As filed with the Securities and Exchange Commission on September 17, 1999
Registration No. _________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
Registration Statement
Under the Securities Act of 1933
------------------------------------
LOCH ENERGY, INC.
(Exact name of Registrant as specified in its charter)
Texas 1311 75-1657943
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification
organization) Code Number) Number)
202 South Dixon, Suite 204 Glenn L. Loch
Gainesville, Texas 76240 202 South Dixon, Suite 204
(940) 668-1271 Gainesville, Texas 76240
(Address, and telephone number (940) 668-1271
of principal executive offices) (Name, address and telephone number
of agent for service)
Copies to:
Margaret C. Fitzgerald
Brewer & Pritchard, P.C.
1111 Bagby, 24th Floor
Houston, Texas 77002
Phone (713) 209-2913
Facsimile (713) 209-2923
---------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities To Being Offering Price Aggregate Registration
Be Registered Registered Per Share(1) Offering Fee
------------- ---------- ------------ Price(1)(2) -----------
-----------
<S> <C> <C> <C> <C>
Common Stock to
be Distributed 1,295,286 $.06 77,717.16 $100
-------------- -------- ------------- ---------
TOTAL 1,295,286 $.06 77,717.16 $100
============== ======== ============= ==========
</TABLE>
(1)Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457.
(2)The book value of the common stock, calculated pursuant to Rule 457(f).
- -------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of or until the registration statement shall become effective
on such date as the SEC, acting pursuant to said Section 8(a), may determine.
<PAGE>
LOCH ENERGY, INC.
Distribution of 1,295,286 Shares as a stock dividend
Design Automation Systems, Inc. ("DASI"), our parent company, has
decided to distribute 1,295,286 shares, consisting of a majority of our
securities, as a stock dividend to DASI stockholders of record as of December 2,
1998. This distribution will constitute our initial public offering.
Neither the Nasdaq Stock Market nor any national securities exchange
lists our common stock. Prior to this offering, there has been no public market
for our common stock. There can be no assurance that a market for our securities
will develop.
This investment involves a high degree of risk. See "Risk Factors"
beginning on page 5.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------
The date of this prospectus is September 17, 1999
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary..........................................................1
Questions and Answers Concerning the Rights Offering and
Stock Distribution.........................................................2
Risk Factors................................................................3
We have a history of losses and we anticipate losses until
at least the year 2000....................................................3
Our working capital requirements may require us to pursue
additional financing......................................................3
Historically, oil and gas prices and markets have been volatile,
and they are likely to continue to be volatile in the future. The
volatility of oil and gas process may have an adverse effect
on our operations.........................................................4
Capital Requirements and Liquidity.........................................4
Limited State Registration.................................................4
Our future success will depend upon our ability to find, develop
or acquire additional oil and gas reserves at prices that permit
profitable operations......................................................5
Our future success is dependent upon the success of our exploratory
drilling activities........................................................5
Our operations are subject to all of the operating hazards and risks
normally incident to drilling for and producing oil and gas............... 5
Our insurance may not adequately cover us against all operating hazards
associated with drilling...................................................5
Our utilization of 3-D seismic surveys may be unreliable...................6
Harm to producing properties could have a material adverse effect
on our business............................................................6
Competition for desirable properties suitable for exploration or
acquisition is high........................................................6
Our oil and gas reserve estimates may be imprecise as we are relying
on the judgment of petroleum engineers.....................................6
Our business is subject to government regulation...........................6
We may be liable for environmental clean up costs, regardless of whether
we are responsible for the release of any hazardous substance..............7
We may not be able to successfully or economically defend title
to our properties..........................................................7
Under joint operating agreements in which we are the operator, we are
at risk if one of the joint owners does not reimburse its share of costs...7
Plan of Distribution........................................................8
Federal Income Tax Consequences of the Distribution.........................9
Our Special Note Regarding Forward-Looking Statements.......................9
Use of Proceeds.............................................................9
Dividend Policy............................................................10
Capitalization.............................................................10
Management's Discussion and Analysis of Financial Condition and
Results of Operation.......................................................10
Impact of Year 2000........................................................13
Business...................................................................14
Legal Proceedings..........................................................20
Management.................................................................20
Executive Compensation ....................................................20
Certain Transactions and Related Transactions..............................21
Principal Stockholders.....................................................21
Description of Securities..................................................21
Shares Available For Future Sale...........................................22
Market For Common Stock and Related Stockholder Matters....................23
Experts....................................................................23
Legal Matters..............................................................23
Where You Can Find More Information........................................23
</TABLE>
The information in this prospectus is not complete and may be changed. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement field with the Securities and Exchange Commission is
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities,
or components of these securities, in any state in which such offer,
solicitation, or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
We have not applied to register the shares in any state. An exemption from
registration will be relied upon in the states where share are distributed,
and the shares may only be traded in such jurisdictions after compliance with
applicable securities laws. There can be no assurances that the shares will be
eligible for sale or resale in such jurisdictions. We may apply to register the
shares in several states for offer hereunder or for secondary trading, however
we are under no requirement to do so. Rather, we retain the option and
anticipate that we will pay the dividend in cash rather than in share to holders
of DASI common stock that reside in states which do not provide for an exemption
from state registration for this offering.
<PAGE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus.
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. To understand this offering fully, you should read the entire
prospectus carefully.
KEY FACTS ABOUT OUR COMPANY AND THIS PROSPECTUS
Our Company...............We are engaged in exploration for and development
of oil and gas reserves, primarily onshore in the
Midwestern and Southwestern areas of the United
States.
Our Address...............202 South Dixon, Suite 204, Gainesville, Texas 76240.
Our Phone Number..........(940) 668-1271.
Common Stock Outstanding..2,445,286 shares
Shares to be Distributed..1,295,286 shares
Common Stock Outstanding
After Dividend............2,445,286 shares, the number of shares to be
distributed may be adjusted if DASI issues the
dividend in cash as permitted.
No Proceeds...............We nor DASI will receive any proceeds from this
distribution.
Market for Company
Securities................There is currently no market for our securities,
and there is no assurance that any market will
develop. If a market develops for our securities,
it will likely be limited, sporadic, and highly
volatile.
- --------------
<PAGE>
SUMMARY FINANCIAL DATA
The financial information presented below is derived from the audited
financial statements of the predecessor of Loch, Loch Exploration, Inc. which is
now known as Design Automation Systems, Inc. for the fiscal year ended December
31, 1997 as compared to the fiscal year ended December 31, 1998. Also presented
is interim financial information for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1999.
<TABLE>
<CAPTION>
AUDITED UNAUDITED
---------------------------- --------------------------
Year Ended Year Ended Six Months Six Months
STATEMENT OF December 31, December 31, Ended Ended
OPERATIONS DATA: 1997 1998 June 30, 1998 June 30, 1999
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $178,842 $127,353 $15,924 $ 198,744
Total Expenses 260,717 213,052 37,401 313,915
Net Loss $(81,875) $(85,699) $(21,477) $(115,171)
BALANCE SHEET DATA:
Working Capital $118,068 $(140,033) $66,046 $(16,417)
Total Assets 291,836 618,317 210,101 $506,344
Long-Term
Liabilities 10,153 0 0 0
Stockholders' Equity $228,277 $132,028 $178,505 $153,828
(Deficit)
</TABLE>
WHY THIS PROSPECTUS WAS SENT TO YOU
This prospectus is being delivered by DASI to you because you owned
DASI common stock on December 2, 1999. This entitles you to receive, at no cost
to you, for each one share of DASI common stock you own a distribution
consisting of one share of Loch, a development stage corporation.
QUESTIONS AND ANSWERS CONCERNING
THE STOCK DISTRIBUTION
Will Every Stockholder Share in Proportion to Their DASI Holdings?
Yes, the stockholders of record at December 2, 1998, will receive
shares in proportion to their holdings. However, the following states;
California, Colorado, Illinois, New York, North Dakota and Utah, will not allow
us to distribute the shares without registration or qualification in that
particular state. Therefore, we have the right to pay you $.06 as the dividend
for each share you would have received.
What is the connection between DASI and Loch?
Prior to this dividend we were a subsidiary of DASI.
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<PAGE>
Why Are We Engaging in This Distribution?
The dividend represents Loch's initial public offering of its
securities, although it is different than a traditional offering in that
securities are directed only to eligible DASI stockholders. We believe that the
dividend has several advantages over a traditional initial public offering. This
type of offering gives us an opportunity to offer our common stock to investors
who we believe, as DASI stockholders, already have some interest in Loch. This
form of offering also is more cost effective than the traditional method since
there will not be any underwriting discounts and commissions.
In addition, DASI's management supports the dividend because they
believe it will benefit DASI stockholders by:
* separating our business, with its own unique market opportunity and
risk/reward profile, from DASI's other traditional business, which should
increase our financial flexibility in the capital markets by allowing
us to be viewed, from an investor's perspective, as engaging in only oil
and gas exploration business;
* enabling DASI stockholders to increase or decrease their level of
participation in our new business by varying their level of investment in
us; and
* allowing DASI and us to pursue different operating strategies,given our
different business environments and competitive market conditions.
Can I Sell My Shares?
Upon the effectiveness of our registration statement with the SEC, the
shares of common stock will be freely tradeable, assuming any market for these
securities ever develops.
Where Will the Common Stock Trade?
There is currently no public market for our common stock. We expect
that securities will trade in the over-the-counter market on the OTC Electronic
Bulletin Board. We can not assure you that a market for our common stock will
develop or if it does develop that the market will be sustained.
RISK FACTORS
We have a history of losses and we anticipate losses until at least the
year 2000.
We have a history of losses. Although we have experienced revenue
growth, growth rates may not be sustained and are not necessarily indicative of
future operating results. Given the level of our planned operating and capital
expenditures, we anticipate that we will continue to incur operating losses at
least into the year 2000. If revenues do not grow at anticipated rates, if
increases in operating expenses precede or are not subsequently followed by
commensurate increases in revenues, or if we are unable to adjust operating
expense levels accordingly, our business, results of operations, and financial
condition will be materially and adversely affected.
Our working capital requirements may require us to pursue additional financing.
At June 30, 1999, we had a working capital deficit of $16,417. Our
ability to maintain adequate working capital will be largely dependent upon
our results of operations. Net cash used in the operation of our
business was $54,884 for the six months ended June 30, 1999, as compared to net
cash provided by operating activities of $6,515 for the six months ended
June 30, 1998. For the six-month period ended January 31, 1998, net cash
provided in the operation of our business was $39,228 as compared to net cash
used in the operation of our business of $182,992 for the six months ended
January 31, 1999. We may need to raise additional capital to fund
3
<PAGE>
future operations and to satisfy future capital requirements. If we are unable
to secure sufficient capital in the future, our ability to pursue our business
strategy will be limited and our results from operations may be impaired.
The failure to raise any needed additional funds will likely have a material
adverse effect on our company. In addition, it is possible that raising
additional funds will result in substantial additional dilution.
Historically, oil and gas prices and markets have been volatile, and they are
likely to continue to be volatile in the future. The volatility of oil and gas
process may have an adverse effect on our operations.
Our revenues, cash flows and profitability are substantially dependent
upon prevailing prices for both oil and gas. Historically, oil and gas prices
and markets have been volatile, and they are likely to continue to be volatile
in the future. Prices for oil and gas are subject to wide fluctuations in
response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty and a variety of additional factors that are beyond the
our control. These factors include, among others:
* political conditions in the Middle East and other regions,
* the domestic and foreign supply of oil and gas,
* the level of consumer demand,
* weather conditions,
* domestic and foreign government regulations,
* the price and availability of alternative fuels, and
* overall economic conditions.
Capital Requirements and Liquidity
The oil and gas industry is capital intensive. Our cash flow from
operations and the continued availability of credit to it are subject to a
number of variables, including:
* our proved reserves and proved developed reserves,
* the level of oil and gas we are able to produce from existing wells,
* the prices at which oil and gas are sold, and
* our ability to acquire, locate and produce new reserves, each of which can
materially affect the borrowing base availability under our revolving loan
agreement, which is our only credit facility.
We may from time to time seek additional financing, either in the form of
increased bank borrowings, sales of our securities or other forms of financing.
We have no agreements for any such financing and there can be no assurance as
to the availability or terms of any such financing. To the extent our resources
and earnings are at any time insufficient to fund our activities or repay our
indebtedness as due, we will need to raise additional funds through public or
private financings or additional borrowings. No assurance can be given as to
our ability to obtain any such capital resources. If we are at any time not able
to obtain then necessary capital resources, our results of operations and
financial condition could be materially adversely affected. If, however,
additional funds are raised through the issuance of equity securities, your
ownership percentage at that time could be diluted and, in addition, such
equity securities may have rights, preferences or privileges senior to those
of the common stock.
Limited State Registration
Our parent company is relying on exemptions from registration in
various states in issuing the stock dividend to its shareholders. Seven states,
California, Colorado, Illinois, New York, North Dakota, Ohio and Utah require
that we register the securities before we issue the distribution. For
shareholders living in those states we have elected to pay a cash dividend.
4
<PAGE>
Our future success will depend upon our ability to find, develop or acquire
additional oil and gas reserves at prices that permit profitable operations.
Our reserves are depleted as we produce oil and gas. Therefore, our
future success will depend upon our ability to find, develop or acquire
additional oil and gas reserves at prices that permit profitable operations.
Unless we conduct successful exploitation or exploration activities or acquire
properties containing reserves, our proved reserves will decline. There can be
no assurance that our acquisition, exploitation and exploration activities will
result in additional reserves, or that we will be able to drill productive wells
at acceptable costs.
Our future success is dependent upon the success of our exploratory drilling
activities.
Our success is dependent upon the success of our exploratory drilling
activities. Exploratory drilling is subject to numerous risks, including the
risk that no commercially productive oil and gas reservoirs will be encountered.
The cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including:
* encountering unexpected formations and drilling conditions,
* equipment failures or accidents, as well as weather conditions,
* compliance with governmental requirements,
* shortages or delays in the delivery of equipment,
* and the unavailability of qualified personnel.
Historically, a majority of our wells have been drilled to depths of less than
10,000 feet, but we also participate in the drilling of deeper wells and may in
the future participate in the drilling of additional deep wells. Deeper drilling
typically involves greater expense and risk.
Our operations are subject to all of the operating hazards and risks normally
incident to drilling for and producing oil and gas.
Our operations are subject to all of the operating hazards and risks
normally incident to drilling for and producing oil and gas, such as:
* encountering unusual or unexpected formations and pressures,
* explosions,
* blowouts,
* fire,
* pipe and tubular failures,
* casing collapses,
* environmental pollution, and other disasters, any one of which could result
in environmental damage, and
* personal injury and other harm that could result in substantial liabilities
to us.
Our insurance may not adequately cover us against all operating hazards
associated with drilling.
As is customary in the industry, we maintain insurance against some, but not
all, of these risks. We maintain general liability insurance and obtain
insurance against blowouts on a well-by-well basis, but we have not obtained
insurance against operating hazards such as environmental risks. Should we
sustain an uninsured liability, our ability to operate may be materially
adversely affected. Drilling activities may also be curtailed, delayed or
canceled as a result of numerous factors outside our control, including but
not limited to:
* defects in title to properties,
* weather conditions,
* compliance with governmental requirements,
* mechanical difficulties,
5
<PAGE>
* shortages or delays in the delivery of drilling rigs or other
equipment, and
* the unavailability of qualified personnel.
Our utilization of 3-D seismic surveys may be unreliable.
No assurance can be given that the results of our future drilling
efforts based on 3-D seismic surveys, whether in areas in which we have used
such surveys or elsewhere, will be as successful as our results employing such
surveys to date, or successful at all.
Harm to producing properties could have a material adverse effect on our
business.
We own interests in 98 gross (10 net) producing oil and gas wells. Any
material harm to the current producing reservoirs or any significant
governmental regulation with respect to these wells, including any curtailment
of production or interruption of transportation of oil or gas produced from the
wells, could have a material adverse effect on our liquidity and results of
operations.
Competition for desirable properties suitable for exploration or acquisition is
high.
We operate in a highly competitive environment in all facets of our
operations. In seeking to acquire desirable properties suitable for exploration
or acquisition, we face intense competition from both major and independent oil
and gas companies, as well as from numerous individuals and drilling programs.
Many of our competitors have financial and other resources substantially in
excess of ours.
Our oil and gas reserve estimates may be imprecise as we are relying on the
judgment of petroleum engineers.
The proved developed and undeveloped oil and gas reserve figures
included in this prospectus are estimates based on reserve reports prepared by
in-house and independent petroleum engineers. The estimation of reserves
requires substantial judgment on the part of the petroleum engineers and is
based upon a number of variable factors and assumptions, all of which are to
some degree speculative, resulting in imprecise determinations, particularly
with respect to new discoveries. Estimates of reserves, future net revenues and
present values of future net revenues prepared or based on reports by petroleum
engineers are estimates only, and different petroleum engineers' estimates may
vary substantially depending, in part, on the assumptions made and may be
subject to material adjustment either up or down in the future. Accordingly,
actual quantities of oil and gas may differ materially from the amounts set
forth in the engineers' reports.
Our business is subject to government regulation.
Our business is subject to substantial regulation under local, state
and federal laws relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and gas, as
well as environmental and safety matters. In the past, prices of oil and gas
have been controlled by and subject to governmental regulation and there can be
no assurance that such price controls will not again be implemented in the
future. There can be no assurance that present or future regulation will not
adversely affect our operations.
The oil and gas industry is also subject to substantial environmental risks,
such as oil spills, oil and gas leaks, ruptures, and discharges of oil and toxic
gases, which could expose us to substantial liability. We believe that the oil
and gas industry may experience increasing liabilities and risks under the
Comprehensive Environmental Response, Compensation and Liability Act, as well
as other federal, state and local environmental laws, as a result of increased
enforcement of environmental laws by various regulatory agencies. Any such
liabilities could be materially adverse to us. New or different environmental
standards imposed in the future may also adversely affect us.
6
<PAGE>
We may be liable for environmental clean up costs, regardless of whether we are
responsible for the release of any hazardous substance.
As an "owner" or "operator" of property where hazardous materials may
exist or be present, we, like others engaged in the petroleum industry, could be
liable for fines and "clean-up" or remediation costs, regardless of whether the
we are responsible for the release of any hazardous substances. Management does
not believe that our environmental risks are materially different from those of
comparable companies engaged in similar businesses. However, we have not
obtained environmental compliance surveys, including so-called "phase one"
reports, which would disclose matters of public record and could disclose
evidence of environmental contamination requiring remediation on any of our
properties.
We may not be able to successfully or economically defend title to our
properties.
As is customary in the oil and gas industry, we conduct only a
preliminary title examination at the time properties believed to be suitable for
drilling operations are acquired. Prior to the commencement of drilling
operations, a more extensive title examination of the properties in the drill
site tract believed to have higher values is generally conducted and title
documents for some other properties are examined to a lesser extent. However,
even the more extensive review would not necessarily reveal existing or
potential title defects. Accordingly, no assurance can be given that we could
successfully or economically defend title to our properties.
Under joint operating agreements in which we are the operator, we are at risk if
one of the joint owners does not reimburse its share of costs.
Substantially all of our business activities are conducted through
joint operating agreements in which we own a partial interest in oil and gas
wells and the wells are operated by us or other joint owners. At June 30, 1999,
we owned interests in 1 gross (1 net) oil and gas wells where we are the
operator and 97 gross (29 net) oil and gas wells where we are not the operator.
To the extent we do not operate, we have risks because we must reimburse our
share of costs, but do not have control over normal operating procedures and
expenditures. To the extent we are the operator, we are at risk if one of the
joint owners does not reimburse its share of costs. Since we do not have a
majority position with respect to most wells in which we have an interest but
are not the operator, we may not be in a position to remove the operator in the
event of poor performance.
PLAN OF DISTRIBUTION
Introduction
DASI's board of directors has declared a stock dividend, and has
authorized the distribution of the shares subject to the effectiveness of the
registration statement. The terms of the distribution were arbitrarily
determined and bear no relation to assets or any other criteria. It is expected
that we will expend a total of approximately $5,000 for legal fees, printing,
organization costs and other costs involved in the distribution of the shares to
the DASI stockholders.
Method of Distribution and Subsequent Trading
No underwriters are involved or are expected to be involved in the
distribution of the shares. The shares are being distributed by DASI as a
dividend in exchange for no consideration.
Certificates representing the shares will be distributed on ___________, 1999
or as soon thereafter as practicable to holders of DASI common stock of record
on December 2, 1998. The distribution will result in there being about 3,250
stockholders of Loch Energy, Inc. The dividend will be distributed on the basis
of one share of company common stock for each share of DASI common stock
outstanding on December 2, 1998. It is anticipated that Certificates
representing fractional shares will not be issued. No exchange of shares,
payment, or other action by holders of DASI common stock will be required (not
including any payments from the exercise of the Rights or Warrants, if any).
7
<PAGE>
A copy of this prospectus is being mailed to each DASI holder of record
on December 2, 1998 together with certificates representing the shares.
DASI is relying on exemptions from registration in various states in
issuing the stock dividend to its shareholders. Seven states, California,
Colorado, Illinois, New York, North Dakota, Ohio and Utah require that we
register the securities before we issue the distribution. For shareholders
living in those states we have elected to pay a cash dividend
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion is a summary of the material U.S. federal
income tax consequences of the distribution of the shares. However, it is not
intended to be a complete discussion of all potential tax effects that might be
relevant to the distribution. It also is limited to domestic non-corporate
stockholders. It may not be applicable to certain classes of taxpayers,
including, without limitation, corporations, nonresident aliens, insurance
companies, tax-exempt organizations, financial institutions, securities dealers,
and broker-dealers. Such classes of taxpayers should consult their own tax
advisors regarding the tax consequences of the distribution.
The following summary is based on laws, regulations, rulings, practice,
and judicial decisions in effect at the date of this prospectus. Legislative,
regulatory, or interpretive changes, or future court decisions may significantly
modify the statements made in this description. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences described herein.
You are urged to consult with your own tax advisor as to the particular
tax consequences to you of the distribution of the our shares, including the
applicability and effect of any state, local, or foreign tax laws, and of change
in the applicable laws.
Federal Income Tax Consequences to Stockholders
DASI has not requested nor does it intend to request a ruling from the
Internal Revenue Service as to the federal income tax consequences of the
distribution. However, based on the facts of the proposed transaction, it is the
opinion of management of DASI that the transaction will not qualify as a "tax
free" spin off under Section 355 of the Internal Revenue Code of 1986, as
amended. Rather, DASI will report the transaction as a taxable distribution to
which Section 301 applies.
The amount of the distribution for purposes of Section 301 of the Code
is equal to the fair market value of the shares on the date of the distribution.
Since we are a development stage company and have minimal, if any, operations,
we are not expected to have earnings or profits as of the date of the
distribution. Furthermore, because there is no current public market for our
common stock the fair market value of these securities, and hence the amount of
the distribution, will probably be minimal on the date of distribution. Our net
book value on the date of the distribution is expected to be approximately $.06
per share. This is the amount that DASI intends to report as the taxable value
of the distribution.
The distribution should first reduce your adjusted basis in your DASI
common stock, but not below zero. If the amount of the distribution would have
the effect of reducing your adjusted basis below zero, the excess will be
treated as a gain from the sale or exchange of property. If the DASI common
stock is a capital asset in your hands, the gain will be a capital gain, either
long-term or short-term depending on whether you held the DASI common stock for
more than 12 months. The maximum federal income tax rate on long-term capital
gains is 20%, while the maximum federal income tax rate on short-term capital
gains is 39.6%.
Your tax basis in the securities received in the distribution will
equal the fair market value of the securities on the date of the distribution.
The holding period for measuring your gain or loss on a subsequent sale of the
securities will generally begin on the day following the date of the
distribution.
8
<PAGE>
The foregoing sets forth the opinion of management of DASI. DASI will
report the amount of the distribution to the Internal Revenue Service based on
our net book value on the date of distribution. The Internal Revenue Service is
not bound thereby and no assurance exists that it will concur with the position
of management regarding the value of the shares or other matters herein
discussed. Specifically, it is possible that the Internal Revenue Service may
assert that a substantially higher fair market value existed for the shares on
the date of distribution. If the Internal Revenue Service were to successfully
assert that a substantially higher value should be placed on the amount of the
distribution, the taxation of the transaction to DASI and its stockholders would
be based on such higher value. In such event, the tax impact would increase
significantly and would not be minimal. DASI would recognize gain to the extent
the value placed on the amount of the distribution exceeded its adjusted basis
in the stock (which approximates our net book value). You would be taxed on the
amount so determined for the distribution as a dividend to the extent of any
current year or accumulated earnings and profits of DASI and would recognize
gain on the balance of the distribution to the extent it exceeded their adjusted
basis in our shares owned by them.
You are urged to consult with your own tax advisor as to the particular
tax consequences to you of the distribution of our shares, including the
applicability and effect of any state, local or foreign tax laws, and of change
in the applicable laws.
OUR SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, in particular the
"Risk Factors" and "Business" sections, discuss future expectations, contain
projections of results of operation or financial condition or state other
"forward-looking" information. These statements are subject to known and unknown
risks, uncertainties, and other factors that could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and is derived using numerous
assumptions. Important factors that may cause actual results to differ from
projections include, for example:
* the success or failure of our management's efforts to implement their
business strategy;
* our ability to raise sufficient capital to meet operating requirements;
* the volatility of oil and gas prices;
* our ability to compete with major established companies;
* the effect of changing economic conditions;
* our ability to identify and acquire drilling properties; and
* other risks which may be described in future filings with the SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements.
USE OF PROCEEDS
Neither we nor DASI will receive any proceeds from the distribution of
the shares.
9
<PAGE>
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock to
date. The current policy of the board of directors is to retain earnings, if
any, to provide funds for operating and expansion of our business. Such policy
will be reviewed by the board of directors from time to time in light of, among
other things, our earnings and financial position.
CAPITALIZATION
<TABLE>
<CAPTION>
June 30, 1999
<S> <C>
Long-term debt................................................ $ 0
Stockholders equity:
Common Stock, $.001 par value,
60,000,000 shares authorized; 2,429,700
shares issued and outstanding............................. 2,430
Additional paid-in capital................................ 232,333
Accumulated deficit....................................... (80,935)
--------
Total stockholders' equity (deficit)...................... $153,828
========
Total capitalization.......................................... $ 506,344
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements.
General
We were incorporated in May 1998. We were formed by DASI which, prior
to this distribution, owned 1,295,286 shares of our common stock. We are a
development stage company with a limited operating history. The financial
information contained in this prospectus is for the six months ended June 30,
1998 as compared to the six months ended June 30, 1999, the year ended December
31, 1998 compared to the year ended December 31, 1997, and the year ended
December 31, 1997 compared to the year ended December 31, 1996
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in volatile markets like oil and gas. We
will encounter various risks in implementing and executing our business
strategy. There can be no assurance that we will be successful in addressing
such risks, and the failure to do so could have a material adverse effect on
our business.
We follow the full-cost method of accounting for our oil and gas
exploration and development activities. Under this method, we capitalize
leasehold acquisition, exploration (including unsuccessful exploration) and
development costs into one cost center. If unamortized costs within the cost
center exceed the cost center ceiling, as defined, the excess will be charged to
expense during the year in which the excess occurs.
10
<PAGE>
Depreciation and amortization for each cost center are computed on a
composite unit-of-production method, based on estimated provided reserves
attributable to the respective cost center. All costs associated with oil and
gas properties are currently included in the base for computation and
amortization. Such costs include all acquisition, exploration and development
costs. All of our oil and gas properties are located within the continental
United States.
Gains and losses on sales of oil and gas properties representing less
than 25% of the reserve quantities for a given cost center are treated as
adjustments of capitalized costs. Gains and losses on sales of oil and gas
properties representing 25% or more of the reserve quantities for a given cost
center are recognized as part of operations. Gains or losses on sales of
property and equipment, other than oil and gas properties, are recognized as
part of operations. Expenditures for renewals and improvements are capitalized,
while expenditures for maintenance and repairs are charged to operations as
incurred.
Costs of oil and gas properties, including leases, are periodically
evaluated by management, and losses are recognized if a property becomes
impaired or the net value of the capitalized cost center exceeds the present
value of discounted future net cash flows.
Results of Operations
The following is an analysis of our historical results of operations
for the six months ended June 30, 1999 as compares to the six months ended June
30, 1998, the year ended December 31, 1998 as compared to the year ended
December 31, 1997, and the year ended December 31, 1997 as compared to the year
ended December 31, 1996.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
For the six months ended June 30, 1999, as compared to the six months
ended June 30, 1998, total revenues increased to $198,744 from $31,185, an
increase of $167,559 or 537 %. Of the total revenues, oil and gas revenues
increased to $72,239 for the six months ended June 30, 1999 from $21,291 for the
six months ended June 30, 1998, an increase of $50,948 or 239%; equipment
rentals increased to $44,446 for the six months ended June 30, 1999 from $1,336
for the six months ended June 30, 1998, an increase of $43,110 or 3,226%; and
revenue from lease operations increased to $76,183 for the six months ended June
30, 1999 from $4,590 for the six months ended June 30, 1998, an increase of
$71,593 or 1,559%. The increase were primarily due to increased oil and gas
production and the acquisition of Kansas gas properties.
For the six months ended June 30, 1999, as compared to the six months
ended June 30, 1998, costs and expenses increased to $313,915 from $80,957, an
increase of $232,958 or 288%. Of the total expenses, lease operations increased
to $137,612 for the six months ended June 30, 1999 from $20,536 for the six
months ended June 30, 1998, an increase of $117,076 or 570%; and depreciation,
depletion and amortization increased to $19,881 for the six months ended June
30, 1999 from $6,378 for the six months ended June 30, 1998, an increase of
$13,503 or 211%. The increases were due primarily to increased lease operations
resulting from the Kansas acquisition.
For the six months ended June 30, 1999 as compared to the six months
ended June 30, 1998, general and administrative expenses increased to $146,625
for the six months ended June 30, 1999 from $49,651 for the six months ended
June 30, 1998, an increase of $96,974 or 195%; the increase was primarily due to
the acquisition of Kansas properties.
For the six months ended June 30, 1999 as compared to the six months
ended June 30, 1998, net loss increased to $88,241 from $49,772, an increase of
$38,469 or 77%. The increase in net loss was primarily due to the acquisition of
Kansas properties.
11
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
For the year ended December 31, 1998, as compared to the year ended
December 31, 1997, total revenues decreased to $127,353 from $178,842, a
decrease of $51,489 or 29%. Of the total revenues, oil and gas revenues
decreased to $101, 825 for the year ended December 31, 1998 from $148,059 for
the year ended December 31, 1997, a decrease of $46,234 or 31%; equipment
rentals decreased to $8,743 for the year ended December 31, 1998 from $16,584
for the year ended December 31, 1997, a decrease of $7,841 or 47%; and revenue
from lease operations decreased to $2,985 for the year ended December 31, 1998
from $9,665 for the year ended December 31, 1997, a decrease of $6,680 or 69%.
The decreases were primarily due to lower oil and gas prices and the loss of
compressor rental revenues.
For the year ended December 31, 1998, as compared to the year ended
December 31, 1997, costs and expenses decreased to $213,052 from $260,717, a
decrease of $47,665 or 18%. Of the total expenses, lease operations decreased to
$59,827 for the year ended December 31, 1998 from $95,381 for the year ended
December 31, 1997, a decrease of $35,554 or 37%; and depreciation, depletion and
amortization decreased to $15,918 for the year ended December 31, 1998 from
$18,763 for the year ended December 31, 1997, a decrease of $2,845 or 15%. The
decreases were due primarily to the costs and expenses for the year ended
December 31, 1997, having an increase due to a one time loss taken in the sale
of New York gas producing properties totaling $40,302.
For the year ended December 31, 1998 as compared to the year ended
December 31, 1997, general and administrative expenses increased to $133,554
from $99,615, an increase of $33,939 or 34%. The increase was primarily due to
increase in personnel for the Kansas operations.
For the year ended December 31, 1998 as compared to the year ended
December 31, 1997, net loss increased to $96,249 from $81,875, an increase of
$14,374 or 15%. The increase in net loss was primarily due to lower oil and gas
prices and the loss of compressor rental revenues.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, as compared to the year ended
December 31, 1996, total revenues decreased to $178,842 from $231,623, a
decrease of $52,781 or 23%. Of the total revenues, oil and gas revenues
decreased to $148,059 for the year ended December 31, 1997 from $177,972 for the
year ended December 31, 1996, a decrease of $29,913 or 17%; equipment rentals
decreased to $16,584 for the year ended December 31, 1997 from $32,465 for the
year ended December 31, 1996, a decrease of $15,881 or 49%; and revenue from
lease operations decreased to $9,665 for the year ended December 31, 1997 from
$10,216 for the year ended December 31, 1996, a decrease of $551 or 5%. The
decreases were primarily due to lower oil and gas prices and compressor rental
revenues.
For the year ended December 31, 1997, as compared to the year ended
December 31, 1996, costs and expenses increased to $260,717 from $239,116, an
increase of $21,601 or 9%. Of the total expenses, lease operations decreased to
$95,381 for the year ended December 31, 1997 from $109,393 for the year ended
December 31, 1996, a decrease of $14,012 or 13%; and depreciation, depletion and
amortization decreased to $18,763 for the year ended December 31, 1997 from
$23,097 for the year ended December 31, 1996, a decrease of $4,334 or 19%. The
increase was due to a one time loss taken in the sale of New York gas producing
properties totaling $40,302.
For the year ended December 31, 1997 as compared to the year ended
December 31, 1996, general and administrative expenses increased to $99,615 from
$95,830, an increase of $3,785 or 4%.
For the year ended December 31, 1997 as compared to the year ended
December 31, 1996, net loss increased to $81,875 from $7,493, an increase of
$74,382 or 993%. The increase in net loss was primarily due to lower oil
and gas prices and the loss of compressor rental revenues.
12
<PAGE>
Liquidity and Capital Resources
The liquidity and capital resources section of Management's Discussion
and Analysis of Financial Condition and Results of Operations is intended to
present the reader with information regarding our ability to generate cash to
meet our ongoing cash requirements.
As of June 30, 1999, our primary sources of liquidity were $9,856 in
cash and cash equivalents, $59,449 of accounts receivable, and $4,473 of
accounts receivable from related parties. The company had a working capital
deficit of $16,417 as of June 30, 1999.
Net cash used by operating activities was $54,884 for the six months
ended June 30, 1999, as compared to net cash provided by operating activities of
$6,515 for the six months ended June 30, 1998, the difference was primarily the
result of the Kansas acquisition. Net cash provided by investing activities was
$35,504 for the six months ended June 30, 1999, as compared to $2,895 for the
six months ended June 30, 1998. Net cash used in financing activities was $4,847
for the six months ended June 30, 1999, as compared to net cash used in
financing activities of $8,580, the result of the Kansas acquisition.
At August 31, 1999, we had cash of $7,600. Our internally generated
cash flows from operations have historically been and continue to be
insufficient for our cash needs. As of August 31, 1999, our sources of external
and internal financing were limited. Until we can obtain monthly revenues of
$25,000, which would be sufficient to cover our working capital needs, there is
no certainty of our ability to continue our current operations. We may need to
raise additional capital to fund future operations and to satisfy future capital
requirements. If we are unable to secure sufficient capital in the future, our
ability to pursue our business strategy will be limited and our results from
operations may be impaired. The failure to raise any needed additional funds
will likely have a material adverse effect on our company, and could force us to
curtail operations, or sell assets. In addition, it is possible that raising
additional funds will result in substantial additional dilution.
IMPACT OF YEAR 2000
The year 2000 poses certain issues for business and consumer computing,
particularly the functionality of software for two-digit storage of dates and
special meanings for certain dates such as 9/9/99. The year 2000 is also a leap
year, which may also lead to incorrect calculations, functions, or system
failure. The problem exists for many kinds of software, including software for
mainframes, PCs, and embedded systems.
In assessing the effect of the year 2000 problem, our management
determined that there existed two general areas that needed to be evaluated:
* Internal infrastructure and
* Supplier/third-party relationships.
A discussion of the various activities related to assessment and
actions resulting from those evaluations is set forth below.
Internal Infrastructure.
We are in the process of verifying that all of our personal computers,
servers, and software are year 2000 compliant. We are in the process of
replacing or upgrading all items that have been found not to be year 2000
compliant. We intend to determine if the software vendors of all of our critical
applications have represented that their products are year 2000 compliant. The
costs related to these efforts are not expected to be material to our business.
13
<PAGE>
Suppliers/Third-Party Relationships.
As mentioned above, we will be gathering information from vendor web
sites and available compliance statements to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. We rely on outside
vendors for water, electrical, and telecommunications services as well as
climate control, building access, and other infrastructure services. We do not
intend to independently evaluate the Year 2000 compliance of the systems
utilized to supply these services. We have received no assurance of compliance
from the providers of these services. There can be no assurance that these
suppliers will resolve any or all Year 2000 problems with these systems before
the occurrence of a material disruption to our business. Any failure of these
third-parties to resolve Year 2000 problems with their systems in a timely
manner could have a material adverse effect on our business.
Contingency Plans.
We have not currently developed a formal contingency plan to be
implemented as part of our efforts to identify and correct year 2000 problems
affecting our internal systems. However, if we deem necessary, we may take the
following actions:
* Accelerated replacement of affected equipment or software;
* Short to medium-term use of backup equipment and software;
* Increased work hours for our personnel;
* Other similar approaches.
If we are required to implement any of these contingency plans, such
plans could have a material adverse effect on our business.
Based on the actions taken to date as discussed above, we are
reasonably certain that we have or will identify and resolve all year 2000
problems that could materially adversely affect our business and operations.
BUSINESS
General
We are a Texas corporation which was formed in May 1998. We are engaged
in exploration for and development of oil and gas reserves, primarily onshore in
the Midwestern and Southwestern area of the United States. To a lesser extent,
we have also acquired and sold oil and gas properties. Our executive and
administrative offices are located at 202 South Dixon, Suite 204, Gainesville,
Texas 76240, and our telephone number is 940-668-1271.
Recent Developments
In November 1998, we formed a Texas limited liability company, Kantex
LLC, in which we own a 50% membership interest. Our initial contribution was
535,000 shares of common stock and approximately $10,000 cash. Kantex acquired
certain oil and gas properties for 465,000 shares of our common stock, $45,900
cash and a note payable in the amount of $175,000.Kantex also acquired Cherokee
Methane Corporation, a gas transport company located in Independence, Kansas.
The purchase price was approximately $30,000 cash, and the issuance of
70,000 shares of our common stock valued at approximately $.17 per share.
The acquisition has been accounted for as a purchase.
Competition
Significant competition exists for the acquisition of producing oil and
gas properties and undeveloped leases. Many of our competitors have
greater financial capabilities and more sophisticated means for in-house
evaluation than we possess. The principal means of competition for oil and
gas properties is the amount and terms of the consideration offered. The oil
and gas exploration and development industry has been highly competitive,
14
<PAGE>
particularly with respect to the acquisition of desirable undeveloped oil and
gas leases. However, due to the deterioration in prices, the demand for
oil and gas leases has dropped significantly. Competitors include the major
oil companies, independent oil and gas concerns and individual producers
and operators, many of which have financial resources, staffs and facilities
substantially greater than ours. In time of high drilling activity, exploration
for and production of oil and gas may be affected by availability of the
equipment and supplies and by competition for drilling rigs. We cannot predict
the effect these factors will have on our operations. We own no drilling rigs,
and all of our drilling is conducted by third parties. The demand for drilling
rigs and equipment has declined sharply due to the decline in the number of oil
and gas wells being drilled. This has led to a decline in prices being paid
to drillers. The principal means of competition in oil and gas exploration and
development are product availability and price. We may be at a competitive
disadvantage in acquiring oil and gas prospects since we must compete with
companies which have greater financial resources and larger technical staffs.
Regulation
Various state and federal authorities regulate the production and sale of oil
and gas.
State Regulation Of Oil And Gas Production
The State of Texas and other states in which we conduct oil and gas
activities regulate the production and sale of oil and natural gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. In addition, most states, including Texas, regulate the rate
of production and may establish maximum daily production allowable from both oil
and gas wells on a market demand or conservation basis. As a result of recent
domestic crude oil shortages, producers have been permitted to price 100% of
allowable daily production on the basis of market demand since mid-1972;
however, production continues to be regulated for conservation purposes.
Environmental Regulations
Our activities are also subject to existing federal and state laws and
regulations governing environmental quality and pollution control. The existence
of such regulations has had no material effect on our individual operations and
the cost of such compliance have not been material to date. It is anticipated
that compliance with federal, state and local laws, rules and regulations
regulating the discharge of material will not significantly effect our capital
expenditures, earnings or competitive position.
Oil Price Regulation
Historically, regulatory policy affecting crude oil pricing was derived
from the Emergency Petroleum Allocation Act of 1973, as amended, which provided
for mandatory crude oil price controls until June 1, 1979, and discretionary
controls through September 30, 1981. On April 5, 1979, President Carter directed
the Department of Energy to complete administrative procedures designed to phase
out, commencing May 1, 1979, price controls on all domestic oil production,
effective immediately. Consequently, oil may currently be sold at unregulated
prices.
Gas Price Regulation
The Natural Gas Act of 1938 regulates the interstate transportation and
certain sales for resale of natural gas. The Natural Gas Policy Act of 1978 (the
"NGPA") regulates the maximum selling prices of certain categories of natural
gas and provided for graduated deregulation of price controls for first sales of
several categories of natural gas. With certain exceptions, all price
deregulation contemplated under the NGPA as originally enacted in 1978 has
already taken place. Under current market conditions, deregulated gas prices
under new contracts tend to be substantially lower than most regulated price
ceilings prescribed by the NGPA.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of
1989 ("Decontrol Act") was ended. The Decontrol Act amends the NGPA to
remove as of July 27, 1989 both price and non-price controls from natural
gas not subject to a first sale contract in effect on July 26, 1989.
The Decontrol Act also provided for the phasing out of
15
<PAGE>
all price regulation under the NGPA by January 1, 1993. The Federal Energy
Regulatory Commission is currently considering the promulgation of
regulations pertaining to the Decontrol Act but has taken no action to date
other than to propose such new rules. We are unable to predict the
consequences of the Decontrol Act on our operations.
Employees
We presently have one full-time officer. In addition, we employ
consultants from time-to-time to assist in its acquiring and evaluating oil and
gas properties. Pursuant to industry practice, we expect we will pay our
consultants a retainer and cash and/or overriding bonus on properties which
prove productive and which were brought to our attention by one or more such
consultants.
Description of PropertiesDescription of PropertiesDescription of Properties
The following is information with regard to our extractive enterprises:
(A) Physical Facilities
Our offices, consisting of approximately 1,000 square feet are leased
on a monthly basis at a rate of $600 per month. It is expected that this office
space will serve our needs adequately for the foreseeable future.
(B) Oil and Gas Drilling Activities
None.
(C) Oil and Gas Properties
All of our reserves are located in the United States. We have no
interests in oil and gas applicable to long-term supply or similar agreements
with foreign governments or authorities in which we act as the producer and
share revenues from the reserves of investors accounted for by the equity
method, accordingly, no information pertaining to those categories is presented
herein.
As of June 30, 1999, we owned an aggregate of 21,731 gross (1,729 net)
acres of developed oil and gas leases.
The oil and gas properties in which we own an interest are held under
oil and gas leases negotiated directly with private mineral owners. The leases
were generally for a specific primary term, such as five years, and so long
thereafter as oil or gas is produced in paying quantities. The leases generally
reserve a royalty of 12-1/2 % to the mineral owner and require a payment of up
to $1 per acre per year as rentals to retain the lease during the primary term.
Some of the leases held by us were also subject to overriding royalty burdens
reserved by various predecessor-in-title and geologists.
We paid no rental costs on oil and gas leases for 1998.
The estimate net proved and proved developed reserves of oil and gas,
together with the estimated future net revenue of those reserves, and present
value of estimated future net revenue attributable to those reserves as set
forth in the following tables have been estimated as of June 30, 1999 and
December 31, 1998, by an in-house petroleum engineer.
Oil and Gas Reserves
The following table sets forth the estimated net quantities of proved
and proved developed oil and gas reserves as of June 30, 1999 and December 31,
1998, 1997 and 1996.
16
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended Proved Reserves (1) Reserves (2, 3)
June 30 Oil (Bbls) Gas (MCF) Oil (Bbls) Gas(MCF)
------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
1999 11,560 2,096,660 11,560 2,096,660
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year
Ending Proved Reserves (1) Reserves (2, 3)
December 31 Oil (Bbls) Gas (MCF) Oil (Bbls) Gas (MCF)
-------------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998 12,296 2,165,164 12,296 2,165,164
1997 39,068 144,067 39,068 144,067
1996 30,748 496,936 30,748 496,936
</TABLE>
(1) For purpose of all tabular information included in Item 2, proved oil and
gas reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering date demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include consideration
of changes in existing prices provided only by contractual arrangements,
but not on escalations based upon future conditions.
(2) For purposes of all tabular information included in Item 2, proved
developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
(3) Additional oil and gas expected to be obtained through the application of
fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery are included as "proved
developed reserves" only after testing by a pilot project or after the
operation of an installed program has confirmed through production response
that increased recovery will be achieved.
Present Value of Estimated Future Net Revenue
The following table sets forth information as to the present value of
estimated future net revenues of proved reserves and proved developed reserves
attributable to us as of June 30, 1999 and December 31, 1998, 1997 and 1996.
Present value of future net revenues for the years shown below were computed by
applying current contract prices of oil and gas to estimated future production
of proved oil and gas revenues after deducting production taxes, direct lease
operating expenses and ad valorem taxes, discounted by 10% per year, in
accordance with Securities and Exchange Commission rules and regulations.
<TABLE>
<CAPTION>
June 30, 1999 1998 1997 1996
------------- ---- ---- ----
Present value of
estimated future
net revenues from
proved reserves:
<S> <C> <C> <C> <C>
Developed $ 1,406,481 $ 1,263,062 $ 326,176 $ 524,248
Developed and
undeveloped $ 1,406,481 1,263,062 326,176 524,248
</TABLE>
Oil and Gas Reserve Estimates Filed
No reserve reports pertaining to our proved or proved-developed reserve
estimates were filed by us with, or included in, reports to any federal
authority or agency since the beginning of the last fiscal year.
17
<PAGE>
Net Quantities of Oil and Gas Produced for Last Fiscal Year
The following table sets forth information as to quantities of oil and
gas produced, net to our interest, for the six months ended June 30, 1999 and
the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Six Months Ended
June 30 Oil Produced Gas Produced
(Bbls) (1) (MCF) (2)
- ---------------------------- ---------------- -----------------
<S> <C> <C>
1999 1,320 81,100
Fiscal Year Ended
December 31 Oil Produced Gas Produced
(Bbls) (1) (MCF) (2)
- ---------------------------- ---------------- -----------------
1998 2,761 31,077
1997 3,468 37,000
1996 3,791 41,021
- ---------------
</TABLE>
(1) Includes production that is owned by us and produced to our interests, less
royalties and production due other
(2) Includes only marketable production of a gas on an "as sold" basis.
Recovered gas-lift gas and reproduced gas may not be included until sold.
Average Sales Prices and Production Costs
The following table sets for information as to the average sales price
(including transfers) per unit of oil or gas produced and the average production
costs (lifting cost) per unit of production for the six months ended June 30,
1999 and the fiscal years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
June 30, 1999 1998 1997 1996
------------- ---- ---- ----
Average Sales Price
<S> <C> <C> <C> <C>
Oil $/Bbls $ 12.50 $ 11.61 $ 15.38 $ 19.00
Gas $/MCF $ 2.25 $ 2.25 $ 2.56 $ 2.55
Average Production Costs(1)
Oil $/Bbls $ 10.20 $ 9.05 $ 11.07 $ 10.43
Gas $/MCF $ 1.45 $ 1.29 $ 1.54 $ 1.74
</TABLE>
- --------------
(1) Production (lifting) costs do not include depreciation, depletion, and
amortization of capitalized acquisitions, exploration, and development
costs, and indirect management costs.
18
<PAGE>
Gross Net Productive Oil and Gas Wells and Developed Acres
<TABLE>
<CAPTION>
The following table sets forth, as of June 30, 1999, our interest in
productive oil and gas wells and developed acres:
Developed Acres (4) Product Wells (1)
------------------- ------------------------------
Gross (2) Net (3) Gross(2) Net (3)
------ ---- Oil Gas Oil Gas
----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
21,731 1,729 49 59 2.5 7.5
</TABLE>
Third party operators operate some of our interests in oil and gas wells.
Information as to multiple completions is not available to us.
- ---------------------
(1) Includes producing wells and wells capable of production. One or more
completions in the same bore hole are counted as one well.
(2) A gross well or acre is a well or acre in which a working interest is owned.
(3) A net well or acre is deemed to exist when the sum of factional ownership
working interests in gross wells or acres equals one. The interest owned in
gross wells of acres expressed as whole numbers and factions thereof.
(4) Includes acres spaced or assignable to productive wells.
Undeveloped Acreage as of June 30, 1999: 0 (gross) 0 (net)
Productive and Dry Exploratory and Development Wells
The following table sets forth the number of gross and net productive
and dry development wells drilled in which we had an interest for the six months
ended June 30, 1999.
<TABLE>
<CAPTION>
Exp Dev
Gross Wells
<S> <C> <C>
Drilled (1): 0 0
Productive (2): 0 0
Dry Holes (3): 0 0
Total Net Wells
Drilled (1): 0 0
Productive (2): 0 0
Dry Holes (3): 0 0
</TABLE>
- -----------------
(1) Refers to the number of wells (holes) completed any time during the fiscal
year regardless of when drilling was initialed.
(2) A Productive well is an exploratory or a development well that is not a dry
hole.
(3) A dry well (hole) is an exploratory or a development well found to be
incapable of producing either oil or gas in sufficient quantities to
justify completion as an oil or gas well.
(D) Net Oil and Gas Production
Same as (C).
(E) Unit Sales Price and Production Costs
Same as (C).
(F) Reserves
Same as (C).
19
<PAGE>
LEGAL PROCEEDINGS
There are currently no legal proceedings pending to which the we are a
party or to which any of our properties is subject.
MANAGEMENT
Directors and Executive Officers Subsidiary Business
The following table sets forth the directors and officers of the company and
their respective ages and positions:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ---------------------
<S> <C> <C>
Glenn L. Loch 63 Chairman and President
Michael Black 43 Director, Chief Financial
Officer, Secretary and Treasurer
</TABLE>
Glenn L. Loch has served as chairman and president of the company since
inception. From February 1980 until December 1998, Mr. Loch served as chairman
and president of Loch Exploration, Inc., a predecessor to the company's parent
company, Design Automation Systems, Inc. Mr. Loch has also served as the
executive director of Kantex, LLC, a subsidiary of the company, from October 1,
1998 to the present.
Michael E. Black has served as a director, chief financial officer,
secretary and treasurer of the company since its inception. From 1987 until the
present, Mr. Black has been a self-employed engineer in the oil and gas
industry.
EXECUTIVE COMPENSATION
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------ --------------------
Other
Annual All Other
Year Salary Bonus Compensation Options Compensation
<S> <C> <C> <C> <C> <C> <C>
Glenn Loch 1998 $ 53,500 $ - $ - $ - $ -
Chief Executive 1997 36,000 - - - -
Officer 1996 36,000 - - - -
-----------------------------------------------------------
</TABLE>
We have no options or warrants outstanding, and we do not currently
have a stock option plan.
20
<PAGE>
CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS
Mr. Loch will receive 201,215 shares of company common stock in the
distribution.
PRINCIPAL STOCKHOLDERS
The table below sets forth the beneficial ownership of common stock of
the company by directors, the named executive officer, holders of five percent
or more of the company and the officers and directors as a group.
<TABLE>
<CAPTION>
Number of Shares of Common
Stock Beneficially Owned Percentage of Ownership
--------------------------- ----------------------
Name and Address Before After Before After
of Beneficial Owners(1) Dividend Dividend Dividend Dividend
- ----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Design Automation Systems,
Inc. 1,295,286 -0- 53% 0%
Glenn L. Loch 500,000 701,715 20% 29%
Michael E. Black -- -- -- --
Southport Capital Corp.(2) -0- 624,405 0% 26%
KanMap, Inc.(3) 300,000 300,000 12% 12%
Trinity Affiliates, Inc.(4) 200,000 200,000 8% 8%
All officers and directors
as a group 500,000 701,715 20% 29%
(2 persons)
</TABLE>
- ----------
(1) The business address of Messrs. Loch and Black is the same as the address
of the company's principal executive offices. The address for Southport
Capital Corp. is 16200 Dallas Parkway, Suite 260, Dallas, Texas 75248. The
address for KanMap, Inc. is 2101 W. Maple Independence, Kansas 67301. The
address for Trinity Affiliates, Inc. is 5850 Maple Ave Suite 100 Dallas,
TX 75235.
(2) Frank Moss has voting control over these shares.
(3) Vance Cain has voting control over these shares.
(4) Ken Frisby has voting control over these shares.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue up to 60,000,000 shares of common stock. As of
September 15, 1999 there are 2,435,286 shares of common stock issued and
outstanding.
The holders of shares of common stock are entitled to one vote per share on
each matter submitted to a vote of stockholders. In the event of liquidation,
holders of common stock are entitled to share ratably in the distribution of
assets remaining after payment of liabilities, if any. Holders of common stock
have no cumulative voting rights, and, accordingly, the holders of a majority of
the outstanding shares have the ability to elect all of the directors. Holders
of common stock have no preemptive or other rights to subscribe for shares.
Holders of common stock are entitled to such dividends as may be declared by the
board of directors out of funds legally available therefor. The outstanding
common stock is, and the common stock to be outstanding upon completion of this
offering will be, validly issued, fully paid and non-assessable.
21
<PAGE>
Texas Takeover Statute
Upon completion of this offering, we will be subject to Part Thirteen of
the Texas Business Corporation Act ("Part Thirteen"), which became effective on
September 1, 1997. Subject to certain exceptions, Part Thirteen prohibits a
Texas corporation which is an issuing public corporation from engaging in any
business combination with any affiliated stockholder for a period of three years
following the date that such stockholder became an affiliated stockholder,
unless:
* Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an affiliated stockholder; or
* The business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the affiliated
stockholder or an affiliate or associate of the affiliated stockholder at a
meeting of stockholders called not less than six months after the
affiliated stockholder's share acquisition date.
In general, Part Thirteen defines an affiliated stockholder as any entity
or person beneficially owning 20% or more of the outstanding voting stock of
the issuing public corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. Part Thirteen
defines a business combination to include, among other similar types of
transactions, any merger, share exchange, or conversion of an issuing public
corporation involving an affiliated stockholder.
Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination that we may be involved in.
Transfer Agent
Signature Stock Transfer at 14675 Midway Road, Suite 221, Dallas, Texas
75244 serves as the transfer agent for our shares of common stock.
SHARES AVAILABLE FOR FUTURE SALE
Upon the date of this prospectus, there are 2,445,286 shares of common
stock issued and outstanding. Upon the effectiveness of this registration
statement, 1,295,286 shares of common stock to be distributed pursuant to this
prospectus will be freely tradeable. The remaining 1,150,000 shares of common
stock will be subject to the resale provisions of Rule 144. Sales of shares of
common stock in the public markets may have an adverse effect on prevailing
market prices for the common stock.
Rule 144 governs resale of "restricted securities" for the account of
any person (other than an issuer),and restricted and unrestricted securities for
the account of an "affiliate" of the issuer. Restricted securities generally
include any securities acquired directly or indirectly from an issuer or its
affiliates which were not issued or sold in connection with a public offering
registered under the Securities Act. An affiliate of the issuer is any person
who directly or indirectly controls, is controlled by, or is under common
control with, the issuer. Affiliates of the company may include its directors,
executive officers, and persons directly or indirectly owning 10% or more of the
outstanding common stock. Under Rule 144 unregistered resales of restricted
common stock cannot be made until it has been held for one year from the later
of its acquisition from the company or an affiliate of the company. Thereafter,
shares of common stock may be resold without registration subject to Rule 144's
volume limitation, aggregation, broker transaction, notice filing requirements,
and requirements concerning publicly available information about the company
("Applicable Requirements"). Resales by the company's affiliates of restricted
and unrestricted common stock are subject to the Applicable Requirements. The
volume limitations provide that a person (or persons who must aggregate their
sales) cannot, within any three-month period, sell more than the greater of one
percent of the then outstanding shares, or the average weekly reported trading
volume during the four calendar weeks preceding each such sale. A non-affiliate
may resell restricted common stock which has been held for two years free of the
Applicable Requirements.
22
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Currently, there is no public trading market for our securities and
there can be no assurance that any market will develop. If a market develops for
our securities, it will likely be limited, sporadic and highly volatile.
EXPERTS
The financial statements of Loch Energy, Inc. at June 30, 1999,
appearing in this SB-2 Registration Statement have been audited by Hess &
Rohmer, P.C., independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the issuance of shares of common
stock offered hereby will be passed upon for the company by Brewer & Pritchard,
P.C., Houston, Texas.
WHERE YOU CAN FIND MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
information incorporated by reference in this prospectus. If you want more
information, write or call us at:
Loch Energy, Inc.
202 South Dixon, Suite 204
Gainesville, Texas 76240
Telephone: (940) 668-1271
Our fiscal year ends on December 31. We intend to furnish our
stockholders annual reports containing audited financial statements and other
appropriate reports. In addition, we intend to become a reporting company and
file annual, quarterly and current reports, proxy statements, or other
information with the SEC. You may read and copy any reports, statements, or
other information we file at the SEC's public reference room in Washington, D.C.
You can request copies of these documents, upon payment of a duplicating fee by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings are
also available to the public on the SEC Internet site at http\\www.sec.gov.
23
<PAGE>
LOCH ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
<PAGE>
Board of Directors
Loch Energy, Inc. and Subsidiaries
The accompanying consolidated balance sheet of Loch Energy, Inc. (a Texas
corporation) and subsidiaries as of June 30, 1999, and the related consolidated
statements of operations and cash flows for the six months ended June 30, 1999
were not audited by us and, accordingly, we do not express an opinion on them.
Dallas, Texas
August 16, 1999
<PAGE>
LOCH ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 9,856
Trade accounts receivable 59,449
Accounts receivable - related parties 6,900
Other current assets 4,473
--------------
Total current assets 80,678
PROPERTY AND EQUIPMENT
Oil and gas properties - full cost method 412,166
Equipment - at cost 86,685
--------------
498,851
Less accumulated depreciation, depletion and
amortization (73,185)
--------------
425,666
--------------
$ 506,344
=============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LOCH ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - Continued
June 30, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Note payable $ 5,000
Accounts payable and accrued liabilities 89,145
Accounts payable - related parties 2,950
--------------
Total current liabilities 97,095
Note payable - related party 175,000
MINORITY INTEREST 80,421
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 60,000,000
shares authorized; 2,429,700 shares
issued and outstanding at June 30, 1999 2,430
Additional paid-in capital 232,333
Accumulated deficit (80,935)
--------------
153,828
--------------
$ 506,344
=============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LOCH ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Revenues
<S> <C>
Revenue from lease
operations $ 76,183
Oil and gas revenues 72,329
Equipment rental 44,446
Other 5,786
--------
198,744
Expenses
General and administrative 146,625
Lease operations 137,612
Depreciation, depletion and
amortization 19,881
Loss on sale of assets 9,155
Interest expense 642
----------
313,915
Net loss before minority interest
in earnings of consolidated
subsidiaries (115,171)
Minority interest in earnings of
consolidated subsidiaries 26,930
Net loss $(88,241)
=========
Basic/diluted net loss per share
of common stock $ (.04)
=========
Weighted average shares
outstanding 2,429,700
==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LOCH ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net loss $ (88,241)
Reconciliation of net loss to net cash
used for operating activities
Depreciation, depletion and amortization 19,881
Minority interest earnings (26,930)
Loss on sale of property and equipment 9,155
Decrease in accounts receivable 43,310
Increase in other current assets (4,163)
Decrease in accounts payable (7,896)
---------------
Net cash used for operating activities (54,884)
Cash flows from investing activities
Purchase of property and equipment (1,496)
Proceeds from sale of property and equipment 7,000
Proceeds from sale of oil and gas properties 30,000
--------------
Net cash provided by investing activities 35,504
Cash flows from financing activities
Repayment of debt (10,153)
Proceeds from borrowings 5,000
Proceeds from sale of stock 306
--------------
Net cash used for financing activities (4,847)
--------------
Decrease in cash (24,227)
Cash at beginning of period 34,083
Cash at end of period $ 9,856
==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LOCH ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in accordance with Regulation S-B, Item 310. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
information furnished reflects, in the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results of the interim periods presented. Operating results for the interim
period presented are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The accompanying unaudited
consolidated condensed financial statements and related notes should be read in
conjunction with the audited consolidated financial statements of Loch
Exploration, Inc. and the Form 10-K of Design Automation Systems, Inc. and notes
thereto, for its fiscal year ended December 31, 1998.
<PAGE>
LOCH EXPLORATION, INC. AND SUBSIDIARIES
Index to Financial Statements and Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2 - F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
All schedules have been omitted because they are not applicable, not required,
or the information has been supplied in the financial statements or notes
thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Loch Exploration, Inc.
We have audited the accompanying consolidated balance sheets of Loch
Exploration, Inc. and subsidiaries (a Texas Corporation) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loch Exploration, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years ended December 31, 1998, 1997 and 1996, in
conformity with generally accepted accounting principles.
As discussed in Note H to the financial statements, in January 1999, the Company
acquired all of the stock of an unrelated entity in a "reverse merger" with the
intent to spin off the Company's subsidiary that holds all of the Company's
operating assets and liabilities.
/FARMER, FUQUA, HUNT & MUNSELLE, P.C./
Dallas, Texas
March 31, 1999
F-1
<PAGE>
LOCH EXPLORATION, INC. AND SUBSIDIARIES
BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 34,832 $ 80,457
Trade accounts receivable 83,941 12,067
Accounts receivable, related parties 25,718 33,449
Other accounts receivable - 45,000
Other current assets 620 501
----------- ----------
Total current assets 145,111 171,474
PROPERTY AND EQUIPMENT - AT COST
Oil and gas properties (full cost method) 425,166 125,777
Equipment 136,894 78,891
----------- ----------
562,060 204,668
Less accumulated depreciation, depletion and
amortization (88,854) (84,306)
---------- -----------
473,206 120,362
---------- -----------
$ 618,317 $ 291,836
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
LOCH EXPLORATION, INC. AND SUBSIDIARIES
BALANCE SHEETS - Continued
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------ ----------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 185,153 $ 22,172
Accounts payable and accrued liabilities 77,314 11,322
Accounts payable, related parties 22,677 19,912
-------------- ----------
Total current liabilities 285,144 53,406
LONG-TERM DEBT, less current portion - 10,153
MINORITY INTEREST 201,145 -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000
shares authorized; 1,295,286 and
1,295,286 shares issued and outstanding
at December 31,1998 and 1997,
respectively 12,896 12,896
Additional paid-in capital 326,538 326,538
Accumulated deficit (207,406) (111,157)
-------- ---------
132,028 228,277
------- ---------
$ 618,317 $ 291,836
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
LOCH EXPLORATION, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -----------
Revenues
<S> <C> <C> <C>
Oil and gas revenues $ 101,825 $ 148,059 $ 177,972
Equipment rental 8,743 16,584 32,465
Revenue from lease
operations 2,985 9,665 10,216
Interest income - - 1,591
Dividend income 3,384 4,377 3,379
Gain on sale of assets 9,870 - -
Other 546 157 6,000
------------- -------------- -----------
127,353 178,842 231,623
Expenses
Lease operations 59,827 95,381 109,393
Depreciation, depletion and
amortization 15,918 18,763 23,097
General and administrative 133,554 99,615 95,830
Interest expense 3,753 6,656 10,796
Loss on sale of oil and
gas properties - 40,302 -
----------- ----------- ---------
213,052 260,717 239,116
------------ ----------- ----------
Net loss before minority interest
in earnings of consolidated
subsidiaries (85,699) (81,875) (7,493)
Minority interest in earnings of
consolidated subsidiaries (10,550) - -
------------ ----------- ---------
Net loss $ (96,249) $(81,875) $ (7,493)
============ =========== =========
Basic/diluted net loss per share
of common stock $ (.07) $ (.06) $ (.01)
========= ========= =======
Weighted average shares
outstanding 1,295,286 1,295,286 1,289,286
=============== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LOCH EXPLORATION, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 64,388,802 $ 64,388 $ 269,046 $(21,789) $ 311,645
Effect of 1 for 50 reverse
stock split and change of
par value from $.001/share
to $.01/share (63,099,516) (51,498) 51,498 - -
Net loss - - - (7,493) (7,493)
------------ --------- -------- --------- ---------
Balance, December 31, 1996 1,289,286 12,890 320,544 (29,282) 304,152
Issuance of stock to acquire
gas gathering system 6,000 6 5,994 - 6,000
Net loss - - - (81,875) (81,875)
------------ --------- --------- --------- ---------
Balance, December 31, 1997 1,295,286 12,896 326,538 (111,157) 228,277
Net loss - - - (96,249) (96,249)
------------ --------- -------- --------- --------
Balance, December 31, 1998 1,295,286 $ 12,896 $326,538 $(207,406) $ 132,028
============ ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
LOCH EXPLORATION, INC
STATEMENTS OF CASH FLOWS
Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(96,249) $ (81,875) $ (7,493)
Reconciliation of net loss to net cash
provided by (used for) operating activities
Depreciation, depletion and amortization 15,918 18,763 23,097
Amortization of discount on debentures 949 949 948
Minority interest earnings 10,550 - -
Gain on sale of property and equipment (9,870) - -
(Gain) loss on sale of oil and gas properties - 40,302 -
(Increase) decrease in accounts receivable (4,243) 11,887 (15,304)
Increase in other current assets (119) (501) -
Increase (decrease) in accounts payable 23,494 2,701 6,709
------------ ----------- ---------
Net cash provided by (used for)
operating activities (59,570) (7,774) 7,957
Cash flows from investing activities
Purchase of oil and gas properties (75,000) (5,305) -
Purchase of property and equipment (1,169) (500) -
Proceeds from sale of property and equipment 18,500 - -
Proceeds from sale of oil and gas properties 3,215 5,000 4,705
------------ ---------- --------
Net cash provided by (used for)
investing activities (54,454) (805) 4,705
Cash flows from financing activities
Repayment of debt (22,172) (30,685) (32,226)
Cash from acquisition of subsidiary 5,571 - -
Payments for minority interest 85,000 - -
----------- --------- ---------
Net cash provided by (used for)
financing activities 68,399 (30,685) (32,226)
----------- --------- --------
Decrease in cash (45,625) (39,264) (19,564)
Cash at beginning of period 80,457 119,721 139,285
----------- ---------- ---------
Cash at end of period $ 34,832 $ 80,457 $119,721
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - ORGANIZATION AND NATURE OF OPERATIONS
Organization
Loch Exploration, Inc. (the Company) was originally organized under
the laws of the State of Texas, on June 5, 1979.
The Company filed for Chapter 11 bankruptcy in April 1989, and was
reorganized in connection with its Plan of Reorganization (the
Plan), effective November 17, 1989. In connection with the Plan,
and after giving effect to the stock split discussed in Note F,
approximately 70,000 shares of the Company's common stock are
expected to be issued to the Company's former shareholders, to be
exchanged as follows: one-fiftieth of one share of the Company's
$.01 par value common stock for each eight shares of the Company's
pre-reorganization common stock. As of December 31, 1998, 1997 and
1996, 67,823, 67,823, and 67,823 shares, respectively, have been
issued to former shareholders in connection with the Plan.
Nature of Operations
The Company is engaged in the exploration for and development of
oil and gas reserves, primarily in the Midwestern and Southwestern
United States. To a lesser extent, the Company also acquires and
sells oil and gas properties.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil
and gas exploration and development activities. Under this method,
the Company capitalizes leasehold acquisition, exploration
(including unsuccessful exploration) and development costs into
one cost center. If unamortized costs within the cost center
exceed the cost center ceiling, as defined, the excess will be
charged to expense during the year in which the excess occurs.
Depreciation and amortization for each cost center are computed on
a composite unit-of-production method, based on estimated provided
reserves attributable to the respective cost center. All costs
associated with oil and gas properties are currently included in
the base for computation and amortization. Such costs include all
acquisition, exploration and development costs. All of the
Company's oil and gas properties are located within the
continental United States.
Gains and losses on sales of oil and gas properties representing
less than 25% of the reserve quantities for a given cost center
are treated as adjustments of capitalized costs. Gains and losses
on sales of oil and gas properties representing 25% or more of the
reserve quantities for a given cost center are recognized as part
of operations.
F-7
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
Oil and Gas Properties - Continued
Gains or losses on sales of property and equipment, other than oil
and gas properties, are recognized as part of operations.
Expenditures for renewals and improvements are capitalized, while
expenditures for maintenance and repairs are charged to operations
as incurred.
Costs of oil and gas properties, including leases, are
periodically evaluated by management, and losses are recognized if
a property becomes impaired or the net value of the capitalized
cost center exceeds the present value of discounted future net
cash flows.
Property and Equipment
Depreciation is provided in amounts sufficient to relate to the
cost of depreciable assets to operations over their estimated
service lives (5 to 15 years). The straight-line method of
depreciation is used for financial reporting purposes, while
accelerated methods are used for tax purposes.
Statements of Cash Flows
Cash and cash equivalents includes cash on hand, demand deposits,
and short-term investments with original maturities of three
months or less.
Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and
liabilities, using enacted tax rates in effect in the years in
which the differences are expected to reverse.
F-8
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
Principles of Consolidation
The consolidated financial statements include the accounts of Loch
Exploration, Inc. and its controlled subsidiaries, Loch Energy,
Inc. ("LEI"),(53% owned), Kantex, LLC (50% owned by LEI) and
Cherokee Methane Corporation (100% owned by Kantex). All
significant intercompany accounts and transactions have been
eliminated in consolidation. The minority interest amount of
$201,145 represents the outside minority ownership of LEI.
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 reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
Trade accounts payable $ 75,690 $ 10,346
Accrued sales and payroll taxes 1,624 959
Accrued interest - 17
------------ -----------
$ 77,314 $ 11,322
============ ============
</TABLE>
NOTE D - ACQUISITIONS
In December 1998, the Company acquired 1,295,286 shares
(approximately 73%) of LEI, a related entity of which a director
of the Company was the sole shareholder with 500,000 shares
purchased at a par value of $.001 per share. LEI received
approximately $126,000 of net assets in the transaction, which was
accounted for as a purchase. The Company has agreed to distribute
the shares of LEI to the Company shareholders of record as of
December 2, 1998.
In November 1998, LEI formed a Texas Limited Liability Company,
Kantex, LLC ("Kantex"), in which it owns a controlling 50%
membership interest. LEI's initial contribution was 535,000 shares
of LEI stock and approximately $10,000. The other member initially
contributed $85,000 cash and a $15,050 payable. Kantex acquired
certain oil and gas properties for 465,000 shares of the LEI
stock, $45,000 cash and a note payable of $175,000. Kantex also
acquired Cherokee Methane Corporation ("CMC"), a gas transport
company located in Independence, Kansas for approximately $30,000
and 70,000 shares of LEI stock.
F-9
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE D - ACQUISITIONS - Continued
The acquisition has been accounted for using the purchase method
of accounting. Accordingly, CMC's results of operations are
included in the consolidated financial statements since the date
of the acquisition.
NOTE E - LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Note payable bearing no interest,
payable in monthly installments
of 25% of the net proceeds of
production from new wells completed
by the Company $ 175,000 -
12% debentures, interest only
payable in monthly installments
through May 1, 1997, principal
and interest payable in 36 monthly
installments, beginning April 1,
1997, collateralized by a first
mortgage on the Company's interests
in certain oil and gas properties,
net of unamortized discount of $325
and $1,273 at December 31, 1998 and
1997, respectively 10,153 32,325
---------- ---------
185,153 32,325
Less current portion 185,153 22,172
---------- ---------
$ - $ 10,153
========== =========
</TABLE>
The debentures are convertible into shares of the Company's common
stock, in multiples of $1,000, at the holder's option, at the rate
of $.025 per share from June 1, 1993 to May 31, 1994, $.035 per
share from June 1, 1994 to May 31, 1995, $.05 per share from June
1, 1995 to May 31, 1996, and, thereafter, at the greater of $2.50
per share after giving effect to the 1-for-50 reverse stock split
discussed in Note F, or the average of the bid/asked price of the
Company's common stock during the prior 20 day trading period.
F-10
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE E - LONG-TERM DEBT - Continued
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ -------------
<S> <C>
1999 $ 185,153
2000 -
2001 -
2002 -
2003 -
Thereafter -
-------------
$ 185,153
</TABLE>
NOTE F - SHAREHOLDERS' EQUITY
In February, 1997, the Board of Directors declared a 1-for-50
reverse stock split in the Company's common stock, effective
February 28, 1997. The Company also changed the par value from
$.001 per share to $.01 per share and reduced the authorized
shares from 150,000,000 to 50,000,000. All share and per share
data, as appropriate, reflect this split. The effect of the split
has been presented retroactively within stockholders' equity at
December 31, 1996 by transferring the excess stated capital to the
additional paid-in capital account.
NOTE G - INCOME TAXES
There was no income tax expense recorded in 1998, 1997 or 1996,
due to the availability of net operating losses and due to the
availability of a nonconventional source fuel credit, which
eliminated any federal income taxes. This credit is available to
the extent of the current year tax liability, and is not available
for carryover to future years.
Deferred taxes have not been provided because there are no
significant temporary differences between book and taxable income.
NOTE H - SUBSEQUENT EVENTS (UNAUDITED)
In January 1999, in conjunction with a "reverse merger", the
Company acquired all of the issued and outstanding capital stock
of Design Automation Systems Incorporated ("DASI") in exchange for
16,560,000 shares, approximately 93%, of Company stock, valued at
approximately $4,300,000. The amount of the consideration was
negotiated through an arm's-length transaction. The transaction
was accounted for as a purchase.
F-11
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE H - SUBSEQUENT EVENTS (UNAUDITED) - Continued
The Company changed its name to Design Automation Systems
Incorporated and will operate in the computer systems integration
industry. DASI is in the system integration and custom programming
business and is a premier dealer of Sun, Hewlett Packard, IBM and
Digital products and Internet security solutions. The Company will
be headquartered in Houston, Texas. As discussed in Note A, the
Company intends to distribute its shares of LEI to the Company's
shareholders, which will allow LEI and its subsidiaries described
in Note E to operate separately from the Company in the oil and
gas exploration industry.
The Company was the legal acquirer; however, DASI was the acquirer
for accounting purposes. Prior to the merger, the Company had
approved a spin-off of the Company's subsidiary that holds all of
the Company's operating assets and liabilities to the stockholders
of record prior to the merger. As a result of the plan to spin off
the operations to its stockholders and due to the fact that going
forward the balance sheet will effectively be that of DASI, the
historical operations of the Company are not included in the
following unaudited pro forma balance sheet, which only includes
the historical financial statements of DASI.
<TABLE>
<CAPTION>
(Unaudited)
1998
Assets
<S> <C>
Current assets
Cash and cash equivalents $ 850,925
Trade accounts receivable 4,020,385
Other assets 144,579
----------
Total current assets 5,015,889
Property and equipment, net 71,480
----------
Total assets $ 5,087,369
===========
Liabilities
Current liabilities
Notes payable $ 1,031,483
Accounts payable 3,649,398
Accounts payable, related party 50,419
Accrued expenses and other liabilities 386,488
----------
Total current liabilities 5,117,788
Total liabilities 5,117,788
Shareholders' Equity
Common stock 54,392
Accumulated deficit (84,811)
---------
Total shareholders' deficit (30,419)
----------
Total liabilities and shareholders equity $ 5,087,369
============
</TABLE>
F-12
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE H - SUBSEQUENT EVENTS (UNAUDITED) - Continued
In March 1999, the Company acquired all of the issued and
outstanding stock of COAD Solutions, Inc., an information
technology consulting firm, in an arms length transaction between
the Company and the two stockholders of COAD. The consideration
for the acquisition was: (1) 600,000 shares of Company common
stock, (2) $200,000 cash, payable $100,000 at closing, and
$100,000 payable in quarterly installments of $25,000 beginning 90
days from the closing date, and (3) for a period of 24 months each
COAD stockholder will receive a 20% royalty on gross sales
revenues of SQLACE products. The two stockholders of COAD entered
into employment agreements, which terminate in December 2001 and
include a non-compete provision for the term of the agreement and
one year thereafter. However, the Company can provide no assurance
the non-compete will be enforceable. This transaction has been
accounted for as a purchase.
NOTE I - RELATED PARTY TRANSACTIONS
In June 1993, the Company entered into an agreement with a
wholly-owned subsidiary of Spindletop Oil & Gas Co. (Spindletop),
a related party, whereby the parties agreed to combine their
talents and resources to evaluate and acquire producing and
non-producing oil and gas properties at various auctions. Any
properties acquired under the terms of this agreement are to be
acquired by initial assignment to Spindletop. Spindletop has
agreed to provide the Company with a recordable assignment of its
interest, such interest to be determined by the proportionate
share of monies expended for the acquisition of said properties.
All costs are borne by the Company and Spindletop in the same
proportions as their respective ownership interests. Spindletop
serves as administrator for the properties acquired in connection
with this agreement, and is entitled to an overhead reimbursement
for properties for which it serves as operator. This agreement had
an initial term of six months, and continues month-to-month,
thereafter, until canceled by either party. No properties were
acquired in connection with this agreement during 1998, 1997 or
1996.
The Company leases its compressors to Spindletop. During the years
ended December 1998, 1997 and 1996, Spindletop paid the Company
approximately $9,000, $17,000, and $32,000, respectively, under
the lease agreements for the compressors.
The Company operates an inactive oil and gas partnership drilling
program, Loch Exploration, Inc. 1980A, for which it has made
commitments, paid expenses and collected an operating fee.
NOTE J - CASH FLOW INFORMATION
The Company paid approximately $4,000, $7,000 and $11,000 for
interest in 1998, 1997 and 1996, respectively. Excluded from the
Statements of Cash Flows were the effects of certain non-cash
investing and financing activities, as follows:
F-13
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE J - CASH FLOW INFORMATION - Continued
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Acquisition of gas gathering system in
exchange for stock $ - $ 6,000 $ -
Sale of oil and gas properties for
an account receivable - 45,000 -
Acquisition of oil and gas properties
in exchange for note payable and stock 302,904 - -
Acquisition of fixed assets in
exchange for note payable and stock 10,356 - -
Acquisition of subsidiary in exchange
for note payable and stock 41,781 - -
Sale of minority interest in
subsidiary for receivable 15,000 - -
</TABLE>
NOTE K - EARNINGS PER SHARE
Earnings (loss) per share (EPS) are calculated in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128), which was adopted in 1997 for all years
presented. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS does not apply
to the Company due to the absence of dilutive potential common
shares. The adoption of SFAS 128 had no effect on previously
reported EPS.
NOTE L - CONCENTRATIONS OF CREDIT RISK
Trade accounts receivable as of December 31, 1998 and 1997 are
primarily from oil and gas operators, including Spindletop,
related to the Company's interests in oil and gas wells, and its
compressor leases.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities on a month to month
basis. Total rent expense incurred was approximately $6,100,
$7,800 and $7,400 in 1998, 1997 and 1996, respectively.
The Company's oil and gas exploration and production activities
are subject to Federal, State and environmental quality and
pollution control laws and regulations. Such regulations restrict
emission and discharge of wastes from wells, may require permits
for the drilling of wells, prescribe the spacing of wells and rate
of production, and require prevention and clean-up of pollution.
F-14
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE M - COMMITMENTS AND CONTINGENCIES - Continued
Although the Company has not in the past incurred substantial
costs in complying with such laws and regulations, future
environmental restrictions or requirements may materially increase
the Company's capital expenditures, reduce earnings, and delay or
prohibit certain activities.
NOTE N - FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Amount value amount Value
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 34,832 $ 34,832 $ 80,457 $ 80,457
Trade accounts receivable 83,941 83,941 12,067 12,067
Accounts receivable, related
parties 25,718 25,718 33,449 33,449
Other accounts receivable - - 45,000 45,000
Notes payable 185,153 185,153 32,325 32,325
</TABLE>
The fair value amounts for each of the financial instruments
listed approximate carrying amounts due to the short maturities of
these instruments.
NOTE O - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, (SFAS 130), requires that total
comprehensive income be reported in the financial statements. For
the years ended December 31, 1998, December 31, 1997, and
December 31, 1996, the Company's comprehensive income (loss) was
equal to its net income (loss) and the Company does not have
income meeting the definition of other comprehensive income.
NOTE P - SEGMENT INFORMATION
The Company is in one business segment, the oil and gas
exploration business, and follows the requirements of FAS 131,
"Disclosures about Segments of an Enterprise and Related
Information."
F-15
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE Q - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years
ended December 31, 1998, 1997 and 1996 follows.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- --------- ----------
<S> <C> <C> <C>
Capitalized costs relating to
oil and gas producing activities:
Unproved properties $ - $ - $ -
Proved properties 425,166 125,777 245,862
---------- ----------- -----------
Total capitalized costs 425,166 125,777 245,862
Accumulated amortization (54,617) (45,911) (68,799)
----------- ----------- ----------
$ 370,549 $ 79,866 $ 177,063
=========== =========== ==========
Costs incurred in oil and gas
property acquisition, exploration
and development:
Acquisition of properties $ 302,904 $ 5,305 $ -
Exploration costs - - -
Development costs - - -
----------- ----------- ---------
$ 302,904 $ 5,305 $ -
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Results of operations from
producing activities:
Year Ended December 31,
1998 1997 1996
----------- --------- ----------
<S> <C> <C> <C>
Sales of oil and gas $ 101,825 $ 148,059 $ 177,972
Production costs 59,827 88,951 104,109
Amortization of oil and gas
properties 8,707 12,199 16,533
----------- --------- ---------
68,534 101,150 120,642
----------- ----------- --------
$ 33,291 $ 46,909 $ 57,330
=========== ========== ========
Sales price per equivalent Mcf $ 2.14 $ 2.56 $ 2.79
========== ========= ========
Production cost per equivalent Mcf $ 1.26 $ 1.54 $ 1.63
========== ========= ========
Amortization per equivalent Mcf $ .18 $ .21 $ .26
=========== ========= =========
</TABLE>
F-16
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE Q - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION - Continued
In December, 1997, the Company sold, for $50,000, its interest in
certain natural gas producing properties. The full cost method of
accounting requires that sales of oil and gas properties shall be
accounted for as adjustments of capitalized costs, unless such
adjustments would significantly alter the relationship between
capitalized costs and proven reserves attributable to a cost
center. Due to the significance of the effect of this sale on the
relationship between capitalized costs and proven reserves, a
loss was recognized on the sale in the 1997 statement of
operations.
NOTE R - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged Directly to Expense
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Maintenance and Repairs $ 571 $ 301 $ 1,089
Production taxes 6,619 9,624 11,568
Taxes, other than payroll
and income taxes 605 526 345
</TABLE>
NOTE S - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31,
1998, 1997 and 1996 have been estimated by Company personnel in
accordance with guidelines established by the Securities and
Exchange Commission. Accordingly, the following reserve estimates
were based on existing economic and operating conditions. Oil and
gas prices in effect at December 31 of each year were used.
Operating costs, production and ad valorem taxes and future
development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating
quantities of proved reserves and in projecting the future rates
of production and timing of development expenditures. The
following reserve data represents estimates only and should not
be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company's oil
and gas reserves or the costs that would be incurred to obtain
equivalent reserves.
F-17
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE S - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
Changes in Estimated Quantities of Proved Oil and Gas Reserves
<TABLE>
<CAPTION>
Oil Gas
Blbs Mcf
------- -----------
Proved reserves:
<S> <C> <C>
Balance, December 31, 1995 33,540 586,469
Revisions of previous estimates 999 (48,512)
Production (3,791) (41,021)
---------- -----------
Balance, December 31, 1996 30,748 496,936
Sale of reserves in place - (412,334)
Production (3,468) (37,000)
Revisions of previous estimates 11,788 96,465
---------- ------------
Balance, December 31, 1997 39,068 144,067
Purchase of oil and gas properties - 1,926,205
Production (2,761) (31,077)
Revisions of previous estimates (24,011) 125,969
---------- -------------
Balance, December 31, 1998 12,296 2,165,164
=========== =============
Proved Developed Reserves:
Balance, December 31, 1996 30,748 496,936
Balance, December 31, 1997 39,068 144,067
Balance, December 31, 1998 12,296 2,165,164
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
(Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
("Standardized Measures") does not purport to present the fair
market value of a company's oil and gas properties. An estimate
of such value should consider, among other factors, anticipated
future prices of oil and gas, the probability of recoveries in
excess of existing proved reserves, the value of probable
reserves and acreage prospects, and perhaps different discount
rates. It should be noted that estimates of reserve quantities,
especially from new discoveries, are inherently imprecise and
subject to substantial revision.
Future net cash flows were computed using the contract price,
which was not escalated. Future production includes operating
costs and taxes. No deduction has been made for interest, general
corporate overhead, depreciation or amortization. The annual
discount of estimated future net cash flows is defined, for use
herein, as future cash flows discounted at 10% per year, over the
expected period of realization.
F-18
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1998, 1997 and 1996
NOTE S - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
Standardized Measures of
Discounted Future
Net Cash Flows:
<S> <C> <C> <C>
Future production revenue $ 3,616,095 $ 1,045,705 $ 1,772,577
Future production and
development costs (1,305,147) (470,917) (875,088)
----------- ----------- -----------
Future net cash flows before
Federal income tax 2,310,948 574,788 897,489
Future Federal income tax (577,737) (143,697) (224,372)
------------ ----------- ----------
Future net cash flows 1,733,211 431,091 673,117
Effect of discounting 10%
per year (470,149) (104,915) (148,869)
------------ ----------- ---------
$ 1,263,062 $ 326,176 $ 524,248
============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Change Relating to the Standardized Measures
of Discounted Future Net Cash Flows:
December 31,
--------------------------------------
1998 1997 1996
----------- ------------ ---------
<S> <C> <C> <C>
Beginning balance $ 326,176 $ 524,248 $ 518,940
Oil and gas sales, net of
production costs (41,998) (59,108) (73,863)
Net change in prices, net of
production costs (45,306) (8,013) 41,467
Purchase of reserves in place 1,032,715 - -
Sales of reserves in place - (266,873) -
Revisions of quantity estimates (21,601) 233,293 (55,422)
Accretion of discount 32,618 52,425 51,894
Net change in income taxes 269,985 (113,186) (3,443)
Other (289,527) (36,610) 44,675
------------ ----------- -----------
$ 1,263,062 $ 326,176 $ 524,248
============ =========== ===========
</TABLE>
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The amended and
restated articles of incorporation of the company limit the liability of
directors of the company (in their capacity as directors but not in their
capacity as officers) to the company or its stockholders to the fullest extent
permitted by Texas law. Specifically, directors of the company will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the company or its stockholders, (ii) for acts or omissions not in
good faith that constitute a breach of duty of the director to the company or an
act or omission which involves intentional misconduct or a knowing violation of
law, (iii) for an act or omission for which the liability of a director is
expressly provided by an applicable statute, or (iv) for any transaction from
which the director received an improper personal benefit, whether the benefit
resulted from an action taken within the scope of the director's office. Section
2.41 of the Texas Business Corporation Act relates to directors' liability for
unlawful dividends and stock issuances.
The inclusion of this provision in the amended and restated articles of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the company and its stockholders.
The company's amended articles of incorporation provide for the
indemnification of its executive officers and directors, and the advancement to
them of expenses in connection with any proceedings and claims, to the fullest
extent permitted by the Texas Business Corporation Act. The amended and restated
articles of incorporation include related provisions meant to facilitate the
indemnities' receipt of such benefits. These provisions cover, among other
things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some cases
make such determination, (ii) specification of certain time periods by which
certain payments or determinations must be made and actions must be taken, and
(iii) the establishment of certain presumptions in favor of an indemnitee.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the company pursuant
to the foregoing provisions, the company has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
SEC Registration Fee........................$ 100
Printing and Engraving Expenses.............$ 1,000
Legal Fees and Expenses.....................$ 20,000
Accounting Fees and Expenses................$ 3,000
Miscellaneous...............................$ 600
---------
TOTAL.......................................$ 24,700
=========
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
In December 1998, the company issued 500,000 shares of common stock to
an individual for nominal consideration in connection with services rendered in
the company's formation. The company believes this transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as an isolated
transaction by an issuer not involving a public offering. The investor was an
accredited investor as that term is defined in Regulation D.
In December 1998, the company issued an aggregate of 500,000 shares of
common stock to two entities in exchange for oil and gas properties. The company
believes these transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as isolated transactions by an issuer not involving a
public offering. Prior to the acquisitions, these investors were consultants to
the company and had access to the inner workings of the company, which would
provide them the same kind of information as would be included in a registration
statement. All of the investors had such knowledge and experience in financial
and business matters that they were able to evaluate the merits and risks of an
investment in the company.
In February 1999, the company issued an aggregate of 135,000 shares of
common stock to three individuals in exchange for oil and gas properties. The
company believes these transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as isolated transactions by an issuer not
involving a public offering. Prior to the acquisitions, these investors were
consultants to the company and had access to the inner workings of the company,
which would provide them the same kind of information as would be included in a
registration statement. All of the investors had such knowledge and experience
in financial and business matters that they were able to evaluate the merits and
risks of an investment in the company.
In June 1999, the company issued 15,000 shares of common stock to an
individual in exchange for services rendered. The company believes this
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act as an isolated transaction by an issuer not involving a public
offering. The investor was a consultant to the company and had access to the
inner workings of the company, which would provide him the same kind of
information as would be included in a registration statement. The investor had
such knowledge and experience in financial and business matters that they were
able to evaluate the merits and risks of an investment in the company.
Item 27. Exhibits
INDEX TO EXHIBITS
Exhibit No. ..........................................Identification of Exhibit
2.3(1) ..............Acquisition Agreement of Cherokee Methane Corporation
3.1(2) ..........................................Articles of Incorporation
3.2(2) .............................................By-Laws of the company
4.1(2) ...................................Form of Specimen of common stock
5.1(2) ......................................................Legal Opinion
23.1(2) ....................Consent of Farmer, Fuqua, Hunt & Munselle, P.C.
23.2(3) ...............................Consent of Brewer & Pritchard , P.C.
27.1(1) ............................................Financial Data Schedule
- -------------------
(1) Previously filed as an exhibit to Design Automation Systems, Inc. 10-K
field with the commission on April 15, 1999 and incorporated by reference
herein.
(2) Filed herewith
(3) Contained in Exhibit 5.1.
II-2
<PAGE>
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. Reflect in the prospectus any facts or events arising after
the effective date of which, individually or together,
represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC pursuant to Rule
424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement; and
iii.Include any additional or changed material on the plan of
distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) i. That, for the purpose of determining liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
ii. For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned on the 17th day of September,
1999.
LOCH ENERGY, INC.
By: //S//____________________________
Glenn L. Loch, President and
Chief Executive Officer
---------------------------------
This registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
//S// Glenn L. Loch
----------------
Glenn L. Loch Chief Executive Officer, September 17, 1999
Chairman and President
//S// Michael E. Black
------------------
Michael E. Black Director, Chief Financial September 17, 1999
Officer, Secretary and
Treasurer
24
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
LOCH ENERGY, INC.
The undersigned natural persons of the age of 18 years or more, acting
as incorporators of a corporation under the Texas Business corporation Act,
hereby adopts the following Articles of Incorporation for such corporation:
ARTICLE I. NAME
The name of the Corporation is:
LOCH ENERGY INC.
ARTICLE II. DURATION
The period of its duration is perpetual.
ARTICLE III. PURPOSES
The purpose or purposes for which the Corporation is organized are:
A. To transact any and all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act; and
B. To have and exercise all rights and powers that are now or may
hereafter be granted to a corporation by law.
Without limiting in any way the broad, general powers hereinabove granted to the
corporation, it is expressly agreed that these powers include the power:
(1) To pay pensions and establish pension plans, pension trusts,
profitsharing plans, stock bonus plans, and other incentive plans for
all of, or any class or classes of its officers and/or employees;
(2) To be an organizer, partner, member, associate, or manager of any
partnership, joint venture, or other enterprise, and to the extent
permitted in any other jurisdiction to be an incorporator of any other
corporation of any type or kind; and
(3) To grant franchises and licenses.
The powers of the Corporation may be exercised by it anywhere in the world; and
the hereinabove set forth recital of specific powers of the Corporation shall
not be interpreted to prohibit the Corporation from exercising other powers of
corporations now or hereafter legally permitted to be exercised by corporations.
ARTICLE IV. CAPITALIZATION
The aggregate number of shares which the Corporation shall have
authority to issue is 60,000,000 shares at $.001 par value each.
ARTICLE V. STOCK STRUCTURE
The Corporation is authorized to issue multiple classes of shares of
stock, namely 50,000,000 common shares, and 10,000,000 preferred shares.
The Board of Directors shall have authority to establish the series of
preferred and common shares, and fix the variations in the relative rights and
preferences between the series with the consent of shareholders.
ARTICLE VI. PREEMPTIVE RIGHTS
The shareholders of this corporation shall not have the preemptive
right to subscribe to any and all issues of shares and securities of this
corporation (whether now existing or hereafter authorized), except to the extent
limited or denied by Article 2.22-1, Subparagraph B (or any other portion) of
the Texas Business Corporation Act, as now existing or hereinafter amended.
ARTICLE VII. CUMULATIVE VOTING
The shareholders shall not have the right of cumulative voting.
ARTICLE VIII. ISSUANCE OF STOCK
The Corporation will not commence business until it has received for
the issuance of its shares consideration in the value of at least $1,000
consisting of money, labor done, or property actually received.
ARTICLE IX. REGISTERED OFFICE
The street address of the Corporation's initial registered office is:
414 East Elm
Gainesville, Texas 76240
and the name of its initial registered agent at such address is:
Glenn Loch
ARTICLE X. INDEMNIFICATION
A. To fullest extent permitted by the Texas Business Corporation Act,
Article 2,02-1, as the same may be hereafter amended, the Corporation shall
indemnify any present or former director or officer of the Corporation and each
member of any committee of the board of directors of the Corporation against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses actually incurred by the person in connection with a
proceeding in which the person was, is, or is threatened to be made a named
defendant or respondent because the person is or was a director or officer or
member of any committee of the board of directors of the corporation.
B. Notwithstanding anything to the contrary contained in these Articles
of Incorporation or in any other corporate documents now or hereafter issued or
adopted by this corporation, in no event shall the board of directors or the
shareholders of this corporation have any power or authority whatsoever to amend
these Articles of Incorporation, adopt or amend any By-Laws, or pass any
resolutions, if any purported retroactive application of any such act or action
would adversely affect the indemnification rights afforded from time to time to
persons. acting on behalf of the corporation in connection with any acts or
failures to act which any such persons may have committed prior to any change in
the indemnification policies of this corporation
C. In addition to the other indemnification provisions set forth in
this Article, and to the fullest extent authorized or permitted by Article
2.02-1.R of the Texas Business Corporation Act (as the same may be hereafter
amended, including any successor provision), the Corporation may purchase and
maintain insurance or another arrangement on behalf of any person who is or was
a director, officer, employee or agent of the Corporation, or who is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise, against any
liability asserted against him and incurred by him in. such a capacity or
arising out of his status as such a person, whether or not the Corporation would
otherwise have the power to indemnify him against that liability under the
applicable provisions of the Texas Business Corporation Act.
D. In addition to all of the other indemnification provisions contained
in this Article, the Corporation agrees to and shall indemnify and hold harmless
any person who is or was a director or officer of the Corporation, or who is or
was a, member of any committee of the board of directors, from and against any
and all claims, losses, damages, causes of action, suits, and liability of every
kind, including all expenses of litigation, court costs, and attorneys fees,
arising out of or in any way connected with any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, and any appeals of any such actions, suits or
proceedings, where the party to be indemnified hereunder was, is, or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director or officer of the Corporation, or is or was a
member of any committee of the board of directors of the Corporation, regardless
of whether any such liability is due in whole or in part to the negligence of
the party herein indemnified (it being the express intention of the Corporation
that the indemnity provided for in this paragraph is indemnity by the
Corporation to indemnify and protect such directors, officers and/or committee
members from the consequences of their own negligence, whether that negligence
is the sole or a concurring cause of the injury, death, damage or other
liability asserted); provided, however, the liability assumed by the Corporation
pursuant to this subparagraph D shall not exceed the limits of liability
insurance or other arrangement covering any such occurrence as may be carried
from time to time by the Corporation pursuant to the provisions of subparagraph
B above.
ARTICLE XI. INTERESTED DIRECTORS
A. The Corporation may enter into contracts or transact business with
one or more of its directors, officers, shareholders or employees or with any
firm of which one or more of its directors, officers, shareholders or employees
are members or employees, or in which they are otherwise interested, or with any
corporation or association in which any of its Directors, Officers, shareholders
or employees are stockholders, directors or officers, members, employees or
otherwise interested, and no such contract or other transaction shall be void or
voidable or otherwise affected by reason of such directorship, office,
membership in, employment by, stock ownership in or other interest in the
Corporation or association or any such membership in, employment by or interest
in such other firm, notwithstanding that this corporation's director, officer,
shareholder or employee having any such position, status or interest with such
other firm, corporation or association was present at or participated in the
meeting of the board of directors or committee thereof necessary to authorize,
approve, ratify or otherwise obligate this corporation upon such contract or
transaction, if:
(1) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to
the board of directors of the committee, and the board or
committee in good faith authorizes the contract or transaction
by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less
than a quorum; or
(2) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of
the shareholders; or
(3) The contract or transaction is fair as to the Corporation as
of the time it is authorized, approved, or ratified by the
board of directors, a committee thereof, or the shareholders.
B. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the board of directors or of a
committee which authorizes the contract or transaction.
C. This provision shall not be construed to make any director, officer,
shareholder or employee of this corporation liable to account to this
corporation, by reason of such directorship, office, share ownership or interest
or employment, for any profits realized by, from, or through any such
transaction or contract with this corporation.
D. Nothing herein contained shall create liability in the events
above-described or prevent the authorization, ratification or approval of such
transactions or contracts in any other manner permitted by law. This Article
shall not be construed to invalidate any contract or other transaction which
would otherwise be valid under the common or statutory law applicable thereto or
which would otherwise be valid in the absence of this provision.
ARTICLE XII. DIRECTORS
The number of directors constituting the initial board of directors is
two (2) and the names and addresses of the persons who are to serve as directors
until the first annual meeting of the shareholders or until their successors are
elected and qualified are:
NAME ADDRESS
Glenn Loch 414 East Elm
Gainesville, Texas 76240
The number of directors may be increased of decreased from time to time in
accordance with the By-Laws of the Corporation; provided, however, that the
number of directors shall never be less than one (1).
ARTICLE XIII. AMENDMENT TO ARTICLES
The Articles of Incorporation of this corporation may be amended in the
manner prescribed by the Texas Business Corporation Act upon requisite action by
the board of directors and shareholders pursuant thereto; save and except,
however, to the extent permitted or in the future permitted, by the Texas
Business Corporation Act, in lieu of the shareholder approval requirements of
Subparagraph A(3) of Article 4.02 of the Texas Business Corporation Act (but
without purporting to waive or supersede applicable requirements for action by
the board of directors), it is hereby provided that the proposed amendment shall
be adopted upon receiving the affirmative vote of the holders of more than
one-half (1/2) of the outstanding shares entitled to vote thereon, unless any
class of shares is entitled to vote thereon as a class, in which event, the
proposed amendment shall be adopted upon receiving the affirmative vote of the
holders of more than one-half (1/2) of the shares within each class of
outstanding shares entitled to vote thereon as a class and of more than one-half
(1/2) of the total outstanding shares entitled to vote thereon.
ARTICLE XIV.
SHAREHOLDERS ACTIONS WITHOUT A MEETING
Any action required by the Texas Business Corporation Act, these
Articles of Incorporation or the By-laws of the Corporation (as the same may be
hereafter amended from time to time) to be taken at any annual or special
meeting of shareholders of this corporation, or any action which may be taken at
any annual or special meeting of the shareholders of this corporation, may be
taken without a meeting, without prior notice, and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holder or holders of shares having not less than the minimum number of votes
that would be necessary to take such action at a meeting at which the holder, of
all shares entitled to vote on the action were present and voted.
All requirements of Article 9.10.A. (1) through (5) of the Texas
Business Corporation Act pertaining to such written consent or consents by
shareholders (as the same may be hereafter amended from time to time) are
incorporated herein by this reference.
ARTICLE XV. INCORPORATOR
The name and address of the incorporator is:
Frank Moss
1177 West Loop South, Suite 560
Houston, Texas 77027
In witness whereof, and for the purpose of forming the Corporation
under the laws of the State of Texas, I, the undersigned incorporator of this
corporation have executed these Articles of Incorporation on this the ________
day of May, 1998.
Frank Moss, Incorporator
<PAGE>
Exhibit 3.2
BYLAWS
OF
LOCH ENERGY INC.
(the "Corporation")
ARTICLE 1
OFFICES
1.1 Section . Offices. The principal business office of the
Corporation shall be determined by the Board of Directors.
The Corporation may have such other business offices within or
without the State of Texas as the Board of Directors may from time
to time establish.
ARTICLE 2
CAPITAL STOCK
2.1 Section . Certificate Representing Shares. Shares of the capital
stock of the Corporation shall be represented by certificates in
such form or forms as the Board of Directors may approve, provided
that such form or forms shall comply with all applicable
requirements of law or of the Articles of Incorporation. Such
certificates shall be signed by the president or a vice president,
and by the secretary or an assistant secretary of the Corporation
and may be sealed with the seal of the Corporation or imprinted or
otherwise marked with a facsimile or such seal. In the case of any
certificate countersigned by any transfer agent or registrar,
provided such countersigner is not the Corporation itself or an
employee thereof, the signature of any or all of the foregoing
officers of the Corporation may be represented by a printed
facsimile thereof. If any officer whose signature, or a facsimile
thereof, shall have been set upon any certificate shall cease,
prior to the issuance of such certificate, to occupy the position
in right of which the signature, or facsimile thereof, was so set
upon such certificate the Corporation may nevertheless adopt and
issue such certificate with the same effect as if such officer
occupied such position as of such date of issuance and issuance
and delivery of such certificate by the Corporation shall
constitute adoption thereof by the Corporation. The certificates
shall be consecutively numbered, and as they are issued, a record
of such issuance shall be entered in the books of the Corporation.
2.2 Section . Stock Certificate Book and Shareholders of Record. The
secretary of the Corporation shall maintain, among other records,
a stock certificate book, the stubs in which shall set forth the
names and addresses of the holders of all issued shares of the
Corporation, the number of shares held by each, the number of
certificates representing such shares, the date of issue of such
certificates, and whether or not such shares originate from
original issue or from transfer. The names and addresses of
shareholders as they appear on the stock certificate book shall be
the official list of shareholders of record of the Corporation for
all purposes. The Corporation shall be entitled to treat the
holder of record of any shares as the owner thereof for all
purposes, and shall not be bound to recognize any equitable or
other claim to or interest in such shares or any rights deriving
from such shares on the part of any other person, including, but
without limitation, a purchaser, assignee, or transferee, unless
and until such other person becomes the holder of record of such
shares, whether or not the Corporation shall have either actual or
constructive notice of the interest of such other person.
2.3 Section . Shareholder's Change of Name or Address. Each
shareholder shall promptly notify the secretary of the
Corporation, at its principal business office, by written notice
sent by certified mail, return receipt requested, of any change in
name or address of the shareholder from that as it appears upon
the office list of shareholders of record of the Corporation. The
secretary of the Corporation shall then enter such changes into
all affected Corporation records, including, but not limited to,
the official list of shareholders of record.
2.4 Section . Transfer of Stock. The shares represented by any
certificate of the Corporation are transferable only on the books
of the Corporation by the holder of record thereof or by the duly
authorized attorney or legal representative upon surrender of the
certificate for such shares, properly endorsed or assigned. The
Board of Directors may make such rules and regulations concerning
the issue, transfer, registration and replacement of certificates
as they deem desirable or necessary.
2.5 Section . Transfer Agent and Registrar. The Board of Directors
may appoint one or more transfer agents or registrars of the
shares, or both, and may require all share certificates to bear
the signature of a transfer agent or registrar, or both.
2.6 Section . Lost, Stolen or Destroyed Certificates. The Corporation
may issue a new certificate for shares of stock in the place of
any certificate theretofore issued and alleged to have been lost,
stolen or destroyed, but the Board of Directors may require the
owner of such lost, stolen or destroyed certificate, or the legal
representative, to furnish an affidavit as to such loss, theft, or
destruction and to give a bond in such form and substance, and
with such surety or sureties, with fixed or open penalty, as the
Board may direct, in order to indemnify the Corporation and its
transfer agents and registrars, if any, against any claim that may
be made on account of the alleged loss, theft or destruction of
such certificate.
ARTICLE 3
THE SHAREHOLDERS
3.1 Section . Annual Meeting. Commencing in the calendar year 1999,
the annual meeting of the shareholders, for the election of
directors and for the transaction of such other business as may
properly come before the meeting, shall be held at the principal
office of the Corporation at 10:00 a.m. local time, on the ______
Thursday of June of each year unless such day is a legal holiday,
in which case such meeting shall be held at such hour on the first
day thereafter which is not a legal holiday; or at such other
place and time as may be designated by the Board of Directors.
Failure to hold any annual meeting or meetings shall not work a
forfeiture or dissolution of the Corporation.
3.2 Section . Special Meetings. Except as otherwise provided by law or
by the Articles of Incorporation, special meetings of the
shareholders may be called by the chairman of the Board of
Directors, the president, any one of the directors, or the holders
of not less than one-tenth of all the shares having voting power
at such meeting, and shall be held at the principal office of the
Corporation or at such other place, and at such time, as may be
stated in the notice calling such meeting. Business transacted at
any special meeting of shareholders shall be limited to the
purpose stated in the notice of such meeting given in accordance
with the terms of Section 3.3.
3.3 Section . Notice of Meetings-Waiver. Written or printed notice of
each meeting of shareholders, stating the place, day and hour of
any meeting and, in case of a special shareholders' meeting, the
purpose or purposes for which the meeting is called, shall be
delivered not less than 10 nor more than 50 days before the date
of such meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to
the shareholder at the address of the shareholder as it appears on
the stock transfer books of the Corporation, with postage thereon
prepaid. Such further or earlier notice shall be given as may be
required by law. The signing by a shareholder of a written waiver
of notice of any shareholders' meeting, whether before or after
the time stated in such waiver, shall be equivalent to the
receiving by said shareholder of all notice required to be given
with respect to such meeting. Attendance by a shareholder, whether
in person or by proxy, at a shareholders' meeting shall constitute
a waiver of notice of such meeting. No notice of any adjournment
of any meeting shall be required.
3.4 Section . Closing of Transfer Books and Fixing Record Date. For
the purpose of determining shareholders entitled to notice of, or
to vote at, any meeting of shareholders or any adjournment
thereof, or shareholders entitled to receive payment of any
dividend or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books shall be
closed for a stated period in no case to exceed 50 days. If the
stock transfer books shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least
10 days immediately preceding such meeting. In lieu of closing the
stock transfer books, the Board of Directors may fix in advance a
date as the record date for any such determination of
shareholders, such date in no case to be more than 50 days prior
to the date on which the particular action requiring such
determination of shareholders is to be taken. If the stock
transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at
a meeting of shareholders, or shareholders entitled to receive
payment of dividend, the date of which notice of the meeting is
mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be,
shall be the record date of such determination of shareholders.
When a determination of shareholders entitled to vote at any
meeting of shareholders has been made, as provided in this
section, such determination shall apply to any adjournment thereof
except where the determination has been made through the closing
of stock transfer books and the stated period of closing has
expired.
3.5 Section . Voting List. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least 10 days before
each meeting of shareholders, a complete list of the shareholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each, which list, for a
period of ten days prior to such meeting, shall be kept on file at the
registered office of the Corporation and shall be subject to lawful inspection
by any shareholders during the whole time of the meeting. Failure to comply with
this section shall not affect the validity of any action taken at such meeting.
3.6 Section . Quorum and Officers. Except as otherwise provided by
law, by the Articles of Incorporation or by these Bylaws, the
holder of a majority of the shares entitled to vote and
represented in person or by proxy shall constitute a quorum at a
meeting of shareholders, but the shareholders present at any
meeting, although representing less than a quorum, may from time
to time adjourn the meeting to some other day and hour, without
notice other than announcement at the meeting. The shareholders
present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. The vote of the
holders of a majority of the shares entitled to vote and thus
represented at a meeting at which a quorum is present shall be the
act of the shareholders' meeting, unless the vote of a greater
number is required by law or by the Articles of Incorporation. The
chairman of the board shall preside at, and the secretary shall
keep the records of, each meeting of shareholders, and in the
absence of either, the duties shall be performed by any other
officer authorized by these Bylaws or any person appointed by
resolution duly adopted at the meeting.
3.7 Section . Voting at Meetings. Each outstanding share shall be
entitled to one vote on each matter submitted to a vote at a
meeting of shareholders except to the extent that the Articles of
Incorporation or the laws of the State of Texas provide otherwise.
3.8 Section . Proxies. A shareholder may vote either in person or
by proxy executed in writing by the shareholder, or by a duly
authorized attorney-in-fact. No proxy shall be valid after 11
months from the date of its execution unless expressly provided
therein to be irrevocable and unless otherwise made irrevocable
by law.
3.9 Section . Balloting. Upon the demand of any shareholder, the vote
upon any question before the meeting shall be by ballot. At each
meeting inspectors of election may be appointed by the presiding
officer of the meeting, and at any meeting for the election of
directors, inspectors shall be so appointed on the demand of any
shareholder present or represented by proxy and entitled to vote
in such election of directors. No director or candidate for office
of director shall be appointed as such inspector. The number of
votes cast by shares in the election of directors shall be
recorded in the minutes.
3.10 Section . Record of Shareholders.The Corporation shall keep at
its principal business office, or the office of its transfer agent
or registrars, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of the
shares held by each.
3.11 Section . Action Without Meeting. Any action required by statute
to be taken at a meeting of the shareholders of the Corporation,
or any action which may be taken at a meeting of the shareholders,
may be taken without a meeting and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be
signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take action at
a meeting at which the holders of all shares entitled to vote on
the action were present and voted, and such consent shall have the
same force and effect as a vote of the shareholders. Any such
signed consent, or a signed copy thereof, shall be placed in the
minute book of the Corporation.
ARTICLE 4
THE BOARD OF DIRECTORS
4.1 Section . Number, Qualifications and Term. The business and
affairs of the Corporation shall be managed and controlled by the
Board of Directors; and, subject to any restrictions imposed by
law, by the Articles of Incorporation, or by these Bylaws, the
Board of Directors may exercise all the powers of the Corporation.
The Board of Directors shall, by resolution of the Board of
Directors, consist of at least one but not more than four members.
Such number may be increased or decreased by amendment of these
Bylaws, provided that no decrease shall effect a shortening of the
term of any incumbent director. Directors need not be residents of
Texas or shareholders of the Corporation absent provision to the
contrary in the Articles of Incorporation or laws of the State of
Texas. Except as otherwise provided in Section 4.3 of these
Bylaws, each position of the Board of Directors shall be filled by
election at the annual meeting of shareholders. Any such election
shall be conducted in accordance with Section 3.7 of these Bylaws.
Each person elected a director shall hold office, unless removed
in accordance with Section 4.2 of these Bylaws, until the next
annual meeting of the shareholders and until his or her successor
shall have been duly elected and qualified.
4.2 Section . Removal. Except as provided in the following sentence of
this Section 4.2, any director or the entire Board of Directors
may be removed from office, with or without cause, at any special
meeting of shareholders by the affirmative vote of a majority of
the shares of the shareholders present in person or by proxy and
entitled to vote at such meeting, if notice of the intention to
act upon such matter shall have been given in the notice calling
such meeting. If the notice calling such meeting shall have so
provided, the vacancy caused by such removal may be filled at such
meeting by the affirmative vote of a majority in number of the
shares of the shareholders present in person or by proxy and
entitled to vote.
4.3 Section . Vacancies. Any vacancy occurring in the Board of
Directors may be filled by the vote of a majority of the remaining
directors even if such remaining directors comprise less than a
quorum of the Board of Directors. A director elected to fill a
vacancy shall be elected for the unexpired term of the predecessor
in office. Any position on the Board of Directors to be filled by
reason of an increase in the number of directors shall be filled
by election at an annual meeting of the shareholders, or at a
special meeting of shareholders duly called for such purpose.
4.4 Section . Regular Meetings. Regular meetings of the Board of
Directors shall be held immediately following each annual meeting
of shareholders, at the place of such meeting, and at such other
times and places as the Board of Directors shall determine. No
notice of any kind of such regular meetings need to be given
to either old or new members of the Board of Directors.
4.5 Section . Special Meetings. Special meetings of the Board of
Directors shall be held at any time by call of the chairman of the
board, the president, the secretary or any of the directors. The
secretary shall give notice of each special meeting to each
director at the usual business or residence address by mail at
least three days before the meeting or in person, by telegraph or
telephone at least one day before such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the
United States mail with postage thereon prepaid. Except as
otherwise provided by law, by the articles of incorporation, or by
these Bylaws, such notice need not specify the business to be
transacted at, or the purpose of, such meeting. No notice shall be
necessary for any adjournment of any meeting. The signing of a
written waiver of notice of any special meeting by the person or
persons entitled to such notice, whether before or after the time
stated therein, shall be equivalent to the receiving of such
notice. Attendance of a director at a meeting shall also
constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express and announced purpose
of objecting to the transaction of any business on the ground that
the meeting is not lawfully called or convened.
4.6 Section . Quorum. A majority of the number of directors fixed
by these Bylaws shall constitute a quorum for the transaction of
business and the act of not less than a majority of such quorum of
the directors shall be required in order to constitute the act of
the Board of Directors, unless the act of a greater number shall
be required by law, by the articles of incorporation or by these
Bylaws.
4.7 Section . Procedure at Meetings. The Board of Directors, at each
regular meeting held immediately following the annual meeting of
shareholders, shall appoint one of their number as chairman of the
Board of Directors. The chairman of the Board of Directors shall
preside at meetings of the board. In his or her absence at any
meeting, any officer authorized by these Bylaws or any member of
the board selected by the members present shall preside. The
secretary of the Corporation shall act as secretary. At meetings
of the Board of Directors, the business shall be transacted in
such order as the board may from time to time determine.
4.8 Section . Presumption of Assent. Any director of the Corporation
who is present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be presumed to have
assented to the action taken unless his or her dissent shall be
entered in the minutes of the meeting or unless he or she shall
file a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of
the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in
favor of such action.
4.9 Section . Action Without a Meeting. Any action required by statute
to be taken at a meeting of the directors of the Corporation, or
which may be taken at such meeting, may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall
be signed by each director entitled to vote at such meeting, and
such consent shall have the same force and effect as a unanimous
vote of the directors. Such signed consent, or a signed copy
thereof, shall be placed in the minute book of the Corporation.
4.10 Section . Compensation. Directors as such shall not receive any
stated salary for their service, but by resolution of the Board of
Directors, a fixed sum and reimbursement for reasonable expenses
of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board of Directors or at any
meeting of the executive committee of directors, if any, to which
such director may be elected in accordance with the following
Section 4.11; but nothing herein shall preclude any director from
serving the Corporation in any other capacity or receiving
compensation therefor.
4.11 Section . Executive Committee. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors,
may designate an executive committee, which committee shall
consist of two or more of the directors of the Corporation. Such
executive committee may exercise such authority of the Board of
Directors in the business and affairs of the Corporation as the
Board of Directors may, by resolution duly adopted, delegate to it
except as prohibited by law. The designation of such committee and
the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any
responsibility imposed by law. Any member of the executive
committee may be removed by the Board of Directors. The executive
committee shall keep regular minutes of its proceedings and report
the same to the Board of Directors when required. The minutes of
the proceedings of the executive committee shall be placed in the
minute book of the Corporation. Members of the executive committee
shall receive such compensation as may be approved by the Board of
Directors and will be reimbursed for reasonable expenses actually
incurred by reason of membership on the executive committee.
4.12 Section . Other Committees. The Board of Directors, by resolution
adopted by a majority of the full Board of Directors, may appoint
one or more committees of two or more directors each. Such
committees may exercise such authority of the Board of Directors
in the business and affairs of the Corporation as the Board of
Directors may, by resolution duly adopted, delegate, except as
prohibited b law. The designation of any committee and the
delegation thereto of authority shall not operate to relieve the
Board of Directors, or any member thereof, of any responsibility
imposed on it or the director by law. Any member of a committee
may be removed at any time by the Board of Directors.
ARTICLE 5
OFFICERS' AND DIRECTORS' SERVICES,
CONFLICTING INTERESTS, INDEMNIFICATION AND INSURANCE
5.1 Section . Services. No director and, unless otherwise determined
by the Board of Directors, no officer of the Corporation, shall be
required to devote his or her time or any particular portion of
his or her time or render services or any particular services
exclusively to the Corporation. Every director and, unless
otherwise determined by the Board of Directors, every officer, of
the Corporation shall be entirely free to engage, participate and
invest in any and all businesses, enterprises and activities,
either similar or dissimilar to the business, enterprise and
activities of the Corporation, without breach of duty to the
Corporation or to its shareholders and without accountability or
liability to the Corporation or to its shareholders.
Every director and, unless otherwise determined by the Board of
Directors, every officer, of the Corporation shall, respectively, be entirely
free to act for, serve and represent any other corporation, any entity or any
person, in any capacity, and be or become a director or officer, or both, of any
other corporation or any entity, irrespective of whether or not the business,
purposes, enterprises and activities, or any of them, thereof be similar of
dissimilar to the business, purposes, enterprises and activities, or any of
them, of the Corporation, without breach of duty to the Corporation or to its
shareholders and without accountability or liability of any character or
description to the Corporation or to its shareholders.
5.2 Section . Directors' and Officers' Interests in Contracts. No
contract or other transaction between the Corporation and one or
more of its directors of officers, or between the Corporation and
any firm or partnership of which one or more of its directors or
officers are members or employees or in which they are otherwise
interested, or between the Corporation and any corporation or
association or other entity in which one or more of the
corporation's directors or officers are shareholders, members,
directors, officers or employees or in which they are otherwise
interested, shall be void or voidable by reason of or as a result
of such connection with or holding an office as a director or
officer of the Corporation or such interest in or in connection
with such other firm, partnership, corporation, association or
other entity, notwithstanding the presence of such director or
officer at the meeting of the Board of Directors of the
Corporation which acts upon or in reference to any such contract
or other transaction, and notwithstanding his or her participation
in such action, if such contract or other transaction is fair,
just and beneficial to the Corporation, and if (i) the fact of
such interest shall be disclosed or known to the Board of
Directors and the Board of Directors shall authorize, approve or
ratify such contract or other transaction by a vote of a majority
of the directors present, such interested director to be counted
neither in determining whether a quorum is present, nor in
calculating the majority necessary to carry such vote, or if (ii)
the fact of such interest shall be disclosed or known to the
shareholders and the shareholders either by written consent or by
vote of holders of record of a majority of all the outstanding
shares of stock entitled to vote, shall authorize, approve or
ratify such contract or other transaction; nor shall any director
or officer by responsible to, or liable to account to, the
Corporation for any profits realized by or from or through any
such contract or other transaction of the Corporation so
authorized, ratified or approved, by reason of such interest or
his or her being or having been a director or officer, or both, of
the Corporation. Nothing herein contained shall create
responsibility or liability in or in connection with any such
event or prevent the authorization, ratification or approval of
such contracts or other transactions in any other manner permitted
by law or by statute. This Section shall not be construed to
invalidate any contract or other transaction which would otherwise
be valid under the common or statutory law applicable thereto.
5.3 Section . Reliance Upon Books, Reports and Records. Neither a
director nor a member of any committee shall be liable if, in the
exercise of ordinary care, he or she relied and acted in good
faith upon written financial statements of the Corporation
represented to be correct by the President or by the officer of
the Corporation having charge of its books of account, or
certified by an independent public or certified public accountant
or firm of such accountants fairly to reflect the financial
condition of the Corporation, nor shall he or she be so liable if,
in the exercise of ordinary care and in good faith, in determining
the amount available for payment of a dividend or other
distribution, he or she considered the assets of the Corporation
to be of their book value.
5.4 Section . Non-Liability of Directors and Officers in Certain
Cases. No director, officer or member of a committee shall be
liable for his or her acts as such if he or she is excused from
liability under any present or future provision of the Texas
Business Corporation Act.
5.5 Section . Indemnification of Directors, Officers, Employees an
Agents.
A. As used in this section:
(1) "Corporation" includes any domestic or foreign predecessor entity
of the Corporation in a merger, consolidation or other transaction
in which the liabilities of the predecessor are transferred to the
Corporation by operation of law and in any other transaction in
which the Corporation assumes the liabilities of the predecessor
but does not specifically exclude liabilities that are the subject
matter of this Section 5.
(2) "Director" means any person who is or was a director of the
Corporation any person who, while a director of the Corporation,
is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
(3) "Expenses" include court costs and attorneys' fees.
(4) "Official Capacity" means:
(a) when used with respect to a Director, the office of director in
the Corporation, and
(b) when used with respect to a person other than a Director, the
elective or appointive office in the Corporation held by the
officer or the employment or agency relationship undertaken by the
employee or agent in behalf of the Corporation, but in each case
does not include service for any other foreign or domestic
corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
(5) "Proceeding" means any threatened, pending, or complete action,
suit or proceeding, whether civil, criminal, administrative or
investigative, any appeal in such an action, suit or proceeding,
and any inquiry or investigation that could lead to such an
action, suit or proceeding.
B. The Corporation may indemnify any person who was, is or is
threatened to be made a named defendant or respondent in any
Proceeding because he or she is or was a Director only if it is
determined in accordance with paragraph (F)of this Section 5 that
the person:
(1) conducted himself or herself in good faith;
(2) reasonably believed:
(a) in the case of conduct in his or her Official Capacity as a
Director of the Corporation , that his or her conduct was in the
Corporation's best interests, and
(b) in all other cases, that his or her conduct was at least not
opposed to the Corporation's best interests; and
(3) in the case of any criminal Proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
C. A Director shall not be indemnified under subsection 5(B) for
obligations resulting from a Proceeding:
(1) in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's Official Capacity;
or
(2) in which the person is found liable to the Corporation.
D. The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, be determinative that the person did not
meet the requisite standard of conduct set forth in subsection
5(B).
E. A person may be indemnified under Section 5(B) against judgments,
penalties (including excise and similar taxes), fines, settlements
and reasonable Expenses actually incurred by the person in
connection with the Proceeding; but if the Proceeding was brought
by or in the behalf of the Corporation, indemnification shall be
limited to reasonable Expenses actually incurred by the person in
connection with the Proceeding.
F. No indemnification under subsection 5(B) shall be made by the
Corporation unless authorized in the specific case after a
determination has been made that the Director has met the standard
of conduct set forth in subsection 5(B). Such determination shall
be made:
(1) by the Board of Directors by a majority vote of a quorum
consisting of directors who at the time of the vote are not named
defendants or respondents in the Proceeding;
(2) if such a quorum cannot be obtained, then by a majority vote of a
committee of the Board of Directors, designated to act in the
matter by a majority vote of the full Board of Directors (in which
vote directors who are named defendants or respondents may
participate), which committee shall consist solely of two or more
directors who at the time of the vote are not named defendants or
respondents to the Proceeding; or
(3) by special legal counsel, selected by the Board of Directors or a
committee thereof by vote as set forth in clauses (1) or (2) of
this subsection 5(F), or, if the requisite quorum of the full
Board of Directors cannot be obtained therefor and such a
committee cannot be established, by a majority vote of the full
Board of Directors (in which vote directors who are named
defendants or respondents may participate); or
(4) by the shareholders in a vote that excludes the shares held by
directors who are named defendants or respondents in the
Proceeding.
G. Authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the same manner as the
determination that indemnification is permissible, except that if
the determination that indemnification is permissible is made by
special legal counsel, authorization of indemnification and
determination as to reasonableness of Expenses shall be made in a
manner specified in clause (3) in subsection 5(F) for the
selection of such counsel.
H. A Director who has been wholly successful, on the merits or
otherwise, in the defense of any Proceeding in which he or she is
a party because he or she is a Director shall be indemnified by
the Corporation against reasonable Expenses incurred by the
Director in connection with the Proceeding.
I. If a court of competent jurisdiction determines that a Director is
fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not he or she has met the
standard of conduct set forth in subsection 5(B) or has been
adjudged liable in the circumstances described in subsection 5(C),
the court may order such indemnification as the court determines
is proper and equitable. The court shall limit indemnification to
reasonable Expenses if the Proceeding is brought by or in behalf
of the Corporation or if the Director is found liable on the basis
of circumstances described in subsection 5.5(C)(1); whether or not
the benefit resulted from an action taken in the person's Official
Capacity.
J. Reasonable Expenses incurred by a Director who was, is, or is
threatened to be made a named defendant or respondent to a
Proceeding may be paid or reimbursed by the Corporation in advance
of the final disposition of such Proceeding after:
(1) receipt by the Corporation of a written affirmation by the
Director of his or her good faith belief that he or she has met
the standard of conduct necessary for indemnification by the
Corporation as authorized in this Section 5, and a written
undertaking by or on behalf of the Director to repay the amount
paid or reimbursed if it shall ultimately be determined that he or
she has not met such standard of conduct; and
(2) a determination that the facts then known to those making the
determination would not preclude indemnification under this
Section 5.
K. The written undertaking required by subsection (J) must be an
unlimited general obligation of the Director but need not be
secured. It may be accepted without reference to financial ability
to make repayment. Determinations and authorizations of payments
under subsection (J) shall be made in the manner specified in
subsection (F).
L. The indemnification provided by this Section 5 shall not be deemed
exclusive of any other rights to which those indemnified may be
entitled under any statute, Bylaw, agreement, insurance policy,
vote of shareholders or disinterested directors or otherwise, both
as to action in their Official Capacity and as to action in
another capacity while holding such office, and shall continue as
to a person who has ceased to be a Director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person; provided, however, no provision
for the Corporation to indemnify or to advance Expenses to a
Director who was, is or is threatened to be made a named defendant
or respondent to a Proceeding, whether contained in the Articles
of Incorporation, these Bylaws, a resolution of shareholders or
directors, an agreement or otherwise (except as contemplated by
subsection (Q)), shall be valid unless consistent with this
section or, to the extent that indemnity hereunder is limited by
the Articles of Incorporation, consistent therewith.
M. Nothing contained in this Section shall limit the Corporation's
power to pay or reimburse Expenses incurred by a Director in
connection with the appearance as a witness in a Proceeding at a
time when he or she is not a named defendant or respondent in the
Proceeding.
N. Unless limited by the Articles of Incorporation of the
Corporation,
(1) an officer of the Corporation shall be indemnified as and to the
same extent provided in subsections (H) and (I) for a Director and
shall be entitled to the same extent as a Director to seek
indemnification pursuant to the provisions of those subsections;
and
(2) the Corporation may indemnify and advance Expenses to an officer,
employee or agent of the Corporation to the same extent that it
may indemnify and advance Expenses to Directors pursuant to this
Section 5.
O. The Corporation may indemnify and advance Expenses to nominees and
designees who are not or were not officers, employees, or agents
of the Corporation who are or were serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole
proprietorship, trust, other enterprise, or employee benefit plan
to the same extent that it may indemnify and advance expenses to
Directors under this Section 5.
P. The Corporation, in addition, may indemnify and advance Expenses
to an officer, employee or agent or person who is identified by
subsection 5(O) as a nominee or designee and who is not a Director
to such further extent, consistent with law, as may be provided by
the Articles of Incorporation of the Corporation, these Bylaws,
general or specific action of the Board of Directors, or contract
or as permitted or required by common law.
Q. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of
the Corporation, or who is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor,
trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole
proprietorship, trust, other enterprise or employee benefit plan,
against any liability asserted against or incurred by him or her
in any such capacity or arising out of the status as such a
person, whether or not the Corporation would have the power to
indemnify such party against such liability under the provisions
of the Texas Business Corporation Act or this Section 5.
R. Any indemnification of, or advance of Expenses to a Director in
accordance with this Section shall be reported in writing to the
shareholders with or before the notice or waiver of notice of the
next shareholders' meeting or with or before the next meeting
pursuant to Section A, Article 9.10 of the Texas Business
Corporation Act, and in any case, within the 12-month period
immediately following the date of the indemnification or advance.
S. For purposes of this Section 5, the Corporation shall be deemed to
have requested a Director to serve an employee benefit plan
whenever the performance of the duties for the Corporation also
imposes duties on, or otherwise involves services by, the Director
to the plan or participants or beneficiaries of the plan. Excise
taxes assessed on a Director with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines." Action
taken or omitted by the Director with respect to an employee
benefit plan in the performance of the duties for a purpose
reasonably believed by the Director to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the
Corporation.
ARTICLE 6
OFFICERS
6.1 Section . Number. The officers of the Corporation shall consist of
a president and a secretary, and may also include one or more vice
presidents, a treasurer and such other officers and assistant
officers and agents as may be deemed necessary or desirable.
Officers shall be elected or appointed by the Board of Directors.
Any two or more offices may be held by the same person. In its
discretion, the Board of Directors may leave unfilled any office
except those of president and secretary.
6.2 Section . Election; Term; Qualification. Officers shall be chosen
by the Board of Directors following the annual shareholders'
meeting. Each officer shall hold office until a successor has
been chosen and qualified, or until his or her death, resignation,
or removal.
6.3 Section . Removal. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interest of the Corporation will
be served thereby, but such removal shall be without prejudice to
the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create
any contract rights.
6.4 Section . Vacancies. Any vacancy in any office for any cause
may be filled by the Board of Directors at any meeting.
6.5 Section . Duties. The officers of the Corporation shall have such
powers and duties, except as modified by the Board of Directors,
as generally pertain to their offices, respectively, as well as
such powers and duties as from time to time shall be conferred by
the Board of Directors and by these Bylaws.
6.6 Section . The President. The president shall have general
direction of the affairs of the Corporation and general
supervision over its several officers, subject however, to the
control of the Board of Directors. The president shall preside at
each annual meeting, and, from time to time, report to the
shareholders and to the Board of Directors all matter within his
or her knowledge which, in his or her opinion, the interest of the
Corporation may require to be brought to the notice of such
persons. The president may sign, with the secretary or an
assistant secretary, any or all certificates of stock of the
Corporation. The president shall sign and execute in the name of
the Corporation, without requirement of attestation by the
secretary, (i) all contracts or other instruments authorized by
the Board of Directors, and (ii) all contracts or instruments in
the usual and regular course of business, pursuant to Section 6.2
hereof, except in cases when the signing and execution thereof
shall be expressly delegated or permitted by the board or by these
Bylaws to some other officer or agent of the Corporation; and, in
general, shall perform all duties incident to the office of
president, and such other duties as from time to time may be
assigned to the president by the Board of Directors or as are
prescribed by these Bylaws.
6.7 Section . The Vice President. At the request of the president, or
in the absence or disability of the president, the vice
presidents, in the order of their election, shall perform the
duties of the president, and, when so acting, shall have all the
powers of, and be subject to all restrictions upon, the president.
Any action taken by a vice president in the performance of the
duties of the president shall be conclusive evidence of the
absence or inability to act of the president at the time such
action was taken. The vice presidents shall perform such other
duties as may, from time to time, be assigned to them by the Board
of Directors or the president. A vice president may sign, with the
secretary or an assistant secretary, certificates of stock of the
Corporation.
6.8 Section . Secretary. The secretary shall keep the minutes of all minutes of
the shareholders, of the Board of Directors, and of the executive committee, if
any, of the Board of Directors, in one or more books provided for such purpose
and shall see that all notices are duly given in accordance with the provisions
of these Bylaws or as required by law. The secretary shall be custodian of the
corporate records and of the seal (if any) of the Corporation and see, if the
Corporation has a seal, that the seal of the Corporation is affixed to all
documents the execution of which on behalf of the Corporation under its seal is
duly authorized; shall have general charge of the stock certificate books,
transfer books and storage ledgers, and such other books and papers of the
Corporation as the Board of Directors may direct, all of which shall, at all
reasonable times, be open to the examination of any director, upon application
at the office of the Corporation during business hours; and in general shall
perform all duties and exercise all powers incident to the office of the
secretary and such other duties and powers as the Board of Directors or the
president from time to time may assign to or confer on the secretary.
6.9 Section . Treasurer. The treasurer shall keep complete and
accurate records of account, showing at all times the financial
condition of the Corporation. The treasurer shall be the legal
custodian of all money, notes, securities and other valuables
which may from time to time come into the possession of the
Corporation. The treasurer shall furnish at meetings of the Board
of Directors, or whenever requested, a statement of the financial
condition of the Corporation, and shall perform such other duties
as these Bylaws may require or the Board of Directors may
prescribe.
6.10 Section . Assistant Officers. Any assistant secretary or assistant
treasurer appointed by the Board of Directors shall have power to
perform, and shall perform, all duties incumbent upon the
secretary or treasurer of the Corporation, respectively, subject
to the general direction of such respective officers, and shall
perform such other duties as these Bylaws may require or the Board
of Directors may prescribe.
6.11 Section . Salaries. The salaries or other compensation of the
officers shall be fixed from time to time by the Board of
Directors. No officer shall be prevented from receiving such
salary or other compensation by reason of the fact that he or she
is also a director of the Corporation.
6.12 Section . Bonds of Officers. The Board of Directors may secure
the fidelity of any officer of the Corporation by bond or
otherwise, on such terms and with such sureties, conditions,
penalties or securities as shall be deemed proper by the Board of
Directors.
6.13 Section . Delegation. The Board of Directors may delegate
temporarily the powers and duties of any officer of the
Corporation, in case of his or her absence or for any other
reason, to any other officer, and may authorize the delegation by
any officer of the Corporation of any of his or her powers and
duties to any agent or employee, subject to the general
supervision of such officer.
ARTICLE 7
MISCELLANEOUS
7.1 Section . Dividends. Dividends on the outstanding shares of the
Corporation, subject to the provisions of the articles of
incorporation, if any, may be declared by the Board of Directors
at any regular or special meeting, pursuant to law. Dividends may
be paid by the Corporation in cash, in property, or in the
Corporation's own shares, but only out of the unreserved and
restricted earned surplus of the Corporation, except as otherwise
allowed by law.
Subject to limitations upon the authority of the Board of Directors
imposed by law or by the articles of incorporation, the declaration of and
provision for payment of dividends shall be at the discretion of the Board of
Directors.
7.2 Section . Contracts. The president shall have the power and
authority to execute, on behalf of the Corporation, contracts or
instruments in the usual and regular course of business, and in
addition the Board of Directors may authorize any officer or
officers, agent or agents, of the Corporation to enter into any
contract or execute and deliver any instrument in the name of and
on behalf of the Corporation, and such authority may be general or
confined to specific instances. Unless so authorized by the Board
of Directors or by these Bylaws, no officer, agent or employee
shall have any power or authority to bind the Corporation by any
contract or engagement, or to pledge its credit or to render it
pecuniarily liable for any purpose or in any amount.
7.3 Section . Checks, Drafts, Etc. All checks, drafts, or other orders
for the payment of money, notes, or other evidences of
indebtedness issued in the name of the Corporation shall be signed
by such officers or employees of the Corporation as shall from
time to time be authorized pursuant to these Bylaws or by
resolution of the Board of Directors.
7.4 Section . Depositories. All funds of the Corporation shall be
deposited from time to time to the credit of the Corporation in
such banks or other depositories as the Board of Directors may
from time to time designate, and upon such terms and conditions as
shall be fixed by the Board of Directors. The Board of Directors
may from time to time authorize the opening and maintaining within
any such depository as it may designate, of general and special
account, and may make such special rules and regulations with
respect thereto as it may deem expedient.
7.5 Section . Endorsement of Stock Certificates. Subject to the
specific directions of the Board of Directors, any share or shares
of stock issued by any corporation and owned by the Corporation,
including reacquired shares of the Corporation's own stock, may,
for sale or transfer, be endorsed in the name of the Corporation
by the president or any vice president; and such endorsement may
be attested or witnessed by the secretary or any assistant
secretary either with or without the affixing thereto of the
corporate seal.
7.6 Section . Corporate Seal. The corporate seal, if any, shall be
in such form as the Board of Directors shall approve, and such
seal, or a facsimile thereof, may be impressed on, affixed to, or
in any manner reproduced upon, instruments of any nature required
to be executed by officers of the Corporation.
7.7 Section . Books and Records. The Corporation shall keep correct
and complete books and records of account and shall keep minutes
of the proceedings of its shareholders and Board of Directors, and
shall keep at its registered office or principal place of
business, or at the office of its transfer agent or registrar, a
record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
7.8 Section . Resignations. Any director or officer may resign at
any time. Such resignations shall be made in writing and shall
take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the president or
secretary. The acceptance of a resignation shall not be
necessary to make it effective, unless expressly so provided in
the resignation.
7.9 Section . Legends. There shall be typed across the face of
each stock certificate issued by the Corporation to any
shareholder or presently owned by any shareholder the following:
NOTICE: THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER.
REFER TO THE BACK OF THIS CERTIFICATE AND TO THE
SHAREHOLDERS AGREEMENT.
There shall be typed across the back of each such Stock Certificate the
following:
THE SHARES OF STOCK REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER ANY U.S. OR STATE SECURITIES LAWS
AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT
APPROPRIATE REGISTRATION OR AN EXEMPTION FROM
REGISTRATION.
7.10 Section . Meetings by Telephone. Subject to the provisions
required or permitted by these Bylaws or the laws of the State of
Texas for notice of meetings, shareholders, members of the Board
of Directors, or members of any committee designated by the Board
of Directors may participate in and hold any meeting required or
permitted under these Bylaws by telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in
a meeting pursuant to this section shall constitute presence in
person at such a meeting, except where a person participates in
the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not
lawfully called or convened.
ARTICLE 8
AMENDMENTS
8.1 Section . Amendments. These Bylaws may be altered, amended or
repealed, or new Bylaws may be adopted, by a majority or the Board
of Directors at any duly held meeting of directors or by the
holders of a majority of the shares represented at any duly held
meeting of shareholders; provided that notice of such proposed
action shall have been contained in the notice of any such
meeting.
CERTIFICATE OF SECRETARY
The undersigned, being the secretary of LOCH ENERGY INC., hereby
certifies that the foregoing Bylaws were duly adopted by the initial directors
of said corporation effective on _______________, 1998.
IN WITNESS WHEREOF, I have signed this certification on this _____ day
of _______________, 1998.
- ----------------- ---------------------------
Secretary
- --------------------
<PAGE>
LOCH ENERGY, INC.
COMMON STOCK
AUTHORIZED ISSUE 50,000,000, $.01 PAR VALUE
This certifies that _____________ is the owner of ___________ fully paid and
non-assesable shares of the COMMON STOCK of LOCH ENERGY, INC. a corporation
organized under the laws of the State of Texas transferrable only on the books
of the corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this certificate properly endorsed.
In Witness whereof, the said corporation has caused this certificate to be
signed by its duly authorized officers and sealed with the seal of the
corporation this __________ day of __________ 19___.
----------------- -----------------
President Secretary
<PAGE>
Exhibit 5.1
September 17, 1999
Board of Directors
Loch Energy, Inc.
202 South Dixon, Suite 204
Gainesville, Texas 76240
Gentlemen:
As counsel for Loch Energy, Inc., a Texas corporation ("Company"), you
have requested our firm to render this opinion in connection with the
Registration Statement of the Company on Form SB-2 filed under the Securities
Act of 1933, as amended ("Act"), with the Securities and Exchange Commission
relating to the registration of the distribution of 1,295,286 shares of Company
common stock ("Shares").
We are familiar with the registration statement and the registration
contemplated thereby. In giving this opinion, we have reviewed the registration
statement and such other documents and certificates of public officials and of
officers of the Company with respect to the accuracy of the factual matters
contained therein as we have felt necessary or appropriate in order to render
the opinions expressed herein. In making our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents presented to us
as originals, the conformity to original documents of all documents presented to
us as copies thereof, and the authenticity of the original documents from which
any such copies were made, which assumptions we have not independently verified.
Based upon all the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas.
2. The Shares are duly authorized common shares in the capital of the
Company.
3. The Shares when distributed in the manner described as in the
Registration Statement, will be validly issued, fully paid and
nonassessable
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the use in the registration statement of the
reference to Brewer & Pritchard, P.C. under the heading "Legal Matters."
Very truly yours,
BREWER & PRITCHARD, P.C.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement of Loch Energy, Inc.
on Form SB-2 of (1.) our report and financial statements dated March 31, 1999 of
Loch Exploration, Inc. for the year ended December 31, 1998 and 1997 and (2.)
our report and unaudited financial statements dated August 16, 1999 of Loch
Energy, Inc. for the six months ended June 30, 1999.
/FARMER, FUQUA, HUNT & MUNSELLE, P.C./
Dallas, Texas
September 14, 1999
