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 June 30, 1996
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
(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 August 7, 1996: 16,580,487
<PAGE>
BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Page
-----
Item 1. Financial Statements 3
Consolidated Balance Sheets - June 30, 1996
and March 31, 1996 3
Consolidated Statements of Operations - Quarter Ended
June 30, 1996 and June 30, 1995 5
Consolidated Statements of Cash Flows - Quarter Ended
June 30, 1996 and June 30, 1995 6
Notes to Financial Statements 7
Summary of Significant Accounting Policies 7
Income Taxes 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
<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
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $46,000 $92,000
Accounts receivable:
Oil and gas sales 327,000 322,000
Joint interest billings and other, net 93,000 155,000
Other current assets 146,000 148,000
---------- ---------
Total current assets 612,000 717,000
---------- ---------
Property and equipment
Oil and gas property (full cost method) 31,900,000 31,844,000
Support equipment 417,000 432,000
---------- ----------
32,317,000 32,276,000
Accumulated depletion (includes cumulative
ceiling limitation charges of
$14,091,000) (29,424,000) (29,295,000)
Accumulated depreciation (347,000) (356,000)
------------ ------------
Net property and equipment 2,546,000 2,625,000
Other noncurrent assets 77,000 77,000
------------ ------------
Total noncurrent assets 2,623,000 2,702,000
------------ ------------
Total Assets $3,235,000 $3,419,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
<TABLE>
<CAPTION>
June 30 March 31
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
Liabilities
Current liabilities
Accounts payable and accrued liabilities $489,000 $699,000
Current portion of long-term debt 153,000 126,000
---------- ----------
Total current liabilities 642,000 825,000
Long-term debt, less current portion 617,000 692,000
---------- ----------
Total liabilities 1,259,000 1,517,000
---------- ----------
Shareholders' Equity
Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares ----- -----
Common stock, $.001 par value
32,000,000 shares authorized;
16,580,487 shares outstanding at
March 31 and at June 30 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (20,718,000) (20,792,000)
Less treasury stock (299,265 shares at
March 31 and June 30); at cost (15,000) (15,000)
------------ ------------
Total shareholders' equity 1,976,000 1,902,000
------------ ------------
Total Liabilities & Shareholders' Equity $3,235,000 $3,419,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenue
Oil and gas sales $725,000 $751,000
Well service revenue 11,000 1,000
---------- ----------
Total revenue 736,000 752,000
---------- ----------
Expenses
Oil and gas production 385,000 486,000
Production tax 70,000 59,000
Well service expenses 12,000 1,000
Depreciation, depletion and amortization 132,000 174,000
General and administrative 42,000 34,000
---------- ----------
Total operating expenses 641,000 754,000
---------- ----------
Income (loss) from operations 95,000 (2,000)
---------- ----------
Other income (expense)
Interest and other income 3,000 2,000
Interest expense (24,000) (33,000)
---------- ----------
Total other income (expense) (21,000) (31,000)
---------- ----------
Income (loss) before income taxes 74,000 (33,000)
Income taxes ----- -----
---------- ----------
Net income (loss) $74,000 $(33,000)
========== ==========
Weighted average number of
shares outstanding 16,580,487 16,307,013
========== ==========
Net income (loss) per share $.004 $(.002)
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Quarter Ended June 30
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $74,000 $(33,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion and amortization 132,000 174,000
Change in current assets and current
liabilities:
Accounts receivable, net 57,000 200,000
Accounts payable & accrued liabilities (210,000) (47,000)
Other current assets 2,000 (87,000)
Change in other assets ----- (15,000)
Loss/(gain) on sale of assets (1,000) -----
Other 3,000 3,000
---------- ----------
Net cash provided by operating activities 57,000 195,000
---------- ----------
Cash flows from investing activities:
Capital expenditures
Oil and gas property (56,000) (84,000)
Support equipment ----- (5,000)
Proceeds from sale of property & equipment 1,000 -----
---------- ----------
Net cash used in investing activities (55,000) (89,000)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowing 42,000 -----
Long-term debt payments (90,000) (106,000)
Purchase of treasury stock ----- -----
---------- ----------
Net cash used in financing activities (48,000) (106,000)
---------- ----------
Cash
Net increase (decrease) (46,000) 0
Balance at beginning of period 92,000 83,000
---------- ----------
Balance at end of period $46,000 $83,000
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest $24,000 $33,000
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
June 30, 1996
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 Form 10-KSB as of March 31, 1996.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications. Certain prior year amounts may have been reclassified to
conform to current year presentation.
Cash and Cash Equivalents. For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, Basic considers all highly liquid investments with
a maturity of ninety days or less when purchased to be cash equivalents.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. There are many factors, including global events, that may
influence the production, processing, marketing, and valuation of crude oil and
natural gas. A reduction in the valuation of oil and gas properties
resulting from declining prices or production could adversely impact
depletion rates and ceiling test limitations.
INCOME TAXES
The Company recognizes 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. 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 deferred tax liabilities and assets are comprised of the following
components at June 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Depreciation and depletion $(577,000) $(377,000)
Deferred tax assets
Net operating loss carryforwards 5,279,000 5,716,000
Statutory depletion carryforward 1,237,000 1,186,000
Valuation allowance (5,939,000) (6,525,000)
------------ ------------
Net deferred tax asset $0 $0
============ ============
</TABLE>
At March 31, 1996, the Company had available approximately $15,083,000 of net
operating loss carryforwards which expire in varying amounts in the years 1997
through 2011. The Company also has available a depletion carryover of
approximately $3,534,000.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. During the quarter just ended, current assets decreased 15% from
$717,000 at year ended March 31, 1996 (March 31) to $612,000 at June 30, 1996
(June 30) and current liabilities decreased 22% from $825,000 at March 31 to
$642,000 at June 30. Consequently, the Company's current ratio increased
from .87:1 at March 31 to .95:1 at June 30. For Bank covenant purposes, at
March 31 the current ratio was 1.03:1 and increased to 1.25:1 at June 30.
The decrease in current assets was due primarily to a decrease in the Company's
trading account used for hedging activities, which is classified on the
balance sheet as an "other receivable." This decrease was a result of net
hedging losses, which were offset by the receipt of higher prices for
physical crude oil sales.
The decrease in current liabilities consisted primarily of the following:
(1) payments made to the Company's bank to pay down the hedging line of
credit; (2) payments of invoices related to the plugging of a
Company-operated well in North Dakota; (3) payments of invoices related to the
unsuccessful recompletion project on a Company-operated well in Montana; and
(4) payments of invoices related to well repairs incurred during the normal
course of business.
Debt. During the fiscal quarter ended June 30, 1996, long-term debt decreased
through the normal course of required monthly payments. There were no changes
to the terms of the Company's debt facilities. Reference should be made to the
Company's Form 10-KSB as of March 31, 1996 for disclosure regarding the
Company's debt.
Hedging. At June 30, 1996, the Company had 51 open futures and/or options
contracts to hedge future deliveries with maturities ranging from August 1996
through February 1997 at prices ranging from $17.35 to $21.00 per barrel. It
should be noted that 51 contracts does not necessarily indicate that the
Company has hedged 51,000 barrels of production in that some futures
contracts and option contracts may offset each other in volume.
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. Assuming that oil prices do not decline significantly from
current levels, 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 1997. Even if oil
prices decline significantly from current levels, assuming the Company is
able to hedge future production, especially through March 1997, management
believes the cash generated from operations and hedging activities will still
enable the Company to meet its existing obligations as they become due in
fiscal year 1997.
STRATEGY IMPLEMENTATION
The Company previously disclosed its intent to participate with unrelated third
parties for a minority interest (10%) in the development of a small 3-D
seismic prospect in southwest Texas. In mid-July 1996, subsequent to the end
of the quarter covered by this report, seismic data was collected and is
currently being processed. The Company's initial commitment is expected to be
$42,000. Management believes the project provides exposure to "high tech"
exploration techniques and, if successful, is capable of increasing reserves
and cash flow with reasonable risk.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 1997
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, 1996 Compared to Quarter Ended June 30, 1995
Overview. Operations in the quarter ended June 30, 1996 (1996) resulted in
net income of $74,000 compared to a net loss of $33,000 in the same quarter
in 1995 (1995).
Revenues. Oil and gas sales revenue decreased $26,000 (3%) in 1996 from
1995. Of this amount, decreased oil production accounted for a negative
variance of -$62,000 (-235%) while $37,000 (140%) was attributable to oil
price increases. Gas volume decreases accounted for a negative variance of
- -$10,000 (-37%) and the remaining variance of $9,000 (32%) was attributable
to gas price increases.
Volumes and Prices. Total liquid production decreased 9%, from 39,100
barrels in 1995 to 35,400 barrels in 1996 and the price per barrel increased
6%, from $17.03 in 1995 to $18.08 in 1996. Total gas production decreased
11%, from 56,600 MCF's in 1995 to 50,100 MCF's in 1996, while the price per
MCF increased 11%, from $1.53 in 1995 to $1.70 in 1996. The decrease in
both liquid and gas production was primarily due to normal production
declines.
Expenses. Oil and gas production expense decreased $101,000 (21%) in 1996
from 1995 due to fewer workovers and lower maintenance primarily on
properties acquired at the end of fiscal 1995. As a result of the decreased
production expense, the overall lifting cost per equivalent barrel decreased
from $11.23 in 1995 to $10.40 in 1996.
Depreciation, depletion and amortization expense decreased $42,000 (24%) in
1996 from 1995 due to decreases in Basic's production volumes in the quarter
just ended combined with an increase in the Company's reserves at the end of
fiscal 1996. As a result, the depletion rate decreased from $3.51 per
equivalent barrel in 1995 to $2.93 per equivalent barrel in 1996.
Net general and administrative expense increased $8,000 (24%), from $34,000
in 1995 to $42,000 in 1996. While gross general and administrative expense
did not change significantly in 1996 from 1995, fewer expenses were charged
out to operated wells and to the full cost pool in 1996, causing net general
and administrative expense to increase. Consequently, as a result of this
overall increase, and in conjunction with decreased production volumes, net
general and administrative expense per equivalent barrel increased from $.70
in 1995 to $.96 in 1996.
LIQUIDS AND NATURAL GAS PRODUCTION SALES PRICE AND PRODUCTION COST
The following table shows selected financial information for the quarter
ended June 30 in the current and prior year. Certain prior year amounts may
have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Sales volume
Oil (barrels) 35,400 39,100
Gas (mcf) 50,100 56,600
Revenue
Oil $640,000 $665,000
Gas 85,000 86,000
---------- ----------
Total 725,000 751,000
Total production expense(1) 455,000 545,000
---------- ----------
Gross profit $270,000 $206,000
========== ==========
Depletion expense $128,000 $170,000
Depletion expense per BOE(3) $2.93 $3.51
Average production expense(2)(3) $10.40 $11.23
Average sales price(3)
Oil (per barrel) $18.08 $17.03
Gas (per mcf) $1.70 $1.53
</TABLE>
- ----------------------------
(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
(Intentionally left blank)
<PAGE>
PART II.
OTHER INFORMATION
(Cumulative from March 31, 1996)
Item 1. Legal Proceedings
None
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, 1996, 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
None
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized persons on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/Ray Singleton /s/Karen E. Riner
- ------------------ -------------------
Ray Singleton, President Karen E. Riner, Controller
(formerly Karen E. Morris)
Principal Accounting Officer
Date: August 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, statements of operations, and statements of cash
flows found on pages 3, 4, 5 and 6 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-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 46,000
<SECURITIES> 0
<RECEIVABLES> 457,000
<ALLOWANCES> (37,000)
<INVENTORY> 0
<CURRENT-ASSETS> 612,000
<PP&E> 32,317,000
<DEPRECIATION> (29,771,000)
<TOTAL-ASSETS> 3,235,000
<CURRENT-LIABILITIES> 642,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 17,000
<TOTAL-LIABILITY-AND-EQUITY> 3,235,000
<SALES> 725,000
<TOTAL-REVENUES> 736,000
<CGS> 641,000
<TOTAL-COSTS> 641,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 24,000
<INCOME-PRETAX> 74,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 74,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,000
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
</TABLE>
