Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
X/ Act of 1934 for the fiscal year ended December 31, 1996
- ---
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 0-9219
------
AVOCA, INCORPORATED
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Louisiana 72-0590868
- ---------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P. O. Box 61260, New Orleans, LA. 70161
- ---------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (504) 552-4720
------------------------
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
- ---------------------------------------- -------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - No Par Value
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. X
---
State issuer's revenues for its most recent fiscal year. $827,494
--------
The aggregate market value of common stock held on March 3, 1997 by
non-affiliates of the registrant was $4,158,375. Such value has been computed on
the basis of the average bid and asked prices of the stock and by excluding,
from the 830,500 shares outstanding on that date, all stock beneficially owned
by officers and directors of the registrant and by beneficial owners of more
than five percent of its stock, even though all such persons may not be
affiliates as defined in SEC Rule 12b-2.
The Company has only one class of common stock, of which 830,500 shares were
outstanding on March 1, 1997.
Parts I and II incorporate by reference information from the Annual Report to
Shareholders for the year ended December 31, 1996. Part III incorporates by
reference information from the Company's Proxy Statement dated February 18,
1997.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
An exhibit index is located on page 15
<PAGE>
<TABLE>
<CAPTION>
AVOCA, INCORPORATED
Index to 10-KSB Annual Report
PAGE
PART I
<S> <C> <C>
Item 1: Description of Business 3-8
Item 2: Description of Property 8-10
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for Common Equity
and Related Stockholder Matters 10
Item 6: Management's Discussion and Analysis or Plan of
Operation 10-11
Item 7: Financial Statements 11
Item 8: Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 11
PART III
Item 9: Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act 11
Item 10: Executive Compensation 11
Item 11: Security Ownership of Certain Beneficial Owners
and Management 12
Item 12: Certain Relationships and Related Transactions 12
Item 13: Exhibits and Reports on Form 8-K 12-13
</TABLE>
Page 2 of 14 Pages
<PAGE>
PART I
Item 1 Description of Business
- ------ -----------------------
Avoca, Incorporated ("the Company") is a Louisiana corporation formed
in 1931. It owns and manages approximately 16,000 acres comprising virtually all
of Avoca Island, which is located about 90 miles west of New Orleans in St. Mary
Parish, Louisiana, adjacent to and immediately southeast of Morgan City. The
island, approximately two-thirds of which is under shallow water, is rural and
virtually undeveloped except for exploration and development of its oil and gas
resources.
Avoca, Incorporated is a passive royalty company that derives most of
its income from royalties, bonuses and delay rentals under oil and gas leases
covering its Avoca Island acreage, seismic permits and interest on its
investments. The following table and accompanying lease map furnish information
respecting mineral leases in effect for the year ended December 31, 1996.
Page 3 of 14 Pages
<PAGE>
<TABLE>
<CAPTION>
MINERAL INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Income Recognized
in 1996
Lease
Initial Bonus
Date of Rental or Delay
Lessee Operator Lease Acreage Expiration Per Acre Rental Net Royalties
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texaco, Inc. Texaco, Inc. 5/17/63 41.900 Termination $ 75 $ -- $ 452
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $ 200 -- 127,501
of production
IP Petroleum Company, Inc. IP Petroleum Company, Inc. 10/3/94 860.000 Terminated $ 150 32,250 --
4/30/96 due to
non-payment
of rental
Boo-Ker Oil and Gas Corporation Exchange Oil and Gas Company *10/6/94 185.440 Well plugged and $ -- -- 652
abandoned first
quarter of 1996
Capital Energy, Inc. Black Gold Production **1/2/96 45.029 Termination $ 125 5,625 100,444
Company of production
or 1/2/97 if
nonproducing
Burlington Resources Oil & Gas Burlington Resources Oil & 8/12/96 420.000 Termination $ 110 46,200 --
Company Gas Company of production
or 8/12/99 if
nonproducing
------- --------
$84,075 $229,049
======= ========
*---This lease supersedes a lease dated August 21, 1990 with the same lessee.
**---This lease supersedes a lease dated January 19, 1960 with Cabot Carbon
Corporation.
</TABLE>
Page 4 of 14 Pages
<PAGE>
[Map of Avoca Island appears here,
showing property of Avoca, Incorporated,
mineral leases and well locations]
Page 5 of 14 Pages
<PAGE>
Item 1 Description of Business (continued)
- ------ -----------------------
At December 31, 1996, 783.66 acres of the Company's land were covered
by oil and gas leases. Approximately 363 acres were held by production pursuant
to leases (in favor of Texaco, Inc., Alliance Operating Company and Capital
Energy, Inc.) providing for royalties ranging from 25% to 30%. The remaining 420
acres are covered by a lease, granted in 1996 to Burlington Resources Oil & Gas
Company, which stipulates a 21% royalty.
The Company's leases with Boo-Ker Oil and Gas Corporation and I. P.
Petroleum Company, Inc., covering approximately 1045 acres in the aggregate,
expired during 1996 in accordance with their terms.*
In recent years, the Delta Operating Corporation (formerly Alliance
Operating Company) Avoca No. 1 well in the Ramos Field has been the Company's
largest producing well. Royalties from the Avoca No. 1, in which Avoca,
Incorporated has a net revenue interest of approximately 19%, were responsible
for approximately 96% of the Company's royalty income during 1994, 94% in 1995,
and 56% in 1996. Production from the well was 238,455 thousand cubic feet (mcf)
of gas and 3,787 barrels of condensate in 1996, as compared with 259,513 Mcf and
4,158 barrels in 1995, and 311,602 Mcf and 5,312 barrels in 1994.
During 1996, the Intercoastal Shipyard No. 2 well succeeded the Avoca
No. 1 as the Company's largest producing well. A successful workover by its
operator, Black Gold Production Company, Inc., restored production to the
Intercoastal Shipyard No. 2 well (also in the Ramos Field) during the second
quarter of the year. Royalties from this well, in which Avoca, Incorporated has
a net revenue interest of approximately 4.05%, was responsible for 44% of the
Company's royalty
- --------
*The Boo-Ker lease expired because the lease well, which produced
only intermittently in 1995, went off production and was plugged and abandoned
during 1996. The other lease expired because I. P. Petroleum failed to pay the
delay rentals due for the second quarter of the year.
Page 6 of 14 Pages
<PAGE>
income during 1996. Since its return to production, the Intercoastal Shipyard
No. 2 well produced 883,498 Mcf of gas and 25,473 barrels of condensate in 1996.
Review of the operator's production records since year end shows that daily
production from the well has declined to a point where, at current levels, it
approximates only 50% of the year-end production rate.
The Company's share of production from the Bateman Lake Field tract
leased to Texaco, Inc., has been negligible in recent years.
In addition to information regarding prices, the following table
shows the Company's share of gas produced (in terms of thousand cubic feet) and
oil delivered (in terms of barrels) from the Ramos Field during the last three
years.
Company's Share Average Sales Price
--------------- -------------------
Year Gas Volume Oil Volume Per mcf Per bbl
1994 66,647 mcf 1,055 bbls $2.13 $16.75
1995 50,501 mcf 809 bbls $1.73 $18.00
1996 82,228 mcf 1,770 bbls $2.81 $21.66
The Company granted two mineral leases in 1996, as compared with no
leases in 1995 and one lease in 1994. Except for reworking operations, no
drilling operations were conducted on Avoca Island during the three year period
ended December 31, 1996.
The Company received substantial income from the granting of three
new 3-D seismic permits during 1996. The first permit was granted to
Geco-Prakla, Inc. and covers 3073 acres on the western part of Avoca Island. The
second permit, granted to Texas Meridian Resources Exploration, Inc., covers
7535 acres on the southern part of the island and includes an option until
January 10, 1998 to lease all or part (but not less than 753 acres) of the
permitted acreage for mineral development. The third permit, in favor of
Burlington Resources Oil & Gas Company, covers most
Page 7 of 14 Pages
<PAGE>
of the northern part of the island (7330 acres) and includes an option until
December 12, 1997 to lease all or part (but not less than 50%) of the permitted
acreage.
Further information respecting oil and gas operations on the
Company's property appears under the captions "Report to the Shareholders" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 4 and 14 of the Company's 1996 Annual Report to
Shareholders, attached as an exhibit hereto and incorporated herein by
reference. The Company's activities with respect to oil and gas are limited to
the granting of leases, seismic permits and the collection of bonuses, delay
rentals and landowner royalties thereunder. Accordingly, only limited
information, furnished primarily by the Company's lessees, has been included
with respect to oil and gas operations affecting the Company's lands. Complete
information respecting these and related matters, such as proved reserves, is
unavailable to the Company and cannot be obtained without unreasonable effort or
expense.
Wild game, bird hunting and non-commercial fishing rights on Avoca
Island are leased to Avoca Duck Club. Revenues from these sources were $21,000
in 1996.
The Company has no employees but retains the services of three
individuals as independent contractors. One acts as consultant to the Board of
Directors and assists with the Company's day to day business affairs. The other
two individuals maintain the Company's financial records and watch over the
Company's lands, respectively.
Additional information regarding the Company's business is included
under Item 2 of this report, incorporated herein by reference.
Item 2 Description of Property
- ------ -----------------------
The Company owns approximately 16,000 acres comprising virtually all
of Avoca Island. The island, located in St. Mary Parish, Louisiana,
approximately 90 miles west of New Orleans, lies
Page 8 of 14 Pages
<PAGE>
southeast of the greater Morgan City area, from which it is separated by Bayou
Boeuf. There are no bridges or roads leading to the island. Access is by means
of a free ferry which operates on a regular schedule across Bayou Boeuf (a
distance of approximately 500 feet) and connects the northwest tip of the island
with the Morgan City area. Ferry service is interrupted by periodic mechanical
breakdowns and during periods of high water.
Avoca Island is within the Morgan City Harbor and Terminal District.
Bayou Boeuf and Bayou Chene, which border the island for a distance of
approximately thirteen miles and form its northern, eastern and southern
perimeters, are part of the Gulf section of the Intracoastal Waterway.
Approximately one-third of the island, located along its northern and
eastern perimeters, is dry ground. The remaining two-thirds is under shallow
water. Avoca Island is rural, and its surface is virtually undeveloped.
Over the years, preliminary studies and proposals have been made with
regard to a bridge linking Avoca Island with the mainland. Nothing definite has
resulted from these efforts and it is doubtful that such a bridge will be built.
A study conducted with the assistance of LSU's Cooperative Extension
Service in 1991 indicates that aquaculture and tree farming are not economically
feasible and that the island's suitability for farming is limited. The Company
is continuing its search for persons interested in farming or otherwise using
the Avoca Island for agrarian purposes that will preserve the farmland status of
the property and minimize the effect of Section 404 of the Clean Water Act,
under which vast areas have been designated as wetlands subject to the
jurisdiction and permitting requirements of the U.S. Corps of Engineers. In
1996, the Company signed a letter of intent related to a possible cattle lease
that will help achieve the foregoing objectives. The lease, if executed, will
cover approximately 3200 acres on the northern and western part of the island.
Page 9 of 14 Pages
<PAGE>
Information respecting development of oil and gas resources on Avoca
Island is provided under Item 1 of this report, incorporated herein by
reference.
Item 3 Legal Proceedings
- ------ -----------------
As noted in previous reports, an historic home owned by the Company
burned to the ground during the course of roofing work performed by Gibson
Roofers, Inc. The Company sued Gibson and its insurer for total loss of the
building. Gibson counterclaimed for recovery under its roofing contract.
Having settled its claims against Gibson, the Company moved for
summary judgment on Gibson's counterclaim. The trial court granted the motion
and dismissed the counterclaim. Gibson's appeal was dismissed during the third
quarter of 1996, thus finally bringing the litigation to an end.
Item 4 Submission of Matters to
- ------ a Vote of Security Holders
--------------------------
Not Applicable
PART II
Item 5 Market for Common Equity
- ------ and Related Stockholder Matters
-------------------------------
The information called for by this item appears under the caption
"Stock Prices and Related Security Holder Matters" on page 15 of the Company's
1996 Annual Report to Shareholders, attached as an exhibit hereto and
incorporated herein by reference.
Item 6 Management's Discussion and
- ------ Analysis or Plan of Operation
-----------------------------
The information called for by this item appears under the captions
"Report to the Shareholders" and "Management's Discussion and Analysis of
Financial Condition and Results of
Page 10 of 14 Pages
<PAGE>
Operations" on pages 4 and 14, respectively, of the Company's 1996 Annual Report
to Shareholders, attached as an exhibit hereto and incorporated herein by
reference.
Item 7 Financial Statements
- ------ --------------------
The information called for by this item appears on pages 5 through 13
of the Company's 1996 Annual Report to Shareholders, attached as an exhibit
hereto and incorporated herein by reference.
Item 8 Changes In and Disagreements With
- ------ Accountants on Accounting and Financial Disclosure
--------------------------------------------------
Not applicable
PART III
Item 9 Directors, Executive Officers,
- ------ Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
--------------------------------------
The Company has two executive officers, both of whom are directors:
Edward B. Grimball, President, and M. Cleland Powell, III, Secretary-Treasurer.
Information concerning such persons and the Company's other directors is shown
under the caption "Number and Election of Directors" on pages 3 and 4 of the
Company's Proxy Statement dated February 18, 1997, incorporated herein by
reference.
Item 10 Executive Compensation
- ------- ----------------------
The information called for by this item appears under the caption
"Information Concerning Management - Executive Compensation" on page 5 of the
Company's Proxy Statement dated February 18, 1997, incorporated herein by
reference.
Page 11 of 14 Pages
<PAGE>
Item 11 Security Ownership of Certain
- ------- Beneficial Owners and Management
--------------------------------
The information called for by this item appears under the caption
"Voting Securities" on pages 2 and 3, and under the caption "Number and Election
of Directors" on pages 3 and 4, of the Company's Proxy Statement dated February
18, 1997, incorporated herein by reference.
Item 12 Certain Relationships
- ------- and Related Transactions
------------------------
The information called for by this item appears under the caption
"Information Concerning Management - Certain Relationships" on page 5 of the
Company's Proxy Statement dated February 18, 1997, incorporated herein by
reference.
PART IV
Item 13 Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a)1. Financial Statements
The following financial statements of Avoca, Incorporated,
included in its 1996 Annual Report to Shareholders, are incorporated by
reference in Part II, Item 7:
Report of Ernst & Young LLP, Independent Auditors, dated January
13, 1997
Balance sheet - December 31, 1996
Statements of Income - years ended
December 31, 1996 and 1995
Statements of Retained Earnings -
years ended December 31, 1996 and 1995
Statements of Cash Flows - years ended
December 31, 1996 and 1995
Notes to Financial Statements -
December 31, 1996
Page 12 of 14 Pages
<PAGE>
(a)2. Exhibits required by Item 601 of Regulation S-B:
3.1 Copy of Composite Charter(1)
3.2 Copy of Charter, dated October 21, 1931(1)
3.3 Copy of amendment to Charter, dated
September 13, 1972(1)
3.4 Copy of amendment to Charter, dated
May 30, 1975(1)
3.5 Copy of amendment to Charter, dated
September 15, 1981(2)
3.6 Copy of amendment to Charter, dated
March 17, 1987(2)
3.7 Copy of Composite Charter (as of
August 14, 1987)(2)
4.0 Copy of specimen stock certificate(1)
13 Annual Report to Shareholders for
the year ended December 31, 1996. Except for
the information expressly specifically
incorporated by reference in this Form 10-KSB,
the annual report is provided solely for the
information of the Securities and Exchange
Commission and is not to be deemed filed
as part of the Form 10-KSB.
23 Consent of independent auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the three
months ended December 31, 1996.
1 Incorporated by reference from registrant's Form 10 Registration
Statement, filed with the Securities and Exchange Commission on April 29,
1980, Commission file number 0-9219.
2 Incorporated by reference from registrant's Form 8 Report dated August 14,
1987, Commission file number 0-9219.
Page 13 of 14 Pages
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Avoca, Incorporated
By: /s/ Edward B. Grimball
----------------------------------
Edward B. Grimball
President and principal executive,
financial and accounting officer
Date: March 18, 1997
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.
/s/ Richard W. Fox
- -------------------------------
Richard W. Fox, Director
Date: March 18 , 1997
/s/ Edward B. Grimball
- -------------------------------
Edward B. Grimball, Director
Date: March 18, 1997
/s/ Peter V. Guarisco
- -------------------------------
Peter V. Guarisco, Director
Date: March 18, 1997
/s/ Guy C. Lyman, Jr.
- -------------------------------
Guy C. Lyman, Jr., Director
Date: March 18, 1997
/s/ M. Cleland Powell, III
- -------------------------------
M. Cleland Powell, III, Director
Date: March 18, 1997
Page 14 of 14 Pages
<PAGE>
Exhibit Index
Sequentially
Numbered
Exhibit No. Description Page
3.1 Copy of Composite Charter(1)
3.2 Copy of Charter, dated October 21, 1931(1)
3.3 Copy of amendment to Charter, dated
September 13, 1972(1)
3.4 Copy of amendment to Charter, dated
May 30, 1975(1)
3.5 Copy of amendment to Charter, dated
September 15, 1981(2)
3.6 Copy of amendment to Charter, dated
March 17, 1987(2)
3.7 Copy of Composite Charter
(as of August 14, 1987)(2)
4.0 Copy of specimen stock certificate(1)
13 Annual Report to Shareholders for the year
ended December 31, 1996. Except for
the information expressly specifically
incorporated by reference in this Form
10-KSB, the annual report is provided
solely for the information of the
Securities and Exchange Commission and is not
to be deemed filed as part of the Form 10-KSB.
23 Consent of independent auditors
27 Financial Data Schedule
- --------------------
(1)Incorporated by reference from registrant's Form 10 Registration Statement,
filed with the Securities and Exchange Commission on April 29, 1980, Commission
file number 0-9219.
(2)Incorporated by reference from registrant's Form 8 Report dated August 14,
1987, Commission file number 0-9219.
EXHIBIT 13
AVOCA Annual Report
INCORPORATED --------------------------------
1996
<PAGE>
[Blank page appears here]
<PAGE>
Description of Business
Avoca, Incorporated owns and manages approximately 16,000 acres
comprising virtually all of Avoca Island, which is located about 90 miles west
of New Orleans in St. Mary Parish, Louisiana, adjacent to and immediately
southeast of Morgan City. The island is rural and virtually undeveloped except
for exploration and development of its oil and gas resources.
Avoca, Incorporated is largely a passive royalty company which derives
most of its income from royalties, bonuses and delay rentals under oil and gas
leases covering its Avoca Island acreage.
Directors and Officers
Richard W. Fox, Director; Guy C. Lyman, Jr., Director;
Investor, formerly Manager, Attorney, Milling, Benson, Woodward,
Sandy Run Farm L.L.C.; Hillyer, Pierson & Miller, L.L.P.
prior thereto Vice President, FirstNBC
(Trust Investment Department) M. Cleland Powell, III,
Director and Secretary-Treasurer;
Edward B. Grimball, Senior Vice President,
Director and President; Whitney National Bank
Chief Financial Officer and
Executive Vice President,
Whitney National Bank
Peter V. Guarisco, Director;
Chairman, Hellenic, Inc.
[Picture of boat appears here.]
AVOCA, Incorporated 3
<PAGE>
Report to the Shareholders
Issued Preliminary to the Sixty-Fifth
Annual Meeting of Shareholders on March 18, 1997
Dear Shareholders:
During 1996 net royalties from oil and gas production increased 125% to
$229,049. Income increased to $423,651 in 1996 from $87,356 before an
extraordinary item ($69,613 net of income taxes) related to the settlement of
the Company's lawsuit against Gibson Roofers, Inc. in 1995. Three new seismic
permits, which reflect the Company's continuing efforts to fully develop Avoca
Island's mineral resources and are discussed on Page 14 of this report, are
primarily responsible for the increase. Annual per share earnings were $.51 in
1996 compared to $.11 before the extraordinary item and $.19 after the
extraordinary item in 1995. Dividends per share increased to $.45 from $.15 in
1995 in line with the Company's increased income.
Production from the Intercoastal Shipyard No. 2 in the Ramos Field was
reported at approximately 25,473 barrels of condensate and 883,498 thousand
cubic feet (Mcf) of gas in 1996. A successful workover by its operator, Black
Gold Production Company, Inc., restored production to this well early in 1996.
According to the operator, the current wellhead flowing pressure is 4,444 pounds
per square inch gauge (psig) and the well produces water at a fairly constant
rate of 350 barrels per day. The average 1996 sales prices from the Intercoastal
Shipyard No. 2 well were approximately $2.82 per Mcf of gas and $22.17 per
barrel of condensate. The well, which produces from the Ramos Field, B Sand Unit
B under the Capital Energy, Inc. Lease dated January 2, 1996, accounted for 44%
of the Company's royalty income in 1996.
Production from the Delta Operating Corporation (formerly Alliance
Operating Company) Avoca No. 1 well, also in the Ramos Field, was reported at
approximately 3,787 barrels of condensate and 238,455 Mcf of gas in 1996 as
compared to 4,158 barrels of condensate and 259,513 Mcf of gas in 1995. The No.
1 well reportedly continues to produce water, as it has from inception of
production, at a fairly constant rate of approximately 400 barrels per day.
According to the operator of the well, the current wellhead flowing pressure is
3,475 psig as compared to 3,175 psig in December of 1995. In September, the
operator chemically treated the well to clean the producing formation near the
wellbore in order to improve the well's performance, and has advised the Company
that the treatment was successful. The average 1996 sales prices from the Delta
No. 1 Avoca well were approximately $2.79 per Mcf of gas and $21.15 per barrel
of condensate as compared to $1.73 per Mcf of gas and $18.00 per barrel of
condensate in 1995.
Although no new wells were drilled on Avoca Island, two new mineral
leases covering a total of 465 acres were granted in 1996. Also, two of the
above mentioned seismic permits include mineral lease options which in the
aggregate cover almost all of the island. A complete list of mineral leases is
found on the back cover of this annual report.
Respectfully submitted,
/s/ Edward B. Grimball
Edward B. Grimball
President
February 7, 1997
4 AVOCA, Incorporated
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors
The Board of Directors
Avoca, Incorporated
We have audited the accompanying balance sheet of Avoca, Incorporated
as of December 31, 1996, and the related statements of income, retained
earnings, and cash flows for each of the two years in the period ended December
31, 1996. 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 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 Avoca, Incorporated
at December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 13, 1997
AVOCA, Incorporated 5
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET
December 31
1996
- ------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 65,127
Short-term investments 1,730,628
Accounts receivable 44,630
Accrued interest receivable 24,262
Prepaid expenses 5,143
----------
TOTAL CURRENT ASSETS 1,869,790
PROPERTY AND EQUIPMENT
Land and land improvements 613,751
Buildings 57,450
----------
671,201
Less accumulated depreciation and depletion 595,651
----------
75,550
OTHER ASSETS
Long-term investments 639,169
Avoca Drainage Bonds, $415,000, in default --
at nominal amount 1
----------
$2,584,510
==========
</TABLE>
[Picture of oil tanks appears here.]
6 AVOCA, Incorporated
<PAGE>
<TABLE>
<CAPTION>
December 31
1996
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'EQUITY
CURRENT LIABILITES
<S> <C>
Accounts payable and accrued expenses $ 17,106
Dividends payable 373,725
Income taxes payable 9,221
----------
TOTAL CURRENT LIABILITIES 400,052
DEFERRED INCOME TAXES 13,902
SHAREHOLDERS'EQUITY
Common stock, no par value -- authorized,
issued and outstanding 830,500 shares
(no change during the year) 94,483
Retained earnings 2,076,073
----------
TOTAL SHAREHOLDERS'EQUITY 2,170,556
----------
$2,584,510
==========
See accompanying notes.
</TABLE>
[Picture of fishing pier appears here]
AVOCA, Incorporated 7
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year ended December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C>
Royalties $ 234,289 $ 107,969
Less severance taxes 5,240 6,291
--------- ---------
229,049 101,678
Seismic permit fees 356,830 -
Lease bonuses and delay rentals 84,075 32,250
Interest income 121,531 111,537
Rental income 27,700 33,600
Other 8,309 10,837
--------- ---------
827,494 289,902
Expenses:
Attorney fees and expenses 18,093 19,237
Auditing fees 15,000 15,000
Bookkeeping and clerical services 5,250 5,000
Management fees 41,000 40,000
Directors' fees 5,000 6,500
Geological and engineering fees and expenses 14,349 6,243
Insurance 23,366 23,937
Office and miscellaneous expenses 23,272 30,204
Taxes, other than income taxes 23,664 23,742
Repairs and cleanup expenses 11,126 4,116
--------- ---------
180,120 173,979
--------- ---------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 647,374 115,923
Income taxes 223,723 28,567
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 423,651 87,356
Extraordinary item,
net of income taxes of $ 44,507 - 69,613
--------- ---------
NET INCOME $ 423,651 $ 156,969
========= =========
Earnings per share:
Income before extraordinary item $ .51 $ .11
Extraordinary item - .08
--------- ---------
Net income $ .51 $ .19
========= =========
Dividends per share $ .45 $ .15
========= =========
See accompanying notes.
</TABLE>
8 AVOCA, Incorporated
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF RETAINED EARNINGS
Year ended December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings:
<S> <C> <C>
Balance at beginning of year $ 2,026,147 $ 1,993,753
Net income for the year 423,651 156,969
----------- -----------
2,449,798 2,150,722
Cash dividends:
1996 - $ .45 per share 373,725 -
1995 - $ .15 per share - 124,575
----------- -----------
BALANCE AT END OF YEAR $ 2,076,073 $ 2,026,147
=========== ===========
See accompanying notes.
</TABLE>
[Picture of gas separator appears here.]
AVOCA, Incorporated 9
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 423,651 $ 156,969
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 2,735 2,672
Loss on disposition of asset - 7,153
Deferred income taxes (507) (7,390)
Gain from litigation settlement - (181,000)
Change in operating assets and liabilities:
Accounts receivable (29,181) 42
Accrued interest receivable 3,147 6,142
Prepaid expenses 151 81
Accounts payable and accrued expenses (8,402) 12,247
Income taxes (27,603) 37,497
---------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 363,991 34,413
INVESTING ACTIVITIES
Purchase of short-term investments (1,008,097) (1,935,247)
Maturity of short-term investments 1,268,229 2,772,113
Purchase of long-term investments (639,169) (722,531)
Purchase of property and equipment - (31,200)
Proceeds from sales of property and equipment - 15,750
Litigation settlement proceeds - 181,000
---------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (379,037) 279,885
FINANCING ACTIVITIES
Dividends paid (124,575) (124,575)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES (124,575) (124,575)
---------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (139,621) 189,723
Cash and cash equivalents at beginning of year 204,748 15,025
---------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 65,127 $ 204,748
========== ===========
See accompanying notes.
</TABLE>
10 AVOCA, Incorporated
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE A--Significant Accounting Policies
General: Avoca, Incorporated (the Company) owns and leases land, located in St.
Mary Parish, Louisiana, to unaffiliated parties for oil and gas exploration.
Mineral income in the accompanying financial statements is primarily derived
from lease bonuses, delay rentals, seismic permit fees and royalties received
from oil and gas production related to these leases. Estimates of proved
reserves related to the leases are not available.
Cash Equivalents: Cash equivalents consists of United States Government Treasury
bills with a maturity of three months or less from date of purchase.
Investments: Short-term investments consist of United States Government Treasury
bills with a maturity of greater than three months but less than one year from
date of purchase and a United States Agency note due in 1997.
Long-term investments consist of United States Government Treasury Notes due
in 1998.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost including accrued interest. At
December 31, 1996 all short-term investments and long-term investments were
classified as held-to-maturity. The fair value of the investments approximated
the carrying value at December 31, 1996.
Property and Equipment: Land is carried at cost less amounts received for the
sale of rights-of-way and similar servitudes. Land improvements and building are
carried at cost and depreciated over their estimated useful life of 30 years.
Income Taxes: The Company accounts for income taxes using the liability method.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B--Income Taxes
The components of income tax expense for the years ended December 31 are as
follows:
1996 1995
-------------- -------------
Current:
Federal $200,184 $32,875
State 24,046 3,082
-------------- -------------
TOTAL CURRENT 224,230 35,957
Deferred :
Federal (453) (6,757)
State (54) (633)
-------------- -------------
TOTAL DEFERRED (507) (7,390)
-------------- -------------
$223,723 $28,567
============== =============
The deferred income tax liability of $13,902 relates to a difference between the
accounting and income tax basis of property and equipment.
The Company paid income taxes of $252,664 and $42,967 in 1996 and 1995,
respectively.
AVOCA, Incorporated 11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
B. Income Taxes (continued)
The reconciliations between the federal statutory income tax rate and the
Company's effective income tax rate, based on income before income taxes and
extraordinary item, for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
Amount Rate Amount Rate
-------- ---- ------- ----
<S> <C> <C> <C> <C>
Tax expense based on federal statutory rate $220,107 34.0% $28,460 24.6%
Statutory percentage depletion (11,949) (1.8) ( 5,506) (4.8)
State income taxes (net of federal income tax
deduction) 24,045 3.7 2,449 2.1
Other (8,480) (1.3) 3,164 2.7
-------- ---- ------- ----
INCOME TAXES $223,723 34.6% $28,567 24.6%
======== ==== ======= ====
</TABLE>
[Picture of valve appears here.]
12 AVOCA, Incorporated
<PAGE>
NOTES TO FINANCIAL
STATEMENTS (Continued)
NOTE C--Major Customers
The net royalties received from two independent oil and gas exploration
companies accounted for 99% of total net royalties recorded for the year ended
December 31, 1996; net royalties received from one independent oil and gas
exploration company accounted for 94% for the year ended December 31, 1995.
Substantially all of the lease bonus and delay rental revenue in 1996 was the
result of leases with two companies and in 1995 with one company. Seismic permit
fees recognized in 1996 are the result of permits with three oil and gas
exploration companies.
Note D--Related Party Transactions
A member of the Board of Directors is of counsel with the law firm which serves
as legal counsel for the Company. Fees paid to this law firm were $25,377 and
$66,626 for the years ended December 31, 1996 and 1995, respectively.
NOTE E--Oil and Gas Quantities Produced
The following table reflects the Company's share of the oil and gas volumes
produced from leases held under production during each of the last two years:
Production
--------------------------
Oil Gas
(BBLs) (MCFs)
------------- ------------
1,770 82,228
1996
1995 809 50,501
NOTE F--Litigation Settlement
In 1995, the Company settled for $181,000 its ongoing litigation against a
roofing company and its insurer to recover damages for the total loss of a
building which was destroyed by fire in 1992. The Company recognized the
proceeds, net of related legal expenses of $66,880 and income taxes of $44,507,
as an extraordinary item in the 1995 statement of income. The roofing company's
counterclaim against the Company was dismissed in 1995 and the roofing company's
appeal was dismissed in 1996.
NOTE G--Commitment
The Company has a lease with the Avoca Duck Club (the Club), an unrelated
entity, to allow the members of the Club use of the island for the purpose of
hunting wild game and birds, and for noncommercial fishing. The terms of the
lease commenced June 1, 1994 for a period of ten years with the Club having two
ten-year options to extend the lease. Under the terms of the lease, the Club
constructed a new building including a separate apartment for the exclusive use
of the Company's caretaker of the island. This building replaced the building
destroyed by fire in December 1992. During 1994, under the terms of the lease,
the Company contributed $50,000, which represents the approximate cost to
construct the apartment.
If the Company elects to exercise its unrestricted, unconditional and absolutely
discretionary right to terminate the lease before the end of its term, the
Company must reimburse the Club for its unamortized cost of the building
(excluding the Company's cash contribution), based on straight-line depreciation
over 30 years. Under the lease, the Club's unamortized cost of the building will
be reduced over time to an ultimate reimbursable amount not less than $80,000.
[Picture of marsh scene appears here.]
AVOCA, Incorporated 13
<PAGE>
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company's continued liquidity is evidenced by the fact that more than 94% of
its assets, as measured by book value, are cash and cash equivalents, U.S.
Government and U.S. Government agency securities. Current liabilities at year
end were $400,052, including a $373,725 dividend declared in December 1996 but
not paid until January 1997. The Company's business is largely passive and
consequently all capital requirements for exploration, development and
production of the Company's mineral resources are funded by its lessees. Current
financial resources and anticipated net income are expected to be adequate to
meet cash requirements in the year ahead.
1996 As Compared to 1995
The Company enjoyed a commendable year in 1996. Revenue for the year increased
by $537,592. Most of the increase, reflected in the income statement as seismic
permit fees, comes from the granting of three new 3-D seismic permits totaling
$356,830. The first permit was granted to Geco-Prakla, Inc. and covers 3,073
acres on the western part of Avoca Island. The second permit, granted to Texas
Meridian Resources Exploration, Inc., covers 7,535 acres on the southern part of
the island and includes an option until January 10, 1998 to lease all or part
(not less than 753 acres) of the permitted acreage for mineral development. The
third permit, granted to Burlington Resources Oil & Gas Co., covers 7,330 acres
on the northern part of the island and includes an option until December 12,
1997 to lease all or part (not less than 3,665 acres) of the permitted acreage
for mineral development.
Also contributing to increased revenue in 1996 was a $127,371 or 125%
increase in royalty income net of severance taxes. The increase is attributable
to the successful workover of the Intercoastal Shipyard No. 2 well in the Ramos
Field. This well was restored to production by its operator, Black Gold
Production Company, Inc., during the second quarter of 1996 and was responsible
for approximately 44% of the Company's 1996 royalty income. It produces from the
Ramos Field, B Sand Unit B under the Capital Energy, Inc. lease dated January 2,
1996. Since its return to production total gas and condensate recoveries from
the Intercoastal Shipyard No. 2 well (in which the Company has a net revenue
interest of approximately 4.05%) was 883,498 thousand cubic feet (Mcf) of gas
and 25,473 barrels of condensate.
In 1996 the Delta Operating Corporation (formerly Alliance Operating
Company) Avoca No. 1 well also in the Ramos Field was responsible for
approximately 56% of the Company's royalty income, down from 94% in 1995. Total
gas and condensate recoveries from the Avoca No. 1 well (in which the Company
has a net revenue interest of approximately 19%) decreased from 259,513 Mcf of
gas and 4,158 barrels of condensate in 1995 to 238,455 Mcf of gas and 3,787
barrels of condensate in 1996. In September, the operator performed a chemical
treatment on the well to clean the producing formation near the wellbore in
order to improve the well's performance. The operator has told the Company that
the treatment appears to have been successful in improving production.
The Exchange Oil & Gas (formerly Boo-Ker Oil & Gas) Avoca No. B-1 well,
also located in the Ramos Field, produced minimal royalty income for the Company
in 1995. The well was plugged and abandoned in the first quarter of 1996.
Lease bonuses and delay rentals increased by $51,825 because two new
mineral leases were granted in 1996 as compared with none in 1995.The Company
received $5,625 on a new lease from Capital Energy, Inc., as mentioned above,
and $46,200 from Burlington Resources Oil & Gas Co., on a 420 acre lease on the
northern part of Avoca Island in August, 1996. I P Petroleum Co., Inc. made a
quarterly delay rental payment in the first quarter of 1996 but the lease lapsed
for non-payment of the quarterly payment due in the second quarter of 1996.
Interest income on U.S. Government and U.S. Government agency
securities increased $9,994 or approximately 9% because of higher interest rates
and the availability of more funds for investment. Rental income decreased
$5,900 or approximately 18% because of the lapsing of a short-term surface lease
at the end of 1995.
Overall expenses were $6,141 or approximately 4% higher in 1996 than in
1995. Increased geological and engineering fees and repairs and cleanup expenses
were partially offset by reduced office and miscellaneous expenses and decreases
in attorney fees, director fees, insurance and taxes other than income taxes.
The decrease in office and miscellaneous expenses resulted primarily from a
$7,153 one-time loss incurred in 1995 on the sale of a mobile home provided by
the Company as temporary housing for the Company's caretaker on the island. The
increase in repairs and cleanup expenses was attributable to funds expended to
assist in preparing 600 acres of farm land on Avoca Island for the establishment
of a cattle operation.
In comparison with 1995 (including the income tax related to the
extraordinary item), income tax expense for 1996 increased by $155,224 as a
result of increases in income and the Company's effective tax rate.
Income before extraordinary item increased by $336,295 or 385%, in
comparison with the prior year, but income after the extraordinary item
increased only $266,682 or 170% from 1995. Net income was $.51 per share in 1996
as compared to $.11 per share before and $.19 after the extraordinary item in
1995. Dividends per share went from $.15 per share to $.45 per share in 1996 as
a result of an increase in income. Future dividends will be largely dependent on
the amount of oil and gas related income received.
Further information regarding the Company's financial condition and
results of operations is contained in the President's message on page 4.
14 AVOCA, Incorporated
<PAGE>
STOCK PRICES AND RELATED
SECURITY HOLDER MATTERS
As of January 10, 1997, there were approximately 819 holders of record of the
Company's stock, which is traded in the over-the-counter market.
The following table shows the range of high and low bid quotations for
the Company's stock for each quarterly period during the last two years, as
quoted by the National Quotation Bureau, Incorporated. Such quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions and may not
necessarily reflect actual transactions. The table also shows the amount and
frequency of cash dividends declared by the Company during the same period.
<TABLE>
<CAPTION>
Period High Low Declared Record Date Date Paid Amount
1996
<S> <C> <C> <C> <C> <C> <C>
First Quarter $6.75 $5.87
Second Quarter 8.00 5.87
Third Quarter 8.25 7.50
Fourth Quarter 9.75 7.50 12-20-96 1-7-97 1-21-97 $.45
1995
First Quarter $6.50 $5.50
Second Quarter 6.25 5.50
Third Quarter 6.25 5.50
Fourth Quarter 6.50 5.75 12-12-95 1-5-96 1-19-96 $.15
</TABLE>
AVOCA
INCORPORATED
The Company will furnish without charge a copy of its 1996 Annual Report on Form
10-KSB to be filed with the Securities and Exchange Commission, including the
financial statements thereto, to any record or beneficial owner of its Common
Stock as of February 7, 1997. Requests for the report must be in writing
addressed to Avoca, Incorporated, P.O. Box 61260, New Orleans, Louisiana 70161,
Attention: M. Cleland Powell. If made by a person who was not a shareholder of
record on February 7, 1997, the request must include a good faith representation
that such person was a beneficial owner of Common Stock on that date. Copies of
any exhibits to the Form 10-KSB will be furnished upon payment of $.20 per page
plus postage to cover the cost of furnishing such copies.
AVOCA, Incorporated 15
<PAGE>
[Map of Avoca Island appears here,
showing property of Avoca, Incorporated,
mineral leases and well locations]
<PAGE>
<TABLE>
<CAPTION>
MINERAL INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Income Recognized
in 1996
Lease
Initial Bonus
Date of Rental or Delay
Lessee Operator Lease Acreage Expiration Per Acre Rental Net Royalties
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texaco, Inc. Texaco, Inc. 5/17/63 41.900 Termination $ 75 $ -- $ 452
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $ 200 -- 127,501
of production
IP Petroleum Company, Inc. IP Petroleum Company, Inc. 10/3/94 860.000 Terminated $ 150 32,250 --
4/30/96 due to
non-payment
of rental
Boo-Ker Oil and Gas Corporation Exchange Oil and Gas Company *10/6/94 185.440 Well plugged and $ -- -- 652
abandoned first
quarter of 1996
Capital Energy, Inc. Black Gold Production **1/2/96 45.029 Termination $ 125 5,625 100,444
Company of production
or 1/2/97 if
nonproducing
Burlington Resources Oil & Gas Burlington Resources Oil & 8/12/96 420.000 Termination $ 110 46,200 --
Company Gas Company of production
or 8/12/99 if
nonproducing
------- --------
$84,075 $229,049
======= ========
*---This lease supersedes a lease dated August 21, 1990 with the same lessee.
**---This lease supersedes a lease dated January 19, 1960 with Cabot Carbon
Corporation.
</TABLE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-KSB)
of Avoca, Incorporated of our report dated January 13, 1997, included in the
1996 Annual Report to Shareholders of Avoca, Incorporated.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 65,127
<SECURITIES> 1,730,628
<RECEIVABLES> 44,630
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,869,790
<PP&E> 671,201
<DEPRECIATION> 595,651
<TOTAL-ASSETS> 2,584,510
<CURRENT-LIABILITIES> 400,052
<BONDS> 0
0
0
<COMMON> 94,483
<OTHER-SE> 2,076,073
<TOTAL-LIABILITY-AND-EQUITY> 2,584,510
<SALES> 229,049
<TOTAL-REVENUES> 827,494
<CGS> 0
<TOTAL-COSTS> 5,240
<OTHER-EXPENSES> 180,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 647,374
<INCOME-TAX> 223,723
<INCOME-CONTINUING> 423,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 423,651
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
