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, 1997
( ) 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: (940) 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 24, 1998, there were 1,295,286 shares of $.01 par value Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
LOCH EXPLORATION, INC.
ANNUAL REPORT ON FORM 10-K
INDEX
Securities and Exchange Commission
Item Number and Description
Part I Page
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, 1997 AND 1996.............. F-2
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995............................. F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995......... F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996, AND 1995............................ F-6
NOTES TO FINANCIAL STATEMENTS................................ F-7
3
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
Loch Exploration, Inc. (the Company) 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, (940) 668-1271.
DESCRIPTION OF BUSINESS
Since its formation, the Company 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 Company 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 was 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 Company'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 Company'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, 1997, $32,325 remained to be paid on the principal.
On October 5, 1995, the Company 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.
On December 31, 1997, the Company sold the remaining 20 gas wells it owned in
New York for $50,000. These wells are located in Wyoming County, New York, and
they were sold along with their respective oil and gas leases. The properties
were sold to a corporation not affiliated with the Registrant.
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
5
<PAGE>
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.
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
6
<PAGE>
of price controls for first sales of several categories of natural gas. With
certain exceptions, all price deregulation contemplated under the NGPA as
originally enacted in 1978 has already taken place. Under current market
conditions, deregulated gas prices
under new contracts tend to be substantially lower than most regulated price
ceilings prescribed by the NGPA.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 ("Decontrol
Act") was ended. The Decontrol Act amends the NGPA to remove as of July 27, 1989
both price and non-price controls from natural gas not subject to a first sale
contract in 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 940-668-1271. 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.
7
<PAGE>
As of December 31, 1997 the Registrant owned an aggregate of 15,913 gross(565
net) acres of developed oil and gas leases.
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 1997.
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, 1997, 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, 1997, 1996 and 1995.
<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>
1997 39,068 144,067 39,068 144,067
1996 30,748 496,936 30,748 496,936
1995 33,540 586,469 33,540 586,469
</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, 1997, 1996 and 1995. 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>
1997 1996 1995
----------- ----------- -----------
Present value of estimated
future net revenues
from proved reserves:
<S> <C> <C> <C>
Developed $ 326,176 $ 524,248 $ 518,940
Developed and undeveloped 326,176 524,248 518,940
</TABLE>
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Fiscal Year Ending Oil Produced Gas Produced
December 31, (Bbls) (1) (MCF) (2)
---------------- ------------------ --------------------
<C> <C> <C>
1997 3,468 37,000
1996 3,791 41,021
1995 4,504 36,936
<FN>
(1) Includes production that is owned by the Registrant and produced to its
interest, less royalties and production due others.
</FN>
</TABLE>
9
<PAGE>
(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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
Average Sales Price:
<S> <C> <C> <C>
Oil $/Bbls $ 15.38 $ 19.00 $ 17.00
Gas $/MCF $ 2.56 $ 2.55 $ 2.50
Average Production Costs:
Oil $/Bbls $ 11.07 $ 10.43 $ 11.58
Gas $/MCF $ 1.54 $ 1.74 $ 1.93
<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, 1997, 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)
------------------------ ------------------------------
Oil Gas Oil Gas
<C> <C> <C> <C> <C> <C>
15,913 565 52 36 2.7 0.54
====== === == == === ====
<FN>
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.
(1) Includes producing wells and wells capable of production. One or more
completions in the same bore hole are counted as one well.
(2) A gross well or acre is a well or acre in which a working interest is
owned.
10
<PAGE>
(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, 1997
4,932 (gross) 2,932 (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, 1997
------------------------------------
Exp Dev
--- ---
<S> <C> <C>
Gross Wells
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>
(D) Net Oil and Gas Production
Same as (C)
(E) Unit Sales Price and Production Cost
Same as (C)
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<PAGE>
(F) Reserves
Same as (C)
(G) Gas Compression Equipment
The Company owns two (2) gas compressors. One of the compressors is
currently servicing a well in Parker County, Texas which is operated by
Spindletop Oil & Gas Co. and is 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 agreement
is $1,000, 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 well 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
---- ---
1997
<S> <C> <C>
1st Quarter 1.00 .03
2nd Quarter 1.00 .68
3rd Quarter .68 .68
4th Quarter .68 .38
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
</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, 1997 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
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues $ 178,842 $ 231,623 $ 327,075 $ 222,723 $ 97,808
Net Earnings (Loss) (81,875) (7,493) 42,970 1,674 (30,256)
Net Earnings (Loss)
per Common Share (1) (.06) (.01) .03 - (.02)
Total Assets 291,836 394,746 426,808 393,115 221,531
Long-Term Obligations 10,153 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
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.
14
<PAGE>
RESULTS OF OPERATIONS
1997 Compared to 1996
Total revenues for 1997 were $178,482 as compared to $231,623 in 1996. The
decrease is primarily due to lower oil and gas prices and compressor rental
revenues. Costs and expenses increased from $239,116 in 1996 to $260,717 in
1997. This increase was due to a one time loss taken on the sale of New York gas
producing properties totaling approximately $40,000.
1996 Compared to 1995
Total revenues for 1996 were $231,623 as compared to $327,075 in 1995. This
difference is primarily due to the one time gain taken on sale of oil and gas
properties in 1995 totaling approximately $95,000. Costs and expenses have
decreased from $284,107 in 1995 to $239,116 in 1996. This decrease was due to
reductions in 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 in 1995 totaling approximately
$95,000. Costs and expenses have increased from $221,049 in 1994 to $284,105 in
1995. This increase was due to increases in 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-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 the Company and certain information
concerning each of them are set forth in the following table:
Name Age Position
Glenn L. Loch 61 President, Chief Executive Officer,
Treasurer and Director
Paul E. Cash 65 Vice President, 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.
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 Company 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.
16
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
Paul E. Cash, an officer and director of the Company is actively involved in the
management of other companies, and is the owner of rental equipment and
personally invests in oil and gas properties. In some instances, business
opportunities in the oil and gas industry known to him or developed by him may
be offered first to other companies or individuals, and the Company 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, 1997.
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 28, 1998, 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. 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 56,647 shares
Gainesville, Texas 76240 (direct ownership) 4.37%
Paul Cash
9319 LBJ FRWY. #205 674,405 shares
Dallas, TX 75243 (direct ownership) 52.07%
Sonel Companies, Inc. (1)
414 E. Elm 136,084 shares(2)
Gainsville, TX 76240 (direct ownership) 10.51%
17
<PAGE>
<FN>
(1) Glenn Loch, officer and director of the registrant, owns 50% of
Sonel Companies, Inc.
All officers & Directors as 878,913 shares (includes 68%
a group (2 persons) direct and indirect
holdings through Sonel
Companies, Inc.)
</FN>
</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
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)
Independent Auditors' Report................................... F-1
Balance Sheets - December 31, 1997 and 1996.................F-2 - F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................. F-4
Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995............. F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................. 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.
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 23, 1998
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 23, 1998
Glenn L. Loch Executive Officer,
Treasurer and Director
/s/Paul E. Cash Vice President, Secretary March 23, 1998
Paul E. Cash and Director
20
<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, 1997 and 1996, and the related statements
of operations, changes in shareholders' equity and cash flows for the years
ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
FARMER, FUQUA, HUNT & MUNSELLE, P.C.
Dallas, Texas
March 12, 1998
F-1
<PAGE>
<TABLE>
LOCH EXPLORATION, INC.
BALANCE SHEETS
December 31,
ASSETS
c
1997 1996
------- -------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 80,457 $ 119,721
Trade accounts receivable 12,067 17,054
Accounts receivable, related parties 33,449 40,349
Other accounts receivable 45,000 -
Other current assets 501 -
-------- ---------
Total current assets 171,474 177,124
PROPERTY AND EQUIPMENT - AT COST
Oil and gas properties (full cost method) 125,777 245,862
Equipment 78,891 72,391
-------- ---------
204,668 318,253
Less accumulated depreciation, depletion and
amortization (84,306) (100,631)
-------- ---------
120,362 217,622
-------- ---------
$ 291,836 $ 394,746
========== =========
F-2
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
LOCH EXPLORATION, INC.
BALANCE SHEETS - Continued
December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1997 1996
-------- --------
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 22,172 $ 29,734
Accounts payable and accrued liabilities 11,322 8,038
Accounts payable, related parties 19,912 20,495
-------- --------
Total current liabilities 53,406 58,267
LONG-TERM DEBT, less current portion 10,153 32,327
SHAREHOLDERS' EQUITY
Common stock,$.01 par value;50,000,000 shares
authorized; 1,295,286 and 1,289,286 shares
issued and outstanding at December 31, 1997
and 1996, respectively 12,896 12,890
Additional paid-in capital 326,538 320,544
Accumulated deficit (111,157) (29,282)
-------- --------
228,277 304,152
-------- --------
$ 291,836 $ 394,746
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
<TABLE>
LOCH EXPLORATION, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
<CAPTION>
1997 1996 1995
--------- --------- ---------
Revenues
<S> <C> <C> <C>
Oil and gas revenues $ 148,059 $ 177,972 $ 179,524
Equipment rental 16,584 32,465 35,118
Revenue from lease
operations 9,665 10,216 9,909
Interest income - 1,591 712
Dividend income 4,377 3,379 -
Gain on sale of oil and gas
properties - - 94,832
Other 157 6,000 6,980
--------- --------- ---------
178,842 231,623 327,075
--------- --------- ---------
Expenses
Lease operations 95,381 109,393 141,708
Depreciation, depletion and
amortization 18,763 23,097 22,662
General and administrative 99,615 95,830 101,415
Interest expense 6,656 10,796 18,320
Loss on sale of oil and
gas properties 40,302 - -
--------- --------- ---------
260,717 239,116 284,105
--------- --------- ---------
NET EARNINGS (LOSS) $ (81,875) $ (7,493) $ 42,970
========= ========= =========
Net earnings (loss) per
share of common stock $ (.06) $ (.01) $ .03
========= ========= =========
Weighted average shares
outstanding 1,289,796 1,288,951 1,288,947
========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
<TABLE>
LOCH EXPLORATION, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Balance,January 1,1995 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 (63,099,516) (51,498) 51,498 -
Net loss - - - (7,493)
----------- -------- -------- ---------
Balance,December 31,1996 1,289,286 12,890 320,544 (29,282)
Issuance of stock to acquire
gas gathering system 6,000 6 5,994 -
Net loss - - - (81,875)
----------- -------- -------- ---------
Balance,December 31,1997 1,295,286 $ 12,896 $ 326,538 $ (111,157)
========== ======== ======== =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE>
<TABLE>
LOCH EXPLORATION, INC
STATEMENTS OF CASH FLOWS
Years Ended December 31,
<CAPTION>
1997 1996 1995
-------- --------- --------
Cash flows from operating activities
<S> <C> <C> <C>
Net earnings (loss) $ (81,875) $ (7,493) $ 42,970
Reconciliation of net earnings (loss)
to net cash provided (used) by
operating activities
Depreciation, depletion and amortization 18,763 23,097 22,662
Amortization of discount on debentures 949 948 949
(Gain) loss on sale of oil and gas properties 40,302 - (94,832)
(Increase) decrease in accounts receivable 11,887 (15,304) 19,295
Increase in other current assets (501) - -
Increase (decrease) in accounts payable 2,701 6,709 (90)
-------- --------- --------
Net cash provided (used) by operating activities (7,774) 7,957 (9,046)
-------- --------- --------
Cash flows from investing activities
Purchase of oil and gas properties (5,305) - (32,047)
Purchase of property and equipment (500) - (500)
Proceeds from sale of oil and gas properties 5,000 4,705 176,250
-------- --------- --------
Net cash provided by investing activities (805) 4,705 143,703
-------- --------- --------
Cash flows from financing activities
Repayment of debt (30,685) (32,226) (41,136)
Proceeds from borrowings - - 31,000
-------- --------- --------
Net cash used by financing activities (30,685) (32,226) (10,136)
-------- --------- --------
Increase (decrease) in cash (39,264) (19,564) 124,521
Cash at beginning of period 119,721 139,285 14,764
-------- --------- --------
Cash at end of period $ 80,457 $ 119,721 $ 139,285
========== ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
F-6
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND NATURE OF OPERATIONS
Organization
Loch Exploration, Inc. (the Company) was originally organized under
the laws of the State of Texas, on June 5, 1979.
The Company filed for Chapter 11 bankruptcy in April 1989, and was
reorganized in connection with its Plan of Reorganization (the
Plan), effective November 17, 1989. In connection with the Plan,
and after giving effect to the stock split discussed in Note E,
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, 1997, 1996 and
1995, 67,823, 67,823, and 67,823 shares, respectively, have been
issued to former shareholders in connection with the Plan.
Nature of Operations
The Company is engaged in the exploration for and development of
oil and gas reserves, primarily in the Northeastern and
Southwestern United States. To a lesser extent, the Company also
acquires and sells oil and gas properties.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil
and gas exploration and development activities. Under this method,
the Company capitalizes leasehold acquisition, exploration
(including unsuccessful exploration) and development costs into
one cost center. If unamortized costs within the cost center
exceed the cost center ceiling, as defined, the excess will be
charged to expense during the year in which the excess occurs.
Depreciation and amortization for each cost center are computed on
a composite unit-of-production method, based on estimated provided
reserves attributable to the respective cost center. All costs
associated with oil and gas properties are currently included in
the base for computation and amortization. Such costs include all
acquisition, exploration and development costs. All of the
Company's oil and gas properties are located within the
continental United States.
F-7
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued
Oil and Gas Properties - Continued
Gains and losses on sales of oil and gas properties representing
less than 25% of the reserve quantities for a given cost center
are treated as adjustments of capitalized costs. Gains and losses
on sales of oil and gas properties representing 25% or more of the
reserve quantities for a given cost center are recognized as part
of operations. Gains or losses on sales of property and equipment,
other than oil and gas properties, are recognized as part of
operations. Expenditures for renewals and improvements are
capitalized, while expenditures for maintenance and repairs are
charged to operations as incurred.
Costs of oil and gas properties, including leases, are
periodically evaluated by management, and losses are recognized if
a property becomes impaired or the net value of the capitalized
cost center exceeds the present value of discounted future net
cash flows.
Property and Equipment
Depreciation is provided in amounts sufficient to relate to the
cost of depreciable assets to operations over their estimated
service lives (5 to 15 years). The straight-line method of
depreciation is used for financial reporting purposes, while
accelerated methods are used for tax purposes.
Statements of Cash Flows
Cash and cash equivalents includes cash on hand, demand deposits,
and short-term investments with original maturities of three
months or less.
Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and
liabilities, using enacted tax rates in effect in the years in
which the differences are expected to reverse.
F-8
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE B - 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.
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Trade accounts payable $ 10,346 $ 6,551
Accrued sales and payroll taxes 959 1,391
Accrued interest 17 96
-------- --------
$ 11,322 $ 8,038
========= =========
</TABLE>
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------- --------
<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 $1,273 and $2,221 at December 31, 1997
and 1996, respectively $ 32,325 $ 51,894
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
-------- --------
32,325 62,061
Less current portion 22,172 29,734
-------- --------
$ 10,153 $ 32,327
========= =========
</TABLE>
F-9
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE D - LONG-TERM DEBT - Continued
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 E, or the average of the bid/asked price of the
Company's common stock during the prior 20 day trading period.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended
December 31, Amount
------------ ---------
<C> <C>
1998 $ 22,172
1999 10,153
2000 -
2001 -
2002 -
Thereafter -
---------
$ 32,325
=========
</TABLE>
NOTE E - SHAREHOLDERS' EQUITY
In February, 1997, the Board of Directors declared a 1-for-50
reverse stock split in the Company's common stock, effective
February 28, 1997. The Company also changed the par value from
$.001 per share to $.01 per share and reduced the authorized
shares from 150,000,000 to 50,000,000. All share and per share
data, as appropriate, reflect this split. The effect of the split
has been presented retroactively within stockholders' equity at
December 31, 1996 by transferring the excess stated capital to the
additional paid-in capital account.
NOTE F - INCOME TAXES
There was no income tax expense recorded in 1997, 1996 or 1995,
due to the availability of net operating losses and due to the
availability of a nonconventional source fuel credit, which
eliminated any federal income taxes. This credit is available to
the extent of the current year tax liability, and is not available
for carryover to future years.
Deferred taxes have not been provided because there are no
significant temporary differences between book and taxable income.
F-10
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE G - 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 1997, 1996 or
1995.
The Company leases its compressors to Spindletop. During the years
ended December 1997, 1996 and 1995, Spindletop paid the Company
approximately $17,000, $32,000, and $35,000, respectively, under
the lease agreements for the compressors.
The Company operates an inactive oil and gas partnership drilling
program, Loch Exploration, Inc. 1980A, for which it has made
commitments, paid expenses and collected an operating fee.
NOTE H - CASH FLOW INFORMATION
The Company paid approximately $7,000, $11,000 and $17,000 for interest
in 1997, 1996 and 1995, respectively.
Excluded from the Statements of Cash Flows were the effects of
certain non-cash investing and financing activities, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Acquisition of gas gathering system in
exchange for stock $ 6,000 $ - $ -
Sale of oil and gas properties for
an account receivable 45,000 - -
</TABLE>
NOTE I - EARNINGS PER SHARE
Earnings (loss) per share (EPS) are calculated in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128), which was adopted in 1997 for all years
presented. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS does not apply
to the Company due to the absence of dilutive potential common
shares. The adoption of SFAS 128 had no effect on previously
reported EPS.
F-11
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE J - CONCENTRATIONS OF CREDIT RISK
Trade accounts receivable as of December 31, 1997 and 1996 are
primarily from oil and gas operators, including Spindletop,
related to the Company's interests in oil and gas wells, and its
compressor leases. Other accounts receivable, totaling $45,000 at
December 31, 1997 related to the sale of oil and gas properties,
and were collected in January, 1998.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities on a month to month
basis. Total rent expense incurred was approximately $7,800,
$7,400 and $7,800 in 1997, 1996 and 1995, 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 L - FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 80,457 $ 80,457 $ 119,721 $ 119,721
Trade accounts receivable 12,067 12,067 17,054 17,054
Accounts receivable,
related parties 33,449 33,449 40,349 40,349
Other accounts receivable 45,000 45,000 - -
Notes payable 32,325 32,325 62,061 62,061
</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-12
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE M - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years
ended December 31, 1997, 1996 and 1995 follows.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Capitalized costs relating to oil
and gas producing activities:
Unproved properties $ - $ - $ -
Proved properties 125,777 245,862 250,567
Total capitalized costs 125,777 245,862 250,567
Accumulated amortization (45,911) (68,799) (52,266)
------- ------- -------
$ 79,866 $ 177,063 $ 198,301
========= ======== ========
Costs incurred in oil and gas
property acquisition, exploration
and development:
Acquisition of properties $ 5,305 $ - $ 32,047
Exploration costs - - -
Development costs - - -
-------- -------- --------
$ 5,305 $ - $ 32,047
======== ======== ========
Results of operations from
producing activities:
Sales of oil and gas $ 148,059 $ 177,972 $ 179,524
-------- ------- -------
Production costs 88,951 104,109 123,708
Amortization of oil
and gas properties 12,199 16,533 16,101
-------- ------- -------
101,150 120,642 139,809
-------- ------- -------
$ 46,909 $ 57,330 $ 39,715
======== ======= =======
Sales price per equivalent Mcf $ 2.56 $ 2.79 $ 2.81
======== ======= =======
Production cost per equivalent Mcf $ 1.54 $ 1.63 $ 1.93
======== ======= =======
Amortization per equivalent Mcf $ .21 $ .26 $ .25
======== ======= =======
</TABLE>
F-13
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE M - ADDITIONAL OPERATIONAL AND BALANCE SHEET INFORMATION - Continued
In December, 1997, the Company sold, for $50,000, its interest in
certain natural gas producing properties. The full cost method of
accounting requires that sales of oil and gas properties shall be
accounted for as adjustments of capitalized costs, unless such
adjustments would significantly alter the relationship between
capitalized costs and proven reserves attributable to a cost
center. Due to the significance of the effect of this sale on the
relationship between capitalized costs and proven reserves, a
loss was recognized on the sale in the 1997 statement of
operations.
In October 1995, the Company sold, for $124,500, its interests in
certain natural gas producing properties. 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 N - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged Directly to Expense
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Maintenance and Repairs $ 301 $ 1,089 $ 1,300
Production taxes 9,624 11,568 11,669
Taxes, other than payroll
and income taxes 526 345 3,189
</TABLE>
NOTE O - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and gas reserves as of December 31,
1997, 1996 and 1995 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.
F-14
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE O - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
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
Bbls Mcf
-------- ---------
<S> <C> <C>
Proved reserves:
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
Revisions of previous estimates 999 (48,512)
Production (3,791) (41,021)
------ -------
Balance, December 31, 1996 30,748 496,936
Sale of reserves in place --- (412,334)
Production (3,468) (37,000)
Revisions of previous estimates 11,788 96,465
------ ------
Balance, December 31, 1997 39,068 144,067
====== =======
Proved Developed Reserves:
Balance, December 31, 1995 33,540 586,469
====== =======
Balance, December 31, 1996 30,748 496,936
====== =======
Balance, December 31, 1997 39,068 144,067
====== =======
</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-15
<PAGE>
LOCH EXPLORATION, INC
NOTES TO FINANCIAL STATEMENTS - Continued
December 31, 1997, 1996 and 1995
NOTE O - 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,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Standardized Measures of
Discounted Future Net
Cash Flows:
Future production revenue $ 1,045,705 $ 1,772,577 $ 1,854,400
Future production and
development costs (470,917) (875,088) (880,592)
-------- -------- --------
Future net cash flows before
Federal income tax 574,788 897,489 973,808
Future Federal income tax (143,697) (224,372) (243,452)
-------- -------- --------
Future net cash flows 431,091 673,117 730,356
Effect of discounting 10% per year (104,915) (148,869) (211,416)
-- -------- -------- --------
$ 326,176 $ 524,248 $ 518,940
========= ========= =========
Change Relating to the
Standardized Measures
of Discounted Future
Net Cash Flows:
Beginning balance $ 524,248 $ 518,940 $ 456,659
Oil and gas sales, net of
production costs (59,108) (73,863) (55,816)
Net change in prices, net of
production costs (8,013) 41,467 14,030
Purchase of reserves in place - - -
Sales of reserves in place (266,873) - (33,652)
Revisions of quantity estimates 233,293 (55,422) 244,206
Accretion of discount 52,425 51,894 45,666
Net change in income taxes (113,186) (3,443) (26,857)
Other (36,610) 44,675 (125,296)
------- ------ --------
$ 326,176 $ 524,248 $ 518,940
======== ======== =========
</TABLE>
F-16
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 80,457
<SECURITIES> 0
<RECEIVABLES> 90,516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 171,474
<PP&E> 204,668
<DEPRECIATION> 84,306
<TOTAL-ASSETS> 291,836
<CURRENT-LIABILITIES> 53,406
<BONDS> 0
0
0
<COMMON> 12,896
<OTHER-SE> 215,381
<TOTAL-LIABILITY-AND-EQUITY> 291,836
<SALES> 148,059
<TOTAL-REVENUES> 178,842
<CGS> 0
<TOTAL-COSTS> 114,144
<OTHER-EXPENSES> 139917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,656
<INCOME-PRETAX> (81,875)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,875)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
