<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ___________________
TO _____________________
COMMISSION FILE NUMBER 0-9129
LOCH EXPLORATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1657943
- ------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) OR NUMBER)
414 E. ELM, GAINESVILLE, TEXAS 76240
- ---------------------------------------- -----------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (817) 668-1271
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, ($0.001 PAR VALUE) NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORT REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
------ ------
AT MARCH 1, 1996, THE AGGREGATE VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES
WAS APPROXIMATELY $843,090.
AT MARCH 1, 1996, THERE WERE 64,388,802 SHARES OF $.001 PAR VALUE COMMON STOCK
OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: TWO
<PAGE>
LOCH EXPLORATION, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
SECURITIES AND EXCHANGE COMMISSION
ITEM NUMBER AND DESCRIPTION PAGE
- --------------------------- ----
PART I
ITEM 1. BUSINESS.............................................. 4
ITEM 2. PROPERTIES............................................ 9
ITEM 3. LEGAL PROCEEDINGS..................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 14
ITEM 6. SELECTED FINANCIAL DATA............................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA............ 16
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................. 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.... 17
ITEM 11. EXECUTIVE COMPENSATION................................ 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................ 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 20
2
<PAGE>
PART IV AND SIGNATURES
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K................................... 21
SIGNATURES............................................ 22
INDEPENDENT AUDITORS' REPORT.......................... F-1
BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994....... F-2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993...................... F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.. F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994, AND 1993..................... F-6
NOTES TO FINANCIAL STATEMENTS......................... F-7
3
<PAGE>
PART I
ITEM 1. BUSINESS
HISTORY
The Corporation was incorporated under Texas law on June 5, 1979 to engage
generally in the oil and gas business. Its offices and phone number are 414 E.
Elm Street, Gainesville, Texas 76240, (817) 668-1271.
DESCRIPTION OF BUSINESS
Since its formation, the Corporation has engaged in exploration for and
development of oil and gas reserves, primarily onshore in the Northeastern and
Southwestern area of the United States. To a lesser extent, the Corporation has
also acquired and sold oil and gas properties.
In December, 1992, the Board of Directors approved a Private Placement
Memorandum, The Loch Exploration, Inc. 1993 A 12% Secured Convertible Debenture,
in the maximum amount of $350,000. There were seventy (70) units available for
private sale, each unit being comprised of a $5,000 debenture along with 25,000
shares of the Company's Common Stock. The minimum placement was 10 units. At
the close of the offering on October 31, 1993, subscriptions for 25.6 Units
($128,000) had been received.
The funds raised were used for acquiring producing oil and gas properties
through public auctions as well as privately negotiated transactions.
The 1993-A 12% Secured Convertible Debentures are payable on or before May 1,
1999. Interest only will be payable during the first three years at 12% per
annum of the first on each month, continuing through May 1, 1996, with the
unpaid principal balance being payable in 36 equal consecutive monthly
installments, plus interest, commencing June 1, 1996 through May 1, 1999. The
Units are secured by first mortgage covering the Corporation's interest in the
producing oil and gas properties acquired with the net proceeds from this
Placement. The debenture holders have the option, exercisable only during May or
June of 1996, to convert the unpaid principal balance of their Debentures into
their pro rata portion of 75% of the Corporation's interest in the producing oil
and gas properties which secure payment of the Debentures. The Debentures are
convertible in multiples of $1,000 at holder's option at $.025 per Share in 1st
year, $.035 per Share in 2nd year, $.05 per Share in 3rd year and thereafter at
greater of $.05 per Share or average of "bid/asked" price during prior 20 day
trading period.
4
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On November 1, 1994, $63,000 in debentures were converted into Loch Exploration,
Inc. common stock at a one-time conversion price of $.02 per share. In addition
to lowering the conversion price to $.02 per share, the Board of Directors
approved the continuation of the monthly interest payments on these converted
Debentures for one year after the conversion date of November 1, 1994.
On October 5, 1995, Loch Exploration, Inc. sold sixteen natural gas producing
wells along with their respective oil and gas leases, located in Chautauqua and
Cattaragus Counties, New York. The properties were sold to a corporation not
affiliated with the Registrant for a total price of $124,500, which was paid at
closing. The subject properties were acquired from a corporation not affiliated
with the Registrant for a total purchase price of $29,668 which was paid at
closing on May 31, 1995.
COMPETITION
Significant competition exists for the acquisition of producing oil and gas
properties and undeveloped leases. Many of the Company's competitors have
greater financial capabilities and more sophisticated means for in-house
evaluation than the Company possesses. 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, 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 those of the Company. 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. The Company cannot predict the effect these factors will have on its
operations. The Company owns no drilling rigs, and all of its 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. The Company may be at a competitive
disadvantage in acquiring oil and gas prospects since it must compete with such
companies, many of which have greater financial resources and larger technical
staffs.
5
<PAGE>
REGULATION
The production and sale of oil and gas is regulated by various state and federal
authorities.
STATE REGULATION OF OIL AND GAS PRODUCTION. The State of Texas and other states
in which the Company conducts 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 produce 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. The Company's 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 the Company's individual operations and the cost of such compliance
has 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 upon the capital expenditures, earnings or
competitive position of the Company.
OIL PRICE REGULATION. Historically, regulatory policy affecting crude oil
pricing was derived for 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 June 1, 1979, price controls on all
domestically produced crude oil by October 1, 1981. However, on January 28,
1981, President Reagan ordered the elimination of remaining federal controls on
domestic oil production, effective immediately. Consequently, oil may currently
be sold at unregulated prices.
GAS PRICE REGULATION. The Natural Gas Act of 1938 (the "NA") 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
6
<PAGE>
under new contracts tend to be substantially lower than most regulated price
sellings 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 affect on July 26, 1989. The Decontrol Act also provided for
the phasing out of all price regulation under the NGPA by January 1, 1993. The
FERC 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. The Company is unable to predict the consequences of the Decontrol Act
on its operations.
EMPLOYEES
The Registrant presently has one full-time officer. In addition, the Registrant
employs consultants from time-to-time to assist it in acquiring and evaluating
oil and gas properties. Pursuant to industry practice, the Registrant expects
it will pay its consultants a retainer and a cash and/or overriding bonus on
properties which prove productive which were brought to the Registrant's
attention by one or more such consultants.
ITEM 2. PROPERTIES
(A) PHYSICAL FACILITIES
-------------------
The Company's executive and administrative offices are located at 414 E. Elm,
Gainesville, Texas 76240, telephone 817-668-1271. The Company's offices,
consisting of approximately 1,000 square feet are leased on a monthly basis at a
rate of $562 per month. It is expected that this office space will serve the
Company's needs adequately for the foreseeable future.
(B) OIL AND GAS DRILLING ACTIVITIES
-------------------------------
None
(C) OIL AND GAS PROPERTIES
----------------------
The Following information is provided pursuant to Item 102 of Regulation S-K.
All of the Registrant's reserves are located in the United States. The
Registrant has no interests in oil and gas applicable to long-term supply or
similar agreements with foreign governments or authorities in which the
Registrant acts as producer of and share of revenues from the reserves of
investors accounted for by the equity method, and hence, no information
pertaining to those categories is presented herein.
As of December 31, 1995 the Registrant owned an aggregate of 16,718 gross (3,877
net) acres of developed oil and gas leases.
7
<PAGE>
The oil and gas properties in which the Registrant owns 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 the Registrant were also subject to
overriding royalty burdens reserved by various predecessors-in- title and
geologists.
The Registrant paid $7,688 in rental costs on oil and gas leases for 1995.
The estimated 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 December 31, 1995, 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 December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
FISCAL YEAR PROVED DEVELOPED
ENDING PROVED RESERVES (1) RESERVES (2, 3)
DECEMBER 31, OIL (BBLS) GAS (MCF) OIL (BBLS) GAS (MCF)
- -------------- ---------------------- ----------------------
<S> <C> <C>
1995 33,540 586,469 33,540 586,469
1994 27,505 523,922 27,505 523,922
1993 18,261 243,148 18,261 243,148
</TABLE>
(1) For purposes 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 data 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.
8
<PAGE>
(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 the Registrant as of December 31, 1995, 1994 and 1993. 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>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Present value of estimated
future net revenues
from proved reserves:
Developed $518,940 $456,659 $220,076
Developed and undeveloped 518,940 456,659 220,076
</TABLE>
The Registrant has a gas sales contract with U.S. Gypsum Company which expires
on 30 days written notice by either party. The Registrant has no long-term oil
contracts. The Registrant would not be adversely affected by loss of the U.S.
Gypsum Company contract.
OIL AND GAS RESERVE ESTIMATES FILED
- -----------------------------------
No reserve reports pertaining to the Registrant's proved or proved developed
reserve estimates were filed by the Registrant with or included in reports to
any federal authority or agency since the beginning of the last fiscal year.
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 the Registrant's interest, for the years ended December 31,
1995, 1994 and 1993.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING OIL PRODUCED GAS PRODUCED
DECEMBER 31, (BBLS) (1) (MCF) (2)
- --------------------- ------------ ------------
<S> <C> <C>
1995 4,504 36,936
1994 4,200 39,276
1993 665 13,951
</TABLE>
9
<PAGE>
(1) Includes production that is owned by the Registrant and produced to its
interest, less royalties and production due others.
(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 forth information as to the average sales price
(including transfers) per unit of oil or gas produced and the average
production cost (lifting cost) per unit of production for the last fiscal years
ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
AVERAGE SALES PRICE:
Oil $/Bbls $17.00 $15.00 $15.00
Gas $/MCF $ 2.50 $ 2.05 $ 2.55
AVERAGE PRODUCTION COSTS:
Oil $/Bbls $11.58 $ 8.34 $ 7.56
Gas $/MCF $ 1.93 $ 1.39 $ 1.26
</TABLE>
(1) Production (lifting) costs do not include depreciation, depletion, and
amortization of capitalized acquisitions, exploration, and development
costs, and indirect management costs.
GROSS AND NET PRODUCTIVE OIL AND GAS WELLS AND DEVELOPED ACRES
- --------------------------------------------------------------
The following table sets forth, as of December 31, 1995, the Registrant's
interest in productive oil and gas wells and developed acres:
DEVELOPED ACRES (4) PRODUCTIVE WELLS (1)
------------------- ---------------------
GROSS (2) NET (3) GROSS (2) NET (3)
------------------- ---------------------
Oil Gas Oil Gas
--- --- --- ---
16,718 3,877 66 53 2.8 19
------ ----- -- -- --- --
The Registrant's interests in oil and gas wells are all operated by third party
operators. Information as to multiple completions is not available to the
Registrant.
(1) Includes producing wells and wells capable of production. One or more
completions in the same bore hole are counted as one well.
10
<PAGE>
(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 fractional ownership
working interests in gross wells or acres equals one. The number of net
wells or acres is the sum of the fractional working interests owned in
gross wells of acres expressed as whole numbers and fractions thereof.
(4) Includes acres spaced or assignable to productive wells.
UNDEVELOPED ACREAGE AS OF DECEMBER 31, 1995
- -------------------------------------------
4632 acres
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 the Registrant had an interest in each fiscal
year indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995
-----------------------------------
Gross Wells Exp Dev
--- ---
<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 initiated.
(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.
11
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(D) NET OIL AND GAS PRODUCTION
--------------------------
Same as (C)
(E) UNIT SALES PRICE AND PRODUCTION COST
------------------------------------
Same as (C)
(F) RESERVES
--------
Same as (C)
(G) GAS COMPRESSION EQUIPMENT
-------------------------
The Company owns two (2) gas compressors. The compressors are currently
servicing wells in Palo Pinto and Parker Counties, Texas which are operated
by Spindletop Oil & Gas Co. and are covered by written lease agreements
between the Company and Spindletop Oil & Gas Co. The current monthly rental
payable to the Company under the terms of the rental agreements is
$3,064.00 less maintenance costs. The Company and Spindletop Oil & Gas Co.
are brother-sister companies as defined by the Internal Revenue Service
Code. Paul E. Cash is a substantial working interest owner in the above
described wells and is also the majority shareholder of Spindletop Oil &
Gas Co.
ITEM 3. LEGAL PROCEEDINGS
The Registrant knows of no material pending legal proceedings to the subject and
no such proceedings are known to the Registrant to be contemplated by
governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market, and at
various times has been listed in the "OTC Bulletin Board". The following table
sets forth the range of high and low bid quotations as reported by security
dealers, do not include retail mark-up, mark-down or commission, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID PRICE
------------------
High Low
---- ---
<S> <C> <C>
1995
1st Quarter .03 .03
2nd Quarter .03 .03
3rd Quarter .03 .03
4th Quarter .03 .03
1994
1st Quarter .03 .03
2nd Quarter .03 .03
3rd Quarter .03 .03
4th Quarter .03 .03
1993
1st Quarter .02 .02
2nd Quarter .02 .02
3rd Quarter .02 .02
4th Quarter .02 .02
</TABLE>
The Company has not paid cash dividends on shares of its common stock since its
inception and does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. It is expected that any earnings which may be
generated from operations would be used to finance the growth of the Company.
Holders of shares of Common Stock are entitled to receive such dividends as may
be declared by the Company's Board of Directors.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial data for
the five years ended December 31, 1995 and is qualified in its entirety by the
more detailed financial statements included in this report and should be read in
conjunction with such financial statements, the notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,1994
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total Revenues $327,075 $222,723 $ 97,808 $ 97,910 $103,068
Net Earnings (Loss) 42,970 1,674 (30,256) (10,195) 3,900
Net Earnings (Loss)
per Common Share - - - - -
Total Assets 426,808 393,115 221,531 114,582 93,559
Long-Term Obligations 59,911 60,882 115,200 - -
Cash Dividends per
Common Share -0- -0- -0- -0- -0-
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company plans to invest funds in capital assets necessary to the growth of
its oil and gas exploration and related activities. The funding of these
expenditures is planned from equity offerings, cash flow, bank borrowings,
debenture sales, joint ventures and limited partnerships and it is the Company's
intent to continue the use of all these capital sources in future periods.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
- ---------------------
Total revenues for 1995 were $327,075 as compared to $222,723 in 1994, primarily
due to the gain on sale of oil and gas properties totaling approximately
$95,000. Costs and expenses have increased from $221,049 in 1994 to $284,105 in
1995. This increase was due to general administration and lease operating
expenses.
14
<PAGE>
1994 COMPARED TO 1993
- ---------------------
Total revenues for 1994 were $222,723 as compared to $97,808 in 1993, primarily
as the result of a full year of revenues generated by production related to
reserves acquired during 1993. Costs and expenses have increased from $128,064
in 1993 to $221,049 in 1994. This increase was due to depletion, depreciation,
and lease operating expenses.
1993 COMPARED TO 1992
- ---------------------
Total revenues for 1993 were $97,808 as compared to $97,910 in 1992. Costs and
expenses have increased from $108,105 in 1992 to $128,064 in 1993. This
increase was due to depletion, depreciation, general administration, and lease
operating expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The audited financial statements and schedules are included on pages F-1 through
F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
In January 1996, the Company's Board of Directors accepted the resignation of
Rigler, Hess & Rohmer, P.C., Certified Public Accountants and named Farmer,
Fuqua, Hunt & Munselle, P.C., Certified Public Accountants as the Company's new
independent auditors.
There were no disagreements with Rigler, Hess & Rohmer, P.C. on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of Loch and certain information concerning
each of them are set forth in the following table:
NAME AGE POSITION
- ---- --- --------
Glenn L. Loch 60 President, Chief Executive Officer,
Treasurer and Director
Paul E. Cash 63 Vice President, Secretary and
Director
K. Paul Cash 39 Vice President, Assistant Secretary
and Director
GLENN L. LOCH graduated from the Louisiana State University with a B.S. degree
in Petroleum Engineering in 1960. He has served as President of the Company
from June 1979 through March 1989 and from January 1, 1990 to present. For more
than five years preceding 1979, he served as president of Loch & Tracy
Engineering Company, and Vice President of Scientific Petroleum, Inc. He is
past Chairman of Texas Chapter, A.P.I. and received the Meritorious Service
Award for the A.P.I. in 1968. He is past mayor of Gainesville, Texas, and was a
member of the Governor's State Manpower Board.
PAUL E. CASH is a graduate of The University of Texas (B.B.A. Accounting) and is
a Certified Public Accountant. He has been active in the oil and gas industry
for over 20 years, during which time he has served as financial officer of two
publicly owned companies, Texas Gas Producing Co., and Landa Oil Co., and also
served as president of publicly owned Continental American Royalty Co., Aledo
Oil & Gas Co., Prairie States Energy Co., Spindletop Oil & Gas Co., and Double
River Oil & Gas Co. During the last 10 years, Mr. Cash has also been an officer
and part owner of a large number of private oil and gas companies and
partnerships, including EnnTex Oil & Gas Co. and Spindletop Oil & Gas Co. He is
currently serving as President and a Director of Spindletop Oil & Gas Co., and
is an officer and director of Double River Oil & Gas Co. and Loch Exploration,
Inc. Mr. Cash was formerly the Mayor of Sunnyvale, Texas.
K. PAUL CASH is a geologist and received his degree in geology from the
University of Texas at Arlington in 1981. He has been serving as Vice President
and Director of Spindletop Oil & Gas Co. since 1993. Prior to 1993, he had been
a Director and President of Daltex Oil & Gas Co., a privately held company for
more than ten years.
16
<PAGE>
FAMILY RELATIONSHIPS
K. Paul Cash is the son of Paul E. Cash.
DIRECTORSHIP
Glenn Loch, director of the Registrant is not a director of any other company
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended ("1934 Act"). No Director of the Registrant is
subject to the requirements of Section 15(d) of the Act or any company
registered as an investment company under the Investment Company Act of 1940.
Paul E. Cash is a director of other companies with a class of Securities
Registered pursuant to Section 12 of the 1934 Act as shown: officer/director of
Spindletop Oil & Gas Co., and officer/director of Double River Oil & Gas Co.
POTENTIAL CONFLICTS OF INTEREST
Both Paul E. Cash and K. Paul Cash, officers and directors of the Company are
actively involved in the management of other companies, and are owners of rental
equipment and personally invest in oil and gas properties. In some instances,
business opportunities in the oil and gas industry known to them or developed by
them may be offered first to other companies or individuals, and the Registrant
may not be able to participate in such ventures.
ITEM 11. EXECUTIVE COMPENSATION
The Company had no director or officer, nor group of directors and officers
whose aggregate renumeration exceeded $60,000 during twelve (12) months ended
December 31, 1995.
The Company is not a party to any employment contract, nor does it have any
pension, profit sharing, bonuses, stock option plan or royalty pools in effect
or under consideration. Such plans may be adopted in the future if deemed in
the best interest of the Company by its Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the ownership of the Company's Common Stock $.001
par value per share as of February 1, 1996, by (i) each director of the Company,
(ii) each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of its Common Stock, and (iii) information as to the
shares beneficially owned by all directors and officers of the Company as a
group.
17
<PAGE>
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF AMOUNT AND NATURE OF OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- ------------------- -------------------- -------
<S> <C> <C>
Glenn L. Loch
414 E. Elm 785,325 shares
Gainesville, Texas 76240 (direct ownership) 1.22%
Paul Cash
9319 LBJ FRWY. #205 34,920,229 shares
Dallas, TX 75243 (direct ownership) 54.23%
K. Paul Cash
9319 LBJ FRWY. #205 507,936 shares 0.79%
Dallas, TX 75243 (direct ownership)
Sonel Companies, Inc. (1)
414 E. Elm 9,439,987 shares(2)
Gainsville, TX 76240 (direct ownership) 14.66%
</TABLE>
(1) Glenn Loch, officer and director of the registrant, owns 50% of Sonel
Companies, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
All officers & Directors as 45,653,477 shares 71%
a group (3 persons) (includes direct and
indirect holdings through
Sonel Companies, Inc.)
</TABLE>
The Registrant knows of no contractual arrangements which might at a subsequent
date result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 24, 1994, Mr. Paul E. Cash purchased 35,310,000 shares of Loch
Exploration, Inc. common stock from Double River Oil & Gas Co. There was no
change of control of the Company since Mr. Cash was the majority owner of Double
River Oil & Gas Co., at the time of the exchange.
The Company serves as its own stock transfer agent, and charges a fee of $5.00
per new certificate issued for such services. Computer services and records of
such shareholder transactions are furnished and maintained by Spindletop Oil &
Gas Co. Spindletop charges a fee to the Company for such services, which
approximate the $5.00 stock transfer fee. Paul E Cash is president and a
director of Spindletop, and owns in excess of 80% of the common stock of
Spindletop.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report.
Financial Statements (included herein at Pages F-1 through F-16
Report of Independent Certified Public Accountants.
Balance Sheets - December 31, 1995 and 1994................ F-2
Statements of Operations for the years ended December 31, 1995,
1994 and 1993.............................................. F-4
Statements of Stockholders' Equity for the years ended December 31,
1995, 1994 and 1993........................................ F-5
Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993.............................................. F-6
Notes to Financial Statements.............................. F-7
Reports on Form 8-K
A report on Form 8-K was filed on February 24, 1994, a copy of which is
attached.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LOCH EXPLORATION, INC.
By Glenn L. Loch
-----------------------------------
Glenn L. Loch
President
Dated: April 10, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- ----
Glenn L. Loch President, Chief April 10, 1996
- ----------------------- Executive Officer,
Glenn L. Loch Treasurer and Director
Paul E. Cash Vice President, April 10, 1996
- ----------------------- Secretary and Director
Paul E. Cash
K. Paul Cash Vice President, April 10, 1996
- ----------------------- Assistant Secretary
K. Paul Cash and Director
20
<PAGE>
LOCH EXPLORATION, INC.
Index to Financial Statements and Schedules
Page
---------
Independent Auditors' Report F-1
Balance Sheets - December 31, 1995 and 1994 F-2 - F-3
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Financial Statements F-7
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>
[FARMER, FUQUA, HUNT & MUNSELLE, P.C. LETTERHEAD APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Loch Exploration, Inc.
We have audited the accompanying balance sheets of Loch Exploration, Inc. (a
Texas Corporation) as of December 31, 1995 and 1994, and the related statements
of operations, changes in shareholders' equity and cash flows for the years
ended December 31, 1995, 1994 and 1993. 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. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Farmer, Fuqua, Hunt & Munselle, P.C.
Dallas, Texas
April 3, 1996
F-1
<PAGE>
LOCH EXPLORATION, INC.
Balance Sheets
December 31,
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
CURRENT ASSETS
Cash $139,285 $ 14,764
Trade accounts receivable 14,304 21,038
Accounts receivable, related parties 27,795 40,356
-------- --------
Total current assets 181,384 76,158
PROPERTY AND EQUIPMENT - AT COST
Oil and gas properties (full cost method) 250,567 299,938
Equipment 72,391 71,891
-------- --------
322,958 371,829
Accumulated depreciation, depletion and amortization (77,534) (54,872)
-------- --------
245,424 316,957
-------- --------
$426,808 $393,115
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
LOCH EXPLORATION, INC.
Balance Sheets - (Continued)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 33,428 $ 6,844
Notes payable, related parties --- 34,800
Accounts payable and accrued liabilities 11,681 19,114
Accounts payable, related parties 10,143 2,800
-------- --------
Total current liabilities 55,252 63,558
LONG-TERM DEBT, less current portion 59,911 60,882
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 150,000,000
shares authorized; 64,388,802 and 64,388,376
shares issued and outstanding at December 31, 1995
and 1994, respectively 64,388 64,388
Additional paid-in capital 269,046 269,046
Accumulated deficit (21,789) (64,759)
-------- --------
311,645 268,675
-------- --------
$426,808 $393,115
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
LOCH EXPLORATION, INC.
Statements of Operations
Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
Oil and gas revenues $ 179,524 $ 172,860 $ 52,875
Equipment rental 35,118 40,304 41,568
Revenue from lease
operations 9,909 9,559 2,087
Interest income 712 --- ---
Gain on sale of oil and gas
property 94,832 --- ---
Other 6,980 --- 1,278
----------- ----------- -----------
327,075 222,723 97,808
----------- ----------- -----------
Expenses
Lease operations 141,708 91,738 33,970
Depreciation, depletion and
amortization 22,662 30,058 10,698
General and administrative 101,415 79,571 77,978
Interest expense 18,320 19,682 5,418
----------- ----------- -----------
284,105 221,049 128,064
----------- ----------- -----------
NET EARNINGS (LOSS) $ 42,970 $ 1,674 $ (30,256)
=========== =========== ===========
Net earnings (loss) per
share of common stock $ --- $ --- $ ---
=========== =========== ===========
Weighted average shares
outstanding 64,388,589 61,385,564 60,960,789
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LOCH EXPLORATION, INC.
Statements of Changes in Shareholders' Equity
Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Common Stock Additional Treaasury Stock
-------------------- Paid-in Accumulated -------------------
Shares Amount Capital Deficit Shares Amount Total
---------- -------- --------- ----------- ------------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 60,960,726 $60,961 $ 43,235 $(36,177) --- $ --- $ 68,019
Stock issued to prior shareholders 125 --- --- --- --- --- ---
Treasury stock contributed by
shareholders --- --- --- --- 640,000 --- ---
Treasury stock sold --- --- 12,800 --- (640,000) --- 12,800
Net loss --- --- --- (30,256) --- --- (30,256)
---------- -------- --------- --------- ----------- ------ --------
Balance, December 31, 1993 60,960,851 60,961 56,035 (66,433) --- --- 50,563
Stock issued in satisfaction of
payable to a related party 277,525 277 9,461 --- --- --- 9,738
Treasury stock contributed by
shareholders --- --- --- --- 2,500,000 --- ---
Treasury stock issued to acquire
oil and gas property --- --- 150,000 --- (2,500,000) --- 150,000
Stock issued to retire debentures 3,150,000 3,150 53,550 --- --- --- 56,700
Net earnings --- --- --- 1,674 --- --- 1,674
---------- -------- --------- --------- ----------- ------ --------
Balance December 31, 1994 64,388,376 64,388 269,046 (64,759) --- --- 268,675
Common stock issued to former
shareholders 426 --- --- --- --- --- ---
Net earnings --- --- --- 42,970 --- --- 42,970
---------- -------- --------- --------- ----------- ------ --------
Balance December 31, 1995 64,388,802 $64,388 $269,046 $(21,789) $ --- $ --- $311,645
========== ======== ========= ========= =========== ====== ========
</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>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 42,970 $ 1,674 $(30,256)
Reconciliation of net earnings (loss) to net cash
provided (used) by operating activities
Depreciation, depletion and amortization 23,611 31,011 12,128
Gain on sale of oil and gas property (94,832) --- ---
(Increase) decrease in accounts receivable 19,295 (40,069) (2,415)
Increase (decrease) in accounts payable (90) 9,313 (1,962)
-------- -------- --------
Net cash provided (used) by operating activities (9,046) 1,929 (22,505)
Cash flows from investing activities
Purchase of oil and gas properties (32,047) (38,046) (80,708)
Purchase of property and equipment (500) (12,506) ---
Proceeds from sale of oil and gas properties 176,250 7,595 6,250
-------- -------- --------
Net cash provided (used) by investing activities 143,703 (42,957) (74,458)
Cash flows from financing activities
Repayment of debt (41,136) --- ---
Proceeds from borrowings 31,000 6,844 ---
Proceeds from related party borrowings --- 2,800 9,738
Proceeds from sale of debentures --- --- 128,000
-------- -------- --------
Net cash provided (used) by financing activities (10,136) 9,644 137,738
-------- -------- --------
Increase (decrease) in cash 124,521 (31,384) 40,775
Cash at beginning of period 14,764 46,148 5,373
-------- -------- --------
Cash at end of period $139,285 $ 14,764 $ 46,148
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE 1 - 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, approximately 3,500,000 shares of the
Company's common stock are expected to be issued to the Company's former
shareholders, to be exchanged as follows: one share of the Company's $.001 par
value common stock for each eight shares of the Company's pre-reorganization
common stock. As of December 31, 1995, 1994 and 1993, 3,391,152, 3,390,726, and
3,390,726 and 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 Northeastern and Southwestern United States. To a
lesser extent, the Company also acquires and sells oil and gas properties.
NOTE 2 - 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 are treated as adjustments
of capitalized costs. 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.
F-7
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED
Oil and Gas Properties - Continued
- ----------------------------------
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.
Statement of Cash Flows
- -----------------------
The Company does not consider any of its assets to meet the definition of a cash
equivalent.
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.
These temporary differences primarily relate to depreciation, depletion and
intangible drilling costs.
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 3 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Trade accounts payable $ 8,469 $18,505
Accrued sales and payroll taxes 2,925 609
Accrued interest 287 ---
------- -------
$11,681 $19,114
======= =======
</TABLE>
F-8
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
12% debentures, interest only payable in monthly installments
through May 1, 1996, principal and interest payable in 36
monthly installments, beginning April 1, 1996, collateralized
by a first mortgage on the Company's interests in certain
oil and gas properties, net of unamortized discount of $3,169
and $4,120 at December 31, 1995 and 1994, respectively $61,831 $60,882
Note payable to a bank, with interest at 11%,payable in
monthly installments of principal and interest of $1,445
through July 1997, guaranteed by a shareholder 25,428 ---
Notes payable to banks, bearing interest at rates ranging from
9.5% to 11%, collateralized by equipment with an original
cost of $50,000, payable in monthly installments of $902
through July 1996 6,080 6,844
------- --------
93,339 67,726
Less current portion 33,428 6,844
------- --------
$59,911 $60,882
======= ========
</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 in
the first year, $.035 per share in the second year, $.05 per share in the third
year, and, thereafter, at the greater of $.05 per share or the average of the
bid/asked price of the Company's common stock during the prior 20 day trading
period. In 1994, the Company's Board of Directors approved a one-time, lowered
conversion price of $.02 per share, and approved the continuation of interest
payments on the converted debentures, for one year after the conversion date of
November 1, 1994. On November 1, 1994, debentures totaling $56,700, net of the
related unamortized discount, were converted into 3,150,000 shares of the
Company's common stock, at the lowered conversion price of $.02 per share.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ -------
<S> <C>
1996 $33,428
1997 29,717
1998 22,169
1999 8,025
2000 ---
Thereafter ---
-------
$93,339
=======
</TABLE>
F-9
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 5 - SHAREHOLDERS' EQUITY
In connection with a private placement offering (the Offering) of its debentures
in May 1993, the Company acquired 640,000 shares of its $.001 par value common
stock as treasury stock by donation from two shareholders. The shares were sold
in units with the debentures in the Offering, with a minimum unit consisting of
$5,000 debentures and 25,000 shares of the Company's $.001 par value common
stock. The Company recorded $12,800 as additional paid-in capital in accordance
with the private placement memorandum, and a discount of an equal amount was
recorded with respect to the debentures. The discount is being amortized over
the life of the debentures.
During 1994, two of the Company's shareholders contributed 2,500,000 shares of
the Company's common stock back to the Company. This treasury stock was issued
by the Company to a third party, in exchange for an oil and gas property, in a
transaction recorded at $150,000, based on the estimated fair value of the
assets acquired.
NOTE 6 - INCOME TAXES
There was no income tax expense recorded in 1995 or 1994, 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 temporary differences between book
and taxable income are not significant.
NOTE 7 - 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 cancelled by either party. No properties were
acquired in connection with this agreement during 1995. During 1994 and 1993,
the Company acquired interests in approximately seven and 78 properties,
respectively, with total costs of approximately $7,000 and $81,000,
respectively, in connection with this agreement.
F-10
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 7 - RELATED PARTY TRANSACTIONS - CONTINUED
At December 31, 1994, the Company had notes payable to Spindletop, totaling
$34,800, consisting of a promissory note in the amount of $14,800, and an 8%
convertible promissory note in the amount of $20,000. The first promissory note
bore interest at 8% per annum, due quarterly, beginning April 1, 1993. The
second promissory note had an interest rate of 8% per annum and was due and
payable on December 31, 1997. Interest on the second note was due annually,
payable in cash or common stock of the Company at the request of either the
holder or the Company, at valuation rates detailed in the note. The first such
interest payment was due December 31, 1993. The accrued interest on both notes,
in the amount of $2,800, that was due and payable on December 31, 1993, was
converted to 70,000 shares of the Company's $.001 par value common stock on May
25, 1994. Both notes were repaid in 1995.
The Company leases its compressors to Spindletop. During the years ended
December 1995, 1994 and 1993, Spindletop paid the Company approximately $35,000,
$40,000, and $42,000, respectively, under the lease agreements for the
compressors.
The Company operates an oil and gas partnership drilling program, Loch
Exploration, Inc. 1980A, for which it makes commitments, pays expenses and
collects an operating fee.
NOTE 8 - CASH FLOW INFORMATION
The Company paid approximately $17,000, $19,000, and $2,000 for interest in
1995, 1994 and 1993, respectively.
Excluded from the Statements of Cash Flows were the effects of certain non-cash
investing and financing activities, as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Discount on debentures $ --- $ --- $12,800
Exchange of related party payable for
common stock --- 9,738 ---
Conversion of debentures to common stock --- 56,700 ---
Acquisition of oil and gas property in
exchange for stock --- 150,000 ---
</TABLE>
NOTE 9 - EARNINGS PER SHARE
Earnings per common share is based on the weighted average number of shares
outstanding during each year.
F-11
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 10 - CONCENTRATIONS OF CREDIT RISK
Accounts receivable as of December 31, 1995 and 1994 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 11 - COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities on a month to month basis. Total rent
expense incurred was approximately $7,800, $7,100 and $7,600 in 1995, 1994 and
1993, respectively.
NOTE 12 - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended December
31, 1995, 1994 and 1993 follows.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Capitalized costs relating to oil and
gas producing activities:
Unproved properties $ --- $ --- $ ---
Proved properties 250,567 299,571 119,487
-------- -------- --------
Total capitalized costs 250,567 299,571 119,487
Accumulated amortization (52,266) (36,165) (11,480)
-------- -------- --------
$198,301 $263,406 $108,007
======== ======== ========
Costs incurred in oil and gas property
acquisition, exploration and development:
Acquisition of properties $ 32,047 $188,046 $ 80,708
Exploration costs --- --- ---
Development costs --- --- ---
-------- -------- ---------
$ 32,047 $188,046 $ 80,708
======== ======== =========
</TABLE>
F-12
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 12 - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Results of operations from producing
activities:
Sales of oil and gas $179,524 $172,860 $52,875
-------- -------- -------
Production costs 123,708 89,814 22,639
Amortization of oil and gas properties 16,101 24,685 5,498
-------- -------- -------
139,809 114,499 28,137
-------- -------- -------
$ 39,715 $ 58,361 $24,738
======== ======== =======
Sales price per equivalent Mcf $ 2.81 $ 2.68 $ 2.95
======== ======== =======
Production cost per equivalent Mcf $ 1.93 $ 1.39 $ 1.26
======== ======== =======
Amortization per equivalent Mcf $ .25 $ .38 $ .31
======== ======== =======
</TABLE>
In October 1995, the Company sold, for $124,500, its interests in 16 natural gas
producing properties. These properties had been acquired in May 1995 for
approximately $30,000. 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 proved reserves attributable to a cost center.
Due to the significance of the effect of this sale on the relationship between
capitalized costs and proved reserves, a gain was recognized in the sale in the
1995 statement of operations.
NOTE 13 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged Directly to Expense
---------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Maintenance and Repairs $ 1,300 $ 3,760 $1,866
Production taxes 11,669 11,235 3,437
Taxes, other than payroll and income taxes 3,189 664 2,370
</TABLE>
NOTE 14 - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31, 1995, 1994 and
1993 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
F-13
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 14 - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - CONTINUED
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.
Changes in Estimated Quantities of Proved Oil and Gas Reserves
<TABLE>
<CAPTION>
Oil Gas
Blbs Mcf
------ -------
<S> <C> <C>
Proved reserves:
- ----------------
BALANCE DECEMBER 31, 1992 --- 133,459
Acquired properties 18,926 111,414
Revisions of previous estimates --- 12,226
Production (665) (13,951)
------ -------
BALANCE DECEMBER 31, 1993 18,261 243,148
Acquired properties 935 9,096
Revisions of previous estimates 12,509 310,954
Production (4,200) (39,276)
------ -------
BALANCE DECEMBER 31, 1994 27,505 523,922
Sales of reserves in place (2,253) (29,087)
Revisions of previous estimates 12,792 128,570
Production (4,504) (36,936)
------ -------
BALANCE DECEMBER 31, 1995 33,540 586,469
====== =======
Proved Developed Reserves:
- --------------------------
Balance December 31, 1993 18,261 243,148
Balance December 31, 1994 27,505 523,922
Balance December 31, 1995 33,540 586,469
</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
F-14
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1995, 1994 and 1993
NOTE 14 - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - CONTINUED
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
(Unaudited) - Continued
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.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Standardized Measures of Discounted Future
Net Cash Flows:
Future production revenue $1,854,400 $1,584,014 $ 781,342
Future production and development costs (880,592) (793,225) (460,388)
---------- ---------- ---------
Future net cash flows before Federal
income tax 973,808 790,789 320,954
Future Federal income tax (243,452) (198,306) (48,143)
---------- ---------- ---------
Future net cash flows 730,356 592,483 272,811
Effect of discounting 10% per year (211,416) (135,824) (52,735)
---------- ---------- ---------
$ 518,940 $ 456,659 $ 220,076
========== ========== =========
Change Relating to the Standardized Measures
of Discounted Future Net Cash Flows:
Beginning balance $ 456,659 $ 220,076 $ 66,763
Oil and gas sales, net of production costs (55,816) (83,046) (30,326)
Net change in prices, net of production costs 14,030 (1,717) 2,693
Purchase of reserves in place --- 13,133 174,727
Sales of reserves in place (33,652) --- ---
Revisions of quantity estimates 244,206 359,060 14,414
Accretion of discount 45,666 22,008 6,676
Net change in income taxes (26,857) (96,687) (26,766)
Other (125,296) 23,832 11,895
---------- ---------- ---------
$ 518,940 $ 456,659 $ 220,076
========== ========== =========
</TABLE>
F-15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 139,285
<SECURITIES> 0
<RECEIVABLES> 42,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 181,384
<PP&E> 322,958
<DEPRECIATION> 77,534
<TOTAL-ASSETS> 426,808
<CURRENT-LIABILITIES> 55,252
<BONDS> 0
0
0
<COMMON> 64,388
<OTHER-SE> 247,257
<TOTAL-LIABILITY-AND-EQUITY> 426,808
<SALES> 327,075
<TOTAL-REVENUES> 327,075
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 265,785
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,320
<INCOME-PRETAX> 42,970
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,970
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
