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, 1996
( ) 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, ($.01 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 13, 1997, there were 1,288,951 shares of $.01 par value Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
LOCH EXPLORATION, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
Securities and Exchange Commission
Item Number and Description Page
Part I
ITEM 1. Description of Business...................................... 4
ITEM 2. Properties................................................... 7
ITEM 3. Legal Proceedings............................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 13
ITEM 6. Selected Financial Data...................................... 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
ITEM 8. Financial Statements and Supplemental Data................... 15
ITEM 9. Changes in and Disagreements on Accounting and
Financial Disclosure......................................... 15
Part III
ITEM 10. Directors and Executive Officers of the Registrant............ 16
ITEM 11. Executive Compensation....................................... 17
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 17
ITEM 13. Certain Relationships and Related Transactions............... 18
2
<PAGE>
PART IV AND SIGNATURES
ITEM 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K...........................................19
SIGNATURES.....................................................20
INDEPENDENT AUDITORS' REPORT...................................F-1
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995................F-2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994...............................F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994...........F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994..............................F-6
NOTES TO FINANCIAL STATEMENTS..................................F-7
3
<PAGE>
PART I
ITEM 1. DESCRIPTION OF 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 had 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 from
June 1, 1993 to May 31, 1994, $.035 per Share from June 1, 1994 to May 31, 1995,
$.05 from June 1, 1995 to May 31, 1996, and thereafter at the greater of $2.50
per Share, after giving effect to the 50 to 1 reverse stock split discussed in
Item 5, or the average of "bid/asked" price during prior 20 day trading period.
4
<PAGE>
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 June
1, 1996, the company began the payments of the remaining $65,000 in debentures
which were not converted into Loch Exploration, Inc. common stock, and on
December 31, 1996, $51,894 remained to be paid on the principal.
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 the capital expenditures, earnings or competitive position
of the Company.
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 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 under new contracts tend to be substantially
lower than most regulated price ceilings prescribed by the NGPA.
6
<PAGE>
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, 1996 the Registrant owned an aggregate of 18,631 gross (3,670
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 no rental costs on oil and gas leases for 1996.
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, 1996, 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, 1996, 1995 and 1994.
<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> <C> <C>
1996 30,748 496,936 30,748 496,936
1995 33,540 586,469 33,540 586,469
1994 27,505 523,922 27,505 523,922
<FN>
(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.
</FN>
</TABLE>
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, 1996, 1995 and 1994. 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>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Present value of estimated
future net revenues
from proved reserves:
Developed $ 524,248 $ 518,940 $ 456,659
Developed and undeveloped 524,248 518,940 456,659
</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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Fiscal Year Ending Oil Produced Gas Produced
December 31, (Bbls) (1) (MCF) (2)
- ---------------------- ----------------- ------------------
<S> <C> <C>
1996 3,791 41,021
1995 4,504 36,936
1994 4,200 39,276
9
<PAGE>
<FN>
(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.
</FN>
</TABLE>
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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Average Sales Price: 1996 1995 1994
------------ -------------- ------------
<S> <C> <C> <C>
Oil $/Bbls $ 19.00 $ 17.00 $ 15.00
Gas $/MCF $ 2.55 $ 2.50 $ 2.05
Average Production Costs:
Oil $/Bbls $ 10.43 $ 11.58 $ 8.34
Gas $/MCF $ 1.74 $ 1.93 $ 1.39
<FN>
(1) Production (lifting) costs do not include depreciation, depletion, and
amortization of capitalized acquisitions, exploration, and development
costs, and indirect management costs.
</FN>
</TABLE>
Gross and Net productive Oil and Gas Wells and Developed Acres The following
table sets forth, as of December 31, 1996, the Registrant's interest in
productive oil and gas wells and developed acres:
<TABLE>
<CAPTION>
Developed Acres (4) Productive Wells (1)
-------------------------------- --------------------------------
Gross (2) Net (3) Gross (2) Net (3)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Oil Gas Oil Gas
18,631 3,670 66 53 2.8 19
------ ----- -- -- --- --
Some of the Registrant's interests in oil and gas wells are operated by third
party operators. Information as to multiple completions is not available to the
Registrant.
<FN>
(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.
</FN>
</TABLE>
Undeveloped Acreage as of December 31, 1996
4705 (gross) 2705 (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 the Registrant had an interest in each fiscal year indicated below:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1996
-----------------------------------
<S> <C> <C>
Gross Wells Exp Dev
--- ---
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
<FN>
(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.
</FN>
</TABLE>
11
<PAGE>
(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>
1996
1st Quarter .03 .03
2nd Quarter .03 .03
3rd Quarter .02 .02
4th Quarter .02 .02
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
</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>
A special shareholders meeting was held on February 25, 1997, during which the
shareholders of Loch Exploration, Inc. voted in favor of a 50 to 1 reverse split
of the company's common stock, to be effective at the close of business on
February 28, 1997. In addition, the shareholders voted in favor of reducing the
authorized shares of common stock from 150,000,000 shares to 50,000,000 shares,
and to increase the par value of each share of common stock from $.001 to $.01.
The new symbol of Loch Exploration, Inc. for the NASDAQ bulletin Board quotes is
LOCX.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected historical financial data for
the five years ended December 31, 1996 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,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 231,623 $ 327,075 $ 222,723 $ 97,808 $ 97,910
Net Earnings (Loss) (7,493) 42,970 1,674 (30,256) (10,195)
Net Earnings (Loss)
per Common Share (1) (.01) .03 - (.02) (.01)
Total Assets 394,746 426,808 393,115 221,531 114,582
Long-Term Obligations 32,327 59,911 60,882 115,200 -
Cash Dividends per
Common Shares -0- -0- -0- -0- -0-
<FN>
(1) Amounts reflect the 50 for 1 reverse stock split mentioned in Item 5
</FN>
</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
14
<PAGE>
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
1996 Compared to 1995
Total revenues for 1996 were $231,623 as compared to $327,075 in 1995. The
decrease is primarily due to the gain on sale of oil and gas properties in 1995
totaling approximately $95,000. Costs and expenses have decreased from $284,107
in 1995 to $239,114 in 1996. This decrease was due to general administration and
lease operating expenses.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The audited financial statements and schedules are included on pages F-1 through
F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NONE
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 64 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
16
<PAGE>
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.
K. Paul Cash resigned from the Board of Directors on February 7, 1997.
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, 1996.
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 $.01
par value per share as of February 1, 1997, 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
17
<PAGE>
shares beneficially owned by all directors and officers of the Company as a
group. The par value of the Company's Common Stock was increased to $.01 per
share at a specially called shareholders meeting February 25, 1997.
<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 15,707 shares
Gainesville, Texas 76240 (direct ownership) 1.22%
Paul Cash
9319 LBJ FRWY. #205 674,405 shares
Dallas, TX 75243 (direct ownership) 52.32%
K. Paul Cash
9319 LBJ FRWY. #205 20,159 shares
Dallas, TX 75243 (direct ownership) 1.56%
Sonel Companies, Inc. (1)
414 E. Elm 188,801 shares(2)
Gainsville, TX 76240 (direct ownership) 14.651
(1) Glenn Loch, officer and director of the registrant, owns 50% of
Sonel Companies, Inc.
All officers & Directors as 899,072 shares (includes 70%
a group (3 persons) direct and indirect
holdings through Sonel
Companies, Inc.)
</TABLE>
All of the Company's Common Stock listed above reflect the effect of a 50 to 1
reverse split at a specially called shareholders meeting on February 25, 1997,
as discussed in Item 5 in this 10-K report. 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
18
<PAGE>
director of Spindletop, and owns in excess of 80% of the common stock of
Spindletop.
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-17)
Report of Independent Certified Public Accountants..................F-1
Balance Sheets - December 31, 1996 and 1995.........................F-2
Statements of Operations for the years ended December 31, 1996,
1995 and 1994.......................................................F-4
Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.................................................F-5
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994.......................................................F-6
Notes to Financial Statements.......................................F-7
No reports on Form 8-K were filed during the last quarter of the period covered
by this Report.
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 /s/ Glenn L. Loch
--------------------
Glenn L. Loch
President
Dated: March 18, 1997
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
/s/ Glenn L. Loch President, Chief March 18, 1997
- ------------------ Executive Officer,
Glenn L. Loch Treasurer and Director
/s/ Paul E. Cash Vice President, Secretary March 18, 1997
- ------------------ and Director
Paul E. Cash
20
<PAGE>
LOCH EXPLORATION, INC.
Index to Financial Statements and Schedules
Page
Independent Auditors' Report F-1
Balance Sheets - December 31, 1996 and 1995 F-2 - F-3
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 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.
21
<PAGE>
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, 1996 and 1995, and the related statements
of operations, changes in shareholders' equity and cash flows for the years
ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results of its operations and its cash flows
for the years ended December 31, 1996, 1995 and 1994, in conformity with
generally accepted accounting principles.
FARMER, FUQUA, HUNT & MUNSELLE, P.C.
Dallas, Texas
March 13, 1997
F-1
<PAGE>
LOCH EXPLORATION, INC.
Balance Sheets
December 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 119,721 $ 139,285
Trade accounts receivable 17,054 14,304
Accounts receivable, related parties 40,349 27,795
----------- -----------
Total current assets 177,124 181,384
----------- -----------
PROPERTY AND EQUIPMENT - AT COST
Oil and gas properties (full cost method) 245,862 250,567
Equipment 72,391 72,391
----------- -----------
318,253 322,958
Less accumulated depreciation, depletion and
amortization (100,631) (77,534)
----------- -----------
217,622 245,424
----------- -----------
$ 394,746 $ 426,808
=========== ===========
</TABLE>
F-2
<PAGE>
LOCH EXPLORATION, INC.
Balance Sheets - (Continued)
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 29,734 $ 33,428
Accounts payable and accrued liabilities 8,038 11,681
Accounts payable, related parties 20,495 10,143
----------- -----------
Total current liabilities 58,267 55,252
LONG-TERM DEBT, less current portion 32,327 59,911
SHAREHOLDERS' EQUITY
Common stock, $.01 and $.001 par value at
December 31, 1996 and 1995, respectively;
50,000,000 and 150,000,000 shares authorized
at December 31, 1996 and 1995,respectively;
1,288,951 and 64,388,802 shares issued and
outstanding at December 31, 1996 and 1995,
respectively 12,890 64,388
Additional paid-in capital 320,544 269,046
Accumulated deficit (29,282) (21,789)
----------- -----------
304,152 311,645
----------- -----------
$ 394,746 $ 426,808
=========== ===========
</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>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Oil and gas revenues $ 177,972 $ 179,524 $ 172,860
Equipment rental 32,465 35,118 40,304
Revenue from lease
operations 10,216 9,909 9,559
Interest income 1,591 712 ---
Dividend income 3,379 --- ---
Gain on sale of oil and gas
property --- 94,832 ---
Other 6,000 6,980 ---
----------- ----------- -----------
231,623 327,075 222,723
----------- ----------- -----------
Expenses
Lease operations 109,393 141,708 91,738
Depreciation, depletion and
amortization 23,097 22,662 30,058
General and administrative 95,830 101,415 79,571
Interest expense 10,796 18,320 19,682
----------- ----------- -----------
239,116 284,105 221,049
----------- ----------- -----------
NET EARNINGS (LOSS) $ (7,493) $ 42,970 $ 1,674
=========== =========== ===========
Net earnings (loss) per
share of common stock $ (.01) $ .03 $ ---
=========== =========== ===========
Weighted average shares
outstanding 1,288,951 1,288,947 1,234,267
=========== =========== ===========
</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, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount
---------- -------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,1994 60,960,851 $60,961 $56,035 $(66,433) --- $ ---
Stock issued in
satisfaction of
payable to a
related party 277,525 277 9,461 --- --- ---
Treasury stock
contributed by
shareholders --- --- --- --- 2,500,000 ---
Treasury stock
issued to acquire
oil and gas property --- --- 150,000 --- (2,500,000) ---
Stock issued to
retire debentures 3,150,000 3,150 53,550 --- --- ---
Net earnings --- --- --- 1,674 --- ---
---------- -------- ------- --------- ------- --------
Balance December 31,1994 64,388,376 64,388 269,046 (64,759) --- ---
Common stock
issued to former
shareholders 426 --- --- --- --- ---
Net earnings --- --- --- 42,970 --- ---
---------- -------- ------- --------- ------- --------
Balance December 31,1995 64,388,802 64,388 269,046 (21,789) --- ---
Effect of 1 for 50
reverse stock split
and change of par
value from $.001/share
to $.01/share (63,099,851)(51,498) 51,498 --- --- ---
Net loss --- --- --- (7,493) --- ---
---------- -------- ------- --------- ------- --------
Balance December 31,1996 1,288,951 $12,890 $320,544 $(29,282) --- $ ---
========== ======== ======= ========= ======= ========
</TABLE>
F-5
<PAGE>
LOCH EXPLORATION, INC
Statements of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (7,493) $ 42,970 $ 1,674
Reconciliation of net earnings (loss) to net cash
provided (used) by operating activities
Depreciation, depletion and amortization 23,097 22,662 30,058
Amortization of discount on debentures 948 949 953
Gain on sale of oil and gas property --- (94,832) ---
(Increase) decrease in accounts receivable (15,304) 19,295 (40,069)
Increase (decrease) in accounts payable 6,709 (90) 9,313
--------- --------- ---------
Net cash provided (used) by operating activities 7,957 (9,046) 1,929
--------- --------- ---------
Cash flows from investing activities
Purchase of oil and gas properties --- (32,047) (38,046)
Purchase of property and equipment --- (500) (12,506)
Proceeds from sale of oil and gas properties 4,705 176,250 7,595
--------- --------- ---------
Net cash provided (used) by investing activities 4,705 143,703 (42,957)
--------- --------- ---------
Cash flows from financing activities
Repayment of debt (32,226) (41,136) ---
Proceeds from borrowings --- 31,000 6,844
Proceeds from related party borrowings --- --- 2,800
--------- --------- ---------
Net cash provided (used) by financing activities (32,226) (10,136) 9,644
--------- --------- ---------
Increase (decrease) in cash (19,564) 124,521 (31,384)
Cash at beginning of period 139,285 14,764 46,148
---------- --------- ---------
Cash at end of period $119,721 $139,285 $ 14,764
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
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, and after
giving effect to the stock split discussed in Note 2, 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, 1996, 1995 and 1994, 67,823, 67,823, and 67,815
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.
F-7
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
Oil and Gas Properties - Continued
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.
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 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, 1996, 1995 and 1994
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
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.
Stock Split
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 is presented retroactively within stockholders'
equity at December 31, 1996 by transferring the excess stated capital
to the paid-in capital account.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Trade accounts payable $ 6,551 $ 8,469
Accrued sales and payroll taxes 1,391 2,925
Accrued interest 96 287
--------- ---------
$ 8,038 $ 11,681
========= =========
</TABLE>
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
-------- --------
<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
$2,221 and $3,169 at December 31, 1996 and
1995, respectively $ 51,894 $ 61,831
======== ========
F-9
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 4 - LONG-TERM DEBT - Continued
1996 1995
--------- ---------
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 10,167 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
--------- ---------
62,061 93,339
Less current portion 29,734 33,428
--------- ---------
$ 32,327 $ 59,911
========= =========
</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 2,
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:
Year ended
December 31, Amount
----------
1997 $ 29,734
1998 22,169
1999 10,158
2000 ---
2001 ---
Thereafter ---
----------
$ 62,061
==========
F-10
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 5 - SHAREHOLDERS' EQUITY
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 1996 or 1995, 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 temporary
differences between book and taxable income.
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 canceled by either party. No properties were acquired in
connection with this agreement during 1996 and 1995. During 1994, the
Company acquired interests in approximately seven properties, with
total costs of approximately $7,000, respectively, in connection with
this agreement.
F-11
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
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, along with certain other operating
expenses that were due and payable on December 31, 1993, were converted
to 277,525 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 1996, 1995 and 1994, Spindletop paid the Company
approximately $32,000, $35,000, and $40,000, 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 $11,000, $17,000, and $19,000 for
interest in 1996, 1995 and 1994,respectively.
Excluded from the Statements of Cash Flows were the effects of certain
non-cash investing and financing activities, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
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>
F-12
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 9 - EARNINGS PER SHARE
Earnings per common share is based on the weighted average number of
shares outstanding during each year.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK
Accounts receivable as of December 31, 1996 and 1995 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 $7,300, $7,800 and $7,100
in 1996, 1995 and 1994, 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.
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 12 - FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 119,721 $ 119,721 $ 139,285 $ 139,285
Trade accounts receivable 17,054 17,054 14,304 14,304
Accounts receivable, related
parties 40,349 40,349 27,795 27,795
Notes payable 62,061 62,061 93,339 93,339
</TABLE>
The fair value amounts for each of the financial instruments listed
above approximate carrying amounts due to the short maturities of these
instruments.
F-13
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 13 - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended
December 31, 1996, 1995 and 1994 follows.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Capitalized costs relating to oil
and gas producing activities:
Unproved properties $ --- $ --- $ ---
Proved properties 245,862 250,567 299,571
--------- -------- ---------
Total capitalized costs 245,862 250,567 299,571
Accumulated amortization (68,799) (52,266) (36,165)
--------- -------- ---------
$ 177,063 $198,301 $ 263,406
========= ======== =========
Costs incurred in oil and gas
property acquisition, exploration
and development:
Acquisition of properties $ --- $ 32,047 $ 188,046
Exploration costs --- --- ---
Development costs --- --- ---
--------- -------- ---------
$ --- $ 32,047 $ 188,046
========= ======== =========
Results of operations from
producing activities:
Sales of oil and gas $ 177,972 $179,524 $ 172,860
--------- -------- ---------
Production costs 104,109 123,708 89,814
Amortization of oil and gas
properties 16,533 16,101 24,685
--------- -------- ---------
120,642 139,809 114,499
--------- -------- ---------
$ 57,330 $ 39,715 $ 58,361
========= ======== =========
Sales price per equivalent Mcf $ 2.79 $ 2.81 $ 2.68
Production cost per equivalent Mcf $ 1.63 $ 1.93 $ 1.39
Amortization per equivalent Mcf $ .26 $ .25 $ .38
</TABLE>
F-14
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 13 - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION - Continued
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
on the sale in the 1995 statement of operations.
NOTE 14 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged Directly to Expense
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Maintenance and Repairs $ 1,089 $ 1,300 $ 3,760
Production taxes 11,568 11,669 11,235
Taxes, other than payroll and income taxes 345 3,189 664
</TABLE>
NOTE 15 - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31, 1996,
1995 and 1994 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-15
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 15 - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
Changes in Estimated Quantities of Proved Oil and Gas Reserves
<TABLE>
<CAPTION>
Oil Gas
Bbls Mcf
--------- ---------
<S> <C> <C>
Proved reserves:
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
Revision of previous estimated 999 (48,512)
Production (3,791) (41,021)
--------- ---------
Balance December 31, 1996 30,748 496,936
========= =========
Proved Developed Reserves:
Balance December 31, 1994 27,505 523,922
Balance December 31, 1995 33,540 586,469
Balance December 31, 1996 30,748 496,936
</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.
F-16
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1996, 1995 and 1994
NOTE 15 - 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
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,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Standardized Measures of Discounted
Future Net Cash Flows:
Future production revenue $1,772,577 $1,854,400 $1,584,014
Future production and development
costs (875,088) (880,592) (793,225)
---------- ---------- ----------
Future net cash flows before Federal
income tax 897,489 973,808 790,789
Future Federal income tax (224,372) (243,452) (198,306
---------- ---------- ----------
Future net cash flows 673,117 730,356 592,483
Effect of discounting 10% per year (148,869) (211,416) (135,824)
---------- ---------- ----------
$524,248 $518,940 $ 456,659
========== ========== ==========
Change Relating to the Standardized
Measures of Discounted Future Net
Cash Flows:
Beginning balance $ 518,940 $ 456,659 $ 220,076
Oil and gas sales, net of
production costs (73,863) (55,816) (83,046)
Net change in prices, net of
production costs 41,467 14,030 (1,717)
Purchase of reserves in place --- --- 13,133
Sales of reserves in place --- (33,652) ---
Revisions of quantity estimates (55,422) 244,206 359,060
Accretion of discount 51,894 45,666 22,008
Net change in income taxes (3,443) (26,857) (96,687)
Other 44,675 (125,296) 23,832
---------- ---------- ----------
$ 524,248 $ 518,940 $ 456,659
========== ========== ==========
</TABLE>
F-17
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 119,721
<SECURITIES> 0
<RECEIVABLES> 57,403
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 177,124
<PP&E> 318,253
<DEPRECIATION> 100,631
<TOTAL-ASSETS> 394,746
<CURRENT-LIABILITIES> 58,267
<BONDS> 0
0
0
<COMMON> 12,890
<OTHER-SE> 291,262
<TOTAL-LIABILITY-AND-EQUITY> 394,746
<SALES> 177,972
<TOTAL-REVENUES> 231,623
<CGS> 0
<TOTAL-COSTS> 239,116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,796
<INCOME-PRETAX> (7,493)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,493)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,493)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0
</TABLE>
