UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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.
The proxy statement for the 1997 annual meeting is incorporated by reference
into Part III.
<PAGE>
Basic Earth Science Systems, Inc.
Form 10-KSB
March 31, 1997
Table of Contents
Page
-----
Part I:
Item 1. Description of Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II:
Item 5. Market for Common Equity and Related Stockholder
Matters 12
Item 6. Management's Discussion and Analysis or
Plan of Operation 13
Item 7. Financial Statements 18
Item 8. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure 38
Part III:
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With
Section 16(a) of the Exchange Act 38
Item 10. Executive Compensation 38
Item 11. Security Ownership of Certain Beneficial Owners
and Management 39
Item 12. Certain Relationships and Related
Transactions 39
Part IV:
Item 13. Exhibits and Reports on Form 8-K 40
<PAGE>
PART I
ITEM 1
DESCRIPTION OF BUSINESS
OVERVIEW
Basic Earth Science Systems, Inc. (Basic or the Company), was originally
organized in July 1969 and became a public company in 1980. The Company is
principally engaged in the acquisition, exploitation, development, operation and
production of crude oil and natural gas. The Company's primary areas of
operation are the Williston basin in North Dakota and Montana, south Texas and
the D-J basin in Colorado.
BUSINESS DEVELOPMENT
Since 1994, the Company's new management has undertaken a strategy which
redirects the Company's existing capital into productive and economic oil and
gas properties, focuses on increasing reserves through the acquisition and
improvement of producing properties, and re-establishes banking relationships
which may provide debt financing for these purposes. Despite the fact that many
companies are moving away from an acquisition strategy, management believes that
opportunities still exist to increase reserves through the acquisition and
improvement of producing properties. In fact, given the Company's size, its
shortage of external funding and its existing internal staff strengths, this may
be one of the few strategies which the Company may be able to pursue
successfully. The Company's acquisition strategy is based largely on the
consolidation, merger, liquidation or exodus of large independent companies from
the Rocky Mountain region.
In pursuing this plan, in its fiscal year ended March 31, 1995, the Company
reported the successful establishment of a new banking relationship, the
drilling and recompletion of four wells on its Antenna Federal Prospect, the
sale of its office building and move of its corporate headquarters from the
suburbs to downtown Denver, Colorado, the sale of deep exploration rights in
south Texas and the acquisition of approximately sixty properties in the
Williston basin.
Following these successes, in the fiscal year ended March 31, 1996 compared to
the previous year, oil and gas sales revenue increased 97% from approximately
$1.4 million to approximately $2.8 million and Cash Flows from Operating
Activities increased 484% from $134,000 to $782,000. Production expense was
higher than expected and net income was lower than expected due to the magnitude
of unanticipated equipment repair costs associated with the Williston basin
acquisition.
In the fiscal year ended March 31, 1997 compared to the previous year, oil and
gas sales revenue increased 7% from approximately $2.8 million to approximately
$3.0 million, while Cash Flows from Operating Activities decreased 30% from
$782,000 to $544,000. This decrease in cash flow was primarily a result of
reducing the Company's payables and accrued liabilities.
In the fiscal year just ended, the Company continued to be adversely affected by
the magnitude of routine repair costs associated with equipment on recently-
acquired Williston basin properties. However, the Company made great strides in
replacing this suspect equipment and management believes this has had and will
continue to have a positive impact in reducing routine repair costs.
While progress was made on routine repairs, the Company experienced non-routine
casing failures due to salt collapse in three wells in Richland County, Montana
and two wells in Billings County, North Dakota. While casing failures due to
salt collapse are known to occur, the number of occurrences was unanticipated.
These repairs significantly increased oil and gas production expense. Although
some equipment could not be removed and was abandoned in the wells, repairs were
moderately successful in that four of the five wells were returned to
production. The fifth well was lost and will be abandoned. The Company's
reserves were not adversely affected by these events. Furthermore, the Company
considers all of these repairs to be non-routine and does not expect their
reoccurrence.
As a result of these equipment malfunctions, the Company's cash position was
adversely impacted, and its intentions to pursue the exploitation of unproved
reserves from "behind pipe" prospects in marginal wellbores was postponed.
During the fiscal year just ended, the Company participated with unrelated third
parties for a minority interest (10%) in two small 3-D seismic prospects. The
first prospect was abandoned following seismic interpretation and the second
resulted in the drilling of a dry hole.
The Company did not acquire any significant new properties in fiscal year 1997.
CONTEMPLATED ACTIVITIES
GENERAL The Company has begun implementation of its strategy by virtue of the
various activities described above. Further implementation of its plan of
operation is described herein. 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 and
other events which the Company is not able to anticipate.
REPAIRS The Company previously disclosed that it was adversely affected by the
magnitude of routine repair costs associated with equipment on recently acquired
Williston basin properties and the replacement thereof. The Company expects to
continue to replace suspect equipment, although in decreasing amounts, in the
coming fiscal year.
DEVELOPMENT The Company holds a number of properties that management believes
has the potential for increased cash flow and may have additional unproved
reserves which could be exploited. This exploitation may be realized by
conventional and unconventional petroleum engineering techniques and field
management practices. Management expects to pursue these potential
opportunities on a number of these properties in the upcoming fiscal year.
However, there can be no assurances that funds will be available to pursue such
opportunities or that such efforts will be successful.
ACQUISITIONS The Company continues to pursue properties which are made
available for sale. However, there can be no assurances that funds will be
available to pursue such opportunities or that offers the Company submits will
be accepted.
DRILLING While drilling is no longer the major focus of the Company's strategy,
Basic may participate in high quality development or exploratory prospects which
management believes are capable of increasing reserves and cash flow with
reasonable risk.
DIVESTITURES/ABANDONMENTS During the fiscal year just ended, the Company was
unable to sell several uneconomic properties at prices which management believed
took into account the value of salvageable equipment. Management believes the
current demand for this equipment to be particularly high, especially in the
Williston basin. The Company has abandoned, and will continue to abandon, in
accordance with state and federal regulations, those properties and salvage
and/or sell useful equipment. This strategy has generated, and is expected to
continue to generate, cash in excess of the cost of abandonment. The Company
continues to hold a number of marginal, operated and non-operated properties in
several states. Management intends to divest itself of a number of these
properties in the current fiscal year.
SUBSEQUENT EVENTS In June 1997, the Company successfully recompleted the George
Anderson #25-1 in North Dakota into the Gunton formation. The well had
previously produced 7.5 barrels of oil per day (BOPD) and 112 barrels of water
per day (BWPD) from the Red River formation and contributed little to the
Company's cash flow or reserve base. Following the recompletion, the well
established an initial production rate of 149 BOPD, 20 BWPD and 41 thousand
cubic feet of gas per day (MCFGPD). Basic has a fifty-one percent (51%) revenue
interest in the well. Management believes, if this initial production rate is
an indication of the extent of the reservoir, this well will have a favorable
impact on Basic's future reserves and cash flow.
SEGMENT INFORMATION AND MAJOR CUSTOMERS
INDUSTRY SEGMENT The Company is engaged only in the upstream segment of the oil
and gas industry, which comprises exploration, production, operations and
development. The Company has no gathering, transportation, refining or
marketing functions.
MARKETS The Company's oil and natural gas is sold to various purchasers in the
geographic area of its properties. Basic is a small company and, as such, has
no impact on the market for its goods and little control over the price
received. The market for, and the value of, oil and natural gas are dependent
upon a number of factors including other sources of production, competitive
fuels, and proximity and capacity of pipelines or other means of transportation,
all of which are beyond the control of Basic.
The Company believes that substantially all domestic oil which is produced can
be readily sold at prevailing market prices. The oil prices the Company
receives are slightly lower than the benchmark U.S. crude spot price because of
adjustments for location and grade. The price of domestic oil fluctuates due to
supply and demand. Since there is strong competition among purchasers,
management does not believe it is dependent on any one purchaser or group of
purchasers.
In the year ended March 31, 1997, Basic sold 70 percent of its oil and gas
production to a total of three purchasers: 34 percent to Cenex, Inc., 18
percent to Murphy Oil USA, Inc. and 18 percent to Norco Crude Gathering, Inc.
Sales to no other customer of Basic (or group of customers under common control)
were equal to 10 percent or more of oil and gas sales.
Substantially all of Basic's gas production is sold at prevailing wellhead gas
prices, subject to additional charges customary to an area. Basic does not own
or operate any gas gathering or processing plant facilities nor does it possess
sufficient volume on any pipeline to market its product to end-users.
COMPETITION
The oil and gas industry is a highly competitive and speculative business. The
Company encounters strong competition from major and independent oil companies
in all phases of its operations, particularly in the acquisition of economically
desirable producing properties and drilling prospects. Competition is intense
with respect to the acquisition of large producing properties, or large packages
of producing properties. These multiple well packages are particularly
competitive if they include partially developed properties or properties with
natural gas attributes. In this arena, the Company must compete with many
companies having financial resources and technical staffs significantly larger
than its own. However, management believes that the competition for smaller
properties, especially distressed properties, is less intense. Because of the
limited capital resources available to the Company, management has focused on
these smaller and/or marginal properties in its acquisition efforts.
REGULATIONS
GENERAL The operations of the Company are affected in varying degrees by
federal, state, regional and local laws and regulations, including, but not
limited to, laws governing allowable rates of production, well spacing, air
emissions, water discharges, reporting requirements, endangered species,
marketing, prices, and taxes. The Company is further affected by changes in
such laws and by constantly changing administrative regulations. To the best of
its knowledge, the Company is in compliance with all such regulations and is not
aware of any claims which could have a material impact upon the Company's
financial condition, results of operations, or cash flows.
FEDERAL TAXATION During fiscal 1993, The Comprehensive National Energy Policy
Act (Act) was signed into law. The Act provides for various incentives and
revenue-raising provisions. Perhaps most significant to independent oil and gas
companies are the provisions repealing certain intangible drilling cost and
statutory depletion tax preferences for the purposes of calculating the
alternative minimum tax. While provisions are favorable to the oil and gas
industry, Basic will not realize current benefits because of its relatively
high, non-cash depletion expense and a substantial net operating loss
carryforward.
NATURAL GAS PRICING During fiscal 1992, the Federal Energy Regulatory
Commission (FERC) issued FERC Order 636 (the Order) which is intended to ensure
that pipelines provide transportation service that is equal in quality for all
gas suppliers, whether the customer purchases gas from the pipeline or from a
different supplier. While the Company views this Order as favorable to natural
gas producers, it does not have a material impact on Basic in that the vast
majority of the Company's production is crude oil rather than natural gas.
ENVIRONMENTAL MATTERS The Company is subject to various federal, state,
regional and local laws and regulations relating to the discharge of materials
into, and the protection of, the environment. These laws and regulations, among
other things, may impose liability on the owner or the lessee for the cost of
pollution cleanup resulting from operations, subject the owner or lessee to
liability for pollution damages, require the suspension or cessation of
operations in affected areas and impose restrictions on injection into
subsurface aquifers that may contaminate ground water. Although environmental
requirements do have a substantial impact upon the energy industry, these
requirements do not appear to affect Basic any differently than other companies
in this industry who operate in a given geographic area. The Company is not
aware of any environmental claims which could have a material impact upon the
Company's financial condition, results of operations, or cash flows.
Such regulation has increased the resources required and costs associated with
planning, designing, drilling, operating and both installing and abandoning oil
and natural gas wells and facilities. Indeed, within the fiscal year just
ended, the Company has had to re-allocate staff resources to the task of
complying with developing, changing and expanding environmental regulations. As
yet, Basic has not had to hire any new employees to comply with these
regulations. The Company will continue to make expenditures in its efforts to
comply with these requirements, which are unavoidable business costs in the oil
and gas industry.
Although the Company is not fully insured against all environmental and other
risks, it maintains insurance coverage which it believes is customary in the
industry.
OTHER
The oil and gas business is not generally seasonal in nature, although unusual
weather extremes for extended periods may increase or decrease demand for oil
and natural gas products temporarily. Additionally, catastrophic events, such
as hurricanes or other supply disruptions, may also temporarily increase the
demand for oil and gas supplies. Such events and their impacts on oil and gas
commodity prices may cause fluctuations in quarterly or even annual revenues and
earnings.
Basic's offices are located at 633 Seventeenth Street, Suite 1670, Denver,
Colorado 80202 (telephone number: 303-294-9525). At the end of its fiscal year,
the Company had nine employees: four at its main office in Denver, Colorado and
five at its subsidiary's field office in Bruni, Texas, located forty-five miles
east, southeast of Laredo, Texas. The Company expects to add a clerical
position at its Denver office in the near future.
FORWARD-LOOKING STATEMENTS
This Form 10-KSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Form 10-KSB, including, without limitation, the statements
under "Item 1. Description of Business", "Item 6. Management's Discussion and
Analysis or Plan of Operation", and Note 3 to the Consolidated Financial
Statements located elsewhere herein regarding the Company's financial position
and liquidity, the amount of and its ability to make debt service payments, its
strategies, financial instruments, and other matters, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in this Form 10-KSB in conjunction with the forward-looking statements
included in this Form 10-KSB.
The Company's intentions and expectations described in this Form 10-KSB with
respect to possible development activities concerning properties in which it
holds interests may be deemed to be forward-looking statements. These
statements are made based on management's current assessment of the development
merits of the particular property in light of the geological information
available at the time and based on the Company's relative interest in the
property and its estimate of its share of the development cost. Subsequently
obtained information concerning the merits of any property, as well as changes
in estimated development costs and ownership interest, may result in revisions
to management's expectations and intentions and, thus, the Company may alter its
plans regarding these development activities. Furthermore, circumstances beyond
the Company's control may cause such prospects to be eliminated from further
consideration as development prospects.
ITEM 2
DESCRIPTION OF PROPERTY
PRODUCING PROPERTIES: LOCATIONS AND IMPACT As of March 31, 1997, Basic owned an
interest in 96 oil wells and 21 gas wells. Basic currently operates 67 wells in
five states: North Dakota, Montana, Colorado, Texas and Wyoming. These operated
wells contributed approximately 73 percent of Basic's total liquid hydrocarbon
sales and approximately 58 percent of total gas sales in the year ended March
31, 1997. The majority of Basic's operated liquid reserves are located in the
Williston basin of North Dakota and Montana and in south Texas while the
majority of Basic's operated gas reserves are located in Colorado's Denver-
Julesburg basin. Substantially all producing properties are encumbered and used
to secure bank debt.
<TABLE>
<CAPTION>
Producing Property
-----------------------------------
Gross Wells Net Wells
-------------- ---------------
Oil Gas Oil Gas
---- ---- ----- -----
<S> <C> <C> <C> <C>
Colorado 0 4 0.00 2.40
Kansas 3 0 0.53 0.00
Louisiana 3 10 .46 .38
Montana 16 0 13.55 0.00
New Mexico 0 5 0.00 0.98
North Dakota 38 0 22.00 0.00
Oklahoma 2 1 0.50 0.31
Texas 32 1 26.19 0.23
Wyoming 2 0 0.42 0.00
--- --- ----- -----
Total 96 21 63.65 4.30
=== === ===== =====
</TABLE>
RESERVES At March 31, 1997, the discounted present value of Basic's estimated
proved reserves was approximately $3,082,000 reflecting a 35% decrease from the
previous year's reserves of $4,725,000. This decrease was primarily the result
of lower oil prices at March 31, 1997 compared to the previous year, and actual
production of forecast reserves. The analysis of Basic's oil and gas reserves
and the financial analysis of the oil and gas properties are in Notes 1 and 9 to
the Consolidated Financial Statements.
LEASEHOLD ACREAGE The Company leases the rights to explore for and produce oil
and gas from mineral owners. Leases (quantified in acres) expire after their
primary term unless oil or gas production is established. Prior to establishing
production, leases are considered undeveloped. After production is established,
leases are considered developed or "held-by-production." Basic's acreage is
comprised of developed and undeveloped acreage. Typically, undeveloped acreage
is considered an indication of the Company's "raw material" and, therefore, its
potential to replace reserves in the future. Basic's strategy is the
acquisition of producing properties. Given this strategy, there is no need for
Basic to amass undeveloped acreage blocks. As a result, Basic has a minimal
amount of undeveloped acreage relative to exploration companies. Management
believes this is a reflection of the Company's strategy rather than its ability
to replace reserves.
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
------------------- -------------------
Gross Net Gross Net
------ ---- ------ ----
<S> <C> <C> <C> <C>
Colorado 640 344 0 0
Kansas 800 130 0 0
Louisiana 2,669 209 0 0
Montana 2,720 2,029 2,600 826
New Mexico 800 156 0 0
North Dakota 8,012 4,477 5,037 2,413
Oklahoma 320 85 0 0
Texas 3,166 2,311 80 65
Wyoming 634 254 1,016 486
----- ----- ----- -----
19,761 9,995 8,733 3,790
Total ====== ====== ===== ======
</TABLE>
FIELD SERVICE EQUIPMENT At March 31, 1997, the Company's subsidiary, Basic
Petroleum Services, Inc., owned a trailer house/field office, a shallow pulling
rig, a large winch truck, a skid-mounted cementing unit, four pickup trucks and
six ancillary service vehicles. None of the vehicles are encumbered.
OFFICE LEASE The Company currently leases approximately 3,000 square feet of
office space in downtown Denver for its corporate headquarters. The lease term
expires April 30, 1999.
ITEM 3
LEGAL PROCEEDINGS
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of Basic's shareholders during the fiscal
quarter ended March 31, 1997.
PART II
ITEM 5
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Basic's common stock is traded in the over-the-counter market. The following
table sets forth the range of high and low bid prices for each quarter of the
last two fiscal years. Prices are obtained from National Quotation Bureau, LLC.
<TABLE>
<CAPTION>
High Low
------ ------
Year Ended March 31, 1996
- -------------------------
<S> <C> <C>
First Quarter $.0938 $.0312
Second Quarter .0800 .0312
Third Quarter .0800 .0200
Fourth Quarter .0312 .0200
Year Ended March 31, 1997
- -------------------------
First Quarter $.0312 $.0312
Second Quarter .0500 .0312
Third Quarter .0900 .0500
Fourth Quarter .0900 .0700
</TABLE>
The bid price on June 13, 1997 was $0.07. Transactions on the over-the-counter
market reflect inter-dealer quotations, without adjustments for retail mark-ups,
mark-downs or commissions to the broker-dealer and may not necessarily represent
actual transactions.
As of March 31, 1997, Basic had approximately 2,470 shareholders of record.
Management estimates there are over 5,000 beneficial owners. Basic has never
paid a cash dividend on its common stock. Any future dividend on common stock
will be at the discretion of the Board of Directors and will be dependent upon
the Company's earnings, financial condition, and other factors. The Company's
Board of Directors presently has no plans to pay any dividends in the
foreseeable future.
ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
CAPITAL STRUCTURE AND LIQUIDITY
FINANCING The Company recognizes the importance of developing its capital
resource base in order to pursue its objectives. However, subsequent to its
last public offering in 1980, debt financing has been the sole source of
external funding.
BANK DEBT On December 13, 1996, Norwest Bank Colorado N.A. (the Bank) and the
Company modified the Company's loan agreement to set the borrowing base to
$1,200,000 effective December 13, 1996. This modification also extended the
maturity date of the Declining Balance, Revolving Line of Credit (DBRLOC) to
April 1, 2000 and the maturity date of the hedging Revolving Line of Credit
(RLOC) to October 31, 1997. All other terms and conditions remain in full force
and effect. Information concerning the Company's debt appears in Note 3 to the
Consolidated Financial Statements.
HEDGING Hedging techniques are traditionally used to limit exposure to price
fluctuations. Given the financial leverage created by its bank debt and the
magnitude of principal payments due in fiscal 1997, fluctuations in crude oil
prices could have had a negative impact on the Company's financial affairs.
Accordingly, the Company entered into futures and/or options contracts in order
to hedge its exposure. As a result of this decision, the Company did not
realize the full benefit of the oil price surge which occurred in fiscal 1997
and, with hindsight, did sacrifice some cashflow and income in order to achieve
this objective. The Company did not hedge any gas production.
With a reduction in near-term debt repayment requirements in fiscal 1998, the
Company has not hedged its production as aggressively as it did in fiscal 1997.
In addition, the Company has favored options, rather than futures contracts, in
order to participate more fully if prices were to again escalate. Information
concerning the Company's hedging activities appears in Note 1 to the
Consolidated Financial Statements.
LIQUIDITY The Company's current ratio increased from .9:1 at March 31, 1996
(1996) to 1.2:1 at March 31, 1997 (1997). A specific Bank covenant requires the
maintenance of a current ratio of 1:1, after adjustment for the removal of the
current portion of long-term debt. At March 31, 1997, the Company was in
compliance with all Bank covenants and the Company's current ratio was 1.2:1 as
calculated per the provisions of the covenants.
During the fiscal year just ended, current assets increased slightly (less than
1%) from $717,000 at 1996 to $723,000 at 1997 while current liabilities
decreased 29% from $825,000 at 1996 to $585,000 at 1997. Cash increased $5,000
(5%) from $92,000 at 1996 to $97,000 at 1997.
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 will enable the Company
to meet its existing obligations as they become due in fiscal year 1998.
At March 31, 1997, the Company had a deferred tax asset of $5,099,000 that had a
100% valuation allowance recorded to reflect management's evaluation that it is
more likely than not that all of the deferred tax asset will not be realized.
IMPACT OF INFLATION Inflation has not had a great impact on the Company in
recent years because of the relatively low rates of inflation in the United
States.
CAPITAL RESOURCES
OVERVIEW In addition to the Company's routine and predictable production-
related costs, its general and administrative expenses and its debt repayment
requirements, the Company requires capital to fund the development and
enhancement of recently acquired properties and the capital to fund the
acquisition of additional properties. The Company intends to fund its immediate
needs for these efforts with the use of its internally-generated cash flow from
operations, industry and/or investment partners, and new financing, all of which
may or may not be generated or obtained.
OTHER COMMITMENTS As of June 13, 1997, the Company has no obligations to
purchase or sell any of its oil and gas properties nor any other commitments
beyond its hedging activities and rental expense for its office lease.
NEW DEBT/EQUITY FINANCING The Company's balance sheet and borrowing base have
capacity for approximately $600,000 of additional debt. This would only be
sufficient to fund a modest property acquisition. Unless the Company is
successful in exploiting undeveloped potential from recently acquired
properties, and thus add to the Company's borrowing base, management does not
believe it can successfully obtain bank debt exceeding $600,000 without securing
additional equity capital.
Given Basic's size and the current price of the Company's stock, management
believes additional equity would be difficult and expensive to obtain. At the
same time, management is acutely aware of the need for additional equity
financing in order to fund future growth. While addressing the care and
concerns of existing shareholders, management has explored, and will continue to
explore, methods of developing a stronger capital base. However, it must be
stressed, there are no assurances that equity financing is available or can be
attained by the Company. Furthermore, pursuit of equity financing may alter or
vary due to changes in circumstances, unforeseen costs or difficulties,
unforeseen opportunities and other events which the Company is not able to
anticipate.
RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS (LOSS) PER SHARE The Financial Accounting Standards Board (FASB) has
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128). This pronouncement provides a different method of calculating
earnings per share than is currently used in accordance with Accounting Board
Opinion No. 15, "Earnings Per Share". SFAS No. 128 provides for the calculation
of "Basic" and "Dilutive" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. The Company will adopt SFAS No. 128 in 1998 and its implementation is
not expected to have a material effect on the consolidated financial statements.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
OVERVIEW Operations in the fiscal year ended March 31, 1997 (1997) resulted in
net income of $109,000 compared to net income of $6,000 for the fiscal year
ended March 31, 1996 (1996). Cash Flows from Operating Activities decreased 30%
from $782,000 in 1996 to $544,000 in 1997. This decrease in cash flow was
primarily a result of reducing the Company's payables and accrued liabilities.
REVENUES Oil and gas sales revenue increased $200,000 (7%) over 1996. Of this
amount, -$272,000 (-136%) was attributable to decreases in oil production and
$419,000 (210%) was attributable to strengthening oil prices. Furthermore, -
$19,000 (-10%) was attributable to gas volume decreases while $72,000 (36%) was
attributable to strengthening gas prices.
VOLUMES AND PRICES Total liquid production decreased 11%, from 150,000 barrels
in 1996 to 133,500 barrels in 1997, while the average price per barrel increased
19% from $16.43 in 1996 to $19.56 in 1997. Total gas production decreased 6%,
from 214,000 MCF in 1996 to 202,000 MCF in 1997, while the price per MCF
increased 21%, from $1.63 in 1996 to $1.98 in 1997. The decrease in liquid and
gas production was due to normal production decline.
EXPENSES Oil and gas production expense and production taxes increased $116,000
(6%) in 1997 over 1996. The majority of the increase was in production taxes,
which increased proportionately with the higher oil and gas sales revenue
mentioned above. The slight increase (4%) in oil and gas production expense was
the result of the previously mentioned casing repairs. The overall lifting cost
per equivalent barrel increased 17% from $10.85 in 1996 to $12.75 in 1997 due
primarily to the decrease in volumes produced.
Depletion expense per equivalent barrel increased 8% from $2.87 in 1996 to $3.09
in 1997, primarily because of the relatively greater increase in the full cost
pool versus the increase in equivalent barrels at March 31, 1997 compared to
March 31, 1996. Despite this increased cost per barrel, actual depreciation and
depletion expense decreased $13,000 (-2%) in 1997 from 1996 because fewer
equivalent barrels were produced. The percentage of reserves depleted in the
fiscal year just ended increased slightly from 17% in 1996 to 18% in 1997.
Net general and administrative expense increased $19,000 (13%) in 1997 from
1996. This increase is primarily attributable to a decrease in administrative
overhead fees, which are charged to various properties which the Company
operates and serve to reduce gross general and administrative expenses. As a
result of the overall increase, and in conjunction with decreased production
volumes, general and administrative expense per equivalent barrel increased from
$.81 in 1996 to $1.02 in 1997.
OTHER INCOME/(EXPENSE) Other Income/(Expense) decreased $25,000 (-26%) from
($95,000) in 1996 to ($70,000) in 1997. This decrease was the result of lower
interest expense combined with higher interest and other income.
SELECTED FINANCIAL INFORMATION
The following table shows selected financial information and averages for each
of the three prior years in the period ended March 31.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Production:
Oil (barrels) 133,500 150,000 69,000
Gas (mcf) 202,000 214,000 175,000
Revenue: (in thousands)
Oil $2,611 $2,464 $1,122
Gas 402 349 307
------ ------ ------
Total 3,013 2,813 1,429
Less: total production expense
(in thousands)(1) 2,131 2,015 851
------ ------ ------
Gross profit (in thousands) $882 $798 $578
====== ====== ======
Depletion expense (in thousands) $517 $533 $333
General & administrative expense
(in thousands) $170 $151 $239
Average sales price:
Oil (per barrel) $19.56 $16.43 $16.26
Gas (per mcf) 1.98 1.63 1.75
Average production expense(2) 12.75 10.85 8.67
Average gross profit(3) 5.28 4.30 5.89
Average depletion expense(4) 3.09 2.87 3.39
Average gen. & admin. expense(5) 1.02 .81 2.43
- --------------------------
(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) Gross profit per equivalent barrel (6 mcf of gas is equivalent to 1
barrel of oil)
(4) Depletion expense per equivalent barrel (6 mcf of gas is equivalent to
1 barrel of oil)
(5) General & administrative expense per equivalent barrel (6 mcf of gas
is equivalent to 1 barrel of oil)
</TABLE>
<PAGE>
Basic Earth Science Systems, Inc.
Table of Contents
Consolidated Financial Statements
and Accompanying Notes
March 31, 1997
Page
-----
Report of Independent Certified Public Accountants - BDO Seidman, LLP 19
Report of Independent Public Accountants - Arthur Andersen LLP 20
Consolidated Balance Sheet 21
Consolidated Statements of Income 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Changes in Shareholders' Equity 25
Notes to Consolidated Financial Statements:
1. Summary of Significant Accounting Policies 26
2. Other Current Assets 30
3. Debt 30
4. Commitments 31
5. Shareholders' Equity 32
6. Major Customers 33
7. Income Tax 33
8. Related Party Transactions 34
9. Unaudited Oil and Gas Reserve Information 34
<PAGE>
ITEM 7
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Basic Earth Science Systems, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Basic Earth
Science Systems, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Basic Earth Science Systems,
Inc. and subsidiaries as of March 31, 1997, and the results of their operations
and their cash flows for the year ended March 31, 1997, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado
June 6, 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Basic Earth Science Systems, Inc.:
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity and cash flows of BASIC EARTH SCIENCE SYSTEMS, INC. (a
Delaware corporation) and subsidiaries, for the year ended March 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Basic Earth
Science Systems, Inc., and subsidiaries for the year ended March 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 7, 1996.
<PAGE>
<TABLE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheet
Page 1 of 2
March 31, 1997
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $97,000
Accounts receivable:
Oil and gas sales 255,000
Joint interest and other receivables 128,000
Less: allowance for doubtful accounts (40,000)
Other current assets 283,000
-----------
Total current assets 723,000
-----------
Property and equipment:
Oil and gas property (full cost method) 32,171,000
Furniture, fixtures and equipment 445,000
-----------
32,616,000
Accumulated depreciation (357,000)
Accumulated depletion - FCP (includes cumulative ceiling
limitation charges of $14,091,000) (29,812,000)
-----------
Net property and equipment 2,447,000
Other noncurrent assets 75,000
-----------
Total noncurrent assets 2,522,000
-----------
TOTAL ASSETS $3,245,000
===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheet
Page 2 of 2
March 31, 1997
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Current liabilities:
Accounts payable $466,000
Accrued liabilities 119,000
-----------
Total current liabilities 585,000
-----------
Long-term debt 649,000
-----------
Commitments
Shareholders' equity:
Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares -----
Common stock, $.001 par value
Authorized - 32,000,000 shares
Issued - 16,879,752 shares 17,000
Additional paid-in capital 22,692,000
Treasury stock (299,265 shares); at cost (15,000)
Accumulated deficit (20,683,000)
-----------
Total shareholders' equity 2,011,000
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,245,000
===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Income
<CAPTION>
Year Ended March 31
1997 1996
------------ ------------
<S> <C> <C>
REVENUE:
Oil and gas sales $3,013,000 $2,813,000
Well service revenue 32,000 13,000
------------ ------------
Total revenue 3,045,000 2,826,000
EXPENSES:
Oil and gas production 1,846,000 1,779,000
Production tax 285,000 236,000
Well servicing expenses 31,000 12,000
Depreciation, depletion and amortization 534,000 547,000
General and administrative 170,000 151,000
------------ ------------
Total expenses 2,866,000 2,725,000
------------ ------------
Income from operations 179,000 101,000
------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 17,000 9,000
Interest expense (87,000) (104,000)
------------ ------------
Total other expense (70,000) (95,000)
------------ ------------
NET INCOME $109,000 $6,000
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 16,580,487 16,478,869
============ ============
NET INCOME PER SHARE $.007 NIL
====== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended March 31
1997 1996
---------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $109,000 $6,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 534,000 547,000
Change in current assets and
current liabilities:
Accounts receivable, net 134,000 114,000
Other current assets (136,000) (102,000)
Accounts payable & accrued liabilities (114,000) 227,000
Changes in other assets 4,000 (21,000)
Changes in other liabilities ----- (3,000)
(Gain)/loss on sale of assets (6,000) 1,000
Other 19,000 13,000
---------- ----------
Net cash provided by operating activities 544,000 782,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Oil and gas property (364,000) (455,000)
Support equipment (13,000) (28,000)
Proceeds from sale of support equipment 7,000 0
Proceeds from sale of oil and gas property ----- 29,000
---------- ----------
Net cash used in investing activities (370,000) (454,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (371,000) (564,000)
Proceeds from borrowing 202,000 245,000
---------- ----------
Net cash used in financing activities (169,000) (319,000)
---------- ----------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 5,000 9,000
Balance at beginning of year 92,000 83,000
---------- ----------
Balance at end of year $97,000 $92,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $87,000 $104,000
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Years ended March 31, 1997 and 1996
<CAPTION>
Common stock Additional
------------ paid-in
Shares Par value capital
------ --------- ---------
<S> <C> <C> <C>
Balance, April 1, 1995 16,879,752 $1,688,000 $21,022,000
Issuance of treasury stock for
Employee Stock Ownership
Plan contribution --- --- (1,000)
Change in common stock
par value --- (1,671,000) 1,671,000
Net Income --- --- ---
---------- ---------- ----------
Balance, March 31, 1996 16,879,752 17,000 22,692,000
Net Income --- --- ---
---------- ---------- ----------
Balance, March 31, 1997 16,879,752 $17,000 $22,692,000
========== ========== ==========
<CAPTION>
Employee Stock Treasury stock
Ownership Plan --------------- Accumulated
contribution Shares Amount deficit
-------------- ------ ------ -----------
<S> <C> <C> <C> <C>
Balance, April 1, 1995 $13,000 (572,739) $(29,000) $(20,798,000)
Issuance of treasury stock for
Employee Stock Ownership
Plan contribution (13,000) 273,474 14,000 ---
Change in common stock
par value --- --- --- ---
Net Income --- --- --- 6,000
---------- --------- -------- ----------
Balance, March 31, 1996 --- (299,265) (15,000) (20,792,000)
Net Income --- --- --- 109,000
---------- --------- -------- -----------
Balance, March 31, 1997 $--- (299,265) $(15,000) $(20,683,000)
========== ========= ======== ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Basic Earth Science Systems, Inc. (Basic or the Company) and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
OIL AND GAS PRODUCING ACTIVITY Basic follows the full cost method of
accounting for its oil and gas activity. Accordingly, all costs associated with
the acquisition, exploration and development of oil and gas property are
capitalized. Should net oil and gas property cost exceed an amount equal to the
present value (using a 10% discount factor) of estimated future net revenue from
proved reserves, considering related income tax effects, as prescribed by the
Securities and Exchange Commission's ceiling limitation, the excess is charged
to expense during the period in which the excess occurs. Basic did not incur a
ceiling limitation charge during the years ended March 31, 1997 or 1996.
If a significant portion of Basic's oil and gas reserves are sold, a gain or
loss would be recognized; otherwise, proceeds from sales are credited to oil and
gas property cost. In the years ended March 31, 1997 and 1996, Basic credited
oil and gas property cost for $0 and $29,000, respectively, as a result of the
sale of its interest in certain oil and gas property.
The majority of Basic's operated liquid reserves are located in the Williston
basin of North Dakota and Montana and in south Texas and the majority of Basic's
operated gas reserves are located in Colorado's Denver-Julesburg basin.
All capitalized cost is depleted on a composite units-of-production method based
on estimated proved reserves attributable to the oil and gas property owned by
Basic. Depletion per equivalent barrel of production was $3.09 and $2.87 for
the years ended March 31, 1997 and 1996, respectively.
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.
SUPPORT EQUIPMENT AND OTHER When property and equipment other than oil and gas
property is retired, abandoned or sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
operations. Depreciation of support equipment and other property is computed
using various methods over periods ranging from five to seven years.
RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS No. 128). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Board Opinion No. 15, "Earnings Per Share". SFAS No. 128 provides
for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. The Company will adopt SFAS No. 128 in 1998
and its implementation is not expected to have a material effect on the
consolidated financial statements.
NET INCOME PER SHARE Net income per common share has been computed by dividing
net income, after reduction for preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding during
each of the periods presented. Options and warrants to purchase stock are
included as common stock equivalents when dilutive. Common stock equivalents
are not utilized for the years ended March 31, 1997 and 1996 as their effect is
immaterial.
The weighted average number of shares for the years ended March 31, 1997 and
1996 was 16,580,487 and 16,478,869, respectively.
STOCK OPTION PLANS The Company applies Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," (APB Opinion 25) and related
Interpretations in accounting for all stock option plans. Under APB Opinion 25,
no compensation cost has been recognized for stock options granted as the option
price equals or exceeds the market price of the underlying common stock on the
date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) requires the Company to provide pro forma
information regarding net income as if compensation cost for the Company's stock
option plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123.
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. The
carrying amount of cash equivalents approximates fair value because of the short
maturity of those instruments.
HEDGING Hedging techniques are traditionally used to limit exposure to price
fluctuations. Under futures contracts, the Company receives or makes payments
to the New York Mercantile Exchange (NYMEX) via a trading account based on the
differential between the price at which any given contract was sold and the
price at which it was bought back (the closing price). Under put option
contracts, the Company would receive payments from NYMEX if the closing price is
greater than the floor price at which the put option was purchased. When a put
option contract is combined with the sale of a call option contract, a "collar"
or a floor price and a ceiling price is created. In this situation the Company
would receive payments from NYMEX if the closing price is greater than the floor
price at which the put option was purchased or would make payments to NYMEX if
the closing price is greater than the ceiling price at which the call option was
sold. If the closing price was between the floor and the ceiling both options
would expire unexercised and the Company would benefit by the amount the closing
price exceeded the floor price, less the cost of the option. When a futures
contract is combined with the purchase of a call option contract, a "synthetic
put" is created. In this situation, the futures contract would cause the
Company to receive or make payments to NYMEX as described above. However, any
payment would be offset by, and to the extent, the closing price is greater than
the price at which the call option was purchased.
Given the financial leverage created by its bank debt and the magnitude of
principal payments due in fiscal 1997, fluctuations in crude oil prices could
have had a negative impact on the Company's financial affairs. Accordingly, the
Company entered into futures and/or options contracts in order to hedge its
exposure. As a result of this decision, the Company did not realize the full
benefit of the oil price surge which occurred in fiscal 1997 and, with
hindsight, did sacrifice some cashflow and income in order to achieve this
objective. The Company did not hedge any gas production.
With a reduction in near-term debt repayment requirements in fiscal 1998, the
Company has not hedged its production as aggressively as it did in fiscal 1997.
In addition, the Company has favored options, rather than futures contracts, in
order to participate more fully if prices were to again escalate. Gains or
losses attributable to such contracts that hedge specific future deliveries are
deferred and recognized in income when the corresponding physical sale is
recorded.
At March 31, 1997, the Company had thirty-six open futures and/or options
contracts to hedge future deliveries with maturities ranging from April 1997
through February 1998 at prices ranging from $20.26 to $20.42 per barrel for
futures contracts and at a strike price of $19.00 per barrel for options.
Cash flows from hedging activities are consolidated into oil and gas revenues on
the income statement and, as a result, are included in net income in the
Statement of Cash Flows. The Company realized an approximate $206,000 loss on
its hedging activities in 1997. These losses were offset by receiving higher
prices, relative to the oil prices management accepted to hedge its exposure,
for physical crude oil sales in 1997. The Company realized an approximate
$38,000 loss on its hedging activities in 1996. The fair market value of the
open futures and options contracts at March 31, 1997, using commodity prices in
effect at March 31, 1997, would, if such prices were to remain constant in the
future, create a loss of less than $21,000. As previously noted, the Company
has favored the use of options in its current hedging strategy. Unlike futures
contracts, where such a loss theoretically would be offset by receiving higher
prices for physical crude oil sales, options losses would not be theoretically
offset and such a loss will occur if prices remain constant.
For each futures contract and each call option contract that is sold, the
Company is required to furnish an initial cash margin. In addition, to the
extent that the price of oil moves above the price each futures or call option
contract was sold, the Company is required to furnish an additional cash margin,
an event known as a margin call. The purchase of put or call options does not
require a cash margin to be maintained. If a margin call is not funded, NYMEX
will close the contracts and any unrealized loss would become a realized loss.
The Company has executed a tri-party agreement to fund the initial margin
requirement and any margin calls up to $900,000 (See further information under
Debt). Because of the volatility of oil prices, it is possible for this credit
limit to be exceeded. One example of how this credit limit could be exceeded
would occur if the Company were to execute one hundred (100) contracts and the
price of oil were to increase nine dollars per barrel ($9/Bbl) in each future
month in which the Company had a contract (other variations of this example
could result in credit limit exposure). By loan covenant and Board of Directors
direction, the Company is precluded from exceeding 75% of the average monthly
production demonstrated over the three preceding months. At March 31, 1997,
approximately $15,000 of the $900,000 credit limit was being utilized. During
the past year, the maximum credit utilization never exceeded $160,000.
The Company is not exposed to credit risk in the event of nonperformance by a
counterparty in that such risk is borne by NYMEX. Since each trader in each
future contract and put or call option sold is required to furnish an initial
cash margin and is subject to margin calls, nonperformance by NYMEX is
considered unlikely.
Continuation of hedging activities, at this level of coverage or at higher or
lower levels of coverage, may vary or change, due to change of circumstances,
unforeseen opportunities, inability to fund margin requirements, lending
institution requirements and other events which the Company is not able to
anticipate.
2. OTHER CURRENT ASSETS
Other current assets at March 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Lease and well equipment inventory $220,000
Other current assets 63,000
--------
Total other current assets $283,000
========
</TABLE>
The lease and well equipment inventory represents equipment owned by the Company
that has either been purchased or has been transferred from wells that the
Company operates. When placed in inventory, the equipment is valued, in the
case of new equipment, at cost or, in the case of used equipment, at prevailing
market prices. The equipment is eventually either sold to third parties at
prevailing market prices or transferred to other wells that the Company operates
on an as-needed basis. This account increased approximately $91,000 (71%) over
March 31, 1996 due primarily to equipment that was transferred off of wells that
were plugged during the year ended March 31, 1997.
<PAGE>
3. DEBT
Outstanding debt of Basic as of March 31, 1997 is as follows:
<TABLE>
<S> <C>
Bank note under loan
agreement (see below) $643,000
Other long-term liabilities 6,000
--------
649,000
Less current portion 0
--------
Total long-term debt $649,000
========
</TABLE>
BANK DEBT On December 13, 1996, Norwest Bank Colorado, N.A. (the Bank) and the
Company modified the Company's loan agreement to extend the maturity date of the
Declining Balance, Revolving Line of Credit (DBRLOC) to April 1, 2000 and the
maturity date of the hedging Revolving Line of Credit (RLOC) to October 31,
1997. This modification also set the borrowing base at $1,200,000 effective
December 13, 1996. Commencing January 1, 1997, the borrowing base amount will
be reduced on the first day of each calendar month by $30,000. At March 31,
1997 the Company's borrowing base was at $1,080,000. On the maturity date of
April 1, 2000, the borrowing base amount will be zero. All other terms and
conditions remain in full force and effect.
As a result of the foregoing loan modification, the Company now has the ability
to draw additional funds from the DBRLOC up to the then-effective borrowing
base. 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.
Finally, the Company has no obligation to make regularly scheduled principal
payments until such time as the outstanding debt exceeds the declined and/or
adjusted borrowing base. Because of this flexibility, the current portion of
long-term debt is $0 on the financial statements herein. However, the Company
intends to make monthly debt payments in amounts comparable to prior periods,
which, if followed, would result in an approximate 25% decrease in the bank
indebtedness over the ensuing fiscal year.
Under the modified loan agreement, the Company must maintain certain covenants
with regard to various financial ratios, net worth, liens and other criteria.
Failure to maintain any covenant, after a curative period, creates a default
under the loan agreement and requires the repayment of the then-existing
principal balance. At March 31, 1997 the Company was in compliance with all
Bank covenants, including those regarding financial ratios, net worth, liens,
encumbrances and other criteria.
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. At
March 31, 1997, the Company's effective annual interest rate was 10.50%.
The Company's required debt payments during the next five years total
approximately $658,000. This amount represents the March 31, 1997 balance of
$643,000 on the DBRLOC and $15,000 on the RLOC and takes into account the fact
that both lines of credit mature within five years.
Statements of Financial Accounting Standards No. 107 and 119 require a
disclosure comparing the fair value of long-term debt relative to the carrying
value. The Company's lines of credit require interest payments to be adjusted
by fluctuations in the Bank's prime lending rate. Based on this, management
believes the fair value of long-term debt approximates the carrying value.
4. COMMITMENTS
The Company leases its primary office space for approximately $3,200 per month
through April 30, 1998 and $3,450 per month through April 30, 1999. Rental
expense was approximately $40,000 and $30,000 for the years ended March 31, 1997
and 1996, respectively.
5. SHAREHOLDERS' EQUITY
EMPLOYEE STOCK OWNERSHIP PLAN Subsequent to the year ended March 31, 1995, the
Company filed an application with the Internal Revenue Service to terminate the
Employee Stock Ownership Plan (the Plan) effective April 1, 1995. The
application was approved by the Internal Revenue Service and the process for
final distribution of Plan assets is under way. The Company is still reviewing
several alternatives in deciding how to replace the Plan.
STOCK OPTION PLAN During 1997 and 1996, the Company granted various options to
purchase an aggregate of 50,000 and 250,000 shares, respectively, of its common
stock to directors and employees for services rendered. At March 31, 1997, all
the options were still outstanding. Under the terms of the options, employees
and directors may exercise their options at prices ranging from $.065 to
$.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 they remain directors or employees of the Company.
FASB Statement 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
requires the Company to provide pro forma information regarding net income and
net income per share as if compensation costs for the Company's stock option
plans and other stock awards had been determined in accordance with fair value
based methods prescribed in SFAS No. 123. Under the accounting provisions for
SFAS No. 123, the Company's net income per share would have been decreased by
immaterial amounts.
A summary of the status of the Company's stock option plans and outstanding
options as of March 31, 1997 and 1996 and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Weighted
Average
Range of Exercise Range of Exercise
Shares Price Shares Price
------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 250,000 $.078125 --- ---
Granted 50,000 $.065 250,000 $.078125
Cancelled --- --- --- ---
Exercised --- --- --- ---
------- -------- -------- --------
Outstanding, end of year 300,000 $.072 250,000 $.078125
======= ======== ======== ========
Options exercisable, end of year 300,000 $.072 250,000 $.078125
Weighted average fair value of
options granted during the year $.072 $.078125
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/97 Life Price at 3/31/97 Price
- -------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.065 50,000 9 $.065 50,000 $.065
$.078125 250,000 9 $.078125 250,000 $.078125
- -------- -------- --- -------- -------- --------
$.065 -
$.078125 300,000 9 $.072 300,000 $.072
======== ======= === ====== ======== ======
</TABLE>
6. MAJOR CUSTOMERS
Significant purchasers of 10% or more of Basic's oil and gas production are as
follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Cenex, Inc. 34% 34%
Norco Crude Gathering, Inc. 18% 18%
Murphy Oil USA, Inc. 18% 19%
</TABLE>
It is not expected that the loss of any of these customers would cause a
material adverse impact on operations since alternative markets for the
Company's products are available.
7. INCOME TAX
Basic and its subsidiaries file a consolidated income tax return.
As of March 31, 1997, Basic had available, to reduce future taxable income, tax
net operating loss carryforwards of approximately $11,552,000 which approximates
alternative minimum tax net operating loss carryforwards, and which expire in
1998 through 2011. The net operating loss carryforward for tax purposes is
different from the net operating loss carryforward for financial reporting
purposes primarily because of the expensing of intangible drilling and
development costs for tax purposes and the ceiling limitation charges for
financial reporting purposes. For income tax purposes, investment tax credit
and excess statutory depletion carryforwards as of March 31, 1997 are
approximately $94,000 and $3,723,000, respectively. Investment tax credits are
accounted for using the flow-through method and expire in the year ended March
31, 2001.
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes," requires recognition of deferred income tax assets and
liabilities based on enacted tax laws for all temporary differences between
financial reporting and tax bases of assets, liabilities and carryforwards under
SFAS 109. Deferred tax assets are then reduced, if deemed necessary (i.e., more
likely than not), by a valuation allowance for the amount of any tax benefits
which, based on current circumstances, are not expected to be realized. The
Company's application of SFAS 109 had no cumulative effect on operations for the
year ended March 31, 1997 since the net deferred tax asset of $5,099,000 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 March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities
Depreciation and depletion $(582,000)
Deferred tax assets
Net operating loss carryforwards 4,292,000
Statutory depletion carryforward 1,389,000
Valuation allowance (5,099,000)
----------
Net deferred tax asset $0
==========
</TABLE>
Basic 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 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.
8. RELATED PARTY TRANSACTIONS
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. In the years ended March 31, 1997 and
1996, there were no significant related party transactions.
9. UNAUDITED OIL AND GAS RESERVE INFORMATION
Approximately ninety-five percent (95%) of the reserve estimates presented
herein, for the year ended March 31, 1997, were derived from reports prepared by
the independent petroleum engineering firm, Heinle & Associates, Inc (Heinle).
The remaining five percent (5%) were prepared by Basic. For the year ended
March 31, 1996, approximately ninety-six percent (96%) of the reserve estimates
presented herein were derived from reports prepared by Heinle. The remaining
four percent (4%) were prepared by Basic. The Company cautions that there are
many inherent uncertainties in estimating proved reserve quantities and in
projecting future production rates and the timing of development expenditures.
Accordingly, these estimates are likely to change as future information becomes
available, and these changes could be material.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.
Proved developed reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods.
<PAGE>
ANALYSIS OF CHANGES IN PROVED RESERVES Estimated quantities of proved reserves
(all of which are located within the United States), as well as the changes in
proved reserves during the periods indicated, are presented in the following two
tables:
<TABLE>
Proved Developed and Undeveloped Reserves
<CAPTION>
Oil and
natural gas Natural
liquids gas
(bbl) (mcf)
---------- ----------
<S> <C> <C>
Proved developed and undeveloped
reserves at March 31, 1995 610,000 1,091,000
Revisions of previous estimates 108,000 228,000
Extensions and discoveries 68,000 ---
Improved recovery 70,000 ---
Production (150,000) (214,000)
Purchase of reserves 15,000 2,000
---------- ----------
Proved developed and undeveloped
reserves at March 31, 1996 721,000 1,107,000
Revisions of previous estimates 5,000 84,000
Extensions and discoveries 12,000 ---
Improved recovery 9,000 ---
Production (134,000) (202,000)
---------- ----------
Proved developed and undeveloped
reserves at March 31, 1997 613,000 989,000
========== ==========
</TABLE>
<TABLE>
Proved Developed Reserves
<CAPTION>
Oil and
natural gas Natural
liquids gas
(bbl) (mcf)
---------- ----------
<S> <C> <C>
March 31, 1997 613,000 989,000
March 31, 1996 721,000 1,107,000
</TABLE>
In the year ended March 31, 1996, Basic received approximately $29,000 from an
unrelated third party for undeveloped acreage in Stark County, North Dakota.
This $29,000 payment is reflected as a credit to unproved property acquisition
cost in the table below:
<TABLE>
<CAPTION>
Costs Incurred
Year Ended March 31
1997 1996
---------- ----------
<S> <C> <C>
Property acquisition
Proved property $67,000 $215,000
Unproved property 1,000 (15,000)
Exploration 20,000 11,000
Development 112,000 276,000
</TABLE>
<TABLE>
Aggregate Capitalized Oil and Gas Property Cost
<CAPTION>
March 31, 1997
--------------
<S> <C>
Capitalized cost
Proved property $32,150,000
Unproved property 21,000
-----------
32,171,000
Accumulated depreciation and depletion (15,721,000)
Oil and gas property cost in excess
of ceiling limitation (cumulative) (14,091,000)
-----------
Net capitalized cost $2,359,000
===========
</TABLE>
The following table sets forth a standardized measure of the estimated
discounted future net cash flows attributable to Basic's proved oil and gas
reserves. Estimated future cash inflows were computed by applying year end
prices of oil and gas (with consideration of price changes only to the extent
provided by contractual arrangements) to the estimated future production of
proved oil and gas reserves at March 31, 1997 and 1996. The future production
and development cost represents the estimated future expenditures to be incurred
in developing and producing the proved reserves, assuming continuation of
existing economic conditions. Discounting the annual net cash flows at 10%
illustrates the impact of timing on these future cash flows.
<TABLE>
STANDARDIZED MEASURE OF ESTIMATED DISCOUNTED FUTURE NET CASH FLOWS
<CAPTION>
March 31
1997 1996
----------- -----------
<S> <C> <C>
Future cash inflows $12,631,000 $16,392,000
Future cash outflows
Production cost (8,334,000) (9,532,000)
Development cost (48,000) (45,000)
----------- -----------
Future net cash flows 4,249,000 6,815,000
Adjustment to discount future
annual net cash flows at 10% (1,167,000) (2,090,000)
----------- -----------
Standardized measure of discounted
future net cash flows $3,082,000 $4,725,000
=========== ===========
</TABLE>
The following table summarizes the principal factors comprising the changes in
the standardized measure of estimated discounted net cash flows for the years
ended March 31, 1997 and 1996.
<TABLE>
Changes in Standardized Measure of Estimated Discounted Net Cash Flows
<CAPTION>
Year Ended March 31
1997 1996
---------- ----------
<S> <C> <C>
Standardized measure, beginning of period $4,725,000 $3,437,000
Sales of oil and gas, net of production cost (883,000) (835,000)
Net change in sales prices, net of production cost (1,198,000) 498,000
Discoveries, extensions and improved recoveries,
net of future development cost 112,000 840,000
Purchase of reserves --- 71,000
Revisions of quantity estimates 73,000 792,000
Accretion of discount 472,000 344,000
Changes in rates of production and other (219,000) (422,000)
---------- ----------
Standardized measure, end of period $3,082,000 $4,725,000
========== ==========
</TABLE>
In the year ended March 31, 1997, Basic realized a decrease from the prior year
in the standardized measure of estimated discounted net cash flows. This
decrease in the standardized measure was primarily the result of lower oil
prices at March 31, 1997 compared to March 31, 1996, in addition to the actual
production of forecast reserves.
ITEM 8
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 26, 1997, the Board of Directors of the Company approved the dismissal
of Arthur Andersen LLP as the Company's independent public accountant and
auditor for the fiscal year ended at March 31, 1997.
None of the Company's financial statements audited by Arthur Andersen LLP
commencing from the fiscal year ended March 31, 1994 through the fiscal year
ended March 31, 1996 contained an adverse opinion or disclaimer of opinion or
was qualified or modified as to uncertainty, audit scope or accounting
principle. Also, during this period and up to and including April 26, 1997, the
effective date of the dismissal, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
Effective as of May 1, 1997, the Company's new independent certified public
accountant is BDO Seidman, LLP, whose business address is 303 E. Seventeenth
Avenue, Suite 600, Denver, Colorado 80203. The appointment of BDO Seidman, LLP
as the Company's independent certified public accountant was approved by the
Board of Directors of the Company.
PART III
ITEM 9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
Information concerning this item will be in Basic's 1997 Proxy Statement, which
is incorporated herein by reference.
ITEM 10
EXECUTIVE COMPENSATION
Information concerning this item will be in Basic's 1997 Proxy Statement, which
is incorporated herein by reference.
ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning this item will be in Basic's 1997 Proxy Statement, which
is incorporated herein by reference.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this item will be in Basic's 1997 Proxy Statement, which
is incorporated herein by reference.
<PAGE>
PART IV
ITEM 13
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Document
- ------- --------
3i Restated Certificate of Incorporation included in Basic's Form 10-K
for the year ended March 31, 1981 (1)
3i By-laws included in Basic's Form S-1 filed October 24, 1980 (1)
3i Certificate of Amendment to Basic's Restated Certificate of
Incorporation dated March 31, 1996 (1)
10(i)a Loan Agreement between Norwest Denver, N.A. and Basic, dated August 1,
1994 (1)
10(i)a Sales Agreement between Basic and TransTexas, dated March 3, 1995,
pertaining to the sale of deep exploration rights (1)
10(i)a Purchase & Sale Agreement between Basic and MCM, dated March 6, 1995,
pertaining to Williston basin acquisition (1)
10(i)a Amended Loan Agreement between Norwest Denver, N.A. and Basic, dated
March 30, 1995 (1)
10(i)a Amended Loan Agreement between Norwest Denver, N.A. and Basic,
September 13, 1995 (1)
10(i)a Amended Loan Agreement between Norwest Denver, N.A. and Basic,
December 13, 1996 (*)
10(ii) Oil and Gas Incentive Compensation Plan included in Basic's Form 10-K
for the year ended March 31, 1985 (1)
22 Subsidiaries of Basic included in Basic's Form 10-K for the year ended
March 31, 1987 (1)
- ---------------------------
(1) Previously filed and incorporated herein by reference
(*) Filed herein
Other exhibits and schedules are omitted because they are not applicable, not
required or the information is included in the financial statements or notes
thereto.
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton /s/ Karen E. Riner
- ----------------- ------------------
Ray Singleton, President Karen E. Riner, Controller
Principal Accounting Officer
Date: June 27, 1997 Date: June 27, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name and Capacity: Date:
- ------------------ ------------------
- ----------------------
G. W. Breuer, Director
/s/ David J. Flake June 27, 1997
- ----------------------
David J. Flake, Director
/s/ Edgar J. Huffman June 27, 1997
- ----------------------
Edgar J. Huffman, Director
/s/ Ray Singleton June 27, 1997
- ----------------------
Ray Singleton, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, statements of income, statements of cash flows, and
statements of changes in shareholders' equity on pages 21, 22, 23, 24 and 25 of
the Company's Form 10-KSB for the fiscal year ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 97
<SECURITIES> 0
<RECEIVABLES> 383
<ALLOWANCES> (40)
<INVENTORY> 0
<CURRENT-ASSETS> 723
<PP&E> 32,616
<DEPRECIATION> (30,169)
<TOTAL-ASSETS> 3,245
<CURRENT-LIABILITIES> 585
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 17
<TOTAL-LIABILITY-AND-EQUITY> 3,245
<SALES> 3,013
<TOTAL-REVENUES> 3,045
<CGS> 2,866
<TOTAL-COSTS> 2,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> 109
<INCOME-TAX> 0
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
December 13, 1996
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") has agreed to
provide certain credit facilities to Basic Earth Science Systems, Inc. (the
"Borrower") on the terms and conditions set forth in that letter agreement dated
March 30, 1995 (the "Original Loan Agreement") as amended by that letter
agreement dated September 13, 1995 (the "Amendment") and that letter agreement
dated January 15, 1996 (the "Second Amendment"). The Original Loan Agreement,
the Amendment and the Second Amendment shall be referred to herein as the "Loan
Agreement".
Norwest and the Borrower have agreed to further modify and amend the terms
of the subject credit facilities as specifically set forth in this letter
agreement. This letter agreement shall serve to evidence the amendment to the
Loan Agreement and shall be referred to as the "Third Amendment". All terms and
conditions of the Loan Agreement that are not specifically amended herein shall
remain in full force and effect.
1. TERMS OF PRODUCTION LOAN
COMMITMENT AMOUNT
Not to exceed the lesser of the Borrowing Base Amount or $2,500,000. The loan
made hereunder 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 as
modified by that Modification/Extension Agreement dated March 30, 1995
increasing the principal face amount of the Note to $1,120,000 and extending the
maturity date to May 1, 1998 and by that Modification/Extension Agreement
effective September 13, 1995 increasing the principal face amount of that
promissory note to $2,500,000 and extending the maturity date to May 31, 1998
and by that Modification/Extension Agreement effective December 1, 1996
extending the Maturity Date to April 1, 2000, all of which shall be collectively
referred to as the "Note". The remainder of this Section shall remain in full
force and effect.
BORROWING BASE AMOUNT/PROCEDURES
The second paragraph shall be revised as follows:
Effective as of the execution of this letter the Borrowing Base shall be
$1,200,000. Commencing January 1, 1997, the Borrowing Base Amount will be
reduced on the first day of each calendar month by the amount of $30,000. On
the Maturity Date of April 1, 2000 the Borrowing Base Amount shall be zero.
PURPOSE
Borrower may use the proceeds of the Production Loan to finance working capital
requirements, drilling and completion costs, property acquisitions and the
issuance of letters of credit, provided such letters of credit are for a
purpose, and are in form and substance, satisfactory to Norwest. The issuance
of a letter of credit under the Production Loan shall be deemed to be an advance
under the Production Loan, subject to the Borrowing Base, whether or not the
letter of credit is drawn upon. Interest will accrue on the funded portion of a
letter of credit at the interest rate set forth in the Production Loan Note at
such time as a letter of credit is funded. Letters of credit issued under the
Production Loan must have a final expiry prior to April 1, 2000; in the event
Norwest agrees, in its sole discretion, to issue a letter of credit with an
expiry beyond April 1, 2000 the letter of credit must be secured with cash
collateral satisfactory to Norwest. The issuance of any letters of credit
hereunder will be in accordance with Norwest's then current policies and
procedures and subject to Norwest's then current fees.
MATURITY DATE
The Maturity Date is the earlier of (1) April 1, 2000 or (ii) the date to which
the maturity of the Note is accelerated.
1A. TERMS OF RLOC
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 Continuation Promissory Note to the order of Norwest, dated October
31, 1996, to mature on October 31, 1997, in the face amount of $900,000 (the
"RLOC Note"). The Continuation RLOC Note is a continuation and substitution of
that promissory note dated September 13, 1995 and represents a continuation of
the indebtedness evidenced thereby.
FEES
Borrower shall pay Norwest a loan commitment fee of $1,000 upon the execution of
this Third Amendment.
MATURITY DATE
The Maturity Date is the earlier of (1) October 31, 1997 or (ii) the date to
which the maturity of the RLOC Note is accelerated.
III. CONDITIONS PRECEDENT The Obligation of Norwest to make advances under the
Production Loan and RLOC after the date hereof shall be subject to the condition
precedent that Norwest shall have received all of the following, duly executed
and in form and substance satisfactory to Norwest:
a. The RLOC Note and the Production Loan Note Modification/Extension
Agreement; and
b. Modifications to the Mortgage Documents as required by Norwest.
XII. ADDITIONAL PROVISIONS
The Borrower and Norwest agree that all obligations or liabilities of Borrower
to Norwest under the terms of any contracts or agreements between them for the
purchase, sale or hedging of commodities, including oil and gas, or trading
positions therein will be secured by the Mortgage Documents described in the
Loan Agreement.
The Borrower and Bank hereby ratify and affirm that all other provisions of the
Loan Agreement and Mortgage Documents remain in full force and effect. This
Third Amendment shall not be deemed to be an amendment, waiver or modification
of any of the terms of the Loan Agreement except as specifically set forth
herein. Borrower further remakes and reaffirms all representations, covenants
and warranties contained in the Loan Agreement and Mortgage Documents. Any
references to the Loan Agreement or any of the Mortgage Documents in any other
contract or agreement shall refer to the Loan Agreement and Mortgage Documents
as amended hereby. All defined terms used in the Loan Agreement and Mortgage
Documents shall have the same meaning herein except as expressly amended. The
Parties hereto have caused this Third Amendment to be executed by their
respective officers, who have been duly authorized, as of the date first above
written.
Please acknowledge your acceptance of and agreement to the terms of this
agreement by dating and executing where indicated.
Sincerely,
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By: /s/ Don McDonald
----------------
Don McDonald
Vice President
Energy & Minerals
AGREED TO AND ACCEPTED THIS 13 OF DECEMBER, 1996 AND EFFECTIVE AS OF DECEMBER 1,
1996.
BASIC EARTH SCIENCE SYSTEMS, INC.
By: /s/ Ray Singleton, President
----------------------------
Ray Singleton, President
