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 December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-0592823
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(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 February 14, 2000: 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 - December 31, 1999
and March 31, 1999.......................................... 3
Consolidated Statements of Operations - Quarter Ended
and Nine Months Ended December 31, 1999 and
December 31, 1998........................................... 5
Consolidated Statements of Cash Flows - Nine Months Ended
December 31, 1999 and December 31, 1998..................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis and Plan of Operation.. 9
Results of Operations....................................... 12
PART. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 17
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
Signatures........................................................... 17
2
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PART I.
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
December 31 March 31
1999 1999
------------ ------------
(Unaudited) (Audited)
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents $ 175,000 $ 38,000
Accounts receivable
Oil and gas sales 248,000 129,000
Joint interest and other receivables 194,000 126,000
Less: allowance for doubtful accounts (49,000) (54,000)
Other current assets 143,000 139,000
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Total current assets 711,000 378,000
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Property and equipment
Oil and gas property (full cost method) 32,783,000 32,619,000
Support equipment 303,000 424,000
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33,086,000 33,043,000
Accumulated depletion - FCP (includes cumulative
ceiling limitation charges of $14,961,000) (31,677,000) (31,479,000)
Accumulated depreciation (258,000) (369,000)
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Net property and equipment 1,151,000 1,195,000
Other non-current assets 155,000 168,000
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Total non-current assets 1,306,000 1,363,000
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Total Assets $ 2,017,000 $ 1,741,000
============ ============
See accompanying notes to consolidated financial statements.
3
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Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
December 31 March 31
1999 1999
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(Unaudited) (Audited)
Liabilities
Current liabilities
Accounts payable $ 360,000 $ 192,000
Accrued liabilities 162,000 141,000
Current portion of long-term debt 480,000 240,000
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Total current liabilities 1,002,000 573,000
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Long-term debt, less current portion -- 330,000
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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 December 31
and at March 31 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (21,671,000) (21,848,000)
Treasury stock (349,265 shares at December 31
and March 31); at cost (23,000) (23,000)
------------ ------------
Total shareholders' equity 1,015,000 838,000
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Total Liabilities and Shareholders' Equity $ 2,017,000 $ 1,741,000
============ ============
See accompanying notes to consolidated financial statements.
4
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Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended Quarters Ended
December 31 December 31
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue
<S> <C> <C> <C> <C>
Oil and gas sales $ 1,436,000 $ 1,109,000 $ 539,000 $ 315,000
Well service revenue 28,000 20,000 12,000 4,000
------------ ------------ ------------ ------------
Total revenue 1,464,000 1,129,000 551,000 319,000
------------ ------------ ------------ ------------
Expenses
Oil and gas production 848,000 732,000 367,000 258,000
Production tax 120,000 67,000 44,000 25,000
Well service expenses 23,000 17,000 9,000 3,000
Depreciation, depletion and
amortization 201,000 315,000 81,000 101,000
General and administrative 59,000 93,000 17,000 32,000
------------ ------------ ------------ ------------
Total operating expenses 1,251,000 1,224,000 518,000 419,000
------------ ------------ ------------ ------------
Income (loss) from operations 213,000 (95,000) 33,000 (100,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest and other income 6,000 14,000 2,000 6,000
Interest expense (42,000) (58,000) (15,000) (17,000)
------------ ------------ ------------ ------------
Total other expense (36,000) (44,000) (13,000) (11,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes 177,000 (139,000) 20,000 (111,000)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 177,000 $ (139,000) $ 20,000 $ (111,000)
============ ============ ============ ============
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 $ .011 $ (.008) $ .001 $ (.007)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
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Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
December 31
1999 1998
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Cash flows from operating activities:
Net income (loss) $ 177,000 $(139,000)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 201,000 315,000
Change in current assets and current liabilities:
Accounts receivable, net (192,000) 3,000
Other current assets (4,000) 22,000
Accounts payable and accrued liabilities 189,000 (95,000)
Other non-current assets 13,000 --
Other adjustments 9,000 11,000
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Net cash provided by operating activities 393,000 117,000
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Cash flows from investing activities:
Capital expenditures
Oil and gas property (266,000) (155,000)
Support equipment (2,000) (5,000)
Proceeds from sale of property and equipment 102,000 83,000
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Net cash used in investing activities (166,000) (77,000)
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Cash flows from financing activities:
Long-term debt payments (140,000) (91,000)
Proceeds from borrowing 50,000 67,000
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Net cash used in financing activities (90,000) (24,000)
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Cash and cash equivalents:
Net increase 137,000 16,000
Balance at beginning of period 38,000 52,000
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Balance at end of period $ 175,000 $ 68,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 42,000 $ 51,000
See accompanying notes to consolidated financial statements.
6
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Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 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
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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
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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.
YEAR 2000
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The much anticipated "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.
7
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With a March 31 fiscal year end, from an accounting prospective, the Company has
been effectively in Year 2000 since April 1999. The Company received several
accounting software module updates during the course of the current fiscal year
aimed at resolving any Year 2000 issues. The Company has not experienced any
difficulties that were not immediately resolved. 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 have not created a problem.
With respect to the Company's operational activity, to date Basic has not
experienced any delays, shortage of supplies and equipment, curtailments, or any
other Year 2000 problems with respect to any of its vendors or purchasers.
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
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.
(Intentionally left blank.)
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
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LIQUIDITY AND CAPITAL RESOURCES
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LIQUIDITY. During the nine months ended December 31, 1999, Basic's current
assets increased 88% from $378,000 at year end March 31, 1999 (March 31) to
$711,000 at December 31, 1999 (December 31) and current liabilities increased
75% from $573,000 at March 31 to $1,002,000 at December 31. Consequently, the
Company's current ratio increased from 0.66:1 at March 31 to 0.71:1 at December
31. A specific bank covenant requires the maintenance of a current ratio of at
least 1:1, after adjustment for the removal of the current portion of long-term
debt. At December 31 the Company was in compliance with all bank covenants and
Basic's current ratio was approximately 1.36:1 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 December 31 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 to 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 first nine months of the current fiscal
year, enabled Basic to focus its attention on the exploitation of potential
unproved reserves on some of its operated properties and perform workovers and
repairs on others. This increase in development, workover and repair activity
prompted a substantial increase in accounts payable and also contributed to the
increase in joint interest receivables. These activities had been postponed
during the previous year ended March 31, 1999 as declining oil prices made any
development activity and necessary workovers and repairs uneconomic.
DEBT. The terms of the Company's loan agreement with its bank have been both
postponed and/or amended since March 31, 1999. Under the current agreement,
beginning in October 1999, monthly principal payments increased to $20,000 and
will 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
(currently estimated to be $420,000) is required to be paid in full. As of
December 31, 1999, all required principal payments had been made as scheduled or
amended. Reference should be made to Basic's Form 10-KSB as of March 31, 1999
for additional information regarding the Company's debt.
Officially, as of December 31, 1999, Basic did not have any remaining borrowing
capacity. However, in August 1999, the bank extended the borrowing base and
loaned the Company an additional $50,000 to be 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. Management believes that
the bank may make additional funds available on a project by project basis.
9
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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. Although no written amendment has been received,
Basic's bank has favorably responded to the Company's efforts to extend the
$20,000 principal payments through December 31, 2001. If for some unforeseen
event this amendment is not executed, 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.
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. As of December 31, 1999 Basic
has forfeited approximately $18,000 under this hedging agreement. At December
31, the Company also had eight open option contracts to hedge future deliveries
with maturities ranging from April 2000 through June 2000. Basic had unrealized
losses of $1,500 on these contracts as of December 31.
LIQUIDITY OUTLOOK. The Company's primary source of funding is the net cash flow
from the sale of its oil and gas production. The profitability and cash flow
generated by the Company's operations in any particular accounting period will
be directly related to: (a) the volume of oil and gas produced and then sold,
(b) the average realized prices for oil and gas sold, and (c) lifting costs.
Assuming that oil prices do not decline significantly from current levels,
management believes the cash generated from operations will enable the Company
to meet its existing 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.
Instead, during its first quarter, the Company focused on reducing general and
administrative expenses and returning shut-in wells to production. Only during
the second and third quarters of the current fiscal year has the Company
returned, albeit conservatively, to its stated plan of operation. Basic 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.
10
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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 quarter just ended, Basic attempted to acid stimulate production from a
previously recompleted well in Sheridan County Montana. Initial results from the
recompleted zone were extremely promising. However, salt water entry through
perforations in a previously co-mingled zone could not be effectively shut-off
and the recompletion effort has been deemed unsuccessful. Total expenses in this
effort during the quarter ended December 31, 1999 were approximately $99,000.
Basic does not intend to re- attempt shutting off water in this well.
In addition, during the recent third, Basic attempted the recompletion of one
operated and one non-operated property. Both of these efforts were successful.
The non-operated well, in which Basic has a 19% working interest, was completed
at an initial rate of 25 barrels of oil per day (BOPD). The operated property,
in which Basic has a 100% working interest has not been finalized, but is
expected to initially produce approximately 45 BOPD. Through December 31, total
expenditures for these two recompletions were approximately $31,000. It is
anticipated that an additional $35,000 to $40,000 will be spent in the fourth
quarter of the current fiscal year on the continued recompletion of the operated
property. Also during the third quarter, the Company spent $42,000 to convert a
former non-operated producing well into a salt water disposal well for use on
another non-operated property.
The Company intends to exploit other wells which it believes have recompletion
potential, on a funds available basis.
ACQUISITIONS. In August 1999, Basic purchased for approximately $50,000 working
interests ranging from 6 percent to 45 percent in five separate oil properties.
At the time of purchase only one of these wells was producing. The Company took
over operations on all five properties. During the fiscal third quarter just
completed, Basic incurred expenses totaling $16,000 to return two of these wells
to production. One is currently producing approximately 10 BOPD and the second
is producing approximately 30 BOPD. Basic has a 32% working interest in both of
these wells. The Company plans to return the remaining two wells to production
in the upcoming fourth quarter.
In November 1999, Basic acquired a 20% working interest in a Sheridan County,
Montana well for $5,000. The company was able to gain operations of this well
and return the it to production. The well currently makes approximately 13 BOPD.
In addition, during the just completed third quarter, Basic spent approximately
$17,000 to acquire various overriding royalty and working interests in several
of its operated properties.
The overwhelming majority of both the Company's recompletion and acquisition
efforts occurred at the end of the quarter. While there was no current impact on
revenue, any effects from these efforts will be realized in future periods.
11
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Basic 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 nine 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 $61,000 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
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Year-to-Date Comparison
OVERVIEW. Operations in the nine months ended December 31, 1999 (1999) resulted
in net income of $177,000 compared to a net loss of $139,000 for the nine months
ended December 31, 1998 (1998).
REVENUES. Oil and gas sales revenue increased $327,000 (29%) in 1999 over 1998.
Oil sales revenue increased $349,000 (37%). A significant jump in oil prices
created a $439,000 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 $90,000. Gas sales revenue decreased $22,000 (13%) in 1999 from
1998. A decrease in gas sales volume accounted for a $47,000 drop in gas sales
revenue. This drop was only partially offset by an $25,000 increase resulting
from a rise in gas prices.
VOLUMES AND PRICES. Total liquid sales volume decreased 10%, from 75,900 barrels
in 1998 to 68,600 barrels in 1999 while there was a 52% increase in the average
price per barrel from $12.31 in 1998 to $18.71 in 1999. Total gas sales volume
decreased 27%, from 106,900 Mcf in 1998 to 78,300 Mcf in 1999 while the average
price per Mcf increased 20%, from $1.64 in 1998 to $1.96 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.
12
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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 $116,000 (16%) 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 nine 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 nine months of the
current fiscal year, and primarily during the first and third quarters, 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. Then in the third quarter,
as oil prices stabilized in the $20-$25 per barrel range and market conditions
supported these price levels, these expenses increased to $129,000 as management
stepped up workover/repair activity in an attempt to maximize production from
its existing operated wells.
Management previously cautioned that the Company's second quarter production
expenses were relatively lower than normal. In light of the Company's recent
acquisitions, efforts to return additional wells to production, and attempts to
recomplete several wells, the Company anticipates fourth quarter expenditures,
both capital and operational in nature, to be more in line with those seen in
the third quarter. However, this level of activity will continue only if oil
prices remain at least in the $20-$25 per barrel range.
Production taxes increased $53,000 (79%) 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 39% from $8.53
in 1998 to $11.86 in 1999.
Depreciation, depletion and amortization expense decreased $114,000 (36%) 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 21.0% in 1998 to 14.6% in 1999. Despite the drop in sales volume, the
depletion rate per equivalent barrel decreased from $3.28 in 1998 to $2.42 in
1999.
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Gross general and administrative (G&A) expense decreased $45,000 (18%) in 1999
from 1998 while net G&A decreased $34,000 (37%). 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 future oil price levels.
Approximately $26,000 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
$18,000 reduction, net of moving expenses, in G&A expense in 1999 from 1998. The
entire $45,000 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 71% in 1999 compared to 63%
in 1998. Net general and administrative expense per equivalent barrel decreased
from $0.99 in 1998 to $0.73 in 1999.
OTHER INCOME/(EXPENSE). Other income/(expense) decreased $8,000 (18%) from a net
expense of $44,000 in 1998 to a $36,000 net expense in 1999. A $16,000 (28%)
reduction in interest expense resulted a lower average outstanding balance due
on the Company's bank debt and a slightly lower interest rate in 1999 compared
to 1998. This was partially offset by an $8,000 (57%) decrease in interest and
other income. This drop was primarily due to interest income received in 1998 on
the severance tax refund mentioned above.
Quarter Ended December 31, 1999 Compared to Quarter Ended December 31, 1998
OVERVIEW. Operations in the quarter ended December 31, 1999 (1999) resulted in
net income of $20,000 compared to a net loss of $111,000 in the quarter ended
December 31, 1998 (1998).
REVENUES. Oil and gas sales revenue increased $109,000 (42%) in 1999 over 1998.
Oil sales revenue increased $223,000 (84%). A $23,000 decrease due to lower oil
sales volume was more than offset by an increase of $246,000 resulting from an
increase in oil prices. In addition, gas sales revenue increased $1,000 (2%) in
1999 over 1998. A decrease in gas volume sales accounting for a drop of $13,000
again was more than offset by a $14,000 benefit from higher gas prices.
VOLUMES AND PRICES. Total liquid sales decreased 8%, from 24,300 barrels in 1998
to 22,300 barrels in 1999 while there was a 101% jump in the average price per
barrel from $10.94 in 1998 to $21.98 in 1999. Total gas sales decreased 27%,
from 30,700 mcf in 1998 to 22,300 mcf in 1999, while the average price per mcf
increased 40%, from $1.60 in 1998 to $2.24 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, again 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.
14
<PAGE>
EXPENSES. Oil and gas production expense increased $109,000 (42%) in 1999 from
1998. As mentioned above, as oil prices showed signs of stabilizing in the
$20-$25 per barrel price range, management elected to take advantage of the
increased cash flow to perform previously postponed workovers and repairs on
certain Company-operated properties in an effort to maximize production. These
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.
Production taxes increased $19,000 (76%) as a direct result of the increase in
oil and gas sales revenue. The drop in oil and gas sales volumes coupled with
increases in both oil and gas production expense and production taxes caused the
overall lifting cost per equivalent barrel to increase from $9.62 in 1998 to
$15.86 in 1999.
Depreciation, depletion and amortization expense decreased $20,000 (20%) 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 6.6%
in 1998 to 4.7% in 1999. Despite the drop in sales volume, the depletion rate
per equivalent barrel decreased from $3.35 in 1998 to $3.07 in 1999.
Gross general and administrative expense decreased $13,000 (16%) in 1999 from
1998 and net general and administrative expense decreased $15,000 (47%). The
decrease in gross G&A expense is again 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 future oil price levels. This
decrease in net general and administrative expense led to a significant drop in
net general and administrative expense per equivalent barrel from $1.06 in 1998
to $0.64 in 1999.
OTHER INCOME/(EXPENSE). Other income/(expense) increased $2,000 (18%) from a net
expense of $11,000 in 1998 to an $13,000 net expense in 1999. Interest expense
decreased $2,000 (12%) due to a lower average outstanding balance due on the
Company's bank debt in 1999 compared to 1998. This was more than offset by a
$4,000 (67%) decrease in interest and other income.
(Intentionally left blank.)
15
<PAGE>
Liquids and Natural Gas Production, Sales Price and Production Costs
--------------------------------------------------------------------
The following table shows selected financial information for the nine months and
quarter ended December 31 in the current and prior year. Certain prior year
amounts may have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Nine Months Ended Quarters Ended
December 31 December 31
1999 1998 1999 1998
---------- ---------- ---------- -----------
Sales volume
<S> <C> <C> <C> <C>
Oil (barrels) 68,600 75,900 22,300 24,300
Gas (mcf) 78,300 106,900 22,300 30,700
Revenue
Oil $1,283,000 $ 934,000 $ 489,000 $ 266,000
Gas 153,000 175,000 50,000 49,000
---------- ---------- ---------- ----------
1,436,000 1,109,000 539,000 315,000
Total production expense1 968,000 799,000 411,000 283,000
---------- ---------- ---------- ----------
Gross profit $ 468,000 $ 310,000 $ 128,000 $ 32,000
========== ========== ========== ==========
Depletion expense $ 198,000 $ 307,000 $ 81,000 $ 99,000
Average sales price(2)
Oil (per barrel) $ 18.71 $ 12.31 $ 21.98 $ 10.94
Gas (per mcf) $ 1.96 $ 1.64 $ 2.24 $ 1.60
Average production expense(1),(2),(3) $ 11.86 $ 8.53 $ 15.86 $ 9.62
Average gross profit(2),(3) $ 5.73 $ 3.31 $ 4.90 $ 1.07
Average depletion expense(2),(3) $ 2.42 $ 3.28 $ 3.07 $ 3.35
Average general and administrative
expense(2),(3) $ 0.73 $ 0.99 $ 0.64 $ 1.06
- ----------------------------
(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)
16
</TABLE>
<PAGE>
PART II.
OTHER INFORMATION
-----------------
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 nine months ended December 31, 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
- ----------------------------------------
None.
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: February 14, 2000
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000
<PERIOD-START> APR-01-1999 OCT-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 175,000 0
<SECURITIES> 0 0
<RECEIVABLES> 442,000 0
<ALLOWANCES> (49,000) 0
<INVENTORY> 143,000<F1> 0
<CURRENT-ASSETS> 711,000 0
<PP&E> 33,086,000 0
<DEPRECIATION> (31,935,000) 0
<TOTAL-ASSETS> 2,017,000 0
<CURRENT-LIABILITIES> 1,002,000 0
<BONDS> 0 0
0 0
0 0
<COMMON> 17,000 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 2,017,000 0
<SALES> 1,436,000 539,000
<TOTAL-REVENUES> 1,464,000 551,000
<CGS> 968,000<F2> 411,000<F2>
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 42,000 15,000
<INCOME-PRETAX> 177,000 20,000
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 177,000 20,000
<EPS-BASIC> 0.011 0.001
<EPS-DILUTED> 0.011 0.001
<FN>
<F1> AND OTHER CURRENT ASSETS
<F2> OPERATING EXPENSES
</FN>
</TABLE>
