ITEM 1. BUSINESS
THE COMPANY
Maynard Oil Company is a Delaware corporation which was organized in 1971 to continue the oil and gas operations conducted on an individual basis by its founders, including Mr. James G. Maynard, its Chairman of the Board and Chief Executive Officer. The Company's principal executive office is located at 8080 N. Central Expressway, Suite 660, Dallas, Texas 75206, and its telephone number is (214) 891-8880. Unless the context requires otherwise, as used herein the term "Company" refers to Maynard Oil Company and its subsidiaries.
The Company's principal line of business is the production and sale of, and exploration and development of, crude oil and natural gas. The Company's oil and gas operations are conducted exclusively in the United States, primarily in the states of Texas and Oklahoma.
RECENT ACTIVITIES
During 1996, the Company sold its interests in approximately 130 producing wells in Texas and Oklahoma for cash totaling $8,865,731. The wells selected for sale were considered non-strategic assets due to the following criteria:
(1) no significant economic upside, (2) probable non-recurring operating cost exposure in the near future, (3) above average environmental concerns, (4) remote geographic location to the Company's major operating areas in Southern Oklahoma and West Texas.
The properties sold represented proved reserves of approximately 269,000 barrels of oil and 4.5 billion cubic feet of gas.
OIL AND GAS OPERATIONS
The Company is an independent oil and gas company, engaged primarily in the production and exploration phases of the oil and gas business. Company operations include acquiring, exploring, developing, and operating crude oil and natural gas properties.
The Company seeks to accomplish its overall goal of increasing hydrocarbon reserves and cash flow by selectively acquiring and exploiting producing oil and gas properties. When possible, the Company acquires producing properties on which it can act as operator, and thus, supervise production and development activities. Although the Company was unsuccessful during 1996 in its quest for reserve acquisitions, the year did bring the opportunity to build cash reserves for additional acquisitions in future years.
The availability of a ready market for the sale of oil and gas from the Company's wells depends on numerous factors beyond the control of the Company, including the amount of domestic production, the importation of oil, the proximity of the Company's property to natural gas pipelines and the capacity of such pipelines, the market for other competitive fuels, fluctuations in seasonal demand, and governmental regulations relative to hydrocarbon production and pricing. The production of oil and gas is also subject to the laws of supply and demand, and therefore, is subject to purchaser cutbacks and price reductions during periods of oversupply. At December 31, 1996 almost 79% of the Company's estimated proved reserves, as well as 72% of the Company's 1996 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.
The market price for natural gas has fluctuated significantly from month to month and year to year for the past several years. The Company cannot predict gas price movements with any certainty.
During the year ended December 31, 1996, two customers, Total Petroleum and Amoco Production Company, accounted for approximately 16%, and 10%, respectively, of consolidated revenues. The Company does not believe it would be adversely affected by the loss of any of its oil or gas purchasers.
Except for curtailed exploration and production activity occasionally experienced in severe weather and normal curtailments of gas sales in summer months, the Company does not consider its business to be seasonal and does not carry significant amounts of inventory.
During 1996, a total of twelve wells were drilled, three exploratory wells, and nine development wells. Below is a brief description of the work completed during the year and the results thereof.
Fullerton Field, Andrews County, Texas - two productive development wells were drilled on this secondary recovery project which is owned 100% by the Company. These wells tested oil at a cumulative rate of 98 barrels of oil per day (BOPD).
Of the remaining seven development wells, two were lease line cooperative wells being drilled to extend a secondary recovery project at Shafter Lake in Andrews County, Texas.
Five other successful development wells were drilled in Burleson, Duval, Garza and Fisher Counties, Texas. Each tested in commercial quantities, one at the rate of 503 BOPD in which the Company owns a 2.5% working interest, the second at the rate of one thousand cubic feet of gas per day (MCFD) where the Company owns a 7.2% working interest and two infill drilling wells where the Company owns less than 1% working interest. The fifth development well was horizontally drilled in Garza County, Texas. Production rates have leveled off at 70 BOPD of which the Company owns a 100% working interest.
Three exploratory wells were drilled in 1996, two of which were successful oil wells, and the third a dry hole. The first producer was drilled in Dawson County, Texas on a prospect the Company farmed out to another operator. This well tested at 168 BOPD and the Company retained a 6.25% working interest. The second successful exploratory well was drilled in Wayne County, Mississippi. The well tested at 183 BOPD and the Company owns a 15% working interest.
GENERAL
The oil and gas business involves intense competition in all of its phases and, because of its size, the Company is not a significant competitive factor in the industry. In its efforts to acquire property rights, the Company competes with many companies having access to substantially greater financial resources and larger technical staffs.
The Company's oil and gas exploration effort often involves exploratory drilling on unproven acreage involving high risks. There is no assurance that any oil or gas production will be obtained, or that such production, if obtained, will be profitable. The cost of drilling, completing and operating wells is often uncertain. Drilling may be curtailed or delayed as a result of many factors, including title problems, weather conditions, delivery delays, and shortages of pipe and equipment.
The Company's operations are subject to potential hazards, inherent in the exploration for and production of hydrocarbons, including blowouts and fires. These and other events can cause a suspension of drilling operations, severe damage to equipment or surrounding property, personal injury, and perhaps even a loss of life. The Company may be subject to liability for pollution and other damages and is subject to statutes and regulations relating to environmental and other matters. While the Company maintains insurance against certain of these risks, there are certain risks against which it cannot insure, or which it may elect not to insure due to premium costs, or for other reasons. Substantial uninsured liabilities to third parties may be incurred.
The oil and gas operations of the Company are subject to local, state and federal environmental regulations. To date, compliance with these regulations by the Company has had no material effect on the Company's capital expenditures. The Company is unable to assess or predict at this time the impact that compliance with such environmental regulations may have on its future capital expenditures, earnings and competitive position. The Company presently estimates that it will not make any material capital expenditures for environmental control facilities for its fiscal year ending December 31, 1997.
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 18, 1997, the Company employed approximately 37 persons, including one geologist and five petroleum engineers.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are presently located at 8080 N. Central Expressway, Suite 660, Dallas, Texas occupying approximately 11,300 square feet of space under a lease agreement which expires in April, 2000.
The Company's principal property holdings consist of leasehold interests in oil and gas properties located in the United States, primarily in Oklahoma and Texas. The leaseholds are continued in force so long as production from lands under lease is maintained. The Company believes that it has satisfactory title to its oil and gas properties. Such properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes, and other burdens and minor encumbrances, easements, and restrictions. The Company believes that such burdens do not materially detract from the value of the properties or materially interfere with their use in the operation of the Company's business. The Company has pledged certain of its oil and gas properties to secure its term loan.
ESTIMATED PROVED RESERVES, FUTURE NET REVENUES AND PRESENT VALUE
Reflected below are the estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas owned by the Company as of December 31, 1996, 1995, and 1994. 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, 1996.
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, 1996, 1995, and 1994. 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, 1996, 1995, and 1994 respectively, used in the estimates were $24.66, $18.13, and $16.06 per barrel of oil and $3.59, $1.65, and $1.62 per mcf of natural gas. Lease and well operating costs are based upon actual operating expense records.
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, 1996.
PRODUCTIVE WELLS AND ACREAGE
As of December 31, 1996, the Company owned an interest in approximately 1,207 gross (293.5 net) wells, of which 1,176 gross (287.5 net) are oil wells and 31 gross (6.0 net) are gas wells, located on approximately 31,293 gross (13,142 net) producing acres.
UNDEVELOPED ACREAGE
The following table sets forth the Company's gross and net undeveloped acreage as of December 31, 1996.
Undeveloped Acreage Gross Net
Colorado . . . . . . . . . . . . . . . . . 80 10 Louisiana . . . . . . . . . . . . . . . . . 80 40 Mississippi . . . . . . . . . . . . . . . . 120 18 North Dakota . . . . . . . . . . . . . . . 62 4 Oklahoma . . . . . . . . . . . . . . . . . 5,492 869 Texas . . . . . . . . . . . . . . . . . . . 5,342 2,118 Wyoming . . . . . . . . . . . . . . . . . . 2,256 794 ------ ----- Total 13,432 3,853 ====== ===== DRILLING ACTIVITY
The following table sets forth the results of the Company's drilling activity during the three years ended December 31, 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in minor lawsuits that have arisen in the ordinary course of business. The Company does not expect any of these to have a material adverse effect on the Company's consolidated financial position.
ITEM 4.
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 18, 1997, is set forth in the table below.
Name Position Age Since
James G. Maynard Chairman of the Board, 70 1971 Chief Executive Officer and Treasurer
Glenn R. Moore President and Chief 59 1982 Operating Officer
L. Brent Carruth Vice President of 63 1984 Operations
Kenneth W. Hatcher Vice President of 53 1983 Finance
Linda K. Burgess Corporate Secretary 48 1984 and Controller
Mr. Maynard has been a director since 1971 and engaged in oil and gas exploration as an independent operator and private investor for the past 40 years.
Mr. Moore has over 30 years experience in domestic and foreign oil and gas exploration and production. Prior to joining the Company in November, 1982, Mr. Moore served as President of Shannon Oil and Gas, Inc. and Hanover Petroleum Corporation.
Mr. Carruth has over 30 years of petroleum engineering experience. Prior to joining the Company in January, 1984, he served for one year as Vice President of Operations of Cordova Resources. Preceding that, Mr. Carruth was a petroleum consultant for three years and served as Manager of Engineering of Texas Pacific Oil Company for eight years.
Mr. Hatcher has over 25 years of finance and accounting experience in the oil and gas industry and is a Certified Public Accountant. Prior to joining the Company in February, 1983, Mr. Hatcher served as Controller and Vice President of Finance of Shannon Oil and Gas, Inc. for three years and as Controller and Vice President of Hanover Petroleum Corporation for four years.
Ms. Burgess has in excess of 20 years of oil and gas accounting experience. Prior to joining the Company in May, 1984, Ms. Burgess served as Controller for Trans-Western Exploration Inc. for four years and as Controller for Energy Resources Oil and Gas for three years.
Each officer's term of office expires on the date of the next annual meeting of the Board of Directors, or until his earlier resignation or removal. There are no family relationships among the executive officers listed, and there are no arrangements or understandings pursuant to which any of them were elected or appointed as officers.
PART II
ITEM 5.
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, 1996, were as follows:
1996 High Low 1995 High Low
First Quarter $ 8 1/2 $6 3/4 First Quarter $5 $4 1/8 Second Quarter 8 3/4 7 1/8 Second Quarter 6 1/2 4 1/2 Third Quarter 11 8 3/8 Third Quarter 6 1/2 5 3/4 Fourth Quarter 22 9 5/8 Fourth Quarter 7 5 3/4
As of March 18, 1997, the Company had approximately 968 shareholders of record.
The Company has not paid any dividends on its Common Stock in the past, nor does it plan to pay dividends in the foreseeable future. The Company's ability to pay dividends is currently restricted under its Loan Agreement with Bank One, Texas.
ITEM 6.
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company sold its interest in approximately 130 producing oil and gas wells in Texas and Oklahoma for cash totaling $8,865,731 which resulted a pre-tax gain in excess of $6,000,000. Company management considered this group of properties not to be a major contributor to the future earning capacity of the Company, and thus, opted to sell these properties while searching for additional acquisitions which represent a better geographic and economic fit with the Company's core properties in southern Oklahoma and west Texas.
Although the Company was not successful in 1996 in making an acquisition, it has positioned itself for future acquisition transactions by having over 26% of its year end assets in cash and additional borrowing capacity with its lender.
Net cash provided by operating activities before changes in assets and liabilities rose approximately 19% to $11,741,897. Higher crude oil sales more than offset the net revenues given up from the sale of property referred to above.
Net working capital at December 31, 1996 was $12,942,000 compared with a negative $370,000 at the end of 1995.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Net income for 1996 more than tripled 1995 levels, rising from $3,023,107 for 1995 to $9,953,783, primarily as a result of gains from the disposition of assets. The gain from disposals in 1995 was $991,875 versus $6,202,473 during the current year.
The earnings increase was also aided by higher oil and gas revenues, which rose 49% to $30,583,133. Higher revenues were the result of increased production volumes and prices. Oil volumes rose almost 27% to 1,212,369 barrels and gas volumes over 6% to 2,890,061 mcf, both a result of the late 1995 producing property acquisition and prior year drilling. Pricing also shot up with oil selling at $20.39 per barrel compared to $16.98 per barrel a year ago and gas selling at $2.03 per mcf compared with $1.57 per mcf in 1995. These price increases will probably not be sustained during the first half of 1997, but are definitely a welcome addition to the Company.
Lease operating expenses increased $1,636,482 over 1995 levels. However, on a net equivalent barrel (NEB) basis lifting costs actually declined three cents per equivalent barrel.
Exploration costs were 67% lower in 1996, totaling $201,509, versus $609,279 due to decreased exploratory activity. Very little seismic activity was performed in 1996, and only 3 exploratory wells were drilled during the current year.
General and administrative expenses rose $974,586 from $925,822 in 1995 to $1,900,408 in 1996. The majority of this increase, $888,884, is represented by charges for an employee benefit plan whose value appreciates as the Company's common stock price rises. These charges represent a liability on the Company's books which will not be converted into cash until the various employees covered by this plan terminate their employment with the Company.
Depreciation and amortization expense increased on a dollar basis from $6,879,672 in 1995 to $7,894,388. However, when converted to a net equivalent barrel basis, this amount actually declined from $4.87 per net equivalent barrel (NEB) a year ago to $4.66 per NEB currently as a result of oil and gas reserve additions and revisions during the current period.
Interest expense increased $692,542 due to the additional bank borrowings utilized to finance the properties acquired in 1995.
Income tax expense rose to $5,804,370 in 1996 from $1,330,500 in 1995 due to improved earnings and the additional gain generated from the sale of properties during the current year. The Company had anticipated deferring tax expense on a substantial portion of the 1996 gain via the like-kind exchange rules. Qualified escrow accounts amounting to over $6,200,000 were established and replacement property was identified. However, the Company was unable to consummate the transaction, and subsequently, paid the tax due on the gain.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994 LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities before changes in assets and liabilities increased 50% in 1995 to $9,870,251. Higher crude oil sales was the principal reason for this sharp rise in operating cash flow. In the fourth quarter of 1994 and in the second quarter of 1995, the Company was successful in consummating two significant property acquisitions, which were largely responsible for the substantial increases in oil production. 1995 operating cash flow was also favorably impacted by higher crude oil prices, lower exploration costs (which include dry holes and abandonments and lease rentals and seismic) and general and administrative costs, which was partially offset by higher lease operating and interest expense.
In March and December, 1995 the Company completed the acquisition of working interests in 200 and 250 producing properties, respectively, in the Permian Basin of West Texas. These two acquisitions were financed with $6.75 million of the Company's cash resources and $22.5 million in additional bank financing. Thus, total bank debt at the end of 1995 was $26.1 million. A restated loan agreement was put into place on December 20, 1995 in connection with the second property acquisition. This new loan has a term of five years with principal and interest to be paid quarterly and with a maturity date of January 1, 2001. The loan agreement allows the Company to choose between three interest rate options ranging from Bank One prime rate to its certificate of deposit rate to a LIBOR rate. The loan is secured by certain producing properties, but the Company also has significant groups of properties remaining unmortgaged should the opportunity arise to make additional property acquisitions.
Net working capital at December 31, 1995 was a negative $370,000 compared to $4,079,000 at December 31, 1994. Negative working capital is attributable to the second property acquisition, which closed on December 20, 1995, and the current portion of long-term debt outstanding at that time. The Company's cash position grew over $300,000 during 1995 while significant amounts were spent on property acquisitions, development drilling, and debt repayment. The year end cash position was $6.1 million, and the Company believes it will generate sufficient cash in 1996 to support its debt service, fund its capital expenditure program, and pursue other acquisition candidates.
The Company's recent drilling and acquisition activities have increased its reserve base and its productive capacity and ultimately its potential cash flow. Each outstanding share of common stock is supported by 2.46 net equivalent barrels ("NEB") of oil compared with 1.8 and 1.3 NEB respectively, for the prior two years. Management of the Company intends to continue to acquire and develop oil and gas properties in its areas of activity as allowed by market conditions and financial ability.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Net income for 1995 more than tripled 1994 levels, rising from $943,216 to $3,023,107, representing sixty two cents per share for 1995 versus nineteen cents per share in 1994.
This earnings increase was fueled by higher oil and gas revenues, which rose 55% to $20,710,243. Higher revenues were the result of a 72% increase in oil production and a 14% increase in natural gas production. These sharp increases reflect the late 1994 acquisition of waterflood properties in Carter and Stephens Counties, Oklahoma, and the March 1995 acquisition of Permian Basin properties in West Texas, as well as results from 1995 drilling activities.
In 1995, oil prices averaged $16.98 per barrel compared to $15.47 during 1994, a $1.51 per barrel increase. Natural gas prices experienced a 19% decline in 1995, from an average price of $1.94 per thousand cubic feet of gas sold (MCF) in 1994 to $1.57 per MCF in 1995. Natural gas prices reflect the country's mild weather conditions and excess domestic supply.
A gain from the sale of property totaling $991,875 was generated during 1995 compared to only $66,367 in 1994.
Lease operating expenses rose $3,472,960 in 1995. On a net equivalent barrel (NEB) basis, lifting costs rose seventy-eight cents per barrel in 1995 to $5.98 per barrel, reflecting higher costs associated with waterflood properties which were acquired in fourth quarter 1994 and first quarter 1995.
Exploration costs were 48% lower in 1995, totaling $609,279, versus $1,169,680 primarily due to reduced activity in the three dimensional seismic program, which the Company had utilized to establish exploratory drilling projects for the last two years.
Depreciation and amortization expense grew almost 46% in 1995 to $6,879,672. This significant increase was principally attributable to the addition of properties in late 1994 and first quarter 1995, which added approximately $20 million to the Company's depletable costs.
The Company accounts for overhead charges billed to working interest owners, including the Company, as a reduction to general and administrative expenses. The Company's proportionate share of the amounts billed are included in lease operating expenses. Since the number of operated properties increased due to the recent acquisitions, the amounts billed out in 1995 resulted in a 45% reduction in general and administrative expenses from $1,676,228 to $925,822.
Interest expense grew $844,702 in 1995 due to bank borrowings to finance the properties acquired.
Income tax expense rose to $1,330,500 in 1995 from $252,482 in 1994, due primarily to improved earnings and additional state taxes arising from an audit assessment.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included on pages 19 through 36 of this Report.
ITEM 9.
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 21, 1997, and is incorporated herein by reference. Information with respect to the Company's executive officers as of March 18, 1997, is set forth commencing on pages 8 and 9 hereof under the caption "Executive Officers of the Registrant".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Schedules on page 18 of this Report.
REPORTS ON FORM 8-K
On October 15, 1996, the Company filed a Form 8-K with the Securities and Exchange Commission, to report the sale of producing oil and gas properties. Pro forma financial information was included in the report.
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 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1984, and incorporated herein by reference.
(d) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference.
(e) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993 and incorporated herein by reference.
4.1 Credit agreement ($10,000,000 Term Facility) dated October 1, 1990 between Maynard Oil Company and First City, Texas - Dallas, filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1990, and incorporated herein by reference.
4.2 First Amendment to Loan Agreement dated November 19, 1991 between Maynard Oil Company and First City, Texas - Dallas, filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1992, and incorporated herein by reference.
4.3 Second Amendment to Loan Agreement, dated February 1, 1993 between Maynard Oil Company and Bank One, Texas, N.A. filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993, and incorporated herein by reference.
4.4 Third Amendment to Loan Agreement, dated December 22, 1994 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994, and incorporated herein by reference.
4.5 Fourth Amendment to Loan Agreement, dated March 29, 1995 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1995, and incorporated herein by reference.
4.6 Restated Loan Agreement, dated December 20, 1995 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995, and incorporated herein by references.
10.1 1989 Stock Participation Plan, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and incorporated herein by reference.
11.1 Computation of per share earnings, filed herewith.
21.1 List of subsidiaries of the Company as of December 31, 1996, filed herewith.
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, 1997
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, 1997 -------------------- Chief Executive Officer James G. Maynard & Treasurer
/s/ Glenn R. Moore President and Chief March 31, 1997 -------------------- Operating Officer Glenn R. Moore
/s/ Kenneth W. Hatcher Vice President of Finance March 31, 1997 -------------------- (Principal Financial Kenneth W. Hatcher and Accounting Officer)
/s/ Robert B. McDermott Director March 31, 1997 -------------------- Robert B. McDermott
/s/ Ralph E. Graham Director March 31, 1997 -------------------- Ralph E. Graham
MAYNARD OIL COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Three years ended December 31, 1996
Consolidated Statements of Shareholders' Equity - Three years ended December 31, 1996
Consolidated Statements of Cash Flows - Three years ended December 31, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules for the Three years ended December 31, 1996
II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Maynard Oil Company
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Maynard Oil Company and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP March 25, 1997 Dallas, Texas
MAYNARD OIL COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Business Activity
The Company is engaged in the production and sale of and the acquisition, exploration and development of crude oil and natural gas in the Continental United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Maynard Oil Company (Company) and its subsidiaries, all of which are wholly- owned. All significant intercompany balances and transactions have been eliminated in consolidation.
Property and Equipment
The Company follows the "successful efforts" method of accounting for its costs of acquisition, exploration and development of oil and gas properties. Intangible drilling and development costs related to development wells and successful exploratory wells are capitalized, whereas the costs of exploratory wells which do not find proved reserves are expensed. Costs of acquiring unproved leases are evaluated for impairment until such time as the leases are proved or abandoned. All geological and geophysical costs not reimbursed are expensed as incurred.
Depreciation and amortization of producing properties is computed using the unit-of-production method based upon estimated proved recoverable reserves. Depreciation of other property and equipment is calculated by the straight-line method based upon estimated useful lives ranging from two to ten years.
Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation and amortization are removed from the accounts, and the resulting gain or loss is recognized.
Overhead Reimbursement Fees
Overhead charges billed to working interest owners including the Company of $1,870,752, $1,892,370, and $805,982, for the three years ended December 31, 1996, respectively, have been classified as a reduction of general and administrative expenses in the accompanying Consolidated Statements of Income. The Company's working interest portion of the amounts billed are included in lease operating expenses.
Deferred Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the tax and financial reporting bases of the Company's assets and liabilities by applying enacted tax rates. Income per Common Share
Income per common share is computed using the weighted average number of common shares outstanding during each year. The difference between primary and fully diluted earnings per share, which assumes the exercise of stock options in 1994, was not significant. During 1995, all outstanding stock options were exercised, and consequently, primary and fully diluted earnings per share are the same for 1996 and 1995.
Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt, including the current portion, approximates fair value because the interest rate on this instrument changes with market interest rates.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality institutions. With respect to accounts receivable, these financial instruments primarily pertain to oil and gas sales and joint interest billings. These accounts receivable are due from small to mid-size companies engaged principally in oil and gas activities. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Payment terms are on a short-term basis and in accordance with industry standards.
The Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, disclosure of gain and loss contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Since estimates are made based on all information available at the time, it is reasonably possible that, in the near term, a change in an estimate may occur or that actual amounts may differ from estimated amounts.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company adopted the provisions of SFAS 121 on January 1, 1996, and such adoption did not have a material effect on the Company's consolidated financial position or results of operations.
Reclassifications
Certain reclassifications of prior period statements have been made to conform with the 1996 presentation.
(2) Acquisitions and Dispositions (Reserve information is unaudited)
During 1996, the Company sold its interest in approximately 130 producing wells in Texas and Oklahoma for cash totaling $8,865,731. The Company considered these properties to be non strategic assets. Proved reserves sold were estimated to be approximately 269,000 barrels of oil and 4.9 billion cubic feet of gas (BCF).
During 1995, the Company consummated two separate producing property acquisitions for an aggregate price of $29,250,000. On March 29, 1995, the Company acquired working interests in 200 producing wells in the Permian Basin of West Texas. Estimated proved reserves associated with this transaction approximated .99 million barrels of oil and 7.2 BCF of gas. Total consideration paid was $10,500,000. At December 31, 1996, the Company maintains ownership in approximately 1 million barrels of oil and 3.4 BCF of gas acquired in this transaction.
On December 20, 1995, the Company purchased working interests in 250 producing wells located in Garza County, Texas. Total consideration paid was $18,750,000, $13,000,000 of which was borrowed under a new term loan arrangement with Bank One, Texas. Proved reserves were estimated to be 2.46 million barrels of oil and .3 BCF of gas. In 1996, the Company received cash proceeds of $874,245, which represented a purchase price adjustment on this acquisition.
The following table presents unaudited pro forma operating results as if the acquisitions and dispositions had occurred on January 1, 1995.
Years ended December 31, 1996 1995 Amounts in thousands, except per share amounts Revenues $28,706 $31,676 Net income 5,234 7,461 Net income per common share 1.07 1.53
(3) Cash Flow Data
Cash in excess of daily requirements is invested in marketable securities, consisting of repurchase agreements, certificates of deposit, money market funds, and commercial paper, with maturities of three months or less. At December 31, 1996 and 1995, such investments totaled $22,246,554 and $6,300,000, respectively, and are considered to be cash equivalents, which approximate their fair value.
Supplemental cash flow information for the three years ended December 31, 1996 is summarized as follows:
1996 1995 1994 Cash paid (received): Interest expense $1,735,416 $ 853,247 $ 175,319
Income taxes paid $2,779,099 $ 121,674 $ 28,016
Income taxes refunded $ -- $ -- $(369,528)
(4) Long-term Debt
Long-term debt at December 31, 1996 and 1995 is summarized as follows:
1996 1995 Term note due in 20 equal quarterly installments of $1,250,000 commencing April 1, 1996 plus one payment of $1,062,500 made January 1, 1996. Interest paid quarterly at varying rates. Secured by certain oil and gas properties with a net book value of $30,345,000. $21,250,000 26,062,500 Less current installments 5,000,000 4,812,500 Long-term debt $16,250,000 $21,250,000
Effective December 21, 1995, the Company executed a new loan agreement with Bank One, Texas, increasing its outstanding loan from $13,062,500 to $26,062,500 in connection with the acquisition of producing properties discussed in Note 2.
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, 1996, interest on the bank term loan was at a rate of approximately 7.22%.
The credit agreement contains various financial covenants related to working capital, net worth, and cash flow. Additionally, the debt agreement places certain limitations on the incurrence of additional debt and prohibits the payment of dividends.
(5) Employee Incentive Plans
In August 1989, an employee incentive plan was adopted, whereby stock participation units might be granted to officers and key employees. Such stock participation units will entitle a participant to a cash payment following termination of employment in an amount equal to the excess, if any, of the fair market value of one share of the Company's common stock over a share price specified on the date of grant, multiplied by the number of vested units. The units vest over a five year period with 25% vesting after two years and the remainder in three equal annual installments. For the year ended December 31, 1989, 73,000 units were awarded to certain employees at a price of $4.50 per share of which 49,500 units remain outstanding at December 31, 1996, all of which are 100% vested. During August 1993, 52,000 additional units were awarded at $5.625 per share of which 26,000 units are vested. Earnings are charged over the life of the units for increases in stock prices (if any) over $4.50 per share and $5.625 per share. During the years ended December 31, 1996 and 1995, operations were charged $594,000 and $76,183, respectively, in regard to the stock participation units granted in 1989. During 1996 and 1995, operations were also charged $294,887 and $15,676, respectively for the units awarded in 1993. There were no such charges in 1994.
In March 1982, an employee incentive plan was adopted whereby stock options and stock appreciation rights might be granted to officers and key employees. A total of 281,517 shares were initially reserved for issuance. This plan terminated in March 1992 and no further grants may be made under this plan. The options became exercisable cumulatively in five equal installments, beginning on the first anniversary of the date of grant. The option price for shares granted pursuant to the plan was not less than the fair market value of the shares at the date of grant.
A summary of stock option activity for the 1982 plan for 1994 and 1995 is as follows:
Number of Option Price Shares per Share ------- -------------- Outstanding at December 31, 1993 40,600 $4.50 to $6.50 Granted -0- -- Exercised (11,500) $4.69 Cancelled (5,100) $4.50 to $6.50
Outstanding at December 31, 1994 24,000 $4.50 Exercised (24,000) $4.50
Outstanding at December 31, 1995 -0-
During September 1995, options for 24,000 shares were exercised. Common stock was credited for $2,400 and additional paid-in capital was credited for $105,600. The Company simultaneously repurchased and cancelled 23,500 of the shares exercised for $6.50 per share. Common stock was debited for $2,350 and retained earnings charged $150,400 in regard to the repurchased shares.
(6) Income Taxes
Income tax expense (benefit) consists of the following:
Years ended December 31, 1996 1995 1994 Federal Current $5,397,880 $ 620,500 $(615,028) Deferred 6,490 480,000 867,510 State 400,000 230,000 --
$5,804,370 $1,330,500 $ 252,482
Income tax expense for the three years ended December 31, 1996 differs from the amount computed by applying the applicable U.S. corporate income tax rate (35% in 1996 and 34% in 1995 and 1994) to income before income taxes. The reasons for this difference are as follows:
Year ended December 31, 1996 1995 1994
Income tax expense at U.S. statutory rate $5,515,354 $1,480,226 $ 406,537 State income taxes 400,000 230,000 -- Allowable depletion in excess of cost depletion (223,197) (281,526) -- Rate differential 33,996 -- -- Items not related to current year earnings -- (89,198) (294,528) Net operating loss not utilized -- -- 88,000 All other items 78,217 (9,002) 52,473
Income tax expense $5,804,370 $1,330,500 $ 252,482
The components of the net deferred tax liability were as follows:
December 31, 1996 1995 1994
Depreciable assets $ 48,500 $ 61,510 29,210 Depletable assets 111,500 14,400 (6,100) Intangible drilling and development costs 2,572,000 2,542,600 2,115,400 Employee benefit obligations (346,000) -- -- Tax credit carryforwards (167,000) (406,000) (406,000)
Net deferred tax liability $2,219,000 $2,212,510 $1,732,510
In November 1995 the Oklahoma State Tax Commission completed an examination of the 1990 through 1993 state income tax returns for Maynard Oil Company. Taxes on the adjustments amounted to $149,690. The Company had followed a three factor apportionment formula (sales, property, and payroll) as allowed and utilized by the majority of taxpayers in calculating their Oklahoma tax liability. However, the Oklahoma Tax Commission requires a separate accounting theory to calculate the state tax liability.
As of December 31, 1996, the Company has alternative minimum tax credit carryforwards of approximately $167,000 available for Federal income tax purposes. No valuation allowance has been provided for this deferred tax asset.
(7) Employee Benefit Plans
Effective January 1, 1985 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. Under this plan, amounts equal to retirement plan expense are funded annually, which amounted to $53,965, $40,777, and $28,298, respectively, for the years ended December 31, 1996, 1995, and 1994. The contributions for the same three year period have been reduced by $648, $1,818, and $10,407, respectively, for forfeitures attributable to employees terminated in prior years.
Effective February 1, 1991, the Company adopted 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 1996, 1995, and 1994. During this same three year period, the Company's matching portion amounted to $79,879, $59,579, and $52,710, respectively.
(8) Major Customers
During the years ended December 31, 1996 and 1994, oil and gas sales to two customers, amounting to approximately $6,059,000 and $3,898,000 and $5,166,000 and $1,500,000, respectively, each accounted for more than 10% of total consolidated revenues. During the year ended December 31, 1995, oil and gas sales to three customers, amounting to approximately $4,377,000, $3,746,000, and $2,946,000, each accounted for more than 10% of total consolidated revenues.
(9) Contingencies and Commitments
The Company is a defendant in certain non-environmental litigation arising from operations in the normal course of business. While it is not feasible to determine the outcome of these actions, it is the Company's opinion that the ultimate outcome of the litigation will have no material adverse effect in the financial position or results of operations of the Company.
The Company leases office space and certain equipment under various operating leases which expire over the next five years. All leases require the payment of taxes and insurance, and the office lease requires the Company to pay its pro rata share of increases in maintenance expense above that prevailing in base years. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company extended its office space lease, which was scheduled to terminate April 30, 1996, for an additional four years, such that the expiration date is now April 30, 2000. Rent expense for the three years ended December 31, 1996 was $314,743, $298,371, and $266,967, respectively.
Minimum payments for operating leases having initial or noncancellable terms in excess of one year are as follows:
1997 $ 243,059 1998 231,828 1999 217,301 2000 74,269
Total minimum payments $ 766,457
(10) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the years ended December 31, 1996 and 1995 is as follows:
During the fourth quarter of 1996, the Company recorded an additional $3,104,370 in income tax expense related to the third quarter gain on the disposition of assets. The Company had anticipated deferring tax expense on a substantial portion of this gain via the like-kind exchange rules, but was unable to consummate the transaction. Additionally, fourth quarter results included approximately $650,000 additional compensation expense in connection with an employee benefit plan which appreciates in value as the price of the Company's common stock rises.
During the fourth quarter of 1995, the Company recorded an impairment of $491,051 to unproved leasehold costs relating to the Company's three- dimensional seismic program. The effect of this impairment is included in Dry holes and abandonments on the Consolidated Statements of Income.
(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, 1996 1995 Undeveloped leaseholds and royalties $ 105,385 $ 124,924 Producing properties 103,118,219 111,348,464
103,223,604 111,473,388 Accumulated depreciation and amortization 48,906,086 48,807,308
Net capitalized costs $ 54,317,518 $ 62,666,080
Costs Incurred
A summary of costs incurred in oil and gas acquisition, exploration and development activities follows:
Years ended December 31, 1996 1995 1994 Acquisition of properties Undeveloped $ 104,846 $ 59,010 $ 293,472 Proved -- 29,234,607 9,679,619 Exploration costs 125,963 413,632 1,473,571 Development costs 2,980,849 3,949,882 4,972,784
$3,211,658 $33,657,131 $16,419,446
Results of Operations
The results of operations from oil and gas producing activities are as follows: Years ended December 31, 1996 1995 1994
Sales $30,583,133 $20,539,738 $13,265,075 Production costs (b) (10,079,948) (8,443,466) (4,970,506) Exploration expenses (340,913) (661,319) (2,093,756) Depreciation and amortization (7,816,674) (6,801,115) (4,671,569) 12,345,598 4,633,838 1,529,244 Income tax expense (4,408,531) (1,478,000) (408,000)
Results of operations from oil and gas producing activities $7,937,067 $3,155,838 $ 1,121,244
(b) Includes lifting costs, severance taxes and advalorem taxes.
Oil and Gas Reserve Quantities
The following unaudited tables represent the Company's estimates of its proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates were evaluated by the Company's staff of petroleum engineers and audited by independent petroleum engineers. It is their opinions that the reserve quantity and present value information in the following tables complies with the applicable rules and regulations of the SEC. All of the Company's reserves are located within the United States.
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:
The following are the principal sources of changes in the standardized measure of discounted future net cash flows.
Schedule II