UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant X
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Filed by a Party other than the Registrant
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Check the appropriate box:
X Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
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AVOCA, INCORPORATED
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
X No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule
- -----0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
1
AVOCA, INCORPORATED
228 St. Charles Ave.
Suite 838
New Orleans, Louisiana 70130
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
, 2004
TO THE STOCKHOLDERS OF AVOCA, INCORPORATED:
A Special Meeting of Stockholders of Avoca, Incorporated ("AVOCA"), will be
held in the 2nd Floor Board Room, Whitney National Bank, 228 St. Charles Avenue,
New Orleans, Louisiana, on , , 2004, at 10:30 a.m., for the
following purposes as more fully described in the accompanying proxy statement:
(1) To approve an amendment to AVOCA's Charter, as amended, to effect a
reverse stock split and cash payment in lieu of issuance of resulting
fractional shares. The reverse stock split and cash payment for
fractional shares is proposed to terminate AVOCA's reporting
obligations under the Securities Exchange Act of 1934, as amended.
(2) To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The close of business on , 2004 has been fixed as the
record date for determining shareholders entitled to notice of and to vote at
the meeting.
By order of the Board of Directors
M. Cleland Powell, III
Secretary-Treasurer
New Orleans, Louisiana
, 2004
YOUR VOTE IS IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING
YOU SHOULD COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY. Any Stockholder
present at the meeting may withdraw his or her proxy and vote personally on each
matter brought before the meeting. Stockholders attending the meeting whose
shares are held in the name of a broker or other nominee who desire to vote
their shares at the meeting should bring with them a proxy or letter from that
firm confirming their ownership of shares.
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AVOCA, INCORPORATED
228 St. Charles Avenue
Suite 838
New Orleans, Louisiana 70130
PRELIMINARY COPY
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PROXY STATEMENT
INTRODUCTION
This proxy statement is being furnished in connection with the
solicitation of proxies by the board of directors of Avoca, Incorporated, a
Louisiana corporation ("AVOCA" or the "Company"), for use at the Special Meeting
of Stockholders ("Special Meeting") to be held on , , 2004,
at 10:30 a.m., in the 2nd Floor Board Room, Whitney National Bank, 228 St.
Charles Avenue, New Orleans, Louisiana This proxy statement and the accompanying
proxy are being mailed to stockholders on or about , 2004. It is
contemplated that this solicitation of proxies will be made primarily by mail;
however, if it should appear desirable to do so in order to ensure adequate
representation at the meeting, directors, officers and employees of AVOCA may
communicate with stockholders, brokerage houses and others by telephone or in
person to request that proxies be furnished and may reimburse banks, brokerage
houses, custodians, nominees and fiduciaries for their reasonable expenses in
forwarding proxy materials to the beneficial owners of the shares held by them.
All expenses incurred in connection with this solicitation shall be borne by
AVOCA.
At the Special Meeting, holders of shares of common stock
("Stockholders") will be asked to consider and vote (i) to approve an amendment
to AVOCA's Charter, as amended, to effect a reverse split of AVOCA's common
stock (the "Common Stock") at a ratio of 100 to 1, and to provide for payment in
cash, in lieu of the issuance of fractional shares, to those Stockholders
holding, prior to the reverse stock split, fewer than 100 shares or who would
otherwise be entitled to fractional shares as a result of the stock split (the
reverse split and cash payments are referred to, collectively, as the "Split
Transaction"), and (ii) to transact such other business as may properly come
before the Special Meeting, as set forth in the preceding Notice of Special
Meeting.
Stockholders who execute proxies retain the right to revoke them at any
time before they are voted. Any proxy given by a Stockholder may be revoked or
superseded by executing a later dated proxy, by giving notice of revocation to
the Secretary of AVOCA at Avoca, Incorporated, 228 St. Charles Avenue, Suite
838, New Orleans, Louisiana 70130, in writing prior to or at the meeting or by
attending the meeting and voting in person. A proxy, when executed and not so
revoked, will be voted in accordance with the instructions given in the proxy.
If no choice is specified in the proxy, the proxy will be voted "FOR"
the approval of the amendments to AVOCA's Charter, as amended, to effect the
Split Transaction.
VOTING SECURITIES
Only Stockholders of record as of the close of business on
, 2004 (the "Record Date"), are entitled to vote at the meeting. At
that time, 830,500 shares of the Company's Common Stock (being the Company's
only class of authorized stock) were outstanding. A majority of shares entitled
to vote represented in person or by proxy will constitute a quorum at the
Special Meeting. Abstentions and broker non-votes are counted for the purpose of
determining whether a quorum is present for the transaction of business. Each
share is entitled to one vote. Approval of the amendments and the related Split
Transaction requires a vote of at least two-thirds (2/3) of the voting power
present at the Special Meeting, either in person or by proxy. Abstentions will
have the effect of a vote against the approval of the amendment, while broker
non-votes will not affect the outcome. The proposed amendment does not require
the affirmative vote of a majority of the outstanding shares of AVOCA Common
Stock held by unaffiliated Stockholders. (For purposes of this proxy statement,
"unaffiliated Stockholders" are all Stockholders other than (a) officers or
directors of the Company, and their spouses and (b) entities that are
Stockholders and whose officers or directors are officers or directors of the
Company).
3
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Split Transaction, passed upon the
merits or fairness of the Split Transaction, or passed upon the adequacy or
accuracy of the disclosure in this proxy statement. Any representation to the
contrary is a criminal offense.
IMPORTANT: PLEASE RETURN YOUR PROXY PROMPTLY. AN ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED STATES. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT
THIS TIME. WE WILL SEND DETAILED INSTRUCTIONS TO STOCKHOLDERS FOR
SURRENDERING THEIR STOCK CERTIFICATES AS SOON AS PRACTICABLE AFTER THE
AMENDMENTS BECOME EFFECTIVE.
PROPOSAL
APPROVAL OF AMENDMENT TO AVOCA'S CHARTER TO
EFFECT A REVERSE STOCK SPLIT OF AVOCA'S COMMON STOCK
Forward Looking Statements
Forward looking statements are those statements that describe
management's beliefs and expectations about the future. We have identified
forward looking statements by using words such as "anticipate," "believe,"
"could," "estimate," "may," "expect" and "intend." Although we believe that
these expectations are reasonable, our operations involve a number of risks and
uncertainties, including those described in this proxy statement and other
documents filed by us with the Securities and Exchange Commission (the "SEC").
Therefore, these types of statements may prove to be incorrect.
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SUMMARY TERM SHEET
THE FOLLOWING SUMMARY BRIEFLY DESCRIBES THE MATERIAL TERMS OF THE SPLIT
TRANSACTION. THE PROXY STATEMENT CONTAINS A MORE DETAILED DESCRIPTION OF SUCH
TERMS. WE ENCOURAGE YOU TO READ THIS ENTIRE PROXY STATEMENT AND THE DOCUMENTS WE
HAVE INCORPORATED BY REFERENCE BEFORE VOTING.
AS USED IN THIS PROXY STATEMENT, "AVOCA," "WE," "OUR," "OURS" AND "US"
REFER TO AVOCA, INCORPORATED, A LOUISIANA CORPORATION, AND THE "SPLIT
TRANSACTION" REFERS TO THE REVERSE STOCK SPLIT, TOGETHER WITH THE RELATED CASH
PAYMENTS, IN LIEU OF THE ISSUANCE OF FRACTIONAL SHARES, TO STOCKHOLDERS HOLDING
FEWER THAN 100 SHARES OF COMMON STOCK AT THE EFFECTIVE TIME OF THE REVERSE SPLIT
AND TO STOCKHOLDERS WHO WOULD OTHERWISE BE ENTITLED TO FRACTIONAL SHARES AS A
RESULT OF THE REVERSE SPLIT. NO FRACTIONAL SHARES WILL BE ISSUED IN CONNECTION
WITH THE REVERSE SPLIT.
The Split Transaction
If the Split Transaction is completed:
o Stockholders will be entitled to receive one share of AVOCA Common
Stock (each a "Post-Split Share") for every 100 shares of Common
Stock held immediately prior to the time of the reverse split
(each, a "Pre-Split Share");
o Stockholders who would otherwise be entitled to fractional shares
after giving effect to the reverse 100:1 stock split of our Common
Stock will receive a payment of $28.00 per share (the "Purchase
Price") for each Pre-Split Share held other than in 100 share lots
(or multiples thereof);
o We expect to pay no more than approximately $625,000.00 in the
aggregate to purchase the fractional shares;
o Stockholders with less than 100 Pre-Split Shares will have no
further interest in AVOCA and will become entitled only to payment
for their Pre-Split Shares; and
o Stockholders owning more than 100 Pre-Split Shares, but in a
number not divisible to a whole number when divided by 100, will
remain Stockholders, but will have their resulting fractional
shares redeemed. This redemption may or may not change their
respective percentage ownership in AVOCA.
See "SPECIAL FACTORS - Background, Purpose, Structure and Effect of the
Split Transaction - Structure of the Split Transaction" beginning on page ___.
Effects of the Split Transaction
The intended effect of the Split Transaction will be to reduce the
costs associated with being a publicly traded company.
o If the number of Stockholders of record is reduced to less than
300, which is expected, AVOCA will be able to terminate its
reporting obligations under the Securities Exchange Act of 1934
(the "1934 Act").
o The costs associated with these reports and other filing
obligations as well as other costs relating to public company
status comprise a significant overhead expense, amounting to an
anticipated average for fiscal years 2004 through 2006 of over
$50,000.00.
o Though AVOCA will no longer be subject to the reporting
obligations of the 1934 Act, including the heightened disclosure
and independence requirements imposed by the Sarbanes-Oxley Act of
2002, the Company intends to continue providing Stockholders with
annual audited financial statements, and such other reporting as
the board of directors determines is necessary and appropriate to
keep AVOCA Stockholders timely and accurately apprised of the
income and status of their investment in the Company.
5
The cost of administering and maintaining so many small Stockholder
accounts is also significant.
o In 2005, assuming that the Split Transaction does not occur, we
expect that each Stockholder will cost us approximately $10.00 for
transfer agent and other administrative fees, as well as printing
and postage costs to mail proxy materials and the annual and
periodic reports required to be distributed to Stockholders under
the 1934 Act.
o In light of the number of shareholders owning less than 100 shares
and these disproportionate costs, as well as the passive nature of
our operations, the board of directors concluded that, at this
time, the costs associated with reducing the number of
Stockholders of record below 300 was reasonable in view of the
anticipated benefits of being privately held.
o In addition to eliminating the substantial costs we are currently
incurring to be a public company, the Split Transaction will also
permit Stockholders holding a small amount of shares of our Common
Stock to receive cash for their current shares without incurring
brokerage fees.
Each of our management-related Stockholders who own Pre-Split Shares
holds more than 100 shares of Common Stock and will remain Stockholders of AVOCA
following the Split Transaction.
o Following the completion of the Split Transaction, each of our
management-related Stockholders will own a slightly increased
percentage of the outstanding Common Stock.
o We do not anticipate any changes in AVOCA's board of directors or
management following the Split Transaction.
See "SPECIAL FACTORS - Background, Purpose, Structure and Effect of the
Split Transaction - Purpose and Reasons for the Split Transaction" beginning on
page ; "Conversion of Shares in Split Transaction" beginning on page ; and
"Conduct of AVOCA's Business After the Split Transaction" beginning on page .
Recommendation of the Board of Directors
The board of directors has unanimously determined that the Split
Transaction is advisable and in the best interests of AVOCA and its Stockholders
and recommends that you vote "FOR" the Split Transaction.
See "SPECIAL FACTORS - Recommendation of the Board of Directors"
beginning on page .
Fairness Opinion of Financial Advisor
The board of directors retained Chaffe & Associates, Inc. ("Chaffe") as
its financial advisor in connection with its evaluation of the Split
Transaction. On August 10, 2004, Chaffe delivered its opinion to the AVOCA board
of directors that, as of that date, and based upon and subject to the various
limitations, qualifications and assumptions stated in the opinion, the Purchase
Price to be paid by AVOCA to the holders of fractional shares in the Split
Transaction is fair to the unaffiliated Stockholders from a financial point of
view. (For purposes of this proxy statement, "unaffiliated Stockholders" are all
Stockholders other than (a) officers or directors of the Company, and their
spouses and (b) entities that are Stockholders and whose officers or directors
are officers or directors of the Company).
A copy of Chaffe's written opinion, which describes the assumptions
made, matters considered and limitations on the review undertaken in connection
with the fairness opinion, is attached to this proxy statement as Annex B.
6
See "SPECIAL FACTORS - Background, Purpose, Structure and Effect of
Split Transaction - Opinion of Independent Financial Advisor" beginning on page
.
Vote Required
In order to be approved, a vote in favor of the Split Transaction of at
least two-thirds (2/3) of the voting power present is required.
o The Split Transaction is not subject to and does not require the
affirmative vote of a majority of the outstanding shares of our
Common Stock held by our unaffiliated Stockholders.
o Our "management-related Stockholders" being certain of AVOCA's
directors and executive officers, their spouses and entities that
are Stockholders and whose executive officers and directors are
officers and directors of the Company, collectively own
approximately 45% of our Common Stock outstanding.
o Though we cannot provide assurance regarding the outcome of the
vote, our "management-related Stockholders" have independently
indicated to us orally that they intend to vote their shares, and
those of the entities they represent, in favor of the Split
Transaction, and we therefore believe that the requisite
Stockholder approval will likely be obtained.
See "SPECIAL FACTORS - Vote Required" beginning on page .
No Dissenter's or Appraisal Rights
Under Louisiana law, our Stockholders are not entitled to dissenter's
or appraisal rights with respect to the Split Transaction. However, there may
exist other rights or actions under state law for Stockholders who are aggrieved
by reverse stock splits generally.
See "SPECIAL FACTORS - Appraisal Rights" beginning on page .
U.S. Federal Income Tax Consequences
The receipt of cash in the Split Transaction by Stockholders may be a
taxable transaction.
See "SPECIAL FACTORS - Background, Purpose, Structure and Effect of
Split Transaction - Material Federal Income Tax Consequences" beginning on page
.
Sources of Funds for the Split Transaction
We estimate that the total funds required to complete the Split
Transaction, including consideration to be paid to the Stockholders entitled to
receive cash and professional fees and expenses, will be no more than
approximately $775,000.00. We expect that the total funds required will be paid
from our investment accounts and, and as a result, will have little or no effect
on our operations or dividend practices.
See "SPECIAL FACTORS - Background, Purpose, Structure and Effect of the
Split Transaction - Sources of Funds and Financial Effect of the Split
Transaction" beginning on page ___.
Risks to Stockholders
There are risks associated with the Split Transaction. The risks to the
Stockholders whose shares will be completely cashed out as a result of the Split
Transaction include, but are not necessarily limited to, the forfeiture of the
opportunity to participate in any future growth in the value of their shares.
The risks to the continuing Stockholders include, but are not necessarily
limited to, the following:
7
o The lack of liquidity for shares of our Common Stock following the
Effective Date may adversely affect the value of the continuing
Stockholders' shares.
o AVOCA has no plans to sell the Company or otherwise enter into a
transaction that would provide liquidity for the continuing
Stockholders' shares, which could affect the value of their
shares.
o As a deregistered company, AVOCA will no longer be subject to the
SEC's financial reporting requirements or the heightened
disclosure and independence requirement imposed by the
Sarbanes-Oxley Act of 2002.
o As a deregistered company, AVOCA will no longer be subject to the
liability provisions of the 1934 Act, and its officers will no
longer be required to certify the accuracy of AVOCA's financial
statements.
o Stockholders will continue to be subject to the operational and
other risks facing AVOCA, which risks, if realized, could result
in a substantial reduction in the value of their shares of Common
Stock.
See "SPECIAL FACTORS - Risk Factors" beginning on page .
Surrender of Share Certificates; Payment for Fractional Shares
If the Split Transaction occurs:
o As soon as practical, but in no event sooner that ten (10) days
nor later than thirty (30) days following the date of the Special
Meeting, we will mail a letter of transmittal to each Stockholder
of record.
o The letter of transmittal will contain instructions for the
surrender of each Stockholder's certificate or certificates to
AVOCA's exchange agent in exchange for a new certificate and/or
the aggregate Purchase Price.
o The certificate exchange and cash payment of the aggregate
Purchase Price will be made promptly to each Stockholder who has
surrendered outstanding certificate(s), together with the letter
of transmittal, to AVOCA's exchange agent.
See "SPECIAL FACTORS - Exchange of Stock Certificates" beginning on
page .
If you have more questions about the Split Transaction or would like
additional copies of this proxy statement, please contact our General Manager at
AVOCA, Incorporated, 225 St. Charles Avenue, Suite 838, New Orleans, Louisiana
70130, Telephone: 504-552-4720.
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TABLE OF CONTENTS
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Page
SPECIAL FACTORS
Introduction
Risk Factors
Recommendation of the Board of Directors
Background, Purpose, Structure and Effect of the Split Transaction
Background
Purpose and Reasons for the Split Transaction
Factors Considered by the Board of Directors
Source of Funds and Financial Effect of the Split Transaction.
Structure of the Split Transactionand Effect on AVOCA's
Stockholders.
Conversion of Shares in Split Transaction
Effect of Split Transaction on AVOCA.
Effect of the Split Transaction on Management-Related
Stockholders.
Cash Payment in Lieu of Shares of Common Stock.
Conduct of AVOCA's Business After the Split Transaction
Material Federal Income Tax Consequences
Opinion of Independent Financial Advisor
Land and Mineral Appraisals
Certain Effects of the Split Transaction
Vote Required
Board of Directors' Reservation of Rights
Effective Date
Exchange of Stock Certificates
Regulatory Approvals
Appraisal Rights
Information and Security Ownership of Management and Certain
Beneficial Owners
SUMMARY FINANCIAL INFORMATION
Summary Historical and Pro Forma Financial Information
AVAILABLE INFORMATION
OTHER MATTERS
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SPECIAL FACTORS
Introduction
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AVOCA'S board of directors has authorized, and recommends for your
approval a Split Transaction that is comprised of:
o a reverse stock split (the "Reverse Split") pursuant to which each
share of Common Stock registered in the name of a Stockholder at the
effective time of the Reverse Split will be converted into one
hundredth (1/100) of a share of Common Stock; and
o payment of $28.00 per share for each Pre-Split Share paid to
Stockholders who would otherwise be entitled to receive fractional
shares as a result of the Reverse Split.
If approved by stockholders, the Split Transaction will become
effective as soon as practical, but in no event sooner than ten (10) days nor
later than thirty (30) days following the date of such approval, upon the filing
of the necessary amendments to AVOCA's Charter, as amended, with the Secretary
of State of the State of Louisiana (the "Effective Date"). The form of proposed
amendments to AVOCA's Charter, as amended, necessary to effect the Split
Transaction is attached to this proxy statement as Annex A.
Any holder of record of less than 100 Pre-Split Shares who desires to
retain an equity interest in AVOCA after the Effective Date may do so by
purchasing, prior to the Effective Date, a sufficient number of shares of Common
Stock such that the Stockholder holds 100 or more Pre-Split Shares. Due to the
limited trading market for AVOCA's stock, however, a Stockholder desiring to
retain an equity interest in AVOCA may not be able to purchase enough shares to
retain an equity interest in AVOCA. We intend for the Split Transaction to treat
Stockholders holding Common Stock in street name through a nominee (such as a
bank or broker) in the same manner as Stockholders whose shares are registered
in their names, and nominees will be instructed to effect the Split Transaction
for their beneficial holders. However, nominees may have different procedures
and Stockholders holding shares in street name should contact their nominees.
Risk Factors
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You should consider the following risks prior to casting your vote.
Additional risks may also exist which have not been specifically identified here
by the Company.
Risks Associated with Remaining a Stockholder
The Lack Of Liquidity For Shares Of Our Common Stock Following The
Effective Date May Adversely Affect The Value Of Your Shares.
Following the Split Transaction, we expect to have less than 300
Stockholders. As a result, we will be entitled and we intend to de-register our
shares of Common Stock under the 1934 Act. Once we de-register our shares of
Common Stock, our shares will no longer be traded on the Over-The-Counter
Electronic Bulletin Board (the "OTC") and we will not file any more reports with
the SEC. As a result, there will be no effective trading market for our shares
and Stockholders desiring to sell their shares may have a difficult time finding
a buyer for these shares. This lack of liquidity may adversely affect your
ability to sell your shares and the price a buyer is willing to pay for the
shares.
We Do Not Have Any Plans To Sell AVOCA Or Otherwise Enter Into A
Transaction That Would Provide Liquidity For Your Shares, Which Could Adversely
Affect The Value Of Your Shares.
We do not have any present intention or plans to sell AVOCA or enter
into any other transaction that would provide Stockholders with a liquidity
event for their shares, which may adversely affect the value of your shares.
10
As a deregistered company, AVOCA will no longer be subject to the SEC's
financial reporting requirements or the heightened disclosure and independence
requirements imposed by the Sarbanes-Oxley Act of 2002. Nor will AVOCA be
subject to the liability provisions of the 1934 Act and its officers will no
longer be required to certify the accuracy of AVOCA's financial statements.
Once the Company has deregistered under the 1934 Act, it will no longer
be required to file periodic reports with the SEC and the information previously
reported by the Company in those periodic reports will no longer be available to
Stockholders in that form. Nor will AVOCA's officers be required to certify the
accuracy of the financial statement pursuant to the provisions of the 1934 Act,
or be subject to the 1934 Act's liability provisions.
Rather, once AVOCA deregisters, it will only be subject to Louisiana
law governing financial reporting. Louisiana law requires only that the Company
furnish Stockholders annually, upon request, with a condensed balance sheet
(unaudited) and a combined statement of income and earned surplus (unaudited)
for the last preceding fiscal year ended more than four months before receipt of
such request. It is the current intention of the Company to provide Stockholders
with annual audited financial statements and such other periodic reporting in a
form, and subject to the level of activity that may exist from time to time, as
the board of directors believes will keep Stockholders timely and accurately
apprised of the income and status of their investment. Any reporting to
Stockholders in excess of that required by Louisiana law will be provided at the
discretion of the board of directors.
Stockholders Will Continue To Be Subject To The Operational And Other
Risks Facing AVOCA, Which Risks, If Realized, Could Result In A Substantial
Reduction In The Value Of Their Shares Of Common Stock.
Following the Split Transaction, we will continue to face the same
risks we have faced in the past. AVOCA's revenues are highly dependent on the
results of oil and gas operations on Avoca Island by AVOCA's mineral lessees.
Currently, there are only five (5) wells in production, and approximately 92% of
AVOCA's net royalty income is derived from just three (3) of those wells. As the
current wells are depleted by production, there is no assurance that the same or
new mineral lessees will be interested in, or successful at, additional
operations. The last two attempts at new wells in which Avoca would have
participated, have been unsuccessful. There have also been production problems
with the wells currently in production. While in the past those production
problems have been able to be remedied, there is no assurance that will be true
with respect to future production problems, if any. There is no intention by
AVOCA to conduct mineral operations on its own or otherwise engage in an active
trade or business. Upon cessation of production of the minerals underlying Avoca
Island, AVOCA revenues would consist of rental income from surface operations
and interest from its investment portfolio. These revenues are relatively small
compared to the current mineral operation income and are not expected to
increase significantly. If and when the mineral revenues decrease, the price of
the shares of Common Stock may never reach $28.00 or more per share.
Risks Associated with Not Being a Stockholder.
Stockholders Who Are Cashed Out Will Forfeit The Opportunity To
Participate In Any Future Growth In The Value Of Their Shares.
Stockholders who are cashed out in the Split Transaction will no longer
be stockholders in AVOCA (unless they subsequently acquire shares from other
Stockholders following the Effective Date) and will no longer participate in any
growth in the value of their shares that may occur in the future. It is possible
that the value of our shares could exceed $28.00 per share in the future. Such
growth would require significant additional mineral operations, coupled with the
continuation of historically high prices for oil and gas.
Recommendation of the Board of Directors
- ----------------------------------------
The board of directors has unanimously determined that the Split
Transaction is in the best interest of AVOCA and our Stockholders, and is both
substantively and procedurally fair to our unaffiliated Stockholders, and
unanimously recommends a vote "FOR" the proposal to approve the Split
Transaction described in this proxy statement. None of the officers or directors
are employees of AVOCA.
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Background, Purpose, Structure and Effect of the Split Transaction
- ------------------------------------------------------------------
Background
For as many as twenty (20) years, the board of directors has discussed
the desirability of taking AVOCA private. The Company assets consist of
approximately 16,000 acres of Avoca Island and government and other high grade
investments. The Company does not engage in an active trade or business. The
Company's acreage is subject to a long term lease for hunting and fishing and a
limited amount of agricultural and other surface leases. Although the Company
takes certain limited activities to promote the leasing and development of its
mineral potential, the Company is largely dependent on reacting to approaches by
potential mineral lessees. Thus, the Company's activities are (1) protecting its
land from physical and legal encroachments, (2) collecting, accounting for and
investing rents and royalties and making decisions as to dividend distributions,
and (3) intermittent negotiations for mineral and surface leases and related
contracts.
There has never been an active trading market for AVOCA's stock. And
for many years, an overwhelming percentage of AVOCA's Stockholders of record has
together owned only slightly more than one (1%) percent of the Common Stock. As
a result, the administrative costs of maintaining the Company as a
publicly-traded company have long been considered to exceed its benefits to the
Stockholders. But while the concept of going private was periodically discussed
by the board of directors, the transactional costs that would be incurred were
considered to be non-economical.
With the enactment of the Sarbanes-Oxley Act of 2002, and the more
recent promulgation of regulations pursuant thereto, the board of directors once
again considered whether the costs of maintaining its publicly-traded status was
justifiable. At first, the board did not fully appreciate the breadth and scope
of the new regulations, but as the Company began to experience the increases in
the associated legal and accounting expenses, the costs associated with
remaining public began to outweigh the costs of going private, particularly in
light of the passive nature of the AVOCA's business. The Company believes that
the rules and regulations that it must follow as a public company, and the
associated direct costs and indirect costs, add no protections or better
understandings to the Company's relatively simple operations.
As of July 21, 2004, approximately 460 of our 642 Stockholders of
record of our Common Stock owned fewer than 100 shares. At that time, these
Stockholders represented approximately 72% of the total number of Stockholders
of record of such Common Stock. However, these 460 Shareholders collectively
owned only 9,344, or 1.13% of the total number of outstanding shares of our
Common Stock.
We do not know the exact number of shares of our Common Stock owned
beneficially (but not of record) by persons who own fewer than 100 shares of our
Common Stock and who hold the shares in street name. However, based on
information that we do have on non-objecting beneficial owners, and the number
of sets of proxy materials that we are requested to provide to the brokers,
dealers, etc., we estimate that there are approximately 140 such holders owning
beneficially approximately 3,965 shares or 0.5% of the total number of
outstanding shares of our Common Stock.
Accordingly, we estimate that there are an aggregate of approximately
13,300 (9,344 + 3,965 = 13,309) shares of our Common Stock, representing 1.6% of
our outstanding shares, held by Stockholders holding fewer than 100 shares.
Additionally, we estimate an aggregate of approximately 3,460 shares of
our Common Stock held by owners of record of more than 100 shares will become
fractional share as a result of the Split Transaction, and that another 3,925
shares owned beneficially (but not of record) will become fractional. Therefore,
the total number of shares to be purchased as a result of the Split Transaction
will be approximately 20,700 (13,300 + 3,460 + 3,925 = 20,685) shares of our
common shares or 2.5% of the total number of shares of our Common Stock
outstanding.
Purpose and Reasons for the Split Transaction
In recent years, the board of directors believes the public marketplace
has had less interest in public companies with a limited amount of shares
available for trading ("float") in the public
12
marketplace. The board of directors believes it is highly speculative whether
our Common Stock would ever achieve significant trading volume in the public
marketplace with an active and liquid market. The realization that our Common
Stock might not in the foreseeable future achieve significant trading volume as
a public company is one of the reasons that caused the board of directors to
conclude that AVOCA is not benefiting from being a public company, and that it
would be in the best interest of AVOCA and its Stockholders for AVOCA to be
privately held. It is the belief of the board of directors that the lack of an
active market has not been for lack of persons willing to buy, but from a lack
of shareholders willing to sell. The board of directors further believes that
the person interested in buying will continue to be interested even if AVOCA
were a privately held company.
Additionally, as a public company, AVOCA is required to prepare and
file with the Securities and Exchange Commission, among other items, the
following:
o Quarterly Reports on Form 10-QSB;
o Annual Reports on Form 10-KSB;
o Proxy statements and annual Stockholder reports as required by
Regulation 14A under the 1934 Act; and
o Current Reports on Form 8-K.
The costs associated with these reports and other filing obligations as
well as other costs relating to public company status comprise a significant
overhead expense, anticipated to be in excess of $50,000.00 in each of the next
three fiscal years.
YEAR ENDED
ACTUAL PROJECTED
2003 2004 2005 2006
---------------------------------------
Compliance Cost Incurred
Mailings And Copying 6,000 6,000 6,000 6,000
Edgar Fees 1,250 1,250 1,250 1,250
Additional Board Meetings 2,500 5,000 5,000 5,000
Internal Evaluation Of Internal
Controls 0 3,000 5,000 4,000
Auditing:
Incremental Annual Audit Expense 0 800 1,000 1,000
SEC Forms 10-QSB And 10-KSB Review 5,000 5,500 5,700 5,900
Internal Control 1,644 3,000 3,500 3,000
Sarbanes-Oxley Compliance 1,862 2,000 2,000 1,000
Legal:
SEC Forms 10-QSB And 10-KSB Preparation 20,000 17,000 17,000 17,000
Internal Control 0 2,000 3,000 2,000
Sarbanes-Oxley Compliance 7,500 5,000 5,000 3,000
Audit Committee 0 5,000 3,000 2,000
45,756 55,550 57,450 51,150
Such amount is significant to our total cost of administration and to
the value of the information to our shareholders. The reporting and filing costs
primarily include professional fees for our auditors and corporate counsel and
internal compliance costs incurred in preparing and reviewing a filing. They do
not include executive or administrative time involved in the process. Avoca's
officers and directors, who are not employees of the Company, devoted
approximately sixty (60%) percent of the time they spent on Avoca addressing
issues related to being a public company. Two of Avoca's three employees, each
of whom are part time employees, have spent approximately 60 hours a quarter
dealing with reporting and compliance matters.
These Securities and Exchange Commission registration-related costs
have been increasing over the years, and we believe that they will continue to
increase substantially, particularly as a result of the additional reporting and
disclosure obligations imposed on public companies by the recently enacted
Sarbanes-Oxley Act of 2002.
In addition to the direct and indirect costs associated with the
preparation of the filings under the 1934 Act and the recent additional
reporting and disclosure obligations referenced above, the cost of administering
13
and maintaining so many small Stockholder accounts is significant. The cost of
administering each Stockholder's account is essentially the same regardless of
the number of shares held in that account. Therefore, our costs to maintain such
small accounts are disproportionately high when compared to the total number of
shares involved. In 2005, assuming that the Split Transaction does not occur, we
expect that each Stockholder will cost us approximately $10.00 for transfer
agent and other administrative fees as well as printing and postage costs to
mail proxy materials and the annual and periodic reports required to be
distributed to Stockholders under the 1934 Act.
We expect that we will reduce the total cost of administering
Stockholder accounts by at least $6,000.00 per year if we complete the Split
Transaction. In addition, we estimate that other costs associated with public
filings, including legal and accounting fees directly attributable to the public
filings, will save AVOCA approximately $50,000.00 per year if the Split
Transaction is completed, for an aggregate annual savings to AVOCA of
approximately $56,000.00 including the cost of administering Stockholder
accounts.
In light of the passive nature of our business activities and these
disproportionate costs, the board of directors concluded that the costs
associated with reducing the number of Stockholders of record below 300 was
reasonable in view of the anticipated benefits of being privately held.
Moreover, the Split Transaction will provide Stockholders with fewer than 100
Pre-Split Shares with an efficient way to cash out their investment in AVOCA
because we will pay all transaction costs, other than brokerage fees or
commissions incurred by such Stockholders, if any, in connection with the Split
Transaction. Otherwise, Stockholders with small holdings would likely incur
brokerage fees to sell their shares of Common Stock that are disproportionately
high relative to the market value of their shares, based on the $21.50 bid price
as of August 10, 2004, the day prior to the announcement of the Split
Transaction.
The reasons for structuring the going private proposal as a Split
Transaction as opposed to other formats considered by the board of directors,
including a cash tender offer and purchases of shares of Common Stock on the
open market, were based on an analysis of the costs of undertaking the
transaction as well as the likelihood of success in accomplishing the going
private objective. Though the board of directors believed that the cost of a
cash tender offer would be very similar to that of the proposed Split
Transaction, and that the cost of purchasing shares in the open market should be
even lower, the board strongly believed that neither a cash tender offer nor
purchases of shares of Common Stock on the open market would meet the going
private objective because, in the first instance it was unlikely that holders of
small numbers of shares would make the effort to tender their shares and, in the
second instance, there is no active trading market for the Common Stock. Based
on board of directors' desire to accomplish the going private objective, the
structure of the Split Transaction appeared to be the most cost-effective manner
to meet such objective successfully.
The reason that the going private proposal is being made at this time
is because of the expected increased costs of public company status going
forward. As is reflected in expert reports obtained by the board of directors,
discussed more fully below, AVOCA has experienced an overall decline in
production in existing wells from levels experienced in 2001, suggesting some
level of depletion. The estimated life of AVOCA's mineral reserves has been
calculated to be about four years. Post-depletion, AVOCA's income will be
substantially diminished, as will its ability to cover the expenses of remaining
a public company, As part of AVOCA's operational plans going forward, the board
of directors believes that it is incumbent to reduce costs as much as possible.
In this respect, the sooner the Split Transaction can be implemented, the sooner
AVOCA will cease to incur the expenses and burdens of public company status and
the sooner Stockholders who are to receive cash in the transaction will receive
and be able to reinvest or otherwise make use of such cash payments.
Factors Considered by the Board of Directors
In the course of reaching its decision to recommend to the Stockholders
the approval of the Split Transaction, the following material positive factors
were considered by the board of directors:
o the value being paid to the holders of less than 100 Pre-Split
Shares and other Stockholders receiving cash payment in lieu of
the issuance of fractional shares is higher than the market value
of Common Stock based on the closing bid price of $21.50 per share
on August 10, 2004, and the book value of $5.88 per share on June
30, 2004.
14
o the opinion of the independent financial advisor that the
consideration to be received by the unaffiliated Stockholders is
fair to those Stockholders from a financial point of view;
o with the buy back of shares being at fair value, the continuing
Stockholders are not negatively impacted, financially;
o anticipated reductions in operating expenses associated with
administering a large number of Stockholder accounts holding
small amounts of shares;
o anticipated reductions in the expenses of compliance with the
reporting requirements of U.S. securities laws;
o the opportunity for Stockholders holding less than 100 Pre-Split
Shares to liquidate their holdings, particularly given the
relatively illiquid market for shares of AVOCA's Common Stock, at
a price higher than the market value for such shares;
o the ability of Stockholders wishing to remain Stockholders to
purchase, subject to what has been limited availability,
sufficient shares in advance of the meeting to cause them to own
more than 100 Pre-Split Shares;
o the respective increase in the interests held by the continuing
Stockholders as a result of the buyout of the fractional shares;
o the continuing Stockholders will continue to get timely and
accurate periodic reporting on AVOCA's business and finances; and
o due to the relatively small number of shares being cashed out,
voting rights of the continuing Stockholders are not changed
significantly;
o the absence of a public trading market is not as significant as it
would be with stocks that are more actively traded; and
o though the market for shares post-going private is unknown,
comments received from Stockholders attending the last Annual
Meeting during preliminary discussions of the Split Transaction
give reason to believe that there should still be willing buyers.
The board of directors also considered the following potential adverse
factors of the Split Transaction:
o following the completion of the Split Transaction, the
Stockholders of less than 100 Pre-Split Shares prior to the
Reverse Split will cease to participate in the future growth of
AVOCA, if any, or benefit from increases, if any, in the value of
AVOCA. This factor is somewhat mitigated by the fact that these
Stockholders may purchase shares of our Common Stock prior to the
Effective Date;
o Stockholders holding Common Stock in other than 100-share
multiples will be required to surrender all or a portion of their
shares involuntarily at a price that has been determined by
others, rather than at a time and price of their choosing
o the payment for fractional shares may be a taxable transaction for
Stockholders;
o following the completion of the Split Transaction, Stockholders
will no longer be legally entitled to all the financial
information and other disclosures currently being reported by the
Company in compliance with the provisions of the Sarbanes-Oxley
Act of 2002 and other federal laws and regulations;
15
o the market for AVOCA's Common Stock will become less liquid since
there no longer will be any established market to trade our Common
Stock;
o AVOCA loses its potential to raise capital through the sale of its
publicly-traded securities in either a public or private offering
in the future. As a practical matter, however, capital from the
public market has not been, and is not expected to be, an action
that AVOCA would wish to pursue.
In arriving at its decision, the board of directors considered the
results of all its analysis as a whole and did not attribute any particular
weight to any particular analysis or factor it considered.
The board of directors considered several alternative transactions to
accomplish the reduction in the number of Stockholders to fewer than 300 holders
of record but ultimately determined the Split Transaction was the preferred
method. Management conducted an analysis of the alternatives available to AVOCA.
In making this analysis, management considered the following alternative
strategies:
(a) A cash tender offer - The board of directors believed a cash tender
offer would cost the Company approximately the same amount as the Split
Transaction, but would not result in shares being tendered by a sufficient
number of record Stockholders so as to accomplish the going private objective
and reducing recurring costs. It was thought unlikely that many holders of small
numbers of shares would make the effort to tender their shares of Common Stock;
(b) A purchase of shares in the open market - Though a purchase of
shares in the open market should be less expensive to the Company than a reverse
split, there is no active trading market for the Common Stock. Therefore, it
would be highly unlikely that shares of Common Stock could be acquired by AVOCA
from a sufficient number of holders to accomplish the board of directors'
objectives.
After careful consideration of several different proposed ratios for
the Split Transaction, the board of directors decided to set the ratio for the
Split Transaction at 100 to 1 in order to provide reasonable assurance that the
remaining number of Stockholders following the Split Transaction would be below
300, taking into consideration changes in share holdings that may occur after
the announcement of the Split Transaction and prior to the effective time. The
board of directors determined that a less significant ratio would not provide
such assurance and would likely result in AVOCA consummating the Split
Transaction but not achieving its goal of going private. The board of directors
believes that, based on its analysis of its Stockholder base as of June 30,
2004, and using the 100 to 1 ratio, the number of Stockholders of record would
be reduced from approximately 640 to approximately 180.
AVOCA retained an outside party, Chaffe & Associates, Inc. ("Chaffe"),
to obtain a report and opinion relating to the fairness of the consideration to
be paid to the unaffiliated Stockholders who will have fractional shares. Based
on information provided by Chaffe in its report and opinion, the board of
directors selected a proposed Purchase Price of $28.00 per share, to be paid to
Stockholders in lieu of issuing fractional shares. The $28.00 Purchase Price is
the mid-point of the $26.00 - $30.00 fairness range suggested by Chaffe, and was
selected by the board in an attempt to deal fairly with both the Stockholders
being cashed out and those that would remain.
The Split Transaction is expected to result in the cash-out of
approximately 20,700 shares of Common Stock at the Purchase Price of $28.00 per
share, for an aggregate purchase price of not more than approximately
$625,000.00. This price represents a premium, both to the current trading price
and to the appraised value of the underlying assets. No independent committee of
the board of directors has reviewed the fairness of the Split Transaction. No
unaffiliated representative acting solely on behalf of the Stockholders for the
purpose of negotiating the terms of the Split Transaction was retained by AVOCA
or by a majority of AVOCA's independent directors. In spite of the absence of an
unaffiliated representative acting solely on behalf of the Stockholders, AVOCA
believes that the Split Transaction is substantively fair to all Stockholders,
including our unaffiliated Stockholders, based on the unanimous approval of the
board of directors, a majority of whom are independent directors, and for the
reasons set forth in the remaining portion of this section.
16
The following table lists the high and low sales prices for the
Company's common stock as quoted on the OTC for the periods indicated.
High Low
------ ------
Fiscal Year Ending December 31, 2004
- ------------------------------------
First Quarter $22.50 $19.50
Second Quarter 25.00 21.75
Fiscal Year Ended December 31, 2003
- -----------------------------------
First Quarter $21.00 $18.50
Second Quarter 20.00 17.60
Third Quarter 21.00 18.80
Fourth Quarter 20.00 19.51
Fiscal Year Ended December 31, 2002
- -----------------------------------
First Quarter $24.50 $22.20
Second Quarter 25.10 19.25
Third Quarter 20.95 17.00
Fourth Quarter 19.00 16.01
The Purchase Price of $28.00 per share reflects a 30% premium over the
bid price of $21.50 per share as reported for the Common Stock on the OTC on
August 10, 2004. The board of directors considered the closing trading prices of
the Common Stock, both recently and over the prior 12 months, and replacement
alternatives for the proceeds from the Common Stock in determining that the
Purchase Price was appropriate for the Split Transaction. The average closing
trading price of the Common Stock from August 4, 2003 to August 5, 2004 was
approximately $21.23 per share. The Purchase Price reflects in excess of a 30%
premium over such average price. Since May 20, 2004, AVOCA's closing trading
price has been at or below $23.50 per share. The fact that $25.00 per share is
the highest closing trading price of the Common Stock since May 13, 2004 was
considered important by the board of directors. In addition to the analysis
concerning the closing trading price of the Common Stock, the board of directors
also took into account the fact that the Purchase Price substantially exceeded
AVOCA's net book value per share of $5.88 as of June 30, 2004.
The board of directors also considered AVOCA's liquidation value in
comparison to the Purchase Price and believes that the liquidation value after
corporate taxes is below the value of AVOCA calculated at $28.00 per share.
The board of directors has not received any firm offers during the past
two years related to a merger or consolidation of AVOCA, the sale or other
transfer of a substantial part of AVOCA's assets, or a purchase of AVOCA's
Common Stock that would have enabled the holder to exercise control of AVOCA.
Finally, the board of directors considered AVOCA's going concern value.
Two key factors in using this valuation methodology are establishing a
reasonably accurate forecast of earnings and identifying an appropriate discount
rate to establish the present value of those future earnings. To establish a
reasonably accurate forecast of earnings, the board of directors would need to
review historical earnings, AVOCA's current financial condition, and any future
earnings projections. To obtain this information, the board of directors had an
appraisal made of the surface of its ownership in Avoca Island and in the
minerals underlying the island. When the value of the investment accounts of
AVOCA was added to the appraised value of the surface and the minerals, the
resulting value, on a per share basis, was less than $28.00.
Based on the foregoing analysis, the board of directors determined that
the Purchase Price of $28.00 per share would be appropriate for the Split
Transaction.
The board of directors believes that the Split Transaction is
substantively fair to all Stockholders, including unaffiliated Stockholders.
Present Stockholders (including those whose shares are expected to be cashed
out) generally will have an opportunity both to evaluate all of the information
contained herein and to compare the potential value of an
17
investment in AVOCA with that of other available investments. The board of
directors believes that the Split Transaction is procedurally fair to our
Stockholders because the Reverse Split is being effected in accordance with all
requirements under Louisiana law and hence will require a vote of at least two-
thirds (2/3) of the voting power present at the Special Meeting.
In addition, between the date hereof and the Effective Date all
Stockholders of AVOCA will have an opportunity to adjust the number of Pre-Split
Shares owned by them so that holders who would otherwise be cashed out can
continue to be Stockholders, and continuing holders can so divide or otherwise
adjust their existing holdings as to become cashed-out Stockholders as to some
or all of their Pre-Split Shares. Furthermore, Stockholders were given advance
notice of the possibility of the Split Transaction at the Annual Meeting held on
March 16, 2004. None of our management-related Stockholders are expected to
adjust their holdings so as to become a cashed-out Stockholder. We believe that,
in making their decision to determine the Purchase Price, our directors were
conscious of the importance of the issues (including those that adversely affect
continuing Stockholders as well as those that affect cashed-out Stockholders)
and acted in accordance with their fiduciary duties to AVOCA and our
Stockholders.
No provision has been made to grant Stockholders of AVOCA access to its
corporate files or to obtain counsel or appraisal services at the expense of
AVOCA or any other party. Each member of the board of directors and each
executive officer of AVOCA who owns or represents shares of Common Stock has
advised AVOCA that he intends to vote his shares, or those he represents, in
favor of the Split Transaction.
Source of Funds and Financial Effect of the Split Transaction.
The Split Transaction will use approximately $775,000 in cash to
complete. This amount includes professional fees and other expenses related to
the transaction and payments to be made in lieu of issuing fractional shares.
Although this is a material amount to Avoca in the context of a single year,
these payments are not expected to have any long term material adverse effect on
Avoca's capitalization, liquidity, results of operations or cash flow. Because
the actual number of Pre-Split Shares which will be purchased by AVOCA is
unknown at this time, the total cash to be paid to holders by AVOCA is unknown,
but is estimated to be not more than $625,000.00.
The approximately $150,000.00 in transaction-related fees and expenses,
excluding the payments to be made in lieu of issuing fractional shares, consists
of the following:
Description Amount
----------- ------
Appraisal Fees
Real Estate $ 5,000.00
Minerals $ 25,000.00
Advisory Fees and Expenses $ 25,000.00
Legal Fees and Expenses $ 70,000.00
Accounting, printing, solicitation, mailing and
Miscellaneous fees and expenses $ 25,000.00
-----------
Total $150,000.00
===========
AVOCA expects to be able to pay for the Split Transaction from internal
sources without affecting the Company's dividend practice of paying out
approximately 90% of current earnings.
Structure of the Split Transaction and Effect on AVOCA's Stockholders.
The Split Transaction includes the Reverse Split and the cash payment
in lieu of fractional shares. If the Split Transaction is approved by
Stockholders, the Reverse Split is expected to occur at 5:00 p.m. Central
Standard Time on the Effective Date. Upon consummation of the Reverse Split,
each Stockholder of record on the Effective Date will receive one share of
Common Stock for each 100 Pre-Split Shares held by such Stockholder at that
time. If a Stockholder of record holds 100 or more Pre-Split Shares, such
Stockholder will be required to surrender his or her current certificate(s), to
be replaced with a new certificate representing Post-Split Shares, and any
fractional share resulting from the Reverse Split will be cashed out. Any
Stockholder of record who holds fewer than 100 Pre-Split
18
Shares at the time of the Reverse Split will receive only a cash payment instead
of a fractional share. We intend for the Split Transaction to treat Stockholders
holding Common Stock in street name through a nominee (such as a bank or broker)
in the same manner as Stockholders whose shares are registered in their names,
and nominees will be instructed to effect the Split Transaction for their
beneficial holders. However, nominees may have different procedures and
Stockholders holding shares in street name should contact their nominees.
In general, the Split Transaction can be illustrated by the following
examples:
Hypothetical Scenario Result
A Stockholder holds a single record account with Instead of receiving a fractional share of
less than 100 shares. As of the Effective Date, a Common Stock immediately after the Reverse Split,
registered Stockholder holds 45 shares of Common such Stockholder's shares will be converted into
Stock in her record account. Such Stockholder holds the right to receive cash in the amount of
no other shares. $1,260.00 (45 shares x $28.00).
Note: If such registered Stockholder wants to
continue her investment in AVOCA, prior to the
Effective Date, she can buy at least 55 more shares
(preferably in her record account so as to
make it more readily apparent that she holds
100 or more shares). Such Stockholder would
have to act far enough in advance of the Split
Transaction so that the purchase is completed
and in her account by the close of business
(Central Standard Time) on the Effective Date.
A Stockholder holds a single brokerage account AVOCA intends for the Split Transaction to
with less than 100 shares. As of the Effective Date, treat Stockholders holding shares of Common Stock
a Stockholder holds 45 shares of Common Stock in her in street name through a nominee (such as a bank
name in a brokerage account. Such Stockholder holds or broker) in the same manner as Stockholders
no other shares. whose shares are registered in their names.
Nominees will be instructed to effect the
Split Transaction for their beneficial owners.
If this occurs, such Stockholder will
receive, through her broker, a check for
$1,260.00 (45 shares x $28.00). However,
nominees may have a different procedure and
Stockholders holding shares of Common Stock
in street name should contact their nominees.
A Stockholder holds a single record account with After the Split Transaction, such Stockholder
more than 100 shares. As of the Effective Date, a will hold 2 shares of Common Stock, and will be
registered stockholder holds 225 shares of Common entitled to receive $700.00 (25 shares x $28.00)
Stock in his record account. in lieu of the issuance of any fractional shares.
A Stockholder holds two separate record accounts After the Split Transaction, such Stockholder
with an aggregate of more than 100 shares. As of will hold an aggregate of 2 shares of Common
the Effective Date, a registered Stockholder holds Stock, and will be entitled to receive $1,400.00
125 shares of Common Stock in one record account (50 shares x $28.00).
and shares of Common Stock in another record account.
A Stockholder holds a record account and a If either AVOCA or such Stockholder can
brokerage account with an aggregate of more than establish to AVOCA's satisfaction that he in fact
19
100 shares. As of the Effective Date, a Stockholder holds greater than 100 shares, such Stockholder
holds 45 shares of Common Stock in his record will be issued one share of stock, and
account and 75 shares of Common Stock in a be entitled to receive $560.00 (20 shares x $28.00).
brokerage account. Otherwise, AVOCA will presume that all of the
shares are held by a holder of fewer than 100
shares and were, therefore, converted into the right
to receive two separate checks in the aggregate
amount of $3,360.00 (45 shares x $28.00 =
$1,260.00; 75 shares x $28.00 = $2,100.00). The
Stockholder would be able to rebut the presumption
that his shares were cashed out in the Split Transaction
by certifying in the letter of transmittal sent to him
after the Reverse Split that he holds greater than 100
shares and providing AVOCA such other information and
documentation as it may request to verify that fact.
Conversion of Shares in Split Transaction
On the Effective Date of the Split Transaction:
o Stockholders holding fewer than 100 Pre-Split Shares, whether
record shares (as defined below) or street shares (as defined
below), will be entitled to receive cash equal to $28.00 per
share, without interest, and such shares will be cancelled;
o Stockholders holding immediately prior to the effective time 100
or more Pre-Split Shares (including any combination of record
shares or street shares) in the aggregate shall be entitled to
receive (a) a new certificate in exchange for his or her old
certificates, and (b) cash consideration with respect to the
fractional shares obtained as a result of the Reverse Split.
As used above:
o the term "record shares" means shares of AVOCA's Common Stock,
other than street shares, and any record share shall be deemed to
be held by the registered holder thereof as reflected on the books
of AVOCA;
o the term "street shares" means shares of AVOCA Common Stock held
of record in street name, and any street share shall be deemed to
be held by the beneficial owner thereof as reflected on the books
of the nominee holder thereof; and
o the term "holder" means: (a) any record holder who would be
deemed, under Rule 12g5-1 under the 1934 Act as described below,
to be a single "person" for purposes of determining the number of
record stockholders of AVOCA, and (b) any other person or persons
who would be deemed to be a "holder" under the above clause if the
shares it holds beneficially in street name were held of record by
such person or persons.
AVOCA (along with any other person or entity to which it may delegate
or assign any responsibility or task with respect thereto) shall have full
discretion and exclusive authority (subject to its right and power to so
delegate or assign such authority) to:
o make such inquiries, whether of any Stockholder(s) or otherwise,
as it may deem appropriate for purposes of effecting the
Split Transaction; and
20
o resolve and determine, in its sole discretion, all ambiguities,
questions of fact and interpretive and other matters relating to
such provisions, including, without limitation, any questions as
to the number of Pre-Split Shares held by any Stockholder. All
such determinations by AVOCA shall be final and binding on all
parties, and no person or entity shall have any recourse against
AVOCA or any other person or entity with respect thereto.
For purposes of effecting the transaction, AVOCA may, in its sole
discretion, but shall not have any obligation to do so:
o presume that any shares of AVOCA Common Stock held in a discrete
account (whether record or beneficial) are held by a person
distinct from any other person, notwithstanding that the
registered or beneficial holder of a separate discrete account has
the same or a similar name as the holder of a separate discrete
account; and
o aggregate the shares held (whether of record or beneficially) by
any person or persons that AVOCA determines to constitute a single
holder for purposes of determining the number of shares held by
such holder.
Rule 12g5-1 under the 1934 Act provides that, for the purpose of
determining whether an issuer is subject to the registration provisions of the
1934 Act, securities shall be deemed to be "held of record" by each person who
is identified as the owner of such securities on the records of security holders
maintained by or on behalf of the issuer, subject to the following:
o In any case where the records of security holders have not been
maintained in accordance with accepted practice, any additional
person who would be identified as such an owner on such records if
they had been maintained in accordance with accepted practice
shall be included as a holder of record.
o Securities identified as held of record by a corporation, a
partnership, a trust (whether or not the trustees are named), or
other organization shall be included as so held by one person.
o Securities identified as held of record by one or more persons as
trustees, executors, guardians, custodians or in other fiduciary
capacities with respect to a single trust, estate or account shall
be included as held of record by one person.
o Securities held by two or more persons as co-owners shall be
included as held by one person.
o Securities registered in substantially similar names where the
issuer has reason to believe because of the address or other
indications that such names represent the same person, may be
included as held of record by one person.
Effect of Split Transaction on AVOCA
Our Charter, as amended, currently authorizes the issuance of 830,500
shares of common stock. As of the Record Date, all 830,500 shares of Common
Stock were outstanding. Based upon AVOCA's best estimates, if the Split
Transaction had been consummated as of the Record Date, the number of holders of
record of Common Stock would have been reduced from approximately 640 to
approximately 180 or by approximately 460 Stockholders.
Our Common Stock is currently registered under Section 12(g) of the
1934 Act and, as a result, we are subject to the periodic reporting and other
requirements of the 1934 Act. As a result of the Split Transaction, we
anticipate that we will have less than 300 holders of record of our
publicly-traded Common Stock and the requirement that AVOCA maintain its
registration under the 1934 Act will terminate and it will become a "private"
company. As a result of AVOCA's deregistration, our shares of Common Stock will
no longer trade on the OTC. In connection with the proposed Split Transaction,
we have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") with the SEC.
21
AVOCA estimates that payments of cash in lieu of the issuance of
fractional shares will not exceed approximately $625,000.00 in the aggregate.
The par value of the Common Stock will remain at no par value per
share, but the number of authorized shares will be reduced to 8,305 following
consummation of the Reverse Split.
Effect of the Split Transaction on Management-Related Stockholders
Management-related Stockholders of AVOCA, consisting of certain of our
executive officers and directors, and entities that are Stockholders and whose
executive officers and directors are officers and directors of the Company, will
participate in the Split Transaction to the same extent as nonaffiliates. The
management-related Stockholders of AVOCA all currently own sufficient shares of
Common Stock (over 100 each) so that they will all continue to be Stockholders
after the Split Transaction. As with all other continuing Stockholders of AVOCA,
the percentage ownership by the management-related Stockholders of the total
outstanding shares after the Split Transaction will increase slightly because of
the 2.5% decrease in common shares outstanding.
The amounts set forth in the table entitled "Security Ownership of
Certain Beneficial Owners and Management" illustrate the anticipated effect of
the Split Transaction on the management-related Stockholders. The Split
Transaction will not have a material effect on the management-related
Stockholders. The net book value per share as of June 30, 2004 was $5.88 per
share; if the Split Transaction had occurred as of that date, we estimate that
the net book value would have been $603.03 per Post-Split Share (or $6.03 per
Pre-Split Share, an increase of approximately 2.5%). The net income per share
for the fiscal year ended December 31, 2003 was $3.18 per share; if the Split
Transaction had been effected as of the same date, we estimate that the income
per share would have been $326.43 per Post-Split Share (or $3.26 per Pre-Split
Share, an increase in the net profit per Pre-Split Share of approximately 2.5%).
Cash Payment in Lieu of Shares of Common Stock
We will not issue any fractional shares in connection with the Split
Transaction. Instead, if a Stockholder holds less than 100 Pre-Split Shares, or
holds Pre-Split Shares in other than multiples of 100, we will pay $28.00 per
Pre-Split Share in lieu of issuing fractional shares. We will not pay interest
on cash sums due any such Stockholder pursuant to the Split Transaction or any
brokerage commissions incurred by such Stockholder.
Assuming the Split Transaction occurs, as soon as practical after the
Effective Date, which will occur no sooner than ten (10) days but no later than
thirty (30) days following the date of the Special Meeting, we will mail a
letter of transmittal to each holder of record. The letter of transmittal will
contain instructions for the surrender of the certificate or certificates to
AVOCA's exchange agent in exchange for a new certificate and, if applicable, the
aggregate Purchase Price. The certificate exchange and cash payment, if
applicable, will be made promptly to each Stockholder who has surrendered
outstanding certificate(s), together with the letter of transmittal, to AVOCA's
exchange agent. The actual amount of time that may elapse until Stockholders
receive their certificates and/or payments will vary depending upon several
factors, including the amount of time it takes each Stockholder to surrender
such Stockholder's certificate or certificates. See "Exchange of Stock
Certificates" below. No appraisal rights are available under the Louisiana
General Corporation Law, or AVOCA's Charter, as amended, to any Stockholders who
dissent from the proposed Split Transaction. However, there may exist other
rights or actions under state law for Stockholders who are aggrieved by reverse
stock splits, generally. See "Appraisal Rights" below.
Conduct of AVOCA's Business After the Split Transaction
We expect our business and operations to continue as they are currently
being conducted and, except as disclosed in this document, the Split Transaction
is not anticipated to have any effect upon the conduct of our business. If the
Split Transaction is consummated, all persons owning fewer than 100 Pre-Split
Shares of Common Stock will no longer have any equity interest in and will not
be Stockholders of AVOCA and, therefore, will not participate in our future
potential for earnings and growth. Instead, each such owner of Common Stock will
have the right to receive, upon surrender of their stock certificates, the
Purchase Price per share in cash, without interest.
22
In addition, management-related Stockholders now owning approximately
45% of the Common Stock are expected to own approximately 46% of the Common
Stock after the Split Transaction. See "Security Ownership of Certain Beneficial
Owners and Management."
Other than as described in this proxy statement, neither AVOCA nor our
management has any current plans or proposals to effect any extraordinary
corporate transaction such as a merger, reorganization or liquidation; to sell
or transfer any material amount of our assets; to change our board of directors
or management; to change materially our indebtedness or capitalization; or
otherwise to effect any material change in our corporate structure or business.
Though AVOCA will no longer be subject to the SEC's financial reporting
requirements or the heightened disclosure and independence requirements imposed
by the Sarbanes-Oxley Act of 2002, the Company intends to continue providing
Stockholders with annual audited financial statements, and such other reporting
as the board of directors determines is necessary and appropriate to keep AVOCA
Stockholders timely and accurately apprised of the income and status of their
investment in the Company. However, any reporting to Stockholders in excess of
that required by Louisiana law will be provided at the discretion of the board
of directors.
Material Federal Income Tax Consequences
The following description of the material federal income tax
consequences of the Split Transaction is based on the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury Regulations promulgated
thereunder, judicial authority and current administrative rulings and practices
as in effect on the date of this Proxy Statement. Changes to the laws could
alter the tax consequences described below, possibly with retroactive effect.
The Company has not sought and will not seek an opinion of counsel or a ruling
from the Internal Revenue Service regarding the federal income tax consequences
of the Split Transaction. THIS DISCUSSION DOES NOT DISCUSS THE TAX CONSEQUENCES
WHICH MAY APPLY TO SPECIAL CLASSES OF TAXPAYERS (E.G., NON-RESIDENT ALIENS,
BROKER/DEALERS OR INSURANCE COMPANIES). THE STATE AND LOCAL TAX CONSEQUENCES OF
THE SPLIT TRANSACTION MAY VARY SIGNIFICANTLY AS TO EACH STOCKHOLDER, DEPENDING
UPON THE JURISDICTION IN WHICH SUCH STOCKHOLDER RESIDES. STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR CONSEQUENCES TO
THEM.
In general, the federal income tax consequences of the Split
Transaction will vary among Stockholders depending upon whether they receive
cash for fractional shares or solely a reduced number of shares of Common Stock
in exchange for their Pre-Split Shares of Common Stock. The Company believes
that because the Split Transaction is not part of a plan to increase
periodically a Stockholder's proportionate interest in the Company's assets or
earnings and profits, the Split Transaction will likely have the following
federal income tax effects: A Stockholder who receives solely a reduced number
of shares of Common Stock will not recognize gain or loss. In the aggregate,
such a Stockholder's basis in the reduced number of shares of Common Stock will
equal the Stockholder's basis in its Pre-Split Shares of Common Stock. A
Stockholder who receives cash in lieu of a fractional share as a result of the
Split Transaction will generally be treated as having received the payment as a
distribution in redemption of the fractional share, as provided in Section
302(a) of the Code, which distribution will be taxed as either a distribution
under Section 301 of the Code or an exchange to such Stockholder, depending on
that Stockholder's particular facts and circumstances. Generally, a Stockholder
receiving such a payment should recognize gain or loss equal to the difference,
if any, between the amount of cash received and the Stockholder's basis in the
fractional share. In the aggregate, such a Stockholder's basis in the reduced
number of shares of Common Stock will equal the Stockholder's basis in its
Pre-Split Shares of Common Stock decreased by the basis allocated to the
fractional share for which such Stockholder is entitled to receive cash, and the
holding period of the post-Split Transaction shares received will include the
holding period of the Pre-Split Shares exchanged.
The Company will not recognize any gain or loss as a result of the
Split Transaction.
23
Opinion of Independent Financial Advisor
Chaffe & Associates, Inc. ("Chaffe") was engaged by AVOCA's board of
directors on May 14, 2004 to act as its financial advisor and to evaluate the
fairness, from a financial point of view, of the $28.00 price per Pre-Split
Share to be paid to unaffiliated Stockholders who would otherwise be entitled to
fractional Post-Split Shares in the Split Transaction, which price was
determined by the board of directors. Chaffe was originally recommended to the
board of directors by Scott Tucker, AVOCA's Vice-President and director. Though
other financial advisors were recommended to and discussed by the board of
directors, Chaffe was selected based on its experience and reputation in
business valuations, its independence from the Company and each of the
directors,the fee quoted for the engagement, and the availability of Chaffe to
produce a fairness opinion in the time period required by AVOCA. The terms of
the engagement are described in more detail below. As part of its investment
banking business, Chaffe is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, fairness
opinions, private placements, minority stockholder representations and
valuations for corporate estate and other purposes.
On June 17,2004, Chaffe met with the board of directors and discussed
in general terms the procedures and methodology that it was following in
connection with its engagement. Chaffe stated that it was still in the process
of analyzing AVOCA and the proposed transaction; however, on the basis of
preliminary data, it provided an oral estimation of a range of value it was then
contemplating as appropriate for AVOCA to pay to the holders of fractional
shares of Common Stock in the Split Transaction. That range was $23.00 to $26.00
per Pre-Split Share. Chaffe cautioned that this range might change once it
completed its analysis. No written materials were furnished to the board of
directors at that time.
On August 10, 2004, Chaffe delivered an oral report to the board of
directors, advising it on a range of value for the consideration to be paid to
the holders of fractional shares of Common Stock in the Split Transaction that
would be fair from a financial point of view. Materials provided by Chaffe to
the board of directors supporting that report are attached as an exhibit to the
Schedule 13E-3 filed with the SEC on September 27, 2004, and are available for
inspection and copying at the principal executive offices of AVOCA. See
AVAILABLE INFORMATION at page ___ below. Chaffe's range of value was increased
to $26.00 to $30.00 per Pre-Split Share. Later that day, Chaffe delivered its
written opinion , that as of that date, and based upon and subject to the
various limitations, qualifications and assumptions stated in the opinion, the
$28.00 Purchase Price to be paid by AVOCA to the holders of fractional shares of
Common Stock in the Split Transaction is fair, from a financial point of view,
to the unaffiliated Stockholders. The Chaffe opinion is sometimes referred to in
this proxy statement as the "Split Opinion." No limitations were imposed by
AVOCA's board of directors or management with respect to the investigations made
or procedures followed by Chaffe in rendering its Split Opinion.
AVOCA's Stockholders are urged to read the entire Split Opinion before
executing their proxy. The written Split Opinion of Chaffe is directed to the
board of directors, is limited only to the fairness of the consideration to be
paid in the proposed Split Transaction from a financial point of view, and does
not constitute a recommendation to any Stockholder as to how such Stockholder
should vote at the Special Meeting.
While Chaffe rendered its Split Opinion and provided certain financial
analyses to AVOCA's board of directors, the Split Opinion was only one of the
many factors taken into consideration by AVOCA's board of directors. The board
of directors independently determined the amount of consideration to be paid in
connection with the Split Transaction.
In arriving at its Split Opinion, Chaffe:
o Reviewed the draft proxy statement and associated documents
related to the proposed Split Transaction;
o Reviewed AVOCA's Forms 10-KSB for the years ended December 31,
1999 through 2003, and its Form 10-QSB for the quarter ended
June 30,2004;
o Reviewed certain financial and operating information provided to
Chaffe by management relating to AVOCA's business;
24
o Interviewed and discussed with AVOCA's senior management and
board of directors the Company's past and current operations,
financial condition and future prospects;
o Reviewed certain real estate and mineral leases covering Avoca
Island;
o Reviewed certain independent appraisals of the land value and
mineral value of Avoca Island, and interviewed the appraiser
of the mineral interests of Avoca Island;
o Reviewed AVOCA's current and historical publicly reported prices
and trading volume of its common stock;
o Compared certain financial information of AVOCA with similar
publicly available financial data and stock market performance
data of public companies that Chaffe deemed generally
comparable to AVOCA; and
o Performed such other analyses and examinations, and considered
such other financial, economic and market criteria as Chaffe
deemed appropriate to its opinion.
In connection with the review, Chaffe relied upon and assumed the
accuracy and completeness of all information that was publicly available or that
was furnished to it by AVOCA or otherwise reviewed by Chaffe. Chaffe did not
independently verify the accuracy or completeness of such information. Chaffe
has not assumed any responsibility or liability for that information. Chaffe has
not conducted any valuation or appraisal of any assets or liabilities, but
relied on valuations and appraisals provided to it. In relying on financial
information and appraisals provided to Chaffe, Chaffe assumed that these were
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by management and its appraisers as to AVOCA's expected
future results of operations and financial condition of AVOCA for which such
analyses or forecasts relate. Chaffe further relied upon the assurance of the
Company's senior managers that they are not aware of any facts that would render
such information inaccurate, incomplete or misleading.
Chaffe expressed no view as to, and in its opinion does not address,
the relative merits of the Split Transaction as compared to (i) any alternative
business strategy that might exist for AVOCA, or (ii) the effect of any other
strategy to accomplish a going private transaction. Although Chaffe evaluated
the consideration to be paid in the Split Transaction from a financial point of
view, it was not asked and did not recommend the specific consideration to the
paid. The consideration was determined by the board of directors. Chaffe
expressed no opinion on the tax consequences of the Split Transaction on AVOCA
or its Shareholders. Further, Chaffe expressed no opinion regarding the prices
or trading ranges at which AVOCA's stock might trade at any time.
In preparing its opinion, Chaffe preformed a variety of financial and
comparative analyses, including those described below. The summary set forth
below does not completely describe the analyses or data considered by Chaffe.
The preparation of a fairness opinion is a complex process not readily
susceptible to partial analysis or summary description. Chaffe believes that the
summary set forth below and its analyses must be considered as a whole and that
selecting parts of the summary, without considering all of its analyses, could
create an incomplete or misleading view of the processes underlying its analyses
and the Split Opinion. Chaffe based its analyses on assumptions it deemed
reasonable, including assumptions about general business and economic conditions
and industry-specific factors.
Review of AVOCA Financial Condition: Chaffe reviewed the financial
condition of AVOCA over the past five years and noted, among other matters, that
the Company has been consistently profitable, but that its revenues and earnings
have fluctuated substantially during this period because of changes in natural
gas production levels from AVOCA's mineral leases, variances in the price of
natural gas and changes in interest rates affecting the company's investment
portfolio. AVOCA's revenue is principally generated from natural gas royalties.
The production is concentrated in one well, AVOCA 47-1, which was responsible
for 67%, 36% and 54% of the Company's net royalty income for the years 2001,
2002 and 2003, respectively. Chaffe noted an overall decline in production in
existing wells from levels experienced in 2001, suggesting some level of
depletion. The estimated life of AVOCA's mineral reserves, as calculated by
Collarini and Associates, is four years.
During the past three years, there were three wells drilled on AVOCA's
property, two of which were non-producing.
Chaffe noted that, historically, AVOCA has paid a dividend to its
shareholders once a year and that the Company typically pays a dividend of
approximately ninety (90%) percent of net income. Chaffe noted also that AVOCA
has substantial liquid assets, including approximately $4.3 million in cash,
cash equivalents and marketable securities.
25
The following paragraphs summarize the material quantitative analyses
performed by Chaffe in arriving at the Split Opinion as delivered to the board
of directors. The financial analyses summarized below include information
presented in tabular format. In order to fully understand these financial
analyses, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
Considering the data set forth below without considering the full narrative
description of the financial analysis, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of Chaffe's financial analyses.
Chaffe performed a valuation analysis of the Company using the
following methodologies: comparable company trading analysis,
liquidation/break-up analysis, and stock trading analysis. Each of these
analyses were used to generate a reference for the equity value of the Company.
Stock Trading Analysis. Chaffe reviewed and analyzed the historical
trading volumes and prices at which AVOCA's common stock had traded for the year
prior to the date of Chaffe's presentation to AVOCA's board of directors (from
August 7, 2003 through and August 6, 2004) and noted that the highest closing
price was $25.00 per share on May 6 through 13, 2004, and the lowest closing
price was $18.80 per share on September 2 through October 18, 2003. In addition,
Chaffe noted that approximately 57% of the volume for AVOCA's common stock had
closing prices between $21.20 and $22.08 per share over the same one-year
period. Chaffe also noted that trading activity was limited and that the trading
market was relatively illiquid, with an average volume of approximately 353
shares per day.
Chaffe then analyzed the premiums paid in the Split Transaction
relative to AVOCA's stock price on August 6, 2004, as well as the 52-week
trading range and provided the following analysis:
Price Purchase Price
Per Share Premium (Discount)
--------- ------------------
Purchase Price $28.00 0.00%
Price at closing on August 6, 2004 $22.00 27.27%
52-Week High $25.00 12.00%
52-Week Low $18.80 48.94%
The stock trading analysis is significant because it demonstrates that
the price per share contemplated in the Split Transaction is at a premium to the
historical prices of AVOCA's common stock. Although the premium to AVOCA's
historical price per share does not imply fairness on its own, it does suggest
fairness.
Comparable Company Analysis. The comparable company analysis estimates
the value of a share of stock based on a comparison of a select company's
financial statistics with the financial statistics of other relevant comparable
public companies. Using publicly available information, Chaffe reviewed and
compared the market values and trading multiples of the Company and a peer group
of twelve selected publicly traded oil and gas royalty trusts, including BP
Prudhoe Bay Royalty Trusts, Cross Timbers Royalty Trust, Dominion Resources
Black Warrior, Eastern American Natural Gas Trust, LL&E Royalty Trust, Mesa
Royalty Trust, Permian Basin Royalty Trust, Sabine Royalty Trust, San Juan Basin
Royalty Trust, Santa Fe Energy Trust, TEL Offshore Trust, and Torch Energy
Royalty Trust. Chaffe referred to these twelve companies as the "Guideline
Companies," most of which companies are significantly larger than the Company
and have estimated reserve lives in excess of AVOCA's estimated reserve life.
Because the Company has a shorter estimated reserve life than the
Guideline Companies, Chaffe also performed the same analysis using "Selected
Guideline Companies" with comparable reserve lives, including Santa Fe Energy
Trust, TEL Offshore Trust and Torch Energy Royalty Trust. Chaffe noted the
difference in pricing multiples between all of the Guideline Companies and the
Selected Guideline Companies.
Both of these analyses compared financial information for the Company
as of June 30, 2004, and the median data for the Guideline Companies or the
Selected Guideline Companies, respectively, as of the most recent period then
available for each comparable company, either March 31, 2004 or June 30, 2004.
The table below sets forth the comparative data.
26
Guideline
Companies Selected Guideline
AVOCA Median Companies Median
------- --------- ------------------
Present Value (10 year life)(1) (000) $ 6,751 $ 92,809 $ 37,172
Book Value Royalty Interests (000) $ -0- $ 11,484 $ 9,241
Book Value Equity (000) $ 4,882 $ 11,853 $ 9,303
Estimated Reserve Life 4 9 5
Dividend Payout Ratio 90%(2) 100% 100%
- -----------------------------------------------
(1) Proved Producing reserves only
(2) Estimate, based on company policy.
Chaffe noted that none of the comparable companies are identical to
AVOCA. Accordingly, a complete analysis of the results of the following
calculations cannot be limited to a quantitative review of such results and
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Comparable Groups and other
factors that could affect the public trading volume of the Comparable Groups, as
well as that of AVOCA.
Chaffe reviewed the appropriate market values as a percentage of, among
other things, PV10 Net Worth and dividend yield of the Guideline Companies, the
Selected Guideline Companies and the Company. All percentages were based on
closing stock prices on August 6, 2004.
Guideline
Companies Selected Guideline
AVOCA Median Companies Median
------- --------- ------------------
Price to PV10 Net Worth 157.06% 208.71% 134.36%
Dividend Yield 12.95% 7.83% 12.86%
Chaffe then applied the selected percentages implied by the Comparable
Groups to the comparable data for the Company, and adjusted the analyses for the
value of land, cash and marketable securities of AVOCA, as appropriate.
The price to PV10 Net Worth percentage reflects the relationship
between the public market share price of a company and the investor's
consideration of that company's equity. Book values of royalty trust companies
may vary widely among companies with similar assets depending on depreciation
and depletion methods used. PV10 Net Worth adjusts the equity of a company to
reflect the net present value of estimated future net cash flow from the proved
reserves of a company's producing properties discounted using 10% as a
standardized rate. The price to PV10 Net Worth percentage resulted in the
following implied per share median equity value indications for the Company, as
compared to the Purchase Price:
Implied Equity Value
Per Share for AVOCA
--------------------
All Guidelines Companies $18.79
Selected Guidelines Companies $14.48
AVOCA Purchase Price $28.00
These analyses demonstrate that the $28.00 Purchase Price to be paid to
AVOCA Stockholders exceeds the values per share indicated by comparison to the
Comparable Groups' PV10 Net Worth percentages.
The value of an equity interest also reflects the claim on present and
future earnings available to the holder of the security. This is generally true
whether the earnings are paid out to the equity owners as dividends or
distributions, or the earnings are reinvested by the company to generate
additional profits. Since royalty trust companies pay out substantially all of
their earnings each year, the dividend yield reflects this relationship between
the public market share price of a company and the investor's consideration of
the company's earnings. The dividend yield analyses resulted in the following
implied per share median equity value indications for AVOCA, as compared to the
Purchase Price:
27
Implied Equity Value
Per Share for AVOCA
--------------------
All Guidelines Companies $40.99
Selected Guidelines Companies $29.04
AVOCA Purchase Price $28.00
Chaffe determined that the $28.00 Purchase Price to be paid to AVOCA
Stockholders is substantially below the value indicated by All Guidelines
Companies; however, because of the difference in estimated reserve life between
the Guideline Companies and AVOCA, Chaffe believed that it was inappropriate to,
and therefore did not, rely on that quantitative result. Chaffe determined that
the value indicated by the Selected Guideline Companies is generally consistent
with the $28.00 Purchase Price, given the Selected Companies' more diverse and
larger asset bases.
Breakup/Liquidation Analysis In addition to considering AVOCA as a
going concern, Chaffe calculated the net value of the company's assets that may
be available to shareholders upon a liquidation of the company, as a way to
derive an implied equity value. Chaffe performed a breakup/liquidation analysis
based on appraisals of the Company's land and minerals, and market value of
liquid assets as of June 30, 2004. The analysis was based on an assessment of
balance sheet assets, net of liabilities of the Company, and assumed certain
transaction costs such as legal, brokerage fees or other miscellaneous winding
up expenses. Chaffe also assumed that AVOCA would pay tax on the gain from sale
of its assets at its approximate historical rate of 31%. This analysis resulted
in the following implied per share equity value indication for the Company, as
compared to the Purchase Price:
Implied Equity Value
Per Share for AVOCA AVOCA Purchase Price
------------------- --------------------
$12.14 $28.00
This analysis demonstrates that a break up/liquidation value indication
is less than the $28.00 Purchase Price to be paid to AVOCA Stockholders.
The Split Opinion was necessarily based upon financial, economic,
market and other conditions as they existed and could be evaluated on, and the
information made available to Chaffe as of, the date of the Split Opinion.
Subsequent developments may affect the written Split Opinion dated August 10,
2004, and Chaffe does not have an obligation to update, revise or reaffirm the
Opinion.
For providing advisory services, conducting its analyses and rendering
its Split Opinion, AVOCA paid Chaffe professional fees in the amount of $20,000,
and agreed to reimburse Chaffe for direct expenses related to its services. In
addition, AVOCA has agreed to indemnify Chaffe and related persons against
liabilities, including liabilities under federal and state securities laws,
arising out of its engagement. Neither AVOCA nor any of its management-related
Stockholders has any ongoing relationship with Chaffe.
Land and Mineral Appraisals
In an effort to determine the value of the Company, AVOCA's board of
directors engaged the Robert W. Merrick Appraisal Division of Latter & Blum,
Inc./Realtors ("Merrick") to perform an independent appraisal of the value of
the surface rights to the land owned by AVOCA, and Collarini Associates
("Collarini") to perform an independent appraisal of the value of the Company's
mineral interests. Each of these appraisers was selected by the board of
directors from a pool of potential qualified appraisers, based on the
appraiser's relative qualifications and availability.
Appraisal of the Surface Rights. For the past thirty (30) years,
Merrick (formerly Robert A. Merrick, Inc.) has provided real estate valuation
and consultation services to government agencies, private and public
corporations, major life insurance companies, law firms, and financial
institutions. In selecting Merrick as the land appraiser, the board of directors
considered Merricks' extensive Gulf South regional experience and reputation in
the community.
28
In preparing its appraisal, Merrick inspected AVOCA's property on Avoca
Island by car and from an airboat, and researched comparable sales and market
information. While Merrick considered the three customary approaches to value:
cost, sales comparison and income capitalization, because the property is wooded
and open marshland and low-lying pastureland with few permanent physical
structure, the cost approach and income approach were deemed inapplicable. The
sales comparison approach was considered by Merrick to be the most reliable
appraisal methodology.
Merrick considered the highest and best use of the wetlands portions of
the property to be recreational use, including hunting, fishing and trapping, as
well as mineral exploration and production. The highest and best use of the
higher land would be cattle grazing and recreational uses, together with mineral
exploration and production. Sufficient vacant land sales were available for
Merrick to conduct its sales comparison, and after analyzing forty-seven (47)
separate large acreage wetland sales, Merrick concluded that AVOCA's surface
rights have an estimated market value of $2,485,000.00.
A copy of the key portions of the Merrick's Appraisal is attached as an
exhibit to the Schedule 13E-3 filed with the SEC on September , 2004. The
full Merrick Appraisal, which includes additional detailed information on
comparable land sales, photographs and maps of Avoca's property on Avoca, is
available for inspection and copying at the principal executive offices of AVOCA
during regular business hours. See AVAILABLE INFORMATION at page below.
Appraisal of the Mineral Interests. Collarini also has extensive
experience in the Gulf South area, more particularly, with Louisiana, Texas and
offshore oil and gas exploration, development, exploitation, and production. Its
appraisal division has served many of the areas largest exploration companies,
as well as smaller independents.
Collarini examined the geoscience, engineering and financial data
associated with the mineral interests underlying Avoca Island, and estimated the
fair market value of AVOCA's mineral and royalty interest, as of May 1, 2004, to
be $5,800,000. In reaching its conclusions, Collarini considered the value of
the current production from AVOCA's five active wells, noting that revenue from
the wells has been fairly consistent, with increasing prices compensating for
decreasing production. Using Nymex futures prices, it projected future cash
flows, then discounted the cash flows to determine their net present value.
Collarini also considered the value associated with behind pipe zones
in the current wells, a lease hold by McRae Exploration & Production, Inc., and
future wells not yet drilled, but found each of these pieces of value to be
worthless.
A copy of Collarini's appraisal is attached as an exhibit to the
Schedule 13E-3 filed with the SEC on September , 2004, and is available for
inspection and copying at the principal executive offices of AVOCA. See
AVAILABLE INFORMATION at page below.
Neither AVOCA nor any of its management-related Stockholders has any
material ongoing relations with Collarini. Though Merrick and its affiliates
frequently perform services for Whitney National Bank, a management-related
Stockholder, the appraiser has certified that, as per the guidelines set forth
by U.S.P.A.P. and F.I.R.R.E.A., the appraisal was prepared in an unbiased
manner.
Certain Effects of the Split Transaction
- ----------------------------------------
The Split Transaction constitutes a "going private" transaction under
the U.S. securities laws. Following the Split Transaction, we expect that our
Common Stock will no longer be publicly traded or quoted on the OTC, that we
will no longer be required to file periodic and other reports with the SEC, and
that we will formally terminate our reporting obligations under the 1934 Act.
Vote Required
- -------------
Approval of the amendments and the related Split Transaction requires a
vote in favor of the Split Transaction of at least two-thirds of the voting
power present. The Split Transaction is not subject to and does not require the
affirmative vote of a majority of the outstanding shares of our Common Stock
held by our unaffiliated Stockholders. You
29
are entitled to one vote per share of Common Stock held as of the Record Date.
Abstentions will have the effect of a vote against the approval of the
amendment, while broker non-votes will not affect the outcome. As of the Record
Date, we had 830,500 shares of Common Stock issued and outstanding.
Our "management-related Stockholders," consisting of certain executive
officers and directors, and entities that are Stockholders and whose executive
officers and directors are officers or directors of the Company, collectively
own or represent approximately 45% of our common stock outstanding on the Record
Date. Each of our management-related Stockholders either sits on the board of
directors or is represented by one of our directors. Acting through these
directors, our management-related Stockholders each indicated at the May 14,
2004 directors' meeting that they support the Split Transaction. This support
was confirmed at each of the following directors' meetings. Since our
"management-related Stockholders" have orally indicated to us that they intend
to vote their shares, and the shares of the entities they represent, in favor of
the Split Transaction, we believe that there is a likelihood the requisite
Stockholder approval will be obtained. However, we cannot provide any assurance
regarding the outcome of the vote.
Board of Directors' Reservation of Rights
- -----------------------------------------
The board of directors retains the right to abandon (and not implement)
the Split Transaction (even after approval thereof) if it determines
subsequently that the Split Transaction is not then in the best interests of
AVOCA and its Stockholders. The board of directors also reserves the right to
delay the Split Transaction if there is litigation pending regarding the Split
Transaction. If the Split Transaction is not approved, or, if approved, is not
implemented, the proposed deregistration of AVOCA's Common Stock will not be
implemented.
Effective Date
- --------------
The effective date of the Split Transaction will occur when the
Secretary of State of the State of Louisiana accepts for filing the amendments
to the Charter of AVOCA, as amended. AVOCA will file the amendments with the
Secretary of State as soon as practical after approval of the Split Transaction,
but in no event sooner than ten (10) days nor later than thirty (30) days
following the approval.
Exchange of Stock Certificates
- ------------------------------
It is currently anticipated that American Stock Transfer and Trust
Company will serve as exchange agent to receive stock certificates of AVOCA and
to send cash payments to our Stockholders entitled to receive them. Promptly
after the Effective Date, the exchange agent will mail to each holder of record
a letter of transmittal (which shall contain a certification as to the number of
shares held and such other matters as AVOCA may determine and shall specify that
delivery shall be effected, and risk of loss and title to the certificates shall
pass, only upon delivery of the certificates to the exchange agent) and
instructions to effect the surrender of the certificates in exchange for a new
certificate and a cash payment, if any, payable with respect to such
certificates. Upon surrender of a certificate for cancellation to the exchange
agent, together with such letter of transmittal, duly completed and executed and
containing the certification of number of shares held, and such other customary
documents as may be required pursuant to such instructions, the holder of such
certificate will receive a new certificate and/or cash payment payable with
respect to the shares formerly represented by such certificate and the
certificate so surrendered shall be canceled. No interest will accrue on the
cash consideration after the Effective Date. In the event of a transfer of
ownership of shares which is not registered in the share transfer records of
AVOCA, the cash payment, if any, payable in respect of such shares may be paid
or issued to the transferee if the certificate representing such shares is
presented to the exchange agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid.
YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES NOW. YOU SHOULD SEND THEM
ONLY AFTER YOU RECEIVE A LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. LETTERS
OF TRANSMITTAL WILL BE MAILED SOON AFTER THE SPLIT TRANSACTION IS COMPLETED.
30
Regulatory Approvals
- --------------------
AVOCA is not aware of any material governmental or regulatory approval
required for completion of the transaction, other than compliance with the
relevant federal and state securities laws and the corporate laws of Louisiana.
Appraisal Rights
- ----------------
No appraisal rights are available under the Louisiana General
Corporation Law to Stockholders who dissent from the Split Transaction. There
may exist other rights or actions under state law for Stockholders who are
aggrieved by reverse stock splits generally. Although the nature and extent of
such rights or actions are uncertain and may vary depending upon facts or
circumstances, Stockholder challenges to corporate action in general are related
to the fiduciary responsibilities of corporate officers and directors and to the
fairness of corporate transactions. For example, Stockholders could, if they
deemed such to be applicable, take appropriate legal action against AVOCA and
its board of directors, and claim that the transaction was unfair to the
unaffiliated Stockholders, and/or that there was no justifiable or reasonable
business purpose for the Split Transaction. Stockholders holding less than 100
Pre-Split Shares who want to remain stockholders of AVOCA may purchase a
sufficient number of additional shares on the open market in order to hold more
than 100 Pre-Split Shares prior to the Effective Date of the Split Transaction.
Those Stockholders who do not desire to remain Stockholders of AVOCA may sell a
sufficient number of shares such that they hold fewer than 100 Pre-Split Shares
before the Effective Date of the Split Transaction in order to be cashed out in
the Split Transaction. AVOCA is not aware of any other right or relief that may
be available to Stockholders in law or in equity.
Information and Security Ownership of Management and Certain Beneficial Owners
- ------------------------------------------------------------------------------
Robert C. Baird, Jr., age 54, is the President and a Director of the
Company. Mr. Baird also serves as Executive Vice President of Whitney National
Bank, President of Berwick Land Co., Inc. and President of Terre Aux Boeufs
Land Co., Inc. Mr. Baird has been a Director of the Company since 1998.
Bernard E. Boudreaux, Jr., age 67, is a Director of the Company. He
is an attorney with the law firm of Breazeale, Sachse & Wilson, L.L.P. in
Baton Rouge, Louisiana. Mr. Boudreaux previously served as Executive Counsel
to the Governor of Louisiana, and as District Attorney for the 16th Judicial
District of Louisiana. In addition to serving as Director of AVOCA, a position
he has held since 2001, Mr. Boudreaux also serves as a director of Sterling
Sugars, Inc.
John P. (Jack) Laborde, age 55, is a Director of the Company.
Mr. Laborde is President of Overboard Holdings, L.L.C., and President of All
Aboard Development Corporation. He has served as Director of AVOCA since 2003.
M. Cleland Powell, III, age 56, is Secretary-Treasurer and a Director
of the Company. Mr. Powell also serves as Senior Vice President of Whitney
National Bank, and Vice President-Treasurer of Terre Aux Boeufs Land Co., Inc.
He has served on AVOCA's Board of Directors since 1986.
J. Scott Tucker, age 56, is a Director and Vice President of the
Company. Mr. Tucker also serves as President, Chief Executive Officer and a
Director of Hellenic, Inc., a company specializing in real estate and oil and
gas investment and construction. He has served as a Director of the Company
since 1998.
The following table provides information as of July 31, 2004 concerning
each officer and director, and each Stockholder known by the Company to be the
beneficial owner (as determined in accordance with applicable rules of the
Securities and Exchange Commission) of more than 5% of its outstanding stock.
The table also shows the anticipated ownership of such Stockholders after the
consummation of the Split Transaction.
31
Name and Address Shares Beneficially Percent of Pro Forma Pro Forma
of Beneficial Owner(1) Owned(2) Class Beneficial Ownership Percent of Class
- -----------------------------------------------------------------------------------------------------------
Robert C. Baird, Jr. None 0.00% None 0.00%
Bernard E. Boudreaux, Jr. 400(3) 0.048% 4 0.050%
John P. (Jack) Laborde None 0.00% None 0.00%
M. Cleland Powell, III None 0.00% None 0.00%
J. Scott Tucker 200(4) 0.024% 2 0.025%
Whitney National Bank
228 St. Charles Avenue
New Orleans, Louisiana 70130 268,000 (5) 32.27% 2680 33.09%
Hellenic, Inc.
800 David Drive
Morgan City, Louisiana 70380 72,875 (6) 8.77% 728 8.99%
- -----------------
(1) The address for each of the directors and executive officers of the Company
is c/o Avoca, Incorporated, 225 St. Charles Avenue, Suite 838, New Orleans,
Louisiana 70130.
(2) Includes direct and indirect ownership and, unless otherwise indicated, also
includes sole voting and investment power with respect to reported holdings.
(3) Mr. Boudreaux's 401(k) retirement plan is the record owner of these shares.
(4) Mr. Tucker's wife is the record owner of these shares. Mr. Tucker is also
and officer and director of Hellenic, Inc., whose ownership interest in AVOCA is
reported below.
(5) Robert C. Baird, Jr. and M. Cleland Powell III, directors of the Company,
are senior officers of Whitney National Bank.
(6) J. Scott Tucker, a director of the Company, is President, Chief Executive
Officer and a director of Hellenic, Inc. He is also Chief Financial Officer, a
director and shareholder of Capital Management Consultants, Inc., a related
company that owns 3.73% of the Company's outstanding stock.
To the Company's knowledge, none of the Company's directors or
executive officers has been convicted in a criminal proceeding during the past
five years (excluding traffic violations or similar misdemeanors) or has been a
party to any judicial or administrative proceeding during the past five years
that resulted in a judgment, decree or final order enjoining the person from
future violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws. Each of the Company's directors and executive officers is a citizen of the
United States.
SUMMARY FINANCIAL INFORMATION
Summary Historical and Pro Forma Financial Information
- ------------------------------------------------------
The following summary of historical and pro forma financial data was
derived from AVOCA's audited financial statements as of and for the fiscal year
ended December 31, 2003, and from AVOCA's unaudited interim financial statements
as of and for the six months ended June 30, 2004, with the interim financial
statements then being adjusted to give effect to the cash payments anticipated
to be made in connection with the Split Transaction. This financial information
is only a summary and should be read in conjunction with the financial
statements of AVOCA, including the notes thereto, and other financial
information contained in AVOCA's Annual Report on Form 10-KSB for the year 2003
and Quarterly Report on Form 10-QSB for the six months ended June 30, 2004,
which information is incorporated by reference in this proxy statement. The
complete financial statements are attached hereto as Annex D.
The pro forma financial statements give effect to the Split Transaction
as if it had occurred on or before June 30, 2004, and are based on the
assumption that an aggregate of approximately 20,700 shares will result in
fractional shares and will be purchased by AVOCA for approximately $625,000,
with $150,000 of costs incurred. This $150,000 of costs will reduce income for
the year and is reflected on the pro forma income statement for June 30, 2004.
The $625,000 for cash in lieu of fractional shares will not affect net income,
but will be accounted for as a reduction in cash and a corresponding reduction
in shareholders' equity as reflected in the pro forma balance sheet for June 30,
2004. The $150,000 of costs similarly reduces cash and shareholders' equity on
the pro forma balance sheet for June 30, 2004, so that the total reduction in
cash and shareholders' equity as a result of the Split Transaction is shown to
equal $775,000. The pro forma information set forth below is not necessarily
indicative of what AVOCA's actual financial position would have been had the
Split Transaction been consummated as of the above-referenced date or of the
financial position that may be reported by AVOCA in the future.
32
Condensed Statements of Operations Data
(Unaudited) Proforma (Unaudited)
Year ended Six months reverse Proforma
December 31 ended June 30 stock June 30
2003 2004 split 2004
---- ---- ----- ----
Gross Revenue $4,417,946 $2,631,646 $2,631,646
Less severance taxes 140,749 96,814 96,814
----------- ---------- ----------
Gross profit 4,277,197 2,534,832 $2,534,832
========== ========== ==========
Net income $2,643,454 $1,604,513 $(150,000) $1,455,513
========== ========== ========== ==========
Condensed Balance Sheet Data
Proforma (Unaudited)
(Unaudited) reverse Proforma
December 31 June 30 stock June 30
2003 2004 split 2004
---- ---- ----- ----
Assets
Current assets $3,718,937 $3,245,819 $(775,000) $2,470,819
Other assets 1,950,532 1,702,984 1,702,984
----------- ---------- ----------
Total assets $5,669,469 $4,948,803 $4,173,803
========== ========== ==========
Liabilities and shareholders' equity
Current liabilities $2,376,995 $ 52,681 $ 52,681
Other liabilities 14,941 14,076 14,076
Shareholders' equity: 3,277,533 4,882,046 $(775,000) 4,107,046
---------- ---------- ----------
Total liabilities and shareholder's
equity $5,669,469 $4,948,803 $4,173,803
========== ========== ==========
Book Value per Share $3.95 $5.88 $5.07
AVAILABLE INFORMATION
We have filed a Rule 13e-3 Split Transaction Statement on Schedule
13E-3 under the 1934 Act with respect to the Split Transaction. The Schedule
13E-3 contains additional information about AVOCA. Copies of the Schedule 13E-3
are available for inspection and copying at the principal executive offices of
AVOCA during regular business hours by any interested Stockholder of AVOCA, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request the Secretary of AVOCA at Avoca,
Incorporated, 228 St. Charles Avenue, Suite 838, New Orleans, Louisiana 70130,
telephone: 504-552-4720.
We are currently subject to the information requirements of the 1934
Act and in accordance therewith we file periodic reports, proxy statements and
other information with the SEC relating to our business, financial and other
matters. Copies of such reports, proxy statements and other information, as well
as the Schedule 13E-3, may be copied (at prescribed rates) at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. For further information concerning the
SEC's public reference rooms, you may call the SEC at 1-800-SEC-0330. This
information may also be accessed on the World Wide Web through the SEC's
Internet address at "http://www.sec.gov."
The following documents, which we have filed with the Securities and
Exchange Commission, are incorporated herein by reference:
(a) AVOCA's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2003.
(b) AVOCA's Quarterly Report on Form 10-QSB for the fiscal quarter
ended June 30, 2004.
33
We will amend this proxy statement and our Schedule 13E-3 to include or
incorporate by reference any additional documents that we may file with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
document to the extent required to fulfill our disclosure obligations under the
1934 Act. Any statement contained in this proxy statement, or in a document
incorporated by reference, shall be deemed to be modified or superseded to the
extent that a statement contained in this proxy statement or in any other
subsequently filed document incorporated by reference, modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this proxy
statement.
You can obtain any of the documents incorporated by reference in this
proxy statement from AVOCA or from the Securities and Exchange Commission
through its web site at the address provided above. Documents incorporated by
reference are available from AVOCA without charge, excluding any exhibits to
those documents unless the exhibit is specifically incorporated by reference in
this proxy statement, by written request directed to the Secretary of AVOCA at
AVOCA, Incorporated, 228 St. Charles Avenue, Suite 838, New Orleans, Louisiana
70130.
OTHER MATTERS
Management is not aware of any other matters to come before the
meeting. If any other matter not mentioned in this proxy statement is brought
before the meeting, the proxy holders named in the enclosed Proxy will have
discretionary authority to vote all proxies with respect thereto in accordance
with their judgment.
By order of the Board of Directors
M. Cleland Powell, III
Secretary-Treasurer
34
ANNEX A
-------
PROPOSED FORM OF CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED
CHARTER TO EFFECT REVERSE STOCK SPLIT
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED CHARTER
OF
AVOCA, INCORPORATED.
AVOCA, INCORPORATED, a Louisiana corporation (the "Corporation"), does hereby
certify that:
FIRST: The name of the Corporation is AVOCA, INCORPORATED. The original Charter
filed with the Secretary of State of the State of Louisiana on October 31, 1931,
under the name AVOCA, INCORPORATED, was amended pursuant to that certain
Amendment to Charted filed on September 22, 1981, and was further amended by
that Amendment to Charter filed on March 17, 1987. This Certificate of Amendment
amends the provisions of the Corporation's Charter, as amended to date.
SECOND: The terms and provisions of this Certificate of Amendment have been duly
adopted in accordance with Section 31 of the General Corporation Law of the
State of Louisiana and shall become effective at 5:00 p.m., central standard
time, on .
--------------
THIRD: The first paragraph of Article IV of the Charter is hereby amended by
deleting such paragraph in its entirety and replacing it with the following:
Without regard to any other provision contained herein, each one (1)
share of Common Stock (as defined below), either issued and outstanding
or held by the Corporation as treasury stock, immediately prior to the
time this amendment becomes effective shall be and is hereby
automatically reclassified and changed (without any further act) into
one one-hundredth (1/100th) of a fully-paid and nonassessable share of
Common Stock, without increasing or decreasing the amount of stated
capital or paid-in surplus of the Corporation, provided that no
fractional shares shall be issued to any holder of Common Stock, and
that instead of issuing such fractional shares, the Corporation shall
make a cash payment equal to $28.00 cash, without interest, per share
of Common Stock held by each holder who would otherwise receive
fractional shares.
The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is 8,305 shares, consisting
of 8,305 shares of Common Stock, no par value.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
be signed by its officer thereunto duly authorized this day of , 2004.
, President
--------------------
35
ANNEX B
-------
FAIRNESS OPINION FOR SPLIT TRANSACTION
August 10, 2004
Board of Directors
Avoca, Incorporated
228 St. Charles Avenue
New Orleans, LA 70130
Gentlemen:
We understand that Avoca, Incorporated (AVOCA or the "Company") has proposed to
its stockholders a 100 to 1 reverse stock split transaction (the "Split
Transaction"), which will result in AVOCA becoming a privately held company. The
Company proposes to pay its stockholders who would otherwise be entitled to
fractional shares after giving effect to the Split Transaction $28.00 per
Pre-Split share of common stock (the "Purchase Price") for each Pre-Split share
held other than in 100 share lots (or multiples thereof).
You have asked our opinion as to whether as of the date hereof, the Purchase
Price is fair, from a financial point of view, to the Unaffiliated Stockholders.
"Unaffiliated Stockholders" is defined as all stockholders other than (a)
officers or directors of the Company and their spouses, and (b) entities that
are stockholders and whose officers and directors are officers or directors of
AVOCA.
Chaffe & Associates, Inc. ("Chaffe"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, fairness opinions,
minority stockholder representations, and valuations for estate, corporate, and
various other purposes. Neither Chaffe nor any of its principal officers or
shareholders have an ownership interest in the Company. Compensation for our
services, including the preparation and delivery of these opinions, is not
dependent or contingent upon the completion of a transaction and is not related
to or based upon the nature of the findings made herein. The Company has agreed
to indemnify us for certain liabilities that may arise out of rendering this
opinion.
In connection with rendering this opinion, Chaffe, among other things: (i)
reviewed the draft proxy statement and associated documents related to the Split
Transaction; (ii) reviewed the audited financial statements of the Company and
its SEC Forms 10-KSB for the five years ended December 31, 2003, and a draft of
the SEC Form 10-QSB for the quarter ended June 30, 2004, along with certain
financial and operating information related to AVOCA's business provided by
management; (iii) reviewed certain contracts including surface and mineral
leases; (iv) reviewed and discussed the past and current operations, financial
condition and prospects of the Company with members of the Company's senior
management and board of directors; (v) reviewed and discussed the strategic
rationale for the Split Transaction with members of the Company's senior
management and board of directors; (vi) reviewed the publicly reported prices
and trading activity for the Company common stock; (vii) compared the financial
performance of the Company and the prices and trading activity of the Company's
common stock with similar publicly available information for certain comparable
publicly-traded companies and their securities; (viii) reviewed an independent
appraisal of the land value of Avoca Island as prepared by the Robert W. Merrick
Appraisal Division of Latter and Blum; (ix) reviewed an independent appraisal of
the mineral value of Avoca Island as prepared by Collarini Associates and also
conducted interviews with Mr. Dennis Jordan, P.E., President of Collarini
Associates; and (x) performed such other analyses and examinations, and
considered such other financial, economic and market criteria as Chaffe deemed
appropriate to this opinion.
In our review, Chaffe relied, without independent verification, upon the
accuracy and completeness of the historical and projected financial information
and all other information publicly available or furnished to us by AVOCA or
otherwise reviewed by us for purposes of our opinion. Chaffe has not been asked
to perform and has not undertaken an independent verification of any such
information, and we do not assume any responsibility or
36
liability for the accuracy or completeness thereof. We did not make an
independent evaluation or appraisal of the value of the Company's assets or
liabilities (contingent or otherwise), but relied on valuations and appraisals
provided to us. With respect to the Company's projected financial results,
Chaffe has assumed, with your consent, that they are reasonably prepared on
bases reflecting AVOCA's senior management's best currently available estimates
of future financial performance. We have further relied upon the assurances of
the Company's senior management that they are not aware of any facts that would
make the above information inaccurate, incomplete or misleading. Our opinion is
necessarily based upon financial, economic, market and other conditions as they
exist and can be evaluated as of the date hereof.
In connection with the preparation of our opinion, we have not considered the
relative merits of the Split Transaction as compared to (i) any alternative
business strategy that might exist for the Company or (ii) the effect of the
Split Transaction with respect to tax consequences that may arise as a result.
Although we evaluated the consideration to be paid to Unaffiliated Stockholders
from a financial point of view, we were not asked, and did not recommend, the
specific consideration payable in the Split Transaction. We have assumed that
the Split Transaction will be consummated on substantially the same terms as set
forth in the proxy statement. It should be understood that subsequent
developments may affect this opinion, and we do not have any obligation to
update, revise or reaffirm this opinion. Further, we express no opinion as to
the prices or trading ranges at which the Company common stock will trade at any
time.
Our opinion is addressed to the board of directors of the Company. It does not
constitute a recommendation to any stockholder as to how such stockholder should
vote at a meeting called to consider and vote upon the Split Transaction; and it
should not be relied upon as a recommendation as to how such stockholder should
vote his or her shares. This opinion is directed only to the fairness, from a
financial point of view, of the Purchase Price to be paid to the Unaffiliated
Stockholders. Our opinion may not be reproduced, summarized, described or
referred to or given to any other person without our prior consent.
Notwithstanding the foregoing, this opinion may be included in the proxy
statement to be mailed to the holders of Company's common stock in connection
with the Split Transaction, provided that this opinion will be reproduced in
such proxy statement in full, and any description of or reference to us or our
actions, or any summary of the opinion in such proxy statement, will be in a
form reasonably acceptable to us.
Based upon and subject to the foregoing and based upon such other matters as we
considered relevant, it is our opinion as of the date hereof, that the Purchase
Price of $28.00 per Pre-Split share of AVOCA common stock is fair, from a
financial point of view, to the Unaffiliated Stockholders.
Very truly yours,
CHAFFE & ASSOCIATES, INC.
37
ANNEX C
-------
PROXY
AVOCA, INCORPORATED
PRELIMINARY COPY
----------------
Proxy Solicited by the Board Of Directors
Special Meeting of the Stockholders - , 2004
------------
The undersigned hereby nominates, constitutes and appoints
_________________ and _________________, and each of them individually, the
attorney, agent and proxy of the undersigned, with full power of substitution,
to vote all stock of AVOCA, INCORPORATED, which the undersigned is entitled to
represent and vote at the 2004 Special Meeting of Stockholders of the Company to
be held in the 2nd Floor Board Room, Whitney National Bank, 228 St. Charles
Avenue, New Orleans, Louisiana on ______________, 2004, at ______ a.m., and at
any and all adjournments or postponements thereof, as fully as if the
undersigned were present and voting at the meeting, as follows:
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEM 1.
1. To approve amendments to AVOCA's Charter, as amended, to effect a 100-for-1
reverse stock split and cash payment of fractional shares, as described in
AVOCA's proxy statement dated ______________, 2004.
FOR AGAINST ABSTAIN
----- ----- -----
2. In their discretion, on such other business as may properly come before the
meeting or any adjournment thereof, provided AVOCA's management had no
knowledge of such matters a reasonable time before the date of the proxy
solicitation.
IMPORTANT - PLEASE SIGN AND DATE ON OTHER SIDE AND RETURN PROMPTLY
38
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. WHERE NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED "FOR"
PROPOSAL NUMBER 1 SET FORTH ON THE REVERSE SIDE OF THIS PROXY.
----------------------------------
(Signature of Stockholder)
----------------------------------
(Date)
Please sign your name exactly as
it appears hereon. Executors,
administrators, guardians,
officers of corporations and
others signing in a fiduciary
capacity should state their full
titles as such.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND
RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
39
ANNEX D
-------
FINANCIAL STATEMENTS
Report of
- ---------
Independent Auditor's
- ---------------------
To the Board of Directors and
Stockholders of Avoca, Incorporated
We have audited the balance sheet of Avoca, Incorporated (a Louisiana
corporation) as of December 31, 2003, and the related statements of income,
retained earnings, and cash flows for the years ended December 31, 2003 and
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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
as of December 31, 2003, and the results of its operations and its cash flows
for the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
Respectfully submitted,
/s/ LeGlue & Company
(A Professional Corporation)
New Orleans, Louisiana
January 16, 2004
40
BALANCE SHEET
December 31
2003
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 889,190
Short-term investments 2,472,187
Accounts receivable 328,892
Accrued interest receivable 11,674
Prepaid expenses 14,058
Recoverable income taxes 2,936
-----------
TOTAL CURRENT ASSETS 3,718,937
PROPERTY AND EQUIPMENT
Less accumulated depreciation and depletion 76,579
OTHER ASSETS
Long-term investments 1,873,952
Avoca Drainage Bonds, $415,000, in default B
at nominal amount 1
-----------
$5,669,469
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,070
Dividends payable 2,366,925
-----------
TOTAL CURRENT LIABILITIES 2,376,995
DEFERRED INCOME TAXES 14,941
SHAREHOLDERS' EQUITY
Common stock, no par value -- authorized, issued and
outstanding 830,500 shares 94,483
Retained earnings 3,183,050
-----------
TOTAL SHAREHOLDERS' EQUITY 3,277,533
-----------
$5,669,469
==========
See accompanying notes.
41
STATEMENTS OF INCOME
Year ended December 31
2003 2002
-----------------------------
Revenue:
Royalties $4,221,935 $2,085,522
Less severance taxes (140,749) (74,260)
----------- -----------
4,081,186 2,011,262
Lease bonuses and delay rentals 40,617 540,038
Interest income 68,069 98,711
Rental income 24,526 46,725
Other 12,799 14,225
----------- -----------
4,227,197 2,710,961
Expenses:
Attorney fees and expenses 108,758 60,336
Auditing fees 18,162 18,230
Bookkeeping and clerical services 11,500 9,750
Management fees 69,600 71,350
Directors' fees 12,500 15,000
Geological and engineering fees and expenses 18,478 20,349
Insurance 49,641 41,850
Office and miscellaneous expenses 70,443 33,897
Surface management expenses 24,854 11,892
Taxes, other than income taxes 23,165 22,748
----------- ----------
407,101 305,402
INCOME BEFORE INCOME TAXES 3,820,096 2,405,559
Income taxes 1,176,642 775,104
----------- -----------
NET INCOME $2,643,454 $1,630,455
=========== ===========
Earnings per share (basic and diluted) $ 3.18 $ 1.96
=========== ===========
Dividends declared per share $ 2.85 $ 1.75
=========== ===========
See accompanying notes.
42
STATEMENTS OF RETAINED EARNINGS
Year ended December 31
2003 2002
---------------------------
Retained Earnings:
Balance at beginning of year $2,906,521 $2,729,441
Net income for the year 2,643,454 1,630,455
----------- -----------
5,549,975 4,359,896
Cash dividends:
2003 - $2.85 per share 2,366,925 -
2003 - $1.75 per share - 1,453,375
----------- -----------
BALANCE AT END OF YEAR $3,183,050 $2,906,521
=========== ===========
See accompanying notes.
43
STATEMENTS OF CASH FLOWS
Year ended December 31
2003 2002
-------------------------------------
OPERATING ACTIVITIES
Net income $ 2,643,454 $ 1,630,455
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation expense 9,140 5,734
Deferred taxes (1,731) 5,305
Change in operating assets and liabilities:
Accounts receivable (194,929) 117,212
Accrued interest receivable 20,527 15,223
Prepaid expenses (1,465) (2,812)
Accounts payable and accrued expenses (9,926) 7,996
Income taxes (683) (7,923)
-------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,464,387 1,771,190
INVESTING ACTIVITIES
Purchase of investments (4,595,760) (5,046,680)
Maturity of investments 3,291,626 5,708,325
Purchase of equipment -- (26,889)
------------- --------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,304,134) 634,746
FINANCING ACTIVITIES
Dividends paid (1,453,375) (2,325,400)
-------------- --------------
NET CASH USED IN
FINANCING ACTIVITIES (1,453,375) (2,325,400)
-------------- --------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (293,122) 80,536
Cash and cash equivalents at beginning of year 1,182,312 1,101,776
------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 889,190 $ 1,182,312
============= =============
See accompanying notes.
44
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
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. In
addition to interest income and the leasing of hunting rights, income in the
accompanying financial statements is primarily derived from lease bonuses, delay
rentals, lease option payments 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 consist of investments with a maturity of
three months or less from date of purchase.
Investments: Short-term investments consist of United States Government agency
securities and corporate bonds with original maturities 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 agency
securities and corporate bonds with maturities in 2005 and 2006.
Management determines the appropriate classification of debt securities
at the time of purchase. 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, 2003, 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, 2003.
The Company maintains cash and investment balances at a financial
institution that exceed the federally insured amounts.
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.
Equipment is carried at cost and depreciated over estimated useful lives of
three to five years.
Income Taxes: The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
Income taxes include deferred taxes resulting primarily from temporary
differences due to differences in bases amounts and depreciation periods of
property and equipment for financial reporting purposes and income tax purposes,
including writing off the cost of assets under IRC Section 179 in the year
acquired..
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.
Fair Value of Financial Instruments: The fair value of the Company's financial
assets and liabilities approximates book value at December 31, 2003.
45
NOTES TO FINANCIAL
STATEMENTS (Continued)
NOTE B-Income Taxes
The components of income tax expense for the years ended December 31 are as
follows:
2003 2002
- ---------------------------------------------------------------------------------------------
Current:
Federal $ 1,031,315 $676,130
State 147,038 93,669
----------- -----------
TOTAL CURRENT 1,178,353 769,799
----------- -----------
Deferred:
Federal (1,497) 4,642
State (214) 663
----------- -----------
TOTAL DEFERRED (1,711) 5,305
----------- -----------
$1,176,642 $775,104
=========== ===========
The deferred income tax liability of $14,941 relates to a difference between the
accounting and income tax basis and depreciation periods of property and
equipment.
The Company paid income taxes of 1,179,000 and $771,000 in 2003 and 2002,
respectively.
NOTE B-Income Taxes (continued)
The reconciliations between the federal statutory income tax rate and the
Company's effective income tax rate, for the years ended December 31 are as
follows:
2003 2002
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------
Tax expense based on federal statutory rate 1,298,833 34.0% $817,890 34.0%
Statutory percentage depletion (215,319) (5.6) (106,362) (4.4)
State income taxes (net of federal income tax deduction) 147,038 4.0 96,051 4.0
Other (53,910) (1.6) (32,475) (1.6)
------------- ------ -------- ------
INCOME TAXES $1,176,642 30.8% $775,104 32.0%
============= ====== ======== ======
46
NOTES TO FINANCIAL
STATEMENTS (Continued)
NOTE C-Major Customers
The net royalties received from one independent oil and gas exploration company
accounted for 99% and 98% of total net royalties recorded for 2003 and 2002,
respectively. Lease bonus and delay rental revenue in 2003 and 2002 was the
result of leases with one and two companies, respectively.
NOTE D-Oil and Gas Quantities Produced (unaudited)
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 NGL
(BBLs) (MCFs) (GALs)
------------------------------------------
2003 14,696 611,023 238,804
2002 18,279 511,363 15,534
NOTE E-Related Party Transactions
The following table summarizes transactions with the Whitney National Bank, a
major shareholder of the Company, for the last two years:
Office Investment Edgar (SEC)
Rent Management Transmission
Paid Fees Paid Fees Paid
2003 $6,148 $19,954 $1,200
2002 $4,422 $2,284 $900
Investment fees increased in 2003 as a result of transferring the Company's
investments from the Safekeeping Department to the Trust Department as an
internal control procedure.
NOTE F-Commitments
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 Company's land 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. In 2003, the Club exercised the
first ten-year option to extend the lease to June 1, 2014. 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. 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 undepreciated cost of the building
(excluding the Company's cash contribution), based on straight-line depreciation
over 30 years. Under the lease, the Club's undepreciated cost of the building
will be reduced over time to an ultimate reimbursable amount not less than
$80,000.
47
Avoca, Incorporated
Condensed Balance Sheet (Unaudited)
June 30, 2004
Assets
Current assets:
Cash and cash equivalents $ 1,518,567
Short-term investments 1,205,902
Accounts receivable 443,000
Accrued interest receivable 23,851
Prepaid expenses 54,499
-----------
Total current assets 3,245,819
Property and equipment, less accumulated depreciation
and depletion 72,522
Other assets:
Long-term investments 1,630,461
Avoca Drainage Bonds, $415,000, in default --
at nominal amount 1
-----------
$ 4,948,803
===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 22,012
Income taxes payable 30,669
-----------
Total current liabilities 52,681
Deferred income taxes 14,076
Shareholders' equity:
Common stock, no par value -- authorized, issued and
outstanding 830,500 shares 94,483
Retained earnings 4,787,563
Total shareholders' equity -----------
4,882,046
-----------
$ 4,948,803
===========
See accompanying notes
48
Avoca, Incorporated
Condensed Statements of Income (Unaudited)
Three months ended Six months ended
June 30 June 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue:
Royalties $1,269,568 $ 962,858 $2,555,046 $1,926,206
Less severance taxes 49,027 17,410 96,814 38,349
---------- ---------- ---------- ----------
1,220,541 945,448 2,458,232 1,887,857
Lease bonuses - 40,617 - 40,617
Interest income 17,008 17,228 31,928 32,681
Rental and miscellaneous income 44,672 16,614 44,672 16,616
---------- ---------- ---------- ----------
1,282,221 1,019,907 2,534,832 1,977,771
Expenses:
Legal and accounting services 28,243 63,714 53,052 100,078
Consultant fees 9,500 13,050 48,550 43,300
Geological and engineering fees 128 4,565 4,694 11,685
Insurance 12,828 12,697 25,813 24,231
Miscellaneous expenses 21,172 31,439 71,532 72,278
---------- ---------- ---------- ----------
71,871 125,465 203,641 251,572
---------- ---------- ---------- ----------
Income before income taxes 1,210,350 894,442 2,331,191 1,726,199
Income taxes 376,345 275,759 726,678 531,860
---------- ---------- ---------- ----------
Net income $ 834,005 $ 618,683 $1,604,513 $1,194,339
========== ========== ========== ==========
Earnings per share $ 1.00 $ 0.75 $ 1.93 $ 1.44
(basic and diluted) ========== ========== ========== ==========
See accompanying notes
49
Avoca, Incorporated
Condensed Statements of Cash Flows (Unaudited)
Six months ending
June 30
2004 2003
--------------------------------
Operating activities
Net income $ 1,604,513 $ 1,194,339
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense 4,057 4,570
Deferred taxes (865) (865)
Decrease in investments due to amortization of premium 21,553
Changes in operating assets and liabilities:
Operating assets (163,790) (104,717)
Operating liabilities 42,611 681
----------- -----------
Net cash provided by operating activities 1,508,079 1,094,008
Investing activities
Purchase of investments (823,493) (2,608,652)
Maturity of investments 2,311,716 1,855,084
----------- -----------
Net cash provided by (used in) investing activities 1,488,223 (753,568)
Financing activities
Dividends paid (2,366,925) (1,453,375)
----------- -----------
Net cash used in financing activities (2,366,925) (1,453,375)
Increase (decrease) in cash and cash equivalents 629,377 (1,112,935)
Cash and cash equivalents at beginning of period 889,190 1,182,312
----------- -----------
Cash and cash equivalents at end of period $ 1,518,567 $ 69,377
============ ===========
See accompanying notes
50
Avoca, Incorporated
Notes to Condensed Financial Statements (Unaudited)
Six months ended June 30, 2004
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 normal and recurring
adjustments and accruals considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004. 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,
2003.
The Company considers its United States Government securities held with
a maturity of three months or less when purchased to be cash equivalents.
51