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, 1998
[ ] 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: $2,450,000
As of June 15, 1998, 16,530,487 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $345,000.
The proxy statement for the 1998 annual meeting is incorporated by reference
into Part III.
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Basic Earth Science Systems, Inc.
Form 10-KSB
March 31, 1998
Table of Contents
-----------------
Part I: Page
----
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................................ 20
Item 8. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure.............. 41
Part III:
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With
Section 16(a) of the Exchange Act................... 41
Item 10. Executive Compensation.............................. 41
Item 11. Security Ownership of Certain Beneficial Owners
and Management...................................... 41
Item 12. Certain Relationships and Related
Transactions........................................ 41
Part IV:
Item 13. Exhibits and Reports on Form 8-K.................... 42
<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
- --------------------
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.
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 a large acquisition the Company completed the previous
year in the Williston basin.
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, accrued liabilities and other current assets.
In the fiscal year ended March 31, 1998 compared to the previous year, oil and
gas sales revenue decreased 20% from approximately $3.0 million to approximately
$2.4 million, while Cash Flows from Operating Activities decreased 25% from
$544,000 to $406,000. This decrease in cash flow was primarily a result of
reducing the Company's payables, accrued liabilities and loss from operations.
During the last half of the Company's fiscal year, the price of oil on the New
York Mercantile Exchange (NYMEX) plummeted from $21.18 per barrel at September
30, 1997 to $15.61 per barrel at March 31, 1998; reaching a low on March 17th of
$13.23 per barrel. These declines have had a profound impact on the Company's
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cash flow, reserves as calculated in accordance with SEC regulations, plan of
operation and outlook. As a result of this impact, the Company's independent
auditors have included a "going concern" explanatory paragraph in their report
of Independent Certified Public Accountants. An expanded discussion of this
issue can be found in Item 6, Management Discussion and Analysis and in Note 2
to the Audited Financial Statements.
Contemplated Activities
- -----------------------
General The Company's long term plan of operation involving Development,
Acquisitions, Drilling and Divestitures/Abandonments is described below.
However, the Company has suspended this plan pending the recovery of oil prices.
In the interim, the Company is focusing on reducing both lease operating and
general and administrative expenses. In addition, the Company plans to
accelerate its plans to divest and/or abandon marginal wells in an effort to
generate additional cash from sales or the salvage of leasehold equipment. The
Company may also 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.
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. However, given current oil prices, management does not
expect to pursue these potential opportunities in the upcoming fiscal year
unless oil prices improve.
Acquisitions The Company continues to evaluate 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 may 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/Abandonment The Company holds a number of marginal, operated and
non-operated properties in several states. Basic intends accelerate its efforts
to plug or sell these wells in the coming fiscal year. Management believes that
the salvage value of the associated equipment, net of plugging costs, will have
a positive impact on the Company's 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.
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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, 1998, Basic sold 64 percent of its oil and gas
production to a total of three purchasers: 19 percent to Cenex, Inc., 21 percent
to Murphy Oil USA, Inc. and 24 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
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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.
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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.
Certain Risks
- -------------
Volatility of Oil & Gas Prices The Company's revenues, operating results,
profitability, future rate of growth and the carrying value of its oil and gas
properties are substantially dependent upon prevailing market prices for oil and
gas. Historically, the markets for oil and gas have been volatile and in certain
periods have been depressed by excess domestic and imported supplies. Such
volatility is expected to reoccur in the future. Various factors beyond the
control of the Company will affect prices of oil and gas, including worldwide
and domestic supplies of oil and gas, the ability of the members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, political instability or armed conflict in oil and gas
producing regions, the price and level of foreign imports, the level of consumer
demand, the price, availability and acceptance of alternative fuels and weather
conditions. In addition to market factors, actions of state and local agencies
and the United States and foreign governments affect oil and gas prices. These
external factors and the volatile nature of the energy markets make it difficult
to estimate future prices of oil and gas. Any substantial or extended decline in
the price of oil would have a material adverse effect on the Company's financial
condition and results of operations. Such decline could reduce the Company's
cash flow and borrowing capacity and both the value and the amount of the
Company's oil and gas reserves.
Uncertainty of Reserve Information and Future Net Revenue Estimates There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves and their values, including many factors beyond the Company's control.
The reserve information set forth in this Form 10-KSB represents estimates only.
Reserve estimates are imprecise and may materially change as additional
information becomes available. More importantly, reserve estimates may
materially change as oil and gas prices fluctuate in their normal course and may
materially change as a result of the price on a single day; the last day of the
Company's fiscal year. For these reasons, the Company believes oil and gas
reserves are valued as current inventory rather than long term assets and
believes such estimates to be unreasonable and unreliable.
Estimates of oil and natural gas reserves, by necessity, are projections based
on geologic and engineering data, and there are uncertainties in the
interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any estimate is a function of
the quality of available data, engineering, and geological interpretation and
judgement. Estimates of economically recoverable oil and gas reserves and future
net cash flows necessarily depend upon a number of variable factors and
assumptions, such as future operating costs, severance and excise taxes,
development costs, workover costs, remedial costs and the assumed effects of
regulations by governmental agencies, all of which may in fact vary considerable
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from actual results. Other variables, specifically oil and gas prices are fixed
at the prices existing on the last day of the fiscal year, whether such prices
or reasonable; and which may vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and gas
attributable to any property or any group of properties, classifications of such
reserves based upon risk of recovery, and estimates of the future net cash flows
expected therefrom may vary substantially. Any significant variance in the
assumptions could materially affect the estimated quantity and value of the
reserves. Actual production, revenues and expenditures with respect to the
Company's reserves will likely vary from estimates, and such variances may be
material.
Reserves, as calculated by SEC regulations, as referred to in this Form 10-KSB,
should not be construed as the current market value of the estimated oil and gas
attributable to the Company's properties. The timing of actual future net cash
flows from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and incidence of expenses in
connection with both extraction costs and development costs. In addition, the
10% discount factor, which is required to be used for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect at the time of calculation.
Operating Hazards The oil and gas business involves certain operating hazards
such as well blowouts, craterings, explosions, uncontrollable flows of oil,
natural gas or well fluids, fires, formations with abnormal pressures, pipeline
ruptures or spills, pollution, releases of toxic gas and other environmental
hazards and risks, any of which could result in substantial losses to the
Company. In addition, the Company may be liable for environmental damage caused
by previous owners of properties purchased or leased by the Company. As a
result, substantial liabilities to third parties or governmental agencies may be
incurred, the payment of which could reduce or eliminate the funds available for
acquisitions, development, exploration or result in losses to the Company.
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.
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 2 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
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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.
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.
ITEM 2
DESCRIPTION OF PROPERTY
Producing Properties: Locations and Impact As of March 31, 1998, Basic owned an
interest in 83 oil wells and 19 gas wells. Basic currently operates 60 wells in
five states: North Dakota, Montana, Colorado, Texas and Wyoming. These operated
wells contributed approximately 74 percent of Basic's total liquid hydrocarbon
sales and approximately 55 percent of total gas sales in the year ended March
31, 1998. 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.
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Producing Property
------------------
Gross Wells Net Wells (%)
--------------- ----------------
Oil Gas Oil Gas
--- --- --- ---
Colorado 0 4 0.00 2.40
Kansas 3 0 0.62 0.00
Louisiana 3 8 .47 .28
Montana 15 0 11.86 0.00
New Mexico 0 5 0.00 0.98
North Dakota 26 0 13.07 0.00
Oklahoma 2 1 0.50 0.31
Texas 32 1 26.19 0.23
Wyoming 2 0 0.35 0.00
---- -- ----- ----
Total 83 19 53.06 4.20
Reserves At March 31, 1998, the discounted present value of Basic's estimated
proved reserves was approximately $1,324,000 reflecting a 57% decrease from the
previous year's reserves of $3,082,000. This decrease was primarily the result
of lower oil prices at March 31, 1998 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 12 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.
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Acreage Developed Acreage Undeveloped Acreage
------- ----------------- -------------------
Gross Net Gross Net
----- --- ----- ---
Colorado 640 384 0 0
Kansas 800 130 0 0
Louisiana 1,925 110 0 0
Montana 2,720 2,029 2,600 826
New Mexico 800 156 0 0
North Dakota 5,612 2,445 2,111 511
Oklahoma 320 85 0 0
Texas 3,166 2,311 80 65
Wyoming 634 242 1,016 486
------ ------ ------ ------
Total 16,617 7,892 5,807 1,888
====== ====== ====== ======
Field Service Equipment At March 31, 1998, 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, 1998.
(Intentionally left blank)
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Part II
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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.
High Low
-------- -----
Year Ended March 31, 1997
- -------------------------
First Quarter............................... $ .0312 $ .0312
Second Quarter.............................. .0500 .0312
Third Quarter............................... .0900 .0500
Fourth Quarter.............................. .0900 .0700
Year Ended March 31, 1998
- -------------------------
First Quarter............................... $ .0700 $ .0700
Second Quarter.............................. .0800 .0700
Third Quarter............................... .1000 .0800
Fourth Quarter.............................. .1100 .0700
The bid price on June 15, 1998 was $0.03. 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, 1998, 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.
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ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Going Concern and Liquidity Outlook The Company's financial statements are
presented on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has incurred a net loss for the year ended March 31, 1998 due to the
fall of oil prices during the year, incurred a ceiling limitation writedown of
$870,000 on its reserves and has a working capital deficit. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is seeking to restructure its debt and sell certain assets to meet
working capital demands.
The financial statements do not include any adjustments to reflect the possible
future effects on the classification of assets or the amounts and classification
of liabilities that may result from the possible inability of the Company to
continue as a going concern
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.
The Company's cash flow has been adversely affected by plummeting oil prices.
Given the Company's projected production, and continued low oil prices, the
Company will have to severely curtail both its field activities and its
administrative expenses.
Furthermore, under the Company's loan agreement, Basic is expected to begin
making scheduled principal payments on its RLOC in the amount of $30,000 per
month beginning in August 1998. Management is currently in discussions with its
bank to both adjust its loan covenants and postpone scheduled principal payments
and/or re-structure its loan.
The Company holds a number of marginal wells, which have been shut down due to
low oil prices. Basic intends to accelerate its efforts to plug or sell these
wells in the coming fiscal year. Management believes that the salvage value of
the associated equipment, net of plugging costs, will have a positive impact on
the Company's cash flow.
The Company holds several major value properties (relative to the size of its
existing debt). If all other efforts fail, and oil prices do not recover, the
Company may chose to sell one or several of these properties in order to reduce
or extinguish its existing debt.
Even if the Company is successful in any or all of these efforts, there can be
no assurance that the Company will be able to continue to meet its existing
obligations as they become due in fiscal year 1999. Additionally, if oil prices
drop further, the Company may incur further ceiling test limitations and be
required to write down additional assets.
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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 December 31, 1998. All other terms and conditions remain in full force
and effect. Information concerning the Company's debt appears in Note 4 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 and 1998, management
recognized that fluctuations in crude oil prices could have a negative impact on
the Company's financial affairs. Accordingly, the Company entered futures and/or
options contracts in order to hedge this exposure. Currently, the Company uses
options, rather than futures contracts, in order to participate more fully if
prices were to again escalate. The Company did not hedge any gas production.
Information concerning the Company's hedging activities appears in Note 1 to the
Consolidated Financial Statements.
Liquidity The Company's current ratio decreased from 1.2:1 at March 31, 1997
(1997) to .7:1 at March 31, 1998 (1998). 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, 1998, the Company was in
compliance with all Bank covenants and the Company's current ratio was 1:1 as
calculated per the provisions of the covenants.
During the fiscal year just ended, current assets decreased $242,000 (33%) from
$723,000 at 1997 to $481,000 at 1998 while current liabilities increased 20%
from $585,000 at 1997 to $702,000 at 1998. Cash decreased $45,000 (46%) from
$97,000 at 1997 to $52,000 at 1998.
Other At March 31, 1998, the Company had a deferred tax asset of $3,906,000 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.
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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. Given the current price of the Company's
stock, management believes it would be difficult to raise additional equity
capital. Furthermore, given the proximity of the existing bank debt to its
borrowing base ceiling, the Company has little available debt capacity. The
Company intends to postpone the acquisition and development of additional
properties. Management intends to fund the Company's immediate needs with its
internally-generated cash flow from operations.
Other Commitments As of June 13, 1998, the Company has no obligations to
purchase or sell any of its oil and gas properties nor any other commitments
beyond its office lease.
Results of Operations
- ---------------------
1998 Compared with 1997
Overview Operations in the fiscal year ended March 31, 1998 (1998) resulted in a
net loss of $1,111,000 compared to net income of $109,000 for the fiscal year
ended March 31, 1997 (1997). The primary source of the loss was a ceiling
limitation charge of $870,000 recorded in 1998. Cash Flows from Operating
Activities decreased 25% from $544,000 in 1997 to $406,000 in 1998. This
decrease in cash flow was primarily a result of reducing the Company's payables,
accrued liabilities and loss from operations.
Revenues Oil and gas sales revenue decreased $591,000 (20%) over 1997. Of this
amount, -$167,000 (-28%) was attributable to decreases in oil production and
- -$331,000 (56%) was attributable to declining oil prices. Furthermore, -$72,000
(-12%) was attributable to gas volume decreases while -$20,000 (4%) was
attributable to declining gas prices.
Volumes and Prices Total liquid production decreased 6%, from 133,500 barrels in
1997 to 125,000 barrels in 1998, while the average price per barrel decreased
19% from $19.56 in 1997 to $16.91 in 1998. Total gas production decreased 18%,
from 202,000 MCF in 1997 to 166,000 MCF in 1998, while the price per MCF
decreased 14%, from $1.98 in 1997 to $1.86 in 1998. The decrease in liquid and
gas production was due to normal production decline.
Expenses Oil and gas production expense and production taxes decreased $240,000
(11%) in 1998 over 1997. The majority of the decrease was in oil and gas
production expense, which declined due to fewer special well repairs in 1998.
The overall lifting cost per equivalent barrel decreased 3% from $12.75 in 1997
to $12.40 in 1998 due primarily to the decrease in well repairs and volumes
produced.
15
<PAGE>
A "ceiling limitation test" created a $870,000 write-down of the "full cost
pool" in 1998. The Company capitalizes all costs associated with the
acquisition, exploration and development of oil and gas property under the full
cost method of accounting for its oil and gas activity. The book value of the
"full cost pool" at March 31, 1998 was $2,213,000. This amount exceeded the
present value (using a 10% discount factor) of estimated future net revenue from
proved reserves at March 31, 1998. The Company was required to write down this
excess.
Depletion expense per equivalent barrel increased 12% from $3.09 in 1997 to
$3.50 in 1998, primarily because of the relatively fewer equivalent barrels of
reserves, determined in accordance with SEC regulations. This decrease in
reserves, calculated in accordance with SEC regulations, was primarily due to a
decline in oil price at March 31, 1998. The increased depletion cost per barrel,
contributed to actual depreciation and depletion expense increase of $16,000
(3%) in 1998 from 1997 even though fewer equivalent barrels were produced. The
percentage of reserves depleted in the fiscal year just ended, increased from
18% in 1997 to 26% in 1998. Once again, this increase is the result of a
decrease in reserves, determined in accordance with SEC regulations, as affected
by oil price, rather than an increase in production.
Net general and administrative expense increased $7,000 (4%) in 1998 from 1997.
This increase is primarily attributable to general inflation. As a result of the
overall increase, and in conjunction with decreased production volumes, general
and administrative expense per equivalent barrel increased from $1.02 in 1997 to
$1.16 in 1998.
Other Income/(Expense) Other Income/(Expense) decreased $24,000 (-34%) from
($70,000) in 1997 to ($46,000) in 1998. This decrease was the result of lower
interest expense combined with higher interest and other income.
.
(Intentionally left blank)
16
<PAGE>
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.
1998 1997 1996
---- ---- ----
Production:
Oil (barrels) ......................... 125,000 133,500 150,000
Gas (mcf) ............................. 166,000 202,000 214,000
Revenue: (in thousands)
Oil ................................... $ 2,113 $ 2,611 $ 2,464
Gas ................................... 309 402 349
-------- -------- --------
Total ................................. 2,422 3,013 2,813
Less: total production expense (in thousands)(1) 1,891 2,131 2,015
-------- -------- --------
Gross profit (in thousands) .................... $ 531 $ 882 $ 798
======== ======== ========
Write down of oil & gas properties ............. $ 870 -- --
Depletion expense (in thousands) ............... $ 534 $ 517 $ 533
General & administrative expense
(in thousands) ........................ $ 177 $ 170 $ 151
Average sales price:
Oil (per barrel) ...................... $ 16.91 $ 19.56 $ 16.43
Gas (per mcf) ......................... 1.86 1.98 1.63
Average production expense(2) .................. 12.40 12.75 10.85
Average gross profit(3) ........................ 3.47 5.28 4.30
Average depletion expense(4) ................... 3.50 3.09 2.87
Average general & admin. expense(5) ............ 1.16 1.02 .81
- ----------------------
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)
17
<PAGE>
Year 2000
- ---------
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve the issue. The "Year 2000" problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
timely completed, the Year 2000 problem may have a material impact on the
operations of the Company. The Company does not believe that the costs of
modifications or conversion will have a material effect.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No.14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, the standards may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these standards.
18
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers" Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and Other Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
(Intentionally left blank)
19
<PAGE>
Basic Earth Science Systems, Inc.
Table of Contents
Consolidated Financial Statements
and Accompanying Notes
March 31, 1998 and 1997
Page No.
--------
Report of Independent Certified Public Accountants - BDO Seidman, LLP. 21
Consolidated Balance Sheet............................................ 22 - 23
Consolidated Statements of Operations................................. 24
Consolidated Statements of Shareholders' Equity....................... 25
Consolidated Statements of Cash Flows................................. 26
Notes to Consolidated Financial Statements............................ 27 - 39
20
<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 sheets of Basic Earth
Science Systems, Inc. and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended March 31, 1998 and 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated 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, 1998 and 1997, and the results of
their operations and their cash flows for the years ended March 31, 1998 and
1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred a net loss for the year ended
March 31, 1998, incurred a writedown of its oil and gas properties due to
ceiling limitations and is in a negative working capital position. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Denver, Colorado
June 5, 1998
21
<PAGE>
<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
March 31, 1998 and 1997
Assets
- ------
1998 1997
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 52,000 $ 97,000
Accounts receivable:
Oil and gas sales 160,000 255,000
Joint interest and other receivables 97,000 128,000
Allowance for doubtful accounts (54,000) (40,000)
Other current assets 226,000 283,000
------------ ------------
Total current assets 481,000 723,000
------------ ------------
Property and equipment:
Oil and gas properties (full cost method) 32,559,000 32,171,000
Furniture, fixtures and equipment 450,000 445,000
------------ ------------
33,009,000 32,616,000
Accumulated depreciation (374,000) (357,000)
Accumulated depletion - FCP (includes cumulative ceiling
limitation charges of $14,961,000) (31,217,000) (29,812,000)
------------ ------------
Net property and equipment 1,418,000 2,447,000
Other noncurrent assets 85,000 75,000
------------ ------------
Total noncurrent assets 1,503,000 2,522,000
------------ ------------
Total assets $ 1,984,000 $ 3,245,000
============ ============
See accompanying report of independent certified
public accounts and notes to consolidated
financial statements.
22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
March 31, 1998 and 1997
Liabilities and Shareholders' Equity
- ------------------------------------
1998 1997
------------ ------------
Current liabilities:
<S> <C> <C>
Accounts payable $ 324,000 $ 466,000
Accrued liabilities 144,000 119,000
Current portion of long-term debt 234,000 --
------------ ------------
Total current liabilities 702,000 585,000
------------ ------------
Long-term debt 390,000 649,000
------------ ------------
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 at
March 31, 1998 and 1997 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Treasury stock (349,265 shares at March
31, 1998, 299,265 shares at March 31,
1997); at cost (23,000) (15,000)
Accumulated deficit (21,794,000) (20,683,000)
------------ ------------
Total shareholders' equity 892,000 2,201,000
Total liabilities and shareholders' equity $ 1,984,000 $ 3,245,000
============ ============
See accompanying report of independent certified
public accounts and notes to consolidated
financial statements.
23
</TABLE>
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
Years Ended March 31,
----------------------------
1998 1997
------------ ------------
Revenues:
Oil and gas sales $ 2,422,000 $ 3,013,000
Well service revenue 28,000 32,000
------------ ------------
Total revenues 2,450,000 3,045,000
------------ ------------
Expenses:
Oil and gas production 1,650,000 1,846,000
Production tax 241,000 285,000
Well servicing expenses 30,000 31,000
Writedown of oil and gas properties 870,000 --
Depreciation, depletion and amortization 547,000 534,000
General and administrative 177,000 170,000
------------ ------------
Total expenses 3,515,000 2,866,000
------------ ------------
Income (loss) from operations (1,065,000) 179,000
------------ ------------
Other Income (Expense):
Interest and other income 13,000 17,000
Interest expense (59,000) (87,000)
------------ ------------
Total other expense (46,000) (70,000)
------------ ------------
Net income (loss) $ (1,111,000) $ 109,000
============ ============
Basic and diluted weighted average
number of shares outstanding 16,553,884 16,580,487
============ ============
Basic and diluted earnings (loss) per share $ (.067) $ .007
============ ============
See accompanying report of independent certified
public accounts and notes to consolidated
financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Statements of Shareholders' Equity
Years ended March 31, 1998 and 1997
Common stock Additional Treasury stock
--------------------------- paid-in ---------------------------- Accumulated
Shares Par value capital Shares Amount deficit
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1996 16,879,752 $ 17,000 $ 22,692,000 (299,265) $ (15,000) $(20,792,000)
Net income -- -- -- -- -- 109,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1997 16,879,752 17,000 22,692,000 (299,265) (15,000) (20,683,000)
Purchase of treasury stock -- -- -- (90,000) (10,000) --
Sale of treasury stock -- -- -- 40,000 2,000 --
Net loss -- -- -- -- -- (1,111,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998 16,879,752 $ 17,000 $ 22,692,000 (349,265) $ (23,000) $(21,794,000)
============ ============ ============ ============ ============ ============
See accompanying report of independent certified
public accounts and notes to consolidated
financial statements.
25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
Years Ended March 31,
-------------------------------
1998 1997
----------- -----------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(1,111,000) $ 109,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Writedown of oil and gas properties 870,000 --
Depreciation, depletion and amortization 547,000 534,000
Gain on sale of assets -- (6,000)
Bad debt expense 14,000 --
Change in current assets and current liabilities:
Accounts receivable 126,000 134,000
Other current assets 57,000 (136,000)
Accounts payable and accrued liabilities (142,000) (114,000)
Changes in other assets (10,000) 4,000
Changes in other liabilities 41,000 --
Other 14,000 19,000
----------- -----------
Net cash provided by operating activities 406,000 544,000
----------- -----------
Cash flows from investing activities:
Capital expenditures:
Oil and gas properties (597,000) (364,000)
Support equipment (15,000) (13,000)
Proceeds from sale of support equipment 1,000 7,000
Proceeds from sale of oil and gas properties 209,000 --
----------- -----------
Net cash used in investing activities (402,000) (370,000)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (265,000) (371,000)
Proceeds from notes payable 224,000 202,000
Purchase of treasury stock (10,000) --
Proceeds from sale of treasury stock 2,000 --
----------- -----------
Net cash used in financing activities (49,000) (169,000)
----------- -----------
Cash and cash equivalents:
Increase (decrease) in cash and cash equivalents (45,000) 5,000
Balance, beginning of year 97,000 92,000
----------- -----------
Balance, end of year $ 52,000 $ 97,000
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 59,000 $ 87,000
See accompanying report of independent certified public
accounts and notes to consolidated financial
statements.
26
</TABLE>
<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 properties 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. The Company incurred a
ceiling limitation charge of $870,000 during the year ended March 31, 1998, as
the carrying value of the oil and gas properties exceeded the underlying reserve
valuations. Basic did not incur a ceiling limitation charge during the year
ended March 31, 1997.
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 applied as a
reduction of oil and gas properties. In the years ended March 31, 1998 and 1997,
Basic reduced the carrying value of oil and gas properties for $209,000 and $0,
respectively, as a result of the sale of its interest in certain oil and gas
properties.
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 properties owned by
Basic. Depletion per equivalent barrel of production was $3.50 and $3.09 for the
years ended March 31, 1998 and 1997, 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.
27
<PAGE>
Support Equipment and Other Support equipment and other equipment are stated at
cost. Depreciation of support equipment and other property is computed using
various methods over periods ranging from five to seven years.
Fair Value of Financial Instruments Unless otherwise specified, the Company
believes the carrying value of financial instruments approximates their fair
value.
Long-Term Assets The Company applies Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 121")
in evaluating long-lived assets for possible equipment. Under SFAS No. 121,
long-lived assets and certain intangibles are reported at the lower of the
carrying amount or their estimated recoverable amounts.
Net Income (Loss) Per Share Through March 31, 1997, the Company followed the
provisions of Accounting Principles Board Opinion (APB) No. 15, "Earnings Per
Share". Effective for the year ended March 31, 1998, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders 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. In loss
periods, dilutive common equivalent shares are excluded as the effect would be
anti-dilutive. Basic and diluted earnings per share are the same for all periods
presented.
Options to purchase 440,000 shares of common stock were not included in the
computation of diluted EPS because their effect was anti-dilutive for the year
ended March 31, 1998.
Diluted earnings per share for the year ended March 31, 1997 include the effect
of 34,375 dilutive potential common shares on 300,000 options that had been
granted to directors and employees.
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.
28
<PAGE>
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.
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.
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, 1998, the Company had thirty-nine open options contracts to hedge
future deliveries with maturities ranging from April 1998 through December 1998
at floor prices ranging from $14 to $20 per barrel. At March 31, 1997, the
Company had thirty-six open futures and/or portions 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.
Cash flows from hedging activities are consolidated into oil and gas revenues on
the Statement of Operations and, as a result, are included in operating
activities in the Statement of Cash Flows. The Company realized an approximate
$23,000 gain on its hedging activities in 1998. These gains were offset by
receiving lower prices, relative to the oil prices management accepted to hedge
its exposure, for physical crude oil sales in 1998. The Company realized an
approximate $206,000 loss on its hedging activities in 1997. The fair market
value of the open futures and options contracts at March 31, 1998 was $64,000,
with a cost basis of $36,000 which is included in other current assets.
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
29
<PAGE>
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 $150,000 (See further information under
Note 4). Because of the volatility of oil prices, it is possible for this credit
limit to be exceeded. During the past year, the maximum credit utilization never
exceeded $15,000.
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.
Income Taxes The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" which requires the use of the "liability
method." Accordingly, deferred tax liabilities and assets are determined based
on the temporary differences between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse.
New Accounting Pronouncements In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), which establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No.14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
30
<PAGE>
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, the standards may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers" Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and Other Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
Reclassifications Certain prior year amounts may have been reclassified to
conform to current year presentation.
2. Going Concern
-------------
The Company's financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred a net loss for the
year ended March 31, 1998 due to the fall of oil prices during the year,
incurred a ceiling limitation writedown of $870,000 on its oil and gas
properties and has a working capital deficit (See Note 4). These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is seeking to restructure its debt and sell certain assets to meet
working capital demands. In the interim, the Company is focusing on reducing
both lease operating expense and general and administrative expenses. In
addition, the Company plans to accelerate its plans to divest itself and/or
abandon marginal wells in an effort to generate cash from the sales or the
salvage of leasehold equipment.
The financial statements do not include any adjustments to reflect the possible
future effects on the classification of assets or the amounts and classification
of liabilities that may result from the possible inability of the Company to
continue as a going concern.
31
<PAGE>
3. Other Current Assets
--------------------
Other current assets at March 31, 1998 and 1997 consisted of the following:
1998 1997
-------- --------
Lease and well equipment inventory $184,000 $220,000
Futures contracts 36,000 20,000
Other current assets 6,000 43,000
-------- --------
Total other current assets $226,000 $283,000
======== ========
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 and is removed from the full cost pool. 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.
4. Long-Term Debt
--------------
Outstanding debt of the Company as of March 31, 1998 is as follows:
1998 1997
-------- --------
Bank note under loan
agreement (see below) $624,000 $649,000
Less current portion 234,000 --
-------- --------
Total long-term debt $390,000 $649,000
======== ========
Bank Debt At March 31, 1998, the Company has two loan agreements with Norwest
Bank of Colorado, N.A. ("the Bank") which include a Declining Balance, Revolving
Line of Credit (DBRLOC) and a Revolving Line of Credit (RLOC). The DBRLOC had an
original borrowing base of $1,200,000 on December 13, 1996 which has been
reduced by $30,000 per month since January 1, 1997. At March 31, 1998 the
Company's borrowing base was at $750,000. On the maturity date of April 1, 2000,
the borrowing base amount will be zero.
On December 23, 1997, the Bank and the Company modified the RLOC to extend the
maturity date of the loan to December 31, 1998. This modification also set the
borrowing base to $150,000. All other terms and conditions of the RLOC remain in
full effect.
32
<PAGE>
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. In addition, 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. At March 31, 1998 and 1997, the current portion of long-term debt on the
DBRLOC and RLOC is $234,000 and $0 on the financial statements herein.
Under the DBRLOC loan agreement, the Company must maintain certain covenants
with regard to various financial ratios and net worth criteria. Failure to
maintain any covenant, after a curative period, creates a default under the loan
agreement and requires the repayment. Effective at March 31, 1998, the Bank
amended the original DBRLOC, by lowering the required net worth covenant the
Company must maintain to $750,000 from $1,700,000. Another 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. The Company was in
compliance with this covenant at March 31, 1998.
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, 1998 and 1997, the Company's effective annual interest rate was 10.5%.
Below is a schedule of the required debt payments:
Year Amount
---- ------
1999 $ 234,000
2000 360,000
2001 30,000
------------
$ 624,000
============
5. Commitments
-----------
The Company leases its 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 $41,000 and $40,000 for the years ended March 31, 1998 and 1997,
respectively.
33
<PAGE>
6. Shareholders' Equity
--------------------
Stock Option Plan During 1998 and 1997, the Company granted various options to
purchase an aggregate of 140,000 and 200,000 shares, respectively, of its common
stock to directors and employees for services rendered. At March 31, 1998 and
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 $.11 (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.
A summary of the status of the Company's stock option plans and outstanding
options as of March 31, 1998 and 1997 and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 300,000 $ .072 100,000 $ .078125
Granted 140,000 $ .106 200,000 $ .065
Cancelled -- -- -- --
Exercised -- -- -- --
------- ------ ------- ---------
Outstanding, end of year 440,000 $ .081 300,000 $ .069
======= ====== ======= =========
Options exercisable, end of year 440,000 $ .081 300,000 $ .069
Weighted average fair value of options
granted during the year $ .106 $ .065
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," 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 the fair value based method
prescribed in SFAS No. 123. The Company estimated the fair value of each stock
award at the grant date by using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in the year ended March
31, 1998: dividend yield at 0 percent; expected volatility of approximately 4
percent; risk free interest rate of 6 percent; and expected lives of ten years
for the warrants. The assumptions used for grants in the year ended March 31,
1997: dividend yield of 0 percent for all years; expected volatility of 3
percent; risk-free rate of 6 percent; and expected lives of ten years for the
warrants.
34
<PAGE>
Under the accounting provisions for SFAS No. 123, the Company's net income and
net income per share would have been adjusted to the following pro forma
amounts:
Year Ended Year Ended
March 31, March 31,
1998 1997
-------------- ------------
Net loss
As reported $ (1,111,000) $ 109,000
Pro forma (1,111,000) 105,000
Net income (loss) per share
Basic and diluted
As reported $ (.067) $ .007
Pro forma (.067) .006
The following table summarizes information about stock options outstanding at
March 31, 1998:
Options Outstanding Options Exercisable
- --------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/98 Life Price at 3/31/98 Price
- ------ ---------- ---- ----- ---------- -----
$.065 200,000 8.33 $.065 200,000 $.065
$ .078125 100,000 7.33 $.078125 100,000 $.078125
$.09 - .11 140,000 9.56 $.106 140,000 $.106
- ---------- ------- ---- -------- ------- -------
$.065 -.11 440,000 8.49 $.081 440,000 $.081
========== ======= ==== ======== ======= ========
7. Major Customers
---------------
Significant purchasers of 10% or more of Basic's oil and gas production are as
follows:
1998 1997
---- ----
Norco Crude Gathering, Inc. 24% 18%
Murphy Oil USA, Inc. 21% 18%
Cenex , Inc. 19% 34%
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.
35
<PAGE>
8. Income Tax
----------
Due primarily to the availability of net operating loss carryforwards and
favorable book to tax differences, the Company had no taxable income during the
year ended March 31, 1998 and 1997.
A reconciliation between the income tax provision at the statutory rate on
income taxes and the income tax provision is as follows:
1998 1997
----------- -----------
Federal income tax provision at statutory
rates $ (378,000) $ 37,000
State income tax (37,000) 4,000
Expired net operating loss carryforward 1,722,000 --
Change in valuation allowance (1,193,000) (41,000)
Other (114,000) --
----------- -----------
Income tax expense (benefit) $ -- $ --
=========== ===========
The Company recorded a valuation allowance of $3,906,000 and $5,099,000 at March
31, 1998 and 1997, respectively, equal to the excess of deferred tax assets over
deferred tax liabilities as it was unable to determine that these benefits are
more likely than not to be realized.
The Components of the net deferred tax assets and liabilities are shown below:
For the Year Ended March 31,
----------------------------
1998 1997
----------- -----------
Net operating loss carryforward $ 2,760,000 $ 4,292,000
Statutory depletion carryforward 1,389,000 1,389,000
Other 80,000 --
----------- -----------
Total gross deferred tax assets 4,229,000 5,681,000
Valuation allowance (3,906,000) (5,099,000)
----------- -----------
Net deferred tax asset 323,000 582,000
Deferred tax liability - depreciation,
depletion and amortization (323,000) (582,000)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
36
<PAGE>
As of March 31, 1998, the Company has net operating loss carryforwards for tax
purposes of approximately $7.4 million which expire as follows:
3/31/99 $ 2,085,000
3/31/00 2,759,000
3/31/01 1,315,000
3/31/02 447,000
3/31/03 and beyond 794,000
-------------
$ 7,400,000
=============
9. 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, 1998 and
1997, there were no significant related party transactions.
10. Significant Fourth Quarter Adjustments
--------------------------------------
At March 31, 1998, the Company recorded a writedown of oil and gas property in
the amount of $870,000 due to ceiling limitations.
11. 401(k) Plan
-----------
During the year ended March 31, 1998, the Company implemented a savings plan
which allows the participant to make contributions by salary reduction pursuant
to Section 401(k) of the Internal Revenue Code.
Employees are required to work for the Company one year before they become
eligible to participate in the Plan. The Company matches 100% of the employee's
contributions up to 3% of the employee's salary. Contributions are vested when
made. During the year ended March 31, 1998, the Company's contributions to the
Plan were approximately $4,000
12. Unaudited Oil and Gas Reserve Information
-----------------------------------------
One hundred percent (100%) of the reserve estimates presented herein, for the
year ended March 31, 1998, were derived from reports prepared by the independent
petroleum engineering firm, Heinle & Associates, Inc (Heinle). For the year
ended March 31, 1997, approximately ninety-six percent (96%) of the reserve
estimates presented herein were derived from reports prepared by Heinle. The
37
<PAGE>
remaining four percent (4%) were prepared by Basic and were not audited by
Heinle. 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.
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:
Proved Developed and Undeveloped Reserves
-----------------------------------------
Oil and
natural gas Natural
liquids gas
(bbl) (mcf)
---------- ----------
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
========== ==========
Proved developed and undeveloped
reserves at March 31, 1997 613,000 989,000
Revisions of previous estimates (171,000) (51,000)
Production (125,000) (166,000)
---------- ----------
Proved developed and undeveloped
reserves at March 31, 1998 317,000 772,000
========== ==========
Proved Developed Reserves
-------------------------
Oil and
natural gas Natural
liquids gas
(bbl) (mcf)
----- -----
March 31, 1997 613,000 989,000
March 31, 1998 317,000 772,000
38
<PAGE>
Costs Incurred
--------------
Year Ended March 31,
--------------------
1998 1997
---- ----
Property acquisition
Proved property $ 34,000 $ 67,000
Unproved property 309,000 1,000
Exploration -- 20,000
Development -- 112,000
Aggregate Capitalized Oil and Gas Property Cost
-----------------------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
Capitalized cost
Proved property $ 32,559,000 $ 32,150,000
Unproved property -- 21,000
------------ ------------
32,559,000 32,171,000
Accumulated depreciation and
depletion (16,256,000) (15,721,000)
Oil and gas property cost in excess
of ceiling limitation (cumulative) (14,961,000) (14,091,000)
------------ ------------
Net capitalized cost $ 1,342,000 $ 2,359,000
============ ============
The table on the following page 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, 1998 and 1997. 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.
39
<PAGE>
Standardized Measure of Estimated Discounted Future Net Cash Flows
------------------------------------------------------------------
March 31,
------------------------------
1998 1997
------------ ------------
Future cash inflows $ 5,412,000 $ 12,631,000
Future cash outflows
Production cost (3,522,000) (8,334,000)
Development cost (45,000) (48,000)
------------ ------------
Future net cash flows 1,845,000 4,249,000
Adjustment to discount future
annual net cash flows at 10% (521,000) (1,167,000)
------------ ------------
Standardized measure of discounted
future net cash flows $ 1,324,000 $ 3,082,000
============ ============
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, 1998 and 1997.
Changes in Standardized Measure of Estimated Discounted Net Cash Flows
----------------------------------------------------------------------
Year Ended March 31,
--------------------------
1998 1997
----------- -----------
Standardized measure, beginning of period $ 3,082,000 $ 4,725,000
Sales of oil and gas, net of production cost (530,000) (883,000)
Net change in sales prices, net of production cost (431,000) (1,198,000)
Discoveries, extensions and improved recoveries,
net of future development cost -- 112,000
Purchase of reserves -- --
Revisions of quantity estimates (584,000) 73,000
Accretion of discount 72,000 472,000
Changes in rates of production and other (285,000) (219,000)
----------- -----------
Standardized measure, end of period $ 1,324,000 $ 3,082,000
=========== ===========
In the year ended March 31, 1998, 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, 1998 compared to March 31, 1997, in addition to the actual
production of forecast reserves.
40
<PAGE>
ITEM 8
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 1998 Proxy Statement, which
is incorporated herein by reference.
ITEM 10
EXECUTIVE COMPENSATION
Information concerning this item will be in Basic's 1998 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 1998 Proxy Statement, which
is incorporated herein by reference.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this item will be in Basic's 1998 Proxy Statement, which
is incorporated herein by reference.
41
<PAGE>
Part IV
- -------
ITEM 13
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Document
- ------------ --------------------------------------
3i(1) Restated Certificate of Incorporation included in Basic's Form
10-K for the year ended March 31, 1981
3i(1) By-laws included in Basic's Form S-1 filed October 24, 1980
3i(1) Certificate of Amendment to Basic's Restated Certificate of
Incorporation dated March 31, 1996
10(i)a(1) Loan Agreement between Norwest Denver, N.A. and Basic, dated
August 1, 1994
10(i)a(1) Sales Agreement between Basic and TransTexas, dated March 3,
1995, pertaining to the sale of deep exploration rights
10(i)a(1) Purchase & Sale Agreement between Basic and MCM, dated March 6,
1995, pertaining to Williston basin acquisition
10(i)a(1) Amended Loan Agreement between Norwest Denver, N.A. and Basic,
dated March 30, 1995
10(i)a(1) Amended Loan Agreement between Norwest Denver, N.A. and Basic,
September 13, 1995
10(i)a(1) Amended Loan Agreement between Norwest Denver, N.A. and Basic,
December 13, 1996
10(ii)(1) Oil and Gas Incentive Compensation Plan included in Basic's Form
10-K for the year ended March 31, 1985
22(1) Subsidiaries of Basic included in Basic's Form 10-K for the year
ended March 31, 1987
- ------------------------
(1) Previously filed and incorporated herein by reference
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
42
<PAGE>
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/ Robert M. Olmsted
- ------------------------------ -----------------------------
Ray Singleton, President Robert M. Olmsted,
Principal Accounting Officer
- ------------------------------ -----------------------------
Date: Date:
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
- ----------------- ----
/s/ G. W. Breuer
- ------------------------------ ----------------------------
G. W. Breuer, Director
/s/ David J. Flake
- ------------------------------ ----------------------------
David J. Flake, Director
/s/ Edgar J. Huffman
- ------------------------------ ----------------------------
Edgar J. Huffman, Director
/s/ Ray Singleton
- ------------------------------ ----------------------------
Ray Singleton, Director
43
<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 22, 23, 24, 25 AND 26 OF
THE COMPANY'S FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 257
<ALLOWANCES> (54)
<INVENTORY> 0
<CURRENT-ASSETS> 481
<PP&E> 33,009
<DEPRECIATION> (31,591)
<TOTAL-ASSETS> 1,984
<CURRENT-LIABILITIES> 702
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,984
<SALES> 2,422
<TOTAL-REVENUES> 2,450
<CGS> 3,515
<TOTAL-COSTS> 3,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (1,111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,111)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,111)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
