . . . . . . . . 62 4
Oklahoma . . . . . . . . . . . . . . . . 135 70
Texas . . . . . . . . . . . . . . . . . . 12,118 3,380
Wyoming . . . . . . . . . . . . . . . . . 2,376 809
Total . . . . . . . . . . . . . . . . . . 14,851 4,313
DRILLING ACTIVITY
The following table sets forth the results of the Company's drilling
activity during the three years ended December 31, 1997.
<TABLE>
<CAPTION>
Exploratory Development Total
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Productive 0 .000 8 3.469 8 3.469
Dry 4 .663 1 1.000 5 1.663
Total 4 .663 9 4.469 13 5.132
December 31, 1996
Productive 1 .063 9 3.856 10 3.919
Dry 1 .333 0 .000 1 .333
Total 2 .396 9 3.856 11 4.252
December 31, 1995
Productive 3 .563 12 5.465 15 6.028
Dry 2 .250 0 .000 2 .250
Total 5 .813 12 5.465 17 6.278
</TABLE>
At March 17, 1998, and December 31, 1997, the Company had one gross
(.125 net) exploratory well in the process of being drilled.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in minor lawsuits that have arisen in the
ordinary course of business. The Company does not expect any of these to
have a material adverse effect on the Company's consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Company's executive officers as of
March 17, 1998, is set forth in the table below.
Name Position Age Since
James G. Maynard Chairman of the Board, 71 1971
Chief Executive Officer
and Treasurer
Glenn R. Moore President and Chief 60 1982
Operating Officer
L. Brent Carruth Vice President of 64 1984
Operations
Kenneth W. Hatcher Vice President of 54 1983
Finance
Linda K. Burgess Corporate Secretary 49 1984
and Controller
Mr. Maynard has been a director since 1971 and engaged in oil and
gas exploration as an independent operator and private investor for the
past 40 years.
Mr. Moore has over 30 years experience in domestic and foreign oil
and gas exploration and production. Prior to joining the Company in
November, 1982, Mr. Moore served as President of Shannon Oil and Gas,
Inc. and Hanover Petroleum Corporation.
Mr. Carruth has over 30 years of petroleum engineering experience.
Prior to joining the Company in January, 1984, he served for one year as
Vice President of Operations of Cordova Resources. Preceding that, Mr.
Carruth was a petroleum consultant for three years and served as Manager
of Engineering of Texas Pacific Oil Company for eight years.
Mr. Hatcher has over 25 years of finance and accounting experience
in the oil and gas industry and is a Certified Public Accountant. Prior
to joining the Company in February, 1983, Mr. Hatcher served as
Controller and Vice President of Finance of Shannon Oil and Gas, Inc. for
three years and as Controller and Vice President of Hanover Petroleum
Corporation for four years.
Ms. Burgess has in excess of 20 years of oil and gas accounting
experience. Prior to joining the Company in May, 1984, Ms. Burgess
served as Controller for Trans-Western Exploration Inc. for four years
and as Controller for Energy Resources Oil and Gas for three years.
Each officer's term of office expires on the date of the next annual
meeting of the Board of Directors, or until his earlier resignation or
removal. There are no family relationships among the executive officers
listed, and there are no arrangements or understandings pursuant to which
any of them were elected or appointed as officers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market,
NASDAQ trading symbol "MOIL". The high and low sales prices for each
quarterly period during the two years ended December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
1997 High Low 1996 High Low
<S> <C> <C> <C> <C> <C>
First Quarter $21 1/2 $12 1/2 First Quarter $ 8 1/2 $6 3/4
Second Quarter 16 1/2 10 Second Quarter 8 3/4 7 1/8
Third Quarter 16 10 Third Quarter 11 8 3/8
Fourth Quarter 14 1/2 10 1/4 Fourth Quarter 22 9 5/8
As of March 17, 1998, the Company had approximately 918 shareholders
of record.
The Company has not paid any dividends on its Common Stock in the
past, nor does it plan to pay dividends in the foreseeable future. The
Company's ability to pay dividends is currently restricted under its Loan
Agreement with Bank One, Texas.
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected financial data to
highlight significant trends in the Company's financial condition and
operating results for the periods indicated. The selected financial
information presented should be read in conjunction with the consolidated
financial statements and related notes appearing elsewhere in this Report
and the Management's Discussion and Analysis of Financial Condition and
Results of Operations set forth under Item 7 below. All amounts are
expressed in thousands, except per share information.
</TABLE>
<TABLE>
<CAPTION>
December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenue from
oil and gas $26,477 $30,583 $20,540 $13,265 $14,861
Income before income
taxes 6,613 15,758 4,354 1,196 1,452
Income before
accounting change 4,455 9,954 3,023 943 867
Net income 4,455 9,954 3,023 943 2,254
Per share income (1) .91 2.04 .62 .19 .46
Total assets 78,286 81,257 72,838 48,071 43,798
Long-term debt 11,250 16,250 21,250 5,250 2,000
Shareholders' equity 53,509 49,054 39,104 36,137 35,203
Net working capital 17,503 12,942 (370) 4,079 9,510
Net cash provided by
operating activities 11,250 13,921 11,558 5,696 6,738
(1) Basic and diluted earnings per share were the same for the years
presented.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
OVERVIEW
After ending the 1996 year with almost $10 million in net income,
which included a $6.2 million gain from the sale of non-strategic oil and
gas properties, management knew it was going to have a difficult time
matching financial results in future years without consummating a
significant acquisition of property. Management was aware that volumes
lost from the sale would result in lower revenues and operating results,
but the strategy included banking the proceeds from these sales to help
finance future acquisitions. The Company was not successful in acquiring
a significant group of properties in 1997, and its financial results were
not as good as the prior year.
Besides the change in the physical make-up of the Company's
properties, 1997 brought a year of declining product prices. An oil and
gas company's ultimate worth is measured by the value of its hydrocarbon
reserves in the ground and available for sale in the marketplace. Since
77% of Maynard Oil Company's hydrocarbon reserves are oil reserves (on a
net equivalent barrel basis "NEB" which uses a conversion ratio of six
thousand cubic feet of gas (MCF) to one equivalent barrel of oil), it is
primarily impacted by oil markets. The Company manages its exposure to
price fluctuations in the oil market through the use of short term
forward sales contracts, generally for a term of thirty days.
During the early part of 1996, the Company's management was pleased
as oil prices rose from approximately $17.25 per barrel to an end of the
year price amounting to $24.66 per barrel. During the first quarter of
1997, the Company received revenue payments in which oil prices peaked at
$25.37 per barrel and averaged $22.72 per barrel for the first quarter.
However, the oil markets continued to fluctuate for the balance of 1997,
and the Company averaged $18.31 per barrel for the last nine months of
the year. End of the year oil pricing was $15.72 per barrel, and the
Company recognized a drop in the value of its oil in the ground amounting
to almost $9 per barrel. Subsequent to year end, the price of crude oil
recorded by the Company declined below $13.00 per barrel, which will have
a negative effect on earnings and cash flow in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired one minor group of oil properties during 1997
for approximately $700,000, but was unsuccessful in other producing
property bids. The Company made its scheduled debt payments, continued
its exploitation work and maintenance activities on existing properties
and ended the year with an additional $2.7 million in cash. Thus, 31.4%
of the Company's current balance sheet is represented by cash, and net
working capital at year end 1997 was $17,503,000. Future acquisitions
would be financed through the utilization of Company cash and bank debt.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Net income for 1997 was $4,455,355 compared to $9,953,783 for 1996.
The current year included a gain from the sale of oil and gas properties
amounting to $191,873 compared to a gain of $6,202,473 in the prior year.
Oil and gas revenues declined 13% between the two years due primarily to
the loss of volumes resulting from last year's property dispositions.
Oil volumes dropped approximately 9% and gas volumes almost 32%. Oil and
gas revenues were also negatively affected by a $1.01 per barrel
reduction in oil prices, which was partially offset by a fifty-five cent
per mcf increase in gas prices.
Lease operating expenses increased $44,264 over 1996 levels.
However, on a net equivalent barrel (NEB) basis, this relatively low
amount equates to a rise in lifting costs of $1.12 per NEB. During 1997,
approximately $835,000, or fifty-eight cents per NEB, was spent on
maintenance costs compared with $486,000, or twenty-nine cents per NEB, a
year ago. Additionally, advalorem taxes in the state of Texas grew from
$582,000 (thirty-four cents per NEB) to $673,000 in 1997 (forty-seven
cents per NEB). The balance of the operating expense increase related to
higher lifting costs for recurring activities on certain identifiable
properties.
Exploration costs totaled $838,580 currently versus $201,509 last
year. Seismic work in 1997 totaled $315,000 compared to only $11,000 in
1996 as the Company initiated two new seismic projects. Dry hole and
abandonment costs were approximately $512,000 for four wells in 1997
compared with $180,000 in 1996 relating to one well and the cancellation
of leaseholds acquired in prior years.
General and administrative expenses were $1,337,484 less this year
than in 1996, and the reduction represents the effect of an employee
benefit plan whose impact on earnings is directly related to the
Company's common stock price. In 1996, earnings were charged in excess
of $888,000 to reflect a closing stock price of $18.75 per share.
However, by the end of 1997, Maynard's stock price had retreated to
$10.25 per share. Generally accepted accounting principles dictate the
treatment of this item of administrative expense and require current year
credits to the account. Thus, the Company ended 1997 with a liability of
$497,375 which represents cash payments to which various employees
covered by this plan are entitled whenever their employment by the
Company is ended.
Depreciation and amortization expense increased on a dollar basis
from $7,894,388 in 1996 to $8,291,128. When converted to a net equivalent
barrel basis, this amount grew from $4.66 per net equivalent barrel (NEB)
a year ago to $5.79 per NEB currently. This resulted from oil and gas
reserve revisions attributable to current pricing trends and also led to
the impairment charges of $227,879 discussed in Note 1 to the
Consolidated Financial Statements.
Interest expense decreased $227,880 due to the scheduled note
payments for 1997 and the resulting lower principal balance outstanding.
Income tax expense was $3,646,870 less than the prior year due to
the non-recurring nature of last year's property sales and the lower
effective tax rate in 1997 compared to 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company sold its interest in approximately 130
producing oil and gas wells in Texas and Oklahoma for cash totaling
$8,865,731 which resulted a pre-tax gain in excess of $6,000,000.
Company management considered this group of properties not to be a major
contributor to the future earning capacity of the Company, and thus,
opted to sell these properties while searching for additional
acquisitions which represent a better geographic and economic fit with
the Company's core properties in southern Oklahoma and west Texas.
Although the Company was not successful in 1996 in making an
acquisition, it has positioned itself for future acquisition transactions
by having over 26% of its year end assets in cash and additional
borrowing capacity with its lender.
Net cash provided by operating activities before changes in assets
and liabilities rose approximately 19% to $11,741,897. Higher crude oil
sales more than offset the net revenues given up from the sale of
property referred to above.
Net working capital at December 31, 1996 was $12,942,000 compared
with a negative $370,000 at the end of 1995.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Net income for 1996 more than tripled 1995 levels, rising from
$3,023,107 for 1995 to $9,953,783, primarily as a result of gains from
the disposition of assets. The gain from disposals in 1995 was $991,875
versus $6,202,473 during the current year.
The earnings increase was also aided by higher oil and gas revenues,
which rose 49% to $30,583,133. Higher revenues were the result of
increased production volumes and prices. Oil volumes rose almost 27% to
1,212,369 barrels and gas volumes over 6% to 2,890,061 mcf, both a result
of the late 1995 producing property acquisition and prior year drilling.
Pricing also shot up with oil selling at $20.39 per barrel compared to
$16.98 per barrel a year ago and gas selling at $2.03 per mcf compared
with $1.57 per mcf in 1995.
Lease operating expenses increased $1,636,482 over 1995 levels.
However, on a net equivalent barrel (NEB) basis lifting costs actually
declined three cents per equivalent barrel.
Exploration costs were 67% lower in 1996, totaling $201,509, versus
$609,279 due to decreased exploratory activity. Very little seismic
activity was performed in 1996, and only 3 exploratory wells were drilled
during the current year.
General and administrative expenses rose $974,586 from $925,822 in
1995 to $1,900,408 in 1996. The majority of this increase, $888,884, is
represented by charges for an employee benefit plan whose value
appreciates as the Company's common stock price rises. These charges
represent a liability on the Company's books which will not be converted
into cash until the various employees covered by this plan terminate
their employment with the Company.
Depreciation and amortization expense increased on a dollar basis
from $6,879,672 in 1995 to $7,894,388. However, when converted to a net
equilvalent barrel basis, this amount actually declined from $4.87 per
net equivalent barrel (NEB) a year ago to $4.66 per NEB currently as a
result of oil and gas reserve additions and revisions during the current
period.
In March and December, 1995, the Company acquired certain oil and
gas properties and utilized additional bank borrowings to finance the
transaction. Interest expense increased $692,542 due to this additional
debt.
Income tax expense rose to $5,804,370 in 1996 from $1,330,500 in
1995 due to improved earnings and the additional gain generated from the
sale of properties during the current year. The Company had anticipated
deferring tax expense on a substantial portion of the 1996 gain via the
like-kind exchange rules. Qualified escrow accounts amounting to over
$6,200,000 were established and replacement property was identified.
However, the Company was unable to consummate the transaction, and
subsequently, paid the tax due on the gain.
OTHER
Company management has attempted to assess whether its internal
computer systems, as well as its vendors, purchasers, and bankers
systems will be Year 2000 compliant without causing disruptions in the
conduct of the Company's business. Based upon the investigative process
employed by the Company to date and assurances from the Company's
software vendor, the Company's computer systems are compatible with the
year 2000. The Company will continue to review compatibility issues of
those with whom it does business. The Company does not anticipate any
major expenditures associated with the Year 2000 consequences.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included on pages 18 through
35 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
PART III
The information required by Part III (Items 10 through 13) is set
forth in the Company's Proxy Statement for the annual meeting of
stockholders to be held on May 20, 1998, and is incorporated herein by
reference. Information with respect to the Company's executive officers
as of March 17, 1998, is set forth commencing on pages 8 and 9 hereof
under the caption "Executive Officers of the Registrant".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Schedules on
page 18 of this Report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of 1997.
EXHIBITS
3.1(a) Certificate of Incorporation, as amended, filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1980 (the "1980 Form 10-K"),
and incorporated herein by reference.
(b) Certificate of Amendment of Certificate of Incorporation
dated May 19, 1981, filed as Exhibit 3.1(b) to the Company's
Annual Report on Form 10-K for its fiscal year ended
December 31, 1981 (the "1981 form 10-K"), and incorporated
herein by reference.
(c) Certificate of Amendment of Certificate of Incorporation
dated May 22, 1987, filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1987, and incorporated herein by reference.
(d) Certificate of Amendment of Certificate of Incorporation
dated June 3, 1993, filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1993, and incorporated herein by reference.
3.2(a) By-Laws, as amended, filed as Exhibit 3.2(b) to the 1981
Form 10-K and incorporated herein by reference.
(b) Amendment to the By-Laws, filed as Exhibit 3.2(b) to the
1981 Form 10-K and incorporated herein by reference.
(c) Amendment to the By-Laws, filed as Exhibit 3.2(c) to the
Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1984, and incorporated herein by
reference.
(d) Amendment to the By-Laws, filed as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1987, and incorporated herein by reference.
(e) Amendment to the By-Laws, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1993 and incorporated herein by
reference.
4.1 Credit agreement ($10,000,000 Term Facility) dated
October 1, 1990 between Maynard Oil Company and First City,
Texas - Dallas, filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1990, and incorporated herein by reference.
4.2 First Amendment to Loan Agreement dated November 19, 1991
between Maynard Oil Company and First City, Texas - Dallas,
filed as Exhibit 4.2 to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1992, and
incorporated herein by reference.
4.3 Second Amendment to Loan Agreement, dated February 1, 1993
between Maynard Oil Company and Bank One, Texas, N.A. filed
as Exhibit 4.1 to the Company's Quarterly Report on Form 10-
Q for the period ended June 30, 1993, and incorporated
herein by reference.
4.4 Third Amendment to Loan Agreement, dated December 22, 1994
between Maynard Oil Company and Bank One, Texas, N.A., filed
as Exhibit 4.4 to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1994, and
incorporated herein by reference.
4.5 Fourth Amendment to Loan Agreement, dated March 29, 1995
between Maynard Oil Company and Bank One, Texas, N.A., filed
as Exhibit 4.1 to the Company's Quarterly Report on Form 10-
Q for the period ended March 31, 1995, and incorporated
herein by reference.
4.6 Restated Loan Agreement, dated December 20, 1995 between
Maynard Oil Company and Bank One, Texas, N.A., filed as
Exhibit 4.6 to the Company's Annual Report on Form 10-K for
its fiscal year ended December 31, 1995, and incorporated
herein by references.
10.1 1989 Stock Participation Plan, filed as Exhibit 10.1 to the
Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1995 and incorporated herein by
reference.
21.1 List of subsidiaries of the Company as of December 31, 1997,
filed herewith.
27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MAYNARD OIL COMPANY
By \s\ James G. Maynard
------------------------------
James G. Maynard
Chairman of the Board
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the date indicated in multiple counterparts with the
same force and effect as if each person executing a separate counterpart
has joined in execution of the same counterpart.
/s/ James G. Maynard Chairman of the Board, March 31, 1998
James G. Maynard Chief Executive Officer
& Treasurer
/s/ Glenn R. Moore President and Chief March 31, 1998
Glenn R. Moore Operating Officer
/s/ Kenneth W. Hatcher Vice President of Finance March 31, 1998
Kenneth W. Hatcher (Principal Financial
and Accounting Officer)
/s/ Robert B. McDermott Director March 31, 1998
Robert B. McDermott
/s/ Ralph E. Graham Director March 31, 1998
Ralph E. Graham
MAYNARD OIL COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements and Schedules
Page
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - Three years ended
December 31, 1997
Consolidated Statements of Shareholders' Equity - Three
years ended December 31, 1997
Consolidated Statements of Cash Flows - Three years
ended December 31, 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules for the Three years
ended December 31, 1997
II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements or Notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Maynard Oil Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the
financial position of Maynard Oil Company and its subsidiary at
December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Dallas, Texas
March 26, 1998
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,584,288 $21,817,447
Accounts receivable, trade 3,267,255 4,274,439
Other current assets 546,238 585,021
Total current assets 28,397,781 26,676,907
Property and equipment, at cost:
Oil and gas properties, successful
efforts method 104,031,352 103,223,604
Other property and equipment 548,668 540,736
104,580,020 103,764,340
Less accumulated depreciation and
amortization ( 54,692,225) ( 49,183,946)
Net property and equipment 49,887,795 54,580,394
$ 78,285,576 $ 81,257,301
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 5,000,000 $ 5,000,000
Accounts payable 4,271,662 3,592,404
Accrued expenses 1,402,021 1,710,681
Income taxes payable 220,798 3,431,476
Total current liabilities 10,894,481 13,734,561
Deferred income taxes 2,632,000 2,219,000
Long-term debt 11,250,000 16,250,000
Shareholders' equity:
Preferred stock of $.50 par value.
Authorized 1,000,000 shares; none
issued -- --
Common stock of $.10 par value.
Authorized 20,000,000 shares;
4,889,450 shares issued
and outstanding 488,945 488,945
Additional paid-in capital 18,831,138 18,831,138
Retained earnings 34,189,012 29,733,657
Total shareholders' equity 53,509,095 49,053,740
Contingencies and commitments (note 9)
$ 78,285,576 $ 81,257,301
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Oil and gas sales and royalties $26,477,238 $30,583,133 $20,539,738
Interest and other 1,229,556 732,660 671,551
Gain on disposition of assets 191,873 6,202,473 991,875
27,898,667 37,518,266 22,203,164
Costs and expenses:
Operating expenses 10,124,212 10,079,948 8,443,466
Exploration, dry holes and
abandonments 838,580 201,509 609,279
General and administrative 562,924 1,900,408 925,822
Depreciation and amortization 8,291,128 7,894,388 6,879,672
Interest and other 1,468,968 1,683,860 991,318
21,285,812 21,760,113 17,849,557
Income before income taxes 6,612,855 15,758,153 4,353,607
Income tax expense 2,157,500 5,804,370 1,330,500
Net income $ 4,455,355 $ 9,953,783 $ 3,023,107
Weighted average number of common
shares outstanding 4,889,450 4,889,690 4,890,708
Net income per common share $ .91 $2.04 $ .62
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
<CAPTION>
Common Stock Additional
Paid-in Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,891,379 $489,138 $18,725,538 $16,922,561 $36,137,237
Net income -- -- -- 3,023,107 3,023,107
Exercise of common stock
options 24,000 2,400 105,600 -- 108,000
Purchase and retirement of
of common stock (25,409) (2,541) -- (161,595) (164,136)
Balance at December 31, 1995 4,889,970 488,997 18,831,138 19,784,073 39,104,208
Net income -- -- -- 9,953,783 9,953,783
Purchase and retirement
of common stock (520) (52) -- (4,199) (4,251)
Balance at December 31, 1996 4,889,450 $488,945 $18,831,138 $29,733,657 $49,053,740
Net income -- -- -- 4,455,355 4,455,355
Balance at December 31, 1997 4,889,450 $488,945 $18,831,138 $34,189,012 $53,509,095
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $4,455,355 $9,953,783 $3,023,107
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,291,128 7,894,388 6,879,672
Deferred income taxes 413,000 6,490 480,000
Exploration, dry holes and
abandonments 512,317 180,230 573,737
Current year costs of dry holes and
abandonments (436,058) (90,521) (94,390)
Gain on disposition of assets (191,873) (6,202,473) (991,875)
(Increase) decrease in current assets:
Accounts receivable 1,007,184 (976,506) (886,482)
Other current assets 38,783 (119,595) 316,661
Increase (decrease) in current liabilities:
Accounts payable 679,258 (533,609) 1,514,804
Accrued expenses (308,660) 790,028 330,515
Income taxes payable (3,210,678) 3,018,781 412,695
Net cash provided by operating
activities 11,249,756 13,920,996 11,558,444
Cash flows from investing activities:
Proceeds from disposition of assets 263,613 8,884,691 3,426,499
Purchase price adjustment -- 874,245 --
Additions to property and equipment (3,746,528) (3,184,637) (33,688,793)
Net cash provided (used) by
investing activities (3,482,915) 6,574,299 (30,262,294)
Cash flows from financing activities:
Proceeds from issuance of
long-term debt -- -- 22,500,000
Principal payments on long-term debt (5,000,000) (4,812,500) (3,437,500)
Purchase of common stock -- (4,251) (164,136)
Exercise of stock options -- -- 108,000
Net cash provided (used) by
financing activities (5,000,000) (4,816,751) 19,006,364
Net increase in cash and
cash equivalents 2,766,841 15,678,544 302,514
Cash and cash equivalents at beginning
of year 21,817,447 6,138,903 5,836,389
Cash and cash equivalents at end of year $24,584,288 $21,817,447 $ 6,138,903
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Business Activity
The Company is engaged in the acquisition, exploration,
development, production and sale of crude oil and natural gas in
the Continental United States, primarily in the states of Texas and
Oklahoma.
Principles of Consolidation
The consolidated financial statements include the accounts of
Maynard Oil Company (Company) and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Property and Equipment
The Company follows the "successful efforts" method of accounting
for its costs of acquisition, exploration and development of oil
and gas properties. Intangible drilling and development costs
related to development wells and successful exploratory wells are
capitalized, whereas the costs of exploratory wells which do not
find proved reserves are expensed. Costs of acquiring unproved
leases are evaluated for impairment until such time as the leases
are proved or abandoned. All geological and geophysical costs not
reimbursed are expensed as incurred.
Depreciation and amortization of producing properties is computed
using the unit-of-production method based upon estimated proved
recoverable reserves. Depreciation of other property and equipment
is calculated by the straight-line method based upon estimated
useful lives ranging from two to ten years.
Maintenance and repairs are charged to expense as incurred.
Renewals and betterments are capitalized. When assets are sold,
retired or otherwise disposed of, the applicable costs and
accumulated depreciation and amortization are removed from the
accounts, and the resulting gain or loss is recognized.
Overhead Reimbursement Fees
Overhead charges billed to working interest owners including the
Company of $1,796,113, $1,870,752, and $1,892,370, for the three
years ended December 31, 1997, respectively, have been classified
as a reduction of general and administrative expenses in the
accompanying Consolidated Statements of Income. The Company's
working interest portion of the amounts billed are included in
lease operating expenses.
Deferred Income Taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between
the tax and financial reporting bases of the Company's assets and
liabilities by applying enacted tax rates.
Income per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", which requires disclosure of two
earnings per share ("EPS") measures, basic EPS and diluted EPS, on
the face of its Consolidated Statements of Income if the Company
has a complex capital structure. Net income per common share is
computed using the weighted average number of common shares
outstanding during each year. During 1995, all outstanding stock
options were exercised, and consequently, basic and diluted
earnings per share were the same for 1997, 1996 and 1995.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value because of
the short maturity of these instruments. The carrying amount of
long-term debt, including the current portion, approximates fair
value because the interest rate on this instrument changes with
market interest rates.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. The Company places its cash
and cash equivalents with high credit quality institutions. With
respect to accounts receivable, these financial instruments
primarily pertain to oil and gas sales and joint interest billings.
These accounts receivable are due from small to mid-size companies
engaged principally in oil and gas activities. The Company
performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its
customers. Payment terms are on a short-term basis and in
accordance with industry standards.
The Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, disclosure of gain and
loss contingencies at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Since estimates are made based on all information
available at the time, it is reasonably possible in the near term a
change in an estimate may occur or actual amounts may differ from
estimated amounts.
Impairment of Long-Lived Assets
The carrying value of property and equipment is periodically
evaluated using undiscounted cash flows as the basis for
determining if impairment exists under the provisions of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121"). To the extent impairment is indicated to exist, an
impairment loss would be recognized under SFAS 121 based on fair
value.
During 1997, oil prices fell from an average of $24.66 per barrel
to an average of $15.72 per barrel and gas prices ranged from $3.59
per thousand cubic feet of gas (mcf) in 1996 to $2.05 per mcf.
Consequently, the Company recognized an impairment loss of $227,879
in December 1997 to account for those properties whose investment
would not be recoverable under current pricing trends. This
impairment is included in depreciation and amortization expense on
the Company's Consolidated Statement of Income for 1997.
Reclassifications
Certain reclassifications of prior period statements have been made
to conform with the 1997 presentation.
(2) Acquisitions and Dispositions (Reserve information is unaudited)
During 1996, the Company sold its interest in approximately 130
producing wells in Texas and Oklahoma for cash totaling $8,865,731.
The Company considered these properties to be non strategic assets.
Proved reserves sold were estimated to be approximately 269,000
barrels of oil and 4.9 billion cubic feet of gas (BCF).
During 1995, the Company consummated two separate producing
property acquisitions for an aggregate price of $29,250,000. On
March 29, 1995, the Company acquired working interests in 200
producing wells in the Permian Basin of West Texas. Estimated
proved reserves associated with this transaction approximated .99
million barrels of oil and 7.2 BCF of gas. Total consideration
paid was $10,500,000. At December 31, 1996, the Company maintains
ownership in approximately 1 million barrels of oil and 3.4 BCF of
gas acquired in this transaction.
On December 20, 1995, the Company purchased working interests in 250
producing wells located in Garza County, Texas. Total consideration
paid was $18,750,000, $13,000,000 of which was borrowed under a new
term loan arrangement with Bank One, Texas. Proved reserves were
estimated to be 2.46 million barrels of oil and .3 BCF of gas. In
1996, the Company received cash proceeds of $874,245, which
represented a purchase price adjustment on this acquisition.
The following table presents unaudited pro forma operating results
as if the acquisitions and dispositions had occurred on January 1,
1995.
Years ended December 31,
1996 1995
Amounts in thousands, except per
share amounts
Revenues $28,706 $31,676
Net income 5,234 7,461
Net income per common share 1.07 1.53
(3) Cash Flow Data
Cash in excess of daily requirements is invested in marketable
securities, consisting of repurchase agreements, certificates of
deposit, money market funds, and commercial paper, with maturities
of three months or less. At December 31, 1997 and 1996, such
investments totaled $24,700,000 and $22,246,554, respectively, and
are considered to be cash equivalents, which approximate their fair
value.
Supplemental cash flow information for the three years ended
December 31, 1997 is summarized as follows:
1997 1996 1995
Cash paid:
Interest expense $1,462,269 $1,735,416 $ 853,247
Income taxes $5,047,847 $2,779,099 $ 121,674
(4) Long-term Debt
Long-term debt at December 31, 1997 and 1996 is summarized as
follows:
1997 1996
Term note due in 20 equal quarterly
installments of $1,250,000 commencing
April 1, 1996 plus one payment of
$1,062,500 made January 1, 1996.
Interest paid quarterly at varying
rates. Secured by certain oil and
gas properties with a net book value
of $27,501,887. $16,250,000 $21,250,000
Less current installments 5,000,000 5,000,000
Long-term debt $11,250,000 $16,250,000
The term note permits the Company to choose between three interest
rate options and to specify what portion of the loan is covered by a
specific interest rate option and the applicable funding period to
which the interest rate option is to apply. The interest rate
options are as follows:
(1) Bank's prime lending rate
(2) Bank's certificate of deposit rate
(3) London interbank eurodollar rate (Eurodollar)
At December 31, 1997, interest on the bank term loan was at a rate
of approximately 7.49%.
The credit agreement contains various financial covenants related to
working capital, net worth, and cash flow. Additionally, the debt
agreement places certain limitations on the incurrence of additional
debt and prohibits the payment of dividends.
(5) Employee Incentive Plans
In August 1989, an employee incentive plan was adopted, whereby
stock participation units might be granted to officers and key
employees. Such stock participation units will entitle a
participant to a cash payment following termination of employment in
an amount equal to the excess, if any, of the fair market value of
one share of the Company's common stock over a share price specified
on the date of grant, multiplied by the number of vested units. The
units vest over a five year period with 25% vesting after two years
and the remainder in three equal annual installments. For the year
ended December 31, 1989, 73,000 units were awarded to certain
employees at a price of $4.50 per share of which 49,500 units remain
outstanding at December 31, 1997, all of which are 100% vested.
During August 1993, 52,000 additional units were awarded at $5.625
per share of which 34,500 units are vested. Earnings are charged
and credited over the life of the units for fluctuations in stock
prices from $4.50 per share and $5.625 per share. During the
current year, operations were credited $420,750 and $97,813 in
regard to the stock participation units granted in 1989 and 1993,
respectively. These credits reflect the reduction in closing stock
prices from $18.75 per share at December 31, 1996 to $10.25 per
share at December 31, 1997. During 1996 and 1995, operations were
charged $594,000 and $76,183 for the units awarded in 1989 and
$294,887 and $15,676 for the units awarded in 1993, respectively.
In March 1982, an employee incentive plan was adopted whereby stock
options and stock appreciation rights might be granted to officers
and key employees. A total of 281,517 shares were initially
reserved for issuance. This plan terminated in March 1992 and no
further grants may be made under this plan. The options became
exercisable cumulatively in five equal installments, beginning on
the first anniversary of the date of grant. The option price for
shares granted pursuant to the plan was not less than the fair
market value of the shares at the date of grant.
A summary of stock option activity for the 1982 plan for 1995 is as
follows:
Number
of Option Price
Shares per Share
Outstanding at December 31, 1994 24,000 $4.50
Exercised (24,000) $4.50
Outstanding at December 31, 1995 -0-
During September 1995, options for 24,000 shares were exercised.
Common stock was credited for $2,400 and additional paid-in capital
was credited for $105,600. The Company simultaneously repurchased
and cancelled 23,500 of the shares exercised for $6.50 per share.
Common stock was debited for $2,350 and retained earnings charged
$150,400 in regard to the repurchased shares.
(6) Income Taxes
Income tax expense consists of the following:
Years ended December 31,
1997 1996 1995
Federal
Current $1,212,500 $5,397,880 $ 620,500
Deferred 413,000 6,490 480,000
State 532,000 400,000 230,000
$2,157,500 $5,804,370 $1,330,500
Income tax expense for the three years ended December 31, 1997
differs from the amount computed by applying the applicable U.S.
corporate income tax rate (34% in 1997 and 1995 and 35% in 1996) to
income before income taxes. The reasons for this difference are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Income tax expense at
U.S. statutory rate $2,248,371 $5,515,354 $1,480,226
State income taxes, net
of Federal income tax
benefit 351,120 260,000 151,800
Allowable depletion in
excess of cost depletion (223,261) (223,197) (281,526)
Items not related to current
year earnings (136,000) -- (89,198)
All other items (82,730) 252,213 69,198
Income tax expense $2,157,500 $5,804,370 $1,330,500
</TABLE>
The components of the net deferred tax liability were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Depreciable assets $ 86,500 $ 48,500 $ 61,510
Depletable assets 36,500 111,500 14,400
Intangible drilling
and development costs 2,678,000 2,572,000 2,542,600
Employee benefit
obligations (169,000) (346,000)
Tax credit
carryforwards -- (167,000) (406,000)
Net deferred tax
liability $2,632,000 $2,219,000 $2,212,510
</TABLE>
(7) Employee Benefit Plans
The Company adopted a noncontributory defined contribution
retirement plan for all full-time employees age 21 or older who
have completed one year of service. The plan provides for a
minimum annual contribution by the Company equal to 3% of an
employee's base salary plus overtime compensation. At its
discretion, the Company may also make supplemental contributions to
the plan. For calendar 1997, the Company elected to contribute 5%
for each employee covered by this plan. Under this plan, amounts
equal to retirement plan expense are funded annually, which
amounted to $99,313, $53,965 and $40,777, respectively, for the
years ended December 31, 1997, 1996 and 1995. The contributions
for the same three year period have been reduced by $0, $648, and
$1,818, respectively, for forfeitures attributable to employees
terminated in prior years.
The Company also has a profit sharing plan pursuant to Section 401
of the Internal Revenue Code, whereby participants may contribute a
percentage of compensation. The Plan provides for a matching
contribution by the Company equal to one-half of the employee's
percentage contribution up to the first 10% of compensation for
1997, 1996, and 1995. During this same three year period, the
Company's matching portion amounted to $91,302, $79,879, and
$59,579, respectively.
(8) Major Customers
During the years ended December 31, 1997 and 1995, oil and gas
sales to three customers, amounting to approximately $5,698,000,
$5,067,000 and $3,783,000, and $4,377,000, $3,746,000, and
$2,946,000, respectively, each accounted for more than 10% of total
consolidated revenues. During the year ended December 31, 1996,
oil and gas sales to two customers, amounting to approximately
$6,059,000 and $3,898,000 each accounted for more than 10% of total
consolidated revenues.
(9) Contingencies and Commitments
The Company is a defendant in certain non-environmental litigation
arising from operations in the normal course of business. While it
is not feasible to determine the outcome of these actions, it is
the Company's opinion that the ultimate outcome of the litigation
will not have a material adverse effect on the financial position
or results of operations of the Company.
The Company leases office space and certain equipment under various
operating leases which expire over the next five years. All leases
require the payment of taxes and insurance, and the office lease
requires the Company to pay its pro rata share of increases in
maintenance expense above that prevailing in base years.
Management expects that in the normal course of business, leases
will be renewed or replaced by other leases. Rent expense for the
three years ended December 31, 1997 was $321,001, $314,743, and
$298,371, respectively.
Minimum payments for operating leases having initial or
noncancellable terms in excess of one year are as follows:
1998 $ 248,624
1999 236,454
2000 81,985
2001 718
Total minimum payments $ 567,781
(10) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Revenues $8,043,876 $6,577,076 $6,447,486 $6,830,229
Net Income 2,113,827 856,383 1,430,864 54,281
Net Income Per Common Share .43 .18 .29 .01
Year ended december 31, 1996
Revenues $7,331,742 $8,257,476 $13,920,810 $8,008,238
Net Income 1,143,454 1,819,180 6,883,228 107,921
Net Income Per Common Share .23 .37 1.41 .02
</TABLE>
During the fourth quarter of 1997, the Company recorded an
adjustment to depreciation and amortization expense arising from
downward revisions to its oil and gas reserves. These revisions
related primarily to pricing changes. The effect of this
adjustment, coupled with the impairment charge (Note 1 to the
Consolidated Financial Statements), was to increase fourth quarter
depreciation and amortization expense $396,740. Offsetting this
expense increase was a $518,563 credit to an employee benefit plan
which decreases in value if the price of the Company's stock
declines.
During the fourth quarter of 1996, the Company recorded an
additional $3,104,370 in income tax expense related to the third
quarter gain on the disposition of assets. The Company had
anticipated deferring tax expense on a substantial portion of this
gain via the like-kind exchange rules, but was unable to consummate
the transaction. Additionally, fourth quarter results included
approximately $650,000 additional compensation expense in
connection with an employee benefit plan which appreciates in value
as the price of the Company's common stock rises.
(11) Supplemental Oil and Gas Disclosures (Unaudited)
Capitalized Costs
A summary of the Company's aggregate capitalized property and
equipment costs relating to oil and gas exploration and
development activities follows:
December 31,
1997 1996
Undeveloped leaseholds and
royalties $ 199,416 $ 105,385
Producing properties 103,831,936 103,118,219
104,031,352 103,223,604
Accumulated depreciation and
amortization 54,351,135 48,906,086
Net capitalized costs $ 49,680,217 $ 54,317,518
Costs Incurred
A summary of costs incurred in oil and gas acquisition,
exploration and development activities follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Acquisition of properties
Undeveloped $ 195,434 $ 104,846 $ 59,010
Proved 700,055 -- 29,234,607
Exploration costs 1,006,253 125,963 413,632
Development costs 2,539,005 2,980,849 3,949,882
$4,440,747 $3,211,658 $33,657,131
</TABLE>
Results of Operations
The results of operations from oil and gas producing activities
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Sales $26,477,238 $30,583,133 $20,539,738
Production costs (a) (10,124,212) (10,079,948) (8,443,466)
Exploration expenses (1,060,616) (340,913) (661,319)
Depreciation and
amortization (8,178,538) (7,816,674) (6,801,115)
7,113,872 12,345,598 4,633,838
Income tax expense (2,267,708) (4,408,531) (1,478,000)
Results of operations
from oil and gas
producing activities $ 4,846,164 $ 7,937,067 $ 3,155,838
</TABLE>
(a) Includes lifting costs, severance taxes and advalorem taxes.
Oil and Gas Reserve Quantities
The following unaudited tables represent the Company's estimates of
its proved oil and gas reserves. The Company emphasizes that
reserve estimates are inherently imprecise and that estimates of new
discoveries are more imprecise than those of producing oil and gas
properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates were evaluated
by the Company's staff of petroleum engineers and audited by
independent petroleum engineers. It is their opinions that the
reserve quantity and present value information in the following
tables complies with the applicable rules and regulations of the
SEC. All of the Company's reserves are located within the United
States.
<TABLE>
<CAPTION>
Proved Developed and Oil Gas
Undeveloped Reserves (Barrels) (MCF)
<S> <C> <C>
Total as of December 31, 1994 6,153,062 14,951,460
Revisions of previous estimates (113,124) (291,417)
Purchases of reserves 3,399,040 7,951,973
Extensions and discoveries 455,693 969,038
Production (957,873) (2,720,441)
Sales of reserves in place (64,283) (1,996,593)
Total as of December 31, 1995 8,872,515 18,864,020
Revisions of previous estimates 1,150,114 3,100,882
Purchases of reserves -- --
Extensions and discoveries 432,789 463,296
Production (1,212,369) (2,890,061)
Sales of reserves in place (268,663) (4,952,957)
Total as of December 31, 1996 8,974,386 14,585,180
Revisions of previous estimates (733,337) (763,172)
Purchases of reserves 55,867 98,228
Extensions and discoveries 10,402 782,797
Production (1,106,042) (1,957,147)
Sales of reserves in place (52,809) (10,966)
Total as of December 31, 1997 7,148,467 12,734,920
Proved Developed Reserves
December 31, 1995 8,712,835 18,214,860
December 31, 1996 8,649,996 13,442,204
December 31, 1997 6,761,920 12,001,602
</TABLE>
Standardized Measure
The standardized measure of discounted future cash flows from proved
oil and gas reserves determined in accordance with rules prescribed by
the Financial Accounting Standards Board is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
(000's) (000's) (000's)
<S> <C> <C> <C>
Future cash inflows $138,471 $273,644 $192,794
Future production costs (73,641) (110,123) (92,873)
Future development costs (2,193) (2,912) (1,146)
62,637 160,609 98,775
Future income tax expenses (6,891) (38,610) (14,464)
Future net cash flows 55,746 121,999 84,311
10% annual discount for estimated
timing of cash flows (17,867) (44,361) (27,710)
Standardized measure of discounted
future net cash flows $ 37,879 $ 77,638 $ 56,601
</TABLE>
The average prices for oil and gas used to calculate future cash inflows
at December 31, 1997 were $15.72 per barrel and $2.05 per mcf,
respectively. Subsequent to year end, the price of crude oil recorded by
the Company declined below $13.00 per barrel.
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
(000's) (000's) (000's)
<S> <C> <C> <C>
Standardized measure - beginning of year $77,638 $56,601 $34,211
Sales of oil and gas produced,
net of production costs (16,353) (20,503) (12,267)
Net changes in prices and production costs (46,696) 36,421 5,396
Extensions, discoveries, and improved
recovery, less related costs 1,593 3,876 3,514
Changes in future development costs 128 (617) 135
Development costs incurred 994 182 850
Revisions of previous quantity estimates (3,741) 14,503 (867)
Accretion of discount 4,256 6,631 3,996
Purchase of proved reserves 348 -- 27,801
Sale of proved reserves (255) (4,669) (2,065)
Net change in income taxes 19,889 (14,861) (3,964)
Other 78 74 (139)
Standardized measure - end of year $37,879 $77,638 $56,601
</TABLE>
Schedule II
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Valuation and Qualifying Accounts
Three Years Ended December 31, 1997
<CAPTION>
Charged to
Beginning Cost and Ending
Description Balance Expenses Deductions Balance
Allowance for
Doubtful Accounts - (a)
<S> <C> <C> <C> <C>
December 31, 1995 $43,000 -- -- $43,000
December 31, 1996 $43,000 $ 7,000 -- $50,000
December 31, 1997 $50,000 20,000 -- $70,000
(a) Valuation account deducted in the balance sheet from trade accounts
receivable.
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF THE COMPANY AS OF
December 31, 1997
Percentage of
Jurisdiction of Voting Securities
Name Incorporation Owned by Company
- ---- -------------- -----------------
M.O.C. Resources, Inc. Nevada 100%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,584
<SECURITIES> 0
<RECEIVABLES> 3,337
<ALLOWANCES> 70
<INVENTORY> 0
<CURRENT-ASSETS> 28,398
<PP&E> 104,580
<DEPRECIATION> 54,692
<TOTAL-ASSETS> 78,286
<CURRENT-LIABILITIES> 10,894
<BONDS> 0
0
0
<COMMON> 489
<OTHER-SE> 53,020
<TOTAL-LIABILITY-AND-EQUITY> 78,286
<SALES> 26,477
<TOTAL-REVENUES> 28,899
<CGS> 10,124
<TOTAL-COSTS> 21,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,469
<INCOME-PRETAX> 6,613
<INCOME-TAX> 2,158
<INCOME-CONTINUING> 4,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,455
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
