SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-----------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
Commission File Number 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-0592823
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8547 E. Arapahoe Road, #J-464, Greenwood Village, CO 80112
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(Address for principal executive offices) (Zip Code)
(303) 773-8000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ____
Shares of common stock outstanding on November 12, 1999: 16,530,487
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BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Consolidated Balance Sheets - September 30, 1999
and March 31, 1999........................................... 3
Consolidated Statements of Operations - Quarter Ended
and Six Months Ended September 30, 1999 and
September 30, 1998........................................... 5
Consolidated Statements of Cash Flows - Six Months Ended
September 30, 1999 and September 30, 1998.................... 6
Notes to Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis and Plan of Operation... 9
Results of Operations........................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 16
Item 2. Changes in Securities........................................ 16
Item 3. Defaults Upon Senior Securities.............................. 16
Item 4. Submission of Matters to a Vote of Security Holders.......... 16
Item 5. Other Information............................................ 16
Item 6. Exhibits and Reports on Form 8-K............................. 16
Signatures............................................................ 17
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PART I.
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
September 30 March 31
1999 1999
------------ ------------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 140,000 $ 38,000
Accounts receivable
Oil and gas sales 209,000 129,000
Joint interest and other receivables 191,000 126,000
Less: allowance for doubtful accounts (54,000) (54,000)
Other current assets 129,000 139,000
------------ ------------
Total current assets 615,000 378,000
------------ ------------
Property and equipment
Oil and gas property (full cost method) 32,612,000 32,619,000
Support equipment 304,000 424,000
------------ ------------
32,916,000 33,043,000
Accumulated depletion - FCP (includes cumulative
ceiling limitation charges of $14,961,000) (31,596,000) (31,479,000)
Accumulated depreciation (258,000) (369,000)
------------ ------------
Net property and equipment 1,062,000 1,195,000
Other non-current assets 168,000 168,000
------------ ------------
Total non-current assets 1,230,000 1,363,000
------------ ------------
Total Assets $ 1,845,000 $ 1,741,000
============ ============
See accompanying notes to consolidated financial statements.
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Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
September 30 March 31
1999 1999
------------ ------------
(Unaudited)
Liabilities
Current liabilities
Accounts payable $ 176,000 $ 192,000
Accrued liabilities 134,000 141,000
Current portion of long-term debt 540,000 240,000
------------ ------------
Total current liabilities 850,000 573,000
------------ ------------
Long-term debt, less current portion -- 330,000
------------ ------------
Shareholders' Equity
Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares -- --
Common stock, $.001 par value
32,000,000 shares authorized;
16,879,752 shares issued at September 30
and at March 31 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (21,691,000) (21,848,000)
Treasury stock (349,265 shares at September 30
and March 31); at cost (23,000) (23,000)
------------ ------------
Total shareholders' equity 995,000 838,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,845,000 $ 1,741,000
============ ============
See accompanying notes to consolidated financial statements.
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Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended Quarters Ended
September 30 September 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue
<S> <C> <C> <C> <C>
Oil and gas sales $ 897,000 $ 794,000 $ 503,000 $ 350,000
Well service revenue 16,000 16,000 16,000 8,000
------------ ------------ ------------ ------------
Total revenue 913,000 810,000 519,000 358,000
------------ ------------ ------------ ------------
Expenses
Oil and gas production 481,000 474,000 211,000 236,000
Production tax 76,000 42,000 41,000 30,000
Well service expenses 14,000 14,000 14,000 7,000
Depreciation, depletion and
amortization 120,000 214,000 59,000 99,000
General and administrative 42,000 61,000 24,000 25,000
------------ ------------ ------------ ------------
Total operating expenses 733,000 805,000 349,000 397,000
------------ ------------ ------------ ------------
Income (loss) from operations 180,000 5,000 170,000 (39,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest and other income 4,000 8,000 2,000 2,000
Interest expense (27,000) (41,000) (13,000) (17,000)
------------ ------------ ------------ ------------
Total other expense (23,000) (33,000) (11,000) (15,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes 157,000 (28,000) 159,000 (54,000)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 157,000 $ (28,000) $ 159,000 $ (54,000)
============ ============ ============ ============
Basic and diluted weighted average
number of shares outstanding 16,530,487 16,530,487 16,530,487 16,530,487
============ ============ ============ ============
Basic and diluted net income
(loss) per share $ .010 $ (.002) $ .010 $ (.003)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
September 30
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 157,000 $ (28,000)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 120,000 214,000
Change in current assets and current liabilities:
Accounts receivable, net (145,000) 30,000
Other current assets 10,000 (9,000)
Accounts payable and accrued liabilities (23,000) (138,000)
Other non-current assets -- 3,000
Other adjustments 6,000 7,000
--------- ---------
Net cash provided by operating activities 125,000 79,000
--------- ---------
Cash flows from investing activities:
Capital expenditures
Oil and gas property (133,000) (140,000)
Support equipment -- (3,000)
Proceeds from sale of property and equipment 140,000 83,000
--------- ---------
Net cash provided by (used in) investing activities 7,000 (60,000)
--------- ---------
Cash flows from financing activities:
Long-term debt payments (80,000) (61,000)
Proceeds from borrowing 50,000 67,000
--------- ---------
Net cash provided by (used in) financing activities (30,000) 6,000
--------- ---------
Cash and cash equivalents:
Net increase 102,000 25,000
Balance at beginning of period 38,000 52,000
--------- ---------
Balance at end of period $ 140,000 $ 77,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,000 $ 35,000
See accompanying notes to consolidated financial statements.
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Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
The accompanying interim financial statements of Basic Earth Science Systems,
Inc. (Basic or the Company) are unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period.
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Management believes the disclosures made are adequate to make the information
not misleading and suggests that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in Basic's
Form 10-KSB for the year ended March 31, 1999.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-QSB, including, without
limitation, the statements under both "Notes to Consolidated Financial
Statements" and "Item 2. Management's Discussion and Analysis and Plan of
Operation" 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-QSB in conjunction with the forward-looking statements
included in this Form 10-QSB.
FASB 133
- --------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning June 15, 1999. Management
believes the adoption of this statement will not have a material impact on the
Company's financial statements.
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YEAR 2000
- ---------
The "Year 2000" problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs, or embedded computer chips, that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Speculation as to the impact of this issue varies widely.
The Company cannot state that the Year 2000 problem will not pose material
operational problems. Nor is the Company in control of the external forces that
could create these material impacts. The Company has not completed a
comprehensive assessment of the Company's Year 2000 problem, nor established any
written Year 2000 policies. The Company has not secured, and has no plans to
secure, backup power generation equipment for its offices or well-site
locations. Nor has the Company made alternate arrangements for the possible
failure, and/or reduced availability, of law enforcement, government services,
banking services, currency or transportation infrastructure.
With a March 31 fiscal year end, from an accounting prospective, the Company is
currently, and effectively, in Year 2000. The Company previously reported that
it was working with the provider of its software accounting system to resolve
Year 2000 issues. The Company received software module updates in March, April
and June 1999. The Company has not experienced any difficulties that were not
immediately resolved. The software provider has assured the Company that its
software is now fully Year 2000 compliant. These modifications were included in
the Company's ongoing software support contract and the Company did not expend
any additional funds to resolve this Year 2000 issue. The vast majority of the
Company's remaining software are Microsoft Windows 95/Office 97 products and are
not expected to create a problem.
The Company is not dependent on any one vendor in a given area, and should not
be impacted by the failure of any one vendor to provide the Company with
necessary supplies and equipment.
The Company sells its primary product, oil, to a number of purchasers, and
sometimes to multiple purchasers in the same geographical area. Furthermore, for
the vast majority of the Company's product, the Company can switch purchasers
within 30 days. For these reasons, the Company will not contact any of its
purchasers as to whether or not they are Year 2000 compliant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------
RECLASSIFICATIONS. Certain prior year amounts may have been reclassified to
conform to current year presentation.
CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, Basic considers all highly liquid investments with a
maturity of ninety days or less when purchased to be cash equivalents.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
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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, which 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
LIQUIDITY. During the six months ended September 30, 1999, Basic's current
assets increased 63% from $378,000 at year end March 31, 1999 (March 31) to
$615,000 at September 30, 1999 (September 30) and current liabilities increased
48% from $573,000 at March 31 to $850,000 at September 30. Consequently, the
Company's current ratio increased from 0.66:1 at March 31 to 0.72:1 at September
30. 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
September 30 the Company was in compliance with all bank covenants and Basic's
current ratio was approximately 2:1 as calculated per the provisions of the
covenants.
In addition to the increase in cash and cash equivalents, the growth in current
assets can be attributed to the increase in oil and gas sales receivable and
joint interest and other receivables. The jump in oil and gas sales receivable
was the direct result of substantially higher oil prices at September 30
relative to prices at March 31 as discussed in more detail in the Results of
Operations section below. As for the joint interest and other receivables, the
sharp increase was primarily due a $55,000 receivable recorded in the second
quarter ended September 30 for Basic's share of the proceeds from the salvage of
equipment from a non-operated lease in North Dakota.
The increased cash flow resulting from the surge in oil prices that began in
March 1999 and continued throughout the Company's first six months of the
current fiscal year, enabled Basic to reduce its accounts payable and accrued
liabilities by 7%, from $330,000 at March 31 to $310,000 at September 30. This
reduction in liabilities was tempered somewhat by an increase in operating
activity as Basic put some of its operated wells back in production and
performed workovers and repairs on others. These workovers and repairs had been
postponed and certain marginal wells were shut in during the previous year ended
March 31, 1999 as declining oil prices made these marginal wells unprofitable
and the necessary workovers and repairs uneconomic.
DEBT. As of September 30, 1999, the Company did not have any remaining borrowing
capacity. Under the terms of the agreement with its bank in effect at March 31,
1999, Basic was obligated to make monthly principal payments of $20,000
beginning April 30, 1999 and continuing at that amount through March 31, 2000.
On the maturity date of April 1, 2000 any remaining balance due is required to
be paid in full. In April and May 1999 the Company made its scheduled $20,000
principal payments. In June 1999 the bank instructed Basic to withhold its June
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principal payment with the intention of modifying the existing agreement
regarding the principal payment schedule. Under the terms of the new agreement
dated August 12, 1999, the Company is obligated to make monthly principal
payments of $10,000 from June 1999 through September 1999 (the $10,000 payments
for June and July were made in July). Beginning in October monthly principal
payments will increase to $20,000 and continue at that amount through March 31,
2000. As with the previous agreement, on the maturity date of April 1, 2000 any
remaining balance due (which is currently estimated to be $420,000) is required
to be paid in full. Reference should be made to the Company's Form 10-KSB as of
March 31, 1999 for additional information regarding the Company's debt.
With respect to the balloon payment due on April 1, 2000, it is management's
belief that the Company will not be able to generate sufficient cash flow from
operations to have available on April 1 the necessary funds to pay the
anticipated remaining balance. As of November 12, 1999, there has been no
agreement to further restructure the current debt facility. If no agreement can
be reached, management believes that alternative financing from another lending
institution can be secured or that it will be able to realize sufficient
proceeds from the sale of one or more key oil and/or gas properties to meet its
debt obligation.
On August 16, 1999 the bank increased the borrowing base by $50,000. The
proceeds from this loan increase were used exclusively for the purchase of
varying working interests in five oil properties located in and around the
Company's current production in the Williston basin.
HEDGING. On August 31, 1999 Basic and its bank entered into an agreement to
hedge two thousand barrels per month (slightly less than one-third of the
Company's anticipated oil production) for a one-year period from September 1999
through August 2000. The type of hedge used is a "Zero-Cost Collar" whereby
Basic is protected for the stated quantity against a drop in oil prices below
the NYMEX floor price of $18.00, but will forfeit any additional revenue should
oil prices exceed the NYMEX cap price of $22.12. There is no effect should oil
prices remain between the floor and cap prices. At September 30, the Company had
no other hedging contracts in place.
LIQUIDITY OUTLOOK. The Company's primary source of funding is the net cash flow
from the sale of its oil and gas production. The profitability and cash flow
generated by the Company's operations in any particular accounting period will
be directly related to: (a) the volume of oil and gas produced and then sold,
(b) the average realized prices for oil and gas sold, and (c) lifting costs.
Assuming that oil prices do not decline significantly from current levels,
management believes the cash generated from operations and hedging activities
will enable the Company to meet its existing and normal recurring obligations as
they become due in fiscal year 2000.
STRATEGY IMPLEMENTATION
- -----------------------
GENERAL. The Company's long term plan of operation involving Development,
Acquisitions, Drilling and Divestitures/Abandonments is described below.
However, both during its latest fiscal year ended March 31, 1999 and in the
first quarter of the current fiscal year, the Company had suspended this plan.
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Instead, during its first quarter, the Company focused on reducing general and
administrative expenses and returning shut-in wells to production. Only during
the fiscal quarter just ended, has the Company returned, albeit conservatively,
to the Company's stated plan of operation 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.
DEVELOPMENT. The Company holds a number of properties that management believes
has the potential for increased cash flow and may have additional unproved
reserves that could be exploited. This exploitation may be realized by
conventional and unconventional petroleum engineering techniques and field
management practices. In the third quarter of the current fiscal year, the
Company has undertaken the recompletion of several operated and non-operated
properties. While total expenditures are still unknown, capital costs and
operational expenditures could exceed $100,000.
ACQUISITIONS. In August 1999 Basic purchased for approximately $50,000 working
interests ranging from 6 percent to 45 percent in five separate oil properties.
The Company took over operations on all five properties. It is anticipated that
Basic will incur capital costs and workover expenses in the coming third quarter
of the current fiscal year to either return these wells to production or improve
existing production.
The Company continues to evaluate properties that 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 may submit 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 first six months of the current fiscal
year, Basic continued its efforts to sell or plug marginal properties. During
this period the Company realized approximately $36,000 in proceeds from the sale
of marginal non-operated properties and incurred $25,000 in costs to plug other
wells. The Company still holds a number of marginal, operated and non-operated
properties. Basic intends to continue 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.
RESULTS OF OPERATIONS
- ---------------------
Year-to-Date Comparison
OVERVIEW. Operations in the six months ended September 30, 1999 (1999) resulted
in net income of $157,000 compared to a net loss of $28,000 for the six months
ended September 30, 1998 (1998).
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REVENUES. Oil and gas sales revenue increased $103,000 (13%) in 1999 over 1998.
Oil sales revenue increased $126,000 (19%). A significant jump in oil prices
created a $194,000 increase in oil sales revenue. However, this benefit was
partially offset by a drop in oil sales volume that resulted in a negative
variance of $68,000. Gas sales revenue decreased $23,000 (18%) in 1999 from
1998. A decrease in gas sales volume accounted for a $33,000 drop in gas sales
revenue. This drop was only partially offset by an $10,000 increase resulting
from an rise in gas prices.
VOLUMES AND PRICES. Total liquid sales volume decreased 10%, from 51,600 barrels
in 1998 to 46,300 barrels in 1999 while there was a 32% increase in the average
price per barrel from $12.95 in 1998 to $17.13 in 1999. Total gas sales volume
decreased 27%, from 76,200 Mcf in 1998 to 56,000 Mcf in 1999 while the average
price per Mcf increased 12%, from $1.65 in 1998 to $1.84 in 1999. Along with
normal production decline, liquid and gas sales volumes were down in 1999 from
1998 due to the loss of sales from non-operated, marginal properties that
contributed to production in 1998, were subsequently sold, and thus did not
contribute to sales volumes in 1999. As far as oil sales volume is concerned,
most of the loss in production from the sale of marginal properties was offset
by an increase in 1999 sales volume from wells that were placed back on
production in 1999 after having been shut-in during all or a portion of 1998.
The sale of non-operated, marginal properties is in line with the Company's
previously stated strategy to divest and/or abandon marginal wells in an effort
to generate additional cash from sale proceeds and improve overall
profitability.
EXPENSES. Oil and gas production expense increased $7,000 (1%) in 1999 over
1998. As mentioned above, the sharp decline in oil prices that dominated 1998
forced Basic to shut in wells as they became unprofitable and postpone workovers
and/or repairs that were uneconomic at the lower oil prices. As prices began to
recover in March 1999 and continued to climb throughout the first six months of
the current fiscal year, Basic was able to return a number of wells to
production and perform necessary workovers and repairs on other properties. The
additional expenditures in 1999 resulting from this increase in field activity
more than offset a decrease in operating expenses resulting from the sale of
non-operated, marginal properties.
Workovers and repairs are normally random in nature and are fairly equally
distributed throughout the year. However, during the first six months of the
current fiscal year, and primarily during the first quarter, the Company focused
on returning shut-in wells to production and performing the workovers and
repairs necessary to establish peak production on other wells. Workover/repair
expenses on Company-operated wells in the first quarter ended June 30, 1999 were
approximately $50,000. With most of the work being done in the first quarter,
workover/repair expenses during the second quarter ended September 30, 1999
dropped to approximately $33,000.
Management cautions that the Company's second quarter production expenses were
relatively lower than normal. This should not be considered a trend in light of
the Company's recent acquisitions, efforts to return additional wells to
production and attempts to recomplete several wells. As a result, the Company
anticipates third quarter expenditures, both capital and operational in nature,
to be significantly higher than normal.
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Production taxes increased $34,000 (81%) as a result of two factors. First,
production taxes are a function of oil and gas sales revenue. Therefore, the
increase in oil and gas sales revenue directly resulted in an increase in
production taxes. Second, the first quarter of 1998 includes a credit for a
$23,000 severance tax refund. As a result of the increases in both oil and gas
production expense and production taxes and the decreases in oil and gas sales
volumes, the overall lifting cost per equivalent barrel increased 25% from $8.02
in 1998 to $10.00 in 1999.
Depreciation, depletion and amortization expense decreased $94,000 (44%) in 1999
from 1998. The decline in oil and gas sales volume in 1999 relative to 1998
combined with an increase in estimated oil and gas reserves at year end March
31, 1999 over March 31, 1998 caused the depletion rate (the ratio of production
for the year divided by the estimated reserves at the beginning of the year) to
drop from 14.4% in 1998 to 10.0% in 1999. Despite the drop in sales volume, the
depletion rate per equivalent barrel decreased from $3.24 in 1998 to $2.11 in
1999.
Gross general and administrative (G&A) expense decreased $32,000 (19%) in 1999
from 1998 while net G&A decreased $19,000 (31%). Gross G&A expense differs from
net G&A expense in that the Company is allowed to recover an overhead fee on
wells that it operates. This fee is applied against, and serves to reduce, gross
G&A expense. The decrease in gross G&A expense is a reflection of management's
continued efforts in the current fiscal year to reduce expenses in light of last
year's decline in oil prices and the uncertainty of current oil price levels.
Approximately $20,000 of the decrease in 1999 from 1998 is a result of a
reduction in personnel, salaries, and related benefits. Additionally, in April
1999, Basic moved its corporate headquarters to a new location that offered a
more favorable lease rate and term. This relocation provided for an approximate
$11,000 reduction, net of moving expenses, in G&A expense in 1999 from 1998. The
entire $32,000 reduction in gross G&A expense was not reflected in the reduction
of net G&A expense because the Company still has some wells that it operates
shut in, thereby reducing the overhead fees that the Company is allowed to
recover. The percentage of gross general and administrative expense that the
Company was able to charge out to operated wells was 69% in 1999 compared to 63%
in 1998. Net general and administrative expense per equivalent barrel decreased
from $0.96 in 1998 to $0.77 in 1999.
OTHER INCOME/(EXPENSE). Other income/(expense) decreased $10,000 (30%) from a
net expense of $33,000 in 1998 to a $23,000 net expense in 1999. The decrease
was primarily the result of reduced interest expense due to a lower average
outstanding balance due on the Company's bank debt and a slightly lower interest
rate in 1999 compared to 1998.
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
OVERVIEW. Operations in the quarter ended September 30, 1999 (1999) resulted in
net income of $159,000 compared to a net loss of $54,000 in the quarter ended
September 30, 1998 (1998).
REVENUES. Oil and gas sales revenue increased $153,000 (44%) in 1999 over 1998.
Oil sales revenue increased $151,000 (50%). A $7,000 decrease due to lower oil
sales volume was more than offset by an increase of $158,000 resulting from a
jump in oil prices. In addition, gas sales revenue increased $2,000 (4%) in 1999
over 1998. A decrease in gas volume sales accounting for a drop of $12,000 again
was more than offset by a $14,000 benefit from higher gas prices.
VOLUMES AND PRICES. Total liquid sales decreased 2%, from 24,400 barrels in 1998
to 23,800 barrels in 1999 while there was a 54% jump in the average price per
barrel from $12.34 in 1998 to $19.00 in 1999. Total gas sales decreased 24%,
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from 32,600 mcf in 1998 to 24,700 mcf in 1999, while the average price per mcf
increased 36%, from $1.50 in 1998 to $2.04 in 1999. Along with normal production
decline, liquid and gas sales volumes were down in 1999 from 1998 due to the
loss of sales from non-operated, marginal properties that contributed to
production in 1998, were subsequently sold, and thus did not contribute to sales
volumes in 1999. As far as oil sales volume is concerned, most of the loss in
production from the sale of marginal properties was offset by an increase in
1999 sales volume from wells that were placed back on production in 1999 after
having been shut-in during all or a portion of 1998.
EXPENSES. Oil and gas production expense decreased $25,000 (11%) in 1999 from
1998. The decrease in operating expenses resulted from both the sale of
non-operated, marginal properties and a concerted effort on the part of
management to reduce lifting costs, especially on Company-operated, lower-margin
properties. During the first six months of the current fiscal year, most of the
field activity to return wells to production and perform previously postponed
workovers and repairs was completed in the first quarter. However, as mentioned
above, it is expected that operating expenses will increase in the third quarter
due to the purchase of five new properties and the corresponding expenditures
necessary to either put these wells back on production or improve existing
production.
Production taxes increased $11,000 (37%) as a direct result of the increase in
oil and gas sales revenue. Despite the drop in oil and gas production expense,
the increase in production taxes together with the decrease in both oil and gas
sales volumes caused the overall lifting cost per equivalent barrel to increase
slightly from $8.90 in 1998 to $8.99 in 1999.
Depreciation, depletion and amortization expense decreased $40,000 (40%) in 1999
from 1998. Again, the decline in oil and gas sales volume in 1999 relative to
1998 combined with an increase in estimated oil and gas reserves at year end
March 31, 1999 over March 31, 1998 caused the depletion rate to drop from 6.7%
in 1998 to 5.0% in 1999. Despite the drop in sales volume, the depletion rate
per equivalent barrel decreased from $3.26 in 1998 to $2.06 in 1999.
Gross general and administrative expense decreased $3,000 (4%) in 1999 from 1998
and net general and administrative expense decreased $1,000 (4%). The decrease
in gross G&A expense is a reflection of management's continued efforts in the
current fiscal year to reduce expenses in light of last year's decline in oil
prices and the uncertainty of current oil price levels. As a result of the drop
in oil and gas sales volumes, net general and administrative expense per
equivalent barrel increased from $0.84 in 1998 to $0.88 in 1999.
OTHER INCOME/(EXPENSE). Other income/(expense) decreased $4,000 (27%) from a net
expense of $15,000 in 1998 to an $11,000 net expense in 1999. The decrease was
primarily the result of reduced interest expense due to a lower average
outstanding balance due on the Company's bank debt in 1999 compared to 1998.
14
<PAGE>
Liquids and Natural Gas Production, Sales Price and Production Costs
--------------------------------------------------------------------
The following table shows selected financial information for the six months and
quarter ended September 30 in the current and prior year. Certain prior year
amounts may have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Six Months Ended Quarters Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- -------- --------
Sales volume
<S> <C> <C> <C> <C>
Oil (barrels) 46,300 51,600 23,800 24,400
Gas (mcf) 56,000 76,200 24,700 32,600
Revenue
Oil $794,000 $668,000 $452,000 $301,000
Gas 103,000 126,000 51,000 49,000
-------- -------- -------- --------
897,000 794,000 503,000 350,000
Total production expense(1) 557,000 516,000 252,000 266,000
-------- -------- -------- --------
Gross profit $340,000 $278,000 $251,000 $ 84,000
======== ======== ======== ========
Depletion expense $117,000 $208,000 $ 57,000 $ 96,000
Average sales price(2)
Oil (per barrel) $ 17.13 $ 12.95 $ 19.00 $ 12.34
Gas (per mcf) $ 1.84 $ 1.65 $ 2.04 $ 1.50
Average production expense(1,2,3) $ 10.00 $ 8.02 $ 8.99 $ 8.90
Average gross profit(2,3) $ 6.11 $ 4.32 $ 8.99 $ 2.82
Average depletion expense(2,3) $ 2.11 $ 3.24 $ 2.06 $ 3.26
Average general and administrative expense(2,3) $ 0.77 $ 0.96 $ 0.88 $ 0.84
- ----------------------------
</TABLE>
1 Operating expenses, including production tax
2 Averages calculated based upon non-rounded figures
3 Per equivalent barrel (6 mcf of gas is equivalent to 1 barrel of oil)
15
<PAGE>
PART II.
OTHER INFORMATION
-----------------
(Cumulative from March 31, 1999)
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
During the six months ended September 30, 1999, there were no meetings of
Basic's shareholders nor were any matters submitted to a vote of security
holders through the solicitation of consents, proxies or otherwise.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
On Form 8-K dated August 31, 1999, the Company reported that G.W. Breuer, a
member of the board of directors and a former president of Basic, along with his
wife, sold all of their directly controlled Basic common stock, comprising
3,765,272 shares, to Ray Singleton, Basic's current president. This transaction
brings Mr. Singleton's holdings to 4,435,478 shares, approximately 26.8 percent
of the Company's outstanding common stock.
On Form 8-K dated September 22, 1999, Basic reported the resignation of G.W.
Breuer from the Company's board of directors, effective September 1, 1999. In
his resignation letter, Mr. Breuer did not convey any dispute with the Company
or with the remaining board members.
16
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized person on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton
- -------------------------
Ray Singleton, President and
Principal Accounting Officer
Date: November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000
<PERIOD-START> APR-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 140,000 0
<SECURITIES> 0 0
<RECEIVABLES> 400,000 0
<ALLOWANCES> (54,000) 0
<INVENTORY> 129,000<F1> 0
<CURRENT-ASSETS> 615,000 0
<PP&E> 32,916,000 0
<DEPRECIATION> (31,854,000) 0
<TOTAL-ASSETS> 1,845,000 0
<CURRENT-LIABILITIES> 850,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 17,000 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 1,845,000 0
<SALES> 897,000 503,000
<TOTAL-REVENUES> 913,000 519,000
<CGS> 557,000<F2> 252,000<F2>
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,000 13,000
<INCOME-PRETAX> 157,000 159,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 157,000 159,000
<EPS-BASIC> 0.010 0.010
<EPS-DILUTED> 0.010 0.010
<FN>
<F1> AND OTHER CURRENT ASSETS
<F2> OPERATING EXPENSES
</FN>
</TABLE>
