SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 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
incorporation or organization) Identification No.)
633 Seventeenth Street, Suite 1670, Denver, Colorado 80202-3635
(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.
Yes /X/ No / /
Shares of common stock outstanding on November 10, 1995: 16,580,487
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
<TABLE>
<CAPTION>
September 30 March 31
1995 1995
(Unaudited)
------------ -----------
<S> <C> <C>
Assets
Current assets
Cash & cash equivalents $152,000 $83,000
Accounts receivable
Oil and gas sales 259,000 292,000
Joint interest and other, net 94,000 299,000
Other current assets 67,000 46,000
----------- -----------
Total current assets 572,000 720,000
----------- -----------
Property and equipment
Oil and gas property (full cost method) 31,537,000 31,418,000
Support equipment 440,000 435,000
----------- -----------
31,977,000 31,853,000
Accumulated depletion - FCP (includes
cumulative ceiling limitation
charges of $14,091,000) (29,098,000) (28,763,000)
Accumulated depreciation (370,000) (358,000)
----------- -----------
Net property & equipment 2,509,000 2,732,000
Other assets 71,000 56,000
----------- -----------
Total Assets $3,152,000 $3,508,000
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
<TABLE>
<CAPTION>
September 30 March 31
1995 1995
(Unaudited)
------------ -----------
<S> <C> <C>
Liabilities
Current liabilities
Accounts payable & accrued liabilities $514,000 $492,000
Current portion of long-term debt 429,000 514,000
------------ -----------
Total current liabilities 943,000 1,006,000
Long-term debt, less current portion 376,000 606,000
------------ -----------
Total liabilities 1,319,000 1,612,000
------------ -----------
Shareholders' Equity
Preferred stock, $.10 par value
Authorized - 3,000,000 shares
Issued - 0 shares ----- -----
Common stock, $.10 par value
32,000,000 shares authorized;
16,307,013 shares outstanding at
March 31 and 16,580,487 at
September 30 1,688,000 1,688,000
Additional paid-in capital 21,022,000 21,022,000
Employee Stock Ownership Plan
contribution ----- 13,000
Accumulated deficit (20,861,000) (20,798,000)
Less: treasury stock (572,739 shares
at March 31 and 299,265 at
September 30); at cost (16,000) (29,000)
------------ -----------
Total shareholders' equity 1,833,000 1,896,000
------------ -----------
Total Liabilities & Shareholders' Equity $3,152,000 $3,508,000
============ ===========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Quarter Ended
September 30 September 30
1995 1994 1995 1994
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $1,397,000 $569,000 $646,000 $313,000
Well service revenue 3,000 5,000 2,000 5,000
---------- --------- --------- ---------
Total revenue 1,400,000 574,000 648,000 318,000
---------- --------- --------- ---------
Expenses:
Oil and gas production 881,000 308,000 395,000 183,000
Production tax 114,000 39,000 55,000 21,000
Well service expenses 3,000 4,000 2,000 4,000
Depreciation, depletion
& amortization 342,000 179,000 168,000 94,000
General & administrative 68,000 120,000 34,000 60,000
---------- ---------- -------- --------
Total expenses 1,408,000 650,000 654,000 362,000
---------- ---------- -------- --------
Loss from operations (8,000) (76,000) (6,000) (44,000)
---------- ---------- -------- --------
Other Income (Expense):
Interest & other income 2,000 7,000 ----- 2,000
Gain on sale of office
building ----- 38,000 ----- 38,000
Interest expense (57,000) (20,000) (24,000) (10,000)
---------- ---------- -------- --------
Total other
income (expense) (55,000) 25,000 (24,000) 30,000
---------- ---------- -------- --------
Loss before income taxes (63,000) (51,000) (30,000) (14,000)
Income taxes ----- ----- ----- -----
---------- ---------- -------- --------
Net loss $(63,000) $(51,000) $(30,000) $(14,000)
========== ========== ======== ========
Weighted average number of
shares outstanding 16377247 16736505 16446721 16736505
========== ========== ======== ========
Net loss per share: $(.004) $(.003) $(.002) $( .001)
========== ========== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30
1995 1994
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(63,000) $(51,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and
amortization 342,000 179,000
Employee Stock Ownership Plan
contribution ----- 13,000
Change in current assets and current
liabilities
Accounts receivable, net 238,000 (74,000)
Accounts payable and accrued
liabilities 22,000 190,000
Other current assets (21,000) 21,000
Other assets (15,000) (52,000)
Gain on sale of office building ----- (38,000)
Other adjustments 6,000 5,000
---------- ----------
Net cash provided by operating activities 509,000 193,000
---------- ----------
Cash Flows from Investing Activities
Capital expenditures
Oil and gas property (120,000) (391,000)
Support equipment (5,000) (33,000)
Proceeds from sale of property and
equipment ----- 382,000
---------- ----------
Net cash used in investing activities (125,000) (42,000)
---------- ----------
Cash Flows from Financing Activities
Long-term debt payments (315,000) (349,000)
Proceeds from borrowing ----- 500,000
Purchase of treasury stock ----- -----
---------- ----------
Net cash provided by (used in) financing
activities (315,000) 151,000
---------- ----------
Cash
Net increase 69,000 302,000
Balance at beginning of period 83,000 378,000
---------- ----------
Balance at end of period $152,000 $680,000
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
September 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 and 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION Certain prior year amounts 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 upon 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 since
the net deferred tax asset of $6,398,000 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 September 30, 1995.
(Intentionally left blank)
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
September 30, 1995
(Continued)
<TABLE>
<CAPTION>
September 30, 1995
------------------
<S> <C>
Deferred tax liabilities
Depreciation and depletion $(494,000)
Deferred tax assets
Net operating loss carryforwards 5,706,000
Statutory depletion carryforward 1,186,000
Valuation allowance (6,398,000)
------------
Net deferred tax asset $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 2010. 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 future
results of operations, it emphasizes 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY During the quarter just ended, current assets decreased 21% from
$720,000 at year ended March 31, 1995 (March 31) to $572,000 at September 30,
1995 (September 30) and current liabilities decreased 6% from $1,006,000 at
March 31 to $943,000 at September 30. Consequently, the Company's current ratio
decreased from .72:1 at March 31 to .61:1 at September 30. For Bank covenant
purposes, at March 31 the current ratio was 1.46:1 and decreased to 1.11:1 at
September 30. If this trend were to continue and the Company's current ratio
fell below 1.0:1.0, the Company would technically be considered in default of
Bank covenants. Since the reduction in the current ratio to this level was
intentional, the Company expects the current ratio to stabilize at or near its
current level. Thus, a technical default is not expected to occur.
HEDGING The Company previously disclosed it had executed twenty-two (22) put
option crude oil contracts at a cost of approximately $9,000. The intent of
this transaction was to create a $14.50 per barrel effective field price for
approximately 75% of the Company's anticipated oil production from key
properties through October 1995. Due to the nature of the Company's debt
repayment requirements, management believed that protection from price
uncertainty was critical during this period. As of this date, all of these
options have expired unexercised and the Company has no other hedges in place.
However, management expects to hedge some portion of future production to
mitigate the effects of future price uncertainty.
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.
DEBT On March 30, 1995, the Company disclosed the modification of its loan
agreement with Norwest Bank Colorado N.A. (the Bank) to increase its loan
indebtedness by an additional $690,000 to $1,120,000. Following required
monthly principal payments, by September 13, 1995, the unpaid loan principal
balance was $805,000.
On September 13, 1995, the Bank and the Company further modified the loan
agreement to create a "Declining Balance, Revolving Line Of Credit" (DBRLOC) and
increased the face amount of the promissory note to $2,500,000. The Company is
now able to draw on the DBRLOC up to $2,500,000 or the borrowing base, whichever
is less. At September 13, 1995 the Company's borrowing base was set at
$1,050,000, but declines monthly by the minimum required principal payment.
Under the DBRLOC and note, the Company is required to make monthly principal
payments commencing October 31, 1995 and continuing each month thereafter until
May 31, 1998 in the following minimum amounts:
<TABLE>
<CAPTION>
Time period Amount
------------------------------------------ -----------------
<S> <C> <C>
October 31, 1995 through December 31, 1995 $53,000 per month
January 31, 1996 through December 31, 1996 $30,000 per month
January 31, 1997 through December 31, 1997 $25,000 per month
January 31, 1998 through April 30, 1998 $20,000 per month
May 31, 1998 Remaining principal balance
</TABLE>
The Company's borrowing base will be reviewed biannually and may be adjusted up
or down due to reevaluation of previously collateralized properties, addition of
newly acquired properties, increased reserves created by enhancements or
exploitation and rising or declining oil or gas prices. At May 31, 1998, unless
the DBRLOC is again modified or the borrowing base is adjusted, the outstanding
principal balance is expected to be approximately $131,000.
In addition to the above described principal payments, monthly interest payments
are due on the unpaid principal balance at the Bank's fluctuating prime lending
rate plus two percent (2%). In addition, quarterly, the Company is required to
pay a 1/2% commitment fee on the unused portion of the adjusted and declined
borrowing base. As of September 30, 1995, the Company's effective annual
interest rate was 10.75%.
As a result of the foregoing loan modification, the Company now has the ability
to draw an additional $245,000 from the DBRLOC. In addition, the Company may
reduce the loan balance ahead of schedule and be able to re-borrow up to the
declined and/or adjusted borrowing base. The increased loan facility allows the
Company to continue implementing its plan of acquiring additional producing
properties and exploiting both existing and newly acquired properties for
additional cashflow and reserve potential. At this time the Company has not
identified any additional properties for acquisition.
Furthermore, on September 13, 1995, in addition to the above described DBRLOC,
the Bank and the Company executed the collateral documents necessary to create a
second Revolving Line Of Credit (RLOC) and make an additional $900,000 available
for the Company's hedging activities. The terms of the RLOC have not yet been
finalized and funds under this second facility are not yet available. In
addition to other anticipated requirements and restrictions, the funds from the
RLOC can only be used to fund margin requirements associated with the Company's
hedging activities. By December 15, 1995, it is expected that terms for the
RLOC will be finalized and funds will then be available.
The DBRLOC and RLOC are collateralized and secured by mortgages on substantially
all of the Company's producing oil and gas properties and the Company's
hedging/margin account associated with the Company's hedging activities.
STRATEGY IMPLEMENTATION
Pursuing its acquisition and exploitation strategy, in the quarter just ended,
the Company: (1) purchased from an unrelated third party, for $7,400, a 25%
working interest in a Montana well that the Company already operates; and (2)
participated, at a cost of approximately $60,000, in the recompletion of a
Montana well in which it owns a 50% working interest. Subsequent to the end of
the quarter, the Company disclosed that this second well was producing 147
barrels of oil, 16 barrels of water and 112 MCF of gas per day from the Bakken
formation. The well previously produced an average of 9 barrels of oil, 11
barrels of water and 4 MCF of gas per day from the Madison formation.
The Company continues to be adversely affected by the magnitude of unanticipated
repair costs associated with subsurface equipment on recently acquired Williston
basin properties. It appears the majority of these costs can be attributed to
the deferral of routine maintenance by the previous operator preparatory to the
sale of these properties. Unfortunately, these temporary deferrals were of
sufficient duration to have accelerated the requirement to replace subsurface
components. An example of such deferrals would be the curtailment of chemical
treatments to reduce apparent monthly expenses, resulting in increased corrosion
of subsurface equipment, increased subsurface failures and operating costs and,
eventually, premature replacement. In the quarter just ended, the Company
incurred approximately $45,000 in repair and replacement costs on one of its
water disposal facilities in Montana. Adding to the impact of this repair was
the fact that four producing wells, which used this facility, had to be shut-in
for three weeks while the repair took place.
The Company expects these repair costs to continue, albeit in decreasing
amounts, as the Company discovers, repairs and replaces damaged and/or
compromised subsurface equipment. While the impact of these costs is evident on
current profitability, the Company cannot predict what the impact will be on
future profitability.
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
YEAR-TO-DATE COMPARISON
OVERVIEW
Operations in the six months ended September 30, 1995 (1995) resulted in a net
loss of $63,000 compared to a net loss of $51,000 in the six months ended
September 30, 1994 (1994).
REVENUES
Oil and gas sales revenue increased $828,000 (146%) in 1995 from 1994. Of this
amount, $777,000 (94%) was attributable to an increase in oil production while
oil price decreases accounted for a negative variance of $28,000 (-3%). Gas
volume increases accounted for a positive variance of $111,000 (13%) and gas
price declines accounted for a negative variance of $32,000 (-4%).
VOLUMES AND PRICES
Total liquid production increased 161% from 29,000 barrels in 1994 to 75,800
barrels in 1995 while the price per barrel decreased slightly (-2%) from $16.60
in 1994 to $16.23 in 1995. Total gas production increased 126% from 48,900 MCFs
in 1994 to 110,600 MCFs in 1995 while the price per MCF decreased 16% from $1.80
in 1994 to $1.51 in 1995. The increase in both liquid and gas production was
primarily due to the Company's Williston basin acquisition completed in March
1995 and its drilling and recompletion program in the Wattenburg field in
northeast Colorado conducted from August 1994 to February 1995.
EXPENSES
Oil and gas production expense, including production tax, increased $648,000
(187%) in 1995 from 1994 primarily as a result of the two aforementioned
acquisition and development efforts. In addition, an unprecedented number of
workovers occurred in the six months just ended, primarily on the 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. The overall lifting cost per equivalent barrel increased 13%
from $9.34 in 1994 to $10.56 in 1995.
Depreciation, depletion and amortization expense increased $163,000 (91%) in
1995 from 1994 due to increases in the full cost pool and increases in produced
volumes, both attributable to the two aforementioned acquisition and development
efforts. The average depletion expense per equivalent barrel decreased 20% from
$4.43 in 1994 to $3.56 in 1995 as a result of the proportionally greater amount
of estimated reserves that were added at the year ended March 31, 1995.
Net general and administrative expense decreased $52,000 (43%) in 1995 from
1994. This decrease is attributable to an increase in the number of
Company-operated properties, and associated administrative overhead fees,
following the Williston basin acquisition mentioned above. Also contributing to
the overall decrease in gross general and administrative expense were decreases
in building-related expenses and outside professional services. Offsetting
these decreases were increases in rent and membership dues.
QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1994
OVERVIEW
Operations in the quarter ended September 30, 1995 (1995) resulted in a net loss
of $30,000 compared to a net loss of $14,000 in the quarter ended September 30,
1994 (1994).
REVENUES
Oil and gas sales revenue increased $333,000 (106%) in 1995 from 1994. Of this
amount, approximately $352,000 (106%) was attributable to an increase in oil
production while oil price decreases accounted for a negative variance of
$59,000 (-18%). Gas volume increases accounted for a positive variance of
$44,000 (13%) while gas price declines accounted for a negative $4,000 (-1%) of
the total variance.
VOLUMES AND PRICES
Total liquid production increased 129% from 15,800 barrels in 1994 to 36,200
barrels in 1995 while the price per barrel decreased 9% from $17.22 in 1994 to
$15.62 in 1995. Total gas production increased 108% from 26,000 MCFs in 1994 to
54,000 MCFs in 1995 while the price per MCF decreased 6% from $1.58 in 1994 to
$1.48 in 1995. The increase in both liquid and gas production was primarily due
to the Company's Williston basin acquisition and its drilling and recompletion
program in the Wattenburg field mentioned above.
EXPENSES
Oil and gas production expense, including production tax, increased $246,000
(121%) in 1995 from 1994 primarily as a result of the aforementioned acquisition
and development programs and an unprecedented number of workovers, as mentioned
earlier. The overall lifting cost per equivalent barrel decreased slightly (2%)
from $10.13 in 1994 to $9.96 in 1995 as a result of the increased production.
Depreciation, depletion and amortization expense increased $74,000 (79%) in 1995
from 1994 due to increases in the full cost pool and increases in produced
volumes, both attributable to the acquisition and development efforts mentioned
above. The average depletion expense per equivalent barrel decreased 16% from
$4.34 in 1994 to $3.65 in 1995 due to the proportionally greater amount of
estimated reserves that were added at the year ended March 31, 1995.
Net general and administrative expense decreased $26,000 (43%) in 1995 compared
to 1994. This decrease is attributable to an increase in the number of
Company-operated properties, and associated administrative overhead fees,
following the Williston basin acquisition previously mentioned. Also
contributing to the overall decrease in gross general and administrative expense
were decreases in building-related expenses and transfer agent fees. Offsetting
these decreases were increases in rent and travel expenses.
(Intentionally left blank)
<PAGE>
Liquids and Natural Gas Production, Sales Price and Production Costs
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 six months and quarter ended September 30 in the current and prior year.
<TABLE>
<CAPTION>
Six Months Ended Quarter Ended
September 30 September 30
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Production
Oil (barrels) 75,800 29,000 36,200 15,800
Gas (mcf) 110,600 48,900 54,000 26,000
Revenue
Oil $1,230,000 $481,000 $566,000 $272,000
Gas 167,000 88,000 80,000 41,000
---------- -------- ---------- ----------
Total $1,397,000 $569,000 $646,000 $313,000
========== ======== ========== ==========
Average sales price
Oil (per barrel) $16.23 $16.60 $15.62 $17.22
Gas (per mcf) 1.51 1.80 1.48 1.58
Total production exp.(1) $995,000 $347,000 $450,000 $204,000
Avg. production exp.(2) $10.56 $9.34 $9.96 $10.13
</TABLE>
(1) Operating expenses, including production tax
(2) Operating expenses, including production tax, per equivalent barrel (6 mcf
of gas is equivalent to 1 barrel of oil)
(Intentionally left blank)
<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 had ninety days to appeal this decision. As
of September 30, 1995, the ninety days had expired and the Company has not
received notification of an appeal. The Company now regards the matter as
closed.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of the shareholders was held on October 6, 1995. Proxies for
the election of directors at this meeting were solicited pursuant to Regulation
14A under the Exchange Act. There was no solicitation in opposition to
management's director nominees and all such director nominees were elected.
They are as follows: G. W. Breuer, David J. Flake, Edgar J. Huffman and Ray
Singleton. The number of votes cast for, against, and withheld with respect to
each nominee are as follows:
<TABLE>
<CAPTION>
For Against Withheld
----------- ----------- -----------
<S> <C> <C> <C>
G. W. Breuer 14,832,959 1,268,036 34,550
David J. Flake 11,865,560 4,235,435 34,550
Edgar J. Huffman 12,191,956 3,909,039 34,550
Ray Singleton 12,192,418 3,908,577 34,550
</TABLE>
The Board of Directors (BOD) had submitted two additional matters to the
Company's shareholders for approval at this annual meeting. First, the BOD
proposed to amend the Company's Certificate of Incorporation to reduce the par
value of the Company's capital stock from ten cents ($0.10) per share to one-
tenth of one cent ($0.001) per share. Proxies for this issue were solicited
pursuant to Regulation 14A under the Exchange Act. There was no solicitation in
opposition to management's proposal and the proposal was accepted with the
number of votes being as follows: For: 10,799,378 votes; Against: 5,281,802
votes; Abstentions: 86,388 votes.
Second, the BOD requested shareholder approval of the 1995 Incentive Stock
Option Plan. This Plan would provide a flexible and comprehensive stock option
and incentive plan which permits the granting of long-term incentive awards to
employees, including officers and directors employed by the Company or its
subsidiary, as a means of enhancing and strengthening the Company's ability to
attract and retain those individuals on whom the continued success of the
Company most depends. Proxies for this issue were solicited pursuant to
Regulation 14A under the Exchange Act. There was no solicitation in opposition
to management's proposal and the proposal was accepted with the number of votes
being as follows: For: 8,555,342 votes; Against: 5,229,546 votes; Abstentions:
85,785 votes.
No other matters were voted upon at the meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Document
- -------- ------------------------------------
<S> <C>
10(i)a Amended Loan Agreement between Norwest Bank Colorado, N.A. and
Basic, dated September 13, 1995, filed herein.
10(i)a 1995 Stock Option Plan, filed herein.
</TABLE>
b. 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 Company's anticipated oil production from key properties through October
1995.
Form 8-K dated September 13, 1995 On September 13, 1995, the Company reported
that it had renegotiated its loan agreement with Norwest Bank Colorado N.A (the
Bank) whereby the existing term loan was modified to create a "Declining
Balance, Revolving Line Of Credit." In addition to the above, the Bank and the
Company executed the collateral documents necessary to create a second Revolving
Line Of Credit and make an additional $900,000 available for the Company's
hedging activities. The terms of the RLOC have not yet been finalized and funds
under this second facility are not yet available.
(Intentionally left blank)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized person on behalf of Basic.
(Registrant) BASIC EARTH SCIENCE SYSTEMS, INC.
(Signature) /s/ Ray Singleton
(Name and title) Ray Singleton, President and Acting Treasurer
(Date) November 10, 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 3, 4 and
5 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 152,000
<SECURITIES> 0
<RECEIVABLES> 380,000
<ALLOWANCES> (27,000)
<INVENTORY> 0
<CURRENT-ASSETS> 572,000
<PP&E> 31,977,000
<DEPRECIATION> (29,468,000)
<TOTAL-ASSETS> 3,152,000
<CURRENT-LIABILITIES> 943,000
<BONDS> 0
<COMMON> 1,688,000
0
0
<OTHER-SE> 1,833,000
<TOTAL-LIABILITY-AND-EQUITY> 3,152,000
<SALES> 1,397,000
<TOTAL-REVENUES> 1,400,000
<CGS> 1,408,000
<TOTAL-COSTS> 1,408,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,500
<INTEREST-EXPENSE> 57,000
<INCOME-PRETAX> (63,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (63,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,000)
<EPS-PRIMARY> (.004)
<EPS-DILUTED> (.004)
</TABLE>
NORWEST BANK COLORADO, NA
1740 Broadway
Denver, Colorado
80274
September 13, 1995
Mr. Ray Singleton
President
Basic Earth Science Systems, Inc.
633 17th Street, Suite 1670
Denver, CO 80202
Dear Mr. Singleton:
Norwest Bank Colorado, National Association ("Norwest") is pleased to commit to
make a revolving line of credit ("RLOC") available to Basic Earth Science
Systems, Inc. on the terms and conditions set forth herein. In addition,
Norwest has agreed to increase its commitment to lend, which is now evidenced by
Borrower's Note to the order of Norwest dated August 1, 1994 in the face amount
of $1,120,000 (the "Production Loan"), to $2,500,000 on the terms set forth
herein.
Norwest and Basic Earth Science Systems, Inc. have entered into that letter
agreement dated March 30, 1995 (the "Agreement"). The terms of this letter
agreement (the "Amendment") shall amend and modify the terms of the Agreement to
provide for the RLOC, the increase in the amount of the Production Loan
Commitment, and such other matters as are specifically set forth herein. All
other terms and conditions of the Agreement shall remain in full force and
effect. All of the provisions of the Agreement contained in Article III
Covenants, Article IV Events of Default, Article V Remedies, Article VI Waiver,
Article VIII Successors, Assignments, Article IX Severability of Provisions,
Article X Arbitration and Article XI Colorado Law Applicable shall specifically
apply to the RLOC and RLOC Note as well as the Production Loan and Note.
1. TERMS OF PRODUCTION LOAN
Commitment Amount
Not to exceed the lesser of the Borrowing Base Amount or $2,500,000. The
Production Loan shall be evidenced by Borrower's promissory note to the order of
Norwest, dated August 1, 1994 in the original face amount of $500,000, and that
Modification/Extension Agreement of even date herewith increasing the face
amount of that promissory note to $2,500,000 (the "Note" or "Production Loan
Note"). Norwest's obligation to make advances is limited to the Borrowing Base
Amount. Although the Production Loan Note is in the face amount of $2,500,000,
it is expressly understood that Norwest's obligation to lend is restricted to
the approved Borrowing Base Amount which is, and may continue to be, less than
$2,500,000.
Fees
In addition to the fees set forth in the Agreement, Borrower shall pay Norwest a
facility fee for the period commencing on the date hereof and continuing until
the Production Loan is repaid in full and Norwest has no commitment to advance
funds under the Production Loan, equal to 1/2% of the daily average of the
difference between the Borrowing Base Amount and the outstanding principal
balance of the Production Loan to be paid quarterly, in arrears, commencing
December 31, 1995 and on the Maturity Date or such other date as the Production
Loan is paid in full.
Structure
Upon any increase in the Production Loan Borrowing Base Amount, advances may be
available on a revolving basis and Borrower may borrow, repay and reborrow so
long as the outstanding amount does not exceed the Commitment Amount.
The principal balance of the Production Loan Note shall be repaid by Borrower to
Norwest on the last day of each month as follows:
October 31, 1995 through December 31, 1995 $53,000 per month
January 31, 1996 through December 31, 1996 $30,000 per month
January 31, 1997 through December 31, 1997 $25,000 per month
January 31, 1998 through April 30, 1998 $20,000 per month
May 31, 1998 ("Maturity Date") balance of remaining principal
Interest shall continue to accrue at an annual rate equal to the fluctuating
prime rate established from time to time by Norwest, plus 200 basis points,
payable monthly on the last day of each calendar month and on the Maturity Date.
Borrowing Base Amount/Procedures
The second paragraph shall be revised as follows:
Effective as of the date hereof the Borrowing Base Amount shall be $1,050,000.
Commencing October 31, 1995, the Borrowing Base Amount will be reduced on the
last day of each calendar month by the amount of principal payments due on that
date.
Increase in Borrowing Base Amount
Borrower shall make any requests for an increase in the Borrowing Base Amount in
writing and shall provide all credit or other information relating to Borrower
or the collateral security properties which is requested by Norwest prior to
evaluation of such request.
Any agreement which Norwest makes to increase the Borrowing Base Amount must be
evidenced in writing, will require modification of this Agreement and the
Production Loan Note amortization schedule set forth herein, will be subject to
approval of a full credit analysis by Norwest and full satisfaction of any other
provisions, terms, or requirements deemed appropriate by Norwest in its
discretion.
Prior to approving any increase in the Borrowing Base Amount, Norwest may
require information including, but not limited to, the title status of the
collateral security properties and an updated independent engineering reserve
report covering the Borrower's collateral security properties pledged and
mortgaged to Norwest, prepared by an independent petroleum engineer acceptable
to Norwest, all to be furnished at Borrower's expense.
Maturity Date
The Maturity Date is the earlier of (i) May 31, 1998 or (ii) the date to which
maturity of the Note is accelerated.
1A. TERMS OF RLOC
Purpose
To fund Borrower's margin calls in Borrower's Hedging Account with Prudential
Securities.
Commitment Amount
Not to exceed $900,000. Loan advances shall be available on a revolving basis
and Borrower may borrow, repay and reborrow so long as the outstanding amount
does not exceed $900,000. The RLOC made hereunder shall be evidenced by
Borrower's promissory note to the order of Norwest, dated September 13, 1995 in
the original face amount of $900,000 (the "RLOC Note").
Structure
Borrower may make requests for loan advances only to cover margin requirements
in the Hedging Account. Loan advances may be requested on a day of each week
specified by Norwest to cover margin activity in Borrower's Hedging Account as
set forth below. Borrower shall provide Norwest with a report satisfactory to
Norwest detailing the margin activity in the Hedging Account prior to any
request for an advance of loan proceeds. Loan advances may be requested at such
time as the aggregate, net outstanding margin requirements exceed $10,000.
In the event the principal amount outstanding under the RLOC exceeds the amount
of margin funds in the Hedging Account, as indicated on the month end statement
for the Hedging Account, Borrower will make a loan paydown in the amount of such
excess by the 25th day of the following month.
Fees
Borrower shall pay Norwest a loan commitment fee of $1,000 at the first advance
of loan funds on the RLOC.
Security
The RLOC Note will be secured by a first priority Mortgage, Deed of Trust,
Assignment of Production, Security Agreement, Financing Statement and Assignment
of Proceeds, and/or any necessary modifications or amendments thereto (the
"Mortgage Documents"), on oil and gas properties owned by Borrower and selected
by Norwest. The RLOC Note will also be secured by a Security Agreement and
Assignment of Hedging Account between Borrower, Norwest and Prudential
Securities (the "Security Agreement").
Maturity Date
The Maturity Date is the earlier of (1) October 31, 1996 or (ii) the date to
which the maturity of the Note is accelerated.
II. CONDITIONS PRECEDENT
Prior to any funds being made available, the Borrower will execute and deliver
to Norwest, in form and substance satisfactory to Norwest, the RLOC Note, a
Modification/Extension Agreement for the Production Loan Note, this Amendment,
the Security Agreement, Mortgage Documents, UCC Financing Statements any other
collateral security documents or other documentation reasonably required by
Norwest, all in form and substance satisfactory to Norwest.
III. COVENANTS
In addition to the Covenants set forth in the Agreement, unless Norwest shall
otherwise consent in writing, and so long as any debt remains outstanding, the
Borrower will comply with the following:
1. Borrower will:
(1) within 30 days after each month end, provide Norwest with an aged
listing of all outstanding futures contracts containing the amount
contracted on a monthly basis and the maturity of each contract.
(2) provide Norwest with copies of confirmations of all contracts
executed for the Hedging Account, monthly position and ledger reports for
the Hedging Account and any other information pertaining to the Hedging
Account requested by Norwest.
2. Borrower and its subsidiaries will not:
(g) engage in any speculative trading in the futures markets.
(h) enter into any futures contracts that extend more than 365 days
from the date of the contract.
(i) enter into or underwrite contracts for the purchase or sale of
oil and/or gas maturing in any calendar month which are in the
aggregate, in excess of 85% of the average actual monthly oil and
gas production of Borrower in the most recent three calendar
months.
IV. EVENTS OF DEFAULT
In addition to the Events of Default set forth in the Agreement the occurrence
of any of the following shall constitute an "Event of Default" under the
Agreement and this Amendment:
9. Borrower shall fail to pay when due any principal, interest, or other
amount payable under this Amendment, or the RLOC Note, before the
expiration of 10 days after such payment is due.
10. Any default or defined Event of Default under any security agreement,
mortgage, deed of trust, promissory note, or other contract or instrument
executed by the Borrower pursuant to, or as required by, this Amendment.
11. Norwest, in good faith, considers Norwest's prospect of or right to payment
or performance under this Amendment or RLOC Note to be impaired.
V. NOTICES
The Agreement shall be amended as follows:
All notices, requests, and demands given to or made upon the respective parties
must be in writing and shall be deemed to have been given or made: (1) at the
time of personal delivery or telecopying thereof, (2) or two days after any of
the same are deposited in the U.S. Mail, first class and postage prepaid,
addressed as follows:
Borrower: Basic Earth Science Systems, Inc.
633 Seventeenth Street, Suite 1670
Denver, CO 80202
Norwest: Norwest Bank Colorado, National Association
Energy and Minerals
1740 Broadway
Denver, CO 80274-8699
or other such address as any party may designate by written notice to all other
parties.
The Agreement, this Amendment, the Notes and any contracts or instruments
relating thereto, represent the entire agreement between the parties, and it is
expressly understood that all prior conversations or memoranda between the
parties regarding the terms of the Agreement and this Amendment shall be
superseded thereby. Any amendment, approval, or waiver by Norwest of the terms
of the Agreement, the Note and any contracts or instruments relating thereto,
must be in writing or confirmed in writings, and shall be effective only to the
extent specifically set forth in such writing.
Borrower hereby ratifies and confirms all of the provisions of the Agreement and
the promissory note and collateral security documents executed in conjunction
therewith. This Amendment shall not be deemed to be a waiver or modification of
any of the terms of the Agreement except as specifically set forth herein. Any
reference to the Agreement in any other contract, agreement or notice shall
refer to the Agreement as amended hereby.
Please acknowledge your acceptance of and agreement to the terms of this
Amendment by dating and executing where indicated. This commitment will expire,
if not accepted and closed and all conditions precedent met by October 1, 1995.
Sincerely,
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By:
Don McDonald
Corporate Banking Officer
Energy & Minerals
AGREED TO AND ACCEPTED THIS OF SEPTEMBER, 1995.
BASIC EARTH SCIENCE SYSTEMS, INC.
By:
Ray Singleton, President
STATE OF COLORADO )
)
COUNTY OF DENVER )
The foregoing instrument was acknowledged before me this day of
September, 1995 by Ray Singleton, President of Basic Earth Science Systems, Inc.
Witness my hand and official seal.
SEAL
Notary Public
My Commission Expires:
1995 STOCK OPTION PLAN
OF
BASIC EARTH SCIENCE SYSTEMS, INC.
I. PLAN ESTABLISHMENT AND ADMINISTRATION.
1. Purposes of the Plan. Basic Earth Science Systems, Inc. (the
"Corporation") proposes to grant to selected employees (including officer and
directors who are employees) of the Corporation and its subsidiaries
(hereinafter referred to as "Eligible Employees") options to purchase shares of
its common stock pursuant to the terms of the plan set forth herein, which shall
be known as the 1995 Stock Option Plan (the "Plan"). The purpose of such grants
is to attract and retain the best available personal for positions of
substantial responsibility, to provide additional incentive to employees of the
Corporation and its subsidiaries and to promote the success of the business of
the Corporation.
The Corporation also proposes to grant to members of the Board of Directors
who are not officers or employees of the Corporation or its subsidiaries at the
time of grant (hereinafter referred to as "Non-Employee Directors") options to
purchase shares of its common stock pursuant to the Plan. The purpose of such
grants is to provide incentive for highly qualified individuals to stand for
election to the Board of Directors, provide maximum incentive to promote long-
term stockholder value and to promote greater identity of interest between Non-
Employee Directors and the Corporation's stockholders.
2. Definitions. In addition to any other definitions contained elsewhere
in this Plan, the following definitions shall apply:
(a) "Act" shall mean the provisions of the Securities Exchange Act of
1934, as amended.
(b) "Board" or "Board of Directors" shall mean the Board of directors
of the Corporation.
(c) "Code" shall mean the Internal Revenue Code of 1986.
(d) "Common Stock" shall mean the common stock of the Corporation.
(e) "Corporation" shall mean Basic Earth Science Systems, Inc., a
Delaware corporation.
(f) "Committee" or "Stock Option Committee" shall mean the
Compensation Committee appointed by the Board in accordance with Section 4(a),
Article I of this Plan or such other committee of the Board which shall succeed
to the functions and responsibilities of the Compensation Committee.
(g) "Option" shall mean a stock option granted pursuant to this Plan.
(h) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to this Plan.
(i) "Parent" shall mean a "parent corporation," as defined in Section
424(e) and (g) of the Code.
(j) "Plan" shall mean the 1995 Stock Option Plan of the Corporation.
(k) "Subsidiary" shall mean a "subsidiary corporation," as defined in
Section 424(f) and (g) of the Code.
(l) "Ten Percent Shareholder" shall mean an Eligible Employee who at
the time an Option is granted pursuant to this Plan owns, as defined in Section
424(d) of the Code, more than ten percent (10%) of the total combined voting
power of all classes of stock of the Corporation or of its Parent or Subsidiary.
3. Shares Subject to the Plan. Subject to adjustment as provided in
Section 9 herein, there shall be reserved for issue upon the exercise of Options
to be granted from time to time under this Plan an aggregate of 1,000,000 shares
of the Common Stock of the Corporation. The shares of Common Stock issuable upon
exercise of Options granted under the Plan may be authorized but unissued shares
of the Common Stock or reacquired shares. If an Option shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
covered thereby shall (unless this Plan shall have terminated or have been
terminated) be added to the shares otherwise available for Options which may be
granted in accordance with the terms of this Plan. Shares issued pursuant to the
exercise of Options granted under the Plan shall be fully paid and
nonassessable.
4. Administration of the Plan.
(a) Procedural Rules.
(1) This Plan shall be administered by the Committee which shall
consist of at least two members of the Board. The Board shall have the power to
add or remove members of the Committee from time to time, to fill vacancies
thereon arising by resignation, death, removal, or otherwise, and may design a
chairman form among the members of the Committee, which chairman shall preside
at all meetings of the Committee. Meetings shall be held at such times and
places as shall be determined by the Committee. A majority of the members of the
Committee shall constitute a quorum, and the action of a majority of the members
present shall be deemed the action of the Committee. In addition, any decision
or determination reduced to writing and signed by all of the members of the
Committee shall be as fully effective as if it had been made by a majority vote
at a meeting duly called and held. The Committee may appoint a secretary to keep
minutes of its meetings and may make such rules and regulations for the conduct
of its business as it shall deem available. When appropriate, the Plan shall be
administered in order to qualify certain options granted hereunder as Incentive
Stock Options described in Section 422 of the Code.
(2) Other than options granted to Non-Employee Directors
pursuant to Article III, no Options may be granted under the Plan to any member
of the Committee during his term of membership on the Committee. No person shall
be eligible to serve on the Committee unless such person is then a
"disinterested person" within the meaning of Rule 16b-3 promulgated under the
Act.
(b) Powers of the Committee. Subject to the provisions of this Plan,
the Committee shall have the authority:
(1) To establish and determine the option price of the shares
covered by each Option (which Option price shall not be less than 100% of the
fair market value, or in the case of a Ten Percent Shareholder, 110% of the fair
market value at the time the Option is granted), the term of each Option (but in
no event shall an Option be exercisable after the expiration of ten years, or,
in the case of a Ten Percent Shareholder, five years from the date the Option is
granted), the Eligible Employees to whom and the time or times in which such
Options shall be granted, and the number of shares to be represented by each
Option to an Eligible Employee (but in no event shall the aggregate fair market
value, determined as of the time the Option is granted, of any stock for which
any Eligible Employee may be granted Options in any calendar year which exceeds
the sum of $100,000);
(2) To interpret the Plan and all Options granted under the
Plan;
(3) To prescribe, amend, and rescind such rules and regulations
as it deems necessary for the proper administration of the Plan;
(4) To propose to the Board (which need not accept any such
proposal) terms and provisions of each Options granted under this Plan (which
need not be identical); and
(5) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
(c) Effect of Committee's Decision. All decisions, determinations,
and interpretations of the Committee shall be final and binding on all Optionees
and any other holders of any Options granted under this Plan. No member of the
Committee or Board shall be liable for any action or determination made in good
faith with respect to the Plan or any Option granted under it.
5. Granting of Options to Employees. The Committee shall have the
authority to grant, prior to the expiration date of the Plan, to Eligible
Employees options to purchase, on the terms and conditions set forth in Article
II below, authorized but unissued, or reacquired, shares of Common Stock;
provided such grants shall be made only to those Eligible Employees, in such
amounts and at such times as determined in the discretion of the Committee. The
Committee may consider any potential Eligible Employee's office or position,
degree of responsibility for, and contribution to, the growth and success of the
Corporation, length of service, promotions, potential and such other factors as
the Committee shall deem relevant in connection with accomplishing the purposes
of this Plan. An Eligible Employee may hold more than one Option, but only on
the terms and subject to the restrictions hereafter set forth.
Any and all options granted to Eligible Employees under Section II are
intended to constitute Incentive Stock Options, as described and provided for
under Section 422 of the Internal Revenue Code of 1986. Accordingly, Section II
and other applicable provisions of Plan shall be administered and construed in a
manner which is consistent with treatment of any options granted to Eligible
Employees as Incentive Stock Options.
6. Granting of Options to Non-Employee Directors. All options granted to
Non-Employee Directors shall be options to purchase, on the terms and conditions
set forth in Section III, authorized but unissued, or reacquired, shares of
Common Stock and shall be nonqualified options.
7. Option Agreements. Each option granted under the Plan shall be
evidenced by a written agreement between the Corporation and the applicable
optionee and shall contain such terms and conditions, and may be exercisable for
such periods, as may be approved by the Committee, which terms and conditions
need not be identical but which must be in compliance with the terms and
provisions hereof.
8. Effective Date. The Plan shall not become effective until approved by
the Shareholders of the Corporation. If the Plan is approved by the
Shareholders, the effective date of the Plan shall be the date the Board adopted
the Plan.
9. Rule 16b-3 Compliance. The Corporation intends that:
(a) the Plan meet the requirements of Rule 16b-3 promulgated under the Act;
(b) that participation by Non-Employee Directors under Article III will
not prohibit them from being "disinterested persons" within the meaning of Rule
16b-3 with respect to administration of the Plan or with respect to
administration of any other plan of the Company;
(c) that transactions of the type specified in the first paragraph of Rule
16b-3 by Non-Employee Directors pursuant to Article III will be exempt from the
operation of Section 16(b) of the Act; and
(d) that transaction of the type specified in the first paragraph of Rule
16b-3 by officers of the Corporation (whether or not they are directors)
pursuant to the Plan will be exempt from the operation of Section 16(b) of the
Act. In all cases, the terms, provisions, conditions and limitations of the Plan
shall be construed and interpreted consistent with the Company intent as stated
in this paragraph 8.
10. Adjustments Upon Changes in Capitalization.
(a) If all or any portion of an Option is exercised subsequent to any
stock dividend, split-up, recapitalization, combination, or exchange of shares,
merger, consolidation, separation, reorganization, or other similar change or
transaction of or by the Corporation, the number of shares of stock and the
class of shares of stock available pursuant to this Plan and the number and
class of shares of stock subject to any Option granted pursuant to this Plan,
and the option prices, may be adjusted by appropriate changes in this Plan. Any
such adjustment to the Plan or to such Options or option prices shall be made by
action of the Board, whose determination shall be conclusive; provided, however,
that each option granted to an Eligible Employee pursuant to Article II of this
Plan shall be so adjusted as to continue to qualify as an Incentive Stock Option
under Section 422 of the Code.
(b) In the event of any such change in the shares, the aggregate
number and class of shares remaining available under the Plan shall be equal to
the number and class of shares which a person, to whom an Option for all
remaining available shares had been granted on the date preceding such change,
would be entitled to receive as provided in this Section.
(c) Upon dissolution of liquidation of the Corporation, other than as
an incident to a merger, reorganization, or other adjustment as referred to
above, any Options granted pursuant to this Plan and remaining unexercised shall
be deemed canceled, notwithstanding anything to the contrary provide in this
Plan. In the event of a complete liquidation or dissolution of a subsidiary of
the Corporation, or in the event that such a subsidiary ceases to be a
subsidiary corporation, any outstanding Options granted to employees of such
subsidiary pursuant to this Plan and remaining unexercised shall be deemed
canceled unless the employee shall, at or before the time of liquidation or
dissolution or cessation of the subsidiary relationship, be or become employed
by the Corporation or by any other subsidiary of the Corporation.
(d) For purposes of this Section 9, an adjustment is appropriate only
where such adjustment merely reflects a change in capitalization or a
corporation transaction which does not constitute a modification, extension, or
renewal of the Option, and, if applicable, is not otherwise inconsistent with
Section 422 and the regulations promulgated thereunder.
11. Time of Grant of Option. The date of grant of an Option under the
Plan shall, unless otherwise provided herein, be the date on which the Committee
grants such Option. Notice of the determination shall be given to each Employee
to whom an Option is so granted within a reasonable time after the date of such
grant. All Options under this Plan must be granted within ten years from the
date of its adoption, or approval by the Corporation's stockholders, whichever
is earlier.
12. Termination and Amendment of this Plan. This Plan shall terminate ten
years after the effective date hereof, and an Option shall not be granted under
this Plan after that date. This Plan shall become effective upon its adoption by
the Board, or approval by the shareholders, whichever is earlier. This Plan may
be terminated by the Board at any time. The Board may at any time and from time
to time modify or amend this Plan (including such form of option agreement) to
conform to qualification as an Incentive Stock Option Plan under Section 422 of
the Code, and the regulations promulgated thereunder, to conform to the
requirements of Rule 16b-3 promulgated under the Act, or in any other respect
which it deems to be in the best interests of the Corporation, to the extent not
inconsistent with either Section 422 of the Code and the regulations thereunder
or Rule 16b-3 promulgated under the Act; provided, however, that no such
modification or amendment of the Board shall change the provisions hereof
relating to adjustments to be made upon changes in capitalizations.
13. Investment Representation. Any person who is issued Options of shares
underlying any Option pursuant to this Plan will be required to represent and
acknowledge that the securities being purchased thereby will be acquired for
investment purposes and not with a view to dispose, sell or transfer such shares
unless a current registration statement is effective for the underlying shares
under the Securities Act of 1933, as amended ("Registration Statement"), or
unless, in the opinion of counsel for the Corporation, such Registration is not
required under the Securities Act of 1933 or any other applicable law,
regulation for rule of governmental agency, state of federal. He will be further
required to acknowledge that he has been advised that the underlying shares,
which are to be issued upon exercise of the Option, have not been registered for
sale pursuant to the Securities Act of 1933, as amended. Any person issued stock
under this Plan will be further required to sign an investment representation to
the effect, and any stock issued pursuant to this Plan shall contain an
investment legend to that effect unless such shares are covered by a current
Registration Statement.
14. Reservation of Shares. The Corporation, during the term of this Plan,
will at all times reserve and keep available such number of shares as shall be
sufficient to satisfy the requirements of this Plan. The inability of the
Corporation to obtain from any regulatory body having jurisdiction authority
deemed by the Corporation's counsel to be necessary to the lawful issuance and
sale of any shares hereunder shall relieve the Corporation of any liability in
respect of the nonissuance or sale of such shares as to which such requisite
authority shall not have been obtained.
15. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Corporation against the
reasonable expenses, including attorney's fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Corporation) or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the performance of
his duties' provided that within 60 days after institution of any such action,
suit or proceeding a Committee member shall in writing offer the Corporation the
opportunity at its own expense to handle and defend the same.
II. INCENTIVE STOCK OPTIONS.
1. Eligible Employees. All Eligible Employees shall be eligible to
receive incentive stock options under this Article II, whether or not the
Eligible Employee shall have received one or more Options hereunder in any
previous year.
2. Calculation of Exercise Price. The exercise price to be paid for each
share of Common Stock deliverable upon exercise of each incentive stock option
granted hereunder shall be equal to the fair market value per share of Common
Stock at the time of grant, as determined by the Committee, based on the mean of
the bid and asked prices of the Corporation's Common Stock on the date on which
the Option is granted. However, if the stock is listed upon an established stock
exchange(s), such fair market value shall be deemed to be the highest closing
price of the Capital Stock on such stock exchange(s) on the day the Option is
granted or if no sale of the Corporation's Common Stock shall have been made on
any stock exchange on that day, on the next preceding day on which there was a
sale of such stock. Finally, in the case of a Ten Percent Shareholder, the
exercise price per share shall be at least 110% of the fair market value of the
Common Stock at the time the Option is granted. Subject to the foregoing, the
Committee in fixing the option price shall have full authority and discretion
and shall be fully protected in doing so.
For purposes of this Plan, the fair market value of the Corporation's
Common Stock shall be determined without regard to any restriction other than a
restriction which, by its terms, will never lapse.
3. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options shall be in such form as the Committee may, from time to time approve,
shall be subject to the following terms and conditions and may contain such
additional terms and conditions, not inconsistent with this Article II, as the
Committee shall deem desirable:
(a) Number of Shares to be Covered by Options Granted to Persons.
The number of shares of Common Stock covered by the Option that shall be granted
to any Eligible Employee shall be determined, from time to time, by the
Committee. Provided, however, that in no event shall the aggregate fair market
value (determined as of the time the Option is granted) of the stock for which
any Eligible Employee may be granted Incentive Stock Options in any calendar
year (under all such plans of the Corporation and its parent and subsidiary
corporation) exceed the sum of $100,000. Each Option shall state the number of
shares to which it pertains. All Options under this Plan must be granted within
ten years from the date the plan is adopted, or approved by the shareholders of
the Corporation, whichever is earlier.
(b) Term of Option. The term of each Option granted under this Plan
shall be determined by the Committee, but in no event shall an Option be
exercisable after the expiration of ten years from the date the Option is
granted. Where, however, an Incentive Stock Option is granted to an Eligible
Employee who, at the time said Option is granted, is a Ten Percent Shareholder,
said Option shall not by its terms be exercisable after the expiration of five
years from the date such Option is granted. The Options or option portion not so
exercised during the term of each Option shall be canceled on the books of the
Corporation, and the shares previously reserved for the exercise of such expired
Option or option portion shall thereupon become available for reservation for
the exercise of such other and additional Options as the Corporation may grant
pursuant to the terms of the Plan.
(c) Exercise of Option.
(1) Procedure for Exercise. Any Option granted pursuant to this
Article II shall be exercisable at such time and under such conditions as shall
be permissible under the terms of this Plan and of the Option granted to an
Eligible Employee. During the lifetime of the Eligible Employee, the Option
shall be exercisable only by him and shall not be assignable or transferable by
him; no other person shall acquire any rights therein. Each Option shall be
exercised in such amounts, on such conditions and at such times as determined by
the Committee. An Option may not be exercised for fractional shares of the
Common Stock of the Corporation. An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Corporation in accordance
with the terms of the Option by the person entitled to exercise the Option.
Until stock certificates have been issued (as evidenced by an appropriate entry
on the books of the Corporation or of a duly authorized transfer agent of the
Corporation), each applicable Eligible Employee shall have no right to vote or
receive dividends or any other rights of a stockholder notwithstanding the
exercise of the Option. No adjustment will be made for a dividend or other
rights for which the record date is prior to the date the stock certificate are
issued except as provided in Section 9, Article I of this Plan.
(2) Medium and Time of Payment. The option price shall be due
and payable upon the Eligible Employee's exercise of an Option. The purchase
price may be paid in cash, by check, or by an exchange of property which may
include shares of the Corporation's common stock. The Committee shall have sole
discretion to determine the fair market value of all such property. In no event,
however, shall an Eligible Employee tender consideration for payment of the
option price which, if accepted by the Committee, would cause a violation of
Section 422(c)(5) of the Code.
(3) Exercise Following Termination of Employment, Death, or
Permanent Disability. If an Eligible Employee's employment terminates for any
reason, including retirement, death, or disability, to the extent that the
Eligible Employee would have been entitled to exercise the Option immediately
prior to his termination, such Option may be exercised during the period ending
on the day three (3) months after employment terminates, but within the exercise
period for the Option. If the Eligible Employee's employment terminates by
reason of his permanent disability, as defined in Section 22(e)(3) of the Code,
to the extent that the Eligible Employee would have been entitled to exercise
the Option immediately prior to his permanent disability, such Option may still
be exercised during a period ending on the day one (1) year after employment
terminates, but only within the exercise period for the Option. In the case of
the Eligible Employee's death, the Option may be exercised by the Eligible
Employee's executors or administrators or by any person who acquires the Option
by devise or inheritance; in all other cases, the Eligible Employee himself must
exercise the Option. An Eligible Employee whose employment by the Corporation is
terminated for any reason, shall, effective with the end of the period for such
exercise as specified above, forfeit his right to exercise any Option covering
shares of the Common Stock of the Corporation, or the unexpired portion of any
option previously granted to him. The Option or option portion not so exercised
shall be canceled on the books of the Corporation, and the shares reserved for
the exercise of such canceled Option or option portion shall become available
for reservation for the exercise of such other and additional Options as the
Corporation may grant under the terms of this Plan.
(d) Non-transferability of Options. An Option may not be
transferred, assigned, pledged or hypothecated by the Eligible Employee, or by
operation of law, other than by will of the laws of descent and distribution,
and an Option may be exercised only as provided in paragraph (c) herein. Any
attempt to transfer, assign, pledge, hypothecate or dispose of an Option, other
than as a result of the death of the Eligible Employee, may result, in the sole
discretion of the Corporation, in the Option becoming null and void.
(e) Granting Limitation. The aggregate fair market value of the
stock (determined at the date of the grant of the Option) for which any Eligible
Employee may be granted Options in any calendar year (under all Incentive Stock
Option Plans of the Corporation and its Parent or its Subsidiary) shall not
exceed the sum of $100,000.
(f) Restrictions. The Committee may establish such repurchase
restrictions on the shares of the Corporation's stock covered under this Plan as
are not inconsistent with the provisions of Section 422 of the Code and the
Regulations promulgated thereunder.
(g) Other Provisions. The option agreements authorized under the
Plan shall contain such other provisions as the Committee shall deem advisable,
including, without limitation, restrictions upon the exercise of the Option,
which are not inconsistent with the provisions of Section 422 of the code. Any
such option agreement shall contain such limitations and restrictions upon the
exercise of the Option as shall be necessary in order that such Option will be
an "incentive stock option" as defined in Section 422 of the Code or to conform
to any change in the law. Any terms set forth in this Plan or in any Option
issued pursuant to this Plan shall be defined so as to comply with Section 422
of the Code, and the regulations promulgated thereunder.
4. Amendment. The Committee may, with the consent of the person(s)
entitled to exercise any outstanding incentive stock option, amend such
incentive stock option; provided, however, that any such amendment shall be
subject to stockholder approval when and if required. Subject to paragraph 2()
of this Article II, in the case of any incentive stock option previously granted
hereunder which is not then immediately exercisable in full, accelerate the time
or times at which such incentive stock option may be exercised to any earlier
time or times.
5. Other Provisions.
(a) No incentive stock option shall be construed as limiting any
right which the Corporation or any subsidiary of the Corporation may have to
terminate at any time, with or without cause, the employment of any person to
whom such incentive stock option has been granted.
(b) Notwithstanding any provision of the Plan or the terms of any
incentive stock option, the Corporation shall not be required to issue any
shares hereunder if such issuance would, in the judgment of the Committee,
constitute a violation of any state or Federal law or of the rules or
regulations of any governmental regulatory body.
(c) The Committee may require any person who exercises an incentive
stock option to give prompt notice to the Corporation of any disposition of
shares of Common Stock acquired upon exercise of an incentive stock option
within one year after transfer of shares to such person.
III. NON-EMPLOYEE DIRECTOR OPTIONS
1. Eligible Persons. Non-Employee Directors shall be eligible to receive
options under, and solely under, this Article III and any such options shall be
nonqualified options.
2. Initial and Annual Granting of Nonqualified Options to Non-Employee
Directors. Subject to the limitation of the number of shares of Common Stock
set forth in paragraph 3, Article I and subject further to the limitation set
forth in paragraph 3, Article III below, the following nonqualified options
shall be granted to each Non-Employee Director:
(a) A nonqualified option to purchase 50,000 shares of Common Stock
will be granted to each Non-Employee Director who is a Non-Employee Director as
of the close of business on the Effective Date (which date shall be the date of
grant for purposes hereof); and
(b) A nonqualified option to purchase 25,000 shares of Common Stock
will be granted annually, effective as of the anniversary date of the Effective
Date in each year after the Effective Date until expiration of the Plan, to each
person who is a Non-Employee Director for each such anniversary date (which date
shall be the date of grant for purposes hereof).
3. Limitation on Grant. A Non-Employee Director shall not be entitled to
receive any grant of a nonqualified option as set forth in paragraph 2, Article
III, if such Non-Employee Director is indebted in any amount to the Corporation
as of the date of grant of such nonqualified option. Notwithstanding the
foregoing, if any such indebtedness is paid in full by or on behalf of the
affected Non-Employee Director within 45 days from the date of grant, the said
Non-Employee Director shall be entitled to receive the applicable grant of a
nonqualified option as if such indebtedness due to the Corporation had not
existed.
4. Calculation of Exercise Price. The exercise price to be paid for each
share of Common Stock deliverable upon exercise of each nonqualified option
granted under this Article III shall be equal to the fair market value per share
of Common Stock at the time of grant, as determined by the Committee, based on
the mean of the bid and asked prices of the Corporation's Common Stock on the
date on which the Option is granted. However, if the stock is listed upon an
established stock exchange(s), such fair market value shall be deemed to be the
highest closing price of the Capital Stock on such stock exchange(s) on the day
the Option is granted or if no sale of the Corporation's Common Stock shall have
been made on any stock exchange on that day, on the next preceding day on which
there was a sale of such stock. Subject to the foregoing, the Committee in
fixing the option price shall have full authority and discretion and shall be
fully protected in doing so.
For purposes of this Plan, the fair market value of the corporation's stock
shall be determined without regard to any restriction other than a restriction
which, by its terms, will never lapse.
5. Terms and Conditions of Nonqualified Options. Subject to the
provisions of this paragraph 4, nonqualified options granted under this Article
III shall be in such form as the Committee may from time to time approve.
Nonqualified options granted under this Article III shall be subject to the
following terms and conditions:
(a) Term of Option. Each nonqualified option granted under this
Article III shall be exercisable from time to time, in whole or in part, at any
time after six months from the date of grant and prior to the date determined by
the Committee upon the grant thereof (the "Option Expiration Date"), which shall
in no event be later than ten years after the date of grant. The Options or
option portion not so exercised during the term of each Option shall be canceled
on the books of the Corporation, and the shares previously reserved for the
exercise of such expired Option or option portion shall thereupon become
available for reservation for the exercise of such other and additional Options
as the Corporation may grant pursuant to the terms of the Plan.
(b) Exercise of Option.
(1) Procedure for Exercise. Any Option granted hereunder shall,
subject to any conditions set forth in paragraph (e) below, be exercisable at
such time and under such conditions as shall be permissible under the terms of
this Plan and of the Option granted to an Non-Employee Director. During the
lifetime of the Non-Employee Director, the Option shall be exercisable only by
him and shall not be assignable or transferable by him; no other person shall
acquire any rights therein. Each Option shall be exercised in such amounts, on
such conditions and at such times as determined by the Committee. An Option may
not be exercised for fractional shares of the Common Stock of the Corporation.
An Option shall be deemed to be exercised when written notice of such exercise
has been given to the Corporation in accordance with the terms of the Option by
the person entitled to exercise the Option. Until stock certificates have been
issued (as evidenced by an appropriate entry on the books of the Corporation or
of a duly authorized transfer agent of the Corporation), each applicable Non-
Employee Director shall have no right to vote or receive dividends or any other
rights of a stockholder notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date the stock certificate are issued except as provided in
Section 9, Article I of this Plan.
(2) Medium and Time of Payment. The option price shall be due
and payable upon Non-Employee Director's exercise of an Option granted under
this Article III. The purchase price may be paid in cash, by check, or by an
exchange of property which may include shares of the Corporation's common stock.
The Committee shall have sole discretion to determine the fair market value of
all such property.
(3) Exercise Following Termination of Employment, Death, or
Permanent Disability. If a Non-Employee Director's directorship terminates for
any reason, including retirement, death, or disability, to the extent that the
Non-Employee Director would have been entitled to exercise the Option
immediately prior to the termination of his directorship, such Option may be
exercised during the period ending on the day three (3) months after such
directorship terminates, but within the exercise period for the Option. If the
Non-Employee Director's directorship terminates by reason of his permanent
disability, as defined in Section 22(e)(3) of the Code, to the extent that the
Non-Employee Director would have been entitled to exercise the Option
immediately prior to his permanent disability, such Option may still be
exercised during a period ending on the day one (1) year after termination of
his directorship, but only within the exercise period for the Option. In the
case of the Non-Employee Director's death, the Option may be exercised by the
Non-Employee Director's executors or administrators or by any person who
acquires the Option by devise or inheritance; in all other cases, the Non-
Employee Director himself must exercise the Option. A Non-Employee Director
whose directorship is terminated for any reason shall, effective with the end of
the period for such exercise as specified above, forfeit his right to exercise
any Option covering shares of the Common Stock of the Corporation, or the
unexpired portion of any option previously granted to him. The Option or option
portion not so exercised shall be canceled on the books of the Corporation, and
the shares reserved for the exercise of such canceled Option or option portion
shall become available for reservation for the exercise of such other and
additional options as the Corporation may grant pursuant to the terms of this
Plan.
(c) Non-transferability of Options. An Option may not be
transferred, assigned, pledged or hypothecated by the Non-Employee Director, or
by operation of law, other than by will of the laws of descent and distribution,
and an Option may be exercised only as provided in paragraph (c) herein. Any
attempt to transfer, assign, pledge, hypothecate or dispose of an Option, other
than as a result of the death of the Non-Employee Director, may result, in the
sole discretion of the Corporation, in the Option becoming null and void.
(d) Restrictions. As a condition to the exercise of any nonqualified
option granted to a Non-Employee Director under this Article III, the Committee
shall require the payment in full of any and all amounts which a Non-Employee
Director may owe to the Corporation. In addition, a legend shall be placed on
any certificate evidencing shares of Common Stock which requires payment in full
of any and all amounts which a Non-Employee Director may owe to the Corporation
at the time of sale of any portion of said shares.
6. Other Provisions.
(a) No nonqualifed option granted under this Article III shall be
construed as limiting any right which either the stockholders of the Corporation
or the Board of Directors may have to remove at any time, with or without cause,
any Non-Employee Director to whom such nonqualified option has been granted from
the Board of Directors.
(b) Notwithstanding any provision of the Plan or the terms of any
nonqualified option granted under this Article III, the Corporation shall not be
required to issue any shares hereunder if such issuance would, in the judgment
of the Committee, constitute a violation of any state or Federal law or of the
rules or regulations of any governmental regulatory body.
(c) Notwithstanding any provision in the Plan, the Committee may not
exercise any discretion with respect to this Article III which would be
inconsistent with the intent that (i) the Plan meet the requirements of Rule
16b-3 and (ii) any Non-Employee Director who is eligible to receive a grant or
to whom a grant is made pursuant to this Article III will not for such reason
cease to be a "disinterested person" within the meaning of such Rule 16b-3 with
respect to the Plan and other stock related plans of the Corporation or any of
its affiliates. If any Plan provision is found not to be in compliance with Rule
16b-3 or if any Plan provision would disqualify any Non-Employee Director from
remaining a "disinterested person," that provision shall be deemed amended so
that the Plan does so comply and the Plan participants remain disinterested, to
the extent permitted by law and deemed advisable by the Committee, and in all
events the Plan shall be construed in favor of its meeting the requirements of
Rule 16b-3.
