<PAGE>
March 23, 1999
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, 1998.
This filing is being effected by direct transmission to the
Commission's EDGAR System.
Sincerely,
/s/ Guy C. Lyman, Jr.
---------------------------------
Guy C. Lyman, Jr.
Attorney at Law
Milling Benson Woodward L.L.P.
(504) 569-7160
GCL/kfl
<PAGE>
UNITED STATES
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, 1998
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
incorporation or organization) Identification Number
228 St. Charles Avenue, Suite 838, New Orleans, LA 70130
- ----------------------------------------------------- -----------------------
(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.
---
State issuer's revenues for its most recent fiscal year. $734,747
----------
The aggregate market value of common stock held on March 1, 1999 by
non-affiliates of the registrant was $5,487,563. 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, 1999.
Parts I and II incorporate by reference information from the Annual Report to
Shareholders for the year ended December 31, 1998. Part III incorporates by
reference information from the Company's Proxy Statement dated February 18,
1999.
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 10-11
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 11
Item 12: Certain Relationships and Related Transactions 12
Item 13: Exhibits and Reports on Form 8-K 12-13
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,
1998.
Page 3 of 15 Pages
<PAGE>
<TABLE>
<CAPTION>
MINERAL INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Income Recognized in 1998
Initial Lease 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 $ -- $ 110
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $200 -- 135,991
of production
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
Burlington Resources Oil & Gas Burlington Resources Oil 12/12/97 1,050.000 Termination $150 157,500 --
Company & Gas Company of production
or 12/12/00 if
nonproducing
The Meridian Resource The Meridian Resource 5/27/98 487.490 Termination $200 97,498 --
& Exploration, Inc.* & Exploration, Inc.* of production
or 5/27/01 if
nonproducing
The Meridian Resource The Meridian Resource 5/27/98 627.100 Termination $200 125,420 --
& Exploration, Inc.* & Exploration, Inc.* of production
or 5/27/01 if
nonproducing
$426,618 $136,101
======== ========
*---Formerly Texas Meridian Resources Exploration, Inc.
</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, 1998, 2,903 acres of the Company's land were covered
by oil and gas leases. Approximately 319 acres were held by production pursuant
to leases (in favor of Texaco, Inc. and Alliance Operating Company) providing
for royalties ranging from 25% to 30%. The remaining 2,584 acres are covered by
leases in favor of Burlington Resources Oil and Gas Company and The Meridian
Resource & Exploration, Inc. The first Burlington lease, granted in 1996,
stipulates a 21% royalty and the second lease, granted in 1997, stipulates a 22%
royalty. The two leases granted to The Meridian Resource & Exploration, Inc.
stipulate a 25% royalty from the surface to 12,500 feet and 23% for all lower
depths.
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 66% of the Company's royalty income during 1996, 74% in 1997
and 99% in 1998. Production from the well was 311,345 thousand cubic feet (mcf)
of gas and 4,206 barrels of condensate in 1998 as compared with 245,165 mcf of
gas and 3,604 barrels of condensate in 1997, and 238,455 mcf and 3,787 barrels
in 1996.
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 and has been plugged and abandoned. The well,
also located in the Ramos Field contributed $54,327 of royalty income in 1997.
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
1996 82,228 mcf 1,770 bbls $2.81 $21.66
1997 56,537 mcf 941 bbls $2.83 $20.84
1998 60,587 mcf 818 bbls $2.28 $12.62
The Company granted two mineral leases in each of the last three years.
Except for reworking operations, no drilling operations were conducted on Avoca
Island during the three year period ended December 31, 1998.
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 1998 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.
Page 7 of 15 Pages
<PAGE>
Wild game, bird hunting and non-commercial fishing rights on Avoca
Island are leased to the Avoca Duck Club. A seven year cattle lease has recently
been signed on 600 acres, which will minimize future expenditures toward land
clearing and fence maintenance.
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.
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.
Page 8 of 15 Pages
<PAGE>
Over the years, preliminary studies and proposals have been made with
regard to a bridge linking Avoca Island with the mainland but no definitive
action has resulted from these efforts. With the Company's cooperation, a new
feasibility study concerning industrial development of Avoca Island has recently
been completed by the St. Mary Parish government and is being reviewed by the
Company and others.
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 recently signed a cattle grazing lease covering
approximately 600 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
1998 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 1998 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 1998 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
- ------ --------------------------------------------------
The following information is included in the Form 8-K Report which the
Company filed with the Securities and Exchange Commission on February 4, 1999.
With the approval of the Company's Board of Directors and effective upon the
filing of the Company's Form 10-KSB for the year ended December 31, 1998, Ernst
& Young LLP has decided not to stand for reappointment as the Company's
independent public accountants. There were no disagreements with Ernst & Young
LLP and its reports have contained no adverse opinion, disclaimer of opinion or
modification as to uncertainty, audit scope or accounting principles.
Page 10 of 15 Pages
<PAGE>
Effective March 16, 1999, Andersen LLP has been engaged to succeed
Ernst & Young LLP as the Company's independent public accountants for 1999.
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:
Richard W. Fox, 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, 1999, incorporated herein by
reference. The balance of the information called for by this item appears under
the caption "Section 16A Beneficial Ownership Reporting Compliance" on page 5 of
the Company's Proxy Statement dated February 18, 1999, 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, 1999, 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, 1999, incorporated herein by reference.
Page 11 of 15 Pages
<PAGE>
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, 1999, 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 1998 Annual Report to Shareholders, are incorporated by
reference in Part II, Item 7:
Report of Ernst & Young LLP, Independent Auditors, dated January
13, 1999
Balance sheet - December 31, 1998
Statements of Income - years ended
December 31, 1998 and 1997
Statements of Retained Earnings -
years ended December 31, 1998 and 1997
Statements of Cash Flows - years ended
December 31, 1998 and 1997
Notes to Financial Statements -
December 31, 1998
(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)
Page 12 of 15 Pages
<PAGE>
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, 1998. 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
A Form 8-K, dealing with a change in the Company's
accountants, was filed on February 4, 1999.
- --------------------------------------
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
<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
/s/ Richard W. Fox
By: ----------------------------------
Richard W. Fox
President and principal executive,
financial and accounting officer
Date: March 16, 1999
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Robert C. Baird, Jr.
- --------------------------------
Robert C. Baird, Jr., Director
Date: March 16, 1999
--------------------------
/s/ Richard W. Fox
- --------------------------------
Richard W. Fox, Director
Date: March 16, 1999
--------------------------
/s/ Guy C. Lyman, Jr.
- --------------------------------
Guy C. Lyman, Jr., Director
Date: March 16, 1999
--------------------------
/s/ M. Cleland Powell, III
- --------------------------------
M. Cleland Powell, III, Director
Date: March 16, 1999
--------------------------
/s/ J. Scott Tucker
- --------------------------------
J. Scott Tucker, Director
Date: March 16, 1999
--------------------------
Page 14 of 15 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, 1998. 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 1998
<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
Robert C. Baird, Jr., Director; M. Cleland Powell, III, Director
Executive Vice President, and Secretary-Treasurer;
Whitney National Bank Senior Vice President,
Whitney National Bank
Richard W. Fox,
Director and President;
President, Fox Financial J. Scott Tucker; Director;
Consulting, Inc. and Manager, President and Chief Executive Officer,
Longford Farm, L.L.C. Hellenic, Inc.
Guy C. Lyman, Jr., Director;
Attorney,
Milling, Benson, Woodward, L.L.P.
[Picture of marsh scene appears here.]
AVOCA, Incorporated 3
<PAGE>
Report to the Shareholders
Issued Preliminary to the Sixty-Seventh
Annual Meeting of Shareholders on March 16, 1999
Dear Shareholders:
In 1998 average crude oil prices declined to their lowest levels since
1986. These declines negatively impacted the revenue and profits of oil
operators, who have responded by reducing exploration and development
expenditures. While the 1996-97 period brought renewed interest and 3-D seismic
surveys for virtually the entire Island, recent events have resulted in a
decrease in exploration budgets, which directly effects any near term prospects
for further exploration.
The Intercoastal Shipyard well ceased production in April 1997,
contributing to a decline in royalty revenues. Lower prices paid for gas and
condensate also contributed to the decline. The only producing well remaining on
the Island, Delta Operating Corporation Avoca No. 1 well, experienced an
increase in production during the year after a chemical perforation treatment.
Because virtually the entire Island was permitted during the 1996-97 period for
3-D seismic work, there were no revenues from seismic permits during 1998.
Similarly, the relocation of existing pipelines during 1997 was completed in
early 1998, causing a decline in revenues from pipeline rights-of-way. Revenues
from lease bonuses and delay rentals decreased, as Burlington Resources Oil &
Gas Company elected to drop its lease of a 1,565 acre tract, and to pay only the
minimum (one-half) of the delay rental due on its 2,100 acre lease. Partially
offsetting this, two new leases covering a total of 1,114 acres were signed in
1998 with The Meridian Resource & Exploration Company.
The Company continues to explore opportunities for use of the surface
acreage of Avoca Island in addition to the current hunting and fishing lease
with the Avoca Duck Club. We have recently signed a seven-year lease providing
for a cattle operation on approximately 600 acres, which will minimize future
expenditures toward land clearing and fence maintenance. We also continue to
explore other surface development possibilities with local governmental bodies.
In conclusion, although the oil and gas industry appears headed into
another cycle of low prices, Avoca, Incorporated is poised well to face future
challenges. Chemical treatment to our current producing well increased
production, 3-D seismic data has been compiled, which may eventually result in
new wells being drilled, and the expanded surface activity will result in lower
land maintenance expenses.
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,
Richard W. Fox
President
February 5, 1999
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, 1998, and the related statements of income, retained
earnings, and cash flows for each of the two years in the period ended December
31, 1998. 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, 1998, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
January 13, 1999
AVOCA, Incorporated 5
<PAGE>
BALANCE SHEET
December 31
1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 315,376
Short-term investments 1,662,334
Accounts receivable 21,589
Accrued interest receivable 28,553
Prepaid expenses 6,568
-----------
TOTAL CURRENT ASSETS 2,034,420
PROPERTY AND EQUIPMENT
Land and land improvements 613,751
Buildings and equipment 61,950
-----------
675,701
Less accumulated depreciation and depletion 601,121
-----------
74,580
OTHER ASSETS
Long-term investments 549,664
Avoca Drainage Bonds, $415,000, in default --
at nominal amount 1
$2,658,665
===========
[Picture of U.S. Army Corps of Engineer locks appears here]
6 AVOCA, Incorporated
<PAGE>
December 31
1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITES
Accounts payable and accrued expenses $ 16,165
Dividends payable 265,760
Income taxes payable 1,368
-----------
TOTAL CURRENT LIABILITIES 283,293
DEFERRED INCOME TAXES 12,888
SHAREHOLDERS' EQUITY
Common stock, no par value -- authorized, issued and
outstanding 830,500 shares (no change during the year) 94,483
Retained earnings 2,268,001
-----------
TOTAL SHAREHOLDERS' EQUITY 2,362,484
$ 2,658,665
===========
See accompanying notes.
AVOCA, Incorporated 7
<PAGE>
STATEMENTS OF INCOME
Year ended December 31,
1998 1997
------------------------------
Revenue:
Royalties $ 142,733 $ 218,521
Less severance taxes 6,632 6,285
----------- -----------
136,101 212,236
Lease bonuses and delay rentals 426,618 595,950
Lease option payments -- 45,813
Seismic permit fees -- 211,241
Pipeline rights-of-way 4,045 138,772
Interest income 133,748 126,356
Rental income 28,000 27,800
Other 6,235 6,403
----------- -----------
734,747 1,364,571
Expenses:
Attorney fees and expenses 16,361 12,826
Auditing fees 16,000 16,000
Bookkeeping and clerical services 6,000 6,000
Management fees 55,442 46,000
Directors' fees 5,000 5,000
Geological and engineering fees and expenses 17,491 6,451
Insurance 22,991 22,460
Office and miscellaneous expenses 30,137 24,421
Taxes, other than income taxes 22,243 22,272
Repairs and cleanup expenses 42,711 31,732
----------- -----------
234,376 193,162
INCOME BEFORE INCOME TAXES $ 500,371 $ 1,171,409
Income taxes 172,106 419,111
----------- -----------
NET INCOME $ 328,265 $ 752,298
=========== ===========
Earnings per share (basic and diluted) $ .40 $ .91
=========== ===========
Dividends per share $ .32 $ .75
=========== ===========
See accompanying notes.
8 AVOCA, Incorporated
<PAGE>
STATEMENTS OF RETAINED EARNINGS
Year ended December 31,
1998 1997
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at beginning of year $2,205,496 $2,076,073
Net income for the year 328,265 752,298
---------- ----------
2,533,761 2,828,371
Cash dividends:
1998 - $ .32 per share 265,760 --
1997 - $ .75 per share -- 622,875
---------- ----------
BALANCE AT END OF YEAR $2,268,001 $2,205,496
========== ==========
See accompanying notes.
[Picture of equipment on gas well location appears here.]
AVOCA, Incorporated 9
<PAGE>
STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
------------------------------
OPERATING ACTIVITIES
Net income $ 328,265 $ 752,298
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 16,074 6,967
Accrued interest receivable 3,077 (7,368)
Prepaid expenses (1,627) 202
Accounts payable and accrued expenses (1,868) 927
Income taxes 1,574 (9,427)
------------ -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 347,723 745,827
INVESTING ACTIVITIES
Purchase of short-term investments (909,085) (509,709)
Purchase of long-term investments (931,936) (1,255,150)
Maturity of investments 1,935,679 1,828,000
Purchase of equipment (4,500) --
----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 90,158 63,141
FINANCING ACTIVITIES
Dividends paid (622,875) (373,725)
----------- -----------
NET CASH USED IN
FINANCING ACTIVITIES (622,875) (373,725)
----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (184,994) (435,243)
Cash and cash equivalents at beginning of year 500,370 65,127
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 315,376 $ 500,370
========== ===========
See accompanying notes.
10 AVOCA, Incorporated
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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
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 a United States Government Treasury
Note due in 2000 and two United States Government agency securities due in 2001.
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, 1998 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, 1998.
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:
1998 1997
- --------------------------------------------------------------------------------
Current
Federal $172,368 $370,259
State 245 49,359
-------- --------
TOTAL CURRENT 172,613 419,618
-------- --------
Deferred:
Federal (462) (443)
State (45) (64)
-------- --------
TOTAL DEFERRED (507) (507)
-------- --------
$172,106 $419,111
======== ========
The deferred income tax liability of $12,888 relates to a difference between the
accounting and income tax basis of property and equipment.
The Company paid income taxes of $171,000 and $430,000 in 1998 and 1997,
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>
1998 1997
Amount Rate Amount Rate
-------------------------------------------------
<S> <C> <C> <C> <C>
Tax expense based on federal statutory rate $170,126 34.0% $398,279 34.0%
Statutory percentage depletion (7,279) (1.5) (11,145) (0.9)
State income taxes (net of federal income tax deduction) 15,265 3.1 49,380 4.2
Other (6,006) (5.2) (17,403) (1.5)
--------- ----- ---------- -----
INCOME TAXES $172,106 30.4% $419,111 35.8%
========= ===== ========== =====
</TABLE>
12 AVOCA, Incorporated
<PAGE>
NOTES TO FINANCIAL
STATEMENTS (Continued)
NOTE C--Major Customers
The net royalties received from one independent oil and gas exploration company
accounted for virtually all of total net royalties recorded for the year ended
December 31, 1998 compared to two independent oil and gas exploration companies
comprising 99% of total net royalties recorded for the year ended December 31,
1997. Lease bonus and delay rental revenue in 1998 and 1997 was the result of
leases with two and one company, respectively. Lease option payments consisted
of payments from one company for the year ended December 31, 1997. Seismic
permit fees recognized in 1997 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
1998 and 1997 resulted from rights-of-way agreements with one and two companies,
respectively.
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 $15,111 and
$13,676 for the years ended December 31, 1998 and 1997, 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)
----------------------------
1998 818 60,587
1997 941 56,537
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.
[Picture of old steam pump 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 $283,293, including a $265,760 dividend declared in December 1998 but
not paid until January 1999. 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.
1998 As Compared to 1997
Revenues for 1998 decreased by $629,824 or approximately 46% largely because
Burlington Resources Oil & Gas Company elected not to pay the $234,750 delay
rental due December 12, 1998 on a 1,565 acre oil, gas and mineral lease and to
pay only the minimum delay rental (equal to half of the $315,000 due) on a 2,100
acre lease. The decrease would have been greater but for receipt of $222,918
from The Meridian Resource & Exploration Company, Inc. (formerly Texas Meridian
Resources Exploration, Inc.) for two new oil, gas and mineral leases. The new
leases totaling 1,114 acres were granted under an option included in a 7,535
acre 3-D seismic permit acquired from the Company in 1996.
No new 3-D seismic permits were granted in 1998 whereas $211,241 was
received from this source in the prior year. Pipeline rights-of-way decreased
$134,727 because only one minor permit was granted in 1998.
Royalty income net of severance taxes decreased $76,135 or
approximately 36% primarily because of the absence of royalty income from the
Intercoastal Shipyard No. 2 well. The well, which ceased production on April 8,
1997, contributed $54,327 of royalty income in 1997.
The overall performance of the Delta Operating Corporation (formerly
Alliance Operating Company) Avoca No. 1 well, which was responsible for
virtually all of the Company's royalty income in 1998, improved during the year.
Total gas and condensate recoveries from the well (in which the Company has a
net revenue interest of approximately 19%) increased from 245,165 Mcf of gas and
3,604 barrels of condensate in 1997 to 311,345 Mcf of gas and 4,206 barrels of
condensate in 1998. The operator has told the Company that the increase in gas
production results from a successful chemical treatment to clean the
perforations and the producing formation near the wellbore in September of 1998.
The average 1998 sales prices from the Delta No. 1 Avoca well were approximately
$2.28 per Mcf of gas and $12.62 per barrel of condensate as compared to $2.89
per Mcf of gas and $20.22 per barrel of condensate in 1997.
Interest income on U.S. Government and U.S. Government agency
securities increased $7,392 or approximately 6% because of the availability of
increased funds for investment.
Overall expenses were $41,214 or approximately 21% higher in 1998 than
in 1997. The $3,535 increase in attorney fees and the $11,039 increase in
geological and engineering fees resulted primarily from the increased need for
these services due to increased mineral activity. The $9,442 increase in
consultant fees results from the hiring of a new part-time land manager and, to
a lesser extent, from the larger bonus paid to the Company's general manger in
recognition of commendable results achieved in 1997. The $5,717 increase in
office and miscellaneous expenses resulted primarily from increased annual
meeting expenses and expenses attributable to surface management. The $10,979
increase in repairs and cleanup expenses is attributable to ongoing surface
maintenance on the northern part of Avoca Island.
In comparison with 1997, income tax expense decreased $247,005 as
a result of a decrease in taxable income.
Net income was $.40 per share in 1998 as compared to $.91 per share in
1997. In line with the Company's decreased income, dividends decreased from $.75
per share in 1997 to $.32 per share in 1998. 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 8 1999, there were approximately 756 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.
Period High Low Declared Record Date Date Paid Amount
1998
First Quarter $19.75 $18.34
Second Quarter 20.00 18.50
Third Quarter 18.63 14.00
Fourth Quarter 15.00 12.50 12-15-98 1-6-99 1-22-99 $.32
1997
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
ACCOUNTANTS
With the approval of the Company's Board of Directors and effective upon the
filing of the Company's Form 10-KSB for the year ended December 31, 1998, Ernst
& Young LLP has decided not to stand for reappointment as the Company's
independent public accountants. There were no disagreements with Ernst & Young,
LLP and its reports have contained no adverse opinion, disclaimer of opinion or
modification as to uncertainty, audit scope or accounting principles.
It is anticipated that Arthur Andersen LLP will be asked to succeed
Ernst & Young LLP as the Company's independent public accountants for 1999.
Representatives of Arthur Andersen LLP and Ernst & Young LLP are expected to be
present at the Annual Meeting and to be available to respond to appropriate
questions. Each will have an opportunity to make a statement if he desires to do
so.
AVOCA
INCORPORATED
The Company will furnish without charge a copy of its 1998 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 5, 1998. Requests for the
report must be in writing addressed to Avoca, Incorporated, 228 St. Charles
Avenue, Suite 838, New Orleans, Louisiana 70130, Attention: M. Cleland Powell,
III. If made by a person who was not a shareholder of record on February 5,
1999, 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, 1998
Initial Income Recognized in 1998
Date of Rental Lease Bonus Net
Lessee Operator Lease Acreage Expiration Per Acre or Delay Rental Royalties
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Texaco, Inc. Texaco, Inc. 5/17/63 41.900 Termination $ 75 $ -- $ 110
of production
Alliance Operating Company Delta Operating Corporation 8/14/87 276.733 Termination $200 -- 135,991
of production
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
Burlington Resources Oil & Gas Burlington Resources Oil 12/12/97 1,050.000 Termination $150 157,500 --
Company & Gas Company of production
or 12/12/00 if
nonproducing
The Meridian Resource The Meridian Resource 5/27/98 487.490 Termination $200 97,498 --
& Exploration, Inc.* & Exploration, Inc.* of production
or 5/27/01 if
nonproducing
The Meridian Resource The Meridian Resource 5/27/98 627.100 Termination $200 125,420 --
& Exploration, Inc.* & Exploration, Inc.* of production
or 5/27/01 if
nonproducing
-------- --------
$426,618 $136,101
======== ========
*---Formerly Texas Meridian Resources Exploration, Inc.
</TABLE>
AVOCA, Incorporated 17
<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 13, 1999, included in the
1998 Annual Report to Shareholders of Avoca, Incorporated.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 315,376
<SECURITIES> 1,662,334
<RECEIVABLES> 50,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,034,420
<PP&E> 675,701
<DEPRECIATION> 601,121
<TOTAL-ASSETS> 2,658,665
<CURRENT-LIABILITIES> 283,293
<BONDS> 0
<COMMON> 94,483
0
0
<OTHER-SE> 2,268,001
<TOTAL-LIABILITY-AND-EQUITY> 2,658,665
<SALES> 142,733
<TOTAL-REVENUES> 734,747
<CGS> 0
<TOTAL-COSTS> 6,632
<OTHER-EXPENSES> 234,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 500,371
<INCOME-TAX> 172,106
<INCOME-CONTINUING> 328,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328,265
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
