<PAGE>
August 10, 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-QSB for the period ended
June 30, 1999.
This filing is being effected by direct transmission to the
Commission's EDGAR System.
Sincerely,
/s/ Robert C. Baird, Jr.
---------------------------------
Robert C. Baird, Jr.
Executive Vice President &
Principal Financial Officer
(504) 599-3069
RCB/drm
<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--------------------------------------------------
[ ] 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
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AVOCA, INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Louisiana 72-0590868
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
228 St. Charles Avenue, Suite 838, New Orleans, Louisiana 70130
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(Address of principal executive offices)
(504) 552-4720
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(Issuer's telephone number)
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(Former name, former address and former
fiscal year, if changed since last report
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 the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 830,500 shares on July 31, 1999
-------------------------------------
Transitional Small Business Disclosure Former (check one); Yes No X
----- -----
An exhibit index is located at page 13 of this report.
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1
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AVOCA, INCORPORATED
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I N D E X
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Page No.
--------
Part I. Financial Information (Unaudited)
---------------------
Condensed Balance Sheet - June 30, 1999 4
Condensed Statements of Income
Three Months Ended June 30, 1999
and 1998 and Six Months Ended
June 30, 1999 and 1998 5
Condensed Statements of Cash Flows
Six Months Ended June 30, 1999
and 1998 6
Notes to Condensed Financial Statements 7
Management's Discussion and Analysis or
Plan of Operation 8-12
Part II. Other Information
-----------------
Exhibits and Reports on Form 8-K 12
Signature 12
2
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AVOCA, INCORPORATED
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
Avoca, Incorporated
Condensed Balance Sheet (Unaudited)
June 30, 1999
Assets
Current assets:
<S> <C>
Cash $ 43,163
Short-term investments 1,132,844
Accounts receivable 22,505
Accrued interest receivable 27,192
Prepaid expenses 6,637
------------
Total current assets 1,232,341
Property and equipment, less accumulated depreciation and depletion 73,325
Other assets:
Long-term investments 1,253,180
Avoca Drainage Bonds, $415,000, in default -- at nominal amount 1
------------
$ 2,558,847
============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 3,116
Income taxes payable 31,950
------------
Total current liabilities 35,066
Deferred income taxes 12,635
Shareholders' equity:
Common stock, no par value -- authorized, issued and outstanding
830,500 shares 94,483
Retained earnings 2,416,663
------------
Total shareholders' equity 2,511,146
------------
$ 2,558,847
============
See accompanying notes
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Avoca, Incorporated
Condensed Statements of Income (Unaudited)
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue:
<S> <C> <C> <C> <C>
Royalties $ 32,771 $ 39,495 $ 72,112 $ 72,083
Less severance taxes 1,459 1,967 3,692 3,269
--------- --------- --------- ---------
31,312 37,528 68,420 68,814
Lease bonuses and delay rentals 81,345 222,918 81,345 222,918
Lease option payments 79,938 - 79,938 -
Interest income 31,299 31,845 63,107 64,503
Rental and other income 23,583 21,000 23,583 21,000
--------- --------- --------- ---------
247,477 313,291 316,393 377,235
Expenses:
Legal and accounting services 6,902 4,583 17,114 15,424
Consultant fees 11,188 10,747 30,588 31,747
Geological and engineering fees 4,315 4,241 6,248 8,661
Insurance 6,309 5,600 12,594 11,236
Miscellaneous expenses 6,790 11,103 31,659 59,593
--------- --------- --------- ---------
35,504 36,274 98,203 126,661
--------- --------- --------- ---------
Income before income taxes 211,973 277,017 218,190 250,574
Income taxes 67,704 80,176 69,528 80,176
--------- --------- --------- ---------
Net income $ 144,269 $ 196,841 $ 148,662 $ 170,398
========= ========= ========= =========
Net income per share $ .17 $ .24 $ .18 $ .21
========= ========= ======== ========
See accompanying notes.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Avoca, Incorporated
Condensed Statements of Cash Flows (Unaudited)
Six months ended
June 30
1999 1998
-------------------------------
Operating activities
<S> <C> <C>
Net income $ 148,662 $ 170,398
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense 1,880 1,368
Deferred taxes (253) (253)
Changes in operating assets and liabilities:
Operating assets 376 683
Operating liabilities 17,533 59,393
--------- ----------
Net cash provided by operating activities 168,198 231,589
Investing activities
Maturity of investments 729,427 1,276,682
Purchase of investments (903,453) (1,160,763)
Purchase of equipment (625) -
--------- ----------
Net cash provided by (used in) investing activities (174,651) 115,919
Financing activities
Dividends paid (265,760) (622,875)
--------- ----------
Net cash used in financing activities (265,760) (622,875)
--------- ----------
Decrease in cash and cash equivalents (272,213) (275,367)
Cash and cash equivalents at beginning of period 315,376 500,370
--------- ----------
Cash and cash equivalents at end of period $ 43,163 $ 225,003
========= ==========
See accompanying notes.
</TABLE>
6
<PAGE>
Avoca, Incorporated
Notes to Condensed Financial Statements (Unaudited)
Six months ended June 30, 1999
1. Basis of Accounting
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual shareholders'
report incorporated by reference in the Form 10-KSB for the year ended December
31, 1998.
The Company considers its United States Government securities held with a
maturity of three months or less when purchased to be cash equivalents. The
Company's United States Government obligations which do not meet this criteria
are included in, and represent substantially all of, the short-term and long-
term investment balances.
7
<PAGE>
Item 2 - Management's Discussion and
Analysis or Plan of Operation
The unaudited condensed statements of income show that net income for
the second quarter of 1999 as compared with the second quarter of 1998 decreased
from $196,841 to $144,269.
Royalty income net of severance tax decreased from $37,528 to $31,312
or approximately 17% because of a decrease in royalty income from the Delta
Operating Company Avoca No. 1 well. Since the second quarter of 1997, the well
has been responsible for virtually all of the Company's royalty income. The
decrease resulted from a 14% decline in the average sales price of gas, from
$2.44 per Mcf for the three months ended June 30, 1998 to $2.09 per Mcf for the
three months ended June 30, 1999. Gas production from the Avoca No. 1 well was
approximately 7% higher than production during the comparable period of 1998.
The principal reason for the decrease in net income was the $141,573
decrease in lease bonuses and delay rentals in the second quarter of 1999 as
compared to the second quarter of 1998. The decline resulted from the election
by The Meridian Resource & Exploration Company, Inc. not to pay the $125,420
annual delay rental due under its May 27, 1998 lease covering 627.10 acres on
the southwest part of the island. Meridian Resource paid a reduced Pugh Clause
rental under its lease, also dated May 27, 1998, covering 487.46 acres on the
northeast part of the island. The Pugh Clause rental (amounting to $81,345)
resulted from the recent completion of a deep gas well (Meridian Resources -
Thibodaux No. 1 well) in the Ramos Field, across Bayou Chene just north of the
eastern end of Avoca Island.
The Thibodaux No. 1 well was placed on production on June 15, 1999 from
the Operc 5 Sand. Avoca, Incorporated's participation in the unit has not
formally been determined. Meridian Resource commenced drilling the C. M.
Thibodaux No. 2 well on May 14, 1999 to produce from the higher Operc B Sand.
On June 25, while running casing to complete the well, a blowout
8
<PAGE>
occurred. After safely venting natural gas for twelve hours, lightning set the
well on fire. The No. 2 well continued to burn until July 3, when the well
completely "bridged over" and the flame went out. The drill site has been
cleared of debris in order to cap the No. 2 well in anticipation of resumption
of production from the No. 1 well. Salt water flows from the No. 2 well have
delayed production from the No. 1 well. Meridian Resource has spudded the
Thibodaux No. 3 well 2,500 feet east of the present location as a relief well
for the No. 2 well. The drilling contractor estimates it will take 45 days to
reach 18,000 feet.
Lease option payments of $79,938 in the second quarter of 1999 resulted
from the granting of two new oil, gas and mineral lease options. The first
option, covering 1,459.30 acres on the northwest part of the island, allows
McRae Exploration & Production, Inc. to lease all or part (not less than 729.65
acres) on or before December 20, 1999. The second option, covering 2,893 acres
on the southwest part of the island, allows Kevin Caliva & Associates, Inc. to
lease all or part (not less than 964.33 acres) on or before August 26, 1999.
There were no lease option payments received during the second quarter of 1998.
Interest income on U. S. Government and U. S. Government agency
securities decreased slightly due to lower interest rates.
Rental income increased $2,583 due to a CPI adjustment of the annual
rental in the Company's surface lease to the Avoca Duck Club.
As compared with the second quarter of 1998, total expenses remained
virtually the same. The $4,313 decrease in miscellaneous expenses offset slight
increases in legal and accounting, consulting, geological and engineering and
insurance.
9
<PAGE>
The change in income tax expense for the three months ended June 30,
1999 resulted from a decrease in taxable income for the second quarter of 1999
as compared to the second quarter of 1998.
Total revenue for the six month period ended June 30, 1999 decreased
$60,842 or approximately 16%. The decrease results from a substantial drop in
lease bonuses and delay rentals partially offset by lease option payments as
previously discussed above.
Royalties net of severance taxes for the first six months of 1999 were
virtually unchanged from the comparable period in 1998. Average natural gas
prices were 14% lower, but volume was 15% higher for the six month period.
Interest income on U. S. Government and U. S. Government agency
securities decreased $1,396 for the six month period because of lower interest
rates.
Rental income for the six months ending June 30, 1999 increased $2,583
because of a CPI adjustment under the Avoca Duck Club surface lease.
Expenses for the six months ended June 30, 1999 decreased $28,458 or
approximately 22%. Reduced remedial maintenance operations on the northern part
of Avoca Island resulted in a $27,934 decrease in miscellaneous expenses
although legal and accounting services expenses increased by $1,690. Geological
and engineering fees were reduced by $2,413 because of a decrease in a need for
engineering services. The $1,159 decrease in consultant fees resulted from a
smaller bonus paid to the Company's general manager in recognition of results
achieved in 1998, which partially offset fees paid to the Company's new land
manager.
The change in income tax expenses for the six months ended June 30,
1999 resulted from a decrease in taxable income for the first six months of 1999
as compared to the like period of 1998.
10
<PAGE>
The Company's continued liquidity is evidenced by the fact that
approximately 95% of its assets, as measured by book value, are cash and U.S.
Government and U.S. Government agency securities.
In addition to interest income and the leasing of hunting rights, the
Company customarily derives essentially all of its other income from bonuses,
delay rentals and royalties under oil, gas and mineral leases of its Avoca
Island acreage. The Company's business is passive and all capital requirements
for exploration, development and production of the Company's mineral resources
are funded by its lessees.
The Company has completed its assessment of the potential impact that
the Year 2000 (Y2K) issue may have with respect to its operations and financial
position. Due to the nature of the Company's operations, the volume of
accounting transactions is limited and the Company's accounting records are
maintained through manual input to a non-complex financial accounting software
application that is Y2K compliant. The Company has not incurred and does not
expect to incur any significant costs with respect to Y2K issues.
One independent oil and gas company represents the source of
substantially all of the Company's royalty income. Management of Avoca,
Incorporated has been informed by this company that the Y2K issue would not have
a significant impact on its respective oil and gas operations.
The Company deals with a limited number of vendors who are primarily
geologists, engineers, attorneys and accountants. Services provided by the
Company's primary vendors are not expected to be significantly disrupted by the
Y2K issue.
Companies, including Avoca, Incorporated, cannot make Y2K Compliance
certifications because the ability of any organization's systems (and the
systems of other outside organizations) to operate reliably after midnight on
December 31, 1999 is dependent upon factors that may be outside
11
<PAGE>
the control of, or unknown to, the organization. While there can be no
assurance that the Company will not be materially adversely affected by Y2K
problems, the Company believes that it has adequately addressed the risks
associated with the Y2K issue.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
Reports on Form 8-K: No reports have been filed during the quarter for
which this report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AVOCA, INCORPORATED
-------------------
Registrant
August 5, 1999 /s/ Robert C. Baird, Jr.
- ----------------------------- -----------------------------------------
Robert C. Baird, Jr.
President and Principal Financial Officer
12
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 43,163
<SECURITIES> 1,132,844
<RECEIVABLES> 49,697
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,232,341
<PP&E> 73,325
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,558,847
<CURRENT-LIABILITIES> 35,066
<BONDS> 0
<COMMON> 94,483
0
0
<OTHER-SE> 2,416,663
<TOTAL-LIABILITY-AND-EQUITY> 2,558,847
<SALES> 72,112
<TOTAL-REVENUES> 316,393
<CGS> 0
<TOTAL-COSTS> 3,692
<OTHER-EXPENSES> 98,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 218,190
<INCOME-TAX> 69,528
<INCOME-CONTINUING> 148,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,662
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
