SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-0592823
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
633 Seventeenth Street, Suite 1670, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(303) 294-9525
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
/X/ Yes / / No
Shares of common stock outstanding on August 14, 1995: 16,307,013
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
<TABLE>
<CAPTION>
June 30 March 31
1995 1995
(Unaudited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $83,000 $83,000
Accounts receivable:
Oil and gas sales 263,000 292,000
Joint interest billings
and other, net 128,000 299,000
Other current assets 133,000 46,000
------- -------
Total current assets 607,000 720,000
======= =======
Property and equipment
Oil and gas property (full
cost method) 31,502,000 31,418,000
Support equipment 440,000 435,000
---------- ----------
31,942,000 31,853,000
Accumulated depletion (includes
cumulative ceiling limitation
charges of $14,091,000) (28,933,000) (28,763,000)
Accumulated depreciation (365,000) (358,000)
------------ ------------
Net property and equipment 2,644,000 2,732,000
Other assets 71,000 56,000
------------ ------------
TOTAL ASSETS $3,322,000 $3,508,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
<TABLE>
<CAPTION>
June 30 March 31
1995 1995
(Unaudited)
----------- ---------
<S> <C> <C>
LIABILITIES
Current liabilities
Accounts payable and accrued
liabilities $445,000 $492,000
Current portion of long-term
debt 498,000 514,000
-------- ---------
Total current liabilities 943,000 1,006,000
Long-term debt, less current
portion 516,000 606,000
-------- ---------
TOTAL LIABILITIES 1,459,000 1,612,000
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value
Authorized: 3,000,000 shares
Issued: 0 shares 0 0
Common stock, $.10 par value
32,000,000 shares authorized;
16,307,013 shares outstanding
at March 31 and June 30 1,688,000 1,688,000
Additional paid-in capital 21,022,000 21,022,000
Employee Stock Ownership Plan
contribution 13,000 13,000
Accumulated deficit (20,831,000) (20,798,000)
Less treasury stock (572,739
shares at March 31 and
June 30); at cost (29,000) (29,000)
TOTAL SHAREHOLDERS' EQUITY 1,863,000 1,896,000
---------- ----------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $3,322,000 $3,508,000
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30
1995 1994
------- -------
<S> <C> <C>
REVENUE
Oil and gas sales $751,000 $256,000
Well service revenue 1,000 0
-------- --------
Total revenue 752,000 256,000
-------- --------
EXPENSES
Oil and gas production 486,000 125,000
Production tax 59,000 18,000
Well service expenses 1,000 0
Depreciation, depletion and
amortization 174,000 85,000
General and administrative 34,000 60,000
-------- --------
Total operating expenses 754,000 288,000
-------- --------
Loss from operations (2,000) (32,000)
OTHER INCOME (EXPENSE)
Interest and other income 2,000 5,000
Interest expense (33,000) (10,000)
-------- --------
Total other income (expense) (31,000) (5,000)
Loss before income taxes (33,000) (37,000)
Income taxes 0 0
--------- ---------
NET LOSS $(33,000) $(37,000)
========= =========
Weighted average number of
shares outstanding 16,307,013 16,736,505
Net loss per share $(.002) $(.002)
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Quarter Ended June 30
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss $(33,000) $(37,000)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 174,000 85,000
Employee Stock Ownership Plan
contribution 0 7,000
Change in current assets and
current liabilities:
Accounts receivable, net 200,000 23,000
Accounts payable and accrued
liabilities (47,000) (66,000)
Other current assets (87,000) 0
Change in other assets (15,000) 0
Other 3,000 2,000
-------- ---------
Net cash provided by operating
activities 195,000 14,000
-------- ---------
Cash flows from investing activities
Capital expenditures
Oil and gas property (84,000) (53,000)
Support equipment (5,000) (23,000)
Proceeds from sale of property
and equipment 0 0
-------- ---------
Net cash used in investing
activities (89,000) (76,000)
-------- ---------
Cash flows from financing activities
Long-term debt payments (106,000) (3,000)
Purchase of treasury stock 0 0
--------- ---------
Net cash used in financing
activities (106,000) (3,000)
--------- ---------
Cash
Net increase (decrease) 0 (65,000)
Balance, beginning of period 83,000 378,000
-------- --------
Balance, end of period $83,000 $313,000
======== ========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
June 30, 1995
The accompanying interim financial statements of Basic Earth Science Systems,
Inc. (Basic or the Company) are unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period.
The financial statements included herein have been prepared by the Company
pursuant to the rules an regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Management believes the disclosures made are adequate to make the information
not misleading and suggests that these condensed financial statements be read in
conjunction with the financial statements and notes hereto included in Basic's
March 31, 1995 annual report.
1. Summary of Significant Accounting Policies
Reclassifications
Certain prior year amounts may have been reclassified to conform to current year
presentation.
Income Taxes
In the first quarter of fiscal 1994, Basic implemented Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes,"
effective as of April 1, 1993. SFAS 109 requires recognition of deferred income
tax assets and liabilities based on enacted tax laws for all temporary
differences between financial reporting and tax bases of assets, liabilities and
carryforwards under SFAS 109. Deferred tax assets are then reduced, if deemed
necessary (i.e., more likely than not), by a valuation allowance for the amount
of any tax benefits which, based on current circumstances, are not expected to
be realized.
The Company's adoption of SFAS 109 had no cumulative effect on operations for
the quarter ended June 30, 1995 since the net deferred tax asset of $6,525,000
was offset by a valuation allowance of an equal amount. The Company's deferred
tax liabilities and assets are comprised of the following components at June 30,
1995 and 1994.
<TABLE>
<CAPTION>
Quarter ended June 30
1995 1994
------- -------
<S> <C> <C>
Deferred tax liabilities
Depreciation and depletion $(377,000) $(323,000)
Deferred tax assets
Net operating loss
carryforwards 5,716,000 5,705,000
Statutory depletion
carryforward 1,186,000 1,144,000
Valuation allowance (6,525,000) (6,526,000)
----------- -----------
Net deferred tax asset $0 $0
=========== ===========
</TABLE>
At March 31, 1995, the Company had available approximately $16,304,000 of net
operating loss carryforwards which expire in varying amounts in the years 1996
through 2009. The Company also has available a depletion carryover of
approximately $3,388,000.
The Company has established a valuation allowance due to the uncertainty that
the full amount of the operating loss carryforwards will be utilized due to
expiration and other factors. Although management expects improvement in the
future results of operations, it emphasized past performance rather than income
projections when determining the valuation allowance. Any subsequent
adjustments to the valuation allowance, if deemed appropriate due to changed
circumstances, will be recognized as a separate component of the provision for
income taxes.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
Liquidity
During the quarter just ended, current assets decreased 16% from $720,000 at
year ended March 31, 1995 (March 31) to $607,000 at June 30, 1995 (June 30) and
current liabilities decreased 6% from $1,006,000 at March 31 to $943,000 at June
30. Consequently, the Company's current ratio decreased slightly from .7:1 at
March 31 to .64:1 at June 30. For Bank covenant purposes, at March 31 the
current ratio was 1.46:1 and decreased to 1.36:1 at June 30.
Hedging
The Company previously disclosed its intention to hedge its oil price risk.
Consequently, in the quarter just ended, the Company executed twenty-two (22)
put option contracts at a cost of approximately $9,000. The intent of this
transaction was to create a $17.00 per barrel floor price for approximately 75%
of the Company's anticipated oil production from key properties through October
1995. By utilizing this type of instrument, the Company would participate in
100% of any upside price movement. The Company did not hedge any of its gas
production.
Liquidity Outlook
The Company's primary source of funding is the net cash flow from the sale of
its oil and gas production. The profitability and cash flow generated by the
Company's operations in any particular accounting period will be directly
related to: (a) the volume of oil and gas produced and then sold, (b) the
average realized prices for oil and gas sold, and (c) lifting costs. Despite
the Company's increased monthly debt repayment and interest requirements,
management believes the cash generated from operations and hedging activities
will enable the Company to meet its existing and normal recurring obligations as
they become due in fiscal year 1996.
Strategy Implementation
Pursuing its acquisition strategy, in the quarter just ended, the Company
purchased from unrelated third parties: (1) for $20,000, a 60% and 68% working
interest in two North Dakota wells which the Company now operates; (2) for
$16,000, a 5% working interest in a North Dakota well that the Company already
operates; and (3) for $1,500, a 6.3% working interest in a Montana well which
the Company also operates.
Outlook for Remainder of Fiscal Year 1996
To the extent that funds are available, the Company intends to pursue the
acquisition of producing properties and the exploitation of both existing
properties and those which it acquires. However, the Company may alter or vary
its plan of operation based upon changes in circumstances, unforeseen
opportunities, inability to negotiate favorable acquisition or loan terms, lack
of funding, change in oil or gas prices, lending institution requirements and
other events which the Company is not able to anticipate.
Results of Operations
Quarter Ended June 30,1995 Compared to Quarter Ended June 30, 1994
Overview
Operations in the quarter ended June 30, 1995 resulted in a net loss of $33,000
compared to a net loss of $37,000 in the same quarter in 1994.
Revenues
Oil and gas sales revenue increased $495,000 (193%) in the quarter ended June
30, 1995 (1995) from the quarter ended June 30, 1994 (1994). Of this amount,
$409,000 (83%) was attributable to increased oil production and $47,000 (9%) was
attributable to oil price increases. Gas volume increases accounted for a
$69,000 (14%) positive variance and gas price decreases accounted for a negative
variance of -$30,000 (-6%).
Volumes and Prices
Total liquid production increased 196%, from 13,200 barrels in 1994 to 39,100
barrels in 1995 and the price per barrel increased 8%, from $15.83 in 1994 to
$17.03 in 1995. Total gas production increased 147%, from 22,900 MCF's in 1994
to 56,600 MCF's in 1995, while the price per MCF decreased 26%, from $2.06 in
1994 to $1.53 in 1995. The increase in both liquid and gas production was
primarily due to three factors: (1) the acquisition of approximately sixty
properties in the Williston basin of Montana and North Dakota as disclosed in
the Company's 1995 Form 10-KSB; (2) the development drilling and recompletion on
the Company's Antenna Federal prospect in Weld County, Colorado during the last
half of fiscal 1995; and (3) the acquisition of a well in Montana in fiscal
1995.
Expenses
Oil and gas production expense increased $361,000 (289%) in 1995 from 1994
primarily as a result of the normal production expenses associated with the
acquisitions mentioned above as well as workovers on those newly acquired
properties. It is management's belief that these workover expenses are not
indicative of future operations, but rather reflect deferred maintenance by the
previous owner. As a result of the increased production expense, the overall
lifting cost per equivalent barrel increased from $8.43 in 1994 to $11.23 in
1995.
Depreciation, depletion and amortization expense increased $89,000 (105%) in
1995 from 1994 due to increases in Basic's production volumes in the quarter
just ended. This increase was more than offset by the positive impact of the
aforementioned acquisitions on the Company's reserve base determination at the
end of fiscal 1995. As a result, the depletion rate decreased from $4.54 per
equivalent barrel in 1994 to $3.51 per equivalent barrel in 1995.
Net general and administrative expense decreased $26,000 (43%), from $60,000 in
1994 to $34,000 in 1995 primarily as a result of the fact that more general and
administrative expenses were charged out to operations and the full cost pool in
1995. Also contributing to the overall decrease in net general and
administrative expense were decreases in building-related expenses and outside
professional services. Offsetting these decreases were increases in rent,
entertainment, and seminars.
Liquids and Natural Gas Production Sales Price and Production Cost
Liquids and natural gas production, average sales prices and average production
costs per equivalent barrel of production are shown in the following table for
the quarter ended June 30 in the current and prior year. Certain prior year
amounts have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Quarter ended June 30
1995 1994
------- -------
<S> <C> <C>
Production
Oil (barrels) 39,100 13,200
Gas (mcf) 56,600 22,900
Revenue
Oil $665,000 $209,000
Gas 86,000 47,000
-------- --------
Total $751,000 $256,000
======== ========
Average sales price(3)
Oil (per barrel) $17.03 $15.83
Gas (per mcf) $1.53 $2.06
Total production expense(1) $545,000 $143,000
Average production exp.(2)(3) $11.23 $8.43
<FN>
(1) Operating costs, including production tax
(2) Operating costs, including production tax, per equivalent barrel (6
mcf of gas is equivalent to 1 barrel of oil)
(3) Averages calculated based upon non-rounded figures
</FN>
</TABLE>
<PAGE>
PART II.
OTHER INFORMATION
(Cumulative from March 31, 1995)
Item 1. Legal Proceedings
The Company previously disclosed that in November 1994, the Company received
notification from the State of Colorado, Equal Employment Opportunity Commission
(EEOC) that a former employee had filed a complaint regarding severance pay. In
June 1995, the Company received notification from the EEOC that no probable
cause was found for the complaint and that the case had been dismissed. Under
Colorado law, the former employee has ninety days to appeal this decision. If
the decision is appealed, the Company expects to vigorously defend its position,
but to the extent it would be unsuccessful, the disputed item would be a nominal
amount.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
During the period ending June 30, 1995, there were no meetings of Basic's
shareholders nor were any matters submitted to a vote of security holders
through the solicitation of consents, proxies or otherwise.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following Form 8-Ks have been filed with the Securities and Exchange
Commission since March 31, 1995 and are incorporated herein by reference. For
further information on these disclosures, reference to the original documents
should be made. The following is a summary of those original documents.
Form 8-K dated June 19, 1995
On June 19, 1995, the Company reported that it had entered into a hedging
transaction whereby the Company executed twenty-two (22) put option contracts at
a cost of approximately $9,000. The intent of this transaction was to create a
$17.00 per barrel floor price for approximately 75% of the Comapny's anticipated
oil production from key properties through October 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized persons on behalf of Basic.
By (signature) /s/ Ray Singleton
(Name and title) Ray Singleton, President
(Date) August 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of operations found on pages 2, 3 and
4 of the Company's Form 10-QSB for the year-to-date and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 83,000
<SECURITIES> 0
<RECEIVABLES> 416,000
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 607,000
<PP&E> 31,942,000
<DEPRECIATION> 29,298,000
<TOTAL-ASSETS> 3,322,000
<CURRENT-LIABILITIES> 943,000
<BONDS> 0
<COMMON> 1,688,000
0
0
<OTHER-SE> 1,863,000
<TOTAL-LIABILITY-AND-EQUITY> 3,322,000
<SALES> 751,000
<TOTAL-REVENUES> 752,000
<CGS> 754,000
<TOTAL-COSTS> 754,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,400
<INTEREST-EXPENSE> 33,000
<INCOME-PRETAX> (33,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,000)
<EPS-PRIMARY> (.002)
<EPS-DILUTED> (.002)
</TABLE>
