-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJcRFaEgd3q8Rp1Nf2Flu3zeBHAzkKwOnhtHbUaRiy9YpNt/BBOO4ELu+NlvsVaj QmckM3b2//BoqEhvCH/NAg== 0000914760-02-000048.txt : 20020415 0000914760-02-000048.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914760-02-000048 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAYNARD OIL CO CENTRAL INDEX KEY: 0000063528 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751362284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05704 FILM NUMBER: 02597455 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 660 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918880 MAIL ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 660 CITY: DALLAS STATE: TX ZIP: 75206 FORMER COMPANY: FORMER CONFORMED NAME: HOMA OIL & GAS CO DATE OF NAME CHANGE: 19710902 10-K405 1 m32257k02.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to ---------- -------- Commission file number 0-5704 ------ MAYNARD OIL COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-1362284 - ------------------------------------------------- --------------------------- (State of other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8080 N. Central Expressway, Suite 660, Dallas, TX 75206 - ------------------------------------------------- --------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214)891-8880 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.10 Par Value - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] While it is difficult to determine the number of shares owned by non-affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the Registrant estimates that the aggregate market value of its Common Stock held by non-affiliates on March 18, 2002 was $41,090,752 (based upon an estimate that 43.4% of the shares are so owned by non-affiliates and upon the closing price for the Common Stock as reported by NASDAQ (NMS)). The number of shares outstanding of the Registrant's $.10 par value common stock as of March 18, 2002 was 4,880,368 shares. The following documents are incorporated into this Form 10-K by reference: Proxy Statement for Annual Meeting of Stockholders - Part III of Form 10K. -1- PART I. ITEM 1. BUSINESS THE COMPANY Maynard Oil Company is a Delaware corporation which was organized in 1971 to continue the oil and gas operations conducted on an individual basis by its founders, including Mr. James G. Maynard, its Chairman of the Board and Chief Executive Officer. The Company's principal executive office is located at 8080 N. Central, Ste. 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 wholly-owned subsidiary. The Company's principal line of business is the production and sale of, and exploration and development of crude oil and natural gas. The Company's oil and gas operations are conducted exclusively in the United States, primarily in the states of Texas, Oklahoma, Louisiana, New Mexico and Arkansas. POSSIBLE SALE OF THE COMPANY In July 2001, the Board of Directors announced that it was exploring strategic alternatives, including a potential merger or sale of the Company. It retained William Blair & Company as its financial advisor and McDermott, Will & Emery as its legal counsel to assist in the evaluation of strategic alternatives. The Company contacted potential acquirors in the oil and gas industry and provided information to parties expressing interest in a business combination transaction. In December 2001, the Board of Directors announced that it had received expressions of interest from a number of strategic buyers regarding the possible acquisition of the Company. While the Board found the valuations disappointing, the Board authorized continued exploration of a possible sale or merger of the Company. As of March 31, 2002, the Company was engaged in discussions concerning a possible merger of the Company, although the proposals by potential acquirors involve a price to the Company's stockholders below the recent trading range for the Company's stock. The Company's Board of Directors cautions that there can be no guarantee that the Company would enter into a transaction to sell Maynard Oil or any other transaction. RECENT ACQUISITION ACTIVITIES Since January 1, 2001, the Company has spent approximately $12.9 million increasing its working interest position in the Tex-Mex field -2- located in Gaines County, Texas. The Company estimates that approximately 1,056,000 barrels of oil and 1.5 bcf of gas were added to its hydrocarbon reserve base through these transactions. 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. A total of forty-nine wells were drilled in 2001, one of which was an exploratory well operated by Maynard, which failed to find commercial quantities of hydrocarbons. Another eight wells were completed as injection wells on waterflood projects operated by other companies. Additionally, the Company participated in drilling forty productive development wells, seven completed as gas producers and thirty-three as successful oil wells. Maynard served as operator on fourteen of these forty wells. Prices realized from the sale of oil and gas from the Company's wells depend 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, 2001, approximately 68% of the Company's estimated proved reserves and 64% of the 2001 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. As described above, the Company was successful in adding to its hydrocarbon reserve base, the underlying asset for an oil and gas company, through current year producing property acquisitions and development drilling on existing Company properties. Because of these acquisitions and drilling activities, oil production volumes rose approximately 6% and gas production increased almost 26% over the prior year. Average gas prices experienced a modest increase from $3.90 per mcf in 2000 to $4.00 per mcf in 2001. However, oil prices fell an average of $4.10 per barrel (from an average of $27.36 per barrel received in 2000 to an average of $23.26 per barrel in 2001), once again -3- illustrating the challenges and volatility experienced by the domestic oil and gas business and how it is affected by conditions beyond the control of the Company. During the year ended December 31, 2001, two purchasers accounted for approximately 17% and 13%, respectively, of consolidated revenues. The Company does not believe it would be adversely affected by the loss of its oil or gas purchasers due to large numbers of available purchasers. The market price for natural gas has also fluctuated significantly from month to month and year to year for the past several years. Like the oil market, the Company cannot predict gas price movements with any certainty. Except for curtailed exploration and production activity occasionally experienced in severe weather and normal curtailments of gas sales in summer months, the Company does not consider its business to be seasonal and does not carry significant amounts of inventory. GENERAL The oil and gas business involves intense competition in all of its phases and, because of its size, the Company is not a significant competitive factor in the industry. In its efforts to acquire property rights, the Company competes with many companies having access to substantially greater financial resources and larger technical staffs. The Company's oil and gas exploration efforts often involve exploratory drilling on unproven acreage involving high risks. There is 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, 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 arise. 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. Although the Company is unable to -4- assess or predict at this time the impact that compliance with such environmental regulations may have on its future capital expenditures, earnings and financial position, it does not anticipate making any material capital expenditures for environmental control facilities during 2002. 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 numerous 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, 2002 the Company employed 40 persons, including one geologist and five petroleum engineers. ITEM 2. PROPERTIES The Company's executive offices are presently located at 8080 N. Central, Ste. 660, Dallas, Texas occupying approximately 14,300 square feet of space under a lease agreement which expires in April, 2005. The Company's principal property holdings consist of leasehold interests in oil and gas properties located solely in the United States, primarily in Oklahoma, Texas, New Mexico, Louisiana and Arkansas. The leaseholds remain in force so long as production from lands under lease is maintained. The Company believes that it has satisfactory title to its oil and gas properties. Such properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes, and other burdens and minor encumbrances, easements, and restrictions. The Company believes such burdens do not materially detract from the value of the properties or materially interfere with their use in the operation of the Company's business. The Company has pledged certain of its oil and gas properties to secure its term loan. ESTIMATED PROVED RESERVES, FUTURE NET REVENUES AND PRESENT VALUE Reflected below are the estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas owned by the Company as of December 31, 2001, 2000, and 1999. 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 -5- any federal authority or agency during the fiscal year ended December 31, 2001. December 31 ---------------------------------------------------------------------- 2001 2000 1999 ---------------------- ----------------------- --------------------- Oil (MB) Gas (MMCF) Oil (MB) Gas (MMCF) Oil (MB) Gas (MMCF) Proved Developed 9,423.2 27,524.7 11,085.4 29,362.1 10,072.7 28,917.2 Proved Undeveloped 1,577.1 3,294.7 2,524.9 2,715.6 1,447.3 3,009.7 -------- -------- -------- -------- -------- -------- Total Proved Reserves 11,000.3 30,819.4 13,610.3 32,077.7 11,520.0 31,926.9 ======== ======== ======== ======== ======== ========
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, 2001, 2000, and 1999. 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, 2001, 2000, and 1999, respectively, used in the estimates were $17.62, $25.27, and $23.69 per barrel of oil and $2.49, $9.72, and $2.04 per mcf of natural gas. Lease and well operating costs are based upon actual operating expense records. December 31 -------------------------------------------------------------------------- 2001 2000 1999 ------------------- --------------------- -------------------- Future Present Future Present Future Present Net Value Net Value Net Value Expressed in 000's Revenue @ 10% Revenue @ 10% Revenue @ 10% ------- ------- ------- ------- ------- ------- Proved Developed $117,355 $78,822 $383,769 $245,567 $171,425 $112,842 Proved Undeveloped 12,595 4,919 53,015 24,945 20,593 9,851 -------- ------- -------- -------- -------- -------- Total Proved Reserves $129,950 $83,741 $436,784 $270,512 $192,018 $122,693 ======== ======= ======== ======== ======== ========
Amounts presented in the tables above are before the effects of income taxes. -6- 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, 2001. December 31 -------------------------------- 2001 2000 1999 ---- ---- ---- Production: Oil (MB) 1,446.4 1,369.5 990.9 Gas (MMCF) 4,931.8 3,915.3 2,289.6 Average Sales Prices: Oil (per BBL) $23.26 $27.36 $17.64 Gas (per MCF) $ 4.00 $ 3.90 $ 2.58 Average Production Costs: Per net equivalent barrel of oil (1)(2) $ 7.91 $ 7.01 $ 5.71 (1) Six MCF of gas equals one net equivalent barrel ("NEB"). (2) Production costs are comprised of severance and advalorem taxes, if applicable, and lease operating expenses, which include workover costs. PRODUCTIVE WELLS AND ACREAGE As of December 31, 2001, the Company owned an interest in approximately 1,309 gross (525.3 net) wells, of which 1,211 gross (485.3 net) are oil wells and 98 gross (40.0 net) are gas wells, located on approximately 51,871 gross (24,255 net) producing acres. UNDEVELOPED ACREAGE The following table sets forth the Company's gross and net undeveloped acreage as of December 31, 2001. Undeveloped Acreage ------------------- Gross Net ----- --- Arkansas............................................... 420 88 Colorado............................................... 80 10 Louisiana.............................................. 436 136 Mississippi............................................ 160 6 Montana................................................ 7,291 160 New Mexico............................................. 1,280 47 North Dakota........................................... 62 4 Oklahoma............................................... 249 60 Texas.................................................. 19,322 3,121 Wyoming................................................ 5,253 843 ------ ------ Total 34,553 4,475 ======= ====== -7- DRILLING ACTIVITY The following table sets forth the results of the Company's drilling activity during the three years ended December 31, 2001. Exploratory Development Total ----------- ----------- ----- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- December 31, 2001 Productive 0 .000 40 14.199 40 14.199 Dry 1 .504 0 .000 1 .504 --- ----- --- ------ --- ------ Total 1 .504 40 14.199 41 14.703 === ===== === ====== === ====== December 31, 2000 Productive 1 .400 22 8.096 23 8.496 Dry 0 .000 0 .000 0 .000 --- ----- --- ------ --- ------ Total 1 .400 22 8.096 23 8.496 === ===== === ====== === ====== December 31, 1999 Productive 0 .000 5 1.888 5 1.888 Dry 2 .650 0 .000 2 .650 --- ----- --- ------ --- ------ Total 2 .650 5 1.888 7 2.538 === ===== === ====== === ======
At December 31, 2001, the Company had two development wells being drilled which have both been successfully completed during 2002. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in minor lawsuits that have arisen in the ordinary course of business. The Company does not expect any of these lawsuits or other items to have a material adverse effect on the Company's consolidated financial position or results of operations. 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, 2002, is set forth in the table below. Name Position Age Since ---- -------- --- ----- James G. Maynard Chairman of the Board, 75 1971 Chief Executive Officer and Treasurer Glenn R. Moore President and Chief 64 1982 Operating Officer -8- L. Brent Carruth Executive Vice President 68 1984 of Operations Kenneth W. Hatcher Executive Vice President 58 1983 of Finance Linda K. Burgess Vice President of 53 1984 Accounting and Corporate Secretary Cassondra Foster Vice President of Land 59 1999 Jerry G. Keen Vice President of Engineering 53 1999 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 35 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 35 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 35 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 30 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. Ms. Foster has over 30 years of petroleum land management experience, joining Maynard Oil Company's Land Department in 1974. Prior to that Ms. Foster was a Title Analyst for Texas Oil & Gas. Mr. Keen has over 30 years of petroleum engineering experience and has been employed by Maynard Oil Company since 1984. 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. -9- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Company's Common Stock is traded in the over-the-counter market, NASDAQ trading symbol "MOIL". The high and low sales prices for each quarterly period during the two years ended December 31, 2001, were as follows: 2001 High Low 2000 High Low ---- ---- --- ---- ---- --- First Quarter $19.000 $15.875 First Quarter $26.125 $ 9.875 Second Quarter 21.500 15.250 Second Quarter 19.187 10.125 Third Quarter 25.070 18.750 Third Quarter 22.875 14.750 Fourth Quarter 24.000 17.400 Fourth Quarter 23.125 15.250 As of March 18, 2002, the Company had approximately 723 shareholders of record. The Company has not paid any dividends on its Common Stock in the past, nor does it plan to pay dividends in the foreseeable future. The Company's ability to pay dividends is currently restricted under its Loan Agreement with Bank One, Texas. ITEM 6. SELECTED FINANCIAL DATA. The following table summarizes certain selected financial data to highlight significant trends in the Company's financial condition and operating results for the periods indicated. The selected financial information presented should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Report and the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth under Item 7 below. All amounts are expressed in thousands, except per share information. December 31 -------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Oil and gas sales and royalties 53,363 $52,739 $23,392 $16,166 $26,477 Income (loss) before income taxes (1) 12,457 22,273 7,148 (11,897) 6,613 Net income (loss) (1) 7,954 14,103 4,355 (7,816) 4,455 Per share income (loss) (1)(2) 1.63 2.89 .89 (1.60) .91 Total assets 07,234 107,858 94,708 60,363 78,286 Long-term debt 17,213 24,863 32,513 6,250 11,250 Shareholders' equity 72,039 64,087 49,991 45,647 53,509 Net working capital 8,080 14,151 8,321 16,448 17,503 Net cash provided by operating activities 26,370 26,795 9,661 5,025 11,250 -10- (1) Includes effect of 2001 and 1998 impairment of oil and gas properties amounting to $3,382,741 and $8,754,846 respectively. (2) Basic and diluted earnings (loss) per share were the same for all years presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000 - ---------------------------------------------------------- OVERVIEW - -------- The Company continued its strategy for growth through the acquisition of producing properties in calendar 2001. A total of $12.9 million was spent on acquisitions this year. All of these funds were expended for additional interests in the Tex-Mex Field located in Gaines County, Texas. In addition to these acquisition dollars, the Company incurred capital expenditures which totaled an additional $12.9 million, which was spent on the 49 new wells drilled this year, as well as recompleting and installing equipment on other wells. Once again, the Company, like others in the oil and gas industry, dealt with the roller coaster effect from the crude oil markets. The West Texas Intermediate posting for crude began the year averaging approximately $26.40 per barrel, hovered at $23.35 to $24.49 per barrel for much of the year before declining to $16.28 during the last two months of 2001. Obviously, these price reductions negatively impacted the Company's 2001 revenues and cash flow by approximately $5.6 million. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash and cash equivalents totaled $14.3 million and $21.2 million at December 31, 2001 and December 31, 2000, respectively, decreasing approximately $6.9 million during 2001. Cash flow from operations approximated $26.4 million and was utilized as follows: Property acquisitions $12.9 million Drilling of 49 wells and other capitalized workover activities 12.9 million Repayment of debt 7.6 million Proceeds from sale of property, net of miscellaneous expenditures (.1) million Cash decrease (6.9) million ---- Total $26.4 million ===== Company management plans on utilizing cash generated from operations and additional bank debt, if necessary, to fund future oil and gas activities. Any future product price reductions could dictate reductions in planned capital expenditures. Since the Company serves as operator on 46% of its wells, it can exercise judgment about which projects are performed. -11- As discussed in Note 3 to the 2001 Consolidated Financial Statements, the Company has entered into contracts with its employees which provide incentive payments of approximately $5.1 million to be paid within a year should a merger agreement be signed. Additionally, the Company is committed to making cash payments on two other types of contracts, note agreements and leases. Maynard Oil has no off-balance sheet financing arrangements or any other such unrecorded obligations, and the Company has not guaranteed the debt of any other party. Presently, the Company anticipates the following transactions for 2002: Oil and gas revenues, net of lease operating expenses $23.6 million Capital expenditure commitment (6.5) million Repayment of debt (7.7) million Lease payments (.4) million ---- Available cash $ 9.0 million ===== RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000 - ---------------------------------------------------------- During 2001, the Company earned $1.63 per share, or $7,953,823 compared to 2000 earnings of $2.89 per share, or $14,103,093. REVENUES Oil and gas revenue remained almost constant between 2001 and 2000 increasing approximately 1% over the prior year. Higher sales volumes made up for the loss of crude oil revenues during the current year. The table below reflects the differentials by product: Avg. Avg. Oil Price Gas Price Bbls Bbl MCF MCF ---- ----- --- ----- Twelve months 2001 1,446,375 $23.26 4,931,751 $4.00 Twelve months 2000 1,369,456 27.36 3,915,325 3.90 Interest income declined approximately $442,000 due to lower investable cash balances and due to lower rates paid in the investment markets. Additionally, the disposition of assets yielded a minor gain for the current year while prior year dispositions reflected a minor loss. COSTS AND EXPENSES On a net equivalent barrel basis (NEB), lease operating expenses rose ninety cents per NEB from $7.01 per NEB in 2000 to $7.91 per NEB in 2001. Expense workovers represented 36% of the cost increases, all other lease operating items such as labor, saltwater disposal, and -12- plugging charges accounted for an additional 79% of the cost increases while regulatory costs, which include severance taxes and advalorem taxes, declined for the year and reduced this category by 15%. Exploration, dry holes, and abandonments fell $192,591 due to reductions in acreage impairments over the prior year. One exploratory well was drilled and included in this category during the current year. The general and administrative (G&A) expense category reflects a nominal increase of $128,967. However, the prior year G&A expense was abnormally high, having been adjusted upward $1,020,023 to account for the phantom stock activity last year. During 2001, the remaining 11,000 phantom stock units were exercised and G&A was charged an additional $93,500. In July, 2001, the Company announced that it was pursuing strategic alternatives and has spent approximately $586,000 pursuant to sale or merger strategies. Additionally, other G&A items have risen during 2001 to accommodate the growth of the Company from $60.3 million in assets at September 30, 1999 (prior to the Questar acquisition) to $107.2 million in assets currently. On a net equivalent barrel basis, the current depreciation and amortization rate increased approximately 24% from $5.01 per NEB in 2000 to $6.21 per NEB during 2001. Under the successful efforts method of accounting, costs of oil and gas properties are amortized on a unit of production method based upon estimated proved reserves. These estimates of proved reserves can fluctuate from one accounting period to the next because of product pricing and its effect on the recoverability of these hydrocarbon reserves. During 2001, there were downward revisions in estimated volumes of oil reserves of approximately 2.5 million barrels which resulted in increased depreciation and amortization expense. Maynard Oil also recognized non-cash impairment charges of $3,382,741 to the carrying value of its oil and gas properties. Although the reduction in oil pricing impacted this evaluation, the specific properties involved in the writedown had minimal hydrocarbons attached and little chance of recovery from future price increases. Interest expense decreased $1,189,473 between 2000 and 2001 because of reductions in the outstanding bank loan due to scheduled loan repayments and lower interest rates. Offsetting this decreased interest expense in the current year was a bad debt allowance of $259,949 attributable to the downturn in the oil and gas industry. Not only were Maynard's oil and gas revenues negatively impacted by price reductions, its joint interest partners' revenues were also negatively affected by price which resulted in slower pay on the Company's accounts receivable. Income tax expense for 2001 reflects an effective tax rate of 36.1% which differs from the corporate rate of 34% for Maynard Oil's pre-tax income level. The primary reason for this difference relates to income taxes assessed at the state level. RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999 - ---------------------------------------------------------- During 2000, the Company earned $2.89 per share compared to 1999 earnings of $.89 per share. -13- REVENUES Oil and gas revenue more than doubled during 2000, rising from $23.3 million a year ago to $52.7 million during 2000. Higher sales volumes accounted for 57% of the revenue increase and pricing differentials the remaining 43%. The table below reflects these differences by product: Avg. Avg. Oil Price Gas Price Bbls Bbl MCF MCF ---- --- --- --- Twelve months 2000 1,369,456 $27.36 3,915,325 $3.90 Twelve months 1999 990,877 17.64 2,289,563 2.58 Interest income rose approximately $347,000 between 1999 and 2000 due to increased average cash balances. Additionally, the disposition of assets reflects a loss for the current year while the prior year dispositions yielded a gain to the Company. COSTS AND EXPENSES On a net equivalent barrel (NEB) basis, lease operating expenses increased $1.30 per NEB from $5.71 per NEB to $7.01 per NEB. Approximately 46% of this increase was due to higher severance taxes, which are directly proportional to sales values; 18% of the lease operating expense increase was a result of expense workovers; 12% was attributable to greater advalorem taxes, which are also functions of pricing; and 25% was attributable to all other lease operating items such as labor and salt water disposal. The exploration, dry holes, and abandonments category decreased $84,520 during 2000 because no unsuccessful exploratory wells were drilled, while two such dry holes were drilled and expensed in 1999. A substantial portion of this expense category for 2000 is represented by the impairment of acreage for which the Company abandoned future drilling plans. The one successful exploratory well drilled in 2000 was capitalized as oil and gas property. The general and administrative (G&A) expense category reflects an increase of $1,604,659 between 1999 and 2000, primarily the result of phantom stock adjustments which occur because of stock price fluctuations. Since the phantom stock units were originally awarded in 1989, the Company's G&A expense has experienced a great deal of volatility as the stock price has risen and fallen and the related charges and credits for phantom stock have been recorded. At December 31, 1999, the closing stock price was $9.75, and the Company had accrued a liability of $449,625 for this phantom stock obligation on its balance sheet with $214,875 of this amount recorded in 1999 G&A expense. On September 28, 2000 the Company's Board of Directors approved an amendment to the employee incentive plan which originally awarded these phantom stock units. On this date, the Company's stock price had risen to $20.81 per share, so the Company accrued an additional $934,773 to 2000 G&A expense for the 84,500 phantom stock units that were exercised under the plan amendment. At December 31, 2000, the Company also had a -14- remaining liability of approximately $136,000 attributable to the remaining 11,000 stock participation units, $85,250 of which is also reflected in 2000 G&A expense. The remainder of 2000 G&A expense increase represents costs to manage the growth of the Company from approximately $60.3 million in assets at September 30, 1999-prior to the Questar acquisition-to $107.8 million in assets at December 31, 2000. On a net equivalent barrel basis, the depreciation and amortization rate increased approximately 18% from $4.26 per NEB during 1999 to $5.01 per NEB during 2000. Under the successful efforts method of accounting, costs of oil and gas properties are amortized on a unit of production method based upon estimated proved reserves. The Company calculates and applies this rate on a property by property basis. Fluctuations in depreciation and amortization expense can be caused by variations in the performance of the oil and gas property, the amount invested in the property and the hydrocarbon reserves ultimately recoverable from the property. As the oil and gas properties and their associated reserves age within a company, these rates become more predictable and have less variance. Interest expense increased over 200% due to a full annual period having lapsed under the term loan agreement put in place in November, 1999 in connection with the Questar acquisition. Income tax expense for 2000 reflects an effective tax rate of 36.7% which differs from the corporate rate of 35% for Maynard Oil's pre-tax income level. The primary reason for this difference relates to income taxes assessed at the state level. CRITICAL ACCOUNTING MATTERS - --------------------------- The Company follows the "successful efforts" method of accounting for its oil and gas properties. Under this method of accounting, the capitalized costs of unproven leases are periodically assessed to determine whether their value has been impaired below the capitalized cost, and if such impairment is indicated, a loss is recognized in exploration, dry holes, and abandonment expense. The Company makes these assessments based on estimates of future oil and gas prices and considers such other factors as future drilling plans and any lease expiration terms. The Company's financial position and results of operations are materially effected by changes in oil and gas prices. The Company makes estimates of future oil and gas prices to determine the need for an impairment of capitalized costs of proved oil and gas properties under Statement of Accounting Standards No.121(SFAS 121). Under SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company assesses the need for an impairment of capitalized costs of proved oil and gas properties on a field by field basis. Applying SFAS 121, the Company recognized a non-cash property impairment of $3,382,741 in December 2001 to account for those properties whose investment would not be recoverable under current pricing assumptions. Fair value of the -15- property is estimated by the Company using the present value of future cash flows discounted at 10%. At December 31, 2001, the average oil and gas prices used for assessment purposes were $21.92 per barrel and $3.16 per mcf, respectively. Accordingly, a significant reduction in oil and gas prices used to estimate future oil and gas revenues for impairment purposes could materially impact impairment expense. The Company uses estimates of oil and gas reserve quantities to estimate depreciation and amortization expense using the unit of production method of accounting. The estimates of proved oil and gas reserve quantities are also effected by estimates of future oil and gas prices along with other reservoir engineering estimates. Accordingly, a significant reduction in oil and gas reserve quantities could materially impact depreciation and amortization expense. The Company periodically enters into hedging arrangements with respect to portions of its oil and gas production to achieve a more predictable cash flow and to reduce exposure to price fluctuations. Net income and cash flow can be significantly effected by the Company's hedging activities if oil and gas prices change significantly during the hedging period. 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 June 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. -16- 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 expects that the adoption of SFAS No. 144 will not have a significant impact on the Company's future financial statements. 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, teleconferences or otherwise, may be deemed to be 'forward-looking statements' within the meaning of Section 21E of the Securities 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. When used in this document, the words "anticipates," "estimates," "expects," "believes," "intends," "plans" and similar expressions are intended to identify such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to these and other factors. ITEM 7.A. 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 (WTI) traded on the New York Mercantile Exchange (NYMEX). 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 exercised its right to terminate this contract during March, 2001 via payment of $803,000 which reduced oil and gas revenue for the first quarter of 2001. The Company is not currently a party to any derivative instrument. -17- INTEREST RATE RISK - ------------------ While the Company does have interest rate risk associated with its outstanding borrowing as of December 31, 2001, we do not consider the risk to have a material impact on the Company's operations. As such, the Company does not hedge against interest rate risk exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is included on pages 22 through 42 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III The information required by Part III (Items 10 through 13) is set forth in the Company's Proxy Statement for the annual meeting of stockholders and is incorporated herein by reference. Information with respect to the Company's executive officers as of March 18, 2002, is set forth commencing on pages 8 and 9 thereof under the caption "Executive Officers of the Registrant". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K FINANCIAL STATEMENTS AND SCHEDULES See Index to Consolidated Financial Statements and Schedule on page 22 of this Report. REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the last quarter of 2001. 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. -18- (c) Certificate of Amendment of Certificate of Incorporation dated May 22, 1987, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference. (d) Certificate of Amendment of Certificate of Incorporation dated June 3, 1993, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993, and incorporated herein by reference. 3.2 (a) By-Laws, as amended, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference. (b) Amendment to the By-Laws, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference. (c) Amendment to the By-Laws, filed as Exhibit 3.2(c) to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1984, and incorporated herein by reference. (d) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference. (e) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993 and incorporated herein by reference. (f) By-Laws, as amended, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999, and incorporated herein by reference. 4.1 (a) Second Restated Loan Agreement, dated November 12, 1999 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 (the "1999 Form 10-K") and incorporated herein by reference. (b) First Amendment to Second Restated Loan Agreement dated May 15, 2000 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2000 (the "2000 Form 10-K") and incorporated herein by reference. 10.1 1989 Stock Participation Plan, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and incorporated herein by reference. -19- 10.2 Form of Retention Incentive Letter filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001 and incorporated herein by reference. 10.3 Form of Management Retention Agreement filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001 and incorporated herein by reference. 10.4 Form of Director Indemnification Agreement, between the Company and each of its directors, filed herewith. 21.1 List of subsidiaries of the Company as of December 31, 2001, filed herewith. -20- 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 29, 2002 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, April 1, 2002 - ------------------------ Chief Executive Officer James G. Maynard & Treasurer /s/ Glenn R. Moore President and Chief April 1, 2002 - ------------------------ Operating Officer Glenn R. Moore /s/ Kenneth W. Hatcher Executive Vice President April 1, 2002 - ------------------------ of Finance(Principal Kenneth W. Hatcher Financial and Accounting Officer) /s/ Robert B. McDermott Director April 1, 2002 - ------------------------ Robert B. McDermott /s/ Ralph E. Graham Director April 1, 2002 - ------------------------ Ralph E. Graham /s/ Fred L. Oliver Director April 1, 2002 - ------------------------ Fred L. Oliver -21- MAYNARD OIL COMPANY AND SUBSIDIARY Index to Consolidated Financial Statements and Schedule Page ---- Financial Statements: Report of Independent Accountants 23 Consolidated Balance Sheets - December 31, 2001 and 2000 24 Consolidated Statements of Operations - Three years ended December 31, 2001 25 Consolidated Statements of Changes in Shareholders' Equity - Three years ended December 31, 2001 26 Consolidated Statements of Cash Flows - Three years ended December 31, 2001 27 Notes to Consolidated Financial Statements 28 II - Valuation and Qualifying Accounts 42 All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto. -22- REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Maynard Oil Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Maynard Oil Company and its subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. PricewaterhouseCoopers LLP Dallas, TX March 27, 2002 -23- MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Balance Sheets December 31, ----------------------------- 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 14,277,119 $ 21,228,040 Accounts receivable, trade 6,457,897 8,773,669 Income taxes receivable 1,769,928 1,437,587 Other current assets 448,194 441,027 ------------ ----------- Total current assets 22,953,138 31,880,323 ------------ ----------- Property and equipment, at cost: Oil and gas properties, successful efforts method 188,246,168 162,572,339 Other property and equipment 491,699 450,885 ------------ ----------- 188,737,867 163,023,224 Less accumulated depreciation and amortization (104,457,017) (87,045,360) ------------ ----------- Net property and equipment 84,280,850 75,977,864 ------------ ----------- $ 107,233,988 $107,858,187 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 7,650,000 $ 7,650,000 Accounts payable 5,962,824 8,350,643 Accrued expenses 746,806 927,828 Income taxes payable 513,352 800,799 ------------ ----------- Total current liabilities 14,872,982 17,729,270 ------------ ----------- Deferred income taxes 3,110,000 1,179,000 Long-term debt 17,212,500 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 52,719,331 44,768,228 ------------ ----------- Total shareholders' equity 72,038,506 64,087,417 ------------ ----------- Contingencies and commitments (note 10) $ 107,233,988 $107,858,187 ============ =========== See accompanying Notes to Consolidated Financial Statements. -24- MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Operations
Years ended December 31, ------------------------------------------- 2001 2000 1999 ---- ---- ---- Revenues: Oil and gas sales and royalties $ 53,363,128 $ 52,738,994 $ 23,392,231 Interest and other 699,471 1,141,333 794,478 Gain (loss) on disposition of assets 96,027 (38,070) 312,746 ------------ ------------ ------------ 54,158,626 53,842,257 24,499,455 ------------ ------------ ------------ Costs and expenses: Operating expenses 17,953,047 14,168,808 7,839,205 Exploration, dry holes and abandonments 256,497 449,088 533,608 General and administrative, net 3,970,886 3,841,919 2,237,260 Depreciation and amortization 14,079,545 10,120,721 5,848,272 Impairment of proved oil and gas properties 3,382,741 -- -- Interest and other 2,059,087 2,988,628 893,475 ------------ ------------ ------------ 41,701,803 31,569,164 17,351,820 ------------ ------------ ------------ Income before income taxes 12,456,823 22,273,093 7,147,635 Income tax expense 4,503,000 8,170,000 2,793,000 ------------ ------------ ------------ Net income $ 7,953,823 $ 14,103,093 $ 4,354,635 ============ ============ ============ Weighted average number of common shares outstanding 4,880,401 4,880,749 4,883,536 ============ ============ ============ Net income per common share (basic and diluted) $ 1.63 $ 2.89 $ .89 ============ ============ ============ See accompanying Notes to Consolidated Financial Statements.
-25- MAYNARD OIL COMPANY Consolidated Statements of Changes in Shareholders Equity Three Years Ended December 31, 2001
Accumulated Other Additional Common Comprehensive Retained Comprehensiv Paid-in Common Stock Total Income Earnings Income Capital Stock Shares ----- ------ -------- ------ ------- ----- ------ Balance at December 31, 1998 $45,646,943 $26,327,345 $18,831,138 $488,460 4,884,597 Net income 4,354,635 4,354,635 -- -- -- Purchase and retirement of common stock (10,873) (10,502) -- (371) (3,710) ---------- ---------- ---------- ------- --------- Balance at December 31, 1999 49,990,705 30,671,478 18,831,138 488,089 4,880,887 Net income 14,103,093 14,103,093 -- -- -- Purchase and retirement of common stock (6,381) (6,343) -- (38) (371) ---------- ---------- ---------- ------- --------- Balance at December 31, 2000 64,087,417 44,768,228 18,831,138 488,051 4,880,516 Comprehensive Income Net Income 7,953,823 $7,953,823 7,953,823 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 $7,953,823 ========= Purchase and retirement of common Stock (2,734) (2,720) -- (14) (148) ---------- ---------- --------- ---------- ------- --------- Balance at December 31, 2001 $72,038,506 $52,719,331 -- $18,831,138 $488,037 4,880,368 ========== ========== ========= ========== ======= ========= See accompanying Notes to Consolidated Financial Statements.
-26- MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Cash Flows
Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 7,953,823 $ 14,103,093 $ 4,354,635 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,079,545 10,120,721 5,848,272 Impairment of proved oil and gas properties 3,382,741 -- -- Allowance for doubtful accounts 259,949 -- -- Deferred income tax expense 1,931,000 1,527,000 333,000 Exploration, dry holes and abandonments 212,720 429,424 451,688 Current year costs of dry holes and abandonments (213,599) 1,031 (424,077) (Gain) loss on disposition of assets (96,027) 38,070 (312,746) (Increase) decrease in current assets: Accounts receivable 2,055,823 (2,744,481) (3,460,381) Income taxes receivable (332,341) (687,587) 227,587 Other current assets (7,167) 395,527 (357,874) Increase (decrease) in current liabilities: Accounts payable (2,387,819) 4,100,919 1,666,367 Accrued expenses (181,022) (329,790) 415,250 Income taxes payable (287,447) (159,413) 919,413 ------------ ------------ ------------ Net cash provided by operating activities 26,370,179 26,794,514 9,661,134 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from disposition of assets 103,496 780,447 555,022 Additions to property and equipment (25,771,862) (13,513,361) (45,184,704) ------------ ------------ ------------ Net cash used by investing activities (25,668,366) (12,732,914) (44,629,682) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt -- -- 32,000,000 Principal payments on long-term debt (7,650,000) (5,737,500) (5,000,000) Purchase of common stock (2,734) (6,381) (10,873) ------------ ------------ ------------ Net cash provided (used) by financing activities (7,652,734) (5,743,881) 26,989,127 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (6,950,921) 8,317,719 (7,979,421) Cash and cash equivalents at beginning of year 21,228,040 12,910,321 20,889,742 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 14,277,119 $ 21,228,040 $ 12,910,321 ============ ============ ============ See accompanying Notes to Consolidated Financial Statements
-27- MAYNARD OIL COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies ------------------------------------------ Business Activity ----------------- Maynard Oil Company (the Company) is engaged in the acquisition, exploration, development, production and sale of crude oil and natural gas in the Continental United States, primarily in the states of Texas, Oklahoma, Louisiana, New Mexico and Arkansas. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Maynard Oil Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Cash Equivalents ---------------- Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Property and Equipment ---------------------- The Company follows the successful efforts method of accounting for its 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 yield economic proved reserves are expensed. All geological and geophysical costs not reimbursed are expensed as incurred. Costs of acquiring unproved leases are evaluated for impairment until such time as the leases are proved or abandoned. In addition, unamortized costs at a field level are reduced to discounted fair value if the net book value exceeds the sum of expected undiscounted future cash flows. Depreciation and amortization of producing properties is computed using the unit of production method based upon estimated proved reserves. Depreciation of other property and equipment is calculated using 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. -28- Revenue Recognition ------------------- The Company accounts for oil and gas sales from its interests in producing wells under the sales method. Under the sales method, the Company recognizes revenues based on the amount of natural gas sold to purchasers, which may be different from the Company's entitled production based on its interest in the properties. Gas balance obligations as of December 31, 2001, 2000 and 1999 were not significant. Overhead Reimbursement Fees --------------------------- The Company reduces general and administrative expenses by only the amounts actually due from outside working interest owners for overhead charges. Deferred Income Taxes --------------------- The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the tax and financial reporting bases of the Company's assets and liabilities by applying enacted tax rates. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. Derivative Financial Instruments -------------------------------- The Company periodically enters into commodity hedge contracts, including caps and floors which may require payments to (or receipts from) counterparties based on the differential between a fixed price and a variable price for a fixed quantity of crude oil or natural gas without the exchange of underlying volumes. The notional amounts of these derivative financial instruments are based on expected production from existing wells. The Company uses these derivative financial instruments to manage cash flow risks resulting from fluctuations in commodity prices. The derivative financial instruments held by the Company are not leveraged and are held for purposes other than trading. Correlation of the hedge contracts is determined by evaluating whether hedge contract gains and losses will substantially offset the effects of price changes on the underlying crude oil and natural gas sales volumes. To the extent that correlation exists between the hedge contracts and the underlying crude oil and natural gas sales volumes, realized gains or losses and related cash flows arising from the hedge contracts are recognized as a component of oil and natural gas sales in the same period as the sale of the underlying volumes. To the extent that correlation does not exist between the hedge contracts and the underlying crude oil and the natural gas sales volumes, realized gains or losses and related cash flows arising from the hedge contracts are recognized in the period as a component of other income. The fair market value of any hedge contract that does not meet the correlation test outlined above is recorded as a deferred gain or loss on the balance sheet and is -29- adjusted to current market value at each balance sheet date with any deferred gains or losses recognized as a component of other income. In the event that management decides to terminate a hedge contract, generally accepted accounting principles require that any gains or losses upon termination be carried forward and recognized as a component of oil and natural gas sales in the period in which the underlying volumes are sold. The Company is not currently a party to any derivative instrument. Income per Common Share ----------------------- The Company does not have a complex capital structure, and consequently, net income per common share is computed using the weighted average number of common shares outstanding during each year. Basic and diluted earnings per share were the same for 2001, 2000 and 1999 as the Company has no potentially dilutive securities. Segment Information ------------------- All of the Company's oil and gas properties and related operations are located in the United States and management has determined that the Company has one reportable segment. The Use of Estimates in Preparing Financial Statements ------------------------------------------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of gain and loss contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Since estimates are made based on all information available at the time, it is reasonably possible in the near term a change in an estimate may occur or actual amounts may differ from estimated amounts. Reclassifications ----------------- Certain reclassifications of prior period statements have been made to conform with the 2001 presentation. 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. -30- 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 June 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. 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 expects that the adoption of SFAS No. 144 will not have a significant impact on the Company's future financial statements. (2) Fair Value of Financial Instruments, Risk Management, and --------------------------------------------------------- Concentrations of Credit Risk ----------------------------- Fair Value of 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. 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 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 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 -31- 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. A second 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. The Company adopted Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", on January 1, 2001 and recorded a cumulative effect adjustment of approximately $87,000 to earnings to recognize the fair market value of all derivative instruments as a result of adopting SFAS 133. The hedging related components of other comprehensive income have been recorded net of income tax effects using the effective income tax rate for 2001. Concentration of Credit Risks ----------------------------- 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. During 2001, the Company recorded a bad dept allowance of $259,949 to recognize potentially uncollectible accounts receivable. During the year ended December 31, 2001, oil and gas sales to two purchasers amounting to approximately $9,041,000 and $6,867,000 each accounted for more than 10% of total consolidated revenues. During the year ended December 31, 1999, oil and gas sales to three customers, amounting to approximately $4,143,000, $2,868,000, and $2,457,000 respectively, each accounted for more than 10% of total consolidated revenues. During the year ended December 31, 2000, no single purchaser accounted for 10% of consolidated revenues. (3) Strategic Alternatives ---------------------- On July 23, 2001, the Company announced that it was exploring strategic alternatives including the possible sale or merger of the Company. In December, 2001, the Company reported that it had received expressions of interest from a number of potential buyers, -32- but that the valuations were disappointing. Management was instructed by the Board to continue discussions with potentional acquirers. 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 merger agreement is signed. (4) Impairment of Long-Lived Assets ------------------------------- Oil prices fell from an average of $27.36 per barrel for 2000 to an average of $23.26 per barrel for 2001, while gas prices averaged $4.00 per thousand cubic feet (mcf) for 2001 compared with $3.90 per mcf for 2000. Because the Company is significantly impacted by the crude oil markets, the Company performed an impairment evaluation of its oil and gas properties and recognized a non-cash impairment of $3,382,741 in December 2001 to account for those properties whose investment would not be recoverable under current pricing assumptions, as defined by Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"). Although the reduction in oil pricing impacted this evaluation, the specific properties involved in the writedown had minimal volumes of hydrocarbons and little chance of recovery from any future price increases. Because no event occurred in 2000 or 1999 which would trigger an impairment evaluation, no such evaluation was performed for those years. -33- (5) Cash Flow Data -------------- Supplemental cash flow information for the three years ended December 31, 2001 is summarized as follows: 2001 2000 1999 ---- ---- ---- Cash paid for Interest net of $65,314, $28,448 and $7,954 capitalized $2,034,152 $3,015,276 $ 758,695 ========= ========= ========= Income taxes $3,191,788 $7,490,000 $1,279,111 ========= ========= ========= (6) Long-term Debt -------------- Long-term debt at December 31, 2001 and 2000 is summarized as follows: 2001 2000 ---- ---- Term note due in 20 equal quarterly installments of $1,912,500 commencing April 1, 2000. Interest paid quarterly at varying rates. Certain oil and gas properties are pledged as collateral. $24,862,500 $32,512,500 Less current installments 7,650,000 7,650,000 ---------- ---------- Long-term debt $17,212,500 $24,862,500 ========== ========== 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, 2001 and 2000, interest on the bank term loan approximated 3.67% and 8.05%, respectively. The credit agreement contains various financial covenants related to working capital, net worth, and cash flow, and places certain limitations on the incurrence of additional debt and prohibits the payment of dividends. -34- (7) Employee Incentive Plans ------------------------ During 2000, 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 2000, general and administrative expense includes $1,020,023 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 made a cash payment of $1,332,835 to those electing employees. Additionally, at December 31, 2000, the Company had a liability of approximately $136,000 attributable to the remaining 11,000 stock participation units. In anticipation of a potential merger or sale of the Company, the remaining 11,000 stock participation units were exercised at $26.00 per share with the Company making a cash payment of $230,313. For 2001, general and administrative expense includes $93,500 for these remaining stock participation units and there is no remaining financial liability in connection with this plan. (8) Income Taxes ------------ Income tax expense consists of the following: Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Federal Current $2,100,000 $5,898,000 $2,227,000 Deferred 1,931,000 1,527,000 333,000 State 472,000 745,000 233,000 --------- --------- --------- $4,503,000 $8,170,000 $2,793,000 ========= ========= ========= -35- Income tax expense for the three years ended December 31, 2001 differs from the amount computed by applying the applicable U.S. corporate income tax rate of 34% in 2001 and 1999 and 35% in 2000 to income before income taxes. The reasons for this difference are as follows: Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Income tax expense at U.S. statutory rate $4,235,320 $7,795,583 $2,430,196 State income taxes net of Federal income tax effects 297,000 484,250 153,780 Allowable depletion in excess of cost depletion (32,109) (8,750) (135,215) Items not related to current year earnings -0- (109,484) 305,751 All other items 2,789 8,401 38,488 -------- --------- --------- Income tax expense $4,503,000 $8,170,000 $2,793,000 ========= ========= =========
The components of the net deferred tax liability were as follows: December 31, 2001 2000 ---- ---- Oil and gas property assets $3,110,000 $1,227,000 Employee incentive plan -0- (48,000) --------- --------- Net deferred tax liability $3,110,000 $1,179,000 ========= ========= (9) Employee Benefit Plans ---------------------- The Company adopted a noncontributory defined contribution retirement plan for all full-time employees age 21 or older who have completed one year of service. The plan provides for a minimum annual contribution by the Company equal to 3% of an employee's base salary plus overtime compensation. At its discretion, the Company may also make supplemental contributions to the plan. For calendar 1999, 2000 and 2001, the Company elected to contribute 5% for each employee covered by this plan. Under this plan, amounts equal to retirement plan expense are funded annually, which amounted to $129,551, $108,406, and $106,462, and respectively, for 2001, 2000 and 1999. The Company also has a profit sharing plan pursuant to Section 401 of the Internal Revenue Code, whereby participants may contribute a percentage of their compensation up to 15%. The Plan provides for a matching contribution by the Company equal to one-half of the employee's percentage contribution up to 10% of the employee's compensation. During 2001, 2000 and 1999, the Company's matching portion amounted to $113,281, $97,228 and $93,823 respectively. -36- (10) Contingencies and Commitments ----------------------------- The Company is a defendant in certain non-environmental litigation arising from operations in the normal course of business. While it is not feasible to determine the outcome of these actions, it is the Company's opinion that the ultimate outcome of the litigation will not have a material adverse effect on the financial position or results of operations of the Company. All of the Company's operations are generally subject to Federal, state and local environmental regulations. To the best of management's knowledge, the Company is in substantial compliance with such laws and regulations. The Company leases office space and certain equipment under various operating leases which expire over the next four years. All leases require the payment of taxes and insurance, and the office lease requires the Company to pay its pro rata share of increases in maintenance expense above that prevailing in base years. Management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Rent expense for the three years ended December 31, 2001 was $561,272, $453,440 and $362,443, respectively. Minimum payments for operating leases having initial or noncancellable terms in excess of one year are as follows: 2002 $ 386,968 2003 367,510 2004 342,435 2005 264,365 --------- Total minimum payments $1,361,278 ========= -37- (11) Quarterly Financial Data (Unaudited) ----------------------------------- Summarized quarterly financial data for the years ended December 31, 2001 and 2000 as follows: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Year Ended December 31, 2001 Revenues $17,520,111 $14,190,988 $12,848,953 $ 9,598,574 Operating Income (a) 8,926,226 4,657,499 3,193,878 (2,961,164) Net Income 5,673,213 2,803,627 2,004,257 (2,527,274) Net Income per common share 1.16 .57 .41 (.51) Year Ended December 31, 2000 Revenues $11,020,146 $11,566,965 $15,205,773 $16,049,373 Operating Income (a) 4,224,089 4,347,088 7,413,165 8,136,046 Net Income 2,475,864 2,601,185 4,623,290 4,402,754 Net Income per common share .51 .53 .95 .90 (a) Operating income excludes interest income and expense from pre-tax income.
(12) 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, ------------------- 2001 2000 ---- ---- Proved undeveloped leaseholds $ 3,960,520 $ 1,945,518 Producing properties 184,285,648 160,626,821 ----------- ----------- 188,246,168 162,572,339 Accumulated depreciation and amortization 104,165,363 86,828,540 ----------- ----------- Net capitalized costs $ 84,080,805 $ 75,743,799 =========== =========== Costs Incurred -------------- A summary of costs incurred in oil and gas acquisition, exploration and development activities follows: Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Acquisition of properties Proved undeveloped $ 2,015,003 $ 243,885 $ 2,691,308 Proved 11,108,791 7,531,915 40,589,276 Exploration costs 257,394 531,192 1,091,521 Development costs 12,469,097 5,058,262 1,010,969 ---------- ---------- --------- $25,850,285 $13,365,254 $45,383,074 ========== ========== ========== -38- (12) Supplemental Oil and Gas Disclosures (Unaudited) continued ---------------------------------------------------------- Results of Operations --------------------- The results of operations from oil and gas producing activities are as follows: Years ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- Sales $53,363,128 $52,738,994 $23,392,231 Production costs (a) (17,953,047) (14,168,808) (7,839,205) Exploration expenses (2,434,535) (2,228,067) (1,668,191) Depreciation and amortization (13,998,648) (10,053,256) (5,780,413) Impairment of proved oil and gas properties (3,382,741) -- -- ---------- ---------- ---------- 15,594,157 26,288,863 8,104,422 Income tax expense (5,302,013) (9,201,101) (2,744,385) ---------- ---------- ---------- Results of operations from oil and gas producing activities $10,292,144 $17,087,762 $ 5,360,037 ========== ========== ========== (a) Includes lifting costs, severance taxes and advalorem taxes.
Oil and Gas Reserve Quantities ------------------------------ The following unaudited tables represent the Company's estimates of its proved oil and gas reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates were evaluated by the Company's staff of petroleum engineers and audited by independent petroleum engineers. It is their opinions that the reserve quantity and present value information in the following tables complies with the applicable rules and regulations of the SEC. All of the Company's reserves are located within the United States. -39- (12) Supplemental Oil and Gas Disclosures (Unaudited) continued ---------------------------------------------------------- Proved Developed and Oil Gas Undeveloped Reserves (Barrels) (MCF) - -------------------- --------- ----- Total as of December 31, 1998 5,019,452 12,904,100 Revisions of previous estimates 1,874,514 559,013 Purchases of reserves 4,706,560 18,008,548 Extensions and discoveries 930,732 2,928,373 Production (990,877) (2,289,564) Sales of reserves in place (20,351) (183,610) ---------- ---------- Total as of December 31, 1999 11,520,030 31,926,860 Revisions of previous estimates 1,549,760 1,146,955 Purchases of reserves 760,874 1,498,830 Extensions and discoveries 1,230,077 2,196,522 Production (1,369,456) (3,915,325) Sales of reserves in place (80,935) (776,122) ---------- ---------- Total as of December 31, 2000 13,610,350 32,077,720 Revisions of previous estimates (2,469,412) 1,478,240 Purchases of reserves 1,037,087 1,345,844 Extensions and discoveries 268,690 849,327 Production (1,446,375) (4,931,751) ---------- ---------- Total as of December 31, 2001 11,000,340 30,819,380 ========== ========== Proved Developed Reserves - ------------------------- December 31, 1999 10,072,772 28,917,190 December 31, 2000 11,085,442 29,362,127 December 31, 2001 9,423,192 27,524,641 Standardized Measure - -------------------- The standardized measure of discounted future cash flows from proved oil and gas reserves determined in accordance with rules prescribed by the Financial Accounting Standards Board is summarized as follows: Years ended December 31, ------------------------ 2001 2000 1999 (000's) (000's) (000's) ------- ------- ------- Future cash inflows $ 270,608 $ 655,640 $ 338,098 Future production costs (125,842) (201,244) (134,474) Future development costs (14,816) (17,611) (11,605) --------- --------- --------- 129,950 436,785 192,019 Future income tax (expense) (19,177) (127,452) (39,884) --------- --------- --------- Future net cash flows 110,773 309,333 152,135 10% annual discount for estimated timing of cash flows (39,390) (117,755) (54,926) --------- --------- --------- Standardized measure of discounted future net cash flows $ 71,383 $ 191,578 $ 97,209 ========= ========= ========= -40- (12) Supplemental Oil and Gas Disclosures (Unaudited) continued ---------------------------------------------------------- The average prices for oil and gas used to calculate future cash inflows at December 31, 2001 were $17.62 per barrel and $2.49 per mcf, respectively. The following are the principal sources of changes in the standardized measure of discounted future net cash flows. Years ended December 31, ------------------------ 2001 2000 1999 (000's) (000's) (000's) ------- ------- ------- Standardized measure - beginning of year $ 191,578 $ 97,209 $ 24,490 Sales of oil and gas produced, net of production costs (35,410) (38,570) (15,553) Net changes in prices and production costs (164,336) 115,134 35,657 Extensions, discoveries, and improved recovery, less related costs 1,709 20,979 9,151 Changes in future development costs (9,968) (3,336) (228) Development costs incurred 4,097 2,137 60 Revisions of previous quantity estimates (14,200) 26,108 15,202 Accretion of discount 27,051 9,721 2,416 Purchase of proved reserves 4,645 16,399 52,739 Sale of proved reserves -0- (799) (394) Net change in income taxes 66,577 (53,449) (25,817) Other (360) 45 (514) --------- --------- --------- Standardized measure - end of year $ 71,383 $ 191,578 $ 97,209 ========= ========= ========= -41- Schedule II ----------- MAYNARD OIL COMPANY AND SUBSIDIARY Valuation and Qualifying Accounts Three Years Ended December 31, 2001 Charged to Beginning Cost and Ending Description Balance Expenses Deductions Balance - ----------- --------- ---------- ---------- -------- Allowance for Doubtful Accounts - (a) - ------------------------------------- December 31, 1999 $ 53,000 -- -- $ 53,000 ======== ========= ===== ======== December 31, 2000 $ 53,000 -- -- $ 53,000 ======== ========= ===== ======== December 31, 2001 $ 53,000 $ 259,949 $-- $312,949 ======== ========= ===== ======== (a) Valuation account deducted in the balance sheet from trade accounts receivable. -42- MAYNARD OIL COMPANY AND SUBSIDIARIES Index to Exhibits Sequentially Exhibit Numbered Number Page - ------- ------------ 21.1 List of subsidiaries of the Company as of December 31, 2001 44 -43- EX-10.4 3 m32257x104.txt FORM OF DIRECTOR INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT THIS AGREEMENT, made and entered into this 12th day of December, 2001 ("Agreement"), by and between Maynard Oil Company, a Delaware corporation (the "Company"), and Fred Oliver ("Indemnitee"): WHEREAS, qualified persons are reluctant to serve publicly-held corporations as directors or officers or in other capacities, unless they are provided with adequate protection against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of such corporations; WHEREAS, the uncertainties related to obtaining adequate insurance and indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, it is reasonable, prudent and necessary for the Company to obligate itself contractually to indemnify such persons to the fullest extent permitted by law, so that such persons will serve or continue to serve the Company free from undue concern that they will not be adequately indemnified; WHEREAS, the Company and the Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, associated with lawsuits filed against persons serving the Company, and the resultant substantial time, expense and anxiety spent and endured in defending lawsuits bears no reasonable relationship to the compensation received by such persons, and thus poses a significant deterrent and increased reluctance on the part of experienced and capable individuals to serve the Company; WHEREAS, the By-laws of the Company and the laws of the State of Delaware provide for the indemnification of directors, officers, agents and employees of the Company and specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and persons providing services to it; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be indemnified according to the terms of this Agreement; NOW, THEREFORE, in consideration of the premises and promises contained herein, the parties agree as follows: Section 1. Services by Indemnitee. Indemnitee agrees to serve as a director of the Company, and, if he subsequently consents, at its request or for its benefit, as a director, officer, employee, agent or fiduciary of certain other corporations and entities. Nothing contained herein shall entitle or require Indemnitee to continue in Indemnitee's present position or any future position with the Company. Section 2. Term of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten years after the date that Indemnitee ceases to hold a Corporate Status or (b) 120 days after the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 8 of this Agreement. Section 3. Indemnification 3.1 General. The Company shall hold harmless and indemnify Indemnitee against all Liabilities and advance to Indemnitee all Expenses to the fullest extent permitted by the General Corporation Law of the State of Delaware, or by any amendment thereof (but in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification than provided prior to such amendment), or by other statutory provisions authorizing or permitting such indemnification applicable from time to time hereafter. 3.2 Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3.2 if, by reason of Indemnitee's Corporate Status, Indemnitee is, or is threatened to be, made a party to any threatened, pending or completed Proceeding, other than a Proceeding by or in the right of the Company. Under this Section 3.2, Indemnitee shall be indemnified against all Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe the conduct was unlawful. 3.3 Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3.3, if, by reason of Indemnitee's Corporate Status, Indemnitee is, or is threatened to be, made a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Subject to the last sentence of this Section 3.3, Indemnitee shall be indemnified against all Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. No indemnification of Liabilities shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such Proceeding was brought, determines such indemnification is proper. 3.4 Indemnification for Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee's Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection therewith. 3.5 Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Liabilities but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify -2- Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. Section 4. Advancement of Expenses. The Company shall advance all Expenses incurred or to be incurred by or on behalf of Indemnitee in connection with any Proceeding within fifteen (15) days after the receipt by the Company of a statement from Indemnitee requesting such advance from time to time, whether prior to or after final disposition of such Proceeding. Each such statement shall reasonably evidence the Expenses incurred or to be incurred by Indemnitee. The Indemnitee hereby undertakes to repay any Expenses advanced, if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Section 5. Specific Limitations on Indemnity. Indemnitee shall not be entitled to indemnification under this Agreement: (a) In respect to remuneration paid to or advantage gained by the Indemnitee, if it shall be determined by final judgment or other final adjudication that the Indemnitee was not legally entitled to such remuneration or advantage; (b) On account of the Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct; or (c) Prior to a Change in Control in respect of any Proceeding initiated by the Indemnitee against the Company or any director or officer of the Company, unless the Company has joined in or consented to the initiation of such Proceeding, except (i) as provided in Section 8 hereof, (ii) in respect of any counterclaims made against Indemnitee in any such Proceeding and (iii) to the extent Indemnitee seeks contribution or apportionment of an award or settlement against Indemnitee and against the Company and/or any other director or officer of the Company. Section 6. Procedure for Determination of Entitlement to Indemnification. 6.1 Initial Request. To obtain indemnification under this Agreement in connection with any Proceeding, and for the duration thereof, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of any request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. -3- 6.2 Method of Determination. Upon written request by Indemnitee for indemnification pursuant to Section 6.1 hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in such case: (a) if a Change in Control shall have occurred, by Independent Counsel (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case in the manner provided for in clauses (b) or (c) of this Section 6.2) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; (b) if a Change of Control shall not have occurred, (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors, or (ii) if a quorum of the Board consisting of Disinterested Directors is not obtainable, or even if such quorum is obtainable, if such quorum of Disinterested Directors so directs, either (x) by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (y) by the stockholders of the Company, as determined by such quorum of Disinterested Directors, or a quorum of the Board, as the case may be; or (c) as provided in Section 7.2 of this Agreement. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. 6.3 Selection, Payment and Discharge of Independent Counsel. If required, Independent Counsel shall be selected as follows: (a) if a Change of Control shall not have occurred, Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of Independent Counsel so selected; or (b) if a Change of Control shall have occurred, Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event clause (a) shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within seven (7) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, Independent Counsel so selected may not serve as Independent Counsel, unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 6.1 hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware, or other court of competent jurisdiction, for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 6.2 hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with its actions pursuant to this Agreement, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6.3, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement date of any judicial proceeding or arbitration pursuant to Section 8.1 of this Agreement, Independent Counsel shall be discharged -4- and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 6.4 Cooperation. Both the Company and the Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee or the Company, as the case may be, and reasonably necessary to such determination. Any reasonable costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification). Section 7. Presumptions and Effects of Certain Proceedings. 7.1 Burden of Proof. In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section- 6.1 of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. 7.2 Failure to Determine Entitlement. If the person, persons or entity empowered or selected under Section 6 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith require(s) such additional time for the obtaining or evaluating of documentation or information relating thereto; and provided, further, that the foregoing provisions of this Section 7.2 shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6.2 of this Agreement and if (a) within fifteen (15) days after receipt by the Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (b) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat. 7.3 Effect of Other Proceedings. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee -5- reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that the conduct was unlawful. Section 8. Remedies of Indemnitee. 8.1 Adjudication. In the event that (a) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (b) advancement of Expenses is not timely made pursuant to Section 4 of this Agreement, (c) payment of indemnification is not made pursuant to Section 3 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (d) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Sections 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication, in any court of competent jurisdiction selected by Indemnitee within or without the State of Delaware, of Indemnitee's entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence any action under this Section 8.1 within 180 days following the date on which Indemnitee first has the right to commence such action hereunder. 8.2 De Novo Review. In the event that a determination shall have been made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to Section 8.1 shall be conducted in all respects as a de novo trial or arbitration on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any such judicial proceeding or arbitration, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or the advancement of Expenses. 8.3 Company Bound. If a determination shall have been made or deemed to have been made pursuant to Section 6 or 7 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration absent (a) a misstatement of a material fact by Indemnitee, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification or the furnishing of information or (b) a prohibition of such indemnification under applicable law. The Company shall be precluded from asserting in any such judicial proceeding or arbitration that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all provisions of this Agreement. 8.4 Expenses of Adjudication. In the event that Indemnitee seeks an adjudication or an award to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the type described in the definition of Expenses) actually and reasonably incurred by Indemnitee in such adjudication or arbitration, but only if Indemnitee prevails therein. If it shall be determined in such adjudication or arbitration -6- that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Indemnitee shall be entitled to recover expenses from the Company on a pro rata basis. Section 9. Non-Exclusivity; Subrogation. 9.1 Non-Exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation or by-laws of any corporation, any other agreement, a vote of stockholders, a resolution of directors or otherwise. 9.2 Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. 9.3 No Duplicative Payment. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. Section 10. Insurance. The Company hereby covenants and agrees that during the term hereof, the Company shall obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. The Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is an officer but not a director of the Company; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. Notwithstanding the provisions of this Section, the Company shall have no obligation to obtain or maintain D&O Insurance, if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusion so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by an affiliate of the Company. If, at the time of the receipt of the notice of the commencement of a Proceeding, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the applicable policy. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay on behalf of the Indemnitee all amounts payable as a result of such Proceeding in accordance with the terms of such policy. Section 11. Escrow Fund. In the event of a Change in Control, as collateral security for its obligations hereunder, the Company shall dedicate and maintain for the benefit of Indemnitee, for a period of five years following the Change in Control, an escrow account in an -7- aggregate amount of five hundred thousand dollars ($500,000) by depositing assets or bank letters of credit in escrow or reserving lines of credit that may be drawn down by an escrow agent in said amount (the "Escrow Reserve") . The terms of the escrow agreement shall provide that upon a Change in Control (a) the escrow shall not be revoked or the principal of the Escrow Reserve invaded without the written consent of the Indemnitee, (b) the escrow agent shall advance within two business days of a request by the Indemnitee any and all Expenses, (c) the escrow agent shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (d) all unexpended funds in such escrow shall revert to the Company upon a final determination by a court of competent jurisdiction that the Indemnitee has been fully indemnified under the terms of this Agreement. The escrow agent shall be chosen by the Indemnitee. The Company may in its sole discretion establish an Escrow Reserve in anticipation of a Change in Control. Promptly following the establishment of the Escrow Reserve, the Company shall provide Indemnitee with a true and complete copy of the agreement relating to the establishment and operation of the Escrow Reserve, together with such additional documentation or information with respect to the Escrow Reserve as Indemnitee may from time to time reasonably request. Promptly following the establishment of the Escrow Reserve, the Company shall deliver a copy of this Agreement to the escrow agent for the Escrow Reserve to evidence to that agent that Indemnitee is a beneficiary of that Escrow Reserve and shall deliver to Indemnitee the escrow agent's signed receipt evidencing that delivery. Nothing in this Section 11 shall relieve the Company of any of its obligations under this Agreement. Section 12. Company May Assume Defense. In the event the Company shall be obligated to pay the Expenses of any Proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel reasonably acceptable to the Indemnitee, upon the delivery to the Indemnitee of written notice of its election to do so. After delivery of such notice, the Company shall not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same Proceeding; provided, however, that (a) the Indemnitee shall have the right to employ counsel in any such Proceeding at the Indemnitee's expense and (b) if (i) the employment of counsel by the Indemnitee has been previously authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. Section 13. Definitions. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective -8- Date (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least a majority of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. (b) "Corporate Status" means the position of a person as a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise held at the request of the Company and shall include any position which imposes duties on, or involves services by, such person with respect to an employee benefit plan, its participants or beneficiaries. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Effective Date" means the date of this Agreement. (e) "Expenses" means all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types of customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. (f) "Independent Counsel" means a law firm, or a member of a law firm, that is nationally recognized as experienced in matters of corporation law and-neither presently is, nor in the past five years has been, retained to represent either (i) the Company or Indemnitee in any matter material to either such party or (ii) any other party to the -9- Proceeding giving rise to a claim for indemnification hereunder. The term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Liabilities" means any judgments, fines, penalties, or similar payments or amounts paid or incurred by Indemnitee in connection with any Proceeding, and amounts paid or incurred by Indemnitee or on Indemnitee's behalf in settlement of any Proceeding (including any excise taxes assessed upon Indemnitee with respect to any employee benefit plan) and all Expenses. (h) "Proceeding" means any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, pending or threatened, whether civil, criminal, administrative or investigative, except one initiated by the Indemnitee, unless the Board of Directors consents thereto. Section 14. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom such notice or other communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: Fred Oliver 4625 Greenville Ave. Suite 205 Dallas, TX 75206 (b) If to the Company, to: Maynard Oil Company 8080 North Central Expressway Suite 660 Dallas, Texas 75206 Attention: Secretary or to such other address as may have been furnished to the other party. Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, the Indemnitee shall notify the Company of the commencement or the threat of commencement thereof. -10- Section 15. General Provisions. 15.1 Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. The Company shall require and cause any successor to substantially own all of the business or assets of the Company, by written agreement in form and substance satisfactory to the Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 15.2 No Adequate Remedy. The parties acknowledge that it is impossible to measure in money the damages which will accrue to either party by reason of a failure to perform any of the obligations under this Agreement. Therefore, if either party shall institute any action or proceeding to enforce the provisions hereof, the party against whom such action or proceeding is brought hereby waives the claim or defense that the party bringing such action has an adequate remedy at law, and the party against whom the action is brought shall not urge in any action or proceeding the claim or defense that the other party has an adequate remedy at law. 15.3 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. 15.4 Severability. If any provision or provisions of this Agreement shall be held to be invalid or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the remaining provisions of this Amendment (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid or unenforceable. 15.5 Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No amendment, alteration, rescission or replacement of this Agreement or any provision hereof shall be effective as to Indemnitee with respect to any action taken or omitted by such Indemnitee in Indemnitee's Corporate Status before such amendment, alteration, rescission or replacement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. The party shall not be deemed to have waived a right or remedy provided in or relating to this Agreement, unless the waiver is in writing and duly executed by the party. 15.6 Entire Agreement. This Agreement as to its subject matter, exclusively and completely states the rights and duties of the parties, sets forth their entire understanding and merges all prior and contemporaneous representations, promises, proposes, discussions and understandings by or between the parties. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above first above written. MAYNARD OIL COMPANY By: ------------------------------ ATTEST: James G. Maynard, Chairman By ------------------------------------------ WITNESS: - --------------------------------------------- -12- EX-21.1 4 m32257x21.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE COMPANY AS OF December 31, 2001 Percentage of Jurisdiction of Voting Securities Name Incorporation Owned by Company ---- --------------- ----------------- M.O.C. Resources, Inc. Nevada 100% -44- -----END PRIVACY-ENHANCED MESSAGE-----