ITEM 1. BUSINESS
General
Texas Vanguard Oil Company (the "Company" or "Registrant") was incorporated under the laws of the state of Texas on December 4, 1979. The business of the Company is to engage in the acquisition, exploration, development, and operation of onshore oil and gas properties in the United States, principally in Texas. In April 1980, the Company completed a public offering of its securities netting approximately $1,250,000 from the sale of 1,500,000 shares of common stock to the public.
The Company engages in oil and natural gas exploration, development and production in Texas, New Mexico, and Wyoming. Generally, the Company acquires operated working interests in producing oil and natural gas properties which it further develops.
The executive offices of the Company are located at 9811 Anderson Mill Rd., Suite 202, Austin, Texas 78750 and its telephone number is (512) 331-6781.
Markets for Oil and Gas
The market for the Company's primary products, oil and gas, depends upon a number of factors, including the availability of other domestic production, crude oil imports, the proximity and size of oil and gas pipelines and general fluctuations in the supply and demand for oil and gas. At present, the Company sells all of its production to traditional industry purchasers,such as pipeline and crude oil companies, who have the facilities to transport the oil and gas from the well site. The Company has recorded revenues in excess of 10% of total revenue from ETC Texas/Aquila Southwest (10% in 2003), Duke Energy/GPM (30% in 2004, 36% in 2003 and 32% in 2002), and Plains Marketing (45% in 2004, 43% in 2003 and 46% in 2002). The Company does not believe that the loss of major customers would have a material adverse effect on the Company because oil production can be sold to any other oil company at a comparable price. Oil sales are not made under a written contract and the purchaser and price are not specified in the division order for subject properties. The nature of the Company's business is not seasonal except to the extent that adverse weather conditions could affect oil and gas exploration and production activities. The Company currently has no intention of refining or marketing its own oil and gas. Since the Company engages independent contractors for the drilling of any wells, it does not plan to own any significant amount of drilling equipment. The Company does not contemplate any material product research and development, any material acquisition of plants or equipment, or any material changes in its number of employees in the near future.
Competition
The oil and gas industry is highly competitive in all aspects. The Company competes with major oil companies, numerous independent oil and gas producers, individual proprietors, and investment programs. Many of these competitors possess financial and personnel resources substantially in excess of those which are available to the Company and may, therefore, be able to pay greater amounts for desirable leases and to define, evaluate, bid for, and purchase a greater number of potential producing prospects than the Company's own resources permit. The Company's ability to generate resources will depend not only on its ability to develop existing properties, but also on its ability to identify and acquire proven and unproven acreage and prospects for future exploration.
Environmental Matters
The Company's operations are subject to numerous federal, state and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. Such matters have not had a material effect on operations of the Company to date, but the Company cannot predict whether such matters will have any material effect on its capital expenditures, earnings or competitive position in the future.
Regulations
The production and sale of crude oil and natural gas are currently subject to extensive regulation of both federal and state authorities. At the federal level there are price regulations and income tax laws. At the state level, there are severance taxes, proration of production, spacing of wells, prevention and clean-up of pollution and permits to drill and produce oil and gas. Although compliance with their laws and regulations has not had a material adverse effect on the Company's operations, the Company cannot predict whether its future operations will be adversely affected thereby.
Employees
At December 31, 2004, the executive officers and directors were as follows:
Name Offices Held
Linda R. Watson Chairman of the Board and Director
William G. Watson President, Chief Executive Officer and Director
Teresa N. Nuckols Secretary
Robert L. Patterson Director
William G. Watson, (age 56), received his B.A. degree from Texas Tech University in 1970 and his M.S. degree from The University of Texas at Arlington in 1974. He has been a director or Robert Watson, Inc., and is a director and President of William Watson, Inc., an independent geological consulting firm, which he founded in 1983, for more than the last five years. He was a director and Vice President of the Company from 1982 until 1997. He was elected President of the Company on September 27, 2002, after the untimely death of the Company's President and CEO, Robert N. Watson, Jr.
Linda R. Watson (age 61), received her B.A. degree from The University of Texas at Austin in 1966. She has been a director and Secretary-Treasurer of Robert Watson, Inc. for more than the last five years and is now President of Robert Watson, Inc. She has been a Director of the Company since 1982. Also, she was the wife of Robert N. Watson, Jr.
Teresa N. Nuckols (age 45), received her B.B.A. degree from Saint Edwards University in 1988. She has been an employee of the Company since 1989. She was elected Secretary of the Company in 2002.
Robert L. Patterson (age 65), received his B.S. and M.S. degrees from The University of Texas at Austin in 1963 and 1964. He was employed by Union Oil Company of California from 1965 through 1975, serving in various engineering capacities. He was a Vice President of Argonaut Energy Corporation from 1976 through 1982. He was the President of Medallion Equipment Corporation and President of Argonaut Energy Corporation from July, 1985 through January, 1989. He has also been an independent consulting petroleum engineer since 1983.
The Company's officers actively manage the Company's activities. There are no employment contracts with any officers. At December 31, 2004, the Company had two full-time salaried employees. From time to time the Company engages independent petroleum engineers, geologists and landmen on a fee basis. Both William Watson and Linda Watson are directors of companies as previously described which have oil and gas interests.Due to this situation a conflict of interest may arise. However, there have been no such conflicts in the past five years.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns no significant properties other than oil and gas properties. It leases approximately 2,000 square feet of space for its executive offices at 9811 Anderson Mill Rd., Suite 202, Austin, Texas 78750. The Company currently has a month-to-month lease with a company owned by the Chairman of the Company for these facilities, which began on July 1, 2002. The rent for these facilities is $2,000 per month which is the same as would be charged to an unaffiliated party.
Well Activity
All of the Company's oil and gas working and royalty interests, reserves and activities are located onshore in the continental United States. The following table sets forth the acquisition activity of the Company, for the years ended December 31, 2000 through 2004.
Fiscal years Oil Gas Dry ended December 31, Gross Net Gross Net Gross Net
2000 26 18.45 0 1.22 --- --- 2001 3 9.46 2 2.31 --- --- 2002* 5 7.08 2 2.00 --- --- 2003# 4 7.45 2 0.35 1 0.1 2004 4 6.60 1 1.22 --- ---
(1) A gross well is a well in which the Company has an interest.
(2) A net well is made up of 100% of the working interest in a well. If the Company has a 12.5% working interest in a well, .125 is shown in the net well column.
(3) A dry well is a well found to be incapable of producing oil or gas in sufficient quantities to justify completion of the well.
(4) In each of the last five years, the net oil interest and/or the net gas interest is larger than the gross oil interest or gross gas interest because the Company purchased additional interests in oil and/or gas wells in which it already owned an interest.
(*) In 2002, the Company participated in the drilling of 5 new wells. All 5 wells are classified as oil wells (5 gross oil, 2.45 net oil).
(#) In 2003, the Company participated in the drilling of one new well. The well was deemed non-commercial and was plugged.
The Company is not obligated to provide a fixed and determinable quantity of oil or gas in the future under existing contracts or agreements.
Significant Properties
Over the past three years, the Company has made investments in proven oil and gas properties that in the aggregate have been significant to the Company. None of the individual properties has cost more than 15% of the average balance in oil and gas properties at the time of purchase. These investments have been made in different fields and areas, primarily in south and central Texas. At December 31, 2004, the Company does not have any single property that is significant enough to materially affect its operations.
As of December 31, 2004, the Company has pledged its interest in certain properties and well equipment against bank notes payable. None of the individual properties are significant. Copies of the loan documents have been included as an exhibit to the Form 10-K.
Production Wells and Acreage
The following table sets forth by Texas, Wyoming, and New Mexico counties the Company's gross and net productive wells and developed acreage as of December 31, 2004.
Producing Wells (a) Developed Oil Gas Acreage (a) County Gross Net Gross Net Gross Net
Bastrop (b) 87 67.29 41 34.99 3,154.81 2,658.46 Burleson 2 1.30 --- --- 1,258.66 618.48 Chaves (c) --- --- 1 .50 160.00 80.00 Crane (b) 9 8.00 1 .02 160.00 60.41 DeWitt (b) --- --- 2 .16 160.00 12.43 Eastland (b) --- --- 4 .09 122.00 1.30 Fayette (b) 12 11.04 --- --- 1,733.49 1,611.69 Garza (b) 3 .05 --- --- 30.00 .47 Grimes 1 1.00 --- --- 319.05 319.05 Hidalgo --- --- 2 .25 320.00 40.38 Howard (b) 1 .02 --- --- 40.00 .63 Kent (b) 27 .67 --- --- 360.00 26.61 Lea (b)(c) 2 --- 1 .07 400.00 22.25 Lee (b) 113 87.03 5 4.54 2,946.41 2,086.73 Lipscomb 1 .03 --- --- 80.00 2.50 Martin 2 1.82 --- --- 120.00 112.78 Midland 1 .02 --- --- 80.00 1.67 Nolan (b) 1 .03 --- --- 40.00 1.25 Parker (b) --- --- 1 .01 136.91 .83 Ward --- --- 2 .16 720.00 29.20 Washington (b) 3 .21 --- --- 853.98 85.40 Weston (d) 3 .90 --- --- 120.00 36.17 Wilson (b) 1 .95 --- --- 80.00 76.00 ------ ------- ----- ----- -------- -------- 269 180.36 60 40.79 13,395.31 7,884.69
(a) A gross well is a well in which the Company owns either a working interest or a royalty interest. A net well is the fractional interest owned by the Company. Gross acres are the total acres in a lease. Net acres are the gross acres times the Company's interest. (b) The Company owns overriding royalty interest in these counties. (c) Chaves and Lea Counties are located in New Mexico. (d) Weston County is located in Wyoming.
Reserve Quantity Information
For information required by Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities," see the "Supplemental Oil and Gas Information" section included in Item 8. This section also includes estimates of proven oil and gas reserves.
OIL AND GAS STATISTICS
The following summarizes the net oil and gas production, average sales prices and production costs per unit for the years ended December 31, 2004, 2003 and 2002.
2004 2003 2002 Oil: Production volume (barrels) 67,252 63,058 73,006 Average sales price per barrel $ 38.44 28.88 22.57 Gas: Production volume (MCF) 413,250 395,234 461,115 Average sales price per MCF $ 5.04 4.47 2.45
Average production costs per equivalent barrel $	 23.55 18.75 17.86
The worldwide crude oil prices of 2004 continue to fluctuate in 2005. The Company cannot predict how prices will vary during 2005 and what effect they will ultimately have on the Company.
UNDEVELOPED ACREAGE
The following table sets forth by county the Company's gross and net undeveloped acreage as of December 31, 2004.
County Gross Net Bastrop, TX 2,240.32 1,793.67 Crane, TX 240.00 208.52 Crosby, TX 1,120.00 560.00 DeWitt, TX 308.00 47.37 Eastland, TX 199.30 2.37 Eddy, NM 370.00 22.36 Fayette, TX 172.31 82.22 Garza, TX 3,250.00 789.28 Howard, TX 40.00 .63 Kent, TX 4,865.00 1,480.37 Lea, NM 1,094.90 629.90 Lee, TX 1,881.28 1,471.90 Martin, TX 40.00 32.78 Midland, TX 133.33 2.78 Weston, WY 600.00 104.75 Wilson, TX 129.51 123.03 Winkler, TX 701.60 701.60 --------- -------- 17,385.55 8,053.53 ========= ========
All of the 8,053.53 net undeveloped acres under lease are being held by production.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material litigation pending, threatening or contemplated, or unsatisfied judgments against it, or any other proceeding in which the Company is a party. The Company knows of no material legal actions pending or threatening or judgments entered against any officers on the board of directors of the Company in their capacity as such.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the quarter ended December 31, 2004.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the OTC Bulletin Board with the symbol (TVOC.OB). The range of high and low sales price for each quarterly period during the past two years is as follows:
Sales Price High Low Fiscal 2004
First Quarter 3.400 2.750 Second Quarter 3.000 2.200 Third Quarter 3.000 2.300 Fourth Quarter 4.000 2.400
Fiscal 2003
First Quarter 3.000 2.050 Second Quarter 2.950 2.050 Third Quarter 2.050 1.900 Fourth Quarter 3.060 1.700
At December 31, 2004, the approximate number of holders of record of the Company's common stock was 488. The Company has not paid any dividends and has no present plans to do so in the immediate future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31, 2004 2003 2002 2001 2000
Oil and gas sales $ 5,035,532 3,757,649 3,086,950 4,395,458 4,200,297 Total revenue 5,422,624 4,366,554 3,557,542 4,849,022 4,502,830 Total expenses (4,122,888) (3,403,567) (3,775,572) (5,210,533) (4,174,514) Net earnings (loss) 853,980 692,971 (143,900) (238,597) 167,567 Net earnings (loss) per share .60 .49 (.10) (.17) .12 Total assets 7,808,400 7,165,170 5,169,673 6,690,772 7,524,234 Short-term debt 618,166 874,094 939,664 4,138,411 3,944,609 Long-term debt 3,014,569 2,832,579 2,000,000 239,640 691,274 Total liabilities 4,417,770 4,628,520 3,325,994 4,701,693 5,296,558 Stockholders equity 3,390,630 2,536,650 1,843,679 1,989,079 2,227,676
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
During the years ended December 31, 2004 and 2003 cash increased by $738,749 And $1,742,641 respectively. During the year ended December 31, 2002 cash decreased by $1,369,472. The cash flow from operating activities in 2004 was approximately $975,204, a decrease of $653,054 from 2003. The cash flow from operating activities in 2003 was approximately $1,628,258, an increase of $1,207,231 from 2002. The significant use of cash, other than for operating expenses, has been investments in producing oil and gas properties of $120,739, $707,793, and $306,570 in 2004, 2003 and 2002, respectively. In each of the last three years, the Company's investment in producing oil and gas properties was provided by cash flow from operating activities, sales of other oil and gas properties, and from borrowings on notes payable to banks.
In 2002 the Company increased cash by $28,000, through the sales of producing oil and gas properties. The Company plans to continue to sell selected properties when it is more economical to sell them rather than produce them. As of December 31, 2004,the Company had a cash balance of $5,153,210 which represents approximately 142% of its notes payable as compared to the December 31, 2003, cash balance of $4,414,461 which represented approximately 119% of its notes payable.
Working capital at December 31, 2004 increased to 5.42 to 1 from 3.37 to 1 at December 31, 2003. The Company continued its policy of making strategic investments in producing oil and gas properties in the same or similar fields to properties already operated by the Company, which are primarily financed with short-term notes payable and cash from operations.
LIQUIDITY AND CAPITAL RESOURCES
During the current fiscal year, the Company's liquidity has remained strong enough to meet its short-term cash needs. The sources of liquidity and capital resources are generated from cash on hand, cash provided by operations and from credit available from financial institutions. Management believes the Company will be able to meet its current operating needs through internally generated cash from operations. Management believes that oil and gas property investing activities in 2005 can be financed through cash on hand, cash from operating activities, and bank borrowings. The Company anticipates continued investments in proven oil and gas properties in 2005 when they can be purchased at prices that will provide a short payback period. If bank credit is not available, the Company may not be able to continue its policy of continued investment in strategic oil and gas properties. The Company cannot predict how oil and gas prices will fluctuate during 2005 and what effect they will ultimately have on the Company, but management believes that the Company will be able to generate sufficient cash from operations to service its bank debt and provide for maintaining current production of its oil and gas properties. The Company had no significant commitments for capital expenditures at December 31, 2004.
As of December 31, 2004, the Company owed $561,465 and $2,750,000 to a bank secured by producing oil and gas properties and well equipment purchased by the Company. The notes are due in December 2006 (see note 3 of notes to financial statements for further explanation).
ANALYSIS OF RESULTS OF OPERATIONS
From 2001 to 2002 oil and gas sales decreased 30%, from 2002 to 2003 oil and gas sales increased by 22%, and from 2003 to 2004 oil and gas sales increased by 34%. In 2002, oil production volume decreased by 8% at the same time as the average price per barrel decreased by 6% to $22.57. Also, in 2002, the gas production volume decreased by 18% while the average price decreased 39% to $2.45 per MCF. In 2003, oil production volume decreased by 14% at the same time as the average price per barrel increased by 28% to $28.88. Also, in 2003, the gas production volume decreased by 14% while the average price per MCF increased by 82% to $4.47. In 2004, oil production volume increased by 7% at the same time as the average price per barrel increased by 33% to $38.44. Also, in 2004, the gas production volume increased by 5% while the average price increased 13% to $5.04 per MCF. The fluctuation in oil and gas prices is solely attributable to changes in market prices.
Oil and gas production expenses increased in 2004 by 29% while oil and gas production expenses decreased in 2003 and 2002 by 8% and 20%,respectively. Increased production expenses for 2004 are largely associated with workover activities.
Interest expense decreased by 52%in 2004 over 2003 and 17% in 2003 over 2002 due to lower average outstanding balances.
Depreciation, depletion and amortization varies from year to year because of changes in reserve estimates, changes in quantities of oil and gas produced, as well as the acquisition, discovery or sale of producing properties. Depletion increased 30% in 2004 as compared to a 22% increase in depletion in 2003.
Total general and administrative expenses increased $70,343 in 2004 and $29,843 in 2002 while total general and administrative expenses decreased $33,759 in 2003.
In 2004, 2003, and 2002, the Company provided provisions of approximately $51,808, $149,986 and $275,000, respectively, for the impairment of value of oil and gas properties due to less than expected production history of specific wells and for wells that were plugged and abandoned.
Inflation is not anticipated to have a significant impact on the Company's operations.
CONTRACTUAL OBLIGATIONS OF COMPANY
The Companys contractual obligations as of December 31, 2004 are as follows:
Contractual Obligations: 2005 2004 2003 Thereafter Total
Long Term Debt Obligations $ 618,166 3,007,487 7,082 --- 3,632,735 ======= ========= ===== ==== =========
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report on Form 10(k) contain forward-looking statements that are based on current expectations and estimates about the oil and gas industry and other factors impacting the Company's operations and financial condition. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Therefore, actual outcomes and performance may differ materially from what is expressed in such forward-looking statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors Texas Vanguard Oil Company:
We have audited the accompanying balance sheets of Texas Vanguard Oil Company (the Company) as of December 31, 2004 and 2003, and the related statements of earnings, stockholders' equity and cash flows for the years ended December 31, 2004, 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 audits.
We conducted our audits in accordance with standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. 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 Texas Vanguard Oil Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years ended December 31, 2004, 2003 and 2002 in conformity with U.S. generally accepted accounting principles.
Sprouse & Anderson, L.L.P. Austin, Texas
March 11, 2005
TEXAS VANGUARD OIL COMPANY
Balance Sheets
December 31, 2004 and 2003
ASSETS 2004 2003 Current assets: Cash (including certificates of deposit of $700,000 in 2004 and 2003, pledged) $ 5,153,210 4,414,461 Trade accounts receivable, net of allowance for doubtful accounts of $0 and $0 in 2004 and 2003, respectively 203,391 119,654 ---------- --------- Total current assets 5,356,601 4,534,115 ---------- --------- Oil and gas properties, partially pledged, successful efforts method of accounting: Proven properties 4,132,921 4,063,987 Unproven properties 166,630 166,630 Office furniture and equipment, partially pledged 207,873 186,698 --------- --------- 4,507,424 4,417,315 Less accumulated depreciation, depletion and amortization (2,056,625) (1,787,760) --------- --------- 2,450,799 2,629,555 --------- --------- Investments -0- 500 --------- --------- Other assets 1,000 1,000 --------- --------- TOTAL ASSETS $ 7,808,400 7,165,170 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Trade accounts payable $ 273,426 269,178 Taxes payable 62,500 192,730 Asset retirement obligation, current portion 34,720 8,339 Notes payable and current installments of long-term debt 618,166 874,094 --------- --------- Total current liabilities 988,812 1,344,341 --------- --------- Deferred tax liability 251,249 269,967 Asset retirement obligation, less current portion 163,140 181,633 Long-term debt, excluding current installments 3,014,569 2,832,579 --------- --------- Total Liabilities 4,417,770 4,628,520
Commitments
Stockholders' equity: Common stock, par value $.05; authorized 12,500,000 shares; 1,416,587 in 2004 and 2003, issued and outstanding 70,829 70,829 Additional paid-in capital 1,888,530 1,888,530 Accumulated earnings (deficit) 1,431,271 577,291 --------- --------- Total stockholders' equity 3,390,630 2,536,650 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,808,400 7,165,170 ========= =========
See accompanying notes to financial statements.
TEXAS VANGUARD OIL COMPANY Statements of Earnings
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
Revenues: Oil and gas sales $ 5,035,532 3,757,649 3,086,950 Well operation fees 142,541 156,544 163,959 Other, net 200,860 399,578 228,291 Gain on sale of oil and gas property --- --- 28,000 Interest income 43,691 52,783 50,342 --------- --------- --------- Total revenues 5,422,624 4,366,554 3,557,542 --------- --------- --------- Expenses: Production cost 3,240,696 2,503,009 2,734,791 Depreciation, depletion and amortization 293,139 225,477 184,840 Interest expense 53,561 111,754 133,841 General and administrative 483,684 413,341 447,100 Impairment in value of oil and gas property 51,808 149,986 275,000 Loss on sale of oil and gas Property --- --- --- --------- --------- --------- Total expenses 4,122,888 3,403,567 3,775,572 --------- --------- --------- Earnings (loss) before income tax 1,299,736 962,987 (218,030)
Income Taxes: Provision for income tax (benefit) 445,756 263,275 (74,130) -------- --------- --------- Earnings (loss) before change in accounting principle 853,980 699,712 (143,900)
Cumulative effect of change in accounting principle, net of tax --- (6,741) --- -------- --------- --------- Net earnings (loss) $ 853,980 692,971 (143,900) ======== ========= ========= Weighted average number of shares outstanding 1,416,587 1,416,587 1,416,864 ========= ========= =========
Basic and diluted earnings (loss) per share $ .60 .49 (.10) ========= ========= =========
See accompanying notes to financial statements.
TEXAS VANGUARD OIL COMPANY Statements of Stockholders' Equity
Years ended December 31, 2004, 2003 and 2002
Additional Common Stock Paid-in Accumulated Shares Amount Capital (Deficit)/ 						 Earnings
Balances at December 31, 2001 1,417,087 70,854 1,890,005 28,220
Repurchase and cancellation of common stock (500) (25) (1,475) ---
Net earnings (loss) --- --- --- (143,900) --------- -------- --------- -------- Balances at December 31, 2002 1,416,587 70,829 1,888,530 (115,680)
Net earnings --- --- --- 692,971 --------- -------- --------- --------- Balances at December 31, 2003 1,416,587 70,829 1,888,530 577,291
Net earnings (loss) --- --- --- 853,980 _________ ______ _________ ________ Balances at December 31, 2004 1,416,587 $ 70,829 1,888,530 1,431,271 ========= ======== ========= ==========
See accompanying notes to financial statements.
TEXAS VANGUARD OIL COMPANY
Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
Cash flows from operating activities: Net earnings (loss) $ 853,980 692,971 (143,900) Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization 293,139 225,477 184,840 (Gain) loss on sale of equipment (3,173) --- --- (Gain) loss on sale of oil and gas properties --- --- (28,000) Impairment in value of oil and gas property 51,808 149,986 275,000 Changes in assets and liabilities: (Increase) decrease in receivables (83,737) 24,307 70,399 Increase (decrease) in payables and accrued expenses (118,094) 451,792 14,848 Increase (decrease) in deferred federal income tax (18,719) 83,725 47,840 --------- --------- --------- Net cash provided by operating activities 975,204 1,628,258 421,027 --------- --------- --------- Cash flows from investing activities: Purchase of investments --- --- (100,500) Proceeds from disposal of investments 500 100,000 --- Proceeds from sale of oil and gas properties --- --- 28,000 Additions to oil and gas properties (120,739) (707,793) (306,570) Proceeds from sale of equipment 12,000 21,743 28,458 Purchases of equipment (54,277) (66,576) --- --------- --------- --------- Net cash used in investing activities (162,516) (652,626) (350,612) --------- --------- --------- Cash flows from financing activities: Borrowings on notes payable 3,872,514 3,763,489 1,600,000 Repayments of notes payable (3,946,453) (2,996,480) (3,038,387) Repurchase of common stock --- --- (1,500) --------- --------- --------- Net cash provided (used) by financing activities (73,939) 767,009 (1,439,887) --------- --------- --------- Net increase (decrease) in cash 738,749 (1,742,641) (1,369,472)
Cash and cash equivalents at beginning of year 4,414,461 2,671,820 4,041,292 --------- -------- -------- Cash and cash equivalents at end of year $ 5,153,210 4,414,461 2,671,820 ========== ========== ========== Supplemental disclosure of cash flow information: Interest paid $ 53,561 111,754 133,841 ========== ========== ==========
See accompanying notes to financial statements.
TEXAS VANGUARD OIL COMPANY
Notes to Financial Statements
December 31, 2004, 2003 and 2002
(1) Significant Accounting Policies
Description of Business - Texas Vanguard Oil Company (the Company) engages in the acquisition, exploration, development, and operation of onshore oil and gas properties in the United States, principally in Texas. The Company owns interests in producing properties and undeveloped oil and gas leases in Texas, Wyoming and New Mexico. The Company sells all of its production to traditional industry purchasers who have the facilities to transport the oil and gas from the well site.
Oil and Gas Properties - The Company follows the "successful efforts" method of accounting for oil and gas exploration and production operations. Accordingly, costs incurred in the acquisition and exploratory drilling of oil and gas properties are initially capitalized and either subsequently expensed if the properties are determined not to have proved reserves, or reclassified as a proven property if proved reserves are discovered.Costs of drilling development wells are capitalized. Geological, geophysical, carrying and production costs are charged to expense as incurred.
Costs related to acquiring unproven lease and royalty acreage are periodically assessed for possible impairment of value. If the assessment indicates impair- ment, the costs are charged to expense.
Depreciation, depletion and amortization of proved oil and gas property costs, including related equipment and facilities, are provided using the units-of- production method on a property by property basis.
Office Furniture and Equipment - Office furniture and equipment is stated at cost. Depreciation is computed using the straight-line method, based on the following estimated useful lives:
Office furniture and equipment 7 years Automotive equipment 5 years
Investments - The Company had an investment in a private, closely held corporation that was valued at fair value for financial statement purposes. During 2003, the closely held company dissolved, and the Company received A liquidating distribution.
Federal Income taxes - The Company uses the "asset and liability method" of income tax accounting which bases the amount of current and future taxes payable on the events recognized in the financial statements and on tax laws existing at the balance sheet date. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes enactment date.
Cash and Cash Equivalents - The Company considers cash and cash equivalents to consist of demand deposits and certificates of deposit.
Concentration of Credit Risk - The Company sells all of its production to traditional industry purchasers. Oil sales are not made under a written contract and the purchaser and price are not specified in the division order for the subject property. The Company has recorded revenues in excess of 10% of total revenue from two customers in 2004, three customers in 2003, and two customers in 2002 as follows: 2004 - 45%, 30%, 2003 - 43%, 36%, 10% and 2002 - 46%, 32%. The Company does not believe the loss of these customers would have a material adverse effect on its operations as it could sell its production to other gathering companies.
In addition, the Company maintains its cash accounts in several commercial banks. Accounts in the banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December 31, 2004 and 2003, the Company had cash in excess of FDIC coverage.
Use of Estimates - Consistent with the requirements of generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities in order to prepare these financial statements. Actual results could differ from those estimates.
(2) Investments
During 2002, the Company purchased a profit-only interest in a privately, closely held company at a cost of $100,000. At December 31, 2002 the fair value was determined to be $100,000, and as such there was no unrealized gain or loss, and therefore no other comprehensive income or loss to recognize at December 31, 2002.
During 2003, the closely held company dissolved, and the Company received a liquidating distribution. No gain or loss was realized as the distribution was considered a return on capital, and therefore no other comprehensive income or loss is recognized at December 31, 2003.
The Company held other investments at December 31, 2003 totaling less that $500.
(3) Notes Payable and Long-term Debt
The Company had notes payable and long-term debt to banks as follows at December 31: 2004 2003
A note with a bank secured by oil and gas properties. The original amount of the note was $735,074. Interest accrues at .5% above the prime rate, with monthly payments of $30,628 plus accrued interest. The note matures February 12, 2005. --- 428,794
A note with a bank secured by oil and gas properties. The original value of the note was $622,514. Interest accrues at .5% above the prime rate, with monthly payments of $25,938.08 plus accrued interest. The note matures December 15, 2006. 561,465 ---
Line of credit with a bank under which it may borrow up to $3,000,000. Interest payable monthly at prime rate plus .5%, secured by oil and gas properties. the line of credit matures on February 12, 2005. this line of credit was renewed with the same terms, secured by oil and gas properties and a letter of credit of $250,000. The line of credit matures on December 15, 2006. 2,750,000 2,750,000
Line of credit with a bank under which it may borrow up to $700,000. Interest payable quarterly at 6.35%, secured by $700,000 in certificates of deposit. The line of credit matures on April 25, 2004. --- 500,000
Line of credit with a bank under which it may borrow Up to $700,000. Interest payable quarterly at 3.50%, Secured by $700,000 in certificates of deposit. The Line of credit matures on April 23, 2005. 300,000 ---
Note payable with a bank secured by a vehicle. The original value of the note was $28,415. Interest accrues at 4.6%. The note matures on November 16, 2007. 21,270 27,879
--------- --------- Total debt 3,632,735 3,706,673 Less current installments (618,166) (874,094) --------- --------- Long-term bank debt, excluding current installments $ 3,014,569 2,832,579 ========= =========
Future maturities of long-term debt are as follows:
2005 $ 618,166 2006 3,007,487 2007 7,082 --------- Total $3,632,735 =========
The note payable with a $561,465 balance as of December 31, 2004 has a restrictive covenant, among others, that requires the Company to maintain a cash flow to debt service ratio of not less than 1.25 to 1.00. The Company was not in violation of the aforementioned, or other, restrictive covenants for any quarter during the years ended December 31, 2004 or 2003.
(4) Related Party Transactions
The Company and an entity owned by the Chairman of the Company have an agree- ment whereby the latter provides the Company general corporate management services. The affiliated company received $222,000, $222,000, and $210,000 as compensation for performance of those services during the years ended December 31, 2004, 2003 and 2002, respectively. Effective January 1, 2005 the agreement was continued with terms of $19,000 per month through December 31, 2005.
The Company leases office space from a company owned by the Chairman of the Company under a month-to-month operating lease. Rent expense incurred under this lease was $22,800, $22,800 and $22,200 for the years ended December 31, 2004, 2003, and 2002, respectively.
Robert Watson, Inc. and William Watson, Inc.,both own small interests in a number of the properties that the Company has interests in. Each company also owns interest in other similar properties in which the Company does not have an interest. None of the Company's other directors own interests in any oil and gas properties in areas in which the Company operates. The Company presently acquires all of its own properties.
During the years ended December 31,2004, 2003 and 2002, a Director of the Company received $60,000 $60,000 and $72,320, respectively for engineering consultant work.
During the year ended December 31, 2002 an officer of the Company purchased a vehicle from the Company for $28,458, resulting in no gain or loss to the Company.
In addition, the Company purchases materials and services from two businesses in which the Chairman of the Company owns an interest. These purchases represent less than 10% of the Company's total oil field purchases.
During the year ended December 31, 2002, the Company purchased an investment in a private, closely-held corporation that is valued at fair value for financial statement purposes. The purchase of services from this related party totaled $193,155 for the year ended 2002 and $85,105 for the year ended December 31, 2003. As of December 31, 2003, the private, closely-held corporation was dissolved, and the Company received a return of capital of $100,000.
(5) Federal Income Taxes
The actual federal income tax expense differs from the "expected" tax expense computed by applying the US Federal corporate income tax rate of 34% to income before income taxes as follows:
2004 2003 2002
Current tax expense at statutory rate $ 464,475 179,550 --- Deferred tax (benefit) (18,719) 83,725 (74,130) _________ ________ ________ $ 445,756 263,275 (74,130) ========= ======== ========
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2004 and 2003 is presented below:
2004 2003 Deferred tax asset: Net operating loss carryforward $ --- --- --------- --------- Net deferred tax asset --- --- --------- ---------
Deferred tax liability: Office furniture and equipment and oil and gas property, due to differences in depreciation and abandonment (251,249) (269,967) --------- --------- Total deferred tax liability $ (251,249) (269,967) ========= =========
The Company has accumulated losses for Federal income tax purposes of approximately $-0-, $-0- and $230,000, as of December 31, 2004, 2003 and 2002, respectively, which may be carried forward and used to reduce taxable income in future years. The accumulated losses were utilized in 2003.
(6) Fair Value of Financial Instruments
Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of notes payable approximates market value at December 31, 2004 and 2003.
(7) Asset Retirement Obligation
In June 2001, the FASB issued FAS 143,Accounting for Asset Retirement Obligations. FAS 143 requires that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard), with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset. The ARO is recorded at fair value, and accretion expense will be recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash outflows discounted at the companys credit-adjusted risk-free interest rate. The provisions of this statement apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, development, and operation of a long-lived asset.
Texas Vanguard Oil Company, Inc. adopted SFAS 143 as of January 1, 2003. The adoption of SFAS 143, resulted in a January 1, 2003 cumulative effect adjustment to record a $197,542 increase in the carrying values of proved properties and a $204,283 increase in non-current abandonment liabilities. The net impact of these items was to record $6,741, net of tax, as a cumulative effect adjustment of a change in accounting principle in our Statement of Income for 2003. The asset obligation relates to costs to plug and abandon oil and gas properties of the Company.
					 	 2004 2003 Asset retirement obligation Beginning of year	 $ 189,972	204,283 Liabilities incurred during the period 21,263	 2,383 Settlements --- --- Accretion expense		 11,170 11,379 Revisions in estimated cash flow (24,545)	(28,073) -------- -------- 	Asset retirement obligation 	 End of year $ 197,860	189,972 ======== ========
The following pro-forma financial information summarized the impact of Statement 143 on 2002 financial information as if the statement had been applied retroactively to January 1, 2002.
			 	 December 31, 2002 As reported	Pro-forma
Operating loss	 $	 (218,030) 	(224,771)
Net income	 (143,900) (150,641)
Loss per common share basic and diluted	 (0.10) (0.11)
The Board of Directors Texas Vanguard Oil Company:
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL INFORMATION
Our report on our audit of the basic financial statements of Texas Vanguard Oil Company for 2004 appears on page 12. The audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental material presented in the following section of this report is presented for purposes of additional analysis and is not a required part of the basic financial statements. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
Sprouse & Anderson, L.L.P. March 11, 2005
TEXAS VANGUARD OIL COMPANY
SUPPLEMENTAL OIL AND GAS INFORMATION
Years ended December 31, 2004, 2003 and 2002 (Unaudited)
Reserve Quantity Information (Unaudited)
The following reserve related information is based on estimates prepared by management of the Company. Reserve estimates are inherently imprecise and are continually subject to revisions based on production history, results of additional exploration and development, price of oil and gas and other factors. All of the Company's oil and gas reserves are located in the United States.
2004 2003 2002 Oil Gas Oil Gas Oil Gas BBLS MCF BBLS MCF BBLS MCF
Proved developed and undeveloped reserves: Beginning of year 989,011 6,539,396 922,877 6,341,396 951,414 7,180,417 Revisions of previous estimate (11,277) (291,648) 88,500 252,675 21,500 (465,726) Extensions and Discoveries --- --- --- --- --- --- Purchase of minerals in place 23,882 140,929 40,692 340,559 22,921 87,820 Sale of minerals --- --- --- --- --- --- Production (67,252) (413,250) (63,058) (395,234) (73,006) (461,115) --------- --------- -------- --------- -------- --------- End of year 934,364 5,975,427 989,011 6,539,396 922,877 6,341,396 ========= ========= ======== ========= ========= ========= Proved developed reserves: Beginning of year 989,011 6,539,396 922,877 6,341,396 951,412 7,180,417 End of year 934,364 5,975,427 989,011 6,539,396 922,877 6,341,396
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The following is a standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves. Future net cash flows were computed using year-end prices and costs and relate to existing proved oil and gas reserves in which the enterprise has mineral interests. The Company cannot predict price fluctuations which may occur in the future. Future income tax expenses were provided after estimated utilization of Federal income tax loss carryforwards.
December 31, 2004 2003 2002
Future cash inflows $ 61,338,070 53,100,051 41,173,230 Future production and development costs (25,366,016) (23,774,850) (20,628,693) Future income tax expenses (10,768,963) ( 8,390,979) (5,724,646) ------------ ------------ ------------ Future net cash flows 25,203,091 20,934,222 14,819,891
10% annual discount for estimated timing of cash flows (15,050,859) (12,721,019) (6,975,044) ------------ ------------ ------------ Standardized measure of discounted future net cash flows $ 10,152,232 8,213,203 7,844,847 ============ ============ ============
TEXAS VANGUARD OIL COMPANY
SUPPLEMENTAL OIL AND GAS INFORMATION, CONTINUED (Unaudited)
The following are the principal sources of change in the standardized measure of discounted future net cash flows:
2004 2003 2002
Changes: Sale of oil and gas produced, net of production costs $ (1,799,796) (1,257,140) (352,159) Net changes in prices and production costs (966,860) (470,853) (459,699) Purchase of minerals in place 131,847 127,939 60,345 Extensions and discoveries --- --- --- Sales --- --- --- Revisions of previous quantity estimates (223,911) 428,395 (131,114) Accretion of discount 821,320 784,485 825,655 Other 3,976,429 755,530 (354,727) ---------- ---------- --------- Net changes 1,939,029 368,356 (411,699)
Beginning balance - standardized measure of discounted future net cash flows 8,213,203 7,844,847 8,256,546 ---------- ---------- ---------- Ending balance - standardized measure of discounted future net cash flows $10,152,232 8,213,203 7,844,847 ========== ========== ==========
The Company has not filed with or included in reports to any Federal authority or agency other than the Securities and Exchange Commission any estimates of total proved net oil and gas reserves.
Capitalized Costs Relating to Oil and Gas Producing Activities
Years ended December 31, 2004 2003 2002
Unproven oil and gas properties (including wells in progress) $ 166,630 166,630 166,630
Proven oil and gas properties 4,132,921 4,063,987 3,506,181
Accumulated depletion and amortization (1,963,081) (1,699,955) (1,504,724) ---------- ---------- ---------- Net capitalized costs $ 2,336,470 2,560,662 2,168,087 ========== ========== ==========
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
Years ended December 31, 2004 2003 2002
Acquisition of properties - unproven $ --- --- --- Acquisition of properties - proven 120,739 707,793 306,570 Exploration costs --- --- --- Development costs --- --- ---
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its manage- ment, including the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act as of the end of the period covered by our report. Based upon that evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information to be disclosed in the reports filed or submitted under the Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow timely decisions regarding required disclosures.
PART III
Items 10, 11, 12 and 13 constituting Part III of Form 10-K have been omitted from this annual report pursuant to the provisions of Instruction G(3) to Form 10-K, as the Company will file a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of its fiscal year.
PART IV
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed to the Company by Sprouse & Anderson, L.L.P. for the audit of Texas Vanguard Oil Companys annual financial statements included in the 10K and for the review of the financial statements included in its quarterly reports on Form 10-Q for the fiscal years ended December 31, 2004 and 2003 totaled $17,500 and $22,500, respectively.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). Financial Statements.
Independent Auditors' Report, Balance Sheets at December 31, 2004 and 2003 and the related Statements of Earnings, Stockholders' Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2004, and notes to financial statements are included in Item 8.
(a)(2) Financial Statement Schedules
Not applicable.
(a)(3). Exhibits
Number Description of Document
3 Copies of Articles of Incorporation and Bylaws - Incorporated by reference to Exhibits 4a and 4b to Registration Statement No. 2-66693 filed by registrant on Form S-2.
3.1 Articles of Amendment to authorize capitalization of common stock, previously filed as exhibits to Form 8-K dated May 27, 1983.
3.2 Certificate of Amendment dated February 20, 1990 of Articles of Incorporation and Articles of Amendment dated February 16, 1990 to the Articles of Incorporation. Filed as Exhibit to 1989 Form 10-K.
10.1 Incentive Stock Option Plan, previously filed as Exhibit 5b to Registration Statement No. 2-66693 filed by registrant on Form S-2.
10.2 Management contract between Texas Vanguard Oil Company and Robert Watson Inc., previously filed with Form 8-K dated January 30, 1988.
10.4 Note payable to Fort Worth National Bank dated April 23, 2004.
10.5 Note payable to First American Bank dated December 15, 2004.
10.6 Note payable to First American Bank dated December 15, 2004.
99.1 Certificate of Chief Executive Officer and Chief Financial Officer
99.2 Certification of Periodic Financial Reports
(b). Reports on Form 8-K
None filed during the quarter ended December 31, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TEXAS VANGUARD OIL COMPANY
By: William G. Watson William G. Watson, President March 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
William G. Watson Rober L. Patterson William G. Watson, President, Robert L. Patterson, Director Director, Chief Executive March 28, 2005 Officer and Principal Financial and Accounting Officer March 28, 2005
Linda R. Watson Teresa N. Nuckols Linda R. Watson, Director Teresa N. Nuckols, Secretary and Chairman of the Board March 28, 2005 March 28, 2005
OFFICERS AND DIRECTORS CORPORATE INFORMATION
Linda R. Watson CORPORATE OFFICE Chairman of the Board 9811 Anderson Mill Road, Suite 202 and Director Austin, Texas 78750
William G. Watson President, Chief Executive INDEPENDENT ACCOUNTANTS Officer and Director Sprouse & Anderson, L.L.P. Austin, Texas Teresa Nuckols Secretary
Robert L. Patterson Director TRANSFER AGENT Computershare Trust Company, Inc. P.O. Box 1596 Denver, Colorado 80228
COMMON STOCK Quoted on OTC Bulletin Board Symbol: TVOC.OB
CORPORATE GOVERNANCE The Company has adopted a Code of Ethics for its executive officers, directors and employees which is available upon request free of charge from: Investor Relations 9811 Anderson Mill Road, Suite 202 Austin, Texas 78750
2004 ANNUAL SHAREHOLDERS MEETING June 9, 2005, at 10:00 A.M. 9811 Anderson Mill Road, Suite 202 Austin, Texas 78750
EXHIBITS:
EXHIBIT 10.4
COMMERCIAL REVOLVING OR DRAW NOTE:
Fort Worth National Bank ("Lender") Austin Banking Center 8200 N. Mopac, Suite 130 Austin, Texas 78759
Texas Vanguard Oil Company ("Borrower") PO Box 202650 Austin, Texas 78720
TERMS: Interest Rate: 3.50% Principal Amount: $700,000.00 Funding Date: April 23, 2004 Maturity Date: April 23, 2005
For value received, I promise to Pay to you, or your order, at your address listed above the Principal sum of SEVEN-HUNDRED THOUSAND AND NO/100 DOLLARS, ($700,000.00).
XX Multiple Advance: The principal sum shown above is the maximum amount of principal I can borrow under this note. On 4/23/2004 I will receive the amount of $450,308.20 and future principal advances are contemplated.
Conditions: As agreed upon by bank and borrower.
XX Open End Credit: You and I agree that I may borrow up to the maximum principal sum more than one time. This feature is subject to all other conditions and expires on April 23, 2005.
Interest: I agree to pay interest on the outstanding principal balance from 04/23/2004 at the rate of 3.500% per year until April 23, 2005.
Accrual Method: Interest will be calculated on a 360/30 basis.
Post Maturity Rate: I agree to pay interest on the unpaid balance of this Note owing after maturity, and until paid in full, as state below: On the Same fixed or variable rate basis in effect before maturity (as indicated above).
XX Late Charge: If a payment is made more than 10 days after it is due, I agree to pay a late charge of 5.000% of payment.
XX Interest: I agree to pay accrued interest on demand, but if no demand is made then monthly beginning 05/23/2004
XX Principal: I agree to pay the principal on demand, but if no demand is made then on 04/23/2005.
Purpose: The purpose of this loan is revolving line of credit for business expenses.
Security: Fort Worth National Bank Certificate of Deposit Number 13656 in the amount of $700,000.00 along with any renewals or replacements thereof.
XX Specific Property Description: The Property includes, but is not limited by, the following: Fort Worth National Bank Certificate of Deposit Number 13656 in the amount of $700,000.00 along with any renewals of replacements thereof.
This Written Loan Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties.
There are no unwritten oral agreements between the parties.
Signatures: I agree to the terms of this note and security agreement (including those on pages 1 and 2). I have received a copy of this note and security agreement on todays date.
Texas Vanguard Oil Company
Signed: Linda Watson, C.O.B./Director
Signature for Lender: Patrick S. Maloy, President
EXHIBIT 10.5
TERM PROMISSORY NOTE:
First American Bank, SSB ("Lender") 500 West Illinois, Suite 10 Midland, Texas 79701 Midland County
Texas Vanguard Oil Company ("Borrower") PO Box 202650 Austin, Texas 78720 TERMS: Interest Rate: Variable Principal Amount: $622,514.00 Funding Date: December 15, 2004 Maturity Date: December 15, 2006 Loan Number: 700062938 PROMISE TO PAY:
For value received, Texas Vanguard Oil Company, a Texas Corporation ("Borrower"), whose address is PO Box 202650, Austin, TX 78720-2650 promises to pay to the order of First American Bank, SSB ("Lender" or "Payee") the sum of SIX HUNDRED TWENTY-TWO THOUSAND FIVE HUNDRED FOURTEEN DOLLARS ($622,514.00), together with interest on the unpaid principal balance thereof from date hereof until maturity at the rate hereinafter provided, both principal and interest payable as hereinafter provided in lawful money of the United States of America at Lender's offices at 500 West Illinois, Suite 10, Midland, TX 79701 or at such place as from time to time may be designated by the holder of this Note.
This Note, that certain Revolving Line of Credit Note dated as of the date of this Note having an original commitment amount of $3,000,000.00 executed by Borrower and payable to Lender ("Line of Credit Note") and that certain Letter of Credit Note or Agreement dated on or about the date of this Note have a face amount of $250,000.00 executed by Borrower and payable to Lender ("Letter of Credit Note") in support of a Letter of Credit in favor of the Texas Railroad Commission are described in and are subject to the terms and provisions of that certain Loan Agreement ("Loan Agreement") dated as of the date of this Note by and between Borrower and Lender. The Loan Agreement, among other things, contains provisions regarding the amount that Lender is required to advance under the terms of the Line of Credit Note ("the Borrowing Base"), provisions for acceleration of the maturity hereof upon the happening or omission of certain stated events upon the terms and conditions therein specified.
"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from time to time in effect plus one-half of one percent (.5%), provided, that (a) if on any day the Stated Rate shall exceed the Highest Lawful Rate for that day then the Stated Rate shall be fixed at the Highest Lawful Rate on that day and on each day thereafter until the total amount of interest accrued at the Stated Rate on the unpaid balance of this Note equals the total amount of interest which would have accrued if there were no Highest Lawful Rate and/or (b) the Stated Rate shall not be less than five and one-half percent (5.50%).
As used herein the following terms shall have the meanings set forth below:
"Prime Rate" means the fluctuating per annum rate of interest which is published in the Wall Street Journal as the Prime Rate, or if, but only if, such Prime Rate or index is no longer available or if such Prime Rate is no longer ascertainable, Lender (or its successors) will substitute an index determined by Lender to be comparable, in its sole discretion, which rate shall become the "Prime Rate". In the event The Wall Street Journal publishes more than one interest rate as the Prime Rate, the Prime Rate used herein shall be the highest of said published rates, unless Lender (or its successors) notifies Borrower in writing of Lender's (or its successor's) intent to use one of the lower published rates as the prime rate. The interest rate on this Note will change each time and as of the date that the Prime Rate or applicable index rate changes. The Prime Rate may not be the lowest rate of interest charged by Lender to its customers.
"Highest Lawful Rate" means the maximum nonusurious rate of interest that Lender is permitted under applicable law to contract for, take, charge or receive with respect to the indebtedness evidenced by this Note.
The above sum and accrued interest shall be due and payable in twenty-three (23) monthly principal installments of Twenty-Five Thousand Nine Hundred Thirty-Eight dollars and Eight cents($25,938.08) each, plus interest accrued on the unpaid principal balance to the date of each installment, beginning January 15, 2005, and continuing on the 15th date of each month thereafter until and including November 15, 2006, and then in one installment of the entire unpaid principal balance plus accrued unpaid interest on December 15, 2006.
All past due principal and/or interest or installments thereof shall bear interest from maturity at the Highest Lawful Rate.
This Note, the Line of Credit Note and Letter of Credit Note described above are secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of Production and Financing Statement dated as of the date of this Note from Borrower (hereinafter sometimes referred to as "Grantor," whether one or more) to Robert Nordhaus, Trustee for the benefit of the Lender covering any and all of Grantor's interest, whether now owned or hereafter acquired, in and to various leasehold and associated net revenue and overriding royalty interests in oil and gas wells and leases along with personal property associated therewith and proceeds derived therefrom located in the state of Texas(hereinafter referred to as "Security Documents"). Failure to describe all or part of the security shall not be considered as a waiver of such security.
Upon the failure to pay any installment of the principal or interest on this Note as above promised or upon the occurrence of a default or event of default specified in the Line of Credit Note, Letter of Credit Note, the Loan Agreement and/or the Security Documents described above, the holder of this Note or any part thereof shall have the option of declaring the principal balance hereof and the interest accrued herein to be immediately due and payable.
Borrower shall have the right to prepay, without penalty, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note and/or all or any part of the interest accrued to the date of such prepayment, provided that any such principal thus paid is accompanied by accrued interest on such principal.
It is the intent of the Payee of the Note and the undersigned in the execution of this Note and all other instruments now or hereafter securing this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the said Lender and the undersigned stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, at a rate in excess of the Highest Lawful Rate; that neither the undersigned nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the Highest Lawful Rate; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The holder of this Note expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason of if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the loan evidenced by this Note exceeds the Highest Lawful Rate, the holder of this Note shall, at its option, either refund to the undersigned the amount of such excess or credit the amount of such excess against the principal balance of this Note then outstanding and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. In the event that the said Lender or any other holder of this Note shall contract for, charge or receive any amount or amounts and/or any other thing of value which are determined to constitute interest which would equal to interest in excess of the Highest Lawful Rate shall, upon such determination at the option of the Holder of this Note, be either immediately returned to the undersigned or credited against the principal balance of this Note then outstanding, in which event any and all penalties of any kind under applicable law as a result of such excess shall be inapplicable. By execution of this Note the undersigned acknowledges that it believes the loan evidenced by this Note to be non-usurious and agrees that if, at any time the undersigned should have reason to believe that such loan is in fact usurious, it will give the holder of this Note notice of such condition and the undersigned agrees that said holder shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. The term "applicable law" as used in this Note shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future.
Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through bankruptcy, probate or other court proceeding or if this Note is placed in the hands of attorneys for collection after default, the undersigned and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable herein all the costs and expenses of said holder in enforcing this Note including, without limitation, reasonable attorneys' fees and legal expenses.
This Note is given in renewal and extension, but expressly not in extinguishment Of that certain Promissory Note dated February 12, 2003 having an original face Value amount of $735,074.00 executed by Borrower and payable to Lender ("Original Note"), which Original Note is secured by the Deed of Trust setout above. All Liens, assignments and security interests securing the payment of said Original Note are hereby ratified, confirmed, renewed, extended, rearranged and brought forward as security for the payment of this Note.
The undersigned and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of acceleration, notice of intention to accelerate the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in party, with or without notice, before or after maturity.
This Note and the Rights and Duties of the parties hereunder shall be governed for all purposes by the law of the state of Texas and the law of the United States applicable to transactions within such state.
This loan is payable in full on December 15, 2006 or upon acceleration for any reason permitted under this note. At maturity you must repay the entire principal balance of the loan and unpaid interest then due. The Lender is under no obligation to refinance the loan at that time. You will therefore, be required to make payment out of other assets that you may own or you will have to find a lender, which may be the Lender you have this loan with, willing to lend you the money. If you refinance this loan at maturity, you may have to pay some or all of the closing costs normally associated with a new loan even if you obtain refinancing from the same Lender.
NOTICE: This term note, the line of credit note, the Letter of Credit, the Security Documents and accompanying UCC-1 Financing Statements and Loan Agreement and/or any and all other documents executed at or near the time of execution of this document constitute a "Loan Agreement" as defined in section 26.02(a) of the Texas Business & Commerce Code, and represents the final agreement between the parties and may not be contradicted by evidence to prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the Parties.
Dated the date set out above, although executed on this 16th day of December 2004.
By: TEXAS VANGUARD OIL COMPANY WILLIAM G. WATSON PRESIDENT
EXHIBIT 10.6
PROMISSORY NOTE (REVOLVING LINE OF CREDIT):
First American Bank, SSB ("Lender") 500 West Illinois, Suite 10 Midland, Texas 79701 Midland County
Texas Vanguard Oil Company ("Borrower") PO Box 202650 Austin, Texas 78720
TERMS: Interest Rate: Variable Principal Amount: $3,000,000.00 Funding Date: December 15, 2004 Maturity Date: December 15, 2006 Loan Number: 028799 PROMISE TO PAY:
For value received, Texas Vanguard Oil Company, a Texas Corporation ("Borrower"), whose address is PO Box 202650, Austin, TX 78720-2650 promises to pay to the order of First American Bank, SSB ("Lender" or "Payee") the sum of THREE-MILLION DOLLARS ($3,000,000.00), or so much thereof as may be advanced by Lender prior to maturity, together with interest on the unpaid principal balance thereof from date hereof until maturity at the rate hereinafter provided, both principal and interest payable as hereinafter provided in lawful money of the United States of America at Lender's offices at 500 West Illinois, Suite 10, Midland, TX 79701 or at such place as from time to time may be designated by the holder of this Note.
This Note, that certain Term Promissory Note dated as of the date of this Note in the original principal amount of $622,514.00 executed by Borrower and payable to Lender ("Term Note") and that certain Letter of Credit Note or Agreement dated on or about October 31, 2004 having a face amount of $250,000.00 executed by Borrower and payable to Lender ("Letter of Credit Note") in support of a Letter of Credit in favor of the Texas Railroad Commission are described in and are subject to the terms and provisions of that certain Loan Agreement ("Loan Agreement") dated as of the date of this Note by and between Borrower and Lender. The Loan Agreement, among other things, contains provisions regarding the amount that Lender is required to advance under the terms of the Line of Credit Note ("the Borrowing Base"), provisions for acceleration of the maturity hereof upon the happening or omission of certain stated events upon the terms and conditions therein specified and the payment of a non-refundable origination fee at closing of $13,750.00.
"Stated Rate" means, on any day, a rate per annum equal to the Prime Rate from time to time in effect plus one-half of one percent (.5%), provided, that (a) if on any day the Stated Rate shall exceed the Highest Lawful Rate for that day then the Stated Rate shall be fixed at the Highest Lawful Rate on that day and on each day thereafter until the total amount of interest accrued at the Stated Rate on the unpaid balance of this Note equals the total amount of interest which would have accrued if there were no Highest Lawful Rate and/or (b) the Stated Rate shall not be less than four and three-quarters percent (5.50%).
As used herein the following terms shall have the meanings set forth below:
"Prime Rate" means the fluctuating per annum rate of interest which is published in the Wall Street Journal as the Prime Rate, or if, but only if, such Prime Rate or index is no longer available or if such Prime Rate is no longer ascertainable, Lender (or its successors) will substitute an index determined by Lender to be comparable, in its sole discretion, which rate shall become the "Prime Rate". In the event The Wall Street Journal publishes more than one interest rate as the Prime Rate, the Prime Rate used herein shall be the highest of said published rates, unless Lender (or its successors) notifies Borrower in writing of Lender's (or its successor's) intent to use one of the lower published rates as the prime rate. The interest rate on this Note will change each time and as of the date that the Prime Rate or applicable index rate changes. The Prime Rate may not be the lowest rate of interest charged by Lender to its customers.
"Highest Lawful Rate" means the maximum nonusurious rate of interest that Lender is permitted under applicable law to contract for, take, charge or receive with respect to the indebtedness evidenced by this Note.
The above sum and accrued interest shall be due and payable as follows:
(a) Interest shall be due and payable monthly as it accrues on the unpaid principal balance to the date of each installment, payment beginning January 15, 2005, and continuing on the 15th day of each month thereafter until and including November 15, 2006.
(b) On December 15, 2006, the remaining balance, including principal and interest, then remaining unpaid on this Note shall be due and payable.
This Note is a Revolving Line of Credit Promissory Note having a face amount of $3,000,000.00 but an initial commitment amount described in the Loan Agreement. The unpaid principal balance of this Note at any time shall be the total of all amounts loaned or advanced by the holder hereof less the amount of all payments or prepayments of principal made hereon by or for Maker. Maker may use all or any part of the credit provided for herein at any time before December 15, 2006, subject to the Borrowing Base limitation set out in the Loan Agreement. Maker may borrow, repay and reborrow hereunder and there is no limitation on the number of advances made hereunder so long as the total unpaid balance, at any time outstanding, does not exceed the lessor of (a) $3,000,000.00 or (b) the Borrowing Base as set out in the Loan Agreement.
Upon the failure to pay any installment of the principal or interest on this Note as above promised or upon the occurrence of a default or event of default specified in the Term Note, Letter of Credit Note, the Loan Agreement and/or the Security Documents described below, the holder of this Note or any part thereof shall have the option of declaring the principal balance hereof and the interest accrued hereon to be immediately due and payable.
All past due principal and/or interest or installments thereof shall bear interest from maturity at the Highest Lawful Rate.
This Note, the Term Note and Letter of Credit Note described above are secured by a Deed of Trust, Mortgage, Security Agreement, Assignment of Production and Financing Statement dated as of the date of this Note from Borrower (hereinafter sometimes referred to as "Grantor," whether one or more) to Robert Nordhaus, Trustee for the benefit of the Lender covering any and all of Grantor's interest, where now owned or hereafter acquired, in and to various leasehold and associated net revenue and overriding royalty interests in oil and gas wells and leases along with personal property associated therewith and proceeds derived therefrom located in the state of Texas (hereinafter referred to as "Security Documents"). Failure to describe all or part of the security shall not be considered as a waiver of such security.
Upon the failure to pay any installment of the principal or interest on this Note as above promised or upon the occurrence of a default or event of default specified in the Term Note, the Loan Agreement and/or the Security Documents described above, the holder of this Note or any part thereof shall have the option of declaring the principal balance hereof and the interest accrued hereon to be immediately due and payable.
Borrower shall have the right to prepay, without penalty, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note and/or all or any part of the interest accrued to the date of such prepayment, provided that any such principal thus paid is accompanied by accrued interest on such principal.
It is the intent of the Payee of the Note and the undersigned in the execution of this Note and all other instruments now or hereafter securing this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the said Lender and the undersigned stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, at a rate in excess of the Highest Lawful Rate; that neither the undersigned nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the Highest Lawful Rate; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The holder of this Note expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the loan evidenced by this Note exceeds the Highest Lawful Rate, the holder of this Note shall, at its option, either refund to the undersigned the amount of such excess or credit the amount of such excess against the principal balance of this Note then outstanding and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. In the event that the said Lender or any other holder of this Note shall contract for, charge or receive any amount or amounts and/or any other thing of value which are determined to constitute interest which would equal to interest in excess of the Highest Lawful Rate shall, upon such determination at the option of the Holder of this Note, be either immediately returned to the undersigned or credited against the principal balance of this Note then outstanding, in which event any and all penalties of any kind under applicable law as a result of such excess shall be inapplicable. By execution of this Note the undersigned acknowledges that it believes the loan evidenced by this Note to be non-usurious and agrees that if, at any time the undersigned should have reason to believe that such loan is in fact usurious, it will give the holder of this Note notice of such condition and the undersigned agrees that said holder shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. The term "applicable law" as used in this Note shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future.
Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through bankruptcy, probate or other court proceeding or if this Note is placed in the hands of attorneys for collection after default, the undersigned and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon all the costs and expenses of said holder in enforcing this Note including, without limitation, reasonable attorneys' fees and legal expenses.
This Note is given in renewal and extension, but expressly not in extinguishment Of that certain Revolving Line of Credit dated February 12, 2003 having a face amount of $3,000,000.00 executed by Borrower and payable to Lender ("Original Note"), which Original Note is secured by the Deed of Trust set out above. All liens, assignments and security interests securing the payment of said Original Note are hereby ratified, confirmed, renewed, extended, rearranged and brought forward as security for the payment of this Note.
The undersigned and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of acceleration, notice of intention to accelerate the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in party, with or without notice, before or after maturity.
This Note and the Rights and Duties of the parties hereunder shall be governed for all purposes by the law of the state of Texas and the law of the United States applicable to transactions within such state.
This loan is payable in full on December 15, 2006 or upon acceleration for any reason permitted under this note. At maturity you must repay the entire principal balance of the loan and unpaid interest then due. The Lender is under no obligation to refinance the loan at that time. You will therefore, be required to make payment out of other assets that you may own or you will have to find a lender, which may be the Lender you have this loan with, willing to lend you the money. If you refinance this loan at maturity, you may have to pay some or all of the closing costs normally associated with a new loan even if you obtain refinancing from the same Lender.
NOTICE: This line of credit note, the term note, the Letter of Credit, the Security Documents and accompanying UCC-1 Financing Statements and Loan Agreement and/or any and all other documents executed at or near the time of execution of this document constitute a "Loan Agreement" as defined in section 26.02(a) of the Texas Business & Commerce Code, and represents the final agreement between the parties and may note be contradicted by evidence to prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the Parties.
Dated the date set out above, although executed on this 16th day of December 2004.
By: TEXAS VANGUARD OIL COMPANY WILLIAM G. WATSON PRESIDENT
EXHIBIT 99.1: CERTIFICATE OF CHIEF FINANCIAL OFFICER AND CHIEF FINANCIAL OFFICER
I, William Watson, certify that:
1. I have reviewed this annual report on Form 10-K of Texas Vanguard Oil Company (TVOC).
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.
3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present, in all material respects, the financial condition, results of operations and cash flows of TVOC as of, and for, the periods presented in this annual report.
4. Texas Vanguard Oil Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for TVOC and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to TVOC, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of TVOC disclosure controls and procedures as of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
c) presented in this annual report our conclusions about the effective- ness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. TVOC's other certifying officers and I have disclosed, based on our most recent evaluation, to our auditors and the audit committee of TVOC's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect TVOC's ability to record, process, summarize and report financial data and have identified for TVOC's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in TVOC's internal controls.
6. TVOC's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
March 28, 2005
By /s/ William G. Watson - ------------------------ William G. Watson, President (Principal Financial and Accounting Officer)
EXHIBIT 99.2: CERTIFICATION OF PERIODIC FINANCIAL REPORTS
The undersigned hereby certifies that this Annual Report on Form 10-K for the fiscal year ended December 31, 2004, fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial conditions and results of operations of Texas Vanguard Oil Company.
Date: March 28, 2005 By/s/ William G. Watson -------------------------- William G. Watson, President (Principal Financial and Accounting Officer)