UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
633 Seventeenth Street, Suite 1670
Denver, Colorado 80202
Telephone (303) 294-9525
Incorporated in Delaware IRS ID# 84-0592823
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: Common Stock,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 the filing requirements for the past
90 days. Yes [ X ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $3,045,000
As of June 13, 1997, 16,580,487 shares of the registrant's common stock
were outstanding and the aggregate market value of such common stock held
by non-affiliates was approximately $810,000.
<PAGE>
Basic Earth Science Systems, Inc.
Form 10-KSB/A Annual Report - 1997
Table of Contents
PART III:
Page
-----
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With
Section 16(a) of the Exchange Act 3
Item 10. Executive Compensation 5
Item 11. Security Ownership of Certain Beneficial Owners
and Management 9
Item 12. Certain Relationships and Related
Transactions 10
<PAGE>
PART III
Item 9
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
DIRECTORS
The following sets forth the names and ages of the four members of the
Board of Directors of Basic Earth Science Systems, Inc. ("Basic" or "the
Company") who served in the past year, their respective principal
occupations or employment during the past five years, and the period
during which each has served as a director of the Company.
G. W. BREUER (78) was a co-founder of the Company and has been a member of
the Board of Directors since inception in 1969. Mr. Breuer also served as
the Company's Chief Executive Officer from 1969 through March 1993 and was
its President from February 1978 through March 1993. Mr. Breuer is a 1940
graduate of Purdue University with a degree in petroleum engineering. Mr.
Breuer has been retired for the past five years.
DAVID J. FLAKE (42) has been a director of the Company since September
1987. Mr. Flake began his career at Basic in November 1980 as tax
accountant and was appointed Controller in July 1983, a position he held
until his resignation in January 1993 to pursue other business
opportunities. From September 1987 through January 1993, Mr. Flake also
served as Secretary/Treasurer of the Company. In April 1994, Mr. Flake
was appointed Corporate Secretary. Mr. Flake received his Bachelor of
Science degree in Accounting/Business Administration from Regis University
in Denver, Colorado and received a Masters Degree in Business
Administration from Colorado State University's Executive MBA Program in
1995.
EJGAR J. HUFFMAN (57) was elected to the Board of Directors in May 1993.
For the past five years Mr. Huffman has served continuously in the
following capacities. He is a director of Visa Industries, an oil and gas
producer, located in Phoenix, Arizona. Visa Industries is a public
company traded on NASDAQ. He also serves as Chairman of the Board and
Director of Finance and Planning for the Montessori Day Schools in
Phoenix. Additionally, Mr. Huffman is a director of FCS Laboratories,
Inc. (FCS), a diagnostic laboratory and pharmaceutical producer, as well
as Chairman of the Finance Committee and Audit Committee and a member of
the Compensation Committee. FCS is a public company traded on the OTC
market. Mr. Huffman received a Bachelor of Science degree in Business
Administration from Indiana Central University and a Masters Degree in
Business Administration from Arizona State University. He also attended
the Finance Program at New York University's Graduate School of Business.
RAY SINGLETON (46) has been a director of Basic since July 1989. Mr.
Singleton joined the Company in June 1988 as Production Manager/Petroleum
Engineer. In October 1989 he was elected Vice President of Basic and was
appointed President and Chief Executive Officer in March 1993. Upon the
resignation of Mr. Flake, noted above, Mr. Singleton was appointed Acting
Treasurer. Mr. Singleton began his career with Amoco Production Company
in Texas as a production engineer. He was subsequently employed for the
predecessor of Union Pacific Resources as a drilling, completion and
production engineer and in 1981 began his own engineering consulting firm,
serving the needs of some 40 oil and gas companies. In this capacity he
was employed by Basic on various projects from 1981 to 1987. Mr.
Singleton received a degree in petroleum engineering from Texas A&M
University in 1973 and received a Masters Degree in Business
Administration from Colorado State University's Executive MBA Program in
1992. Mr. Singleton currently serves as the elected president of the
Independent Petroleum Association Mountain States (IPAMS). IPAMS is a
thirteen state, regional trade association which represents the interests
of independent oil and gas companies in the Rocky Mountain region. In
addition, Mr. Singleton is a member of the Society of Petroleum Engineers.
EXECUTIVE OFFICERS
At this time, and during the past year, all executive officers are also
board members. Their names, ages, principal occupations or employments
during the past five years are set forth above. There are no family
relationships between or among the officers and Board of Directors.
Directors are elected by the Company's shareholders at each annual meeting
or, in the case of a vacancy, are appointed by the directors then in
office, to serve until the next annual meeting or until their successors
are elected and qualified. Officers are appointed by and serve at the
discretion of the Board of Directors.
BOARD COMMITTEES AND ATTENDANCE
The Board of Directors of the Company held no meetings during the fiscal
year ended March 31, 1997. During the year ended March 31, 1996 the Board
of Directors met six times. Each of the directors attended at least 75%
of all the meetings.
In May 1993, the Board established an Audit Committee consisting of
Messrs. Flake and Huffman, both outside directors. The Audit Committee
is authorized by the Board of Directors to review, with the Company's
independent accountants, the annual financial statements of the Company
prior to publication and to make annual recommendations to the Board for
the appointment of independent public accountants for the ensuing year.
The Audit Committee also reviews the effectiveness of the financial and
accounting functions, operations, and internal controls implemented by
Basic's management.
In June 1993, the Board formed a Compensation Committee which currently
consists of Messrs. Huffman and Flake. This committee reviews and
recommends to the Board of Directors the compensation and benefits of all
officers of the Company, and is empowered to review general policy
matters, including compensation and benefits, pertaining to the employees
of the Company.
Basic does not have a Nominating Committee.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors and shareholders of more than ten percent of the
Company's common stock to file reports of ownership and changes in
ownership of the Company's common stock with the Securities and Exchange
Commission (SEC) and the National Association of Securities Dealers.
Officers, directors and greater-than-ten-percent shareholders are required
by SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely upon a review of copies of ownership reports submitted to
Basic, the Company believes that, for the fiscal year ended March 31,
1997, Messrs. Breuer, Flake, Huffman and Singleton all filed one late
report.
Item 10
Executive Compensation
EXECUTIVE OFFICER COMPENSATION The following table sets forth the
compensation paid or accrued by the Company to its Chief Executive Officer
for the fiscal years ended March 31, 1997, 1996 and 1995. No other
director, officer or employee received annual compensation which exceeded
$100,000.
<TABLE>
<CAPTION>
Other
Name and Fiscal Annual Annual Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ------ ------ ------ ------------
<S> <C> <C> <C> <C>
(1)
Ray Singleton 1997 $72,475 $2,788 $3,949
President, Chief 1996 70,463 ---- 4,430
Executive Officer & 1995 65,000 ---- 6,558
Acting Treasurer
<CAPTION>
Securities All
Name and Fiscal Underlying Other
Principal Position Year Options (#) Compensation
- ------------------ ------ ----------- -------------
<S> <C> <C> <C>
(2)
Ray Singleton 1997 ---- $308
President, Chief 1996 75,000 281
Executive Officer & 1995 N/A 257
Acting Treasurer
</TABLE>
(1) Other Annual Compensation includes $3,949, $4,430 and $4,608 paid
through the Oil and Gas Incentive Compensation Plan for fiscal 1997, 1996
and 1995, respectively. Other Annual Compensation also includes $0, $0
and $1,950 which represents the market value of the Company's common stock
contributed to Mr. Singleton's ESOP account (see discussion below) for
fiscal 1997, 1996 and 1995, respectively. The ESOP contributions are non-
cash compensation.
(2) All Other Compensation of $308, $281 and $257 are the premiums for a
life insurance policy for Mr. Singleton for fiscal 1997, 1996 and 1995,
respectively. Mr. Singleton designates the beneficiary.
In April 1976, the Company adopted an Employee Stock Ownership Plan
(ESOP). ESOP contributions are generally made by transferring sufficient
shares of the Company's common stock or treasury stock which, when valued
at fair market value, equal the annual contribution amount as determined
by the Company's Board of Directors. Effective April 1, 1995, the Board
of Directors voted to discontinue the ESOP. The Company filed an
application with the Internal Revenue Service to terminate the ESOP
effective April 1, 1995. This application was made because of the high
administrative costs associated with maintenance of the ESOP, the low
percentage of proceeds which are received by employees relative to total
ESOP costs, and the belief that alternative methods of compensation will
more effectively benefit the Company's employees. The application was
approved by the Internal Revenue Service and the process for final
distribution of ESOP assets is under way. The Company is reviewing
several alternatives in deciding how to replace the ESOP.
There were no ESOP contributions for the years ended March 31, 1997 and
1996 due to the termination of the ESOP. For the year ended March 31,
1995, the ESOP contribution added to all participants' accounts totalled
$7,000, which resulted in the contribution to the ESOP, based on
applicable market prices, of 140,940 shares of the Company's common stock.
As a result of this contribution, Basic's ESOP received approximately
0.85% of the issued and outstanding shares of the Company's common stock.
While the additional stock ownership received by Basic's ESOP is minimal
in any given year, the cumulative effect over several years of such
additional stock ownership may be considered substantial, i.e., an
aggregate increase in stock ownership of approximately 0.85% over the last
three (3) fiscal years.
As noted, the Company funded its ESOP contribution by issuing shares of
its common stock in sufficient number, when valued at fair market value,
to satisfy the contribution as determined by its Board of Directors. In
making the ESOP contribution in this manner, the market value of the
Company's stock was less than its then $0.10 par value for the
contributions made for 1990, 1991 and 1992. This resulted in a contingent
liability in an amount equal to the difference between the $0.10 par value
and the applicable fair market value, being in the aggregate amount of
approximately $52,000. To the extent that it is ultimately determined
that this contingent liability is owed, compensation was understated by
this amount.
Basic's creditors have the sole right to seek payment of the underpaid
stock consideration. However, any such claim requires that the Company's
assets be insufficient to satisfy its creditor's claims and such claims
must be brought within six (6) years after the issuance of the subject
shares. Since Basic has a positive net asset balance which, it is
anticipated, will continue for the foreseeable future, and since the
passage of time reduces the amount of the contingent liability, it is
currently unlikely that any liability will arise with respect to the
subject ESOP shares.
In 1993, the Board of Directors expressed a desire to fund all or a
substantial portion of its ESOP contribution obligation with treasury
stock rather than issue additional common stock. The use of treasury
shares for an ESOP contribution avoided diluting the value of common stock
held by shareholders and further avoided the potential contingent
liability issue if the fair market value of the Company's stock was less
than its $0.10 par value. It should be noted, however, that even the use
of treasury stock for an ESOP contribution reduced the percentage of
common stock held by public shareholders and increased the percentage held
by the Company's employees. As a result of the foregoing new policy, all
of the Company's ESOP contributions commencing in 1993 and thereafter were
funded with treasury stock.
Each employee's interest in the ESOP vests in incremental portions based
upon number of years of employment ranging from three years (20%) to seven
years (100%). At March 31, 1995, Mr. Singleton was 100% vested in the
424,841 shares in his ESOP account. These shares are included in the
Security Ownership table on page 9. Currently, there are 2,323,057 shares
in the ESOP, including the 424,841 shares in Mr. Singleton's account. All
of the shares in the ESOP represent approximately 14.0% of the total
outstanding shares. Of the current directors, only Mr. Singleton is
currently a participant in Basic's ESOP.
Basic has an Oil and Gas Incentive Compensation Plan (the O&G Plan) for
current and former key employees. Through this O&G Plan, Basic pays to
the O&G Plan participants a portion of its net revenue after operating
expenses on certain properties as designated by the O&G Plan Management
Committee in which Basic has an interest. Messrs. Breuer and Flake are
members of the O&G Plan Management Committee. The portion of the net
revenue contributed from any property shall not exceed 5% of Basic's
interest in that property. The participants in the O&G Plan make no cash
outlay in order to participate; it is entirely non-contributory, and an
interest is not assignable, transferable, nor can it be pledged by the
participant. Interest in the O&G Plan vests over a period ranging from
four to eleven years; however, Basic can sell or otherwise transfer its
interest in properties designated for the O&G Plan. If Basic sells a
property in the O&G Plan, the participants shall receive their respective
percentages of the sales price. There are currently five participants in
the Plan including Messrs. Breuer, Flake and Singleton. During the year
ended March 31, 1997, Messrs. Breuer, Flake and Singleton received $6,060,
$3,121 and $3,949, respectively, through the O&G Plan. During the year
ended March 31, 1996, Messrs. Breuer, Flake and Singleton received $5,080,
$3,504 and $4,430, respectively. Mr. Singleton's amounts are included in
the Other Annual Compensation column in the Executive Officer Compensation
table above. Mr. Breuer's amounts were withheld by the Company as partial
payment of amounts owed the Company. (See Item 12, Certain Relationships
and Related Transactions, below.)
On July 27, 1995, the Board of Directors adopted the 1995 Incentive Stock
Option Plan (the Plan) and in October 1995, the Company's shareholders
approved the Plan. This Plan was established to 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.
During the fiscal year ended March 31, 1996, Mr. Singleton was granted
options to purchase 75,000 shares of the Company's common stock. At March
31, 1997, these options were still outstanding. No additional options
have been granted to Mr. Singleton. Under the terms of the options, Mr.
Singleton may exercise these options at an exercise price of $.078125
(which approximated the fair market value at the date of grant) per share
over a period not to exceed ten years beginning on the grant date,
provided he remains a director or employee of the Company.
The Company has no contract with any officer which would give rise to any
cash or non-cash compensation resulting from the resignation, retirement
or any other termination of such officer's employment with the Company or
from a change in control of the Company or a change in any officer's
responsibilities following a change in control.
DIRECTOR COMPENSATION
In the past, the directors have received no compensation for their
services to the Company as directors, but are reimbursed for expenses
actually incurred in attending board meetings. However, on July 27, 1995,
the Board of Directors adopted the 1995 Incentive Stock Option Plan (the
"Plan") which was approved by the Company's shareholders in October 1995.
The Plan provides for eligible, non-employee members of the Board of
Directors of the Company or its subsidiaries (Non-Employee Directors) to
receive grants of certain options under the Plan to purchase common stock
of the Company as compensation for their services. A Non-Employee
Director shall not be entitled to receive any grant of a non-qualified
option if such Non-Employee Director is indebted in any amount to the
Company as of the date of grant of such non-qualified options. If 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
non-qualified option as if such indebtedness due to the Company had not
existed.
Specifically, the Plan provides that each eligible, Non-Employee Director
shall initially be granted a non-qualified option to purchase 50,000
shares of common stock effective July 27, 1995, the effective date of the
Plan. Thereafter, on a yearly basis, each Non-Employee Director shall be
granted a non-qualified option to purchase 25,000 shares of common stock
of the Company.
During the fiscal year ended March 31, 1996 (1996) and again during the
fiscal year ended March 31, 1997 (1997), in accordance with the terms of
the Plan, two of the Company's Non-Employee Directors, each owning less
than 10% of the Company's common stock, were each automatically granted
non-qualified options to purchase 50,000 and 25,000 shares of common stock
at an exercise price of approximately $.078 and $.065 in 1996 and 1997,
respectively. One other Non-Employee Director, who owns more than 10% of
the Company's common stock, was disqualified to receive similar grants of
non-qualified options to purchase 50,000 and 25,000 shares of common stock
because of the indebtedness limitation previously mentioned. If this Non-
Employee Director had been entitled to receive such an option, the
exercise price would have been approximately $.086 and $.072 in 1996 and
1997, respectively. (See Item 12, Certain Relationships and Related
Transactions, below.)
Item 11
Security Ownership of Certain Beneficial Owners
and Management
Set forth below, as of May 15, 1997, is information concerning stock
ownership of all persons, or group of persons, known by the Company to own
beneficially 5% or more of the shares of Basic's common stock and all
directors and executive officers of the Company, both individually and as
a group, who held such positions in the fiscal year just ended. Basic has
no knowledge of any other persons, or group of persons, owning
beneficially more than 5% of the outstanding common stock of Basic as of
May 15, 1997.
<TABLE>
<CAPTION>
Percent of
Outstanding
Shares
Name and Address Shares of Common Stock Beneficially
of Beneficial Owner Beneficially Owned Owned
- ------------------- ---------------------- ------------
<S> <C> <C>
G. W. Breuer 3,767,670 22.7%
Denver, CO (1)
Basic's Employee Stock 1,898,216 11.4%
Ownership Plan (2)
Ray Singleton 606,341 3.7%
Englewood, CO (3)
David J. Flake 515,478 3.1%
Denver, CO (4)
Edgar J. Huffman 35,000 0.2%
Phoenix, AZ (5)
All officers and 4,924,489 29.7%
directors as a group
(4 persons: (1),(3),(4) and (5))
</TABLE>
(1) Represents 2,645,191 shares owned by Mr. Breuer directly and
1,122,479 shares with indirect beneficial ownership.
(2) Represents shares held in the Company's and its subsidiary's
individual Employee Stock Ownership Plan (ESOP) accounts excluding shares
held in the ESOP accounts of the Company's officers listed separately in
the table.
(3) Represents 181,500 shares held directly by Mr. Singleton and 424,841
shares held in Mr. Singleton's ESOP account.
(4) Represents 505,478 shares owned by Mr. Flake and 10,000 shares with
indirect beneficial ownership.
(5) Represents 35,000 shares owned by Mr. Huffman directly. In addition,
103,500 shares (approximately .6%) of the Company's common stock are held
by the Foundation for Montessori Education, a charitable corporation of
which Mr. Huffman's wife is a director. Mr. Huffman claims no beneficial
interrest in the shares.
Company management knows of no arrangements which may result in a change
in control of Basic.
Item 12
Certain Relationships and Related Transactions
In September 1995, the Board of Directors authorized a loan to Mr.
Singleton, in the amount, up to and including, $10,000. The loan is to be
used solely for the purchase of Company stock from existing shareholders.
The loan is evidenced by a promissory note and requires quarterly interest
payments at a fluctuating rate equal to the Company's cost of debt. The
note requires no principal payments and has a term of five years, at which
time the principal balance becomes due. The loan is collateralized by the
purchased stock. Pursuant to this arrangement, at March 31, 1997, Mr.
Singleton had borrowed $10,000 from the Company to purchase 144,000
shares.
It is the policy of Basic that officers or directors may assign to or
receive assignments from Basic in oil and gas prospects only on the same
terms and conditions as accepted by independent third parties. It is also
the policy of Basic that officers or directors and Basic may participate
together in oil and gas prospects generated by independent third parties
only on the same terms and conditions as accepted by each other.
Subject to this policy, G. W. Breuer, former President and Chief Executive
Officer and a current director, has participated, since 1980, with Basic
in various drilling and development arrangements. Some of these
properties are still producing, but no longer generate net income
consistently. In the past, management's policy allowed for non-payment
from certain individuals, including Mr. Breuer, of a net loss, in the
belief that net income from subsequent months would cover the loss. In
August 1993, with the concurrence of the Board of Directors, management
enacted new policies whereby the Company requested these certain
individuals, including Mr. Breuer, to bring any outstanding account
balances current, and to keep them current on an ongoing basis. This
policy has resulted in a long standing dispute between Mr. Breuer and the
Company over ownership of certain properties and the payment of lease
operating expenses. The Company has withheld proceeds from sales
transactions, and other nominal amounts, from Mr. Breuer, as partial
payment of this debt. The Company contends that, by March 31, 1997, the
balance owed to Basic by Mr. Breuer had been reduced to approximately $0.
However, this balance fluctuates monthly, based on the profitability of
the various leases in which Mr. Breuer owns an interest. If, in the
future, such balance owed the Company again becomes positive, the Company
will again retain funds due to Mr. Breuer as payment of any balance owed
to the Company.
During the year ended March 31, 1995, Basic retained the services of Visa
Stock Transfer, replacing Society National Bank as the Company's stock
transfer agent. Visa Stock Transfer is a wholly-owned subsidiary of Visa
Industries, Inc., of which Mr. Huffman is a director. The fees charged by
Visa Stock Transfer are lower than those charged by other stock transfer
agents.
In the years ended March 31, 1997, 1996 and 1995, there were no other
significant related party transactions.
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, this report is signed below by the following persons on behalf of
Basic and in the capacities indicated.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton /s/ Karen E. Riner
- ----------------- ------------------
Ray Singleton, President Karen E. Riner, Controller
Principal Accounting Officer
July 28, 1997 July 28, 1997
- ------------------ -----------------
Date Date
