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, 1998 or
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[ ] 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
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MAYNARD OIL COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 75-1362284
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(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8080 N. Central Expressway, Suite 660, Dallas, TX 75206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214)891-8880
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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
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(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, 1999 was
$16,979,000 (based upon an estimate that 43.4% 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, 1999 was 4,886,118 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, 1999 Part III of Form 10K.
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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 subsidiary.
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. Acquisition efforts for 1998 have resulted in the
purchase of interests in three fields in West Texas for cash consideration of
$2,684,000. Each of these purchases was secured for additional reserve
development with the Company taking over operations.
Prices realized from 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, 1998, approximately 70% of the Company's
estimated proved reserves and 79% of the 1998 production, were attributable to
crude oil and condensate on a net equivalent barrel basis (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.
During 1998, the oil industry, including the Company, experienced a
significant decline in the average price received from the sale of its
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crude oil. The weighted average price at December 31, 1997 was $15.72 per barrel
of oil sold. During the first quarter of 1998, the Company received an average
of $14.39 per barrel, which then dropped to averages of $12.32, $12.07, and
$10.66 per barrel for the final three quarters of the year, respectively.
Because of such volatility, the Company cannot predict expected oil pricing with
any certainty.
Until the current year, Maynard Oil had not posted an annual loss since
1986, a year when oil and gas prices also suffered significant reductions,
falling to $14.64 per barrel and $1.83 per MCF from prior year averages of
$26.23 per barrel and $2.60 per MCF.
During the year ended December 31, 1998, four customers, Total
Petroleum, Amoco Production Company, Koch Oil Company and EOTT Energy Operating
Limited Partnership, accounted for approximately 14%, 13%, 12%, and 12%
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.
The market price for natural gas has also fluctuated significantly from
month to month and year to year for the past several years. Like the oil market,
the Company cannot predict gas price movements with any certainty.
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.
As a reflection of weak product prices, only a total of nine wells were
drilled during 1998, two exploratory and seven development wells. One of the
seven development wells was drilled as a producer on the Company operated
Fullerton waterflood field in Andrews County, Texas. The Company retained 50% of
the working interest in this well. Five additional development wells were
drilled on the Tatums unit in Carter County Oklahoma, a mature secondary
recovery project in which the Company owns 5.8% of the working interest. The
seventh development well was drilled in Stephens County, Texas as a horizontal
producer in which the Company retained 12.5% of the working interest.
Two Hockley County, Texas exploratory wells were drilled in 1998, both
of which were completed as oil producers. However, early water production
indicates neither well will have significant hydrocarbon reserves.
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 efforts often involve
exploratory drilling on unproven acreage involving high risks. There is
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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, 1999.
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, 1999 the Company employed 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,
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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 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, 1998, 1997, and 1996. 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,
1998.
<TABLE>
<CAPTION>
December 31
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1998 1997 1996
-------------------------- ------------------------ ---------------------
Oil(MB) Gas(MMCF) Oil(MB) Gas(MMCF) Oil(MB) Gas(MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved Developed 4,947.1 12,262.1 6,761.9 12,001.6 8,650.0 13,442.2
Proved Undeveloped 72.4 642.0 386.5 733.3 324.4 1,143.0
------- -------- ------- -------- ------ --------
Total Proved Reserves 5,019.5 12,904.1 7,148.4 12,734.9 8,974.4 14,585.2
======= ======== ======= ======== ======= ========
</TABLE>
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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, 1998, 1997, and
1996. 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, 1998, 1997, and 1996 respectively,
used in the estimates were $10.02, $15.72, and $24.66 per barrel of oil and
$1.86, $2.05, and $3.59 per mcf of natural gas. Lease and well operating costs
are based upon actual operating expense records.
<TABLE>
<CAPTION>
December 31
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1998 1997 1996
------------------------ ----------------------- -----------------------
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 $34,048 $23,374 $59,789 $41,357 $152,508 $ 98,184
Proved Undeveloped 1,302 783 2,848 1,203 8,101 4,026
------ ------ ------ ------ ------- -------
Total Proved Reserves $35,350 $24,157 $62,637 $42,560 $160,609 $102,210
====== ====== ====== ====== ======= =======
</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,
1998.
<TABLE>
<CAPTION>
December 31
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1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Production:
Oil (MB) 1,025.5 1,106.0 1,212.4
Gas (MMCF) 1,637.3 1,957.1 2,890.1
Average Sales Prices:
Oil (per BBL) $12.38 $19.38 $20.39
Gas (per MCF) $ 2.12 $ 2.58 $ 2.03
Average Production Costs:
Per net equivalent barrel of oil (1)(2) $ 6.72 $ 7.07 $ 5.95
(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, 1998, the Company owned an interest in approximately
1,095 gross (295.6 net) wells, of which 1,061 gross (284.7 net) are oil wells
and 34 gross (10.9 net) are gas wells, located on approximately 48,153 gross
(20,257 net) producing acres.
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UNDEVELOPED ACREAGE
The following table sets forth the Company's gross and net undeveloped
acreage as of December 31, 1998.
Undeveloped Acreage
-------------------
Gross Net
----- ---
Colorado..................................................... 80 10
Louisiana.................................................... 80 40
North Dakota................................................. 62 4
Oklahoma..................................................... 135 70
Texas.................................................... 10,284 3,083
Wyoming.................................................. 2,376 809
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Total 13,017 4,016
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DRILLING ACTIVITY
The following table sets forth the results of the Company's drilling
activity during the three years ended December 31, 1998.
<TABLE>
<CAPTION>
Exploratory Development Total
----------- ----------- -----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Productive 2 .438 7 .916 9 1.354
Dry 0 .000 0 .000 0 .000
--- ----- --- ------ --- -----
Total 2 .438 7 .916 9 1.354
=== ===== === ====== === ======
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
=== ===== === ====== === ======
</TABLE>
At March 17, 1999, and December 31, 1998, the Company had no wells 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 lawsuits
or other items to have a material adverse effect on the Company's consolidated
financial position or results of operations.
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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, 1999, is set forth in the table below.
Name Position Age Since
---- -------- --- -----
James G. Maynard Chairman of the Board, 72 1971
Chief Executive Officer
and Treasurer
Glenn R. Moore President and Chief 61 1982
Operating Officer
L. Brent Carruth Vice President of 65 1984
Operations
Kenneth W. Hatcher Vice President of 55 1983
Finance
Linda K. Burgess Corporate Secretary 50 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.
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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, 1998, were as follows:
1998 High Low 1997 High Low
---- ---- --- ---- ---- ---
First Quarter $11 $ 9 3/4 First Quarter $21 1/2 $12 1/2
Second Quarter 11 9 3/4 Second Quarter 16 1/2 10
Third Quarter 10 5/8 7 Third Quarter 16 10
Fourth Quarter 10 1/2 7 Fourth Quarter 14 1/2 10 1/4
As of March 17, 1999, the Company had approximately 874 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.
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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.
December 31
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenue from
oil and gas $ 16,166 $ 26,477 $ 30,583 $ 20,540 $ 13,265
Income (loss) before
income taxes (11,897) 6,613 15,758 4,354 1,196
Net income (loss) (7,816) 4,455 9,954 3,023 943
Per share income
(loss) (1) (1.60) .91 2.04 .62 .19
Total assets 60,363 78,286 81,257 72,838 48,071
Long-term debt 6,250 11,250 16,250 21,250 5,250
Shareholders' equity 45,647 53,509 49,054 39,104 36,137
Net working capital 16,448 17,503 12,942 (370) 4,079
Net cash provided by
operating activities 5,025 11,250 13,921 11,558 5,696
(1) Basic and diluted earnings (loss) per share were the same for the years
presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
OVERVIEW
1998 was a challenging year for Maynard Oil Company, as well as
all others involved in the energy sector, attempting to deal with a virtual
price collapse for its hydrocarbon products. For 1998, the Company recorded a
net loss of $7,815,509, primarily related to oil and gas price reductions, which
resulted in lower oil and gas revenues, as well as a non cash impairment charge
of $8,754,846. Without this non cash write off, the Company would have reported
a loss of approximately $2,075,000 (net of tax).
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company purchased three fields in West Texas for
cash consideration of approximately $2,684,000. The Company also made its
scheduled bank loan payments and continued maintenance activities on existing
properties, all of which reduced the cash balance by approximately $3,700,000 in
1998. However, almost 35% of the Company's total assets, as reflected on its
1998 balance sheet, is represented by cash, which would be utilized along with
additional bank debt to finance future property acquisitions.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
The net loss for 1998 was $7,815,509 compared to net income of
$4,455,355 for 1997 an adverse change in financial results over the two year
period of $12,270,864.
Oil and gas revenues declined $10,311,196, or almost 39% between
the two years, primarily due to product price reductions. Oil prices plummeted
seven dollars per barrel during the period and gas prices fell forty-six cents
per MCF, accounting for approximately $8,600,000 of the revenue reduction. Oil
and gas revenues were also negatively impacted by oil and gas volume reductions
of 7% and 16%, respectively.
Lease operating expenses decreased 14%, from $10,124,212 in 1997
to $8,722,565 in 1998, primarily due to lower production taxes resulting from
the significant decline in oil and gas prices. On a net equivalent barrel basis,
this decrease was thirty-five cents per NEB, from $7.07 per NEB in 1997 to $6.72
per NEB during the current year.
Exploration costs decreased from $838,580 in 1997 to $391,718
currently, a 53% decline, essentially due to a reduction in seismic costs which
were partially offset by higher impairments of undeveloped acreage. Because the
Company follows the successful efforts method of accounting, the Company's
results of operations may be adversely affected during any accounting period in
which seismic costs, exploratory dry hole costs, and unproved property
impairments are expensed.
General and administrative expenses increased approximately 20% in
1998, due primarily to decreased amounts accrued under an employee benefit plan,
which is based upon stock price (see Note 6 to the Company's Consolidated
Financial Statements). Last year, general and administrative expense was
credited $518,563 as the Company's stock price fell from $18.75 per share at the
end of 1996 to $10.25 per share at the end of 1997. During the current calendar
year, the Company's general and administrative expense was credited $262,625 to
reflect a further stock price reduction from $10.25 per share to $7.50 per share
at the end of 1998. Thus, the Company ended 1998 with a liability of $234,750
representing future 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 22% due to an
increase in the Company's average depletion rate. Under the successful efforts
method of accounting, costs of oil and gas properties are amortized on a
unit-of-production method based on estimated proved reserves. The increase in
the Company's average depletion rate was attributable to the effects of lower
oil and gas prices on estimated quantities of proved reserves. These estimates
relate to end-of-year product prices, which were $15.72 per barrel of oil and
$2.05 per MCF of natural gas at the end of 1997 compared to $10.02 per barrel of
oil and $1.86 per MCF of natural gas at the end of 1998. On a net equivalent
barrel basis, the current depreciation and amortization expense rate was
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$7.58 per NEB compared with $5.63 per NEB for the prior twelve months, a 35%
increase.
During 1998, the Company also recognized a non-cash impairment
charge to oil and gas properties in the amount of $8,754,846 compared to
$227,879 in the prior year. Under generally accepted accounting principles, the
Company must compare the carrying value of its oil and gas properties with the
undiscounted value of its future net revenues from the properties. Should this
comparison indicate non-recoverability of the carrying costs, an impairment is
recognized based upon estimates of discounted value. The significant reduction
in product pricing impacted this comparison and caused the current year
writedown.
Interest expense decreased approximately $438,000, or 30% due to
scheduled bank note payments for 1998 and the resulting lower principal amounts
outstanding.
The Company recognized a tax benefit of $4,081,856 during 1998
compared with tax expense of $2,157,500 during the prior year. This current year
tax benefit relates to the tax effects of the revenue reductions, expenses and
impairments discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired one minor group of oil properties during 1997
for approximately $700,000. 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 total assets as reflected on its current balance sheet
was represented by cash, and net working capital at year end 1997 was
$17,503,000.
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 1996. Oil and gas
revenues declined 13% between the two years due primarily to the loss of volumes
resulting from property dispositions in 1996. Oil volumes decreased
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
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related to higher lifting costs for recurring activities on certain
identifiable properties.
Exploration costs totaled $838,580 in 1997 versus $201,509 in
1996. 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 in 1997
as compared to 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 $7,837,332 in 1996 to $8,063,249 in 1997. This increase resulted from oil
and gas reserve revisions attributable to current pricing trends.
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 in 1996 due to the
non-recurring nature of property sales and the decreased effective tax rate in
1997 compared to 1996.
YEAR 2000 ISSUES
The "Year 2000 Issue" is the result of computer programs written
using two digits rather than four to define the applicable year. Any systems
developed with this methodology could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000.
In response to the potential impact of the Year 2000 issue on the
Company's business and operations, certain Company executives have been
appointed to serve on its Year 2000 Readiness Team. This group is in the process
of inventorying and assessing the readiness for Year 2000 by the Company and its
vendors, suppliers, customers and other significant business relationships.
In 1990, as part of a business modernization program intended to
reduce cycle time and improve profitability, the Company purchased a new
accounting package which runs on PC and LAN platforms, which the Company has
upgraded in all years since acquisition. The software vendor has provided
written assurance that dating changes have been throughly
-13-
<PAGE>
tested and were found to be functioning correctly. The Company will conduct
further testing of this system, along with other ancillary financial systems,
during the second quarter of 1999 and anticipates completion by September 30,
1999. The costs of these efforts, which have been funded by cash flow from
operations, were not material.
The Company is in the data gathering phase with regard to
non-financial software and embedded chip technology. Further activity in this
area involves implementing software upgrades to selected equipment and verifying
Year 2000 compliance. The Company anticipates completion of these activities by
the end of the third quarter of 1999.
Additionally, the Company is in the process of surveying critical
suppliers, vendors, and customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issues. It is expected that the survey process will be completed
by June 30, 1999. To the extent that responses regarding Year 2000 readiness are
unsatisfactory, the Company intends to change external business relationships to
those who have demonstrated Year 2000 readiness.
Given the complexity of the Year 2000 issue, there can be no
assurance that the Company will be able to address these problems without costs
and uncertainties that might affect future financial results or cause reported
financial information not to necessarily be indicative of future operating
results or future financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included on pages 18 through
34 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, 1999, and is incorporated herein by reference. Information
with respect to the Company's executive officers as of March 17, 1999, is set
forth commencing on pages 8 and 9 hereof under the caption "Executive Officers
of the Registrant".
-14-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Schedule 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 1998.
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.
-15-
<PAGE>
(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 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 reference.
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, 1998,
filed herewith.
-16-
<PAGE>
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, 1999
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, 1999
- ------------------------
James G. Maynard Chief Executive Officer
& Treasurer
/s/ Glenn R. Moore President and Chief March 31, 1999
- ------------------------
Glenn R. Moore Operating Officer
/s/ Kenneth W. Hatcher Vice President of Finance March 31, 1999
- ------------------------
Kenneth W. Hatcher (Principal Financial
and Accounting Officer)
/s/ Robert B. McDermott Director March 31, 1999
- ------------------------
Robert B. McDermott
/s/ Ralph E. Graham Director March 31, 1999
- ------------------------
Ralph E. Graham
-17-
<PAGE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements and Schedule
Page
Financial Statements:
Report of Independent Accountants 19
Consolidated Balance Sheets - December 31, 1998 and 1997 20
Consolidated Statements of Operations - Three years ended
December 31, 1998 21
Consolidated Statements of Shareholders' Equity - Three
years ended December 31, 1998 22
Consolidated Statements of Cash Flows - Three years
ended December 31, 1998 23
Notes to Consolidated Financial Statements 24
Financial Statement Schedule for the Three years
ended December 31, 1998
II - Valuation and Qualifying Accounts 34
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated Financial
Statements or Notes thereto.
-18-
<PAGE>
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 23, 1999
-19-
<PAGE>
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
<CAPTION>
December 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,889,742 $ 24,584,288
Accounts receivable, trade 2,568,807 3,174,635
Income taxes receivable 977,587 92,620
Other current assets 478,680 546,238
----------- -----------
Total current assets 24,914,816 28,397,781
----------- -----------
Property and equipment, at cost:
Oil and gas properties, successful
efforts method 107,292,314 104,031,352
Other property and equipment 460,475 548,668
----------- -----------
107,752,789 104,580,020
Less accumulated depreciation and
amortization (72,985,138) (54,692,225)
----------- -----------
Net property and equipment 34,767,651 49,887,795
----------- -----------
Deferred income taxes 681,000 --
----------- --------
$ 60,363,467 $ 78,285,576
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 5,000,000 $ 5,000,000
Accounts payable 2,583,357 4,271,662
Accrued expenses 842,368 1,402,021
Income taxes payable 40,799 220,798
----------- -----------
Total current liabilities 8,466,524 10,894,481
----------- -----------
Deferred income taxes -- 2,632,000
Long-term debt 6,250,000 11,250,000
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;
4,884,597 and 4,889,450 shares
issued and outstanding 488,460 488,945
Additional paid-in capital 18,831,138 18,831,138
Retained earnings 26,327,345 34,189,012
----------- -----------
Total shareholders' equity 45,646,943 53,509,095
----------- -----------
Contingencies and commitments (note 10)
$ 60,363,467 $ 78,285,576
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas sales and royalties $16,166,042 $26,477,238 $30,583,133
Interest and other 1,329,606 1,229,556 732,660
Gain on disposition of assets 6,275 191,873 6,202,473
---------- ---------- ----------
17,501,923 27,898,667 37,518,266
---------- ---------- ----------
Costs and expenses:
Operating expenses 8,722,565 10,124,212 10,079,948
Exploration, dry holes and
abandonments 391,718 838,580 201,509
General and administrative 673,935 562,924 1,900,408
Depreciation and amortization 9,845,105 8,063,249 7,837,332
Impairment of oil and gas properties 8,754,846 227,879 57,056
Interest and other 1,011,119 1,468,968 1,683,860
---------- ---------- ----------
29,399,288 21,285,812 21,760,113
---------- ---------- ----------
Income (loss) before income taxes (11,897,365) 6,612,855 15,758,153
Income tax expense (benefit) (4,081,856) 2,157,500 5,804,370
---------- ---------- ----------
Net income (loss) $(7,815,509) $ 4,455,355 $ 9,953,783
========== ========== ==========
Weighted average number of common
shares outstanding 4,887,882 4,889,450 4,889,690
========== ========== ==========
Net income (loss) per common share
(basic and diluted) $(1.60) $ .91 $2.04
==== ==== ====
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
-21-
<PAGE>
<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, 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
Net (loss) -- -- -- (7,815,509) (7,815,509)
Purchase and retirement
of common stock (4,853) (485) -- (46,158) (46,643)
--------- ------- ---------- ---------- ----------
Balance at December 31, 1998 4,884,597 $488,460 $18,831,138 $26,327,345 $45,646,943
========= ======= ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
-22-
<PAGE>
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,815,509) $4,455,355 $9,953,783
Adjustments to reconcile net income (loss)to
net cash provided by operating activities:
Depreciation and amortization 9,845,105 8,063,249 7,837,332
Impairment of oil and gas properties 8,754,846 227,879 57,056
Deferred income tax expense (benefit) (3,313,000) 413,000 6,490
Exploration, dry holes and
abandonments 345,284 512,317 180,230
Current year costs of dry holes and
abandonments (145,868) (436,058) (90,521)
Gain on disposition of assets (6,275) (191,873) (6,202,473)
(Increase) decrease in current assets:
Accounts receivable 605,828 1,099,804 (976,506)
Income taxes receivable (884,967) (92,620) --
Other current assets 67,558 38,783 (119,595)
Increase (decrease) in current liabilities:
Accounts payable (1,688,305) 679,258 (533,609)
Accrued expenses (559,653) (308,660) 790,028
Income taxes payable (179,999) (3,210,678) 3,018,781
---------- ---------- ----------
Net cash provided by operating
activities 5,025,045 11,249,756 13,920,996
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets 38,880 263,613 8,884,691
Purchase price adjustment -- -- 874,245
Additions to property and equipment (3,711,828) (3,746,528) (3,184,637)
---------- ---------- ----------
Net cash provided (used) by
investing activities (3,672,948) (3,482,915) 6,574,299
---------- ---------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (5,000,000) (5,000,000) (4,812,500)
Purchase of common stock (46,643) -- (4,251)
---------- --------- ----------
Net cash provided (used) by
financing activities (5,046,643) (5,000,000) (4,816,751)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (3,694,546) 2,766,841 15,678,544
Cash and cash equivalents at beginning
of year 24,584,288 21,817,447 6,138,903
---------- ---------- ----------
Cash and cash equivalents at end of year $20,889,742 $24,584,288 $21,817,447
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
-23-
<PAGE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Business Activity
-----------------
Maynard Oil Company (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 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. All geological and geophysical costs not
reimbursed are expensed as incurred. Costs of acquiring unproved
leases are evaluated for impairment until such time as the leases are
proved or abandoned. In addition, unamortized costs at a field level
are reduced to fair value if the sum of expected undiscounted future
cash flows are less than net book value.
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 $2,018,870, $1,796,113, and $1,870,752, for the three years
ended December 31, 1998, respectively, have been classified as a
reduction of general and administrative expenses in the accompanying
Consolidated Statements of Operations. The Company's working interest
portion of the amounts billed are included in operating expenses.
-24-
<PAGE>
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. A valuation allowance is
established to reduce deferred tax assets if it is more likely than
not that the related tax benefits will not be realized.
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 Operations 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
1998, 1997 and 1996.
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, disclosures 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.
-25-
<PAGE>
Reclassifications
-----------------
Certain reclassifications of prior period statements have been made to
conform with the 1998 presentation.
(2) Impairment of Long-Lived Assets
-------------------------------
Oil and gas prices fell from an average of $15.72 per barrel and $2.05
per mcf at the end of 1997 to averages of $10.02 per barrel and $1.86
per mcf, at the end of 1998. Consequently, the Company performed an
impairment evaluation of its oil and gas properties and recognized a
non-cash write-down of $8,754,846 in December 1998 to account for
those properties whose investment would not be recoverable under the
Company's current pricing assumptions, as defined by Statement 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").
For 1997 and 1996, when oil prices ranged from averages of $15.72 to
$24.66 per barrel and gas prices averaged $2.05 to $3.59 per mcf, the
Company recognized impairments of oil and gas properties amounting to
$227,879 and $57,056, respectively.
(3) 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).
The following table presents unaudited pro forma operating results as
if the dispositions had occurred on January 1, 1996.
Year ended
December 31,
1996
------------
Amounts in thousands, except per
share amounts
Revenues $28,706
Net income 5,234
Net income per common share 1.07
(4) 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, 1998 and 1997, such investments
totaled $21,050,000 and $24,700,000, respectively, and are considered
to be cash equivalents, which approximate their fair value.
-26-
<PAGE>
Supplemental cash flow information for the three years ended December
31, 1998 is summarized as follows:
1998 1997 1996
---- ---- ----
Cash paid:
Interest expense $982,258 $1,462,269 $1,735,416
======= ========= =========
Income taxes $330,000 $5,047,847 $2,779,099
======= ========= =========
(5) Long-term Debt
--------------
Long-term debt at December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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. $11,250,000 $16,250,000
Less current installments 5,000,000 5,000,000
---------- ----------
Long-term debt $ 6,250,000 $11,250,000
========== ==========
</TABLE>
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, 1998, interest on the bank term loan was at a rate of
approximately 6.64%.
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.
(6) 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 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
-27-
<PAGE>
awarded to certain employees at a price of $4.50 per share of which
49,500 units remain outstanding at December 31, 1998, all of which are
100% vested. During August 1993, 52,000 additional units were awarded
at $5.625 per share of which 46,000 units remain outstanding and are
also 100% 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
$136,125 and $126,500 in regard to the stock participation units
granted in 1989 and 1993, respectively. These credits reflect the
reduction in closing stock prices from $10.25 per share at December
31, 1997 to $7.50 per share at December 31, 1998. During 1997,
operations were credited $518,563 for the two sets of awards which
followed a 1996 charge to operations in the amount of $888,887.
(7) Income Taxes
------------
Income tax expense (benefit) consists of the following:
Years ended December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
Federal
Current $ (734,967) $1,212,500 $5,397,880
Deferred (3,313,000) 413,000 6,490
State (33,889) 532,000 400,000
---------- --------- ---------
$(4,081,856) $2,157,500 $5,804,370
========== ========= =========
Income tax expense(benefit) for the three years ended December 31,
1998 differs from the amount computed by applying the applicable U.S.
corporate income tax rate (34% in 1998 and 1997 and 35% in 1996) to
income (loss) before income taxes. The reasons for this difference are
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit)
at U.S. statutory rate $(4,045,104) $2,248,371 $5,515,354
State income taxes (benefit),
net of Federal income
tax effects (22,366) 351,120 260,000
Allowable depletion in
excess of cost depletion -- (223,261) (223,197)
Items not related to current
year earnings -- (136,000) --
All other items (14,386) (82,730) 252,213
--------- --------- ---------
Income tax expense
(benefit) $(4,081,856) $2,157,500 $5,804,370
========= ========= =========
</TABLE>
-28-
<PAGE>
The components of the net deferred tax (asset) and liability were as
follows:
December 31,
-----------------------
1998 1997
---- ----
Depreciable assets $ (387,000) $ 86,500
Depletable assets (2,094,000) 36,500
Intangible drilling
and development costs 1,860,000 2,678,000
Employee benefit
obligations (60,000) (169,000)
--------- ---------
Net deferred tax (asset)
liability $ (681,000) $2,632,000
========= =========
For 1998, the net deferred tax calculation resulted in the recognition
of a deferred tax asset. After review by management, it was determined
no valuation allowance was deemed necessary. In addition, the Company
has statutory depletion carryovers of approximately $431,000 available
for Federal income tax purposes.
(8) 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 and
1998, 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 $103,458, $99,313, and
$53,965, respectively, for the years ended December 31, 1998, 1997 and
1996.
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 1998,
1997, and 1996. During this same three year period, the Company's
matching portion amounted to $91,911, $91,302, and $79,879,
respectively.
(9) Major Customers
---------------
For the year ended December 31, 1998, oil and gas sales to four
customers, amounting to approximately $2,449,000, $2,277,000,
$2,183,000, and $2,144,000, respectively, each accounted for more than
10% of total consolidated revenues.
During the year ended December 31, 1997, oil and gas sales to three
customers, amounting to approximately $5,698,000, $5,067,000 and
$3,783,000, respectively, each accounted for more than 10% of total
consolidated revenues. During the year ended December 31, 1996, oil
and
-29-
<PAGE>
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.
(10) 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.
All of the Company's operations are generally subject to Federal,
state and local environmental regulations. To the best of management's
knowledge, the Company is in substantial compliance with such laws and
regulations.
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, 1998 was $341,443, $321,001, and $314,743, respectively.
Minimum payments for operating leases having initial or noncancellable
terms in excess of one year are as follows:
1999 $ 271,316
2000 120,914
2001 35,388
2002 20,520
---------
Total minimum payments $ 448,138
========
(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,
----------------------
1998 1997
---- ----
Undeveloped leaseholds and
royalties $ -- $ 199,416
Producing properties 107,292,314 103,831,936
----------- -----------
107,292,314 104,031,352
Accumulated depreciation and
amortization 72,687,281 54,351,135
----------- -----------
Net capitalized costs $ 34,605,033 $ 49,680,217
=========== ===========
-30-
<PAGE>
(11) Supplemental Oil and Gas Disclosures (Unaudited) continued
----------------------------------------------------------
Costs Incurred
--------------
A summary of costs incurred in oil and gas acquisition,
exploration and development activities follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Acquisition of properties
Undeveloped $ 2,946 $ 195,434 $ 104,846
Proved 2,683,526 700,055 --
Exploration costs 472,001 1,006,253 125,963
Development costs 693,363 2,539,005 2,980,849
--------- --------- ---------
$3,851,836 $4,440,747 $3,211,658
========= ========= =========
</TABLE>
Results of Operations
---------------------
The results of operations from oil and gas producing activities
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $16,166,042 $26,477,238 $30,583,133
Production costs (a) (8,722,565) (10,124,212) (10,079,948)
Exploration expenses (421,977) (1,060,616) (340,913)
Depreciation and
amortization (9,776,334) (7,950,659) (7,759,618)
Impairment of oil and
gas properties (8,754,846) (227,879) (57,056)
---------- ---------- ----------
(11,509,680) 7,113,872 12,345,598
Income tax (expense)
benefit 3,897,501 (2,267,708) (4,408,531)
---------- ---------- ----------
Results of operations
from oil and gas
producing activities $(7,612,179) $ 4,846,164 $ 7,937,067
========== ========== ==========
(a) Includes lifting costs, severance taxes and advalorem taxes.
</TABLE>
-31-
<PAGE>
(11) Supplemental Oil and Gas Disclosures (Unaudited) continued
----------------------------------------------------------
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.
Proved Developed and Oil Gas
Undeveloped Reserves (Barrels) (MCF)
- -------------------- --------- -----
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
Revisions of previous estimates (1,372,452) (252,807)
Purchases of reserves 244,810 1,971,319
Extensions and discoveries 24,624 94,318
Production (1,025,524) (1,637,254)
Sales of reserves in place (473) (6,396)
---------- ----------
Total as of December 31, 1998 5,019,452 12,904,100
========== ==========
Proved Developed Reserves
December 31, 1996 8,649,996 13,442,204
December 31, 1997 6,761,920 12,001,602
December 31, 1998 4,947,039 12,262,069
-32-
<PAGE>
(11) Supplemental Oil and Gas Disclosures (Unaudited) continued
----------------------------------------------------------
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:
Years ended December 31,
----------------------------------
1998 1997 1996
(000's) (000's) (000's)
------- ------- -------
Future cash inflows $ 74,282 $ 138,471 $ 273,644
Future production costs (38,158) (73,641) (110,123)
Future development costs (773) (2,193) (2,912)
--------- --------- ---------
35,351 62,637 160,609
Future income tax (expenses)
benefits 487 (6,891) (38,610)
--------- --------- ---------
Future net cash flows 35,838 55,746 121,999
10% annual discount for estimated
timing of cash flows (11,348) (17,867) (44,361)
--------- --------- ---------
Standardized measure of discounted
future net cash flows $ 24,490 $ 37,879 $ 77,638
========= ========= =========
The average prices for oil and gas used to calculate future cash inflows at
December 31, 1998 were $10.02 per barrel and $1.86 per mcf, respectively.
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows.
Years ended December 31,
--------------------------------
1998 1997 1996
(000's) (000's) (000's)
------- ------- -------
Standardized measure - beginning of year $ 37,879 $ 77,638 $ 56,601
Sales of oil and gas produced,
net of production costs (7,443) (16,353) (20,503)
Net changes in prices and production costs (10,714) (46,696) 36,421
Extensions, discoveries, and improved
recovery, less related costs 277 1,593 3,876
Changes in future development costs 1,094 128 (617)
Development costs incurred 193 994 182
Revisions of previous quantity estimates (7,361) (3,741) 14,503
Accretion of discount 3,788 4,256 6,631
Purchase of proved reserves 1,800 348 --
Sale of proved reserves (2) (255) (4,669)
Net change in income taxes 5,015 19,889 (14,861)
Other (36) 78 74
-------- -------- --------
Standardized measure - end of year $ 24,490 $ 37,879 $ 77,638
======== ======== ========
-33-
<PAGE>
Schedule II
<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARY
Valuation and Qualifying Accounts
Three Years Ended December 31, 1998
<CAPTION>
Charged to
Beginning Cost and Ending
Description Balance Expenses Deductions Balance
- ----------- ------- -------- ---------- -------
Allowance for Doubtful Accounts - (a)
- -------------------------------------
<S> <C> <C> <C>
December 31, 1996 $ 43,000 $ 7,000 -- $50,000
======== ======= ======== =======
December 31, 1997 $ 50,000 $20,000 -- $70,000
======== ======= ======== =======
December 31, 1998 $ 70,000 $ 3,600 $(20,600) $53,000
======== ======= ======== =======
(a) Valuation account deducted in the balance sheet from trade accounts receivable.
</TABLE>
-34-
<
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF THE COMPANY AS OF
December 31, 1998
Percentage of
Jurisdiction of Voting Securities
Name Incorporation Owned by Company
---- ------------- ----------------
M.O.C. Resources, Inc. Nevada 100%
-35-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
MAYNARD OIL COMPANY
FINANCIAL DATA SCHEDULES
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,890
<SECURITIES> 0
<RECEIVABLES> 2,622
<ALLOWANCES> 53
<INVENTORY> 236
<CURRENT-ASSETS> 24,915
<PP&E> 107,753
<DEPRECIATION> 72,985
<TOTAL-ASSETS> 60,363
<CURRENT-LIABILITIES> 8,467
<BONDS> 0
0
0
<COMMON> 488
<OTHER-SE> 45,159
<TOTAL-LIABILITY-AND-EQUITY> 60,363
<SALES> 16,166
<TOTAL-REVENUES> 17,502
<CGS> 8,723
<TOTAL-COSTS> 29,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,011
<INCOME-PRETAX> (11,897)
<INCOME-TAX> (4,081)
<INCOME-CONTINUING> (7,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,816)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
