March 27, 1998
Securities and Exchange Commission
450 Fifth St., N.W.
Judiciary Plaza
Washington, D.C. 20549-1004
Via Edgar Electronic Filing System
In Re: File Number 0-9219
------------------
Gentlemen:
Pursuant to regulations of the Securities and Exchange
Commission, submitted herewith for filing on behalf of Avoca, Incorporated
(the "Company") is the Company's Report on Form 10-KSB for the period ended
December 31, 1997.
This filing is being effected by direct transmission to the
Commission's EDGAR System.
Sincerely,
/s/ Edward B. Grimball
---------------------------------
Edward B. Grimball
Executive Vice President &
Chief Financial Officer
(504) 586-7570
EBG/drm
<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
X / Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 for the fiscal year ended December 31, 1997
or
/ Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from to
---------- ----------
Commission file number 0-9219
------
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. $1,364,571
------------
The aggregate market value of common stock held on March 2, 1998 by
non-affiliates of the registrant was $8,118,157. 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 2, 1998.
Parts I and II incorporate by reference information from the Annual Report to
Shareholders for the year ended December 31, 1997. Part III incorporates by
reference information from the Company's Proxy Statement dated February 18,
1998.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
An exhibit index is located on page 15
<PAGE>
AVOCA, INCORPORATED
Index to 10-KSB Annual Report
PAGE
PART I
Item 1: Description of Business 3-8
Item 2: Description of Property 8-9
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
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
Item 7: Financial Statements 10
Item 8: Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 10
PART III
Item 9: Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act 10-11
Item 10: Executive Compensation 11
Item 11: Security Ownership of Certain Beneficial Owners
and Management 11
Item 12: Certain Relationships and Related Transactions 11
Item 13: Exhibits and Reports on Form 8-K 11-13
Page 2 of 15 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, as well as 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,
1997.
Page 3 of 15 Pages
<PAGE>
<TABLE>
<CAPTION>
MINERAL INCOME
Year Ended December 31, 1997
Initial Income Recognized in 1997
Date of Rental Lease Bonus Net
Lessee Operator Lease Acreage Expiration Per Acre or Delay Rental Royalties
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texaco, Inc. Texaco, Inc. 5/17/63 41.900 Termination $ 75 $ -- $ 490
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $200 -- 157,419
of production
Capital Energy, Inc. Black Gold Production *1/2/96 45.029 Termination $125 -- 54,327
Company of production
or 1/2/97 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 8/12/96 420.000 Termination $110 46,200 --
Gas Company Gas Company of production
or 8/12/99 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 12/12/97 2,100.000 Termination $150 315,000 --
Gas Company Gas Company of production
or 12/12/00 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 12/12/97 1,565.000 Termination $150 234,750 --
Gas Company Gas Company of production
or 12/12/00 if
nonproducing
$595,950 $212,236
======== ========
*---This lease supersedes a lease dated January 19, 1960 with Cabot Carbon
Corporation.
</TABLE>
Page 4 of 15 Pages
<PAGE>
[Map of Avoca Island appears here,
showing property of Avoca, Incorporated,
mineral leases and well locations]
Page 5 of 15 Pages
<PAGE>
Item 1 Description of Business (continued)
- ------ -----------------------
At December 31, 1997, 4,448 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
4,085 acres are covered by leases in favor of Burlington Resources Oil & Gas
Company. The first lease, granted in 1996, stipulates a 21% royalty. The other
two leases were granted in 1997 and stipulate a 22% royalty.
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 94% of the Company's royalty income during 1995, 66% in 1996
and 74% in 1997. Production from the well was 245,165 thousand cubic feet (mcf)
of gas and 3,604 barrels of condensate in 1997 as compared with 238,455 mcf of
gas and 3,787 barrels of condensate in 1996, and 259,513 mcf and 4,158 barrels
in 1995.
The Intercoastal Shipyard No. 2 well, operated by Black Gold
Production Company under the Capital Energy, Inc. lease dated January 2, 1996,
ceased production on April 8, 1997. Workover operations have failed and the
operator has advised the Company that the well is to be plugged and abandoned.
The well, also located in the Ramos Field, produced 217,721 mcf of gas and 5,911
barrels of condensate during 1997, as compared with 883,498 mcf and 25,423
barrels in 1996.
The Company's share of production from the Bateman Lake Field tract
leased to Texaco, Inc. has been negligible in recent years.
Page 6 of 15 Pages
<PAGE>
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
1995 50,501 mcf 809 bbls $1.73 $18.00
1996 82,228 mcf 1,770 bbls $2.81 $21.66
1997 56,537 mcf 941 bbls $2.83 $20.84
The Company granted two mineral leases in each of 1997 and 1996, as
compared with no leases in 1995. Except for reworking operations, no drilling
operations were conducted on Avoca Island during the three year period ended
December 31, 1997.
During 1997, the Company's granted two seismic permits covering a
total of 915 acres. It also extended the term of another permit, granted in
1996, covering 7,535 acres. In 1996, three seismic permits (including the one
extended in 1997) covering 17,938 total acres were granted. In the aggregate,
the five permits cover virtually all of Avoca Island.
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 1997 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
Page 7 of 15 Pages
<PAGE>
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 and the possibility of a cattle lease is
being considered.
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 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.
Page 8 of 15 Pages
<PAGE>
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 but, with the Company's cooperation, a new
feasibility study has recently been commissioned by local governmental
authorities.
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 ways to prudently develop Avoca Island for
agricultural and commercial use. In addition to ongoing surface maintenance
operations and its long standing lease of hunting and fishing rights to the
Avoca Duck Club, the Company as lessor is experimenting with a cattle grazing
operation covering approximately 3,200 acres on the northern and western parts
of the island.
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
- ------ -----------------
Not applicable.
Item 4 Submission of Matters to
- ------ a Vote of Security Holders
--------------------------
Not Applicable
Page 9 of 15 Pages
<PAGE>
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
1997 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 Operations" on pages 4 and 14, respectively,
of the Company's 1997 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 1997 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
Page 10 of 15 Pages
<PAGE>
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, 1998, 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, 1998, incorporated herein by
reference.
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, 1998, 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, 1998, 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 1997 Annual Report to Shareholders, are incorporated by
reference in Part II, Item 7:
Report of Ernst & Young LLP, Independent Auditors, dated January
15, 1998
Page 11 of 15 Pages
<PAGE>
Balance sheet - December 31, 1997
Statements of Income - years ended
December 31, 1997 and 1996
Statements of Retained Earnings -
years ended December 31, 1997 and 1996
Statements of Cash Flows - years ended
December 31, 1997 and 1996
Notes to Financial Statements -
December 31, 1997
(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, 1997. 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.
Page 12 of 15 Pages
<PAGE>
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, 1997.
- ------------------------------
(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 15 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 17 , 1998
--
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 17, 1998
--
/s/ Edward B. Grimball
- --------------------------------
Edward B. Grimball, Director
Date: March 17, 1997
--
/s/ Peter V. Guarisco
- --------------------------------
Peter V. Guarisco, Director
Date: March 17, 1997
--
/s/ Guy C. Lyman, Jr.
- --------------------------------
Guy C. Lyman, Jr., Director
Date: March 17, 1997
--
/s/ M. Cleland Powell, III
- --------------------------------
M. Cleland Powell, III, Director
Date: March 17, 1997
--
Page 14 of 15 Pages
<PAGE>
Exhibit Index
Sequentially
Numbered
Exhibit 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, 1997. 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.
Page 15 of 15 Pages
<PAGE>
EXHIBIT 13
AVOCA Annual Report
INCORPORATED ----------------------------
1997
<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;
Investor, formerly Manager,
Sandy Run Farm L.L.C.;
prior thereto Vice President, FirstNBC
(Trust Investment Department)
Edward B. Grimball,
Director and President;
Chief Financial Officer and
Executive Vice President,
Whitney National Bank
Peter V. Guarisco, Director;
Chairman, Hellenic, Inc.
Guy C. Lyman, Jr., Director;
Attorney, Milling, Benson, Woodward,
Hillyer, Pierson & Miller, L.L.P.
M. Cleland Powell, III,
Director and Secretary-Treasurer;
Senior Vice President,
Whitney National Bank
[Picture of cypress tree in lake appears here.]
AVOCA, Incorporated 3
<PAGE>
Report to the Shareholders
Issued Preliminary to the Sixty-Sixth
Annual Meeting of Shareholders on March 17, 1998
Dear Shareholders:
The Company enjoyed another commendable year in 1997. Despite a 7%
decline in net royalties and a 41% decline in seismic permit fees, net income
increased by 78%, from $423,651 in 1996 to $752,298 in 1997. The increase is
primarily attributable to bonuses on two new oil, gas and mineral leases
covering a total of 3,665 acres.
Annual per share earnings were $.91 in 1997 as compared with $.51 in
1996. Dividends per share were raised from $.45 to $.75 in line with the
Company's increased income.
The Delta Operating Corporation (formerly Alliance Operating Company)
Avoca No. 1 well continued to produce during 1997 at approximately the same
levels achieved in 1996. Gas and condensate prices were essentially
unchanged from 1996. The Avoca No. 1, located in the Ramos Field, accounted
for 74% of the Company's royalty income in 1997.
The Intercoastal Shipyard No. 2 well, operated by Black Gold Production
Company under the Capital Energy, Inc. lease dated January 2, 1996, ceased
production on April 8, 1997. Recent attempts to restore production have failed,
and the operator has advised the Company that the well is to be plugged and
abandoned. The well, also located in the Ramos Field, was responsible for 26% of
the Company's royalty income in 1997.
Two new 3-D seismic permits, covering 915 acres in the aggregate were
granted during the year. One of the permits includes an option to lease all or
part (but not less than 298 acres) of the permitted acreage for mineral
development.
Management is continuing its efforts to prudently develop the surface
of Avoca Island as well as its oil and gas resources. In addition to its long
standing lease of hunting and fishing rights to the Avoca Duck Club, the Company
is considering agricultural and commercial opportunities on the northern part of
the island.
The Company's operations and financial condition are further discussed
on page 14 of this report and a complete list of mineral leases is shown inside
the back cover.
Respectfully submitted,
/s/ Edward B. Grimball
Edward B. Grimball
President
February 6, 1998
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, 1997, and the related statements of income, retained
earnings, and cash flows for each of the two years in the period ended December
31, 1997. 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, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 15, 1998
AVOCA, Incorporated 5
<PAGE>
BALANCE SHEET
December 31
1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 500,370
Short-term investments 1,376,479
Accounts receivable 37,663
Accrued interest receivable 31,630
Prepaid expenses 4,941
Recoverable income taxes 206
-----------
TOTAL CURRENT ASSETS 1,951,289
PROPERTY AND EQUIPMENT
Land and land improvements 613,751
Buildings 57,450
-----------
671,201
Less accumulated depreciation and depletion 598,386
-----------
72,815
OTHER ASSETS
Long-term investments 930,177
Avoca Drainage Bonds, $415,000, in default --
at nominal amount 1
-----------
$ 2,954,282
===========
6 AVOCA, Incorporated
<PAGE>
December 31
1997
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITES
Accounts payable and accrued expenses $ 18,033
Dividends payable 622,875
-----------
TOTAL CURRENT LIABILITIES 640,908
DEFERRED INCOME TAXES 13,395
SHAREHOLDERS' EQUITY
Common stock, no par value -- authorized,
issued and outstanding 830,500 shares
(no change during the year) 94,483
Retained earnings 2,205,496
-----------
TOTAL SHAREHOLDERS' EQUITY 2,299,979
$ 2,954,282
===========
[Picture of christmas tree appears here]
See accompanying notes.
AVOCA, Incorporated 7
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year ended December 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C>
Royalties $ 218,521 $ 234,289
Less severance taxes 6,285 5,240
----------- ---------
212,236 229,049
Lease bonuses and delay rentals 595,950 84,075
Lease option payments 45,813 --
Seismic permit fees 211,241 356,830
Pipeline rights-of-way 138,772 --
Interest income 126,356 121,531
Rental income 27,800 27,700
Other 6,403 8,309
----------- ---------
1,364,571 827,494
Expenses:
Attorney fees and expenses 12,826 18,093
Auditing fees 16,000 15,000
Bookkeeping and clerical services 6,000 5,250
Management fees 46,000 41,000
Directors' fees 5,000 5,000
Geological and engineering fees and expenses 6,451 14,349
Insurance 22,460 23,366
Office and miscellaneous expenses 24,421 23,272
Taxes, other than income taxes 22,272 23,664
Repairs and cleanup expenses 31,732 11,126
----------- ---------
193,162 180,120
----------- ---------
INCOME BEFORE INCOME TAXES $1,171,409 647,374
Income taxes 419,111 223,723
----------- ---------
NET INCOME $ 752,298 $ 423,651
=========== =========
Earnings per share $ .91 $ .51
=========== =========
Dividends per share $ .75 $ .45
=========== =========
</TABLE>
See accompanying notes.
8 AVOCA, Incorporated
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF RETAINED EARNINGS
Year ended December 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------
Retained Earnings:
<S> <C> <C>
Balance at beginning of year $ 2,076,073 $ 2,026,147
Net income for the year 752,298 423,651
----------- -----------
2,828,371 2,449,798
Cash dividends:
1997 - $ .75 per share 622,875 --
1996 - $ .45 per share -- 373,725
----------- -----------
BALANCE AT END OF YEAR $ 2,205,496 $ 2,076,073
=========== ===========
</TABLE>
See accompanying notes. [Picture of tractor in field appears here.]
AVOCA, Incorporated 9
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 752,298 $ 423,651
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 2,735 2,735
Deferred income taxes (507) (507)
Change in operating assets and liabilities:
Accounts receivable 6,967 (29,181)
Accrued interest receivable (7,368) 3,147
Prepaid expenses 202 151
Accounts payable and accrued expenses 927 (8,402)
Income taxes (9,427) (27,603)
-------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 745,827 363,991
INVESTING ACTIVITIES
Purchase of short-term investments (509,709) (1,008,097)
Purchase of long-term investments (1,255,150) (639,169)
Maturity of investments 1,828,000 1,268,229
-------------- --------------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 63,141 (379,037)
FINANCING ACTIVITIES
Dividends paid (373,725) (124,575)
-------------- --------------
NET CASH USED IN
FINANCING ACTIVITIES (373,725) (124,575)
-------------- --------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (435,243) (139,621)
Cash and cash equivalents at beginning of year 65,127 204,748
-------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 500,370 $ 65,127
============== ==============
</TABLE>
See accompanying notes.
10 AVOCA, Incorporated
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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.
Income in the accompanying financial statements is primarily derived from lease
bonuses, delay rentals, seismic permit fees, sale of rights-of-way 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 investments with a maturity of
three months or less from date of purchase.
Investments: Short-term investments consist of United States Government Treasury
Bills and United States Government Treasury Notes with an original maturity of
greater than three months but with maturity dates within one year from the
balance sheet date.
Long-term investments consist of United States Government Treasury
Notes due in 1999.
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, 1997 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, 1997.
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:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
Current
<S> <C> <C>
Federal $370,259 $200,184
State 49,359 24,046
--------- ---------
TOTAL CURRENT 419,618 224,230
--------- ---------
Deferred:
Federal (443) (453)
State (64) (54)
---------- ----------
TOTAL DEFERRED (507) (507)
---------- ----------
$ 419,111 $ 223,723
========== ==========
</TABLE>
The deferred income tax liability of $13,395 relates to a difference between the
accounting and income tax basis of property and equipment.
The Company paid income taxes of $430,000 and $252,664 in 1997 and 1996,
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>
1997 1996
Amount Rate Amount Rate
---------------------------------------------
<S> <C> <C> <C> <C>
Tax expense based on federal statutory rate $398,279 34.0% $220,107 34.0%
Statutory percentage depletion (11,145) (0.9) (11,949) (1.8)
State income taxes (net of federal income tax deduction) 49,380 4.2 24,045 3.7
Other (17,403) (1.5) (8,480) (1.3)
--------- ----- --------- -----
INCOME TAXES $419,111 35.8% $223,723 34.6%
========= ===== ========= =====
</TABLE>
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 years ended
December 31, 1997 and 1996. Substantially all of the lease bonus and delay
rental revenue in 1997 was the result of leases with one company. Lease option
payments consisted of payments from one company for the year ended December 31,
1997. Seismic permit fees recognized in 1997 and 1996 are the result of permits
with two oil and gas exploration companies and one seismic company, of which,
one company accounted for 89% of the revenue in 1997. Pipeline rights-of-way
revenue recognized in 1997 is the result of rights-of-way agreements with two
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 $13,676 and
$25,377 for the years ended December 31, 1997 and 1996, 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)
-----------------------------
1997 941 56,537
1996 1,770 82,228
NOTE F--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 term 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.
NOTE G--Earnings Per Share
The Company adopted Financial Accounting Standards Board Statement No. 128,
Earnings per Share, in 1997. The statement replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Due to the Company's simple capital structure, basic and diluted earnings per
share are the same, and the adoption had no impact on current year or previously
reported earnings per share amounts.
[Picture of egret 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 95% 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 $640,908, including a $622,875 dividend declared in December 1997 but
not paid until January 1998. 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.
1997 As Compared to 1996
The Company enjoyed another commendable year in 1997. Revenue increased
primarily because of two new oil, gas and mineral leases which netted the
Company $549,750 in bonuses during the year. The new leases were granted to
Burlington Resources Oil & Gas Co. under an option included in the 7,330 acre
seismic permit it acquired from the Company in November of 1996. Burlington paid
the Company an additional $45,813 to extend until March 15, 1998 its option to
lease all or part (but not less than half) of the remaining 3,665 acres subject
to the 1996 option. No revenues were received from this source in 1996.
Royalty income net of severance taxes decreased $16,813 or
approximately 7% in 1997 because the Intercoastal Shipyard No. 2 well ceased
production on April 8, 1997. Prior thereto, the well produced 5,911 barrels of
condensate and 217,721 Mcf of gas, compared to 25,473 barrels of condensate and
883,498 Mcf of gas in 1996. The operator, Black Gold Production Company, Inc.,
has advised the Company that the recent workover operations have failed, and the
well is to be plugged and abandoned.
The overall performance of the Delta Operating Company (formerly
Alliance Operation Company) Avoca No. 1 well, which was responsible for
approximately 74% of the Company's royalty income in 1997, improved slightly
during the year. While condensate recoveries decreased from 3,787 barrels in
1996 to 3,604 barrels in 1997, total gas recoveries from the Avoca No. 1, in
which the Company has a net revenue interest of approximately 19%, increased
from 238,455 Mcf of 245,165 Mcf of gas during the same period. The operator has
told the Company that the increase in gas production results from a successful
chemical treatment to clean the producing formation near the wellbore in
September of 1996.
Revenue from seismic permit fees decreased by $145,589 or approximately
41% in 1997 because fewer acres were permitted for 3-D exploration than in 1996.
The decrease would have been greater but for receipt of $188,375 from Texas
Meridian Resources Exploration, Inc. to extend until November 30, 1997 the term
of its 3-D seismic permit covering 7,535 acres and also to extend from January
10, 1998 until May 31, 1998 its option to lease all or part (but not less than
753 acres) of the permitted area.
Two new gas and condensate transmission pipeline rights-of-way on Avoca
Island contributed an additional $138,772 to revenue in 1997 (reflected in the
income statement as pipeline rights-of-way). No rights-of-way were granted in
1996.
Interest income on U.S. Government and U.S. Government agency
securities increased $4,825 or approximately 4% due to the availability of more
funds for investment.
Overall expenses were $13,042 or approximately 7% higher in 1997 than
in 1996. Increased auditing fees, bookkeeping and clerical services, management
fees, office and miscellaneous expenses, and repairs and cleanup expenses were
partially offset by reduced attorney fees, geological and engineering fees,
insurance, and taxes other than income taxes. The $5,000 increase in management
fees reflects an exceptional bonus paid to the Company's manager in recognition
of commendable results achieved in 1996. The $20,606 increase in repairs and
cleanup expenses is attributable to ongoing surface maintenance on the northern
part of Avoca Island. The $5,267 decrease in attorney fees and $7,898 decrease
in geological and engineering fees results from less need for such professional
services.
In comparison with 1996, income tax expense for 1997 increased by
$195,388 as a result of an increase in taxable income.
Income increased by $328,647 or 78% in comparison with 1996. Net income
was $.91 per share in 1997 as compared to $.51 in 1996. In line with the
Company's increased income, dividends increased from $.45 per share in 1996 to
$.75 per share in 1997. 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 6, 1998, there were approximately 780 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, mark-down 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
1997
<S> <C> <C> <C> <C> <C> <C>
First Quarter $15.00 $ 8.25
Second Quarter 15.75 14.50
Third Quarter 18.00 15.00
Fourth Quarter 20.75 18.13 12-18-97 1-6-98 1-22-98 $.75
1996
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
</TABLE>
AVOCA
INCORPORATED
The Company will furnish without charge a copy of its 1997 Annual Report on Form
10-KSB to be filed with the Securities and Exchange Commission, including the
financial statements and financial statement schedules thereto, to any record or
beneficial owner of its Common Stock as of February 6, 1998. 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 6, 1998, 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, 1997
Initial Income Recognized in 1997
Date of Rental Lease Bonus Net
Lessee Operator Lease Acreage Expiration Per Acre or Delay Rental Royalties
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texaco, Inc. Texaco, Inc. 5/17/63 41.900 Termination $ 75 $ -- $ 490
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $200 -- 157,419
of production
Capital Energy, Inc. Black Gold Production *1/2/96 45.029 Termination $125 -- 54,327
Company of production
or 1/2/97 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 8/12/96 420.000 Termination $110 46,200 --
Gas Company Gas Company of production
or 8/12/99 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 12/12/97 2,100.000 Termination $150 315,000 --
Gas Company Gas Company of production
or 12/12/00 if
nonproducing
Burlington Resources Oil & Burlington Resources Oil & 12/12/97 1,565.000 Termination $150 234,750 --
Gas Company Gas Company of production
or 12/12/00 if
nonproducing
$595,950 $212,236
======== ========
*---This lease supersedes a lease dated January 19, 1960 with Cabot Carbon
Corporation.
</TABLE>
<PAGE>
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 15, 1998, included in the
1997 Annual Report to Shareholders of Avoca, Incorporated.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 500,370
<SECURITIES> 1,376,479
<RECEIVABLES> 37,663
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,951,289
<PP&E> 671,201
<DEPRECIATION> 598,386
<TOTAL-ASSETS> 2,954,282
<CURRENT-LIABILITIES> 640,908
<BONDS> 0
<COMMON> 94,483
0
0
<OTHER-SE> 2,205,496
<TOTAL-LIABILITY-AND-EQUITY> 2,954,282
<SALES> 212,236
<TOTAL-REVENUES> 1,364,571
<CGS> 0
<TOTAL-COSTS> 6,285
<OTHER-EXPENSES> 193,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,171,409
<INCOME-TAX> 419,111
<INCOME-CONTINUING> 752,298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 752,298
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
</TABLE>
