10-Q 1 m322573q01.txt 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, 2001 Commission File #0-5704 ------------------ ------- MAYNARD OIL COMPANY -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-1362284 -------------------------------------------------------------------------------- (State or other jurisdic- (IRS Employer tion of incorporation) Identification No.) 8080 N. Central Expressway, Suite 660, Dallas, Texas 75206 -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (214)891-8880 ------------- 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, 2001. 4,880,368 shares of common stock, par value $0.10 -------------------------------------------------------------------------------- MAYNARD OIL COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedules Page ---- Part I. Financial Information Consolidated Balance Sheets September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations Nine Months and Three Months ended September 30, 2001 and 2000 4 Consolidated Statements of Shareholders' Equity Nine Months ended September 30, 2001 5 Consolidated Statements of Cash Flows Nine Months ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 5. Other Events Item 6. Exhibits and Reports on Form 8-K 16 Signatures 18 -2- MAYNARD OIL COMPANY AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) September 30, December 31, ------------- ------------ 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 17,999,580 $ 21,228,040 Accounts receivable, trade 6,816,533 8,773,669 Income taxes receivable 1,622,587 1,437,587 Other current assets 906,943 441,027 ---------- ----------- Total current assets 27,345,643 31,880,323 ---------- ----------- Property and equipment, at cost: Oil and gas properties, successful efforts method 185,284,051 162,572,339 Other property and equipment 504,298 450,885 ----------- ----------- 185,788,349 163,023,224 Less accumulated depreciation and amortization (97,678,692) (87,045,360) ----------- ----------- Net property and equipment 88,109,657 75,977,864 ----------- ----------- $115,455,300 $107,858,187 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 7,650,000 $ 7,650,000 Accounts payable 8,762,976 8,350,643 Accrued expenses 1,485,745 927,828 Income taxes payable 62,799 800,799 ---------- ----------- Total current liabilities 17,961,520 17,729,270 ---------- ----------- Deferred income taxes 3,803,000 1,179,000 Long-term debt 19,125,000 24,862,500 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; 4,880,368 and 4,880,516 shares issued and outstanding 488,037 488,051 Additional paid-in capital 18,831,138 18,831,138 Retained earnings 55,246,605 44,768,228 ----------- ----------- Total shareholders' equity 74,565,780 64,087,417 ----------- ----------- Contingencies and commitments $115,455,300 $107,858,187 =========== =========== See accompanying Notes to Consolidated Financial Statements. -3- MAYNARD OIL COMPANY AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
Nine Months ended Three Months ended September 30, September 30, ----------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Revenues: Oil and gas sales $43,955,544 $37,085,448 $12,690,820 $14,781,064 Interest and other 576,264 770,391 156,271 299,827 Gain (loss) on disposition of assets 28,244 (62,955) 1,862 124,882 ---------- ---------- ---------- ---------- 44,560,052 37,792,884 12,848,953 15,205,773 ---------- ---------- ---------- ---------- Costs and expenses: Operating expenses 13,587,928 9,972,575 4,649,601 3,539,492 Exploration, dry holes and abandonments 245,091 21,222 88,922 16,681 General and administrative, net 2,708,285 3,071,408 1,105,453 1,191,842 Depreciation and amortization 10,664,881 7,972,946 3,654,828 2,744,766 Interest and other 1,499,713 2,318,394 359,892 853,702 ---------- ---------- ---------- ---------- 28,705,898 23,356,545 9,858,696 8,346,483 ---------- ---------- ---------- ---------- Income before income taxes 15,854,154 14,436,339 2,990,257 6,859,290 Income tax expense 5,373,057 4,736,000 986,000 2,236,000 ---------- ---------- ---------- --------- Net income $10,481,097 $ 9,700,339 $ 2,004,257 $4,623,290 ========== ========== ========== ========= Weighted average number of common shares outstanding 4,880,409 4,880,809 4,880,371 4,880,702 ========= ========= ========= ========= Net income per common share $2.15 $1.99 $ .41 $ .95 (Basic and diluted) ==== ==== ==== ==== See accompanying Notes to Consolidated Financial Statements.
-4- MAYNARD OIL COMPANY Statement of Changes in Shareholders Equity Period Ended September 30, 2001
Accumulated Other Additional Common Comprehensive Retained Comprehensive Paid-in Common Stock Total Income Earnings Income Capital Stock Shares ----- ------ -------- ------ ------- ----- ------ Balance at December 31, 2000 $64,087,417 $44,768,228 $18,831,138 $488,051 4,880,516 Comprehensive Income: Net income 10,481,097 $10,481,097 10,481,097 Cumulative effect of adopting SFAS 133 86,757 86,757 $86,757 Reclassification adjustments for contract settlements (86,757) (86,757) (86,757) ---------- Comprehensive Income $10,481,097 ========== Purchase and retirement of common stock (2,734) (2,720) _______ (14) (148) ---------- --------- --------- ------- --------- Balance at September 30, 2001 $74,565,780 $55,246,605 $ -- $18,831,138 $488,037 4,880,368 ========== ========== ======= ========== ======= ========= See accompanying Notes to Consolidated Financial Statements.
-5- MAYNARD OIL COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 10,481,097 $ 9,700,339 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,664,881 7,972,946 Deferred income taxes 2,624,000 732,000 Dry holes and abandonments 201,670 1,377 Current year costs of dry holes and abandonments (202,549) (1,377) (Gain) loss on disposition of assets (28,244) 62,955 (Increase) decrease in current assets: Accounts receivable 1,957,136 (496,900) Income taxes receivable (185,000) -- Other current assets (465,916) (110,879) Increase (decrease) in current liabilities: Accounts payable 412,333 (127,316) Accrued expenses 557,917 2,211,874 Income taxes payable (738,000) 819,000 ------------ ------------ Net cash provided by operating activities 25,279,325 20,764,019 ------------ ------------ Cash flows from investing activities: Proceeds from disposition of assets 28,244 735,646 Additions to property and equipment (22,795,795) (7,627,365) ------------ ------------ Net cash used by investing activities (22,767,551) (6,891,719) ------------ ------------ Cash flows from financing activities: Principal payments on long-term debt (5,737,500) (3,825,000) Purchase of common stock (2,734) (4,630) ------------ ------------ Net cash used by financing activities (5,740,234) (3,829,630) ------------ ------------ Net (decrease) increase in cash and cash equivalents (3,228,460) 10,042,670 Cash and cash equivalents at beginning of year 21,228,040 12,910,321 ------------ ------------ Cash and cash equivalents at end of period $ 17,999,580 $ 22,952,991 ============ ============ See Accompanying Notes to Consolidated Financial Statements.
-6- MAYNARD OIL COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2001 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, 2001, the results of operations for the nine months and three months ended September 30, 2001 and 2000 and changes in cash and cash equivalents for the nine months ended September 30, 2001 and 2000. The December 31, 2000 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 2000 Annual Report to Shareholders. 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, 2001 and 2000, the Company had no potentially dilutive common shares, and therefore, basic and diluted earnings per common share were the same. Note 3 Risk Management Effective March 1, 2001, the Company entered into a derivative financial instrument whereby 2,000 barrels of daily production was hedged with a ceiling price of $28.18 per barrel and a floor price of $24.00 per barrel. This hedging arrangement was due to expire on February 28, 2002. However, the Company exercised its ability to terminate the contract during March, 2001 via payment of $803,000, which reduced oil and gas revenues for the first quarter of 2001. During 2000, the Company entered into a derivative financial instrument whereby the Company hedged 1,000 barrels of daily production from September 1, 2000 through February 28, 2001 with -7- a ceiling price of $36.50/bbl and a floor price of $24.00/bbl. The contract called for a monthly settlement such that if the average price received for West Texas Intermediate grade of crude oil (WTI) for the month was greater than $36.50/bbl, Maynard would remit to the counterparty the excess multiplied by the number of barrels hedged during the month. Conversely, if the average WTI for the month was less than $24.00/bbl, the counterparty would pay Maynard for the difference multiplied by the number of barrels hedged during the month. If the average WTI for the month fell between $24.00/bbl and $36.50/bbl, no settlement would be made. As a result of this arrangement, no monies were exchanged. Another derivative instrument was entered into effective October 1, 2000 through March 31, 2001 which mirrored the first except the ceiling and floor amounts were $37.20 and $25.00 per barrel, respectively. Over the life of this contract, average WTI fell between $25.00 per barrel and $37.20 per barrel, so no cash was exchanged. 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, ----------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Federal: Current $2,765 $4,004 $ 116 $1,654 Deferred 2,624 732 886 582 State (refund) (16) - (16) - ----- ---- ----- ---- $5,373 $4,736 $ 986 $2,236 ===== ===== ==== ===== Note 5 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. All of the Company's operations are generally subject to Federal, state and local environmental regulations. To management's knowledge, the Company is in substantial compliance with such laws and regulations. -8- Note 6 Strategic Alternatives As announced on July 23, 2001, the Company is exploring strategic alternatives which include the possible sale or merger of the Company. In connection with these transactions, the Company entered into contracts with its personnel which provide incentive bonuses and retention arrangements that total approximately $5,100,000 to be paid out within one year after a sale or merger agreement is signed. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION -------------------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Quarter Ended September 30, 2001 Compared to Quarter Ended September -------------------------------------------------------------------- 30, 2000 -------- For the third quarter of 2001, the Company earned forty-one cents per share on revenues of $12,848,953 compared to earnings of ninety- five cents per share during the third quarter of 2000 on revenues of $15,205,773. Current quarter results were adversely impacted by reduced revenues in each revenue category - oil and gas sales, interest income and gains from the disposition of assets. Revenues -------- Oil and gas revenues declined $2,090,244 between the two quarterly periods, or approximately 14%, due to price reductions for both oil and gas. Oil and gas prices were $4.71 per barrel and $1.85 per thousand cubic feet of gas (mcf) lower than the same quarter a year ago. Offsetting oil and gas revenue declines were sales volume increases for both products resulting from 2001 property acquisitions. Oil volumes increased almost 3% and gas volumes rose approximately 40% over prior year's third quarter. -9- Interest income fell due to reductions in cash available for investment purposes and lower interest rates. Total capital expenditures for 2001 (through the third quarter) have been $22.8 million with $6.5 million expended during the third quarter of 2001. Additionally, revenues for the third quarter of 2001 include only a minimal gain from the disposition of assets of approximately $2,000. Costs and Expenses ------------------ On a net equivalent barrel basis (NEB), lease operating expenses were $1.00 per NEB higher than the third quarter of 2000 as a result of escalating oil field expenses and additional workover projects. The exploration, dry holes and abandonments category increased $72,241 between the 2000 and 2001 quarters as a result of the impairment of an acreage position acquired earlier this year. General and administrative expenses reflect a decrease of $86,389, during the third quarter of 2001, primarily related to the redemption of 84,500 phantom stock units in third quarter of 2000. During third quarter 2001, there were 11,000 phantom stock units redeemed. Depreciation and amortization expense rose $910,062, or slightly over 33%, between the third quarters of 2000 and 2001. On a net equivalent barrel basis, this category of expense increased from $5.40 per NEB to $6.26 as a result of higher depletion rates on certain properties. Interest expense decreased $493,810 between the two quarterly periods because of reductions in the outstanding bank debt due to scheduled loan repayments and lower interest rates. -10- Nine Months Ended September 30, 2001 Compared to Nine Months Ended ------------------------------------------------------------------ September 30, 2000 ------------------ The Company reported net income of $10,481,097, or two dollars and fifteen cents per share, on revenues of $44,560,052 for the nine months ended September 30, 2001 compared with net income of $9,700,339, or one dollar and ninety-nine cents per share, on revenues of $37,792,884 for the same period a year ago. Earnings for the current period were favorably affected by operating results derived from producing properties acquired last year and this year, as well as average gas price increases. Revenues -------- Oil and gas revenues rose $6,870,096 between the two nine month periods, or approximately 19%, because of increased production volumes and higher average gas prices. Oil volumes rose approximately 5%, and gas volumes were 30% higher than the prior period. Gas price realizations also pushed revenues higher, averaging $4.47 per mcf during the current year compared with $3.45 per mcf in 2000, thus helping offset the $1.30 per barrel reduction in oil prices over this same period. Costs and Expenses ------------------ On a net equivalent barrel basis (NEB), operating expenses increased $1.35 per NEB, primarily due to workover activity levels and higher severance tax expense, which relates proportionally to higher oil and gas revenues. During the current period, one exploratory well was drilled and abandoned, the cost of which is reflected in the exploration, dry -11- holes and abandonments category along with the costs associated with acquiring certain other oil and gas leases which were also abandoned. General and administrative (G&A) expenses decreased $363,123 to reflect lower phantom stock expense. During the first nine months of 2000, approximately $1,079,000 was accrued for 95,500 outstanding phantom units. In 2000, all but 11,000 phantom stock units were redeemed, which were settled in third quarter 2001. Depreciation and amortization expense rose during the current nine months from $5.24 per NEB for the 2000 period to $6.21 per NEB currently, reflecting higher depletion rates on specific properties. Interest expense decreased $818,681 in the current period reflecting lower outstanding bank debt from scheduled loan repayments. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $18.0 million and $21.2 million at September 30, 2001, and December 31, 2000, respectively. Working capital was $9.4 million at September 30, 2001, compared with $14.2 million at December 31, 2000. The following summary table reflects cash flows for the nine months ended September 30, 2001 (in thousands): Net cash provided by operating activities: $25,279 Net cash used by investing activities: 22,768 Net cash used by financing activities: 5,740 At September 30, 2001, the Company's total debt was $26.8 million. The Company believes sufficient cash is being generated from operating activities plus cash currently in the bank, or additional -12- borrowing capacity, to fund its planned development and exploratory work or to make additional property acquisitions. 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 and production volumes, the Company's drilling results, the Company's ability to compete in the 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. -13- Recent Accounting Pronouncements -------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (SFAS 141), "Business Combinations", and also Statement No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 141 requires all business combinations, as defined by the standard, initiated after June 30, 2001 to be accounted for using the purchase method. Companies may no longer use the pooling method to account for future combinations. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and will be adopted by the Company as of January 1, 2002. SFAS 142 requires that goodwill no longer be amortized over an estimated useful life as previously required. Instead, goodwill amounts will be subject to a fair-value-based annual impairment assessment. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. The Company expects that the adoption of SFAS 142 will not have a significant impact on the Company's future financial statements. In July 2001, the FASB issued SFAS 143 "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS 143 is effective for fiscal years beginning after January 15, 2002, and early adoption is permitted. The Company is currently assessing the new standard and has not determined the impact on its consolidated results of operations, cash flows or financial position. -14- In August, 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and early adoption is permitted. The Company is currently assessing the new standard and has not determined the impact on its consolidated results of operations, cash flows, or financial position. 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 and the ultimate cash flow realized by the Company. During 2001, the Company entered into a derivative financial instrument whereby the Company hedged 2,000 barrels of daily production from March 1, 2001 through February 28, 2002 with a ceiling price of $28.18/bbl and a floor price of $24.00/bbl. The Company -15- exercised its right to terminate this contract during March, 2001 via payment of $803,000 which reduced oil and gas revenues for the first quarter of 2001. The Company is not currently a party to any derivative instrument. PART II. OTHER INFORMATION ITEM 5. Other Events ------------ On July 23, 2001 Registrant reported the retention of William Blair & Company as its financial advisor and McDermott, Will & Emery as its legal counsel to assist in evaluating strategic alternatives. The Company has provided information to a number of parties and is assessing interest in a possible business combination transaction, including a potential merger or sale of the Company. In connection with a possible sale of the Company, the Company has committed to pay approximately $5,100,000 in director and employee retention incentives, pursuant to the forms of Retention Incentive Letter and the Management Retention Agreement filed as exhibits to this report on Form 10-Q. The form of Incentive Bonus Letter is attached hereto as Exhibit 10.2 and incorporated herein by reference. The form of Management Retention Agreement is attached hereto as Exhibit 10.3 and incorporated herein by reference. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Exhibit 10.2 - Form of Retention Incentive Letter Exhibit 10.3 - Form of Management Retention Agreement -16- (b) Reports on Form 8-K: On July 23, 2001, the Company filed a report on Form 8-K reporting its intention to pursue strategic alternatives. A copy of the press release was included with the report. -17- 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 14, 2001 -18-