SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ending September 30, 2000 Commission File #0-5704
------------------ -------
MAYNARD OIL COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 75-1362284
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(State or other jurisdic- (IRS Employer
tion of incorporation) Identification No.)
8080 N. Central Expressway, Suite 660, Dallas, Texas 75206
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Registrant's telephone number, including area code: (214)891-8880
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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 the number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 2000.
4,880,618 shares of common stock, par value $0.10
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<PAGE>
MAYNARD OIL COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
----
Part I. Financial Information
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Nine Months and Three Months ended
September 30, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity
Nine Months ended September 30, 2000 5
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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MAYNARD OIL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
------------- ------------
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 22,952,991 $ 12,910,321
Accounts receivable, trade 6,526,088 6,029,188
Income taxes receivable 750,000 750,000
Other current assets 947,433 836,554
------------- -------------
Total current assets 31,176,512 20,526,063
------------- -------------
Property and equipment, at cost:
Oil and gas properties, successful
efforts method 157,147,288 151,655,045
Other property and equipment 475,327 337,546
------------- -------------
157,622,615 151,992,591
Less accumulated depreciation and
amortization (84,932,601) (78,158,395)
------------- -------------
Net property and equipment 72,690,014 73,834,196
------------- -------------
Deferred income taxes -- 348,000
------------- -------------
$ 103,866,526 $ 94,708,259
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 7,650,000 $ 5,737,500
Accounts payable 4,122,408 4,249,724
Accrued expenses 3,469,492 1,257,618
Income taxes payable 1,779,212 960,212
------------- -------------
Total current liabilities 17,021,112 12,205,054
------------- -------------
Deferred income taxes 384,000 --
Long-term debt 26,775,000 32,512,500
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;
4,880,618 and 4,880,887 shares
issued and outstanding 488,062 488,089
Additional paid-in capital 18,831,138 18,831,138
Retained earnings 40,367,214 30,671,478
------------- -------------
Total shareholders' equity 59,686,414 49,990,705
------------- -------------
Contingencies and commitments
$ 103,866,526 $ 94,708,259
============= =============
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine Months ended Three Months ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $37,085,448 $14,519,100 $14,781,064 $ 6,523,657
Interest and other 770,391 661,430 299,827 167,599
Gain (loss) on disposition
of assets (62,955) 303,000 124,882 (99,781)
---------- ---------- ---------- ----------
37,792,884 15,483,530 15,205,773 6,591,475
---------- ---------- ---------- ----------
Costs and expenses:
Operating expenses 9,972,575 5,124,825 3,539,492 2,005,297
Exploration, dry holes and
abandonments 21,222 486,720 16,681 380,543
General and administrative, net 3,071,408 1,725,910 1,191,842 491,539
Depreciation and amortization 7,972,946 4,617,436 2,744,766 1,641,157
Interest and other 2,318,394 456,133 853,702 132,780
---------- ---------- ---------- ----------
23,356,545 12,411,024 8,346,483 4,651,316
---------- ---------- ---------- ----------
Income before income taxes 14,436,339 3,072,506 6,859,290 1,940,159
Income tax expense 4,736,000 840,000 2,236,000 540,000
---------- ---------- ---------- ---------
Net income $ 9,700,339 $ 2,232,506 $ 4,623,290 $1,400,159
========== ========== ========== =========
Weighted average number of common
shares outstanding 4,880,809 4,883,664 4,880,702 4,883,429
========= ========= ========= =========
Net income per common share $1.99 $ .46 $ .95 $ .29
(Basic and diluted) ==== ==== ==== ====
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Nine Months Ended September 30, 2000
(Unaudited)
<CAPTION>
Additional
Common Stock Paid-in
------------ Capital Retained
Shares Amount Amount Earnings Total
------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 4,880,887 $488,089 $18,831,138 $30,671,478 $49,990,705
Net income -- -- -- 9,700,339 9,700,339
Purchase and retirement
of common stock (269) (27) -- (4,603) (4,630)
--------- ------- ---------- ---------- ----------
Balance at September 30, 2000 4,880,618 $488,062 $18,831,138 $40,367,214 $59,686,414
========= ======= ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
MAYNARD OIL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,700,339 $ 2,232,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,972,946 4,617,436
Deferred income taxes 732,000 300,000
Dry holes and abandonments 1,377 405,773
Current year costs of dry holes
and abandonments (1,377) (312,556)
(Gain) loss on disposition of assets 62,955 (303,000)
(Increase) decrease in current assets:
Accounts receivable (496,900) (1,609,358)
Income taxes receivable -- 227,587
Other current assets (110,879) 10,666
Increase (decrease) in current liabilities:
Accounts payable (127,316) 360,370
Accrued expenses 2,211,874 831,853
Income taxes payable 819,000 279,413
------------ ------------
Net cash provided by operating
activities 20,764,019 7,040,690
------------ ------------
Cash flows from investing activities:
Proceeds from disposition of assets 735,646 545,275
Additions to property and equipment (7,627,365) (12,589,688)
------------ ------------
Net cash used by investing
activities (6,891,719) (12,044,413)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (3,825,000) (3,750,000)
Purchase of common stock (4,630) (10,670)
------------ ------------
Net cash used by financing
activities (3,829,630) (3,760,670)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 10,042,670 (8,764,393)
Cash and cash equivalents at beginning
of year 12,910,321 20,889,742
------------ ------------
Cash and cash equivalents at end of period $ 22,952,991 $ 12,125,349
============ ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
MAYNARD OIL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
Note 1 Unaudited Financial Statements
The accompanying consolidated financial statements of Maynard Oil
Company (the "Company") have been prepared in accordance with generally
accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission included in the instructions
to Form 10-Q and Article 10 of Regulation S-X. The financial
information included herein is unaudited but, in the opinion of
management, contains all adjustments, consisting of all recurring
adjustments, necessary to present fairly the Company's financial
position as of September 30, 2000, the results of operations for the
nine months and three months ended September 30, 2000 and 1999 and
changes in cash and cash equivalents for the nine months ended
September 30, 2000 and 1999. The December 31, 1999 consolidated balance
sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the 1999 Annual Report to
Shareholders.
Certain reclassifications of prior period statements have been made to
conform with the 2000 presentation.
Note 2 Earnings Per Share
Net income per common share is based on the weighted average number of
shares outstanding in each period. As of September 30, 2000 and 1999,
the Company had no potentially dilutive common shares, and therefore,
basic and diluted earnings per common share were the same.
Note 3 Risk Management
During 1999, the Company entered into a derivative financial instrument
whereby the Company hedged 2,500 barrels of daily production from
November 1, 1999 through June 30, 2000 with a ceiling price of
$23.90/bbl and a floor price of $14.00/bbl. The contracts provided for
a monthly settlement such that if the average WTI for the month was
greater than $23.90/bbl, Maynard remitted to the counterparty the
excess price times the number of barrels hedged
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during the month. Conversely, if the average WTI for the month was less
than $14.00/bbl, the counterparty was obligated to pay Maynard for the
difference times the number of barrels hedged during the month. If the
average WTI for the month fell between $14.00/bbl and $23.90/bbl, no
settlement was to be made. As a result of this arrangement, the
Company's oil and gas revenues were reduced by approximately $2,173,000
during the nine months ended September 30, 2000.
A second derivative instrument was entered into effective March 1, 2000
through June 30, 2000 which mirrored the first except the ceiling and
floor amounts were $28.30 and $25.00 per barrel, respectively. This
second instrument was cancelled by the Company effective April 1, 2000.
As a result of this arrangement, the Company's first quarter 2000 oil
and gas revenues were reduced by approximately $146,000.
Effective September 1, 2000, the Company entered into an additional
derivative financial instrument in which the Company hedged 1,000
barrels of daily production for a period of six months with a ceiling
price of $36.50/bbl and a floor price of $24.00/bbl. This agreement
calls for a monthly cash settlement if the average WTI for the month is
greater than the ceiling price, whereby Maynard would be obligated to
pay the counterparty to the contract; likewise, if the average WTI for
the month is less than the floor price, the counterparty to the
contract would be obligated to pay Maynard. The amount of any cash
payment would be equal to the difference between the average WTI price
and the ceiling or floor price times the number of hedged barrels for
the month. During September, the average WTI was $30.86/bbl and
consequently, no monies were due to either party under the contract.
Additionally, effective October 1, 2000, the Company entered into
another derivative financial instrument in which an additional 1,000
barrels of daily production was hedged for a period of six months with
a ceiling price of $37.20/bbl and a floor price of $25.00/bbl.
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<PAGE>
Note 4 Income Taxes
The provision for income taxes consists of the following (thousands of
dollars):
Nine Months Ended `` Three Months Ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
Federal:
Current $4,004 $ 540 $1,654 $ 370
Deferred 732 300 582 170
----- ---- ----- ----
$4,736 $ 840 $2,236 $ 540
===== ==== ===== ====
Note 5 Employee Incentive Plan
The Company's Board of Directors approved an amendment to an employee
incentive plan in which officers and key employees had been awarded
stock participation units in 1989 and 1993 that entitled them to a cash
payment equal to the excess of the fair market value of one share of
the Company's common stock over a specified share price at the grant
date times the number of vested shares. Under the original terms of
this plan, no units could be exercised until the employee terminated
his employment with the Company. Pursuant to terms of the amended plan,
each employee holding stock participation units was given the
opportunity to cash out all, or a portion, of the units held. At the
time of the plan amendment, there were a total of 95,500 stock
participation units outstanding with option prices of $4.50 and $5.625
per share. For the nine months and three months ended September 30,
2000, general and administrative expenses were charged $1,079,148 and
$482,273, respectively, for the 95,500 stock participation units. A
total of 84,500 units were exercised under the amended plan at $20.81
per share. As a result of the exercise of these units, the Company will
make a cash payment of $1,332,835 to those electing employees.
Additionally, at September 30, 2000, the Company has a liability of
approximately $196,000 attributable to the remaining 11,000 stock
participation units.
Note 6 Commitments and Contingencies
The Company is the 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
the operations of the Company.
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<PAGE>
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.
Note 7 Subsequent Event
Effective October 1, 2000, the Company purchased working interests in
10 producing properties in the Sho-Vel-Tum Field located in Carter,
Stephens, and Jefferson Counties, Oklahoma for cash consideration of
approximately $2.8 million.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
--------------
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
-----------------------------------------------------------------------------
For the third quarter of 2000, the Company earned ninety-five
cents per share on revenues of $15,205,773 compared to earnings of twenty- nine
cents per share during the third quarter of 1999 on revenues of $6,591,475.
Current quarter results were favorably impacted by higher revenues from the sale
of oil and gas, which are the results of increased product pricing and
additional production volumes derived from producing property acquisitions.
Revenues
--------
Oil and gas revenues rose $8,257,407 between the two quarterly
periods, or over 126%, due to both pricing increases and higher volumes
resulting from producing property acquisitions. Oil and gas prices were $10.09
per barrel and $1.75 per thousand cubic feet of gas (mcf) higher than the same
quarter a year ago. Oil volumes increased in excess of 42% and gas volumes rose
approximately 61% over this same period as reflected in the table below.
Nine Months Ended Quarter Ended
September 30, September 30,
Sales Volumes 2000 1999 2000 1999
------------- ---- ---- ---- ----
Bbls 1,031,093 709,748 346,468 243,742
MCF 2,935,974 1,407,820 968,320 600,899
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<PAGE>
Costs and Expenses
------------------
On a net equivalent barrel basis (NEB), lease operating expenses were
$1.14 per NEB higher than the third quarter of 1999 as a result of additional
workover expenses and higher severance taxes, which relate proportionally to
increased oil and gas revenues.
The exploration, dry holes and abandonments category declined $363,862
between the 1999 and 2000 quarters as a result of reduced exploratory drilling
activity.
General and administrative expenses reflect an increase of $700,303,
sixty-nine percent of which is attributable to the employee incentive plan
discussed in Note 5 to the Company's Financial Statements, and the balance
represents costs to manage the growth of the Company from approximately $60.3
million in assets at September 30, 1999 to approximately $103.8 million in
assets at September 30, 2000.
Depreciation and amortization expense rose $1,103,609, or 67%, between
the third quarters of 1999 and 2000 due to the acquisition of producing
properties last year. On a net equivalent barrel basis, this category of expense
increased from $4.77 per NEB to $5.40 per NEB as a result of higher depletion
rates on certain properties.
Interest expense also increased $720,922 between the two quarterly
periods because of additional bank debt incurred in connection with the
properties acquired from Questar Exploration and Production Company in November,
1999.
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<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
------------------------------------------------------------------
September 30, 1999
------------------
The Company reported net income of $9,700,339, or one dollar and
ninety-nine cents per share, on revenues of $37,792,884 for the nine months
ended September 30, 2000 compared with net income of $2,232,506, or forty-six
cents per share, on revenues of $15,483,530 for the same period a year ago.
Earnings for the current period were favorably affected by operating results
derived from producing properties acquired, as well as product pricing
increases.
Revenues
--------
Oil and gas revenues rose $22,566,348 between the two nine month
periods, or approximately 155%, primarily because of volume increases from
producing property acquisitions. Oil volumes rose approximately 45% and gas
volumes were 109% higher than the prior period. Significant price realizations
also pushed revenues higher - oil averaged $26.13 per barrel for the first nine
months of 2000 compared with $15.80 during the prior year, and gas averaged
$3.45 per mcf compared with $2.35 per mcf in 1999. During the current period,
revenues were reduced by $62,955 due to a loss from property sales, while the
prior nine month period included a gain of $303,000 from property dispositions.
Costs and Expenses
------------------
Operating expenses increased $1.13 per NEB, primarily due to workover
activity levels and higher severance tax expense, which relates proportionally
to higher oil and gas revenues.
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<PAGE>
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 costs are expensed. However, during the current period, the
absence of most exploratory drilling costs resulted in a decline of $465,498,
when compared to the same period last year.
General and administrative (G&A) expenses increased $1,345,498, or 78%,
to reflect higher phantom stock expense as discussed in Note 5 to the
Consolidated Financial statements.
Additionally, depreciation and amortization expense rose approximately
73% during the current nine months reflecting the increase in unamortized
property balances resulting from producing property acquisitions. Interest
expense increased $1,862,261 in the current period reflecting higher outstanding
bank debt due to last year's property acquisitions.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents totaled $22.9 million and $12.9 million at
September 30, 2000, and December 31, 1999, respectively. Working capital was
$14.1 million at September 30, 2000, compared with $8.3 million at December 31,
1999.
The following summary table reflects cash flows for the nine months
ended September 30, 2000 (in thousands):
Net cash provided by operating activities: $20,764
Net cash used by investing activities: 6,892
Net cash used by financing activities: 3,829
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<PAGE>
At September 30, 2000, the Company's total debt was $34.4 million. The
Company believes sufficient cash is being generated from operating activities
plus cash currently in the bank, or additional borrowing capacity, to fund its
planned development and exploratory work or to make additional property
acquisitions. Subsequent to September 30, 2000, the Company spent an additional
$2.8 million on the acquisition of producing property.
Certain Factors that Could Affect Future Operations
---------------------------------------------------
Certain information contained in this report, as well as written and
oral statements made or incorporated by reference from time to time by the
Company and its representatives in other reports, filings with the Securities
and Exchange Commission, press releases, conferences or otherwise, may be deemed
to be 'forward-looking statements' within the meaning of Section 21E of the
Securities and Exchange Act of 1934 and are subject to the 'Safe Harbor'
provisions of that section. Forward-looking statements include statements
concerning the Company's and management's plans, objectives, goals, strategies
and future operations and performance and the assumptions underlying such
forward-looking statements. These statements are based on current expectations
and involve a number of risks and uncertainties, including those described in
the context of such forward-looking statements. Actual results and developments
could differ materially from those expressed in or implied by such statements.
Such factors include, among others, the volatility of oil and gas prices, the
Company's drilling results, the Company's ability to compete in the
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<PAGE>
acquisition of producing property, the Company's ability to replace reserves,
the availability of capital resources, the reliance upon estimates of proved
reserves, operating hazards, uninsured risks, competition, government
regulation, and other factors referenced in this Form 10-Q.
Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." This statement, as amended in June 2000 by SFAS No. 138,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires enterprises to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The requisite accounting for changes in the fair value of a
derivative will depend on the intended use of the derivative and the resulting
designation. The Company must adopt SFAS 133 and 138 effective January 1, 2001.
Based on the Company's outstanding derivative contracts, the Company believes
that the impact of adopting those standards would not have a material adverse
affect on the Company's operations or consolidated financial condition. However,
no assurances can be given with regard to the level of the Company's derivative
activities at the time of adoption or the resulting effect on the Company's
operations or consolidated financial condition.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
Commodity Risk
--------------
The Company's primary commodity market risk exposure is to changes in
the pricing applicable to its oil production, which is normally priced with
reference to a defined benchmark, such as light, sweet crude oil traded on the
New York Mercantile Exchange (WTI). Actual prices received vary from the
benchmark depending on quality and location differentials. The markets for crude
oil historically have been volatile and are likely to continue to be volatile in
the future.
From time to time, the Company enters into financial market
transactions, including collars, with creditworthy counterparties, primarily to
reduce the risk associated with the pricing of a portion of the oil and natural
gas that it sells. The policy is structured to underpin the Company's planned
revenues and results of operations.
During 1999, the Company entered into a derivative financial instrument
whereby the Company hedged 2,500 barrels of daily production from November 1,
1999 through June 30, 2000 with a ceiling price of $23.90/bbl and a floor price
of $14.00/bbl. The contracts call for a monthly settlement such that if the
average WTI for the month is greater than $23.90/bbl, the Company remits to the
counterparty the excess price times the number of barrels hedged during the
month. Conversely, if the average WTI for the
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<PAGE>
month is less than $14.00/bbl, the counterparty pays the Company for the
difference times the number of barrels hedged during the month. If the average
WTI for the month falls between $14.00/bbl and $23.90/bbl, no settlement is
made. As a result of this arrangement, the Company's oil and gas revenues were
reduced by approximately $2,173,000 during the nine months ended September 30,
2000.
A second derivative instrument was entered into effective March 1, 2000
through June 30, 2000 which mirrored the first, except the ceiling and floor
amounts were $28.30 and $25.00 per barrel, respectively. This second instrument
was cancelled by the Company effective April 1, 2000. As a result of this
arrangement, the Company's first quarter 2000 oil and gas revenues were reduced
approximately $146,000.
Effective September 1, 2000 the Company entered into an additional
derivative financial instrument in which the Company hedged 1,000 barrels of
daily production for a period of six months. This agreement was identical to
those described above except for pricing. The ceiling price under the current
agreement is $36.50/bbl and the floor price $24.00/bbl. Since the average WTI
for September, 2000 was $30.86, no monies were due to either party.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibit and Reports on Form 8-K
-------------------------------
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities and 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/ Glenn R. Moore
----------------------------
Glenn R. Moore
President
BY: /s/ Kenneth W. Hatcher
-----------------------------
Kenneth W. Hatcher
Vice President of Finance
Dated: November 10, 2000
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