10-Q 1 m32257q101.txt MARCH 31, 2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ending March 31, 2001 Commission File #0-5704 -------------------- ------- MAYNARD OIL COMPANY -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-1362284 -------------------------------------------------------------------------------- (State or other jurisdic- (IRS Employer tion of incorporation) Identification No.) 8080 N. Central, Ste. 660 N. Central Expressway, Suite 660, Dallas, Texas 75206 -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (214)891-8880 ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 10, 2001. 4,880,398 shares of common stock, par value $0.10 -------------------------------------------------------------------------------- MAYNARD OIL COMPANY AND SUBSIDIARY Index to Consolidated Financial Statements and Schedules Page ---- Part I. Financial Information Consolidated Balance Sheets March 31, 2001 and December 31, 2000 3 Consolidated Statements of Operations Three Months ended March 31, 2001 and 2000 4 Consolidated Statement of Shareholders' Equity Three Months ended March 31, 2001 5 Consolidated Statements of Cash Flows Three Months ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2 MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Balance Sheets (Unaudited) March 31, December 31, --------- ------------ 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 16,850,810 $ 21,228,040 Accounts receivable, trade 8,542,116 8,773,669 Income taxes receivable 1,437,587 1,437,587 Other current assets 412,904 441,027 ------------- ------------- Total current assets 27,243,417 31,880,323 ------------- ------------- Property and equipment, at cost: Oil and gas properties, successful efforts method 174,726,308 162,572,339 Other property and equipment 495,414 450,885 ------------- ------------- 175,221,722 163,023,224 Less accumulated depreciation and amortization (90,162,264) (87,045,360) ------------- ------------- Net property and equipment 85,059,458 75,977,864 ------------- ------------- $ 112,302,875 $ 107,858,187 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 7,650,000 $ 7,650,000 Accounts payable 5,483,815 8,350,643 Accrued expenses 1,792,771 927,828 Income taxes payable 2,647,799 800,799 ------------- ------------- Total current liabilities 17,574,385 17,729,270 ------------- ------------- Deferred income taxes 2,020,000 1,179,000 Long-term debt 22,950,000 24,862,500 Shareholders' equity: Preferred stock of $.50 par value Authorized 1,000,000 shares; none issued -- -- Common stock of $.10 par value Authorized 20,000,000 shares; 4,880,398 and 4,880,516 shares issued and outstanding 488,039 488,051 Additional paid-in capital 18,831,138 18,831,138 Retained earnings 50,439,313 44,768,228 Accumulated other comprehensive income -- -- ------------- ------------- Total shareholders' equity 69,758,490 64,087,417 ------------- ------------- Contingencies and Commitments $ 112,302,875 $ 107,858,187 ============= ============= See accompanying Notes to Consolidated Financial Statements. 3 MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Operations (Unaudited)

4 MAYNARD OIL COMPANY Statement of Changes in Shareholders Equity Period Ended March 31, 2001

5 MAYNARD OIL COMPANY AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)

6 MAYNARD OIL COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2001 Note l Unaudited Financial Statements The accompanying consolidated financial statements of Maynard Oil Company (the "Company") have been prepared in accordance with generally accepted accounting principals, pursuant to the rules and regulations of the Securities and Exchange Commission included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included herein is unaudited but, in the opinion of management, contains all adjustments, consisting of all recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 2001 and the results of operations and cash flows for the three months ended March 31, 2001. The December 31, 2000 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The accounting policies followed by the Company are set forth in Note 1 to the Company's financial statements in the 2000 Annual Report to Shareholders. Note 2 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. During the first quarter of 2001, net hedging gains of approximately $87,000 were reclassified from other comprehensive income due to settlement of the contracts during the quarter. As of March 31, 2001, the Company had no outstanding derivative arrangements. Note 3 Earnings Per Share Net income per common share is based on the weighted average number of shares outstanding in each period, which was 4,880,463 and 4,880,879 shares at March 31, 2001 and 2000, respectively. As of March 31, 2001 and 2000, the Company had no potentially dilutive common shares, and therefore, basic and diluted earnings per common share were the same. Note 4 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 7 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 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. Note 5 Income Taxes The provision for income taxes consists of the following (thousands of dollars): Three Months Ended March 31 -------- 2001 2000 ---- ---- Federal: Current $2,056 $1,000 Deferred 841 225 ----- ----- $2,897 $1,225 ===== ===== Note 6 Commitments and Contingencies The Company is the defendant in certain non-environmental litigation arising from operations in the normal course of business. While it is not feasible to determine the outcome of these actions, it is the Company's opinion that the ultimate outcome of the litigation will not have a material adverse effect on the financial position or results of the operations of the Company. 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. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS -------------- Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000 --------------------------------------------------------------------- For the first quarter of 2001, the Company earned $1.16 per share on revenues of $17,520,111 compared to $.51 per share during the first quarter of 2000 on revenues of $11,020,146. Current quarter results were favorably impacted by higher revenues from the sale of oil and gas, which are the results of increased product pricing and additional production volumes derived from producing property acquisitions. Revenues -------- Oil and gas revenues rose $6,466,239 between the two quarterly periods, or approximately 60%, due to both pricing increases and higher volumes resulting from prior year's property acquisitions. Average oil and gas prices were $.36 per barrel and $4.63 per thousand cubic feet of gas (mcf) higher than the same quarter a year ago. Oil volumes increased approximately 7% and gas volumes rose almost 24% over this same period. Costs and Expenses ------------------ On a net equivalent barrel basis (NEB), lease operating expenses were $1.77 per NEB higher than the first quarter of 2000 resulting from increases in routine operating costs which usually occur during periods of rising product-prices, additional expense workovers, and higher severance taxes which relate proportionally to increased oil and gas revenues. The general and administrative expense category reflects a decrease of $344,441,or approximately 31%, primarily the result of phantom stock adjustments. During 2000, the Company amended this employee benefit plan to permit employees the opportunity to exercise 9 benefits under the plan. Accordingly, there are only 11,000 units outstanding under this plan compared with 95,500 units a year ago. The value of these units are adjusted (upward or downward) based upon the closing stock prices at the end of each quarter. Thus, the March, 2000 quarterly phantom stock adjustment was a charge of $525,250 while the current quarter's adjustment was a benefit of $12,375. Offsetting these reductions to the G&A category are increased costs to manage the growth of the Company from $60.3 million in assets at September 31, 1999 (prior to the Questar acquisition)to $112.3 million in assets at March 31, 2001. Per NEB, the current quarter's depreciation and amortization rate increased approximately 18% from $4.74 per NEB during the first quarter of 2000 to $5.59 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. 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 decreased $147,438 between the two quarterly periods due to scheduled bank note payments and the resulting lower average outstanding principal balance. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $16.9 million and $21.2 million at March 31, 2001 and December 31, 2000, respectively. Working capital 10 was $9.7 million at March 31, 2001 compared with $14.2 million at December 31, 2000. The following summary table reflects cash flows for the three months ended March 31, 2001 (in thousands): Net cash provided by operating activities: $9,736 Net cash used by investing activities: 12,198 Net cash used by financing activities: 1,915 Included in the amount utilized by investing activities, is $8.8 million spent to increase the Company's working interest position in certain properties acquired in 2000. The balance utilized in investing activities, $3.4 million, was spent performing development work on various properties. At March 31, 2001, the Company's long-term debt was $22,950,000. The Company believes it has sufficient cash being generated from operating activities plus cash currently in the bank, or additional borrowing capacity, to fund its planned drilling activities and to make additional property acquisitions. 11 Certain Factors that Could Affect Future Operations --------------------------------------------------- Certain information contained in this report, as well as written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be 'forward-looking statements' within the meaning of Section 21E of the Securities and Exchange Act of 1934 and are subject to the 'Safe Harbor' provisions of that section. Forward-looking statements include statements concerning the Company's and management's plans, objectives, goals, strategies and future operations and performance and the assumptions underlying such forward-looking statements. These statements are based on current expectations and involve a number of risks and uncertainties, including those described in the context of such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements. Such factors include, among others, the volatility of oil and gas prices, the Company's drilling results, the Company's ability to compete in the acquisition of producing property, the Company's ability to replace reserves, the availability of capital resources, the reliance upon estimates of proved reserves, operating hazards, uninsured risks, competition, government regulation, and other factors referenced in this Form 10-Q. 12 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Risk -------------- The Company's primary commodity market risk exposure is to changes in the pricing applicable to its oil production, which is normally priced with reference to a defined benchmark, such as light, sweet crude oil traded on the New York Mercantile Exchange (WTI). Actual prices received vary from the benchmark depending on quality and location differentials. The markets for crude oil historically have been volatile and are likely to continue to be volatile in the future. From time to time, the Company enters into financial market transactions, including collars, with creditworthy counterparties, primarily to reduce the risk associated with the pricing of a portion of the oil and natural gas that it sells. The policy is structured to underpin the Company's planned revenues and results of operations. During 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 revenues for the first quarter of 2001. 13 PART II. OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits - None (b) No reports on Form 8-K were filed during the quarter ended March 31, 2001. 14 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAYNARD OIL COMPANY By: /s/ Glenn R. Moore ---------------------------- Glenn R. Moore President BY: /s/ Kenneth W. Hatcher ----------------------------- Kenneth W. Hatcher Vice President of Finance Dated: May 15, 2001 15

MAYNARD OIL CO 10-Q