SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 1-10437
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 No. 1-10437
TEXAS VANGUARD OIL COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-2075344
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9811 Anderson Mill Rd., Suite 202
Austin, Texas 78750
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (512) 331-6781
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class: None
Name of each exchange of which registered: Not applicable
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.05 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or 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 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]
As of March 9, 1999, there were 1,417,087 shares of the registrant's Common
Stock outstanding; the aggregate market value of the share of Common Stock
held by non-affiliates of the registrant (316,572 shares), based on average
bid and asked prices on the aforesaid date, was $296,786.00.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement regarding the election of directors
at the registrant's 1998 Annual Stockholders' Meeting filed or to be filed with
the Commission on or before April 30, 1999, has been incorporated by reference
in Part III of this report.
PART I
ITEM 1. BUSINESS
General
Texas Vanguard Oil Company (the "Company" or "Registrant") was incorporated
under the laws of the state of Texas on December 4, 1979. The business of the
Company is to engage in the acquisition, exploration, development, and
operation of onshore oil and gas properties in the United States, principally
in Texas. In April 1980, the Company completed a public offering of its
securities netting approximately $1,250,000 from the sale of 1,500,000 shares
of common stock to the public.
The Company engages in oil and natural gas exploration, development and
production in Texas, New Mexico, and Wyoming. Generally, the Company
acquires operated working interests in producing oil and natural gas
properties which it further develops.
The executive offices of the Company are located at 9811 Anderson Mill Rd.,
Suite 202, Austin, Texas 78750 and its telephone number is (512) 331-6781.
Markets for Oil and Gas
The market for the Company's primary products, oil and gas, depends upon a
number of factors, including the availability of other domestic production,
crude oil imports, the proximity and size of oil and gas pipelines and general
fluctuations in the supply and demand for oil and gas. At present, the Company
sells all of its production to traditional industry purchasers, such as pipeline
and crude oil companies, who have the facilities to transport the oil and gas
from the well site. The Company has recorded revenues in excess of 10% of total
revenue from Aquila Southwest (21% in 1998 and 12% in 1997), GPM (18% in 1998
and 19% in 1997), Genesis Oil (15% in 1997), Scurlock Permian (14% in 1998, 20%
in 1997, 24% in 1996 and 46% in 1995), Howell Crude Oil (21% in 1996) and EOTT
Energy (22% in 1998, 17% in 1997 and 12% in 1996). The Company does not believe
that the loss of major customers would have a material adverse effect on the
Company because oil production can be sold to any other oil company at a
comparable price. Oil sales are not made under a written contract and the
purchaser and price are not specified in the division order for subject
properties. The nature of the Company's business is not seasonal except to the
extent that adverse weather conditions could affect oil and gas exploration
and production activities. The Company currently has no intention of refining
or marketing its own oil and gas. Since the Company engages independent
contractors for the drilling of any wells, it does not plan to own any
significant amount of drilling equipment. The Company does not contemplate
any material product research and development, any material acquisition of
plants or equipment, or any material changes in its number of employees in
the near future.
Competition
The oil and gas industry is highly competitive in all aspects. The Company
competes with major oil companies, numerous independent oil and gas producers,
individual proprietors, and investment programs. Many of these competitors
possess financial and personnel resources substantially in excess of those which
are available to the Company and may, therefore, be able to pay greater amounts
for desirable leases and to define, evaluate, bid for, and purchase a greater
number of potential producing prospects than the Company's own resources permit.
The Company's ability to generate resources will depend not only on its ability
to develop existing properties, but also on its ability to identify and acquire
proven and unproven acreage and prospects for future exploration.
Environmental Matters
The Company's operations are subject to numerous federal, state and local
laws and regulations controlling the discharge of materials into the environment
or otherwise relating to the protection of the environment. Such matters have
not had a material effect on operations of the Company to date, but the Company
cannot predict whether such matters will have any material effect on its capital
expenditures, earnings or competitive position in the future.
Regulations
The production and sale of crude oil and natural gas are currently subject to
extensive regulation of both federal and state authorities. At the federal
level, there are price regulations, windfall profits tax, and income tax laws.
At the state level, there are severance taxes, proration of production, spacing
of wells, prevention and clean-up of pollution and permits to drill and produce
oil and gas. Although compliance with their laws and regulations has not had a
material adverse effect on the Company's operations, the Company cannot predict
whether its future operations will be adversely affected thereby.
Employees
At December 31, 1998, the executive officers and directors were as follows:
<TABLE>
<CAPTION>
Name Offices Held
<S> <C>
Robert N. Watson, Jr. President, Chairman of the
Board, Chief Executive Officer
and Director
Linda R. Watson Secretary, Treasurer and
Director
Robert L. Patterson Director
</TABLE>
Robert N. Watson, Jr. (age 56), received his B.A. and B.B.A. degrees from
The University of Texas at Austin in 1966 and 1967. He is a director and
President of Robert Watson, Inc., an oil and gas and real estate development
firm, which he founded in 1969. He has been a director of the Company and its
Chief Executive Officer since 1982.
Linda R. Watson (age 55), received her B.A. degree from The University of
Texas at Austin in 1966. She has been a director and Secretary-Treasurer of
Robert Watson, Inc. for more than the last five years. Also, she is the wife of
Robert N. Watson, Jr.
Robert L. Patterson (age 59), received his B.S. and M.S. degrees from The
University of Texas at Austin in 1963 and 1964. He was employed by Union Oil
Company of California from 1965 through 1975, serving in various engineering
capacities. He was a Vice President of Argonaut Energy Corporation from 1976
through 1982. He was the President of Medallion Equipment Corporation and
President of Argonaut Energy Corporation from July, 1985 through January, 1989.
He has also been an independent consulting petroleum engineer since 1983.
The Company's officers actively manage the Company's activities. There are no
employment contracts with any officers and they earn no salary. In addition to
the Company's officers, at December 31, 1998, the Company had one full-time
salaried employee. From time to time the Company engages independent petroleum
engineers, geologists and landmen on a fee basis. Robert Watson is a director
of a company as previously described which has oil and gas interests. Due to
this situation a conflict of interest may arise. However, there have been no
such conflicts in the past five years.
Robert Watson, Inc. owns a small interest in a number of the properties
that the Company has interests in as well as other similar properties in which
the Company does not have an interest. None of the Company's other directors
own interests in any oil and gas properties in areas in which the Company
operates. The Company presently acquires all of its own properties.
The Company and a management company owned by the President of the Company
extended an agreement whereby the latter provides the Company general corporate
management services. This agreement is the same as could be obtained from an
independent third party. The affiliated company will receive $12,500 per month,
for one year, effective January 1, 1999 as compensation for those services.
The affiliated company received $150,000, $150,000,and $144,000 as compensation
for performance of these services during the years ended December 31, 1998,
1997 and 1996, respectively.
ITEM 2. PROPERTIES
The Company owns no significant properties other than oil and gas properties.
It leases approximately 2,000 square feet of space for its executive offices at
9811 Anderson Mill Rd., Suite 202, Austin, Texas 78750. The Company currently
has a five year lease with a company owned by the President of the Company for
these facilities which will expire on June 30, 1999. The rent for these
facilities is $1,250 per month which is the same as would be charged to an
unaffiliated party.
Well Activity
All of the Company's oil and gas working and royalty interests, reserves and
activities are located onshore in the continental United States. The following
table sets forth the acquisition activity of the Company, for the years ended
December 31, 1994 through 1998.
<TABLE>
<CAPTION>
Fiscal years ended Oil Gas Dry
December 31, Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
1994 26 8.90 12 7.74 --- ---
1995 38 23.35 8 3.35 --- ---
1996 21 18.97 3 2.08 --- ---
1997 30 17.72 1 1.11 --- ---
1998 34 22.22 23 15.12 --- ---
</TABLE>
(1) A gross well is a well in which the Company has an interest.
(2) A net well is 100% of the working interest in a well. If the Company has
a 12.5% working interest in a well, .125 is shown in the net well column.
(3) A dry well is a well found to be incapable of producing oil or gas in
sufficient quantities to justify completion of the well.
The Company is not obligated to provide a fixed and determinable quantity of
oil or gas in the future under existing contracts or agreements.
Significant Properties
Over the past three years, the Company has made investments in proven oil
and gas properties that in the aggregate have been significant to the Company.
None of the individual properties has cost more than 15% of the average
balance in oil and gas properties at the time of purchase. These investments
have been made in different fields and areas, primarily in south and west
Texas. At December 31, 1998, the Company does not have any single property
that is significant enough to materially affect its operations.
As of December 31, 1998, the Company has pledged its interest in certain
properties and well equipment against bank notes payable. None of the
individual properties are significant. Copies of the loan documents have
been included as an exhibit to the Form 10-K.
Production Wells and Acreage
The following table sets forth by Texas, Wyoming, and New Mexico counties
the Company's gross and net productive wells and developed acreage as of
December 31, 1998.
<TABLE>
<CAPTION>
Producing Wells (a) Developed
Oil Gas Acreage (a)
County Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Bastrop 55 33.31 39 27.69 1,879.27 1,218.32
Burleson 1 .79 --- --- 40.00 31.60
Chaves (c) --- --- 1 .50 160.00 80.00
Crane (b) 8 6.62 3 .97 200.00 98.45
DeWitt 0 --- 2 .16 160.00 12.43
Eastland (b) 0 .00 4 .09 122.00 1.30
Fayette (b) 3 2.06 --- --- 400.00 320.00
Garza (b) 3 .05 --- --- 30.00 .47
Howard (b) 1 .02 --- --- 40.00 .63
Kent (b) 8 1.22 --- --- 320.00 43.90
Lea (b)(c) 2 --- 1 .07 400.00 22.25
Lee 89 57.05 3 2.38 1,933.43 1,244.09
Lipscomb 1 .03 --- --- 80.00 2.50
Martin 2 1.82 --- --- 120.00 112.78
Midland 1 .02 --- --- 80.00 1.67
Nolan (b) 1 .03 --- --- 40.00 1.25
Parker (b) --- --- 1 .01 136.91 .83
Pecos 1 1.00 --- --- 40.00 40.00
Ward --- --- 2 .16 720.00 29.20
Weston (d) 3 .90 --- --- 120.00 36.17
Wilson (b) 1 .95 --- --- 80.00 76.00
------ ------- ----- ----- -------- --------
180 105.87 56 32.01 7,101.60 3,378.82
</TABLE>
(a) A gross well is a well in which the Company owns a working interest. A
net well is the fractional interest owned by the Company. Gross acres are
the total acres in a lease. Net acres are gross acres times the Company's
interest.
(b) The Company owns overriding royalty interest in these counties.
(c) The Chaves, Eddy and Lea County wells are located in New Mexico.
(d) Weston County wells are located in Wyoming.
Reserve Quantity Information
For information required by Statement of Financial Accounting Standards No.
69, "Disclosures About Oil and Gas Producing Activities," see the "Supplemental
Oil and Gas Information" section included in Item 8. This section also includes
estimates of proven oil and gas reserves.
OIL AND GAS STATISTICS
The following summarizes the net oil and gas production, average sales prices
and production costs per unit for the years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Oil:
Production volume (barrels) 49,357 47,434 41,708
Average sales price per barrel $ 12.16 19.30 18.50
Gas:
Production volume (MCF) 434,374 324,462 260,241
Average sales price per MCF $ 1.69 2.40 2.00
Average production costs per
equivalent barrel $ 5.97 5.88 5.67
</TABLE>
The worldwide crude oil prices of 1998 continue to flucuate in 1999.
The Company cannot predict how prices will vary during 1999 and what
effect they will ultimately have on the Company.
UNDEVELOPED ACREAGE
The following table sets forth by county the Company's gross and net
undeveloped acreage as of December 31, 1998.
<TABLE>
<CAPTION>
County Gross Net
<S> <C> <C>
Bastrop, TX 2,699.04 1,914.46
Crane, TX 240.00 174.11
Crosby, TX 1,120.00 560.00
DeWitt, TX 308.00 47.37
Eastland, TX 199.30 2.37
Eddy, NM 370.00 22.36
Fayette, TX 96.00 5.91
Garza, TX 3,250.00 789.28
Howard, TX 40.00 .63
Kent, TX 3,960.00 1,518.00
Lea, NM 1,094.90 629.90
Lee, TX 1,869.12 1,260.92
Martin, TX 40.00 32.78
Midland, TX 133.33 2.78
Pecos, TX 280.00 280.00
Weston, WY 600.00 104.75
Wilson, TX 129.51 123.03
Winkler, TX 701.60 701.60
--------- --------
17,130.80 8,170.25
========= ========
</TABLE>
All of the 8,170.25 net undeveloped acres under lease are being held by
production.
ITEM 3. LEGAL PROCEEDINGS
On March 16, 1998, the Company, Robert N. Watson, Jr., (President, CEO and
Chairman of the Board), and Linda R. Watson (Secretary-Treasurer) entered into
a consent cease and desist order to settle allegations by the Securities and
Exchange Commission (Commission) that they had violated Sections 9(a)(2), 10(b)
13(d), and 16(a) of the Exchange Act and Rules 10b-5, 13d-2, 16a-2, and 16a-3.
Under terms of the settlement, without admitting or denying any of the
Commission's allegations, the Company, Mr. Watson and Ms. Watson consented to
the entry of an order pursuant to Section 21C of the Exchange Act that each
would cease and desist from committing or causing any future violation of
Sections 9(a)(2), 10(b), 13(d), 16(a) and Rules 10b-5, 13d-2, 16a-2, and 16a-3.
The Commission's allegations related to the Watsons' and the Company's
purchases of stock from December 1994 to May 1996 which were alleged to have
been made in order to maintain the Company's Boston Stock Exchange (BSE)
listing, which the BSE delisted in May of 1996. The Commission did not allege
nor did the Watsons make any sales of the Company's stock. No financial
sanctions were sought nor ordered by the Commission.
The Company knows of no material litigation pending, threatening or
contemplated, or unsatisfied judgments against it, or any other proceeding in
which the Company is a party. The Company knows of no material legal actions
pending or threatening or judgments entered against any officers on the board
of directors of the Company in their capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On May 3, 1996, the Boston Stock Exchange suspended trading and delisted
the Company's stock due to a market value float deficiency which was not in
line with the Boston Stock Exchange's requirements regarding continued listing.
The Company's common stock is now quoted on the OTC Bulletin Board with the
symbol (TVOC). The range of high and low sales price for each quarterly period
during the past two years is as follows:
<TABLE>
<CAPTION>
Sales Price
High Low
<S> <C> <S>
Fiscal 1998
First Quarter 1.375 0.875
Second Quarter 1.375 0.750
Third Quarter 1.375 0.750
Fourth Quarter 1.125 0.750
Fiscal 1997
First Quarter 1.250 0.625
Second Quarter 1.562 0.687
Third Quarter 2.000 0.750
Fourth Quarter 1.375 0.750
</TABLE>
At December 31, 1998, the approximate number of holders of record of the
Company's common stock was 553. The Company has not paid any dividends and has
no present plans to do so in the immediate future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Oil and gas sales $ 1,298,183 1,496,133 1,230,785 729,536 620,742
Total revenue 1,493,456 1,663,995 1,403,772 896,580 714,618
Total expenses (1,279,115) (1,305,175) (1,100,188) (767,799) (958,404)
Net earnings (loss) 169,341 236,820 258,175 86,695 (253,896)
Net earnings (loss)
per share .12 .17 .18 .06 (.18)
Total assets 4,332,767 3,704,635 3,235,502 2,473,759 2,053,923
Short-term debt 1,718,615 944,605 1,074,329 935,009 793,459
Long-term debt 482,606 802,396 560,755 252,247 None
Total liabilities 2,440,987 1,982,196 1,749,883 1,234,352 901,211
Stockholders equity $ 1,891,780 1,722,439 1,485,6119 1,239,407 1,152,712
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
During the year ended December 31, 1998, cash decreased by $5,462. During
the years ended December 31, 1997 and 1996, cash increased by $120,026 and
$601,917, respectively. Cash flow from operating activities in 1998 was
approximately $335,716, a decrease of $289,754 from 1997. The 1997 cash
flows from operating activities had shown an increase of $12,000 from 1996.
The significant use of cash, other than for operating expenses, have been
investments in producing oil and gas properties of $805,768, $617,361, and
$479,783 in 1998, 1997 and 1996, respectively. In each of the last three years,
the Company's investment in producing oil and gas properties was provided by
cash flow from operating activities, sales of other oil and gas properties,
and from borrowings on notes payable to banks.
In 1998 and 1996, the Company also increased cash by $10,370, and $56,930,
respectively, through the sales of producing oil and gas properties. The
Company plans to continue to sell selected properties when it is more
economical to sell them rather than produce them. As of December 31, 1998,
the Company had a cash balance of $1,099,802 which represents approximately
50% of its notes payable.
Working capital at December 31, 1998 has decreased to .66 to 1 from 1.12 to
1 at December 31, 1997. The Company continued it's policy of making strategic
investments in producing oil and gas properties in the same or similar fields
to properties already operated by the Company, which are primarily financed
with short-term notes payable and cash from operations.
LIQUIDITY AND CAPITAL RESOURCES
During the current fiscal year, the Company's liquidity has remained strong
enough to meet its short-term cash needs. The sources of liquidity and capital
resources are generated from cash on hand, cash provided by operations and from
credit available from financial institutions. Management believes the Company
will be able to meet its current operating needs through internally generated
cash from operations. Management believes that oil and gas property investing
activities in 1999 can be financed through cash on hand, cash from operating
activities, and bank borrowings. The Company anticipates continued investments
in proven oil and gas properties in 1999 when they can be purchased at prices
that will provide a short payback period. If bank credit is not available, the
Company may not be able to continue its policy of continued investment in
strategic oil and gas properties. The Company cannot predict how oil and gas
prices will fluctuate during 1999 and what effect they will ultimately have on
the Company, but management believes that the Company will be able to generate
sufficient cash from operations to service its bank debt and provide for
maintaining current production of its oil and gas properties. Oil prices have
increased from approximately $10.00 per barrel at December 31, 1998 to
approximately $11.50 per barrel at March 9, 1999.The Company had no significant
commitments for capital expenditures at December 31, 1998.
As of December 31, 1998, the Company owed $600,000, $789,868 and $600,000 to
a bank secured by producing oil and gas properties and well equipment purchased
by the Company. The notes are due in July 1999, July 2001, and July 1999,
respectively (see note 2 of notes to financial statements for further
explanation).
ANALYSIS OF RESULTS OF OPERATIONS
From 1995 to 1996 oil and gas sales increased approximately 69%, and from
1996 to 1997 oil and gas sales increased approximately 22%, and from 1997 to
1998 oil and gas sales decreased 13%. In 1996, oil production volume increased
by 31% at the same time as the average price per barrel increased by 13% to
18.50. Also, in 1996, the gas production volume increased by 35% while the
average price per MCF was $2.00. In 1997, oil production volume increased
by 14% at the same time as the average price per barrel increased by 4% to
$19.30. Also, in 1997, the gas production volume increased by 25% which was
complemented by an increase in the average price per MCF to $2.40.In 1998, oil
production volume increased by 4% at the same time as the average price per
barrel decreased by 37% to $12.16. Also, in 1998, the gas production volume
increased by 34% while the average price decreased 30% to $1.69 per MCF. The
fluctuation in oil and gas prices is solely attributable to changes in market
prices.
In 1996 the Company sold several sour oil properties in order to reduce
operating costs and realized a loss of $85,598 on those sales.
Oil and gas production expenses increased in 1998 and 1997 by 22% and 24%,
because of higher lease operating costs associated with the 4% and 14%
increase, respectively, in oil production volume and the 34% and 25% increase,
respectively, in gas production volume.
Interest expense decreased by 15% in 1998 over 1997 due to lower average
outstanding balances.
Depreciation, depletion and amortization varies from year to year because of
changes in reserve estimates, changes in quantities of oil and gas produced, as
well as the acquisition, discovery or sale of producing properties. In 1996,
the Company reduced the estimated average reservoir lives on its proved
developed reserves in conjunction with its reduction in Permian Basin wells and
increase in Serbin (Taylor Sand) wells. This had the effect of increasing
depletion expense in 1996.
Total general and administrative expenses increased 6% in 1997 and 22% in
1996, respectively, due primarily to increases in management fees paid to a
company owned by the President of the Company. Total general and administrative
expenses in 1998 were comparable to 1997 as the Company made every effort to
control the level of these type expenses.
In 1998, 1997 and 1996, the Company provided provisions of approximately
$60,165, $170,678 and $102,101, respectively, for the impairment of value of
oil and gas properties due to less than expected production history of specific
wells and for wells that were plugged and abandoned.
Inflation is not anticipated to have a significant impact on the Company's
operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Annual Report on Form 10(k) contain
forward-looking statements that are based on current expectations and estimates
about the oil and gas industry and other factors impacting the Company's
operations and financial condition. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions.
Therefore, actual outcomes and performance may differ materially from what is
expressed in such forward-looking statements.
YEAR 2000 COMPLIANCE
The Company has considered the impact of Year 2000 issues on its computer
systems and applications and have determined that these systems and
application are Year 2000 compliant. As such, no Year 2000 conversion
expenditures were incurred in 1998 and the Company expects no Year 2000
conversion expenditures in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Vanguard Oil Company:
We have audited the accompanying balance sheets of Texas Vanguard Oil Company
(the "Company) as of December 31, 1998 and the related statements of earnings,
stockholders' equity and cash flows for the year then ended. 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 audit. The financial statements of Texas Vanguard Oil Company as of
December 31, 1997 and 1996, were audited by other auditors whose report dated
February 27, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Texas Vanguard Oil Company as
of December 31, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Sprouse & Winn, L.L.P.
February 22, 1999
<TABLE>
TEXAS VANGUARD OIL COMPANY
Balance Sheets
December 31, 1998 and 1997
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Current assets:
Cash (including certificates of deposit of
$200,000 in 1998 and 1997, pledged) $ 1,099,802 1,105,264
Trade accounts receivable 87,860 80,404
---------- ---------
Total current assets 1,187,662 1,185,668
---------- ---------
Oil and gas properties, partially pledged,
successful efforts method of accounting:
Proven properties 3,327,677 2,593,991
Unproven properties 166,630 166,630
Office furniture and equipment, partially pledged 97,891 97,891
--------- ---------
3,592,198 2,858,512
Less accumulated depreciation, depletion and
amortization (449,293) (344,653)
--------- ---------
3,142,905 2,513,859
--------- ---------
Other assets 2,200 5,108
--------- ---------
TOTAL ASSETS $ 4,332,767 3,704,635
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 72,766 113,194
Notes payable and current installments of
long-term debt 1,718,615 923,606
Notes payable to related parties --- 21,000
--------- ---------
Total current liabilities 1,791,381 1,057,800
--------- ---------
Deferred tax liability 167,000 122,000
Long-term debt, excluding current installments 482,606 802,396
--------- ---------
Total Liability 2,440,987 1,982,196
Commitments
Stockholders' equity:
Common stock, par value $.05; authorized
12,500,000 shares; 1,417,087 issued and
outstanding in 1998 and 1997,
respectively 70,854 70,854
Additional paid-in capital 1,890,005 1,890,005
Accumulated deficit (69,079) (238,420)
--------- ---------
Total stockholders' equity 1,891,780 1,722,439
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,332,767 3,704,635
========= =========
<FN>
See accompanying notes to financial statements.
</TABLE>
<TABLE>
TEXAS VANGUARD OIL COMPANY
Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Oil and gas sales $ 1,298,183 1,496,133 1,230,785
Well operation fees 147,304 146,613 145,661
Other, net 37,369 10,335 16,264
Interest income 10,600 10,914 11,062
--------- --------- ---------
Total revenues 1,493,456 1,663,995 1,403,772
--------- --------- ---------
Expenses:
Production cost 726,429 596,678 482,833
Depreciation, depletion and amortization 117,648 136,370 79,467
Interest expense 123,848 145,391 114,000
General and administrative 251,025 251,058 236,189
Impairment in value of oil and gas property 60,165 170,678 102,101
Loss on sale of oil and gas property --- 5,000 85,598
--------- --------- ---------
Total expenses 1,279,115 1,305,175 1,100,188
--------- --------- ---------
Earnings before income taxes 214,341 358,820 303,584
Income Taxes:
Deferred federal income tax expense 45,000 122,000 45,409
-------- --------- ---------
Net earnings $ 169,341 236,820 258,175
======== ========= =========
Weighted average number of
shares outstanding 1,417,087 1,417,087 1,419,754
========= ========= =========
Basic and diluted earnings per share $ .12 .17 .18
========= ========= =========
<FN>
See accompanying notes to financial statements.
</TABLE>
<TABLE>
TEXAS VANGUARD OIL COMPANY
Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balances at December 31, 1995 1,427,087 71,354 1,901,468 (733,415)
Shares repurchased and cancelable (10,000) (500) (11,463) ---
Net earnings --- --- --- 258,175
--------- -------- --------- ---------
Balances at December 31, 1996 1,417,087 70,854 1,890,005 (475,240)
Net earnings --- --- --- 236,820
--------- -------- --------- ---------
Balances at December 31, 1997 1,417,087 70,854 1,890,005 (238,420)
Net earnings --- --- --- 169,341
_________ ________ _________ ________
Balances at December 31, 1998 1,417,087 70,854 1,890,005 (69,079)
========= ======== ========= =========
<FN>
See accompanying notes to financial statements.
</TABLE>
<TABLE>
TEXAS VANGUARD OIL COMPANY
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 169,341 236,820 258,175
Adjustments to reconcile net earnings
to cash provided by operating activities:
Depreciation, depletion and amortization 117,648 136,370 79,467
(Gain) loss on sale of oil and gas properties (8,553) 5,000 70,635
Deferred federal income tax expense 45,000 122,000 45,409
Impairment in value of oil and gas property 60,165 170,678 102,101
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable (7,456) (43,794) (10,258)
Increase (decrease) in trade accounts payable (40,429) (1,604) 67,703
--------- --------- ---------
Net cash provided by operating activities 335,716 625,470 613,232
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 10,370 --- 56,930
Additions to oil and gas properties (805,768) (613,361) (479,783)
Additions to furniture and equipment --- --- (24,327)
--------- --------- ---------
Net cash used in investing activities (795,398) (617,361) (447,180)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on notes payable 1,400,000 343,578 1,473,450
Repayments of notes payable (945,780) (231,661) (1,025,622)
Repurchase and cancellation of common stock --- --- (11,963)
--------- --------- ---------
Net cash provided by financing activities 454,220 111,917 435,865
--------- --------- ---------
Net increase (decrease) in cash (5,462) 120,026 601,917
Cash and cash equivalents at
beginning of year 1,105,264 985,238 383,321
--------- -------- --------
Cash and cash equivalents at
end of year $ 1,099,802 1,105,264 985,238
========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 123,848 145,391 114,000
========== ========== ==========
<FN>
Supplemental disclosure of non cash investing and financing activity:
See note 5.
See accompanying notes to financial statements.
</TABLE>
TEXAS VANGUARD OIL COMPANY
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Significant Accounting Policies
Description of Business - Texas Vanguard Oil Company (the Company) engages in
the acquisition, exploration, development, and operation of onshore oil and gas
properties in the United States, principally in Texas. The Company owns
interests in producing properties and undeveloped oil and gas leases in Texas,
Wyoming and New Mexico. The Company sells all of its production to traditional
industry purchasers who have the facilities to transport the oil and gas from
the well site.
Oil and Gas Properties - The Company follows the "successful efforts" method of
accounting for oil and gas exploration and production operations. Accordingly,
costs incurred in the acquisition and exploratory drilling of oil and gas
properties are initially capitalized and either subsequently expensed if the
properties are determined not to have proved reserves, or reclassified as a
proven property if proved reserves are discovered. Costs of drilling development
wells are capitalized. Geological, geophysical, carrying and production costs
are charged to expense as incurred.
Costs related to acquiring unproved lease and royalty acreage are periodically
assessed for possible impairment of value. If the assessment indicates impair-
ment, the costs are charged to expense.
Depreciation, depletion and amortization of proved oil and gas property costs,
including related equipment and facilities, are provided using the units-of-
production method on a property by property basis.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets to be Disposed of ("Statement 121") in March 1995 for implementation
in fiscal years beginning after December 15, 1995. The statement addresses
the impact on an enterprise's financial statements when circumstances indicate
the carrying amount of an asset may not be recoverable. The Company adopted
Statement 121 as of January 1, 1996. There was no material impact on the
financial statements at adoption. There has been on impairment loss recognized
in the current year financial statements.
Office Furniture and Equipment - Office furniture and equipment is stated at
cost. Depreciation is computed using the straight-line method, based on the
following estimated useful lives:
Office furniture and equipment 7 years
Automotive equipment 5 years
Federal Income taxes - The Company uses the "asset and liability method" of
income tax accounting which bases the amount of current and future taxes
payable on the events recognized in the financial statements and on tax laws
existing at the balance sheet date. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes enactment date.
Cash and Cash Equivalents - The Company considers cash and cash equivalents to
consist of demand deposits and certificates of deposit with an original maturity
of ninety days or less.
Concentration of Credit Risk - The Company sells all of its production to
traditional industry purchasers. Oil sales are not made under a written contract
and the purchaser and price are not specified in the division order for the
subject property. The Company has recorded revenues in excess of 10% of total
revenue from four customers in 1998, five customers in 1997 and three customers
in 1996 as follows: 1998 - 21%, 22%, 18%, 14%, 1997 - 12%, 15% 17%, 19%, 20%
and 1996 - 12%, 21% and 24%. The Company does not believe the loss of these
customers would have a material adverse effect on its operations as it could
sell its production to other gathering companies.
Use of Estimates - Consistent with the requirements of generally accepted
accounting principles, management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities in order to
prepare these financial statements. Actual results could differ from those
estimates.
Earnings Per Share - In February 1997, the FASB issued SFAS 128, "Earnings Per
Share" ("SFAS 128") which established standards for computing and presenting
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Primary EPS includes common stock equivalents while
basic EPS excludes them. This change simplifies the computation of EPS. It
also requires dual presentation of basic and fully diluted EPS on the face of
the income statement for all entities with complex capital structures. The
Company adopted SFAS 128 effective December 31, 1997 and there was no material
impact on its financial statements at adoption.
Recent Accounting Announcements - In June 1997, FASB issued SFAS 130,
"Reporting Comprehensive Income" (SFAS 130"). SFAS 130 established disclosure
standards for reporting comprehensive income in a full set of general purpose
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company adopted SFAS 130 effective December 31, 1998,
and there was no material impact on the financial statements at adoption.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for
periods beginning after December 15, 1997. SFAS establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
<TABLE>
(2) Notes Payable
<CAPTION>
The Company had notes payable and long-term debt to banks as follows at
December 31:
1998 1997
<S> <C> <C>
Line of credit with a bank under which it may borrow
up to $200,000. Interest payable quarterly at 7.30%,
secured by $200,000 of certificates of deposit. The
line of credit matures on April 28, 1999. $ 200,000 ---
A note with a bank secured by oil and gas properties.
The original value of the note was $600,000.
Interest acrues at .5% above the prime rate
(7.75% at December 31, 1998), with monthly
payments of $12,500 plus accrued interest. The
note matures on July 29, 1999. 600,000 ---
A note with a bank secured by oil and gas properties.
The original amount of the note was $1,232,700 in
1997. Interest accrues at .5% above the prime rate
(7.75% at December 31, 1998), with monthly payments
of principal of $26,000 plus interest. The note
matures on July 29, 2001. 789,868 1,102,700
Line of credit with a bank under which it may borrow up
to $600,000. Interest payable monthly at prime rate
plus .5% (7.75% at December 31, 1998), secured by oil
and gas properties. 600,000 600,000
Other notes payable, due on demand or in
monthly installments, maturing on various
dates through September, 2000, secured by equipment. 11,353 23,302
--------- ---------
Total bank debt 2,201,221 1,726,002
Less current installments (1,718,615) (923,606)
--------- ---------
Long-term bank debt, excluding current installments $ 482,606 802,396
========= =======
</TABLE>
All notes and long-term debt are personally guaranteed by Robert N. Watson, Jr.
President.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999 $1,718,615
2000 316,738
2001 165,868
---------
Total $2,201,221
=========
</TABLE>
Texas Vanguard Oil Company
Notes to Financial Statements
(3) Related Party Transactions
The Company and a company owned by the President of the Company have an agree-
ment whereby the latter provides the Company general corporate management
services. None of the Company's officers earn a salary. The affiliated company
received $150,000, $150,000, and $144,000 as compensation for performance of
those services during the years ended December 31, 1998, 1997 and 1996,
respectively. Effective January 1, 1999 the agreement was continued with terms
of $12,500 per month through December 31, 1999.
The Company leases office space from a company owned by the President of the
Company under a non-cancelable operating lease. Rent expense incurred under
this lease was $15,000 for the year ended December 31, 1998. Future minimum
lease payments are as follows:
<TABLE>
<S> <C>
1999 $ 7,500
======
</TABLE>
As of December 31, 1997, the Company had a note payable to an individual
director of the Company in the amount of $21,000. The note is due on demand
and bears interest at 10% and is unsecured. The note was paid during 1998.
(4) Federal Income Taxes
<TABLE>
The actual federal income tax expense differs from the "expected" tax expense
computed by applying the US Federal corporate income tax rate of 34% to income
before income taxes as follows:
<CAPTION>
1998 1997
<S> <C> <C>
Computed tax expense at statutory rate $ 72,876 122,000
Deferred tax (benefit) (27,876) ---
_________ ________
$ 45,000 122,000
========= ========
</TABLE>
Texas Vanguard Oil Company
Notes to Financial Statements
(4) Federal Income Taxes cont.
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1998 and 1997 is presented below:
1998 1997
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 122,252 121,922
--------- ---------
Net deferred tax asset 122,252 121,922
--------- ---------
Deferred tax liability:
Office furniture and equipment and oil and gas property,
due to differences in depreciation and abandonment (289,252) (243,922)
--------- ---------
Total deferred tax liability $ (167,000) (122,000)
========= =========
</TABLE>
The Company has accumulated losses for Federal income tax purposes of
approximately $360,000 and $359,000 as of December 31, 1998 and 1997, respec-
tively, which may be carried forward and used to reduce taxable income in
future years. The carryforward expires in 2009.
(5) Fair Value of Financial Instruments
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of notes payable
approximates market value at December 31, 1998.
(6) Subsequent Events
During 1998, the Securities and Exchange Commission (SEC) entered an
order in an administrative proceeding against the Company, Robert N. Watson
Jr., and Linda R. Watson (the Respondents). The proceeding was directed to
alleged stock purchases made by the Company, Robert N. Watson, Jr. and Linda R.
Watson from December 1994 to May 1996 with the alleged intent to increase the
Company's stock price in order to maintain its listing on the Boston Stock
Exchange. The respondents, without admitting or denying any of the allegations,
have consented to the order issued by the SEC to cease and desist from
committing or causing any violation, or any future violation, of Sections
9(a)(2), 10(b), 13(d) and 16(a) of the Exchange Act and Rules 10b-5, 13d-2,
16a-2, and 16a-3 promulgated thereunder.
TEXAS VANGUARD OIL COMPANY
SUPPLEMENTAL OIL AND GAS INFORMATION
Years ended December 31, 1998, 1997 and 1996
(Unaudited)
Reserve Quantity Information (Unaudited)
The following reserve related information is based on estimates prepared by
management of the Company. Reserve estimates are inherently imprecise and are
continually subject to revisions based on production history, results of
additional exploration and development, price of oil and gas and other factors.
All of the Company's oil and gas reserves are located in the United States.
<TABLE>
<CAPTION>
1998 1997 1996
Oil Gas Oil Gas Oil Gas
BBLS MCF BBLS MCF BBLS MCF
<S> <C> <C> <C> <C> <C> <C>
Proved developed
and undeveloped
reserves:
Beginning of year 589,677 4,017,066 590,924 3,913,319 1,639,187 9,639,887
Revisions of
previous estimates (134,306) 1,065,501 (72,921) 41,566 (1,043,355) (5 950,845)
Extensions
and Discoveries 9,111 8,536 19,377 --- --- ---
Purchase of
minerals in place 117,741 1,692,921 99,731 386,643 82,345 484,519
Sale of minerals --- 14,007 --- --- (45,547) ---
Production (49,357) (434,374) (47,434) (324,462) (41,708) (260,242)
---------- ---------- ---------- ---------- ---------- ---------
End of year 532,866 6,355,643 589,677 4,017,066 590,924 3,913,319
========== ========== ========== ========== ========== =========
Proved developed
reserves:
Beginning of year 589,677 4,017,066 590,924 3,913,319 1,639,189 9,639,887
End of year 532,866 6,355,643 589,677 4,017,066 590,924 3,913,319
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The following is a standardized measure of discounted future net cash flows and
changes therein relating to proved oil and gas reserves. Future net cash flows
were computed using year-end prices and costs and relate to existing proved oil
and gas reserves in which the enterprise has mineral interests. The Company
cannot predict price fluctuations which may occur in the future. Oil prices
have increased from approximately $10.00 at December 31, 1998 per barrel to
approximately $11.50 per barrel at March 9, 1999. Future income tax expenses
were provided after estimated utilization of Federal income tax loss carry-
forwards.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Future cash inflows $ 17,864,686 21,580,020 26,513,000
Future production and development costs (8,694,333) (10,480,296) (9,874,307)
Future income tax expenses (1,685,710) (2,510,533) (4,402,446)
------------ ------------ ------------
Future net cash flows 7,484,643 8,589,191 12,236,247
10% annual discount for estimated
timing of cash flows (3,098,297) (3,400,245) (5,041,705)
------------ ------------ ------------
Standardized measure of discounted
future net cash flows $ 4,386,346 5,188,946 7,194,542
============ ============ ============
</TABLE>
TEXAS VANGUARD OIL COMPANY
SUPPLEMENTAL OIL AND GAS INFORMATION, CONTINUED
(Unaudited)
<TABLE>
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Changes:
Sale of oil and gas produced, net of
production costs $ (1,137,988) (1,331,340) (1,080,046)
Net changes in prices and production costs (342,888) (669,657 1,075,630
Purchase of minerals in place 348,974 213,728 322,455
Extensions and discoveries 8,254 24,512 ---
Sales (2,115) --- (106,480)
Revisions of previous quantity estimates 137,819 (253,051) (4,649,360)
Accretion of discount 518,895 719,454 653,935
Other (333,551) (709,242) 4,439,050
---------- ---------- ----------
Net changes (802,600) (2,005,596) 655,184
Beginning balance - standardized measure
of discounted future net cash flows 5,188,946 7,194,542 6,539,358
---------- ---------- -----------
Ending balance - standardized measure of
discounted future net cash flows $ 4,386,346 5,188,946 7,194,542
========== ========== ==========
</TABLE>
The Company has not filed with or included in reports to any Federal authority
or agency other than the Securities and Exchange Commission any estimates of
total proved net oil and gas reserves.
<TABLE>
Capitalized Costs Relating to Oil and Gas Producing Activities
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Unproven oil and gas properties
(including wells in progress) $ 166,630 166,630 166,630
Proven oil and gas properties 3,327,677 2,593,991 2,175,128
Accumulated depletion and amortization (375,162) (276,407) (184,537)
---------- ---------- ----------
Net capitalized costs $ 3,119,145 2,484,214 2,157,221
========== ========== ==========
</TABLE>
<TABLE>
Costs Incurred in Oil and Gas Property
Acquisition, Exploration and Development Activities
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Acquisition of properties - unproven $ --- --- ---
Acquisition of properties - proven 678,041 409,396 348,471
Exploration costs --- --- ---
Development costs 127,727 207,966 131,312
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10, 11, 12 and 13 constituting Part III of Form 10-K have been omitted
from this annual report pursuant to the provisions of Instruction G(3) to Form
10-K, as the Company will file a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days after
the close of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). Financial Statements.
Independent Auditors' Report, Balance Sheets at December 31, 1998 and 1997 and
the related Statements of Earnings, Stockholders' Equity, and Cash Flows for
each of the years in the three-year period ended December 31, 1998, and notes
to financial statements are included in Item 8.
(a)(2) Financial Statement Schedules
Not applicable.
<TABLE>
(a)(3). Exhibits
<CAPTION>
Number Description of Document
<S> <C>
3 Copies of Articles of Incorporation and Bylaws - Incorporated by
reference to Exhibits 4a and 4b to Registration Statement No. 2-66693
filed by registrant on Form S-2.
3.1 Articles of Amendment to authorize capitalization of common stock,
previously filed as exhibits to Form 8-K dated May 27, 1983.
3.2 Certificate of Amendment dated February 20, 1990 of Articles of
Incorporation and Articles of Amendment dated February 16, 1990 to the
Articles of Incorporation. Filed as Exhibit to 1989 Form 10-K.
10.1 Incentive Stock Option Plan, previously filed as Exhibit 5b to
Registration Statement No. 2-66693 filed by registrant on Form S-2.
10.2 Management contract between Texas Vanguard Oil Company and Robert Watson,
Inc., previously filed with Form 8-K dated January 30, 1988.
10.4 Note payable to First State Bank dated April 28, 1998.
10.5 Note payable to Midland American Bank dated July 29, 1997.
10.6 Note payable to Midland American Bank dated July 29, 1998.
10.7 Note payable to Midland American Bank dated December 23, 1998.
</TABLE>
(b). Reports of Form 8-K
1. Change in Registrant's Certifying Accountant filed by Form 8-k
dated November 13, 1998.
2. Certifying Accountant's letter filed as exhibit by Form 8-K
dated November 19, 1998.
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.
TEXAS VANGUARD OIL COMPANY
By: Robert N. Watson, Jr.
Robert N. Watson, Jr., President
March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Robert N. Watson, Jr.
Robert N. Watson, Jr., President,
Director, Chairman of the Board,
Principal Executive Officer and
Principal Financial and Accounting
Officer
March 24, 1999
Linda R. Watson Robert L. Patterson
Linda R. Watson, Secretary and Robert L. Patterson, Director
Treasurer, Director March 24, 1999
March 24, 1999
OFFICERS AND DIRECTORS CORPORATE INFORMATION
Robert N. Watson, Jr. CORPORATE OFFICE
President, Chief Executive 9811 Anderson Mill Road, Suite 202
Officer and Director Austin, Texas 78750
Linda R. Watson
Secretary/Treasurer INDEPENDENT ACCOUNTANTS
and Director Sprouse & Winn, L.L.P.
Austin, Texas
Robert L. Patterson
Director TRANSFER AGENT
American Securities Transfer & Trust,Inc.
P.O. Box 1596
Denver, Colorado 80201
COMMON STOCK
Quoted on OTC Bulletin Board
Symbol: TVOC
1998 ANNUAL SHAREHOLDERS MEETING
June 3, 1999, at 10:00 A.M.
9811 Anderson Mill Road, Suite 202
Austin, Texas 78750
EXHIBITS:
EXHIBIT 10.4
VARIABLE RATE COMMERCIAL PROMISSORY NOTE:
First State Bank ("Lender")
8045 Mesa Drive
Austin, Texas 78731
Travis County
Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
<TABLE>
<CAPTION>
TERMS:
<S> <C>
Interest Rate: Variable
Principal Amount: $200,000.00
Funding Date: July 28, 1998
Maturity Date: July 28, 1999
</TABLE>
PROMISE TO PAY:
For value received, I promise to pay to you, or your order, at your address
listed above the principal sum of TWO-HUNDRED THOUSAND AND NO/100 DOLLARS,
$200,000.00.
_X_ Multiple Advance: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On April 28, 1998, I will receive the
amount of $00.00 and future principal advances are contemplated.
_X_ Open End Credit: You and I agree that I may borrow up to the maximum
principal sum more than one time. This feature is subject to all other
conditions and expires on April 28, 1999 *see below.
Interest: I agree to pay interest on the outstanding principal balance from
April 28, 1998 at the rate of 7.3000% per year until the first rate change
date.
_X_ Variable Rate: This rate may then change as state below.
_X_ Index Rate: The future rate will be 2.00% above the following index rate:
First State Bank, N.A. one year certificate of deposit.
_X_ Ceiling Rate: The interest rate ceiling for this note is the indicated
ceiling rate announced by the Credit Commissioner from time to time.
_X_ Frequency and Timing: The rate on this note may change as often as at
maturity.
Accrual method: Interest rate will be calculated on a 365 days per year basis.
Post Maturity Rate: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below: _X_ at a rate
equal to highest allowable by law.
_X_ Late Charge: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of highest allowable by laws.
Payments: I agree to pay this note as follows:
_X_Interest: I agree to pay accrued interest on demand, but if no demand is
made, then monthly.
_X_ Principal: I agree to pay the principal on demand, but if no demand is
made, then at maturity.
Purpose: The purpose of this loan is working capital line of credit.
Additional Terms: *This loan is not under chapter 15 of the Texas Credit Code.
Security Interest: I give you a security interest in all of the property
described below that I now own and that I may own in the future (including,
but not limited to, all parts, accessories, repairs, improvements, and
accessions to the Property), wherever the Property is or may be located, and
all proceeds and products from the Property.
_X_ Secured property includes, but is not limited by the following:
First State Bank, N.A. certificate of deposit #8188 and any renewals
or replacements thereof.
Signed: Robert N.Watson, Jr., President
Texas Vanguard Oil Company
EXHIBIT 10.5
VARIABLE RATE COMMERCIAL PROMISSORY NOTE:
Midland American Bank ("Lender")
401 West Texas
Midland, Texas 79701
Midland County
Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
<TABLE>
<CAPTION>
TERMS:
<S> <C>
Interest Rate: Variable
Principal Amount: $1,232,669.87
Funding Date: July 29, 1997
Maturity Date: July 20, 2001
Customer Number: 76384
Loan Number: 43060
</TABLE>
PROMISE TO PAY:
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of ONE MILLION, TWO-HUNDRED THIRTY-TWO THOUSAND SIX-
HUNDRED SIXTY-NINE AND 87/100 Dollars ($1,232,669.87) plus interest on the
unpaid principal balance at the rate and in the manner described below. All
amounts received by Lender shall be applied first to expenses, then to accrued
unpaid interest, and then to outstanding principal, or in any other manner as
determined by Lender, in Lender's discretion, as permitted by law.
INTEREST RATE: This Note has a variable interest rate feature. Interest on the
Note may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days per year (and in any event,
365 or 366 days per year during periods when the Maximum Lawful Rate, which
is defined on the reverse, is in effect) and the actual number of days elapsed.
Interest on this Note shall be calculated at the variable rate of ONE-HALF OF
ONE percent (0.5000%) per annum over the Index Rate provided that such rate
shall not exceed the Maximum Lawful Rate. Any change in the interest rate
resulting from a change in the Index Rate will be effective on: SAME DAY AS
MIDLAND AMERICAN BANK PRIME RATE CHANGES
INDEX RATE: The Index Rate for this Note shall be: MIDLAND AMERICAN BANK PRIME
If the Index becomes unavailable during the term of the loan, Lender may
substitute another index which is similar.
MINIMUM RATE/MAXIMUM RATE: The minimum rate on this Note shall be n/a percent
(n/a %) per annum. The maximum rate on this Note shall not exceed EIGHTEEN AND
NO/1000 percent (18.000%) per annum or the Maximum Lawful Rate, whichever is
less.
DEFAULT RATE: In the event of a default under this Note, the Lender may, in
its discretion, determine that all amounts owing to Lender shall bear interest
as follows: EIGHTEEN PERCENT or the Maximum Lawful Rate, whichever is less.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule: 47 PAYMENTS OF PRINCIPAL IN THE AMOUNT OF $26,000.00
PLUS ACCRUED INTEREST BEGINNING AUGUST 29, 1997 AND CONTINUING AT MONTHLY TIME
INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS
ACCRUED INTEREST IS DUE AND PAYABLE ON JULY 29, 2001.
All payments will be made to Lender at its address in the county described
above and in lawful currency of the United States of America.
RENEWAL: If checked, _X_ this Note is given in renewal of, but not in novation
or discharge of, certain promissory notes dated July 21, 1996 in the original
principal amount of $849,121.90 and having an original commitment amount of
$600,000.00 ("Original Notes") from Maker payable to the order of Payee, which
Original notes are secured by Deeds of Trust as Amended as renewed and extended
under the Deed of Trust as described above. All liens, assignments and security
interests securing the payment of said Original Notes are hereby ratified,
confirmed, renewed, extended, rearranged and brought forward as security for
the payment of this Note.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest in all monies,
instruments, and savings, checking, and other deposit accounts of Borrower's,
(excluding IRA, Keogh, and trust accounts and deposits subject to tax penalties
if so assigned), that are now or in the future in Lender's custody or control.
Upon default, and the extent permitted by applicable law, Lender may exercise
its security interest in all such property which shall be in addition to and
cumulative of Lender's right of common law setoff. __X__ If checked, the
obligations under this note are also secured by a lien and/or security interest
in the property described in the documents executed in connection with this
Note as well as any other property designated as security for this Note now or
in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments shall be as determined by Lender and as permitted by law.
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
THIS NOTE AND RELATED DOCUMENTS HAVE BEEN SIGNED IN THE COUNTY OF LENDER'S
ADDRESS UNLESS OTHERWISE SPECIFIED: MIDLAND.
NOTE DATE: JULY 29, 1997
BORROWER: TEXAS VANGUARD OIL COMPANY
ROBERT N. WATSON, JR.
PRESIDENT
EXHIBIT 10.6
COMMERCIAL REVOLVING OR DRAW NOTE-VARIABLE RATE:
Midland American Bank ("Lender")
401 West Texas
Midland, Texas 79701
Midland County
(915) 687-3013
Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
(512) 331-6781
<TABLE>
<CAPTION>
TERMS:
<S> <C>
Interest Rate: Variable
Principal Amount: $600,000.00
Funding Date: July 29, 1998
Maturity Date: July 29, 1999
Customer Number: 76384
Loan Number: 43070
</TABLE>
PROMISE TO PAY:
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of SIX HUNDRED THOUSAND AND NO/100 Dollars
($600,000.00) plus interest on the unpaid principal balance at the rate and in
the manner described below. All amounts received by Lender shall be applied
first to expenses, then to accrued unpaid interest, and then to outstanding
principal, or in any other manner as determined by Lender, in Lender's
discretion, as permitted by law.
INTEREST RATE: This Note has a variable interest rate feature. Interest on the
Note may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days per year (and in any event,
365 or 366 days per year during periods when the Maximum Lawful Rate, which
is defined on the reverse, is in effect) and the actual number of days elapsed.
Interest on this Note shall be calculated at the variable rate of ONE AND
NO/1000 percent (1.000%) per annum over the Index Rate provided that such rate
shall not exceed the Maximum Lawful Rate. Any change in the interest rate
resulting from a change in the Index Rate will be effective on: SAME DAY
AS MIDLAND AMERICAN BANK PRIME RATE CHANGES
INDEX RATE: The Index Rate for this Note shall be: MIDLAND AMERICAN BANK PRIME
If the Index becomes unavailable during the term of the loan, Lender may
substitute another index which is similar.
MINIMUM RATE/MAXIMUM RATE: The minimum rate on this Note shall be n/a percent
(n/a %) per annum. The maximum rate on this Note shall not exceed EIGHTEEN AND
NO/1000 percent (18.000%) per annum or the Maximum Lawful Rate, whichever is
less.
DEFAULT RATE: In the event of a default under this Note, the Lender may, in
its discretion, determine that all amounts owing to Lender shall bear interest
as follows: EIGHTEEN PERCENT or the Maximum Lawful Rate, whichever is less.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule: ON DEMAND OR IF NO DEMAND IS MADE-INTEREST ONLY
PAYMENTS ARE DUE AUGUST 29, 1997 AND CONTINUING AT MONTHLY TIME INTERVALS
THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL BALANCE PLUS ACCRUED
INTEREST IS DUE AND PAYABLE ON JULY 29, 1998.
All payments will be made to Lender at its address in the county described
above and in lawful currency of the United States of America.
RENEWAL: If checked, _X_ this Note is given in renewal of, but not in novation
or discharge of, Loan Number 43070.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest in all monies,
instruments, and savings, checking, and other deposit accounts of Borrower's,
(excluding IRA, Keogh, and trust accounts and deposits subject to tax penalties
if so assigned), that are now or in the future in Lender's custody or control.
Upon default, and the extent permitted by applicable law, Lender may exercise
its security interest in all such property which shall be in addition to and
cumulative of Lender's right of common law setoff. ____ If checked, the
obligations under this note are also secured by a lien and/or security interest
in the property described in the documents executed in connection with this
Note as well as any other property designated as security for this Note now or
in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all prepayments
shall be as determined by Lender and as permitted by law.
REVOLVING OR DRAW FEATURE: This Note possesses a revolving or draw feature as
indicated below.
_X_ This Note possesses a revolving feature. Borrower shall be entitle to
borrow up to the full amount of the Note from time to time during the term of
this Note.
___ This Note possesses a draw feature. Borrower shall be entitled to make
one or draws under this Note. The aggregate amount of such draws shall not
exceed the full principal amount of this Note.
Lender shall maintain a written ledger of the amounts loaned to and repaid by
Borrower under this Note. The aggregate unpaid principal amount shown on such
ledger shall be rebuttable presumptive evidence of the outstanding principal
amount owing and unpaid on this Note. The Lender's failure to record the date
and amount of any advance on such ledger shall not limit or otherwise affect
the obligations of the Borrower under this Note to repay the outstanding
principal amount of the advances together with all accrued, unpaid interest
thereon. Lender shall not be obligated to provide Borrower a copy of the ledger
on a periodic basis, however, Borrower shall be entitled to inspect or obtain
a copy of the ledger during Lender's business hours.
CONDITIONS FOR ADVANCES: Borrower shall be entitled to borrow monies under
this Note (subject to the limitations described above) under the following
conditions: CUSTOMER REQUEST/ OFFICER APPROVAL.
ADDITIONAL TERMS:
Purpose: Provide funds for oil and gas acquisitions. Secured by: Various Oil
and Gas properties in various counties in Texas.
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
THIS NOTE AND RELATED DOCUMENTS HAVE BEEN SIGNED IN THE COUNTY OF LENDER'S
ADDRESS UNLESS OTHERWISE SPECIFIED: MIDLAND.
NOTE DATE: JULY 29, 1998
BORROWER: TEXAS VANGUARD OIL COMPANY
ROBERT N. WATSON, JR.
PRESIDENT
EXHIBIT 10.7
TERM PROMISSORY NOTE:
Midland American Bank ("Lender")
401 West Texas
Midland, Texas 79701
Midland County
Texas Vanguard Oil Company ("Borrower")
PO Box 202650
Austin, Texas 78720
<TABLE>
<CAPTION>
TERMS:
<S> <C>
Interest Rate: Variable
Principal Amount: $600,000.00
Funding Date: December 23, 1998
Maturity Date: July 29, 1999
Customer Number: 76384
</TABLE>
PROMISE TO PAY:
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of SIX-HUNDRED THOUSAND DOLLARS ($600,000.00) plus
interest on the unpaid principal balance at the rate and in the manner described
below. All amounts received by Lender shall be applied first to expenses, then
to accrued unpaid interest, and then to outstanding principal, or in any other
manner as determined by Lender, in Lender's discretion, as permitted by law.
This note is described in and is subject to the terms and provisions of that
certain Loan Agreement dated July 29, 1997 as amended by those certain First
and Second Amendments to Loan Agreement dated July 29, 1998 and December 23,
1998 (hereinafter collectively referred to as the "Loan Agreement") by,
between and among Midland American Bank, Maker and Robert N. Watson, Jr., as
"Guarantor." The Loan Agreement, among other things, contains provisions
regarding the "Borrowing Base", as defined in the Loan Agreement and for
acceleration of the maturity hereof upon the happening or omission of certain
stated events upon the terms and conditions therein specified.
INTEREST RATE: This Note has a variable interest rate feature. Interest on the
date may change from time to time if the Index Rate identified below changes.
Interest shall be computed on the basis of 360 days per year (and in any event,
365 or 366 days per year during periods when the Maximum Lawful Rate, which
is defined on the reverse, is in effect) and the actual number of days elapsed.
Interest on this Note shall be calculated at the variable rate of ONE-HALF OF
ONE percent (0.5000%) per annum over the Index Rate provided that such rate
shall not exceed the Maximum Lawful Rate. Any change in the interest rate
resulting from a change in the Index Rate will be effective on: SAME DAY AS
MIDLAND AMERICAN BANK PRIME RATE CHANGES
INDEX RATE: The Index Rate for this Note shall be: MIDLAND AMERICAN BANK PRIME
If the Index becomes unavailable during the term of the loan, Lender may
substitute another index which is similar.
MINIMUM RATE/MAXIMUM RATE: The minimum rate on this Note shall be n/a percent
(n/a %) per annum. The maximum rate on this Note shall not exceed EIGHTEEN AND
NO/1000 percent (18.000%) per annum or the Maximum Lawful Rate, whichever is
less.
DEFAULT RATE: In the event of a default under this Note, the Lender may, in
its discretion, determine that all amounts owing to Lender shall bear interest
as follows: EIGHTEEN PERCENT or the Maximum Lawful Rate, whichever is less.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to
the following schedule: 6 PAYMENTS OF PRINCIPAL IN THE AMOUNT OF $12,500.00
PLUS ACCRUED INTEREST BEGINNING JANUARY 29, 1999 AND CONTINUING AT MONTHLY TIME
INTERVALS THEREAFTER. A FINAL PAYMENT OF THE ENTIRE UNPAID PRINCIPAL BALANCE
PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON JULY 29, 1999.
All payments will be made to Lender at its address in the county described
above and in lawful currency of the United States of America.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest in all monies,
instruments, and savings, checking, and other deposit accounts of Borrower's,
(excluding IRA, Keogh, and trust accounts and deposits subject to tax penalties
if so assigned), that are now or in the future in Lender's custody or control.
Upon default, and the extent permitted by applicable law, Lender may exercise
its security interest in all such property which shall be in addition to and
cumulative of Lender's right of common law setoff. __X__ If checked, the
obligations under this note are also secured by a lien and/or security interest
in the property described in the documents executed in connection with this
Note as well as any other property designated as security for this Note now or
in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all
prepayments shall be as determined by Lender and as permitted by law.
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
THIS NOTE AND RELATED DOCUMENTS HAVE BEEN SIGNED IN THE COUNTY OF LENDER'S
ADDRESS UNLESS OTHERWISE SPECIFIED: MIDLAND.
NOTE DATE: DECEMBER 23, 1998
BORROWER: TEXAS VANGUARD OIL COMPANY
ROBERT N. WATSON, JR.
PRESIDENT
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,009,802
<SECURITIES> 0
<RECEIVABLES> 87,860
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,187,662
<PP&E> 3,592,198
<DEPRECIATION> 449,293
<TOTAL-ASSETS> 4,332,767
<CURRENT-LIABILITIES> 1,791,381
<BONDS> 0
<COMMON> 1,417,087
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,332,767
<SALES> 1,298,183
<TOTAL-REVENUES> 1,493,456
<CGS> 726,429
<TOTAL-COSTS> 726,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,848
<INCOME-PRETAX> 214,341
<INCOME-TAX> 45,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,341
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
