<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
- --------------------------------------------------------------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 31, 1998
LOCH EXPLORATION, INC.
----------------------
(Exact Name of Registrant as Specified in Charter)
Texas
-----
State or Other Jurisdiction of
Incorporation or Organization)
0-9129 75-1657943
------ ----------
(Commission File Number) (I.R.S. Employer Identification No.)
3200 Wilcrest, Suite 370, Houston, Texas 77042
----------------------------------------------
(Address of principal executive offices including zip code)
(713) 784-2374
--------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
In connection with the acquisition described in Item 2 below, Carl R. Rose
was issued 14.4 million shares of the Company's common stock which constitutes
71% of the issued and outstanding stock of the Company. The consideration paid
for the stock was all of the issued and outstanding stock of Design Automation
Systems, Inc. of which Mr. Rose was the majority stockholder. Upon the closing
of the transaction there were 20,160,000 shares of Company common stock issued
and outstanding.
To the best of the Company's knowledge, there are no known arrangements
which may at a subsequent date result in a change of control of the Company.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective close of business December 31, 1998, Loch Exploration, Inc., a
Texas corporation (the "Company") acquired all of the stock of Design
Automation Systems, Inc., a Texas corporation ("DASI") in the business of
system integration, custom programming and a premier dealer of Sun, Hewlett
Packard, IBM and Digital products and Internet security solutions. In
connection with the acquisition, the Company issued DASI's sole shareholder
14.4 million shares of authorized but unissued Company common stock, $.001
par value, valued at approximately $4.3 million. The transaction was funded
January 4, 1999. The amount of consideration was negotiated through an arm's-
length transaction. The transaction was accounted for as a purchase. The
acquisition of DASI was deemed "significant," accordingly, separate historical
and pro forma financial statements are filed herewith.
On January 27, 1999, the Exchange Agreement was amended adding Charles
Leaver and Kelly Knake as shareholders of DASI and parties to the Agreement.
In addition, the consideration paid by the Company for 100% of the DASI issued
and outstanding stock was increased from 14,400,000 to 16,560,000.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Inapplicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
In connection with the above captioned acquisition, the Company changed its
certifying accountant from Farmer, Fuqua, Hunt & Munselle, P.C. to Hein +
Associates LLP. The dismissal of Farmer, Fuqua, Hunt & Munselle, P.C. was not
the result of any disagreements on any matter involving accounting principles or
practices, financial statement disclosure or auditing scope or procedure. The
engagement of Hein + Associates LLP was approved by the Company's board of
directors.
ITEM 5. OTHER EVENTS
Inapplicable.
ITEM 6. RESIGNATIONS OR REGISTRANT'S DIRECTORS
In connection with the acquisition, the Company's board of directors,
consisting of Glenn L. Loch and Michael Black, resigned and elected Carl R.
Rose, Charles Leaver and Robert E. Nelson as the new directors. Messrs. Loch
and Black did not have any disagreements with the Company on any matter relating
to the Company's operations, policies or practices. The new directors will
serve until the next respective annual meeting of the stockholders or until
their respective successors have been elected or they resign.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The financial statements relating to the acquisition required
pursuant to Article 3-05 of Regulation S-X are attached hereto
and begin on page F-1.
(b) Pro Forma Financial Information.
The pro forma financial information relating to the acquisition
required pursuant to Article 11 of Regulation S-X is attached hereto
and begins on page F-11.
ITEM 8. CHANGE IN FISCAL YEAR
Inapplicable.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LOCH EXPLORATION, INC.
By: /s/ Robert E. Nelson
------------------------------
Robert E. Nelson
Chief Financial Officer, Principal
Financial and Accounting Officer
DATE: March 16, 1999
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT................................................. F-1
BALANCE SHEETS - December 31, 1998 and 1997.................................. F-2
STATEMENTS OF OPERATIONS - Years Ended December 31, 1998, 1997 and 1996...... F-3
STATEMENTS OF SHAREHOLDERS' EQUITY - Years Ended December 31, 1998,
1997 and 1996.......................................................... F-4
STATEMENTS OF CASH FLOWS - Years Ended December 31, 1998, 1997 and 1996...... F-5
NOTES TO FINANCIAL STATEMENTS................................................ F-6
</TABLE>
- i -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Design Automation Systems, Inc.
We have audited the accompanying balance sheets of Design Automation Systems,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 audits 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 Design Automation Systems, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Houston, Texas
February 1, 1999
F-1
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 850,925 $ 354,551
Account receivable - trade, no allowance for doubtful accounts 4,020,385 2,980,670
Accounts receivable from affiliates - 176,071
Other assets 144,579 27,467
------------ ------------
Total current assets 5,015,889 3,538,759
PROPERTY AND EQUIPMENT, net 71,480 104,141
------------ ------------
Total assets $ 5,087,369 $ 3,642,900
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable $ 1,031,483 $ 1,784,526
Accounts payable 3,649,398 1,287,353
Advances from shareholder - 288,385
Accounts payable to affiliate 50,419 50,419
Accrued expenses and other current liabilities 386,488 309,797
------------ ------------
Total current liabilities 5,117,788 3,720,480
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 11)
SHAREHOLDERS' EQUITY (DEFICIT) :
Shareholder receivable for purchase of common stock - (227,056)
Common stock, no par value; 50,000,000 shares authorized;
16,560,000 and 14,400,000 shares issued and outstanding
at December 31, 1998 and December 31, 1997, respectively 54,392 35,237
Retained earnings (accumulated deficit) (84,811) 114,239
------------ ------------
Total shareholders' equity (deficit) (30,419) (77,580)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 5,087,369 $ 3,642,900
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ 20,442,937 $ 20,074,401 $ 7,843,566
OPERATING EXPENSES:
Cost of revenues 18,124,043 17,486,967 6,377,980
Selling, general and administrative 2,058,842 2,724,239 1,403,104
------------ ------------ ------------
20,182,885 20,211,206 7,781,084
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 260,052 (136,805) 62,482
OTHER INCOME (EXPENSE):
Interest expense (61,060) (72,176) (74,760)
Interest income 56,074 63,730 36,658
Other income 5,266 21,100 5,649
------------ ------------ ------------
280 12,654 (32,453)
------------ ------------ ------------
INCOME (LOSS) FROM:
Continuing operations 260,332 (124,151) 30,029
Discontinued operations - (17,330) 339,943
------------ ------------ ------------
Net income (loss) $ 260,332 $ (141,481) $ 369,972
------------ ------------ ------------
------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ .02 $ (.01) $ -
Discontinued operations $ - $ - $ .02
Net income $ .02 $ (.01) $ .03
WEIGHTED AVERAGE SHARES OUTSTANDING 14,405,918 14,400,000 14,400,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
SHAREHOLDER
RECEIVABLE TOTAL
FOR RETAINED SHARE-
COMMON STOCK PURCHASE OF EARNINGS HOLDERS'
-------------------------- COMMON (ACCUMULATED EQUITY
SHARES AMOUNT STOCK DEFICIT) (DEFICIT)
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 14,400,000 $ 35,237 $ (227,056) $ (63,833) $ (255,652)
Net income - - - 369,972 369,972
---------- ------------ ------------ ------------ ------------
BALANCES, December 31, 1996 14,400,000 35,237 (227,056) 306,139 114,320
Spin-off of net assets of CAD
division - - - (50,419) (50,419)
Net loss - - - (141,481) (141,481)
---------- ------------ ------------ ------------ ------------
BALANCES, December 31, 1997 14,400,000 35,237 (227,056) 114,239 (77,580)
Distribution to shareholder - - 227,056 (459,382) (232,326)
Common stock issued as
compensation 2,160,000 19,155 - - 19,155
Net income - - - 260,332 260,332
---------- ------------ ------------ ------------ ------------
BALANCES, December 31, 1998 16,560,000 $ 54,392 $ - $ (84,811) $ (30,419)
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 260,332 $ (141,481) $ 369,972
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Discontinued operations - 17,330 (339,943)
Depreciation and amortization 22,803 20,810 66,405
Issuance of common stock as compensation 19,155 - -
Changes in:
Accounts receivable (863,644) (1,578,380) (447,396)
Accounts payable 2,362,045 274,022 154,644
Accrued expenses and other current liabilities 76,691 113,735 103,968
Other, net (117,112) 181,988 (12,206)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,760,270 (1,111,976) (104,556)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,190) (69,528) (31,625)
Proceeds from sale of property and equipment 32,048 - -
Advances to related party (654,673) - -
------------ ------------ ------------
Net cash provided by (used in) investing activities (644,815) (69,528) (31,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment on) notes payable, net (753,043) 644,504 778,027
Advances from shareholder, net 133,962 19,891 (30,742)
------------ ------------ ------------
Net cash provided by (used in) financing activities (619,081) 664,395 747,285
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 496,374 (517,109) 611,104
CASH AND CASH EQUIVALENTS, at beginning of year 354,551 871,660 260,556
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, at end of year $ 850,925 $ 354,551 $ 871,660
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES - interest paid $ 61,060 $ 72,176 $ 74,760
------------ ------------ ------------
------------ ------------ ------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Spin-off of net assets of CAD division $ - $ 50,419 $ -
------------ ------------ ------------
------------ ------------ ------------
Elimination of shareholder receivable $ (227,056) $ - $ -
Elimination of shareholder advances 422,347 - -
Elimination of related party receivable (654,673) - -
------------ ------------ ------------
Total non-cash distribution to shareholder $ (459,382) $ - $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Design Automation Systems, Inc. (the "Company"), a
privately held corporation, was incorporated under the laws of the State
of Texas on April 26, 1989. The Company is a value added reseller of
integrated solutions. The Company is headquartered in Houston, Texas and
is a dealer of Sun, HP, and IBM products. The Company sells products and
services throughout the United States.
REVENUE RECOGNITION - The Company recognizes revenue for products sold
when the customer receives the product.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost,
adjusted for accumulated depreciation. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related
assets, which are five to seven years.
FEDERAL INCOME TAXES - The Company has received approval from the
Internal Revenue Service to be treated as an S Corporation in accordance
with Internal Revenue Code Section 1362. Accordingly, the Company's
income is taxed directly to the shareholders, and no provision for
federal income taxes is recorded by the Company.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company considers cash equivalents to include all cash items, such
as time deposits and short-term investments that mature in three months
or less from the date of acquisition.
EARNINGS PER SHARE - Net income per share is computed on the basis of
the weighted average number of common shares outstanding each year, plus
common stock equivalents related to dilutive stock options.
There were no dilutive securities at December 31, 1998 or 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments, primarily accounts receivable, accounts payable and notes
payable, closely approximate the carrying values of the instruments due
to the short-term maturities of such instruments.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income is defined as all
changes in shareholders' equity, exclusive of transactions with owners,
such as capital investments. Comprehensive income includes net income or
loss, changes in certain assets and liabilities that are reported
directly in equity such as translation adjustments on investments in
foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal to
its net income (loss) for all periods presented in these financial
statements.
F-6
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying results.
Actual results could differ from these estimates.
2. ADVANCES FROM SHAREHOLDER
The Company has advances due to the Company's majority shareholder. The
advances are unsecured, due on demand and bears interest at a rate of
14% per annum. Interest on the advances is paid semi-monthly. Interest
related to these advances totaled approximately $56,000, $33,000 and
$39,000 for the years ended 1998, 1997 and 1996, respectively. These
advances were converted to equity in 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Furniture and fixtures $ 45,439 $ 36,001
Computer equipment 130,103 155,304
------------ ------------
175,542 191,305
Accumulated depreciation (104,062) (87,164)
------------ ------------
$ 71,480 $ 104,141
------------ ------------
------------ ------------
</TABLE>
4. NOTE PAYABLE
The Company purchases its inventory from one of its largest vendors
under a $2,500,000 credit facility with an inventory financing company.
Advances under the agreement are paid directly from the financing
company to the supplier, and a fee is calculated on the invoice
amount and remitted to the financing company by the supplier. Draws
are payable in 60 days without interest and are secured by inventory
and receivables. Past due amounts bear interest at the published prime
rate plus 6%. The agreement subjects the Company to certain restrictive
covenants such as limitation on subordinated debt payments, minimum
tangible capital funds requirements and a maximum ratio of
unsubordinated liabilities to tangible net worth.
No interest expense was incurred under this agreement during the years
ended December 31, 1998, 1997 or 1996.
F-7
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
5. LEASE COMMITMENTS
The Company leases office space under a non-cancelable operating lease.
Total rent expense for the years ended 1998, 1997 and 1996 was
approximately $82,000, $46,000 and $42,000, respectively. Future minimum
rentals due under non-cancelable operating leases with an original term
of at least one-year are approximately as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------
<S> <C>
1999 $ 104,000
2000 98,000
------------
$ 202,000
------------
------------
</TABLE>
6. CONCENTRATIONS OF CREDIT RISK
For the year ended December 31, 1998, the Company purchased
approximately 82% of its inventory from three suppliers. For the years
ended December 31, 1997 and 1996, the Company purchased approximately
79% and 74%, respectively, from two suppliers.
Financial instruments that potentially subject the Company to
concentration of credit risk are accounts receivable. The Company
performs ongoing credit evaluations as to the financial condition of its
customers. Generally, no collateral is required. Two customers made up
approximately 64% and 37% of accounts receivable balances at December
31, 1998 and 1997, respectively.
The Company at times maintains deposits which may be in excess of the
Federal Deposit Insurance Corporation insurance limit or the Securities
Investment Protection Corporation insurance limit. Management of the
Company believes the risk of loss in connection with the accounts is
minimal.
7. REVENUES FROM MAJOR CUSTOMERS
A summary of the Companies' revenues from major customers is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Customer A $ 4,739,911 $ 4,276,459 $ 1,213,270
Customer B 2,588,120 633,783 -
Customer C 2,511,147 788,880 -
Other 10,603,759 14,375,279 6,630,296
------------ ------------ ------------
Totals $ 20,442,937 $ 20,074,401 $ 7,843,566
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-8
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
8. DISCONTINUED OPERATIONS
On September 30, 1997, the Board of Directors approved a plan to spin
off its computer-aided design ("CAD") software segment of the business
to a newly formed company that is wholly-owned by the sole shareholder
of the Company at the time of the distribution. The transaction was
completed October 1, 1997. As of the date the transaction was completed,
the book value of the net assets distributed totaled $50,419. This
amount consisted of accounts receivable of $344,047 and accounts payable
and accrued expenses of $293,628.
The financial statements represent the historical amounts of the Company
restated to show the remaining operations of the Company as continuing
operations and the CAD results as discontinued operations.
No gain or loss resulted from this transaction. Operating results of the
discontinued CAD operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 1,254,361 $ 1,300,854
Net income (loss) $ (17,330) $ 339,943
</TABLE>
Included in accounts payable to affiliate as of December 31, 1998
and 1997 was $50,419 due to the same company noted above.
9. RELATED PARTY TRANSACTIONS
The Company had $119,497 and $165,000 management fee income for the
years ended December 31, 1998 and 1997, respectively, from a company
that is wholly-owned by the majority shareholder of the Company.
Accounts receivable related to the management fees was approximately
$163,000 as of December 31, 1997. Additionally, the Company had
approximately $13,000 due from a company that is seventy-percent-owned
by the largest shareholder of the Company.
F-9
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. YEAR 2000
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem.
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculations. The Year 2000 problem may
impact or be impacted by other entities with which the Company transacts
business.
11. SUBSEQUENT EVENT
Effective January 1, 1999, Loch Exploration, Inc. ("Loch"), a Texas
corporation, acquired all of the stock of the Company in a "reverse
merger," whereby the Company is the acquiror for accounting purposes. In
connection with the acquisition, Loch (effectively a shell corporation)
issued the Company's shareholders 16,560,000 shares of authorized but
unissued common stock, $.001 par value, valued at approximately $4.3
million. The transaction was funded January 4, 1999. The amount of
consideration was negotiated through an arm's-length transaction. The
transaction was accounted for in a manner similar to a pooling of
interests, whereby no goodwill resulted from this transaction. As a
result of this transaction, the Company will be taxed as a C
Corporation; however, at the date of the transaction, no significant
basis differences existed between tax and financial reporting purposes
that would result in deferred tax balances.
Effective January 1999, the Board of Directors of the Company approved
five-year employment agreements with three key employees for an
aggregate minimum base salary and bonus compensation of $925,000. On
January 4, 1999, the Company's shareholders approved a 10,000-for-one
split of the Company's common stock. Shares issued and outstanding have
been retroactively restated to reflect this split.
In February 1999, the Board of Directors approved the 1999 Employee
Stock Option Plan (the "Plan"). The Board reserved 3,000,000 shares
of common stock for issuance under the Plan.
F-10
<PAGE>
LOCH EXPLORATION, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statement of operations of Loch
Exploration, Inc. (the "Company") for the year ended December 31, 1998, and the
unaudited pro forma consolidated balance sheet of the Company as of December 31,
1998 (the "Unaudited Pro Forma Consolidated Financial Statements") give effect
to the acquisition of Design Automation Systems, Inc. ("DASI") by the Company,
which was effective January 1, 1999. This acquisition was accounted for as a
reverse merger (the "Merger") and recorded for accounting purposes in a manner
similar to a pooling of interests and resulted in no goodwill.
The unaudited pro forma consolidated statement of operations for the year ended
December 31, 1998, was prepared assuming that the transaction described above
was consummated as of the beginning of the period presented. The unaudited pro
forma consolidated balance sheet as of December 31, 1998 was prepared assuming
that the transaction described above was consummated as of December 31, 1998.
The Unaudited Pro Forma Consolidated Financial Statements are based upon the
historical financial statements of DASI which are included elsewhere in this
filing and should be read in conjunction with those financial statements and the
notes thereto. The Merger was accounted for in a manner similar to a pooling of
interests, whereby no goodwill was derived from the transaction. The Company was
the legal acquiror; however, DASI was the acquiror for accounting purposes.
Therefore, for purposes of these Unaudited Pro Forma Consolidated Financial
Statements, the historical financial statements of DASI will become those of the
registrant. Prior to the Merger, the Company had approved a spin-off of the
Company's subsidiary that holds all of the Company's operating assets and
liabilities to the stockholders of record prior to the Merger. As a result of
the plan to spin off the operations to its stockholders, the historical
operations of the Company will not be included in the Unaudited Pro Forma
Consolidated Financial Statements, which will only include the historical
financial statements of DASI and the necessary pro forma adjustments to reflect
contractual compensation arrangements and income taxes. The pro forma
consolidated balance sheet of the Company, giving effect to the Merger and the
spin-off of the subsidiary of the Company, will effectively be that of DASI;
therefore, an Unaudited Pro Forma Consolidated Balance Sheet is not included
herein, and reference should be made to the audited balance sheet of DASI at
December 31, 1998, included elsewhere herein.
The pro forma adjustments and the resulting Unaudited Pro Forma Consolidated
Financial Statements have been prepared based upon available information and
certain assumptions and estimates deemed appropriate by the Company. The
Company's management believes, however, that the pro forma adjustments and the
underlying assumptions and estimates reasonably present the significant effects
of the transaction reflected thereby and that any subsequent changes in the
underlying assumptions and estimates will not materially affect the Unaudited
Pro Forma Consolidated Financial Statements presented herein. The Unaudited Pro
Forma Consolidated Financial Statements do not purport to represent what the
Company's financial position or results of operations actually would have been
had the Merger occurred on the date indicated or to project the Company's
financial position or results of operations for any future date or period.
Furthermore, the Unaudited Pro Forma Consolidated Financial Statements do not
reflect changes that may occur as the result of post-merger activities and other
matters.
F-11
<PAGE>
LOCH EXPLORATION, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------ -----------------------------
PRO FORMA
DASI ADJUSTMENTS OPERATIONS
------------ ----------- ------------
(a) and (b)
<S> <C> <C> <C>
REVENUES $ 20,442,937 $ - $ 20,442,937
OPERATING EXPENSES:
Cost of revenues 18,124,043 - 18,124,043
Selling, general and administrative 2,058,842 (200,000) 1,858,842
------------ ----------- ------------
20,182,885 (200,000) 19,982,885
------------ ----------- ------------
INCOME FROM OPERATIONS 260,052 200,000 460,052
OTHER INCOME (EXPENSE):
Interest expense (61,060) - (61,060)
Interest income 56,074 - 56,074
Other income 5,266 - 5,266
------------ ----------- ------------
280 - 280
------------ ----------- ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 260,332 200,000 460,332
INCOME TAXES - (161,000) (161,000)
------------ ----------- ------------
INCOME FROM CONTINUING OPERATIONS $ 260,332 $ 39,000 $ 299,332
------------ ----------- ------------
------------ ----------- ------------
BASIC EARNINGS PER COMMON SHARE FROM
CONTINUING OPERATIONS $ .02
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,405,918
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
LOCH EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND AS OF DECEMBER 31, 1998
1. BASIS OF PRESENTATION:
The unaudited pro forma consolidated balance sheet is presented assuming
the Merger occurred December 31, 1998 (see audited balance sheet
included elsewhere herein). The unaudited pro forma consolidated
statement of operations for the year ended December 31, 1998 is
presented as if the Merger occurred at the beginning of 1998. The
Unaudited Pro Forma Consolidated Financial Statements may not
necessarily be indicative of the results which would actually have
occurred if the Merger had been in effect on the date or for the period
indicated or which may result in the future.
2. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS:
The pro forma adjustments to the unaudited pro forma consolidated
statement of operations reflect the following:
(a) SALARIES - This adjustment reflects the contractual compensation
arrangements executed upon effectiveness of the Merger.
(b) INCOME TAXES - The adjustment for income taxes represents the tax
effect of DASI's income before taxes giving effect of the
foregoing pro forma adjustments computed at a 34% income tax rate
for estimated federal and state income taxes. DASI had
historically been taxed under the Subchapter S provisions of the
Internal Revenue Code, whereby the earnings of DASI had been
taxed at the shareholder level for federal purposes.
F-13
<PAGE>
EXHIBITS
Exhibit
No. Page
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2.1(1) Exchange Agreement by and between by and between
Loch Exploration, Inc and Design Automation
Systems, Inc.
2.2(1) Amendment to Exchange Agreement
- -----------
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed January 27, 1999 and incorporated herein by reference.
