UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended March 31, 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.
8547 E. Arapahoe Road, J-464
Greenwood Village, Colorado 80112
Telephone (303) 773-8000
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.
<PAGE>
Basic Earth Science Systems, Inc.
Form 10-KSB/A
March 31, 1998
Table of Contents
-----------------
Part III:
Page
----
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With
Section 16(a) of the Exchange Act......................... 3
Item 10. Executive Compensation.................................... 5
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................ 7
Item 12. Certain Relationships and Related
Transactions.............................................. 9
2
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Part III
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ITEM 9
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors
- ---------
The following sets forth the names and ages of the four members of the Board of
Directors of Basic Earth Science Systems, Inc. ("Basic" or "the Company") who
served in the past year, their respective principal occupations or employment
during the past five years, and the period during which each has served as a
director of the Company.
G. W. Breuer (79) was a co-founder of the Company and has been a member of the
Board of Directors since inception in 1969. Mr. Breuer also served as the
Company's Chief Executive Officer from 1969 through March 1993 and was its
President from February 1978 through March 1993. Mr. Breuer is a 1940 graduate
of Purdue University with a degree in petroleum engineering. Mr. Breuer has been
retired for the past five years.
David J. Flake (43) has been a director of the Company since September 1987. Mr.
Flake began his career at Basic in November 1980 as tax accountant and was
appointed Controller in July 1983, a position he held until his resignation in
January 1993 to pursue other business and financial opportunities. From
September 1987 through January 1993, Mr. Flake also served as
Secretary/Treasurer of the Company. In April 1994, Mr. Flake was appointed
Corporate Secretary. Mr. Flake received his Bachelor of Science degree in
Accounting/Business Administration from Regis University in Denver, Colorado in
1977 and his Masters Degree in Business Administration from Colorado State
University's Executive MBA Program in 1995.
Edgar J. Huffman (58) was elected to the Board of Directors in May 1993. For the
past five years Mr. Huffman has served continuously in the following capacities.
He is a director of Visa Industries, an oil and gas producer, located in
Phoenix, Arizona. Visa Industries is a public company traded on NASDAQ. He also
serves as Chairman of the Board and Director of Finance and Planning for the
Montessori Day Schools in Phoenix. Additionally, Mr. Huffman is a director of
FCS Laboratories, Inc. (FCS), a diagnostic laboratory and pharmaceutical
producer, as well as Chairman of the Finance Committee and Audit Committee and a
member of the Compensation Committee. FCS is a public company traded on the OTC
market. Mr. Huffman received a Bachelor of Science degree in Business
Administration from Indiana Central University and a Masters Degree in Business
Administration from Arizona State University. He also attended the Finance
Program at New York University's Graduate School of Business.
Ray Singleton (47) has been a director of Basic since July 1989. Mr. Singleton
joined the Company in June 1988 as Production Manager/Petroleum Engineer. In
October 1989 he was elected Vice President of Basic and was appointed President
and Chief Executive Officer in March 1993. Upon the resignation of Mr. Flake,
noted above, Mr. Singleton was appointed Acting Treasurer. Mr. Singleton began
his career with Amoco Production Company in Texas as a production engineer. He
was subsequently employed for the predecessor of Union Pacific Resources as a
drilling, completion and production engineer and in 1981 began his own
engineering consulting firm, serving the needs of some 40 oil and gas companies.
In this capacity he was employed by Basic on various projects from 1981 to 1987.
Mr. Singleton received a degree in petroleum engineering from Texas A&M
University in 1973 and received a Masters Degree in Business Administration from
3
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Colorado State University's Executive MBA Program in 1992. Mr. Singleton
currently serves as the elected president of the Independent Petroleum
Association Mountain States (IPAMS). IPAMS is a thirteen state, regional trade
association that represents the interests of independent oil and gas companies
in the Rocky Mountain region. In addition, Mr. Singleton is a member of the
Society of Petroleum Engineers.
Executive Officers
- ------------------
At this time, and during the past year, all executive officers are also board
members. Their names, ages, principal occupations and/or employment during the
past five years are set forth above. There are no family relationships between
or among the officers and Board of Directors.
Directors are elected by the Company's shareholders at each annual meeting or,
in the case of a vacancy, are appointed by the directors then in office, to
serve until the next annual meeting or until their successors are elected and
qualified. Officers are appointed by and serve at the discretion of the Board of
Directors.
Board Committees and Attendance
- -------------------------------
The Board of Directors of the Company held three meetings during the fiscal year
ended March 31, 1998 (fiscal 1998). During the year ended March 31, 1997 (fiscal
1997) no meetings were held. Each of the directors attended 100% of the
meetings.
In May 1993, the Board established an Audit Committee consisting of Messrs.
Flake and Huffman, both outside directors. The Audit Committee is authorized by
the Board of Directors to review, with the Company's independent accountants,
the annual financial statements of the Company prior to publication and to make
annual recommendations to the Board for the appointment of independent public
accountants for the ensuing year. The Audit Committee also reviews the
effectiveness of the financial and accounting functions, operations, and
internal controls implemented by Basic's management.
In June 1993, the Board formed a Compensation Committee that currently consists
of Messrs. Huffman and Flake. This committee reviews and recommends to the Board
of Directors the compensation and benefits of all officers of the Company, and
is empowered to review general policy matters, including compensation and
benefits, pertaining to the employees of the Company.
Basic does not have a Nominating Committee.
Compliance with Section 16(a) of the Securities Exchange Act
- ------------------------------------------------------------
Section 16(a) of the Securities Exchange Act requires the Company's officers and
directors and shareholders of more than ten percent of the Company's common
stock to file reports of ownership and changes in ownership of the Company's
common stock with the Securities and Exchange Commission (SEC) and the National
Association of Securities Dealers. Officers, directors and
greater-than-ten-percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of copies of ownership reports submitted to Basic,
the Company believes that, for fiscal 1998, Mr. Huffman filed one late report.
4
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ITEM 10
EXECUTIVE COMPENSATION
Executive Officer Compensation
- ------------------------------
The following table sets forth the compensation paid or accrued by the Company
to its Chief Executive Officer for fiscal 1998, 1997 and 1996. No other
director, officer or employee received annual compensation that exceeded
$100,000.
<TABLE>
<CAPTION>
Other Securities All
Name and Fiscal Annual Annual Annual Underlying Other
Principal Position Year Salary Bonus Compensation Options (#) Compensation
- ------------------ ---- ------ ----- ------------ ----------- ------------
(1) (2)
<S> <C> <C> <C> <C> <C> <C>
Ray Singleton 1998 $75,416 $3,077 $3,860 90,000 $338
President, Chief 1997 72,475 2,788 3,949 75,000 308
Executive Officer, 1996 70,463 -- 4,430 -- 281
Acting Treasurer
</TABLE>
(1) Other Annual Compensation includes $2,535, $3,949 and $4,430 paid or accrued
through the Oil and Gas Incentive Compensation Plan for fiscal 1998, 1997 and
1996, respectively. Other Annual Compensation also includes $1,325, $0, and $0
which represents matching funds contributed by the Company to its 401(k) plan
(see discussion of both Oil and Gas Incentive Compensation and 401(k) Plans
below).
(2) All Other Compensation of $338, $308 and $281 are premiums paid for a life
insurance policy for Mr. Singleton during fiscal 1998, 1997 and 1996,
respectively. Mr. Singleton designates the beneficiary.
Basic has an Oil and Gas Incentive Compensation Plan (the O&G Plan) for current
and former key employees. Through this O&G Plan, Basic pays to the O&G Plan
participants a portion of its net revenue after operating expenses on certain
properties as designated by the O&G Plan Management Committee. Messrs. Breuer
and Flake are members of the O&G Plan Management Committee. The portion of the
net revenue contributed from any property shall not exceed 5% of Basic's
interest in that property. The participants in the O&G Plan make no cash outlay
in order to participate; it is entirely non-contributory, and an interest is not
assignable, transferable, nor can it be pledged by the participant. Interest in
the O&G Plan vests over a period ranging from four to eleven years; however,
Basic can sell or otherwise transfer its interest in properties designated for
the O&G Plan. If Basic sells a property in the O&G Plan, the participants shall
receive their respective percentages of the sales price. There are currently
five participants in the O&G Plan including Messrs. Breuer, Flake and Singleton.
During fiscal 1998, 1997 and 1996 Mr. Singleton was paid or accrued $2,535,
$3,949 and $4,430, respectively, through the O&G Plan. These amounts are
included in the Other Annual Compensation column in the Executive Officer
Compensation table above.
In October 1997, Basic implemented a savings plan that allows participants 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 401(k) Plan. The Company
matches 100% of the employee's contribution up to 3% of the employee's salary.
Contributions are vested when made. During fiscal 1998, the Company contributed
$1,325 to the 401(k) Plan on behalf of Mr. Singleton. This amount is also
included in the Other Annual Compensation column in the Executive Officer
Compensation table above.
5
<PAGE>
On July 27, 1995, the Board of Directors adopted the 1995 Incentive Stock Option
Plan (the Plan) and in October 1995, the Company's shareholders approved the
Plan. This Plan was established to provide a flexible and comprehensive stock
option and incentive plan which permits the granting of long-term incentive
awards to employees, including officers and directors employed by the Company or
its subsidiary, as a means of enhancing and strengthening the Company's ability
to attract and retain those individuals on whom the continued success of the
Company most depends.
During fiscal 1998 and 1997, Mr. Singleton was granted options to purchase
90,000 and 75,000 shares, respectively, of the Company's common stock. At March
31, 1998, all of these options were still outstanding. No additional options
have been granted to Mr. Singleton. He may exercise the options granted in
fiscal 1998 at a strike price of $0.115 per share and the options granted in
fiscal 1997 at a strike price of $0.065 per share. These exercise prices
approximated the fair market value of the stock at the date of grant. The terms
of the options are for a period not to exceed ten years beginning on the grant
date, provided Mr. Singleton remains a director or employee of the Company.
The Company has no contract with any officer which would give rise to any cash
or non-cash compensation resulting from the resignation, retirement or any other
termination of such officer's employment with the Company or from a change in
control of the Company or a change in any officer's responsibilities following a
change in control.
Director Compensation
- ---------------------
In the past, directors have received no compensation for their services to the
Company as directors, but are reimbursed for expenses actually incurred in
attending board meetings. However, as noted above, the 1995 Incentive Stock
Option Plan (the "Plan") was adopted and approved, providing for eligible,
non-employee members of the Board of Directors of the Company or its
subsidiaries (Non-Employee Directors) to receive grants of certain options under
the Plan to purchase common stock of the Company as compensation for their
services. A Non-Employee Director shall not be entitled to receive any grant of
a non-qualified option if such Non-Employee Director is indebted in any amount
to the Company as of the date of grant of such non-qualified options. If such
indebtedness is paid in full by or on behalf of the affected Non-Employee
Director within 45 days from the date of grant, the said Non-Employee Director
shall be entitled to receive the applicable grant of a non-qualified option as
if such indebtedness due to the Company had not existed.
Specifically, the Plan provides that each eligible, Non-Employee Directors shall
initially be granted a non-qualified option to purchase 50,000 shares of common
stock effective July 27, 1995, the effective date of the Plan. Thereafter, on
each anniversary date of the Plan, each Non-Employee Director shall be granted a
non-qualified option to purchase 25,000 shares of common stock of the Company.
Accordingly, during fiscal 1998, 1997 and 1996 Messrs. Flake and Huffman, as
Non-Employee Directors and each owning less than 10% of Basic's common stock,
were each automatically granted non-qualified options to purchase 50,000, 25,000
and 25,000 shares of common stock, respectively, at exercise prices of
approximately $0.09, $0.065 and $0.078, respectively. The terms of the options
are for a period not to exceed ten years beginning on the grant date, provided
6
<PAGE>
Messrs. Flake and Huffman remain directors of the Company. Mr. Breuer, who owns
more than 10% of the Company's common stock and is also a Non-Employee Director,
was disqualified to receive similar grants of non-qualified options in fiscal
1996 and 1997 because of the indebtedness limitation previously mentioned. Since
Mr. Breuer was not indebted to the Company at July 25, 1997, he was granted
non-qualified options to purchase 25,000 shares during fiscal 1998. These
options were granted at an exercise price of $0.099. The term of these options
is for a period not to exceed five years beginning on the grant date, provided
Mr. Breuer remains a director of the Company. (See Item 12, Certain
Relationships and Related Transactions, below.)
As fully-invested, former key employees of the Company, Messrs. Breuer and Flake
are also participants in the Oil and Gas Incentive Compensation (the O&G Plan)
discussed above. Compensation under the O&G Plan is not for services rendered as
directors, but pertains to fully-vested interests in the O&G Plan for services
performed as key employees of the Company in prior years. During fiscal 1998,
Messrs. Breuer and Flake received or accrued $3,184 and $2,004, respectively,
through the O&G Plan. During fiscal 1997, Messrs. Breuer and Flake were paid or
accrued $6,060 and $3,121, respectively, and during fiscal 1996, Messrs. Breuer
and Flake received or accrued $5,080 and $3,504, respectively. All amounts
accrued to Mr. Breuer were withheld by Basic as partial payment of amounts owed
the Company. (See Item 12, Certain Relationships and Related Transactions,
below.)
ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Set forth below, as of May 15, 1998, is information concerning stock ownership
of all persons, or group of persons, known by the Company to own beneficially 5%
or more of the shares of Basic's common stock and all directors and executive
officers of the Company, both individually and as a group, who held such
positions in fiscal 1998. Basic has no knowledge of any other persons, or group
of persons, owning beneficially more than 5% of the outstanding common stock of
Basic as of May 15, 1998.
7
<PAGE>
Percent of
Outstanding
Shares
Name and Address Shares of Common Stock Beneficially
of Beneficial Owner Beneficially Owned Owned
------------------- ------------------ -----
G. W. Breuer 3,767,670 22.8%
Denver, CO (1)
Basic's Employee Stock 1,898,216 11.5%
Ownership Plan (2)
Ray Singleton 639,675 3.9%
Englewood, CO (3)
David J. Flake 515,478 3.1%
Denver, CO (4)
Edgar J. Huffman 35,000 0.2%
Phoenix, AZ (5)
All officers and directors 4,957,823 30.0%
as a group (4 persons) (1),
(3), (4) and (5)
(1) Represents 2,645,191 shares owned by Mr. Breuer directly and 1,122,479
shares with indirect beneficial ownership.
(2) Represents shares held in the Company's and its subsidiary's individual
Employee Stock Ownership Plan (ESOP) accounts excluding shares held in the ESOP
accounts of the Company's officers listed separately in the table (see
discussion of ESOP below).
(3) Represents 214,834 shares owned directly by Mr. Singleton, 177,334 of which
are held as collateral by the Company against a note receivable from Mr.
Singleton, (See Item 12, Certain Relationships and Related Transactions, below)
and 424,841 shares held in Mr. Singleton's ESOP account.
(4) Represents 505,478 shares owned directly by Mr. Flake and 10,000 shares with
indirect beneficial ownership.
(5) Represents 35,000 shares owned by Mr. Huffman directly. In addition, 162,387
shares (approximately 1.0%) of the Company's common stock are held by the
Foundation for Montessori Education, a charitable corporation of which Mr.
Huffman's wife is a director. Mr. Huffman claims no beneficial interest in the
shares.
Company management knows of no arrangements which may result in a change in
control of Basic.
8
<PAGE>
In April 1976, the Company adopted an Employee Stock Ownership Plan (ESOP). ESOP
contributions were generally made by transferring sufficient shares of the
Company's common stock or treasury stock which, when valued at fair market
value, equaled the annual contribution amount as determined by the Company's
Board of Directors. Effective April 1, 1995, the Board of Directors voted to
discontinue the ESOP. An application filed with the Internal Revenue Service to
terminate the ESOP was approved effective April 1, 1995. The decision to
terminate the ESOP was made because of the high administrative costs associated
with maintenance of the ESOP, the low percentage of proceeds which were received
by employees relative to total ESOP costs, and the belief that alternative
methods of compensation would more effectively benefit the Company's employees.
The ESOP shares shown in the table above represent those shares that are still
to be distributed to eligible participants.
ITEM 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1995, the Board of Directors authorized a loan to Mr. Singleton not
to exceed $10,000. In August 1997 the Board of Directors increased the
authorized loan amount to $20,000. The loan is to be used solely for the
purchase of Company stock from existing shareholders. The loan is evidenced by a
promissory note and requires quarterly interest payments at a fluctuating rate
equal to the Company's cost of debt. The note requires no principal payments and
has a term of five years, at which time the principal balance becomes due. The
loan is collateralized by the purchased stock. Pursuant to this arrangement, at
March 31, 1998, Mr. Singleton had borrowed approximately $13,000 from the
Company to purchase 177,334 shares.
It is the policy of Basic that officers or directors may assign to or receive
assignments from Basic in oil and gas prospects only on the same terms and
conditions as accepted by independent third parties. It is also the policy of
Basic that officers or directors and Basic may participate together in oil and
gas prospects generated by independent third parties only on the same terms and
conditions as accepted by each other.
Subject to this policy, G. W. Breuer, former President and Chief Executive
Officer and a current director, has participated, since 1980, with Basic in
various drilling and development arrangements. Some of these properties are
still producing, but no longer generate net income consistently. In the past,
management's policy allowed for non-payment from certain individuals, including
Mr. Breuer, of a net loss, in the belief that net income from subsequent months
would cover the loss. In August 1993, with the concurrence of the Board of
Directors, management enacted new policies whereby the Company requested these
certain individuals, including Mr. Breuer, to bring any outstanding account
balances current, and to keep them current on an ongoing basis. This policy has
resulted in a long standing dispute between Mr. Breuer and the Company over
ownership of certain properties and the payment of lease operating expenses. The
Company has withheld proceeds from sales transactions, and other nominal
amounts, from Mr. Breuer, as partial payment of this debt. The Company contends
that as of March 31, 1998, the balance owed to Basic by Mr. Breuer had been
reduced to approximately $0. However, this balance fluctuates monthly, based on
the profitability of the various leases in which Mr. Breuer owns an interest.
If, in the future, such balance owed the Company again becomes positive, the
Company will again retain funds due to Mr. Breuer as payment of any balance owed
to the Company.
9
<PAGE>
During the year ended March 31, 1995, Basic retained the services of Visa Stock
Transfer, replacing Society National Bank as the Company's stock transfer agent.
Visa Stock Transfer is a wholly-owned subsidiary of Visa Industries, Inc., of
which Mr. Huffman is a director. The fees charged by Visa Stock Transfer are
lower than those charged by other stock transfer agents.
In fiscal 1998, 1997 and 1996, there were no other significant related party
transactions.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report is signed below by the following persons on behalf of Basic
and in the capacities indicated.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton
- -----------------
Ray Singleton, President and Principal
Accounting Officer
August 30, 1999
- ---------------
Date
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