-----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, GJSqyK2qFFCFdgnOOfWSaVrCJxLDHkpu3cqNS/G0A7oiDBznqoZDEkCwNo7FDdST QzwJCxRTj6SCH56fgKc4nw== 0000914760-98-000078.txt : 19980401 0000914760-98-000078.hdr.sgml : 19980401 ACCESSION NUMBER: 0000914760-98-000078 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: SEC FILE NUMBER: 000-05704 FILM NUMBER: 98581755 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 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, 1997 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 17, 1998 was $21,257,000 (based upon an estimate that 43.5% of the shares are so owned by non-affiliates and upon the closing price for the Common Stock as reported by NASDAQ (NMS)). The number of shares outstanding of the Registrant's $.10 par value common stock as of March 17, 1998 was 4,889,450 shares. The following documents are incorporated into this Form 10-K by reference: Proxy Statement for Annual Meeting of Stockholders to be held on May 20, 1998 - Part III of Form 10K. PART I. ITEM 1. BUSINESS THE COMPANY Maynard Oil Company is a Delaware corporation which was organized in 1971 to continue the oil and gas operations conducted on an individual basis by its founders, including Mr. James G. Maynard, its Chairman of the Board and Chief Executive Officer. The Company's principal executive office is located at 8080 N. Central Expressway, Suite 660, Dallas, Texas 75206, and its telephone number is (214) 891-8880. Unless the context requires otherwise, as used herein, the term "Company" refers to Maynard Oil Company and its subsidiaries. The Company's principal line of business is the production and sale of, and exploration and development of, crude oil and natural gas. The Company's oil and gas operations are conducted exclusively in the United States, primarily in the states of Texas and Oklahoma. OIL AND GAS OPERATIONS The Company is an independent oil and gas company, engaged primarily in the production and exploration phases of the oil and gas business. Company operations include acquiring, exploring, developing, and operating crude oil and natural gas properties. The Company seeks to accomplish its overall goal of increasing hydrocarbon reserves and cash flow by selectively acquiring and exploiting producing oil and gas properties. When possible, the Company acquires producing properties on which it can act as operator, and thus, supervise production and development activities. Although the Company was unsuccessful during 1997 in its quest for significant reserve acquisitions, the year did bring the opportunity to build cash reserves for additional acquisitions in future years. The availability of a ready market for the sale of oil and gas from the Company's wells depends on numerous factors beyond the control of the Company, including the amount of domestic production, the importation of oil, the proximity of the Company's property to natural gas pipelines and the capacity of such pipelines, the market for other competitive fuels, fluctuations in seasonal demand, and governmental regulations relative to hydrocarbon production and pricing. The production of oil and gas is also subject to the laws of supply and demand, and therefore, is subject to purchaser cutbacks and price reductions during periods of oversupply. At December 31, 1997, approximately 77% of the Company's estimated proved reserves and 1997 production, were attributable to crude (net equivalent barrel "NEB" uses a conversion ratio of six thousand cubic feet of gas (MCF) to one net equivalent barrel of oil) and consequently, the Company is primarily impacted by oil markets. The market price for natural gas has fluctuated significantly from month to month and year to year for the past several years. The Company cannot predict gas price movements with any certainty. During the year ended December 31, 1997, three customers, Total Petroleum, Koch Oil Company and Amoco Production Company, accounted for approximately 20%, 18% and 14%, respectively, of consolidated revenues. The Company does not believe it would be adversely affected by the loss of any of its oil or gas purchasers. Except for curtailed exploration and production activity occasionally experienced in severe weather and normal curtailments of gas sales in summer months, the Company does not consider its business to be seasonal and does not carry significant amounts of inventory. During 1997, a total of fourteen wells were drilled, five exploratory wells, and nine development wells. Below is a brief description of the work completed during the year and the results thereof. Four of the nine development wells were drilled on projects which are owned 100% by the Company. The four fields involved are Shafter Lake and Fullerton (both in Andrews County, Texas), Block 31 (Crane County, Texas) and Teas (Garza County, Texas). Two of these four wells were productive oil wells, which together tested at the rate of 79 barrels of oil per day (BOPD), another was a service well in an active waterflood unit, and the fourth resulted in a non-commercial well. Of the remaining five development wells, one was a lease line cooperative well being drilled to extend a secondary recovery project at Shafter Lake in Andrews County, Texas and two others were infill wells drilled on the Claytonville Unit in Fisher County, Texas. Two additional development wells were drilled and completed as gas wells by Chevron in the Knox Field of Grady County, Oklahoma where the Company owns a working interest of 10.5%. Five exploratory wells were drilled in 1997, four of which were dry holes, while the fifth is a test drilled in Johnston County, Oklahoma that is currently being evaluated for completion. GENERAL The oil and gas business involves intense competition in all of its phases and, because of its size, the Company is not a significant competitive factor in the industry. In its efforts to acquire property rights, the Company competes with many companies having access to substantially greater financial resources and larger technical staffs. The Company's oil and gas exploration effort often involves exploratory drilling on unproven acreage involving high risks. There is no assurance that any oil or gas production will be obtained, or that such production, if obtained, will be profitable. The cost of drilling, completing and operating wells is often uncertain. Drilling may be curtailed or delayed as a result of many factors, including title problems, weather conditions, delivery delays, and shortages of pipe and equipment. The Company's operations are subject to potential hazards, inherent in the exploration for and production of hydrocarbons, including blowouts and fires. These and other events can cause a suspension of drilling operations, severe damage to equipment or surrounding property, personal injury, and perhaps even a loss of life. The Company may be subject to liability for pollution and other damages and is subject to statutes and regulations relating to environmental and other matters. While the Company maintains insurance against certain of these risks, there are certain risks against which it cannot insure, or which it may elect not to insure due to premium costs, or for other reasons. Substantial uninsured liabilities to third parties may be incurred. The oil and gas operations of the Company are subject to local, state and federal environmental regulations. To date, compliance with these regulations by the Company has had no material effect on the Company's capital expenditures. The Company is unable to assess or predict at this time the impact that compliance with such environmental regulations may have on its future capital expenditures, earnings and competitive position. The Company presently estimates that it will not make any material capital expenditures for environmental control facilities for its fiscal year ending December 31, 1998. Many facets of the Company's operations are subject to governmental regulations. All of the Company's oil and gas properties are located in states in which oil and gas production is regulated by state production and conservation laws and regulations. These laws and regulations in many instances also require permits for the drilling of wells, the spacing of wells, prevention of waste, conservation of oil and natural gas and various other requirements. The Company's activities are subject to taxation at all levels of government, including taxes on income, severance of minerals, and payroll. Laws governing taxation, protection of the environment, crude oil and natural gas operations and production, and other crucial areas are all subject to modification at any time. At March 17, 1998 the Company employed approximately 35 persons, including one geologist and five petroleum engineers. ITEM 2. PROPERTIES The Company's executive offices are presently located at 8080 N. Central Expressway, Suite 660, Dallas, Texas occupying approximately 11,300 square feet of space under a lease agreement which expires in April, 2000. The Company's principal property holdings consist of leasehold interests in oil and gas properties located in the United States, primarily in Oklahoma and Texas. The leaseholds are continued in force so long as production from lands under lease is maintained. The Company believes that it has satisfactory title to its oil and gas properties. Such properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes, and other burdens and minor encumbrances, easements, and restrictions. The Company believes that such burdens do not materially detract from the value of the properties or materially interfere with their use in the operation of the Company's business. The Company has pledged certain of its oil and gas properties to secure its term loan. ESTIMATED PROVED RESERVES, FUTURE NET REVENUES AND PRESENT VALUE Reflected below are the estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas owned by the Company as of December 31, 1997, 1996, and 1995. Such reserve information has been prepared by the Company's staff of petroleum engineers and audited by the independent petroleum consulting firm of Netherland, Sewell, and Associates, Inc. No reserve reports with respect to the Company's proved net oil or gas reserves were filed with any federal authority or agency during the fiscal year ended December 31, 1997.
December 31 ----------------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Oil(MB Gas(MMCF) Oil(MB) Gas(MMCF) Oil(MB) Gas(MMCF) Proved Developed 6,761.9 12,001.6 8,650.0 13,442.2 8,712.8 18,214.8 Proved Undeveloped 386.5 733.3 324.4 1,143.0 159.7 649.2 Total Proved Reserves 7,148.4 12,734.9 8,974.4 14,585.2 8,872.5 18,864.0
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, 1997, 1996, and 1995. 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, 1997, 1996, and 1995 respectively, used in the estimates were $15.72, $24.66, and $18.13 per barrel of oil and $2.05, $3.59, and $1.65 per mcf of natural gas. Lease and well operating costs are based upon actual operating expense records.
December 31 1997 1996 1995 Future Present Future Present Future Present Net Value Net Value Net Value Expressed in 000's Revenue @ 10% Revenue @ 10% Revenue @ 10% Proved Developed $59,789 $41,357 $152,508 $98,184 $96,297 $65,235 Proved Undeveloped 2,848 1,203 8,101 4,026 2,478 1,075 Total Proved Reserves $62,637 $42,560 $160,609 $102,210 $98,775 $66,310
Amounts presented in the tables above are before the effects of taxes. PRODUCTION, SALES PRICES AND COSTS The following table sets forth the Company's net oil and gas production, average sales prices and production costs for the three years ended December 31, 1997.
December 31 1997 1996 1995 Production: Oil (MB) 1,106.0 1,212.4 957.9 Gas (MMCF) 1,957.1 2,890.1 2,720.4 Average Sales Prices: Oil (per BBL) $19.38 $20.39 $16.98 Gas (per MCF) $ 2.58 $ 2.03 $ 1.57 Average Production Costs: Per net equivalent barrel of oil (1)(2) $ 7.07 $ 5.95 $ 5.98 (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, 1997, the Company owned an interest in approximately 1,131 gross (291.7 net) wells, of which 1,102 gross (285.8 net) are oil wells and 29 gross (5.9 net) are gas wells, located on approximately 29,140 gross (12,786 net) producing acres. UNDEVELOPED ACREAGE The following table sets forth the Company's gross and net undeveloped acreage as of December 31, 1997. Undeveloped Acreage Gross Net ----- ----- Colorado . . . . . . . . . . . . . . . . 80 10 Louisiana . . . . . . . . . . . . . . . . 80 40 North Dakota . . . . . . . . . . . . . . 62 4 Oklahoma . . . . . . . . . . . . . . . . 135 70 Texas . . . . . . . . . . . . . . . . . . 12,118 3,380 Wyoming . . . . . . . . . . . . . . . . . 2,376 809 Total . . . . . . . . . . . . . . . . . . 14,851 4,313 DRILLING ACTIVITY The following table sets forth the results of the Company's drilling activity during the three years ended December 31, 1997.
Exploratory Development Total Gross Net Gross Net Gross Net December 31, 1997 Productive 0 .000 8 3.469 8 3.469 Dry 4 .663 1 1.000 5 1.663 Total 4 .663 9 4.469 13 5.132 December 31, 1996 Productive 1 .063 9 3.856 10 3.919 Dry 1 .333 0 .000 1 .333 Total 2 .396 9 3.856 11 4.252 December 31, 1995 Productive 3 .563 12 5.465 15 6.028 Dry 2 .250 0 .000 2 .250 Total 5 .813 12 5.465 17 6.278
At March 17, 1998, and December 31, 1997, the Company had one gross (.125 net) exploratory well in the process of being drilled. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in minor lawsuits that have arisen in the ordinary course of business. The Company does not expect any of these to have a material adverse effect on the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the Company's executive officers as of March 17, 1998, is set forth in the table below. Name Position Age Since James G. Maynard Chairman of the Board, 71 1971 Chief Executive Officer and Treasurer Glenn R. Moore President and Chief 60 1982 Operating Officer L. Brent Carruth Vice President of 64 1984 Operations Kenneth W. Hatcher Vice President of 54 1983 Finance Linda K. Burgess Corporate Secretary 49 1984 and Controller Mr. Maynard has been a director since 1971 and engaged in oil and gas exploration as an independent operator and private investor for the past 40 years. Mr. Moore has over 30 years experience in domestic and foreign oil and gas exploration and production. Prior to joining the Company in November, 1982, Mr. Moore served as President of Shannon Oil and Gas, Inc. and Hanover Petroleum Corporation. Mr. Carruth has over 30 years of petroleum engineering experience. Prior to joining the Company in January, 1984, he served for one year as Vice President of Operations of Cordova Resources. Preceding that, Mr. Carruth was a petroleum consultant for three years and served as Manager of Engineering of Texas Pacific Oil Company for eight years. Mr. Hatcher has over 25 years of finance and accounting experience in the oil and gas industry and is a Certified Public Accountant. Prior to joining the Company in February, 1983, Mr. Hatcher served as Controller and Vice President of Finance of Shannon Oil and Gas, Inc. for three years and as Controller and Vice President of Hanover Petroleum Corporation for four years. Ms. Burgess has in excess of 20 years of oil and gas accounting experience. Prior to joining the Company in May, 1984, Ms. Burgess served as Controller for Trans-Western Exploration Inc. for four years and as Controller for Energy Resources Oil and Gas for three years. Each officer's term of office expires on the date of the next annual meeting of the Board of Directors, or until his earlier resignation or removal. There are no family relationships among the executive officers listed, and there are no arrangements or understandings pursuant to which any of them were elected or appointed as officers. PART II ITEM 5. 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, 1997, were as follows:
1997 High Low 1996 High Low First Quarter $21 1/2 $12 1/2 First Quarter $ 8 1/2 $6 3/4 Second Quarter 16 1/2 10 Second Quarter 8 3/4 7 1/8 Third Quarter 16 10 Third Quarter 11 8 3/8 Fourth Quarter 14 1/2 10 1/4 Fourth Quarter 22 9 5/8 As of March 17, 1998, the Company had approximately 918 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 1997 1996 1995 1994 1993 Total revenue from oil and gas $26,477 $30,583 $20,540 $13,265 $14,861 Income before income taxes 6,613 15,758 4,354 1,196 1,452 Income before accounting change 4,455 9,954 3,023 943 867 Net income 4,455 9,954 3,023 943 2,254 Per share income (1) .91 2.04 .62 .19 .46 Total assets 78,286 81,257 72,838 48,071 43,798 Long-term debt 11,250 16,250 21,250 5,250 2,000 Shareholders' equity 53,509 49,054 39,104 36,137 35,203 Net working capital 17,503 12,942 (370) 4,079 9,510 Net cash provided by operating activities 11,250 13,921 11,558 5,696 6,738 (1) Basic and diluted earnings per share were the same for the years presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996 OVERVIEW After ending the 1996 year with almost $10 million in net income, which included a $6.2 million gain from the sale of non-strategic oil and gas properties, management knew it was going to have a difficult time matching financial results in future years without consummating a significant acquisition of property. Management was aware that volumes lost from the sale would result in lower revenues and operating results, but the strategy included banking the proceeds from these sales to help finance future acquisitions. The Company was not successful in acquiring a significant group of properties in 1997, and its financial results were not as good as the prior year. Besides the change in the physical make-up of the Company's properties, 1997 brought a year of declining product prices. An oil and gas company's ultimate worth is measured by the value of its hydrocarbon reserves in the ground and available for sale in the marketplace. Since 77% of Maynard Oil Company's hydrocarbon reserves are oil reserves (on a net equivalent barrel basis "NEB" which uses a conversion ratio of six thousand cubic feet of gas (MCF) to one equivalent barrel of oil), it is primarily impacted by oil markets. The Company manages its exposure to price fluctuations in the oil market through the use of short term forward sales contracts, generally for a term of thirty days. During the early part of 1996, the Company's management was pleased as oil prices rose from approximately $17.25 per barrel to an end of the year price amounting to $24.66 per barrel. During the first quarter of 1997, the Company received revenue payments in which oil prices peaked at $25.37 per barrel and averaged $22.72 per barrel for the first quarter. However, the oil markets continued to fluctuate for the balance of 1997, and the Company averaged $18.31 per barrel for the last nine months of the year. End of the year oil pricing was $15.72 per barrel, and the Company recognized a drop in the value of its oil in the ground amounting to almost $9 per barrel. Subsequent to year end, the price of crude oil recorded by the Company declined below $13.00 per barrel, which will have a negative effect on earnings and cash flow in the first quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES The Company acquired one minor group of oil properties during 1997 for approximately $700,000, but was unsuccessful in other producing property bids. The Company made its scheduled debt payments, continued its exploitation work and maintenance activities on existing properties and ended the year with an additional $2.7 million in cash. Thus, 31.4% of the Company's current balance sheet is represented by cash, and net working capital at year end 1997 was $17,503,000. Future acquisitions would be financed through the utilization of Company cash and bank debt. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996 Net income for 1997 was $4,455,355 compared to $9,953,783 for 1996. The current year included a gain from the sale of oil and gas properties amounting to $191,873 compared to a gain of $6,202,473 in the prior year. Oil and gas revenues declined 13% between the two years due primarily to the loss of volumes resulting from last year's property dispositions. Oil volumes dropped approximately 9% and gas volumes almost 32%. Oil and gas revenues were also negatively affected by a $1.01 per barrel reduction in oil prices, which was partially offset by a fifty-five cent per mcf increase in gas prices. Lease operating expenses increased $44,264 over 1996 levels. However, on a net equivalent barrel (NEB) basis, this relatively low amount equates to a rise in lifting costs of $1.12 per NEB. During 1997, approximately $835,000, or fifty-eight cents per NEB, was spent on maintenance costs compared with $486,000, or twenty-nine cents per NEB, a year ago. Additionally, advalorem taxes in the state of Texas grew from $582,000 (thirty-four cents per NEB) to $673,000 in 1997 (forty-seven cents per NEB). The balance of the operating expense increase related to higher lifting costs for recurring activities on certain identifiable properties. Exploration costs totaled $838,580 currently versus $201,509 last year. Seismic work in 1997 totaled $315,000 compared to only $11,000 in 1996 as the Company initiated two new seismic projects. Dry hole and abandonment costs were approximately $512,000 for four wells in 1997 compared with $180,000 in 1996 relating to one well and the cancellation of leaseholds acquired in prior years. General and administrative expenses were $1,337,484 less this year than in 1996, and the reduction represents the effect of an employee benefit plan whose impact on earnings is directly related to the Company's common stock price. In 1996, earnings were charged in excess of $888,000 to reflect a closing stock price of $18.75 per share. However, by the end of 1997, Maynard's stock price had retreated to $10.25 per share. Generally accepted accounting principles dictate the treatment of this item of administrative expense and require current year credits to the account. Thus, the Company ended 1997 with a liability of $497,375 which represents cash payments to which various employees covered by this plan are entitled whenever their employment by the Company is ended. Depreciation and amortization expense increased on a dollar basis from $7,894,388 in 1996 to $8,291,128. When converted to a net equivalent barrel basis, this amount grew from $4.66 per net equivalent barrel (NEB) a year ago to $5.79 per NEB currently. This resulted from oil and gas reserve revisions attributable to current pricing trends and also led to the impairment charges of $227,879 discussed in Note 1 to the Consolidated Financial Statements. Interest expense decreased $227,880 due to the scheduled note payments for 1997 and the resulting lower principal balance outstanding. Income tax expense was $3,646,870 less than the prior year due to the non-recurring nature of last year's property sales and the lower effective tax rate in 1997 compared to 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 LIQUIDITY AND CAPITAL RESOURCES During 1996, the Company sold its interest in approximately 130 producing oil and gas wells in Texas and Oklahoma for cash totaling $8,865,731 which resulted a pre-tax gain in excess of $6,000,000. Company management considered this group of properties not to be a major contributor to the future earning capacity of the Company, and thus, opted to sell these properties while searching for additional acquisitions which represent a better geographic and economic fit with the Company's core properties in southern Oklahoma and west Texas. Although the Company was not successful in 1996 in making an acquisition, it has positioned itself for future acquisition transactions by having over 26% of its year end assets in cash and additional borrowing capacity with its lender. Net cash provided by operating activities before changes in assets and liabilities rose approximately 19% to $11,741,897. Higher crude oil sales more than offset the net revenues given up from the sale of property referred to above. Net working capital at December 31, 1996 was $12,942,000 compared with a negative $370,000 at the end of 1995. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995 Net income for 1996 more than tripled 1995 levels, rising from $3,023,107 for 1995 to $9,953,783, primarily as a result of gains from the disposition of assets. The gain from disposals in 1995 was $991,875 versus $6,202,473 during the current year. The earnings increase was also aided by higher oil and gas revenues, which rose 49% to $30,583,133. Higher revenues were the result of increased production volumes and prices. Oil volumes rose almost 27% to 1,212,369 barrels and gas volumes over 6% to 2,890,061 mcf, both a result of the late 1995 producing property acquisition and prior year drilling. Pricing also shot up with oil selling at $20.39 per barrel compared to $16.98 per barrel a year ago and gas selling at $2.03 per mcf compared with $1.57 per mcf in 1995. Lease operating expenses increased $1,636,482 over 1995 levels. However, on a net equivalent barrel (NEB) basis lifting costs actually declined three cents per equivalent barrel. Exploration costs were 67% lower in 1996, totaling $201,509, versus $609,279 due to decreased exploratory activity. Very little seismic activity was performed in 1996, and only 3 exploratory wells were drilled during the current year. General and administrative expenses rose $974,586 from $925,822 in 1995 to $1,900,408 in 1996. The majority of this increase, $888,884, is represented by charges for an employee benefit plan whose value appreciates as the Company's common stock price rises. These charges represent a liability on the Company's books which will not be converted into cash until the various employees covered by this plan terminate their employment with the Company. Depreciation and amortization expense increased on a dollar basis from $6,879,672 in 1995 to $7,894,388. However, when converted to a net equilvalent barrel basis, this amount actually declined from $4.87 per net equivalent barrel (NEB) a year ago to $4.66 per NEB currently as a result of oil and gas reserve additions and revisions during the current period. In March and December, 1995, the Company acquired certain oil and gas properties and utilized additional bank borrowings to finance the transaction. Interest expense increased $692,542 due to this additional debt. Income tax expense rose to $5,804,370 in 1996 from $1,330,500 in 1995 due to improved earnings and the additional gain generated from the sale of properties during the current year. The Company had anticipated deferring tax expense on a substantial portion of the 1996 gain via the like-kind exchange rules. Qualified escrow accounts amounting to over $6,200,000 were established and replacement property was identified. However, the Company was unable to consummate the transaction, and subsequently, paid the tax due on the gain. OTHER Company management has attempted to assess whether its internal computer systems, as well as its vendors, purchasers, and bankers systems will be Year 2000 compliant without causing disruptions in the conduct of the Company's business. Based upon the investigative process employed by the Company to date and assurances from the Company's software vendor, the Company's computer systems are compatible with the year 2000. The Company will continue to review compatibility issues of those with whom it does business. The Company does not anticipate any major expenditures associated with the Year 2000 consequences. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is included on pages 18 through 35 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III The information required by Part III (Items 10 through 13) is set forth in the Company's Proxy Statement for the annual meeting of stockholders to be held on May 20, 1998, and is incorporated herein by reference. Information with respect to the Company's executive officers as of March 17, 1998, is set forth commencing on pages 8 and 9 hereof 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 Schedules on page 18 of this Report. REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the last quarter of 1997. EXHIBITS 3.1(a) Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1980 (the "1980 Form 10-K"), and incorporated herein by reference. (b) Certificate of Amendment of Certificate of Incorporation dated May 19, 1981, filed as Exhibit 3.1(b) to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1981 (the "1981 form 10-K"), and incorporated herein by reference. (c) Certificate of Amendment of Certificate of Incorporation dated May 22, 1987, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference. (d) Certificate of Amendment of Certificate of Incorporation dated June 3, 1993, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993, and incorporated herein by reference. 3.2(a) By-Laws, as amended, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference. (b) Amendment to the By-Laws, filed as Exhibit 3.2(b) to the 1981 Form 10-K and incorporated herein by reference. (c) Amendment to the By-Laws, filed as Exhibit 3.2(c) to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1984, and incorporated herein by reference. (d) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1987, and incorporated herein by reference. (e) Amendment to the By-Laws, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993 and incorporated herein by reference. 4.1 Credit agreement ($10,000,000 Term Facility) dated October 1, 1990 between Maynard Oil Company and First City, Texas - Dallas, filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1990, and incorporated herein by reference. 4.2 First Amendment to Loan Agreement dated November 19, 1991 between Maynard Oil Company and First City, Texas - Dallas, filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1992, and incorporated herein by reference. 4.3 Second Amendment to Loan Agreement, dated February 1, 1993 between Maynard Oil Company and Bank One, Texas, N.A. filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10- Q for the period ended June 30, 1993, and incorporated herein by reference. 4.4 Third Amendment to Loan Agreement, dated December 22, 1994 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994, and incorporated herein by reference. 4.5 Fourth Amendment to Loan Agreement, dated March 29, 1995 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10- Q for the period ended March 31, 1995, and incorporated herein by reference. 4.6 Restated Loan Agreement, dated December 20, 1995 between Maynard Oil Company and Bank One, Texas, N.A., filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995, and incorporated herein by references. 10.1 1989 Stock Participation Plan, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and incorporated herein by reference. 21.1 List of subsidiaries of the Company as of December 31, 1997, filed herewith. 27 Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAYNARD OIL COMPANY By \s\ James G. Maynard ------------------------------ James G. Maynard Chairman of the Board Date: March 31, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated in multiple counterparts with the same force and effect as if each person executing a separate counterpart has joined in execution of the same counterpart. /s/ James G. Maynard Chairman of the Board, March 31, 1998 James G. Maynard Chief Executive Officer & Treasurer /s/ Glenn R. Moore President and Chief March 31, 1998 Glenn R. Moore Operating Officer /s/ Kenneth W. Hatcher Vice President of Finance March 31, 1998 Kenneth W. Hatcher (Principal Financial and Accounting Officer) /s/ Robert B. McDermott Director March 31, 1998 Robert B. McDermott /s/ Ralph E. Graham Director March 31, 1998 Ralph E. Graham MAYNARD OIL COMPANY AND SUBSIDIARY Index to Consolidated Financial Statements and Schedules Page Financial Statements: Report of Independent Accountants Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Three years ended December 31, 1997 Consolidated Statements of Shareholders' Equity - Three years ended December 31, 1997 Consolidated Statements of Cash Flows - Three years ended December 31, 1997 Notes to Consolidated Financial Statements Financial Statement Schedules for the Three years ended December 31, 1997 II - Valuation and Qualifying Accounts All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Maynard Oil Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Maynard Oil Company and its subsidiary at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Dallas, Texas March 26, 1998 MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Balance Sheets
December 31, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 24,584,288 $21,817,447 Accounts receivable, trade 3,267,255 4,274,439 Other current assets 546,238 585,021 Total current assets 28,397,781 26,676,907 Property and equipment, at cost: Oil and gas properties, successful efforts method 104,031,352 103,223,604 Other property and equipment 548,668 540,736 104,580,020 103,764,340 Less accumulated depreciation and amortization ( 54,692,225) ( 49,183,946) Net property and equipment 49,887,795 54,580,394 $ 78,285,576 $ 81,257,301 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 5,000,000 $ 5,000,000 Accounts payable 4,271,662 3,592,404 Accrued expenses 1,402,021 1,710,681 Income taxes payable 220,798 3,431,476 Total current liabilities 10,894,481 13,734,561 Deferred income taxes 2,632,000 2,219,000 Long-term debt 11,250,000 16,250,000 Shareholders' equity: Preferred stock of $.50 par value. Authorized 1,000,000 shares; none issued -- -- Common stock of $.10 par value. Authorized 20,000,000 shares; 4,889,450 shares issued and outstanding 488,945 488,945 Additional paid-in capital 18,831,138 18,831,138 Retained earnings 34,189,012 29,733,657 Total shareholders' equity 53,509,095 49,053,740 Contingencies and commitments (note 9) $ 78,285,576 $ 81,257,301 See accompanying Notes to Consolidated Financial Statements.
MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Income
Years ended December 31, 1997 1996 1995 Revenues: Oil and gas sales and royalties $26,477,238 $30,583,133 $20,539,738 Interest and other 1,229,556 732,660 671,551 Gain on disposition of assets 191,873 6,202,473 991,875 27,898,667 37,518,266 22,203,164 Costs and expenses: Operating expenses 10,124,212 10,079,948 8,443,466 Exploration, dry holes and abandonments 838,580 201,509 609,279 General and administrative 562,924 1,900,408 925,822 Depreciation and amortization 8,291,128 7,894,388 6,879,672 Interest and other 1,468,968 1,683,860 991,318 21,285,812 21,760,113 17,849,557 Income before income taxes 6,612,855 15,758,153 4,353,607 Income tax expense 2,157,500 5,804,370 1,330,500 Net income $ 4,455,355 $ 9,953,783 $ 3,023,107 Weighted average number of common shares outstanding 4,889,450 4,889,690 4,890,708 Net income per common share $ .91 $2.04 $ .62 See accompanying Notes to Consolidated Financial Statements.
MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Shareholders' Equity
Common Stock Additional Paid-in Retained Shares Amount Capital Earnings Total Balance at December 31, 1994 4,891,379 $489,138 $18,725,538 $16,922,561 $36,137,237 Net income -- -- -- 3,023,107 3,023,107 Exercise of common stock options 24,000 2,400 105,600 -- 108,000 Purchase and retirement of of common stock (25,409) (2,541) -- (161,595) (164,136) Balance at December 31, 1995 4,889,970 488,997 18,831,138 19,784,073 39,104,208 Net income -- -- -- 9,953,783 9,953,783 Purchase and retirement of common stock (520) (52) -- (4,199) (4,251) Balance at December 31, 1996 4,889,450 $488,945 $18,831,138 $29,733,657 $49,053,740 Net income -- -- -- 4,455,355 4,455,355 Balance at December 31, 1997 4,889,450 $488,945 $18,831,138 $34,189,012 $53,509,095 See accompanying Notes to Consolidated Financial Statements.
MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Cash Flows
Years ended December 31, 1997 1996 1995 Cash flows from operating activities: Net income $4,455,355 $9,953,783 $3,023,107 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,291,128 7,894,388 6,879,672 Deferred income taxes 413,000 6,490 480,000 Exploration, dry holes and abandonments 512,317 180,230 573,737 Current year costs of dry holes and abandonments (436,058) (90,521) (94,390) Gain on disposition of assets (191,873) (6,202,473) (991,875) (Increase) decrease in current assets: Accounts receivable 1,007,184 (976,506) (886,482) Other current assets 38,783 (119,595) 316,661 Increase (decrease) in current liabilities: Accounts payable 679,258 (533,609) 1,514,804 Accrued expenses (308,660) 790,028 330,515 Income taxes payable (3,210,678) 3,018,781 412,695 Net cash provided by operating activities 11,249,756 13,920,996 11,558,444 Cash flows from investing activities: Proceeds from disposition of assets 263,613 8,884,691 3,426,499 Purchase price adjustment -- 874,245 -- Additions to property and equipment (3,746,528) (3,184,637) (33,688,793) Net cash provided (used) by investing activities (3,482,915) 6,574,299 (30,262,294) Cash flows from financing activities: Proceeds from issuance of long-term debt -- -- 22,500,000 Principal payments on long-term debt (5,000,000) (4,812,500) (3,437,500) Purchase of common stock -- (4,251) (164,136) Exercise of stock options -- -- 108,000 Net cash provided (used) by financing activities (5,000,000) (4,816,751) 19,006,364 Net increase in cash and cash equivalents 2,766,841 15,678,544 302,514 Cash and cash equivalents at beginning of year 21,817,447 6,138,903 5,836,389 Cash and cash equivalents at end of year $24,584,288 $21,817,447 $ 6,138,903 See accompanying Notes to Consolidated Financial Statements.
MAYNARD OIL COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies Business Activity The Company is engaged in the acquisition, exploration, development, production and sale of crude oil and natural gas in the Continental United States, primarily in the states of Texas and Oklahoma. Principles of Consolidation The consolidated financial statements include the accounts of Maynard Oil Company (Company) and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Property and Equipment The Company follows the "successful efforts" method of accounting for its costs of acquisition, exploration and development of oil and gas properties. Intangible drilling and development costs related to development wells and successful exploratory wells are capitalized, whereas the costs of exploratory wells which do not find proved reserves are expensed. Costs of acquiring unproved leases are evaluated for impairment until such time as the leases are proved or abandoned. All geological and geophysical costs not reimbursed are expensed as incurred. Depreciation and amortization of producing properties is computed using the unit-of-production method based upon estimated proved recoverable reserves. Depreciation of other property and equipment is calculated by the straight-line method based upon estimated useful lives ranging from two to ten years. Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation and amortization are removed from the accounts, and the resulting gain or loss is recognized. Overhead Reimbursement Fees Overhead charges billed to working interest owners including the Company of $1,796,113, $1,870,752, and $1,892,370, for the three years ended December 31, 1997, respectively, have been classified as a reduction of general and administrative expenses in the accompanying Consolidated Statements of Income. The Company's working interest portion of the amounts billed are included in lease operating expenses. Deferred Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the tax and financial reporting bases of the Company's assets and liabilities by applying enacted tax rates. Income per Common Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which requires disclosure of two earnings per share ("EPS") measures, basic EPS and diluted EPS, on the face of its Consolidated Statements of Income if the Company has a complex capital structure. Net income per common share is computed using the weighted average number of common shares outstanding during each year. During 1995, all outstanding stock options were exercised, and consequently, basic and diluted earnings per share were the same for 1997, 1996 and 1995. Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt, including the current portion, approximates fair value because the interest rate on this instrument changes with market interest rates. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality institutions. With respect to accounts receivable, these financial instruments primarily pertain to oil and gas sales and joint interest billings. These accounts receivable are due from small to mid-size companies engaged principally in oil and gas activities. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Payment terms are on a short-term basis and in accordance with industry standards. The Use of Estimates in Preparing Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, disclosure of gain and loss contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Since estimates are made based on all information available at the time, it is reasonably possible in the near term a change in an estimate may occur or actual amounts may differ from estimated amounts. Impairment of Long-Lived Assets The carrying value of property and equipment is periodically evaluated using undiscounted cash flows as the basis for determining if impairment exists under the provisions 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"). To the extent impairment is indicated to exist, an impairment loss would be recognized under SFAS 121 based on fair value. During 1997, oil prices fell from an average of $24.66 per barrel to an average of $15.72 per barrel and gas prices ranged from $3.59 per thousand cubic feet of gas (mcf) in 1996 to $2.05 per mcf. Consequently, the Company recognized an impairment loss of $227,879 in December 1997 to account for those properties whose investment would not be recoverable under current pricing trends. This impairment is included in depreciation and amortization expense on the Company's Consolidated Statement of Income for 1997. Reclassifications Certain reclassifications of prior period statements have been made to conform with the 1997 presentation. (2) Acquisitions and Dispositions (Reserve information is unaudited) During 1996, the Company sold its interest in approximately 130 producing wells in Texas and Oklahoma for cash totaling $8,865,731. The Company considered these properties to be non strategic assets. Proved reserves sold were estimated to be approximately 269,000 barrels of oil and 4.9 billion cubic feet of gas (BCF). During 1995, the Company consummated two separate producing property acquisitions for an aggregate price of $29,250,000. On March 29, 1995, the Company acquired working interests in 200 producing wells in the Permian Basin of West Texas. Estimated proved reserves associated with this transaction approximated .99 million barrels of oil and 7.2 BCF of gas. Total consideration paid was $10,500,000. At December 31, 1996, the Company maintains ownership in approximately 1 million barrels of oil and 3.4 BCF of gas acquired in this transaction. On December 20, 1995, the Company purchased working interests in 250 producing wells located in Garza County, Texas. Total consideration paid was $18,750,000, $13,000,000 of which was borrowed under a new term loan arrangement with Bank One, Texas. Proved reserves were estimated to be 2.46 million barrels of oil and .3 BCF of gas. In 1996, the Company received cash proceeds of $874,245, which represented a purchase price adjustment on this acquisition. The following table presents unaudited pro forma operating results as if the acquisitions and dispositions had occurred on January 1, 1995. Years ended December 31, 1996 1995 Amounts in thousands, except per share amounts Revenues $28,706 $31,676 Net income 5,234 7,461 Net income per common share 1.07 1.53 (3) Cash Flow Data Cash in excess of daily requirements is invested in marketable securities, consisting of repurchase agreements, certificates of deposit, money market funds, and commercial paper, with maturities of three months or less. At December 31, 1997 and 1996, such investments totaled $24,700,000 and $22,246,554, respectively, and are considered to be cash equivalents, which approximate their fair value. Supplemental cash flow information for the three years ended December 31, 1997 is summarized as follows: 1997 1996 1995 Cash paid: Interest expense $1,462,269 $1,735,416 $ 853,247 Income taxes $5,047,847 $2,779,099 $ 121,674 (4) Long-term Debt Long-term debt at December 31, 1997 and 1996 is summarized as follows: 1997 1996 Term note due in 20 equal quarterly installments of $1,250,000 commencing April 1, 1996 plus one payment of $1,062,500 made January 1, 1996. Interest paid quarterly at varying rates. Secured by certain oil and gas properties with a net book value of $27,501,887. $16,250,000 $21,250,000 Less current installments 5,000,000 5,000,000 Long-term debt $11,250,000 $16,250,000 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, 1997, interest on the bank term loan was at a rate of approximately 7.49%. The credit agreement contains various financial covenants related to working capital, net worth, and cash flow. Additionally, the debt agreement places certain limitations on the incurrence of additional debt and prohibits the payment of dividends. (5) Employee Incentive Plans In August 1989, an employee incentive plan was adopted, whereby stock participation units might be granted to officers and key employees. Such stock participation units will entitle a participant to a cash payment following termination of employment in an amount equal to the excess, if any, of the fair market value of one share of the Company's common stock over a share price specified on the date of grant, multiplied by the number of vested units. The units vest over a five year period with 25% vesting after two years and the remainder in three equal annual installments. For the year ended December 31, 1989, 73,000 units were awarded to certain employees at a price of $4.50 per share of which 49,500 units remain outstanding at December 31, 1997, all of which are 100% vested. During August 1993, 52,000 additional units were awarded at $5.625 per share of which 34,500 units are vested. Earnings are charged and credited over the life of the units for fluctuations in stock prices from $4.50 per share and $5.625 per share. During the current year, operations were credited $420,750 and $97,813 in regard to the stock participation units granted in 1989 and 1993, respectively. These credits reflect the reduction in closing stock prices from $18.75 per share at December 31, 1996 to $10.25 per share at December 31, 1997. During 1996 and 1995, operations were charged $594,000 and $76,183 for the units awarded in 1989 and $294,887 and $15,676 for the units awarded in 1993, respectively. In March 1982, an employee incentive plan was adopted whereby stock options and stock appreciation rights might be granted to officers and key employees. A total of 281,517 shares were initially reserved for issuance. This plan terminated in March 1992 and no further grants may be made under this plan. The options became exercisable cumulatively in five equal installments, beginning on the first anniversary of the date of grant. The option price for shares granted pursuant to the plan was not less than the fair market value of the shares at the date of grant. A summary of stock option activity for the 1982 plan for 1995 is as follows: Number of Option Price Shares per Share Outstanding at December 31, 1994 24,000 $4.50 Exercised (24,000) $4.50 Outstanding at December 31, 1995 -0- During September 1995, options for 24,000 shares were exercised. Common stock was credited for $2,400 and additional paid-in capital was credited for $105,600. The Company simultaneously repurchased and cancelled 23,500 of the shares exercised for $6.50 per share. Common stock was debited for $2,350 and retained earnings charged $150,400 in regard to the repurchased shares. (6) Income Taxes Income tax expense consists of the following: Years ended December 31, 1997 1996 1995 Federal Current $1,212,500 $5,397,880 $ 620,500 Deferred 413,000 6,490 480,000 State 532,000 400,000 230,000 $2,157,500 $5,804,370 $1,330,500 Income tax expense for the three years ended December 31, 1997 differs from the amount computed by applying the applicable U.S. corporate income tax rate (34% in 1997 and 1995 and 35% in 1996) to income before income taxes. The reasons for this difference are as follows:
Years ended December 31, 1997 1996 1995 Income tax expense at U.S. statutory rate $2,248,371 $5,515,354 $1,480,226 State income taxes, net of Federal income tax benefit 351,120 260,000 151,800 Allowable depletion in excess of cost depletion (223,261) (223,197) (281,526) Items not related to current year earnings (136,000) -- (89,198) All other items (82,730) 252,213 69,198 Income tax expense $2,157,500 $5,804,370 $1,330,500
The components of the net deferred tax liability were as follows:
December 31, 1997 1996 1995 Depreciable assets $ 86,500 $ 48,500 $ 61,510 Depletable assets 36,500 111,500 14,400 Intangible drilling and development costs 2,678,000 2,572,000 2,542,600 Employee benefit obligations (169,000) (346,000) Tax credit carryforwards -- (167,000) (406,000) Net deferred tax liability $2,632,000 $2,219,000 $2,212,510
(7) Employee Benefit Plans The Company adopted a noncontributory defined contribution retirement plan for all full-time employees age 21 or older who have completed one year of service. The plan provides for a minimum annual contribution by the Company equal to 3% of an employee's base salary plus overtime compensation. At its discretion, the Company may also make supplemental contributions to the plan. For calendar 1997, 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 $99,313, $53,965 and $40,777, respectively, for the years ended December 31, 1997, 1996 and 1995. The contributions for the same three year period have been reduced by $0, $648, and $1,818, respectively, for forfeitures attributable to employees terminated in prior years. The Company also has a profit sharing plan pursuant to Section 401 of the Internal Revenue Code, whereby participants may contribute a percentage of compensation. The Plan provides for a matching contribution by the Company equal to one-half of the employee's percentage contribution up to the first 10% of compensation for 1997, 1996, and 1995. During this same three year period, the Company's matching portion amounted to $91,302, $79,879, and $59,579, respectively. (8) Major Customers During the years ended December 31, 1997 and 1995, oil and gas sales to three customers, amounting to approximately $5,698,000, $5,067,000 and $3,783,000, and $4,377,000, $3,746,000, and $2,946,000, respectively, each accounted for more than 10% of total consolidated revenues. During the year ended December 31, 1996, oil and gas sales to two customers, amounting to approximately $6,059,000 and $3,898,000 each accounted for more than 10% of total consolidated revenues. (9) Contingencies and Commitments The Company is a defendant in certain non-environmental litigation arising from operations in the normal course of business. While it is not feasible to determine the outcome of these actions, it is the Company's opinion that the ultimate outcome of the litigation will not have a material adverse effect on the financial position or results of operations of the Company. The Company leases office space and certain equipment under various operating leases which expire over the next five years. All leases require the payment of taxes and insurance, and the office lease requires the Company to pay its pro rata share of increases in maintenance expense above that prevailing in base years. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rent expense for the three years ended December 31, 1997 was $321,001, $314,743, and $298,371, respectively. Minimum payments for operating leases having initial or noncancellable terms in excess of one year are as follows: 1998 $ 248,624 1999 236,454 2000 81,985 2001 718 Total minimum payments $ 567,781 (10) Quarterly Financial Data (Unaudited) Summarized quarterly financial data for the years ended December 31, 1997 and 1996 is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Year Ended December 31, 1997 Revenues $8,043,876 $6,577,076 $6,447,486 $6,830,229 Net Income 2,113,827 856,383 1,430,864 54,281 Net Income Per Common Share .43 .18 .29 .01 Year ended december 31, 1996 Revenues $7,331,742 $8,257,476 $13,920,810 $8,008,238 Net Income 1,143,454 1,819,180 6,883,228 107,921 Net Income Per Common Share .23 .37 1.41 .02
During the fourth quarter of 1997, the Company recorded an adjustment to depreciation and amortization expense arising from downward revisions to its oil and gas reserves. These revisions related primarily to pricing changes. The effect of this adjustment, coupled with the impairment charge (Note 1 to the Consolidated Financial Statements), was to increase fourth quarter depreciation and amortization expense $396,740. Offsetting this expense increase was a $518,563 credit to an employee benefit plan which decreases in value if the price of the Company's stock declines. During the fourth quarter of 1996, the Company recorded an additional $3,104,370 in income tax expense related to the third quarter gain on the disposition of assets. The Company had anticipated deferring tax expense on a substantial portion of this gain via the like-kind exchange rules, but was unable to consummate the transaction. Additionally, fourth quarter results included approximately $650,000 additional compensation expense in connection with an employee benefit plan which appreciates in value as the price of the Company's common stock rises. (11) Supplemental Oil and Gas Disclosures (Unaudited) Capitalized Costs A summary of the Company's aggregate capitalized property and equipment costs relating to oil and gas exploration and development activities follows: December 31, 1997 1996 Undeveloped leaseholds and royalties $ 199,416 $ 105,385 Producing properties 103,831,936 103,118,219 104,031,352 103,223,604 Accumulated depreciation and amortization 54,351,135 48,906,086 Net capitalized costs $ 49,680,217 $ 54,317,518 Costs Incurred A summary of costs incurred in oil and gas acquisition, exploration and development activities follows:
Years ended December 31, 1997 1996 1995 Acquisition of properties Undeveloped $ 195,434 $ 104,846 $ 59,010 Proved 700,055 -- 29,234,607 Exploration costs 1,006,253 125,963 413,632 Development costs 2,539,005 2,980,849 3,949,882 $4,440,747 $3,211,658 $33,657,131
Results of Operations The results of operations from oil and gas producing activities are as follows:
Years ended December 31, 1997 1996 1995 Sales $26,477,238 $30,583,133 $20,539,738 Production costs (a) (10,124,212) (10,079,948) (8,443,466) Exploration expenses (1,060,616) (340,913) (661,319) Depreciation and amortization (8,178,538) (7,816,674) (6,801,115) 7,113,872 12,345,598 4,633,838 Income tax expense (2,267,708) (4,408,531) (1,478,000) Results of operations from oil and gas producing activities $ 4,846,164 $ 7,937,067 $ 3,155,838
(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.
Proved Developed and Oil Gas Undeveloped Reserves (Barrels) (MCF) Total as of December 31, 1994 6,153,062 14,951,460 Revisions of previous estimates (113,124) (291,417) Purchases of reserves 3,399,040 7,951,973 Extensions and discoveries 455,693 969,038 Production (957,873) (2,720,441) Sales of reserves in place (64,283) (1,996,593) Total as of December 31, 1995 8,872,515 18,864,020 Revisions of previous estimates 1,150,114 3,100,882 Purchases of reserves -- -- Extensions and discoveries 432,789 463,296 Production (1,212,369) (2,890,061) Sales of reserves in place (268,663) (4,952,957) Total as of December 31, 1996 8,974,386 14,585,180 Revisions of previous estimates (733,337) (763,172) Purchases of reserves 55,867 98,228 Extensions and discoveries 10,402 782,797 Production (1,106,042) (1,957,147) Sales of reserves in place (52,809) (10,966) Total as of December 31, 1997 7,148,467 12,734,920 Proved Developed Reserves December 31, 1995 8,712,835 18,214,860 December 31, 1996 8,649,996 13,442,204 December 31, 1997 6,761,920 12,001,602
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, 1997 1996 1995 (000's) (000's) (000's) Future cash inflows $138,471 $273,644 $192,794 Future production costs (73,641) (110,123) (92,873) Future development costs (2,193) (2,912) (1,146) 62,637 160,609 98,775 Future income tax expenses (6,891) (38,610) (14,464) Future net cash flows 55,746 121,999 84,311 10% annual discount for estimated timing of cash flows (17,867) (44,361) (27,710) Standardized measure of discounted future net cash flows $ 37,879 $ 77,638 $ 56,601
The average prices for oil and gas used to calculate future cash inflows at December 31, 1997 were $15.72 per barrel and $2.05 per mcf, respectively. Subsequent to year end, the price of crude oil recorded by the Company declined below $13.00 per barrel. The following are the principal sources of changes in the standardized measure of discounted future net cash flows.
Years ended December 31, 1997 1996 1995 (000's) (000's) (000's) Standardized measure - beginning of year $77,638 $56,601 $34,211 Sales of oil and gas produced, net of production costs (16,353) (20,503) (12,267) Net changes in prices and production costs (46,696) 36,421 5,396 Extensions, discoveries, and improved recovery, less related costs 1,593 3,876 3,514 Changes in future development costs 128 (617) 135 Development costs incurred 994 182 850 Revisions of previous quantity estimates (3,741) 14,503 (867) Accretion of discount 4,256 6,631 3,996 Purchase of proved reserves 348 -- 27,801 Sale of proved reserves (255) (4,669) (2,065) Net change in income taxes 19,889 (14,861) (3,964) Other 78 74 (139) Standardized measure - end of year $37,879 $77,638 $56,601
Schedule II MAYNARD OIL COMPANY AND SUBSIDIARY Valuation and Qualifying Accounts Three Years Ended December 31, 1997
Charged to Beginning Cost and Ending Description Balance Expenses Deductions Balance Allowance for Doubtful Accounts - (a) December 31, 1995 $43,000 -- -- $43,000 December 31, 1996 $43,000 $ 7,000 -- $50,000 December 31, 1997 $50,000 20,000 -- $70,000 (a) Valuation account deducted in the balance sheet from trade accounts receivable.
EX-21 2 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE COMPANY AS OF December 31, 1997 Percentage of Jurisdiction of Voting Securities Name Incorporation Owned by Company - ---- -------------- ----------------- M.O.C. Resources, Inc. Nevada 100% EX-27 3
5 12-MOS DEC-31-1997 DEC-31-1997 24,584 0 3,337 70 0 28,398 104,580 54,692 78,286 10,894 0 0 0 489 53,020 78,286 26,477 28,899 10,124 21,286 0 0 1,469 6,613 2,158 4,455 0 0 0 4,455 0.91 0.91
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