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As filed with the Securities and Exchange Commission on July 24, 1998
Registration No. 333-43919
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Colorado 1301 88-0218499
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer identification no.)
incorporation or organization) classification code number)
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3-5 Audrey Avenue
Oyster Bay, New York 11771
telephone: (516) 922-4170; facsimile: (516) 922-4174
(Address and telephone number
of principal executive offices and principal place of business)
SAM L. BASS, JR.
President and Chief Executive Officer
Environmental Remediation Holding Corporation
3-5 Audrey Avenue
Oyster Bay, New York 11771
telephone: (516) 922-4170; facsimile: (516) 922-4174
(Name, address and telephone number of agent for service)
--------------------
Copies of communications to:
STEPHEN A. WEISS, ESQ.
SPENCER G. FELDMAN, ESQ.
Greenberg Traurig Hoffman Lipoff Rosen & Quentel
The MetLife Building
200 Park Avenue
New York, New York 10166
telephone: (212) 801-9200
facsimile: (212) 801-6400
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION 0F REGISTRATION FEE
Proposed
Proposed Maximum
Aggregate Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Registration
Securities to be Registered Registered Per Unit(1) Price(1) Fee(2)
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Common Stock, par value $.0001 per share... 20,916,402 shares $ 2.06/1.22/0.81 $27,127,823.54 $1,163.75
====================================================================================================================================
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(1) Pursuant to Rule 457(c), the offering price and amount of registration fee
have been calculated based on the average of the quoted high and low prices
of the Registrant's Common Stock in the over-the-counter market on the OTC
Bulletin Board (a) as to 3,698,000 shares, at $2.06 per share on January 2,
1998, the date prior to the filing of the Registration Statement, (b)
as to 12,758,228 shares, at $1.22 per share on April 8, 1998, the date
prior to the filing of Amendment No. 1 to the Registration Statement and
(c) as to 4,534,374 shares, at $0.81 per share on July 9, 1998, the date
prior to the filing of Amendment No. 2 to the Registration Statement.
(2) A registration filing fee of $6,852.01 has previously been paid. A wire
transfer in the amount of $1,163.75, representing the balance of the total
registration filing fee, accompanies this Amendment No. 2 to the
Registration Statement.
--------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 24, 1998
PROSPECTUS
Environmental Remediation Holding Corporation
--------------------
This Prospectus relates to an aggregate of up to 20,916,402 shares (the
"Shares") of common stock, par value $.0001 per share (the "Common Stock"), of
Environmental Remediation Holding Corporation, a Colorado corporation (the
"Company"), which may be sold from time to time by the persons and entities
listed as selling shareholders herein (the "Selling Shareholders"). A maximum of
3,723,800 shares of Common Stock offered hereby are issuable by the Company to
the investors listed in the Securities Purchase Agreement (the "1997
Investors"), pursuant to a Securities Purchase Agreement, dated as of October
15, 1997 (the "Securities Purchase Agreement"), upon the conversion of the
Company's 5.5% convertible senior subordinated secured notes due 2002 (the "1997
Notes") (at a base conversion rate of $1.25 per share, subject to certain
limited conditions) and the exercise of its warrants to purchase Common Stock
(the "1997 Warrants") (at an exercise price of $2.83 per share) held by the 1997
Investors. The maximum number of shares of Common Stock which may be issued by
the Company upon conversion of the 1997 Notes and the exercise of the 1997
Warrants is 3,440,000 shares and 283,800 shares, respectively. Because the
conversion rate of the 1997 Notes is based in part on future average trading
prices of the Common Stock, the number of shares which may actually be sold
pursuant to this Prospectus could differ significantly. For example, in the
event a notice of election to convert all the 1997 Notes were to have been
received on April 8, 1998, the lowest applicable conversion rate would have been
$.96 per share (80% of the average share price for the five consecutive trading
days preceding such date), resulting in a total of 3,723,800 shares of Common
Stock issuable upon conversion (including 283,800 shares into which the 1997
Warrants are exercisable), subject to certain conditions. The 1997 Investors
acquired the 1997 Notes and 1997 Warrants in a private placement from October to
December 1997.
A maximum of 1,140,000 shares of Common Stock offered hereby are
issuable in tranches by the Company to Kingsbridge Capital Limited, a British
Virgin Islands company ("Kingsbridge"), which may receive such shares pursuant
to a Private Equity Line of Credit Agreement, dated as of March 23, 1998 (the
"Kingsbridge Investment Agreement"). The purchase price of the shares of Common
Stock issuable pursuant to the Kingsbridge Investment Agreement is based on
future market prices at the time the shares are purchased and sold. The timing
of purchases and the amount of Common Stock sold to Kingsbridge will be
determined by the Company. Upon each purchase and sale of shares, the Company
will supplement this Prospectus to reflect the amount of shares to be resold by
Kingsbridge. In connection with entering into the Kingsbridge Investment
Agreement, the Company issued to Kingsbridge a three-year warrant to purchase
100,000 shares of Common Stock at an exercise price of $1.20 per share (94% of
the market price calculated as of March 23, 1998), exercisable beginning on
September 21, 1998.
A maximum of 410,000 shares of Common Stock offered hereby are issuable
by the Company to nine "accredited" investors (the "April 1998 Investors")
pursuant to an April 1998 private placement (the "April 1998 Private
Placement"), upon the conversion of the Company's 12% convertible notes which
are due on the earlier of January 1999 or at such time as the Company receives
the first draw-down under the Kingsbridge Investment Agreement (the "April 1998
Notes") (at a base conversion rate of $1.50 per share) and the exercise of its
warrants to purchase Common Stock (the "April 1998 Warrants") (at an exercise
price of $1.25 per share) held by the April 1998 Investors. The maximum number
of shares of Common Stock which may be issued by the Company upon conversion of
the April 1998 Notes and the exercise of the April 1998 Warrants is 200,000
shares and 210,000 shares, respectively.
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A maximum of 1,140,000 shares of Common Stock offered hereby are
issuable by the Company to two "accredited" investors (the "First June 1998
Investors") pursuant to a June 1998 private placement (the "First June 1998
Private Placement"), upon the exercise of its warrants to purchase Common Stock
(the "First June 1998 Warrants") (at an exercise price of $0.75 per share) held
by the First June 1998 Investors.
A maximum of 956,250 shares of Common Stock offered hereby are issuable
by the Company to five "accredited" investors (the "Second June 1998 Investors")
pursuant to a June 1998 private placement (the "Second June 1998 Private
Placement"), upon the conversion of the Company's 12% subordinated convertible
notes, which are due on the earlier of December 1999 or upon the receipt by the
Company of debt or equity or revenue from the sale of leases or other property
of not less than $4 million (the "Second June 1998 Notes") (at a base conversion
rate of $1.00 per share, subject to certain adjustments) and the exercise of its
warrants to purchase Common Stock (the "Second June 1998 Warrants") (at an
exercise price of $0.50 per share for the first two years and $0.85 per share
thereafter) held by the Second June 1998 Investors. The maximum number of shares
of Common Stock which may be issued by the Company upon conversion of the Second
June 1998 Notes and the exercise of the Second June 1998 Warrants is 425,000
shares and 531,250 shares, respectively.
A maximum of 2,028,124 shares of Common Stock offered hereby are
issuable by the Company to one "accredited" investor (the "Third June 1998
Investor") pursuant to a June 1998 private placement (the "Third June 1998
Private Placement"), upon the conversion of the Company's 5.5% convertible notes
due 2000 (the "Third June 1998 Notes") (at a base conversion price of $.72) and
the exercise of its warrants to purchase Common Stock (the "Third June 1998
Warrants") (at an exercise price of $.86 per share) held by the Third June 1998
Investors. The maximum number of shares of Common Stock which may be issued by
the Company upon conversion of the Third June 1998 Notes and the exercise of the
Third June 1998 Warrants is 1,798,124 shares (subject to certain adjustments)
and 230,000 shares, respectively.
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholders. The Company will, however, receive the net proceeds
from any exercise of the warrants issued to the Selling Shareholders. See
"Selling Shareholders."
The Shares may be sold from time to time by the Selling Shareholders on
one or more exchanges or markets in ordinary brokerage transactions, or
otherwise, at then prevailing market prices or in privately negotiated
transactions. See "Plan of Distribution."
The Company's Common Stock is quoted in the over-the-counter market on
the OTC Bulletin Board (the "OTC Bulletin Board") under the symbol "ERHC." The
last sale price of the Common Stock, as quoted on the OTC Bulletin Board on
July 20, 1998, was $.81 per share.
The Company will pay all the expenses, estimated to be approximately
$100,000, in connection with this offering, other than underwriting commissions
and discounts and counsel fees and expenses of the Selling Shareholders. The
Shares are being registered pursuant to registration rights agreements with each
of the Selling Shareholders.
--------------------
The Shares offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 6 hereof.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is July 24, 1998
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes thereto appearing
elsewhere in this Prospectus. The Shares offered hereby involve a high degree of
risk and investors should carefully consider information set forth in "Risk
Factors." In addition, this Prospectus contains "forward looking statements"
that involve risks and uncertainties, including those described under "Risk
Factors." As used in this Prospectus, unless the context otherwise requires, the
term "Company" refers to Environmental Remediation Holding Corporation and its
wholly-owned subsidiary, Bass American Petroleum Company.
The Company
Environmental Remediation Holding Corporation (the "Company") is an
independent oil and gas company formed in 1995 to focus on acquiring and
servicing marginally-producing oil and natural gas properties which contain the
potential for increased value through workovers and secondary recovery
operations utilizing the Company's proprietary horizontal drilling tool. The
Company is also focused on providing a full range of environmental remediation
and "plug and abandonment" services to the oil and gas industry. More recently,
the Company has additionally begun to acquire interests in non-producing oil and
gas properties, particularly high potential international prospects in known
oil-producing areas, which could benefit from the Company's experienced
executive team in managing the exploration of possible reserves. In May 1997,
the Company entered into an exclusive joint venture with the Democratic Republic
of Sao Tome & Principe ("Sao Tome"), a set of islands located in the Gulf of
Guinea off the coast of central West Africa, to manage the exploration,
exploitation and development of the potential oil and gas reserves onshore and
offshore Sao Tome, either through the venture or in collaboration with major
international oil exploration companies. The Company is currently in the initial
phase of exploration and is conducting geophysical, seismic, environmental and
engineering feasibility studies. In April 1998, the Government of Sao Tome
granted approval to the joint venture to proceed with the preparation and sale
of leases of its oil concession rights, which sales are expected to occur in
late 1998. The Company believes that this venture provides it with a significant
foothold in the oil-rich Gulf of Guinea, in which the venture is the largest
single concession holder in the entire Gulf.
The Company has entered into a number of recent transactions in
connection with its workover and recovery operations. In August 1997, the
Company acquired a 37.5% interest in a 49,000 acre natural gas lease, known as
the "Nueces River Prospect," in the Nueces River area of south Texas, one of the
largest producing natural gas areas in the United States. In December 1997, the
Company re-entered the first of two existing shut-in wells on the property, and
expects to ultimately recover up to 5 BCF per well using 5% of the estimated
possible gas in place. The daily production rates from these wells cannot be
determined until the completion and evaluation of the current well testing
program in spring 1998. In addition, the Company acquired in February and March
1997 two leases in oil fields located in Rusk County and Wichita County, Texas.
These oil fields, which together comprise approximately 1,200 acres and 200
wells, have proven reserves totaling 2.5 million barrels of oil, as verified by
Dr. Joseph Shoaf, P.E., an independent reservoir engineer. The Company estimates
that, after reworking the wells using various techniques including its
proprietary drilling tool, these wells could produce from 500 to 800 cumulative
barrels of oil per day. Through December 1997, the Company had recompleted 18
oil wells and is currently producing and selling "test" oil from the Wichita
County field.
The Company also holds interests in oil and natural gas leases in Utah.
In July 1997, the Company entered into a joint venture with MIII Corporation, a
Native American oil and gas company, to workover, recomplete and operate 335
existing oil and gas wells on the Uintah and Ouray Reservation in northeastern
Utah. It is estimated that the first approximately 36 wells will be scheduled
for recompletion and stimulation in early 1998 and the Company believes that,
after initial workover operations are completed, these wells could produce in
excess of 3,900 barrels of oil per day, based on estimates by its co-venturer,
MIII Corporation. These estimates are subject to internal verification by the
Company. In September 1997, the Company acquired net revenue interests ranging
from 80% to 84% (and 100% working interest) in oil and gas properties totaling
13,680 acres, located near the MIII fields,
2
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currently producing approximately 200 barrels of oil per day from eight
producing wells. As of December 31, 1997, these were the Company's only
commercially producing properties, which began realizing revenue for the Company
in November 1997. A 1997 independent reserve report prepared by Sandwood
Consultants indicates that the total ultimate gross recoverable reserves from 23
wells located on these properties total approximately 1.923 million barrels of
oil and 2.075 BCF of natural gas.
Another significant aspect of the Company's current business is
providing environmental remediation services to oil and gas operators. All of
the Company's revenues during the fiscal year ended September 30, 1997 were
attributable to providing these services, which include environmental
engineering, hazardous waste (including naturally occurring radioactive
material) remediation and disposal, oil spill, soil decontamination and
non-hazardous oilfield waste cleanup, as well as "plug and abandonment" of oil
and gas wells, all in accordance with strict federal, state and local
environmental regulations. In April 1997, the Company entered into a master
service agreement with Chevron Oil Company ("Chevron") to rework, in order to
draw additional production from, approximately 400 depleting oil and gas wells
and to remediate and "plug and abandon" these and other wells when depleted, in
Chevron's oil fields in southern Louisiana along the Gulf of Mexico. The Chevron
agreement provides for a three-year work schedule, commencing upon the
completion of the Company's 140 foot "plug and abandonment" barge. The Company
has designed this specialized "plug and abandonment" barge to remediate off
shore well locations and is capable of working in coastal waters as shallow as
19 inches. In addition, through management's extensive relationships in the oil
and gas industry, the Company has obtained a ten-year concession with the Panama
Canal Commission, through a joint venture with Centram Marine Services, S.A., to
supply fuel to tankers and other commercial vessels traversing the Panama Canal.
These operations are expected to commence in mid-1998, provided adequate
financing is secured.
The Company believes that, at its current stage of development, it is
more economical and less speculative to rework and recomplete existing wells
than to drill exploratory wells in search of new oil and gas deposits. Using the
Company's proprietary horizontal drilling tool, known as the BAPCO Tool, the
Company has had, according to internal data, an 80% success ratio in increasing
the level of production from oil and natural gas wells that are suitable for
enhancement of primary recovery by use of the BAPCO tool or candidates for
secondary recovery. The Company believes that the BAPCO Tool serves as a
competitive advantage for securing new workover projects from other oil and gas
operators, for attracting joint venture partners in larger workover contracts in
the United States and internationally and for use on its own oil and gas
properties in Texas and Utah.
Beginning in the early 1990's, both secondary recovery of oil reserves
and environmental remediation of abandoned oil wells have become major items of
interest in the oil and gas industry. According to current industry statistics,
it is estimated that only 7.5% to 15% of total oil reserves are recovered in
primary drilling operations due to the significant incremental costs involved in
exploiting far-reaching reservoirs of an oil formation. Following primary
drilling operations, large independent oil companies have typically outsourced
some or all of the required "plug and abandonment" work to environmental
remediation firms, such as the Company. By conducting enhanced primary or
secondary recovery operations utilizing the BAPCO Tool on the otherwise
abandoned wells, the Company believes that it is able to effectively extend the
economic life of an oil field and increase existing oil recovery by up to 30%,
prior to formal abandonment. The Company, which provides primary and secondary
recovery, "plug and abandonment" operations and environmental remediation
services, believes that, in the United States alone, there are hundreds of oil
and natural gas fields which could benefit from these services.
The Company's goal is to maximize its value through profitable growth
in its oil and gas reserves and production. The Company has taken steps to
achieve this goal through its growth strategy of (i) acquiring
marginally-producing oil and gas properties, at favorable prices, with still
significant resource recovery potential through workovers utilizing the
Company's proprietary drilling technology, (ii) managing the exploration,
exploitation and development of non-producing properties in known oil-producing
areas, such as the Gulf of Guinea in West Africa, with industry or government
3
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partners, and (iii) continuing to pursue environmental remediation service
contracts for oil and gas well rework and "plug and abandonment" services in the
United States and internationally.
The Company's principal executive offices are located at 3-5 Audrey
Avenue, Oyster Bay, New York 11771, and its telephone number is (516) 922-4170.
The Company's main operational facility is located at 1686 General Mouton,
Lafayette, Louisiana 70508, and its telephone number is (318) 264-9657.
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The Offering
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Shares Offered......................................... Up to 20,916,402 shares of Common Stock.
Shares Outstanding:
Before the Offering............................... 24,676,289 shares of Common Stock.
After the Offering................................ Up to 45,592,691 shares of Common Stock,
assuming the full conversion of the Notes
and exercise of the warrants issued to the
Selling Shareholders. See "Selling
Shareholders" for a description of the
conversion rate of the Notes.
Use of Proceeds........................................ Other than the exercise price of the warrants
issued to the Selling Shareholders, the
Company will not receive any proceeds
from the sale of the Shares by the Selling
Shareholders.
Trading Symbol......................................... ERHC
</TABLE>
Risk Factors
An investment in the Shares offered hereby involves a high degree of
risk, including without limitation, the Company's limited operating history,
volatility of oil and natural gas prices, the uncertainty of reserve information
and future net revenue estimates, the Company's concentration in Texas and Utah,
substantial capital requirements, drilling and operating risks, reliance on its
Sao Tome joint venture, risks inherent in international operations, reserve
replacement risk, compliance with governmental and environmental regulations,
and competition. An investment in the Shares offered hereby should be considered
only by investors who can afford the loss of their entire investment. See "Risk
Factors."
4
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Summary Financial Information
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Fiscal Years ended Six Months ended
September 30, March 31,
------------------------------------------------------- ----------------------------
Statement of Operations Data: 1995(1) 1996(2) 1997(3) 1997 1998
---------------- -------------- ---------------- ------------- -----------
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Revenues:
Environmental remediation $ 0 $ 0 $ 108,944 $ 36,944 $ 226,035
services
Crude oil sales 0 0 0 0 265,302
Other income 0 60,477 7,331 6,730 11,490
Cost of sales and expenses:
Environmental remediation
Crude oil
Operating expenses 3,404 789,225 17,029,327 2,285,288 3,632,699
Income before income taxes and
extraordinary item (3,404) (728,748) (16,913,052) (2,241,614) (3,129,872)
Provision (benefit) for
income taxes 0 0 0 0 0
Net income (loss) (4) (3,404) (728,748) (16,913,052) (2,241,614) (3,129,872)
Net income (loss) per share (0.01) (0.30) (1.61) (0.59) (0.13)
Weighted average Common Shares outstanding 398,643 2,469,511 10,500,293 3,804,209 24,255,383
Balance Sheet Data (at end of period):
Property and equipment, net $3,477,000 $ 4,351,185 $ 7,056,629
Total assets 3,477,000 4,894,936 9,874,767
Total liabilities 6,730 1,748,376 6,768,708
Stockholders' equity 3,470,270 1,146,560 3,106,059
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(1) Reflects the operations of Environmental Remediation Funding Corporation
("ERFC"), the Company's predecessor, from the date of its incorporation on
September 5, 1995. See "The Company."
(2) The Company acquired 100% of the issued and outstanding common stock of
ERFC, effective August 19, 1996, in a reverse triangular merger, which has
been accounted for as a reorganization of ERFC. See Note 1 to Notes to
Consolidated Financial Statement.
(3) On April 9, 1997, the Company acquired 100% of the issued and outstanding
common stock of Bass American Petroleum Company, which was accounted for as
a purchase. See "The Company."
(4) The net cash operating loss of the Company was $1,283,900 and $83,700 for
the fiscal years ended September 30, 1997 and 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
5
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RISK FACTORS
The Shares offered hereby involve a high degree of risk. Accordingly,
in analyzing an investment in these Shares, prospective investors should
carefully consider, along with the other matters referred to herein, the
following risk factors. No investor should participate in this offering unless
such investor can afford a complete loss of his investment.
Limited Operating History; Significant Net Loss
The Company, which was formed in September 1995, has a limited
operating history upon which investors may base their evaluation of its
performance. The Company has acquired substantially all of its oil and gas
properties within the past year. As a result of the Company's recent formation
and the brief operating history of its properties, the operating results from
the Company's operation of its properties may not be indicative of future
results that may be obtained by the Company. For the six months ended March
31, 1998 and the fiscal year ended September 30, 1997, the Company had total
revenues of $502,827 and $116,275, respectively, and net losses of $3,129,872
and $16,913,052, respectively. As of March 31, 1998 and September 30, 1997,
the Company had stockholders' equity of $3,106,059 and $1,146,560 respectively,
and working capital deficits of $2,081,723 and $1,204,925, respectively. There
can be no assurance that the Company will generate revenues or production
attributable to its oil and gas properties. In addition, in the event the
Company does not attain certain minimum production levels over specified
timeframes of its oil and gas properties, the Company could forfeit certain
leases without receiving any revenues therefrom. Any future growth of the
Company's oil and natural gas reserves, production and operations could place
significant demands on the Company's financial, operational and administrative
resources.
Volatility of Oil and Natural Gas Prices
The Company's revenues, operating results, profitability and future
growth and the carrying value of its oil and natural gas properties will be
substantially dependent upon the prices received for its oil and natural gas.
Historically, the markets for oil and natural gas have been volatile and such
volatility may continue or recur in the future. Various factors beyond the
control of the Company will affect prices of oil and natural gas, including the
worldwide and domestic supplies of oil and natural gas, the ability of the
members of the Organization of Petroleum Exporting Countries ("OPEC") to agree
to and maintain oil price and production controls, political instability or
armed conflict in oil or natural gas producing regions, the price and level of
foreign imports, the level of consumer demand, the price, availability and
acceptance of alternative fuels, consumer demand, the price, availability and
acceptance of alternative fuels, the availability of pipeline capacity, weather
conditions, domestic and foreign governmental regulations and taxes and the
overall economic environment. Any significant decline in the price of oil or
natural gas would adversely affect the Company's revenues and operating income
and could require an impairment in the carrying value of its oil and natural gas
properties.
Uncertainty of Reserve Information and Future Net Revenue Estimates
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and their values, including many factors
beyond the control of the Company. Estimates of proved undeveloped reserves and
reserves recoverable through enhanced oil recovery techniques are by their
nature uncertain. The reserve information set forth in this Prospectus
represents estimates only. Although the Company believes such estimates as to
its properties to be reasonable, reserve estimates are imprecise and should be
expected to change as additional information becomes available.
Estimates of oil and natural gas reserves, by necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and of future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and excise
taxes, development costs and workover and remedial costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates of the
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economically recoverable qualities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom may
vary substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves. Actual production,
revenues and expenditures with respect to the Company's reserves will likely
vary from estimates, and such variances may be material.
Substantial Capital Requirements
The Company's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
its oil and natural gas properties. Historically, the Company has funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements. The Company believes that it will require a combination
of additional financing and cash flow from operations to implement future
development plans. Although Company management is exploring the private and/or
public equity markets as potential capital sources in connection with its
development plans, the Company currently does not have any binding arrangements
with respect to, or sources of, additional financing, and there can be no
assurance that any additional financing will be available to it on reasonable
terms or at all. Future cash flows and the availability of financing will be
subject to a number of variables, such as the level of production from existing
wells, prices of oil and natural gas and success in locating and producing new
reserves. To the extent that future financing requirements are satisfied through
the issuance of equity securities, shareholders of the Company may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on operations. If revenue were to decrease as a result of lower oil
and natural gas prices, decreased production or otherwise, and the Company had
no availability under a bank arrangement or other credit facility, the Company
could have a reduced ability to execute current development plans, replace
reserves or to maintain production levels, any of which could result in
decreased production and revenue over time.
Concentration in Texas and Utah
The Company's properties in Texas and Utah constitute all of the
Company's existing inventory of producing properties and drilling locations.
Substantially all of the Company's 1998 budget is associated with drilling in
these regions. There can be no assurance that the Company's operations in these
regions will yield positive economic returns. Failure of the properties to yield
significant quantities of economically attractive reserves and production would
have a material adverse impact on the Company's future financial condition and
results of operations.
Drilling and Operating Risks
Oil and natural gas drilling activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. There can be no assurance that wells drilled by the Company will be
productive or that the Company will recover all or any portion of its drilling
costs. Drilling for oil and natural gas may involve unprofitable efforts, not
only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. The cost of drilling, recompleting and operating wells is often
uncertain. Drilling operations may be curtailed, delayed or canceled as a result
of numerous factors, many of which will be beyond the Company's control,
including economic conditions, title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment and services. Future drilling activities may not be successful and, if
unsuccessful, such failure may have a material adverse effect on future results
of operations and financial condition.
Potential Risks of Insufficient Insurance Coverage
Oil and natural gas operations are subject to hazards and risks
inherent in drilling for the producing and transporting oil and natural gas,
such as fires, natural disasters, explosions, encountering formations with
abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of
which can result in the loss of hydrocarbons, environmental pollution, personal
injury claims and other damage to properties. As protection against operating
hazards, the Company currently maintains insurance coverage against some, but
7
<PAGE>
not all, potential losses. The Company may elect to self-insure in circumstances
in which management believes that the cost of insurance, although available, is
excessive relative to the risks presented. The occurrence of an event that is
not covered, or not fully covered, by third-party insurance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Reliance on Sao Tome Joint Venture
Management of the Company expects that activities conducted pursuant to
its Sao Tome joint venture agreement and revenues therefrom will account for a
significant portion of the activities and revenues of the Company in the future.
Pursuant to the terms of the agreement, Sao Tome has the right to terminate the
agreement in the event the Company fails to make the remaining concession fee
payment of $2,000,000 at the time Sao Tome determines, and the United Nations
accepts, the 200 mile exclusive economic zone boundaries (expected to be by
March 1998) or fails to timely commence the orderly development of the national
oil and gas joint venture company. There can be no assurance that the operations
under the joint venture, even if the remaining concession fee payment is made,
as to which there can be no assurance, will be conducted on a profitable basis.
Risks Inherent in International Operations
The Company's foreign operations are subject to various risks
associated with doing business overseas, such as the possibility of armed
conflict and civil disturbance, the instability of foreign economies, currency
fluctuations and devaluation, adverse tax policies and governmental activities
that may limit or disrupt markets, restrict payments or the movement of funds or
result in the deprivation of contract rights or the expropriation of property.
Additionally, the ability of the Company to compete overseas may be adversely
affected by foreign governmental regulations that encourage or mandate the
hiring of local contractors, or by regulations that require foreign contractors
to employ citizens of, or purchase supplies from, a particular jurisdiction. The
Company is subject to taxation in many jurisdictions, and the final
determination of its tax liabilities involves the interpretation of the statutes
and requirements of various domestic and foreign taxing authorities. Foreign
income tax returns of foreign subsidiaries and related entities are routinely
examined by foreign tax authorities.
8
<PAGE>
The Company has also encountered other international risks in
connection with its joint venture with Sao Tome. The Company has been informed
that each of the countries of Gabon, Equatorial Guinea and Cameroon claim a
200-mile economic zone which results in undefined borders or common areas in
which production would be shared proportionally. In 1996, agencies of the United
Nations and a multicountry commission began to study the respective countries'
border lines and common area rights, although there has been no resolution to
date. See "Business-Managing Exploratory Activities."
Material Foreign Currency Risks
Revenues from the Company's operations in Sao Tome and
substantially all raw material purchases for use in Sao Tome will be U.S.
dollar-denominated and managed through the Company's Louisiana operational
facility. The Company believes that it will not be significantly affected by
exchange rate fluctuations in local African currencies relative to the U.S.
dollar. The Company believes that the effects of such fluctuations will be
limited to wages for local laborers and operating supplies, neither of which is
expected to be material to the Company's results of operations when the joint
venture begins more substantial operations in Sao Tome. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Overview."
Reserve Replacement Risk
The future success of the Company will depend in large part upon its
ability to find, develop or acquire additional oil and natural gas reserves that
are economically recoverable. The Company's proved reserves will generally
decline as reserves are depleted, except to the extent that the Company conducts
successful exploration or development activities or acquires properties
containing proved reserves. As of December 31, 1997, approximately 65.6% of the
Company's total proved reserves were undeveloped. In order to increase reserves
and production, the Company must continue development and exploitation drilling
programs or undertake other replacement activities. Current development plans
include increasing the Company's reserve base through continued drilling,
development and exploitation of existing properties of the Company. There can be
no assurance, however, that planned development and exploitation projects will
result in significant additional reserves or that the Company will have success
drilling productive wells at anticipated finding and development costs.
Compliance with Governmental Regulations
Oil and natural gas operations are subject to extensive federal, state
and local laws and regulations relating to the exploration for, and the
development, production and transportation of, oil and natural gas, as well as
9
<PAGE>
safety matters, which may be changed from time to time in response to economic
or political conditions. Matters subject to regulation by federal, state and
local authorities include permits for drilling operations, road and pipeline
construction, reports concerning operations, the space of wells, unitization and
pooling of properties, taxation and alterations to the Company's development
plans could have a material adverse effect on operations. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas.
Although the Company believes that it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company cannot predict the ultimate cost of compliance with these requirements
or their effect on operations. Significant expenditures may be required to
comply with governmental laws and regulations and may have a material adverse
effect on the Company's financial condition and results of operations. See
"Business-Governmental Regulation."
Compliance with Environmental Regulations
The Company's workover and environmental remediation services routinely
involve the handling of significant amounts of waste materials, some of which
are classified as hazardous substance. The Company's operations and facilities
are subject to numerous state and federal environmental laws, rules and
regulations, including, without limitation, laws concerning the containment and
disposal of hazardous materials, oilfield waste and other waste materials, the
use of underground storage tanks and the use of underground injection wells.
Laws protecting the environment have generally become more stringent than in the
past and are expected to continue to do so. Environmental laws and regulations
typically impose "strict liability," which means that in some situations the
Company could be exposed to liability for cleanup costs and other damages as a
result of conduct of the Company that was lawful at the time it occurred or
conduct of, or conditions caused by, others. Cleanup costs and other damages
arising as a result of environmental laws, and costs associated with changes in
environmental laws and regulations, could be substantial and could have a
material adverse effect on the Company's financial condition.
Changes in federal and state environmental regulations may also
negatively impact oil and natural gas exploration and production companies,
which in turn could have a material adverse effect on the Company. For example,
legislation has been proposed from time to time in Congress which would
reclassify oil and natural gas production wastes as "hazardous wastes." If
enacted, such legislation could dramatically increase operating costs for
domestic oil and natural gas companies, and this could reduce the market for the
Company's services by making many wells and/or oilfields uneconomical to
operate. To date, such legislation has not made significant progress toward
enactment. See "Business - Environmental Regulation and Claims."
Dependence on Key Personnel
The Company's success is highly dependent on Sam L. Bass, Jr., the
Company's President and Chief Executive Officer, and James R. Callender, Sr.,
its Chief Operating Officer, and a limited number of other senior management and
technical personnel. Loss of the services of any of those individuals could have
a material adverse effect on the Company's operations. As of March 20, 1998,
none of the Company's executive officers is covered by a long-term employment
agreement and the Company does not possess any key-person life insurance
policies on the lives of any such officers. Furthermore, demands on the time of
some of its executive officers in pursuing other businesses, while not
competitive with the business of the Company, could nevertheless reduce the time
available to manage the business of the Company. See "Management."
Control by Existing Shareholders
Sam L. Bass, Jr., the Company's President and Chief Executive Officer,
and the other officers and directors of the Company beneficially own
approximately 35.0% and 8.0%, respectively, of the outstanding Common Stock on
March 31, 1998. Accordingly, Mr. Bass and such persons may be able to
control the outcome of
10
<PAGE>
shareholder votes, including votes concerning the election of directors, the
adoption or amendment of provisions in the Company's Certificate of
Incorporation or By-laws and the approval of mergers and other significant
corporate transactions.
Competition
The Company will operate in the highly competitive areas of oil and
natural gas acquisition, exploration and production with other companies, most
of which have substantially larger financial resources, operations, staffs and
facilities. In seeking to acquire desirable producing properties or new leases
for future exploration and in marketing its oil and natural gas production, the
Company will face intense competition from both major and independent oil and
natural gas companies. Many of these competitors have financial and other
resources substantially in excess of those available to the Company. The effects
of this highly competitive environment could have a material adverse effect on
the Company. In addition, although the number of available rigs has materially
decreased over the past ten years, the workover and drilling markets remain very
competitive. The number of rigs continues to exceed demand, resulting in severe
price competition. Many of the total available contracts are currently awarded
on a bid basis, which further increases competition based on price. In all of
the Company's market areas, competitive factors also include the availability,
condition and type of equipment necessary to meet both special and general
customer needs, the availability of trained personnel possessing the required
specialized skills and overall quality of service and safety record. See
"Business - Competitive Conditions."
Acquisition Risks
The Company has grown primarily through the acquisition, development
and exploitation of oil and natural gas properties. Although the Company expects
to concentrate on current activities in the near future, the Company may
evaluate and pursue from time to time acquisitions in Texas, Utah and other
areas that provide attractive investment opportunities for the addition of
production and reserves and that meet selection criteria. The successful
acquisition of producing properties and undeveloped acreage requires an
assessment of recoverable reserves, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and other factors that will
be beyond the Company's control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with such an assessment, the
Company will perform a review of the subject properties it believes will be
generally consistent with industry practices. This review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. The Company will generally assume preclosing liabilities, including
environmental liabilities, and will generally acquire interests in the
properties on an "as is" basis. With respect to its acquisitions to date, the
Company does not have any material commitments for capital expenditures to
comply with existing environmental requirements. There can be no assurance that
any acquisitions will be successful. Any unsuccessful acquisition could have a
material adverse effect on the Company.
Absence of Dividends on Common Stock
The Company has never declared or paid cash dividends on its Common
Stock and anticipates that future earnings, if any, of the Company will be
retained for development of its business. See "Dividend Policy."
Effect of Sales of Shares on Market Price
The Shares represent approximately 87.6% of the total number of shares
of Common Stock outstanding on March 31, 1998. Sales of substantial amounts
of Shares pursuant to this Prospectus, or otherwise, could adversely affect the
market price of the Common Stock.
11
<PAGE>
Possible Stock Price Volatility
The market price of the Common Stock and the price at which the Company
may sell securities in the future could be subject to large fluctuations in
response to changes and variations in the Company's operating results,
litigation, general market conditions, the prices of oil and natural gas, the
liquidity of the Company and its ability to raise additional funds the number of
market makers for the Common Stock and other factors. In the event that the
Company's operating results are below the expectations of public market analysts
and investors in one or more future periods, it is likely that the price of the
Common Stock will be materially adversely affected. In addition, the stock
market has recently experienced significant price and value fluctuations that
have particularly affected the market prices of equity securities of many energy
companies and that often have been unrelated to the operating performance of
such companies. General market fluctuations may also adversely affect the market
price of the Shares.
Forward-Looking Statements
This Prospectus 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 facts, included or incorporated by reference in
this Prospectus which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
wells to be drilled or reworked, oil and gas prices and demand, exploitation and
exploration prospects, development and infill potential, drilling prospects,
expansion and other development trends of the oil and gas industry, business
strategy, production of oil and gas reserves, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, including the
risk factors discussed in this Prospectus; general economic, market or business
conditions; the business opportunities (or lack thereof) that may be presented
to and pursued by the Company; changes in laws or regulations; and other
factors, most of which are beyond the control of the Company. Consequently, all
of the forward-looking statements made in this Prospectus are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations. The Company assumes no
obligation to update any such forward-looking statements.
12
<PAGE>
THE COMPANY
The Company is an independent oil and gas company formed in 1995 to
focus on acquiring and servicing marginally-producing oil and natural gas
properties which contain the potential for increased value through workovers and
secondary recovery operations utilizing the Company's proprietary
fracture-enhancing horizontal drilling tool. The Company is also focused on
providing a full range of environmental remediation and "plug and abandonment"
services to the oil and gas industry. More recently, the Company has
additionally begun to acquire interests in non-producing oil and gas properties,
particularly high potential international prospects in known oil-producing
areas, which could benefit from the Company's experienced executive team in
managing the exploration of possible reserves.
The Company's predecessor, Environmental Remediation Funding
Corporation ("ERFC"), was incorporated under the laws of the State of Delaware
in September 1995. In August 1996, the stockholders of ERFC exchanged all of
their shares of ERFC for 2,433,950 authorized and unissued shares of common
stock, representing 87.2% of such then outstanding shares, of Regional Air Group
Corporation ("RAIR"), a Colorado corporation. RAIR was a publicly-owned
corporation, which had ceased operations and as a result had only nominal assets
and liabilities. ERFC was then merged with and into RAIR. Following the
acquisition of control, the stockholders of RAIR approved the change in the
Company's name to Environmental Remediation Holding Corporation. The Company
currently contemplates reincorporating in the State of Delaware and changing its
corporate name to better reflect its primary focus in early 1998.
In April 1997, the Company acquired all of the outstanding capital
stock of Bass American Petroleum Company ("BAPCO"), a privately-held company
controlled by Sam L. Bass, Jr., who was then the Company's Chairman of the
Board, President and Chief Executive Officer. Through this acquisition, the
Company acquired, among other assets, ownership of all rights to the BAPCO Tool
and assignment of the Chevron master service agreement.
The 1997 Private Placement
From October to December 1997, the Company raised gross proceeds of
$4,300,000 in a private placement of the Company's 5.5% convertible senior
subordinated secured notes due 2002 (the "1997 Notes") and warrants to purchase
Common Stock (the "1997 Warrants") to a limited number of "accredited"
institutional investors. The maximum number of shares of Common Stock which may
be issued by the Company upon the conversion of the 1997 Notes (at a base
conversion rate of $1.25 per share, subject to certain limited conditions) and
the exercise of the Warrants (at an exercise price of $2.83 per share) is up to
3,440,000 shares and 283,800 shares, respectively. This Prospectus covers the up
to 3,723,800 total shares of Common Stock issuable upon the conversion of the
1997 Notes and the exercise of the 1997 Warrants. See "Selling Shareholders."
The Company used a portion of the total net proceeds of approximately $3,800,000
of the private placement to make an initial concession fee payment of $2,000,000
in connection with its Sao Tome joint venture. See "Business - Managing
Exploratory Activities."
The Kingsbridge Equity Line of Credit Agreement
In March 1998, the Company entered into a Private Equity Line of Credit
Agreement (the "Kingsbridge Investment Agreement") with Kingsbridge Capital
Limited, a British Virgin Islands company ("Kingsbridge"), pursuant to which the
Company has the right to receive up to $10,000,000 in equity financing from the
sale of its Common Stock in tranches to Kingsbridge. Through the Company's
exercise of put options, Kingsbridge is required to purchase, and the Company is
required to sell, subject to certain closing conditions and limitations on the
timing of purchases and amount of Common Stock to be sold with respect to
exercises of individual put options, at least $3,000,000 in shares of Common
Stock at a purchase price equal to 79% of the average of the lowest prices of
the Common Stock on the trading day on which notice of exercise of the put
option is given and on the one trading day prior, and the two trading days
following, such put option exercise notice. The minimum market price for sales
of shares is $1.00 per share. At a market price of $1.00, the maximum number of
shares of Common Stock which may be issued by the Company upon the exercise of
the put options is 12,658,228 shares. Notwithstanding the foregoing, the maximum
number of shares issuable to Kingsbridge shall not exceed 19.9% of the
outstanding shares of Common Stock at the time of such exercise(s). In
connection with entering into the Kingsbridge Investment Agreement, the Company
issued to Kingsbridge a three-year warrant to purchase 100,000 shares of Common
Stock at an exercise price of $1.20 per share (94% of the market price
calculated as of March 23, 1998), exercisable beginning on September 21, 1998
(the "Kingsbridge Warrant"). As a condition precedent to the purchase and sale
of shares pursuant to the Kingsbridge Investment Agreement, among others, the
Company is required to register with the Commission all of the shares of Common
Stock subject to the put option, as well as those into which the Kingsbridge
Warrant is exercisable, for resale by Kingsbridge.
<PAGE>
The April 1998 Financing
In April 1998, the Company raised gross proceeds of $300,000 in a
private placement of the Company's 12% convertible notes, which are due on the
earlier of January 1999 or at such time as the Company receives the first
draw-down under the Kingsbridge Investment Agreement (the "April 1998 Notes"),
and warrants to purchase shares of Common Stock (the "April 1998 Warrants") to
nine "accredited" investors. The maximum number of shares of Common Stock which
may be issued by the Company upon the conversion of the April 1998 Notes (at a
base price of $1.50 per share), subject to certain adjustments, and the exercise
of the April 1998 Warrants (at an exercise price of $1.25 per share) is 200,000
shares and 210,000 shares, respectively. This Prospectus covers the 410,000
shares of Common Stock issuable upon the conversion of the April 1998 Notes and
the exercise of the April 1998 Warrants. See "Selling Shareholders." The Company
used the net proceeds of this financing for oil and gas-related production
activities and for working capital. See "Business - Workover and Recovery
Activities."
The First June 1998 Financing
In June 1998, the Company raised gross proceeds of $175,000 in a
private placement of warrants to purchase shares of Common Stock (the "First
June 1998 Warrants") to two "accredited" investors. The maximum number of shares
of Common Stock which may be issued upon the exercise of the First June 1998
Warrants (at an exercise price of $.75) is 1,140,000 shares. This Prospectus
covers the 1,140,000 shares of Common Stock issuable upon the exercise of the
June Warrants. See "Selling Shareholders." The Company used the net proceeds of
this financing for working capital.
The Second June 1998 Financing
In June 1998, the Company raised gross proceeds of $425,000 in the
private placement of the Company's 12% subordinated convertible notes, which are
due on the earlier of December 1999 or upon the receipt by the Company of debt
or equity or revenue from the sale of leases or other property of not less than
$4 million (the "Second June 1998 Notes") and warrants to purchase shares of
Common Stock (the "Second June 1998 Warrants") to five "accredited" investors.
The maximum number of shares of Common Stock which may be issued by the Company
upon the conversion of the Second June 1998 Notes (at a base conversion price of
$1.00 per share), subject to certain adjustments, and the exercise of the Second
June 1998 Warrants (at an exercise price of $.50 per share for the first two
years and $.85 per share thereafter, both subject to adjustment) is 425,000
shares and 531,250 shares, respectively. This Prospectus covers the 956,250
shares of Common Stock issuable upon the conversion of the Second June 1998
Notes and the exercise of the Second June 1998 Warrants. See "Selling
Shareholders." The Company used the net proceeds of this financing for working
capital.
The Third June 1998 Financing
In June 1998, the Company raised gross proceeds of $1,250,000 in a
private placement of the Company's 5.5% convertible notes due 2000 (the "Third
June 1998 Notes") and warrants to purchase shares of Common Stock (the "Third
June 1998 Warrants") to one "accredited" investor. The conversion price is
calculated pursuant to a formula as the lower of the average closing bid price
per share for the five days prior to the closing (which was $.72) or 80% of the
average closing bid price per share for the five days prior to notice of intent
to convert. In the event that the lower price were the average closing bid price
for the five days prior to the closing, the maximum number of shares of Common
Stock which may be issued by the Company upon conversion of the Third June 1998
Notes would be 1,798,124 shares. The maximum number of shares of Common Stock
which may be issued by the Company upon the exercise of the Third June 1998
Warrants (at an exercise price of $.86) is 230,000 shares. This Prospectus
covers the 2,028,124 shares of Common Stock issuable upon the conversion of the
Third June 1998 Notes and the exercise of the Third June 1998 Warrants. See
"Selling Shareholders." The Company utilized a significant portion of the net
proceeds of this financing to make a concession fee payment of $1,000,000
towards the $3,000,000 then due in connection with its Sao Tome joint venture.
See "Business - Managing Exploratory Activities."
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<PAGE>
USE OF PROCEEDS
The 3,723,800 Shares covered by this Prospectus relating to the 1997
Private Placement are issuable upon the conversion of the 1997 Notes and the
exercise of the 1997 Warrants. If all such 1997 Warrants covered by this
Prospectus are exercised in full at their stated exercise prices, the Company
will receive gross proceeds of approximately $803,154.
The 100,000 Shares covered by this Prospectus which are issuable to
Kingsbridge upon the exercise of the Kingsbridge Warrant have an exercise price
of $1.20 per share, or an aggregate of $120,000.
The 410,000 Shares covered by this Prospectus relating to the April
1998 Private Placement are issuable upon the conversion of the April 1998 Notes
and the exercise of the April 1998 Warrants. If the April 1998 Warrants to
purchase 210,000 shares are exercised in full at their stated exercise prices,
the Company will receive gross proceeds of $262,500.
The 1,140,000 Shares covered by this Prospectus which are issuable
to the First June 1998 Investors upon the exercise of the First June 1998
Warrants have an exercise price of $.75 per share, or an aggregate of $855,000.
The 956,250 Shares covered by this Prospectus relating to the Second
June 1998 Private Placement are issuable upon the conversion of the Second June
1998 Notes and the exercise of the Second June 1998 Warrants. If the Second June
1998 Warrants to purchase 531,250 shares are exercised in full at their stated
exercise prices, the Company will receive gross proceeds of $265,625.
The 230,000 shares covered by this Prospectus relating to the Third
June 1998 Private Placement are issuable upon the conversion of the Third June
1998 Notes and the exercise of the Third June 1998 Warrants. If the Third June
1998 Warrants to purchase 230,000 shares are exercised in full at their stated
exercise prices, the Company will receive gross proceeds of $198,582.
Expenses expected to be incurred by the Company in connection with this
registration are estimated at approximately $100,000. The Selling Shareholders
will pay all of their underwriting commissions and discounts and counsel fees
and expenses in connection with the sale of the Shares. See "Plan of
Distribution." Proceeds to the Company from the exercise of the warrants issued
to the Selling Shareholders will be available for working capital and general
corporate purposes. No assurance can be given, however, as to when, if ever, any
or all of such Warrants will be exercised.
The Company will not receive any proceeds from the sale of the Shares
by the Selling Shareholders. See "Selling Shareholders".
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March
31, 1998 was $0.55 per share. Since the shares are being offered by the Selling
Shareholders, there is no increase in net tangible book value per share to
existing shareholders by virtue of the sale alone. Without taking into account
any changes in net tangible book value after March 31, 1998, other than to give
effect to the conversion of the Notes and the exercise of the Warrants and the
Kingsbridge Warrant to purchase up to all 3,823,800 shares of Common Stock which
are being offered hereby, the Company will have an aggregate of up to 28,682,089
shares of Common Stock outstanding with a net tangible book value of
approximately $0.64 per share. Assuming a sale at the anticipated offering price
set forth below, this will represent an immediate dilution of $0.67 per share to
new shareholders. The following table illustrates this dilution per share:
<TABLE>
<CAPTION>
<S> <C> <C>
Anticipated offering price per share................................. $1.31
Net tangible book value per share
before Offering (1)......................................... $0.55
Increase attributable to the conversion of Notes
and exercise of Warrants.................................... 0.09
Net tangible book value per share after Offering
and conversion of Notes and exercise of Warrants..................... $0.64
Dilution per share to new shareholders(2)............................ $0.67
</TABLE>
- -------------
(1) Net tangible book value per share is determined by dividing the number of
shares of Common Stock outstanding into the sum of total tangible assets of
the Company less total liabilities.
(2) Dilution is determined by subtracting net tangible book value per share
after the offering from the amount paid by a new shareholder for a share of
Common Stock.
14
<PAGE>
PRICE RANGE FOR COMMON STOCK
Shares of the Company's Common Stock have been traded on the OTC
Bulletin Board under the symbol "ERHC" since August 23, 1996. The following
table sets forth the high and low sales prices of the Common Stock as quoted on
the OTC Bulletin Board for the periods indicated. The high and low sales prices
for the Common Stock below reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year 1996
4th Quarter (August 23 - September 30, 1996) ........................... $5-3/4 $5-1/4
Fiscal Year 1997
1st Quarter (October 1 - December 31, 1996)............................. 5-1/2 1/4
2nd Quarter (January 1 - March 31, 1997)................................ 2-1/2 5/16
3rd Quarter (April 1 - June 30, 1997)................................... 5/8 7/32
4th Quarter (July 1 - September 30, 1997)............................... 5-3/8 5/16
Fiscal Year 1998
1st Quarter (October 1 - December 31, 1997)............................. 3-3/8 1-3/8
2nd Quarter (January 1 - March 31, 1998) ............................... 2-3/16 7/8
3rd Quarter (April 1 - June 30, 1998) .................................. 1-3/4 41/64
</TABLE>
See the cover page of this Prospectus for a recent sale price of the
Common Stock as quoted by the OTC Bulletin Board.
As of March 31, 1998, there were approximately 1,967 shareholders of
record of the Common Stock.
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to such dividends as
may be declared by the Board of Directors and paid out of funds legally
available therefor. The Company has never paid any dividends on the Common
Stock. The Company intends to retain earnings, if any, to finance the
development and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Future determinations regarding the payment
of dividends is subject to the discretion of the Board of Directors and will
depend upon a number of factors, including future earnings, capital
requirements, financial condition and the existence or absence of any
contractual limitations on the payment of dividends.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data of the Company presented below as of
September 30, 1995, 1996 and 1997, have been derived from the Consolidated
Financial Statements of the Company, which Consolidated Financial Statements
have been audited by Durland & Company, CPAs, P.A., independent public
accountants, and are included elsewhere in this Registration Statement. The data
set forth below should be read in conjunction with the Company's Consolidated
Financial Statements, related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Fiscal Years ended Six Months ended
September 30, March 31,
------------------------------------------------------- ----------------------------
Statement of Operations Data: 1995(1) 1996(2) 1997(3) 1997 1998
---------------- -------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Environmental remediation $ 0 $ 0 $ 108,944 $ 36,944 $ 226,035
services
Crude oil sales 0 0 0 0 265,302
Other income 0 60,477 7,331 6,730 11,490
Cost of sales and expenses:
Environmental remediation
Crude oil
Operating expenses 3,404 789,225 17,029,327 2,285,288 3,632,699
Income before income taxes and
extraordinary item (3,404) (728,748) (16,913,052) (2,241,614) (3,129,872)
Provision (benefit) for
income taxes 0 0 0 0 0
Net income (loss) (4) (3,404) (728,748) (16,913,052) (2,241,614) (3,129,872)
Net income (loss) per share (0.01) (0.30) (1.61) (0.59) (0.13)
Weighted average Common Shares outstanding 398,643 2,469,511 10,500,293 3,804,209 24,255,383
Balance Sheet Data (at end of period):
Property and equipment, net $3,477,000 $ 4,351,185 $ 7,056,629
Total assets 3,477,000 4,894,936 9,874,767
Total liabilities 6,730 1,748,376 6,768,708
Stockholders' equity 3,470,270 1,146,560 3,106,059
</TABLE>
- --------------------
(1) Reflects the operations of Environmental Remediation Funding Corporation
("ERFC"), the Company's predecessor, from the date of its incorporation on
September 5, 1995. See "The Company."
(2) The Company acquired 100% of the issued and outstanding common stock of
ERFC, effective August 19, 1996, in a reverse triangular merger, which has
been accounted for as a reorganization of ERFC. See Note 1 to Notes to
Consolidated Financial Statement.
(3) On April 9, 1997, the Company acquired 100% of the issued and outstanding
common stock of Bass American Petroleum Company, which was accounted for as
a purchase. See "The Company."
(4) The net cash operating loss of the Company was $1,283,900 and $83,700 for
the fiscal years ended September 30, 1997 and 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations includes forward-looking statements with
respect to the Company's future financial performance. These forward-looking
statements are subject to various risks and uncertainties, including the factors
described under "Risk Factors" and other sections of this Prospectus, that could
cause actual results to differ materially from historical results or those
currently anticipated.
Overview
The Company is an independent oil and gas company engaged in the
exploration, development, production and sale of crude oil and natural gas
properties with current operations focused in Texas, Utah and Sao Tome in West
Africa. The Company's goal is to maximize its value through profitable growth in
its oil and gas reserves and production. The Company has taken steps to achieve
this goal through its growth strategy of (i) acquiring marginally-producing oil
and gas properties, at favorable prices, with still significant resource
recovery potential through workovers utilizing the Company's proprietary
drilling technology, (ii) managing the exploration, exploitation and development
of non-producing properties in known oil-producing areas, such as the Gulf of
Guinea in West Africa, with industry or government partners, and (iii)
continuing to pursue environmental remediation service contracts for oil and gas
well rework and "plug and abandonment" services in the United States and
internationally.
The Company has acquired all of its oil and gas properties within the
past year. The Company's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
oil and natural gas properties. The Company has historically funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31,
1997
During the first six months of fiscal 1998 the Company incurred a net
loss of $3,129,872, compared to a net loss of $2,241,614 in the first six months
of fiscal 1997, reflecting the Company's increased level of business operations.
In the first six months of fiscal 1998 a total of $1,529,532 was accrued, but
not paid in cash, as compensation to three officers of the Company. Depreciation
and depletion equaled $246,548 in the first six months of fiscal 1998 compared
to $124,000 in the first six months of fiscal 1997. The net cash operating loss
of the Company for the first six months of fiscal 1998 was $2,032,050 compared
to $246,548 for the first six months of fiscal 1997.
Officers' compensation, professional fees, travel, consultant fees and
miscellaneous expenses for the six months ended March 31, 1998 compared to the
six months ended March 31, 1997 increased significantly due to the Company's
business operations continuing to increase. Professional fees in the six months
ended March 31, 1998 included legal, audit, petroleum engineering and other
engineering costs.
17
<PAGE>
The Company had revenues of $502,827 in the first six months of fiscal
1998 compared to $43,674 in the first six months of fiscal 1997. Included in the
first six months of fiscal 1998 were preparatory expenses of approximately
$200,000 related to the cost of bringing a delegation of government officials,
including the Prime Minister of Sao Tome, to the United States for meetings with
various committees of the United Nations and the United States government,
determining the boundaries of the concession and facilitating the passage of a
law in Sao Tome regarding the boundaries of the country.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
During the fiscal year ended September 30, 1997, the Company incurred a
net loss of $16,838,765, compared to a net loss of $654,461 in the fiscal year
ended September 30, 1996. In fiscal 1997, common stock was issued in lieu of
cash compensation to directors and outside consultants valued at $12,303,512. In
fiscal 1997, common stock was issued to acquire geologic data concerning Sao
Tome valued at $2,000,000, which was immediately charged to expense. In fiscal
1997, a total of $960,000 was accrued, but not paid in cash, as compensation to
three executive officers of the Company. Depreciation and amortization amounted
to $198,713. The Company's net cash operating loss for fiscal 1997 was
$1,283,900, compared to $83,700 for fiscal 1996.
The Company had revenues of $108,944 in fiscal 1997, compared to none
in fiscal 1996. Cost of sales were $53,991 in fiscal 1997 and none in fiscal
1996. All of such revenues and cost of sales were attributed to providing
environmental remediation services to oil and gas operators. Such services
included environmental engineering, hazardous waste disposal, oil spill and
non-hazardous waste cleanup.
The Company had no oil and gas production during fiscal 1997.
18
<PAGE>
Liquidity and Capital Resources
Historically, the Company has financed its operations from the sale of
its debt and equity securities (including the issuance of its securities in
consideration for services and/or products) and bank and other debt. The Company
expects to finance its operations and further development plans during fiscal
1998 in part through cash flow from operations. A description of the Company's
most recent financing activities is included herein under the heading "The
Company."
The Company presently intends to utilize any cash flow from operations
as follows: (i) recompletion of wells in the Uinta Basin; (ii) gas drilling at
the Nueces River Project; (iii) seismic studies and fees for the Sao Tome joint
venture; (iv) purchase of refueling barge/tug for Panama Canal; (v) working of
oil fields in Texas; (vi) completion of Chevron "plug and abandonment" barge;
(vii) construction of additional BAPCO Tools; and (viii) working capital and
general corporate purposes.
Capital Expenditures and Business Plan
In May 1997, the Company entered into an exclusive joint venture with
the Democratic Republic of Sao Tome & Principe ("Sao Tome") to manage the
exploration, exploitation and development of the potential oil and gas reserves
onshore and offshore Sao Tome, either through the venture or in collaboration
with major international oil exploration companies. At that time, the Company
was required to pay a $5,000,000 concession fee to the Sao Tome government. In
September 1997, the Company received a Memorandum of Understanding from the Sao
Tome government which allows the Company to pay this concession fee within five
days after Sao Tome files the relevant official maritime claims maps with the
United Nations and the Gulf of Guinea Commission. In December 1997, the Company
paid $2,000,000 of this concession fee to Sao Tome from the net proceeds of the
1997 Private Placement, and in June 1998, paid $1,000,000 of this concession fee
from the net proceeds of the Third June 1998 Private Placement.
The Company is currently in the initial phase of project development
and is conducting seismic surveys, processing existing seismic data and
reviewing environmental and engineering feasibility studies. During fiscal 1997,
the Company issued 1,000,000 shares of its common stock to acquire geologic data
concerning Sao Tome. The Company anticipates spending approximately $1,000,000
over the next 12 months for additional studies necessary to determine the
location and depth of the targeted oil deposits. The Company has spent to date
$250,000 in preparatory expenses including determining the boundaries of the
concession and facilitating the passage of a law in Sao Tome regarding the
boundaries of the country. The costs of further development of this project
cannot be determined until a more definite development plan is established. The
costs depend on the Company's determination to either independently develop the
concession, take on operational partners or lease a portion of the concession
for third-party development. In April 1998, the Government of Sao Tome granted
approval to the joint venture to proceed with the preparation and sale of leases
of its oil concession rights, which sales are expected to occur in early 1999.
In June 1998, the Company and Sao Tome signed a letter of intent to
award a contract to Schlumberger Geco-Prakla to perform a marine seismic survey
in anticipation of the license round to be held in Sao Tome, and to act as the
technical advisor and coordinator of such license round. Schlumberger
Geco-Prakla is a seismic data service company located in Great Britain. The
exact number and size of the lease blocks to be offered have not yet been
determined. The Company intends to run the survey and acquire the seismic data
in late 1998 in order to proceed with the licensing round commencing in early
1999.
19
<PAGE>
Revenues from the Company's operations in Sao Tome and substantially
all raw material purchases for use in Sao Tome will be U.S. dollar-denominated
and managed through the Company's Louisiana operational facility. The Company
believes that it will not be significantly affected by exchange rate
fluctuations in local African currencies relative to the U.S. dollar. The
Company believes that the effects of such fluctuations will be limited to wages
for local laborers and operating supplies, neither of which is expected to be
material to the Company's results of operations when the joint venture begins
more substantial operations in Sao Tome.
In August 1997, the Company acquired a 37.5% interest in a 49,000 acre
natural gas lease, known as the "Nueces River Prospect," in the Nueces River
area of south Texas. The Company paid $200,000 and issued 50,000 shares of its
common stock to acquire the lease. The Company has spent more than $200,000
reworking the first of two existing shut-in wells on the property. In 1998, the
Company plans on spending $650,000 to $1,200,000 to make the wells operational,
utilizing funds to be acquired under the Investment Agreement with Kingsbridge.
See "The Company -- The Kingsbridge Equity Line of Credit Agreement." The
Company is currently considering whether to conduct geophysics surveys to aid in
the selection of future drilling locations. The Company believes that, assuming
the entire lease is productive, there are about 75 locations to be drilled. In
1998, depending on the availability of funding, the Company expects to drill 15
to 20 new wells at this site, at a cost of approximately $650,000 to $1,200,000
per well. The Company is responsible for only half of the drilling cost of each
well, as it shares this cost with its operational co-venturer, Autry Stephens &
Co. The operational dates, as well as the daily production rates, of the wells
cannot be determined until the completion and evaluation of the well testing
program that is currently underway and should be completed in spring 1998.
In February and March 1997, the Company acquired two leases in oil
fields, which together comprise approximately 1,200 acres and 200 wells, located
in Rusk County and Wichita County, Texas. The Company issued 200,000 shares of
its common stock to acquire the leases. Through December 1997, the Company had
recompleted 18 wells, all of which are operational as of March 20, 1998. The
Company has located its BAPCO Tool on site and expects to use such tool
beginning in April 1998. The Company anticipates spending $1,200,000 in order to
bring production on the fields up to a commercial level.
In July 1997, the Company entered into a joint venture with MIII
Corporation, a Native American oil and gas company, to workover, recomplete and
operate 335 existing oil and gas wells on the Uintah and Ouray Reservation in
northeastern Utah. At this time, none of the wells are operational. The Company
has designed a development program, under which it plans to recomplete and
restimulate 36 wells and to drill five to seven development and extension wells
at this site. This plan will require spending a minimum of $1,000,000 to
$1,500,000 in order to make the project operational. Subject to the availability
of such funds, the Company anticipates that the first wells will be on line by
fall 1998.
In October 1997, the Company acquired net revenue interests ranging
from 80% to 84% (and 100% working interest) in oil and gas properties totaling
13,680 acres, located near the MIII fields in the Uinta Basin with 24 oil and
natural gas wells. These wells are currently producing approximately 200 barrels
of oil per day from four producing wells which began realizing revenues for the
Company in November 1997. The Company plans on spending approximately $1,000,000
on additional equipment and up to $80,000 per well on well stimulation in order
to bring 18 more wells on line in 1998. The Company plans on funding this plan
through the use of funds acquired under the Kingsbridge Investment Agreement.
See "The Company - The Kingsbridge Equity Line of Credit Agreement." Provided
additional financing of $5,000,000 to $10,000,000 is secured, the Company is
scheduled to implement a recompilation and drilling program on this project in
1998.
In April 1997, the Company entered into a master service agreement with
Chevron Oil Company ("Chevron") to rework, in order to draw additional
production from, approximately 400 depleting oil and gas wells and to remediate
and "plug and abandon" these and other wells when depleted, in Chevron's oil
fields in southern Louisiana along the Gulf of Mexico. The Chevron agreement
provides for a three-year work schedule, commencing upon the completion of the
Company's 140 foot "plug and abandonment" barge. This barge will be used to
remediate offshore oil rigs and be capable of working in coastal waters as
shallow as 19 inches. A deposit of approximately $131,000 has been made by the
Company to secure the barge and additional funding is being sought to purchase
and equip the barge. It is estimated that the Company's barge would be ready to
20
<PAGE>
operate 60 days following funding. To date, the Company has not yet determined
the extent of financing that will be necessary for this project. The Chevron
agreement was originally entered into by BAPCO and Bass Environmental Services
Worldwide, Inc. ("BEW") in September 1996, prior to the acquisition of BAPCO by
the Company in April 1997, and was assigned to the Company with Chevron's
consent at the time of the acquisition. The Company issued 3,000,000 shares of
Common Stock to BEW in connection with the assignment of this agreement.
During fiscal 1997, the Company issued 4,000,000 shares of its common
stock to acquire BAPCO, a non-operating oil production company with significant
well rework equipment assets.
The Company's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
its oil and natural gas properties. Historically, the Company has funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements. The Company believes that it will require a combination
of additional financing and cash flow from operations to implement future
development plans. Although Company management is exploring the private and/or
public equity markets as potential capital sources in connection with its
development plans, the Company currently does not have any binding arrangements
with respect to, or sources of, additional financing, and there can be no
assurance that any additional financing will be available to it on reasonable
terms or at all. Future cash flows and the availability of financing will be
subject to a number of variables, such as the level of production from existing
wells, prices of oil and natural gas and success in locating and producing new
reserves. To the extent that future financing requirements are satisfied through
the issuance of equity securities, shareholders of the Company may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on operations. If revenue were to decrease as a result of lower oil
and natural gas prices, decreased production or otherwise, and the Company had
no availability under a bank arrangement or other credit facility, the Company
could have a reduced ability to execute current development plans, replace
reserves or to maintain production levels, any of which could result in
decreased production and revenue over time.
Reserves and Pricing
Oil and natural gas prices fluctuate throughout the year. Generally,
higher natural gas prices prevail during the winter months of September through
February. A significant decline in prices would have a material effect on the
measure of future net cash flows which, in turn, could impact the value of the
Company's oil and gas properties.
The Company's drilling and acquisition activities have increased its
reserve base and its productive capacity, and therefore, its potential cash
flow. Lower gas prices may adversely affect cash flow. The Company intends to
continue to acquire and develop oil and natural gas properties in its areas of
activity as dictated by market conditions and financial ability. The Company
retains flexibility to participate in oil and gas activities at a level that is
supported by its cash flow and financial ability. The Company intends to
continue to use financial leverage to fund its operations as investment
opportunities become available on terms that management believes warrant
investment of the Company's capital resources.
The Company expects to utilize the "successful efforts" method of
accounting for its oil and gas producing activities once it has reached the
producing stage. The Company expects to regularly assess proved oil and gas
reserves for possible impairment on an aggregate basis in accordance with SFAS
No. 121.
21
<PAGE>
Net Operating Losses
The Company has net operating loss carryforwards of $19,264,342 which
expire in the years 2010 through 2012. The Company has a $7,705,700 deferred tax
asset resulting from the loss carryforwards, for which it has established a 100%
valuation allowance. Until the Company's current operations begin to produce
earnings, it is unclear as to the ability of the Company to utilize such
carryforwards.
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology for Year 2000 compliance. The Company does not expect that the cost
to modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. The
Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance.
22
<PAGE>
BUSINESS
Overview
The Company is an independent oil and gas company formed in 1995 to
focus on acquiring and servicing marginally-producing oil and natural gas
properties which contain the potential for increased value through workovers and
secondary recovery operations utilizing the Company's proprietary horizontal
drilling tool. The Company is also focused on providing a full range of
environmental remediation and "plug and abandonment" services to the oil and gas
industry. More recently, the Company has additionally begun to acquire interests
in non-producing oil and gas properties, particularly high potential
international prospects in known oil-producing areas, which could benefit from
the Company's experienced executive team in managing the exploration of possible
reserves. In June 1997, the Company entered into an exclusive joint venture with
the Democratic Republic of Sao Tome & Principe ("Sao Tome"), a set of islands
located in the Gulf of Guinea off the coast of central West Africa, to manage
the exploration, exploitation and development of the potential oil and gas
reserves onshore and offshore Sao Tome, either through the venture or in
collaboration with major international oil exploration companies. The Company is
currently in the initial phase of exploration and is conducting geophysical,
seismic, environmental and engineering feasibility studies. In April 1998, the
Government of Sao Tome granted approval to the joint venture to proceed with the
preparation and sale of leases of its oil concession rights, which sales are
expected to occur in late 1998. The Company believes that this venture provides
it with a significant foothold in the oil-rich Gulf of Guinea, in which the
venture is the largest single concession holder in the entire Gulf.
The Company has entered into a number of recent transactions in
connection with its workover and recovery operations. In August 1997, the
Company acquired a 37.5% interest in a 49,000 acre natural gas lease, known as
the "Nueces River Project", in the Nueces River area of south Texas, one of the
largest producing natural gas areas in the United States. In December 1997, the
Company re-entered the first of two existing shut-in wells on the property, and
expects to ultimately recover up to 5 BCF per well using 5% of the estimated
possible gas in place. The daily production rates from these wells cannot be
determined until the completion and evaluation of the current well testing
program in spring 1998. In addition, the Company acquired in February and March
1997 two leases in oil fields located in Rusk County and Wichita County, Texas.
These oil fields, which together comprise approximately 1,200 acres and 200
wells, have proven reserves totaling 2.5 million barrels of oil as verified by
Dr. Joseph Shoaf, P.E., an independent reservoir engineer. The Company estimates
that, after reworking the wells using various techniques including its
proprietary drilling tool, these wells could produce from 500 to 800 barrels of
oil per day. Through December 1997, the Company had recompleted 18 oil wells and
is currently producing and selling "test" oil from the Wichita County field.
The Company also holds interests in oil and natural gas leases in Utah.
In July 1997, the Company entered into a joint venture with MIII Corporation, a
Native American oil and gas company, to workover, recomplete and operate 335
existing oil and gas wells on the Uintah and Ouray Reservation in northeastern
Utah. It is estimated that the first approximately 36 wells will be scheduled
for recompletion and stimulation in fall 1998 and, the Company believes that
after initial workover operations are completed, these wells could produce in
excess of 3,900 barrels of oil per day, based on estimates by its co-venturer,
MIII Corporation. These estimates are subject to internal verification by the
Company. In September 1997, the Company acquired net revenue interests ranging
from 80% to 84% in oil and gas properties totaling 13,680 acres, located near
the MIII fields, currently producing approximately 200 barrels of oil per day
from eight producing wells. As of December 31, 1997, these were the Company's
only commercially producing properties, which began realizing revenues for the
Company in November 1997. A 1997 independent reserve report prepared by Sandwood
Consultants indicates that the total ultimate gross recoverable reserves from 23
wells located on these properties are approximately 1.923 million barrels of
oil and 2.075 BCF of natural gas.
Another significant aspect of the Company's current business is
providing environmental remediation services to oil and gas operators. All of
the Company's revenues during the fiscal year ended September 30, 1997 were
23
<PAGE>
attributable to providing these services, which include environmental
engineering, hazardous waste (including naturally occurring radioactive
material) remediation and disposal, oil spill, soil decontamination and
non-hazardous oilfield waste cleanup, as well as "plug and abandonment" of oil
and gas wells, all in accordance with strict federal, state and local
environmental regulations. In April 1997, the Company entered into a master
service agreement with Chevron Oil Company ("Chevron") to rework, in order to
draw additional production from, approximately 400 depleting oil and gas wells
and to remediate and "plug and abandon" these and other wells when depleted, in
Chevron's oil fields in southern Louisiana along the Gulf of Mexico. The Chevron
agreement provides for a three-year work schedule, commencing upon the
completion of the Company's 140 foot "plug and abandonment" barge. The Company
has designed this specialized "plug and abandonment" barge to remediate off
shore well locations and is capable of working in coastal waters as shallow as
19 inches. In addition, through management's extensive relationships in the oil
and gas industry, the Company has obtained a ten-year concession with the Panama
Canal Commission, through a joint venture with Centram Marine Services, S.A., to
supply fuel to tankers and other commercial vessels traversing the Panama Canal.
These operations are expected to commence in mid-1998, provided adequate
financing is secured.
The Company believes that, at its current stage of development, it is
more economical and less speculative to rework and recomplete existing wells
than to drill exploratory wells in search of new oil and gas deposits. Using the
Company's proprietary horizontal drilling tool, known as the BAPCO Tool, the
Company has had, according to internal data, an 80% success ratio in increasing
the level of production from oil and natural gas wells that are suitable for
enhancement of primary recovery by use of the BAPCO Tool or candidates for
secondary recovery. The Company believes that the BAPCO Tool serves as a
competitive advantage for securing new workover projects from other oil and gas
operators, for attracting joint venture partners in larger workover contracts in
the United States and internationally and for use on its own oil and gas
properties in Texas and Utah.
Beginning in the early 1990's, both secondary recovery of oil reserves
and environmental remediation of abandoned oil wells have become major items of
interest in the oil and gas industry. According to current industry statistics,
it is estimated that only 7.5% to 15% of total oil reserves are recovered in
primary drilling operations due to the significant incremental costs involved in
exploiting far-reaching reservoirs of an oil formation. Following primary
drilling operations, large independent oil companies have typically outsourced
some or all of the required "plug and abandonment" work to environmental
remediation firms, such as the Company. By conducting enhanced primary or
secondary recovery operations utilizing the BAPCO Tool on the otherwise
abandoned wells, the Company believes that it is able to effectively extend the
economic life of an oil field and increase existing oil recovery by up to 30%,
prior to formal abandonment. The Company, which provides primary and secondary
recovery, "plug and abandonment" operations and environmental remediation
services, believes that, in the United States alone, there are hundreds of oil
and natural gas fields which could benefit from these services.
Growth Strategy
The Company's goal is to maximize its value through profitable growth
in its oil and gas reserves and production. The Company has taken steps to
achieve this goal through its growth strategy of (i) acquiring
marginally-producing oil and gas properties, at favorable prices, with still
significant resource recovery potential through workovers utilizing the
Company's proprietary drilling technology, (ii) managing the exploration,
exploitation and development of non-producing properties in known oil-producing
areas, such as the Gulf of Guinea in West Africa, with industry or government
partners, and (iii) continuing to pursue environmental remediation service
contracts for oil and gas well rework and "plug and abandonment" services in the
United States and internationally.
24
<PAGE>
Key elements of the Company's growth strategy include:
o Acquire and Exploit Attractive Oil and Gas Properties. The Company
has an experienced management and engineering team that focuses on
acquisitions of marginally-producing properties which meet its
selection criteria including (a) significant reserves with the
potential for increasing production through low-risk workovers,
recompletions, secondary recovery operations and other production
optimization techniques using its BAPCO Tool, (b) attractive
purchase price and (c) opportunities for improved operating
efficiencies in labor and other field level costs. This growth
strategy has allowed the Company to rapidly grow its reserves, and
its workover and recovery activities have resulted in an 80% success
ratio for improved production from wells that are suitable for
enhanced primary and secondary recovery projects.
o Manage High Potential International Prospects. The Company seeks to
manage the overall exploration activities for high potential
international prospects in known oil-producing areas. By managing
these projects, the Company seeks to share the risks inherent in
exploratory drilling with industry and government partners. The
Company's international exploration activities target significant
long-term reserve growth and value creation, such as the Company's
joint venture with Sao Tome. The Company also plans to pursue
offshore transportation and logistic support services in connection
with its international prospects.
o Pursue Additional Environmental Remediation Contracts. The Company
aggressively pursues new environmental remediation contracts in the
United States and abroad, directly and through joint ventures. The
Company believes it possesses competitive advantages including the
availability and condition of equipment to meet both special and
general customer needs, the availability of trained and licensed
personnel with the required specialized skills, the overall quality
of its service and safety record and the ability to offer ancillary
services, such as "plug and abandonment" services. The Company has
specifically targeted major oil companies with properties located in
the Gulf Coast areas of Louisiana and Texas, which require "plug and
abandonment" services for old and depleted fields.
25
<PAGE>
Summary of Properties
A summary of the Company's oil and gas properties is as follows:
<TABLE>
<CAPTION>
Anticipated
Investment Anticipated
Nature of Date to Make Operational
Property Interest Acquired Cost Operational Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sao Tome Joint Venture to May 1997 $5,000,000 $1,500,000 (1) Undetermined as of
drill and develop concession fee, this time.
fields $2,000,000 of which Recently granted right
has been paid to proceed with sales of
leases expected to occur
in late 1998.
- ---------------------------------------------------------------------------------------------------------------------------------
Nueces River Natural 37.5% interest in a October 1997 $200,000 and 50,000 (2) To be determined upon
Gas Prospect, Texas 49,000 acre natural shares of Common completion and
gas lease Stock evaluation of the
current well testing
program.
- ---------------------------------------------------------------------------------------------------------------------------------
Rusk and Wichita Two leases in oil February and 500,000 shares of Currently 18 wells currently
County Oil Fields, fields March 1997 Common Stock operational(3) operational
Texas
- ---------------------------------------------------------------------------------------------------------------------------------
Uintah and Ouray Joint Venture with July 1997 $55,000 and Minimum of $1,000,000 Fall 1998
Reservation (MIII MIII Corporation to contemplated to $1,500,000
Project), Utah develop and operate issuance of 250,000
335 wells shares of Common
Stock to MIII
- ---------------------------------------------------------------------------------------------------------------------------------
Uinta Project, Utah Net revenue October 1997 $250,000 and Currently operational 4 wells currently
interests ranging 1,000,000 shares of (4) operational
from 80% to 84% Common Stock
(and 100% working
interest) in oil
and gas properties
of approximately
13,680 acres, with 24
wells (22 oil, gas
and mineral leases)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has spent (i)$2,500,000 for data that had been purchased through
cash and stock as of March 1998, and (ii) $250,000 in expenses preparatory to
drilling. The Company anticipates spending $1,000,000 over the next 12 months
for additional studies needed to determine the location and depth of the
targeted oil deposits. The costs of further development of this project cannot
be determined until a more definite development plan is established. The costs
depend on the Company's determination to either independently develop the
concession, take on operational partners or lease a portion of the concession
for third-party development. See "--Managing Exploratory Activities - Sao Tome."
(2) The Company has already spent $200,000 reworking the first of two existing
shut-in wells on the property. In 1998, the Company plans on spending
approximately $650,000 to $1,250,000 to bring both wells on line. Provided
financing is secured, the Company would also like to drill 15 to 20 new wells at
this site in 1998. The Company is responsible for only half of the drilling cost
of each well, as it shares this cost with its operational co-venturer, Autry
Stephens & Co. See "-Workover and Recovery Activities."
(3) The Company expects to spend $1,200,000 to bring production up to a
commercial level. See "-Workover and Recovery Activities."
(4) The Company plans on spending approximately $1,000,000 on additional
equipment and up to $80,000 per well on well stimulation in order to bring 18
additional wells on line in 1998, utilizing funds acquired through the
Investment Agreement with Kingsbridge. Provided financing of $5,000,000 to
$10,000,000 is secured, the Company is scheduled to implement a recompilation
and drilling program. See "-Workover and Recovery Activities."
Managing Exploratory Activities
The Company is currently managing or in the process of negotiating
several international exploratory projects which, if successful, have the
potential to increase the growth of the Company. The Company believes that its
existing project in Sao Tome has the potential to significantly increase
reserves.
26
<PAGE>
Sao Tome
In May 1997, the Company entered into an exclusive joint venture with
Sao Tome, a member of the United Nations, to manage the exploration,
exploitation and development of the country's potential oil and gas reserves in
the Gulf of Guinea. Sao Tome is comprised of two principal islands which
straddle the equator in the prolific petroleum-producing region of the Gulf of
Guinea. The Sao Tome islands are located approximately 200 miles west of
mainland Gabon, and southwest of Equatorial Guinea and Cameroon, and are located
directly on a well-known geologic feature known as the "Cameroon Volcanic Line."
The exclusive 25-year joint venture agreement provides for the
establishment of a national oil and gas company owned jointly by Sao Tome, the
Company and, as a junior partner, Procura Financial Consultants, c.c., a South
African corporation ("Procura"). Under the agreement, the venture has the first
right to select the oil and gas concessions it desires to explore and develop in
an area approximately 64,550 square miles in the Gulf of Guinea. On behalf of
Sao Tome, the Company has agreed to negotiate with major international oil and
gas companies to grant leases to oil and gas concessions not selected by the
joint venture. The Company is entitled to receive an overriding royalty on the
27
<PAGE>
production from those concessions. Pursuant to the terms of the agreement, Sao
Tome has the right to terminate the agreement in the event the Company fails to
make the remaining concession fee payment of $2,000,000 at the time Sao Tome
determines, and the United Nations accepts, the 200 mile exclusive economic zone
boundaries (expected to be by mid 1998) or fails to timely commence the orderly
development of the national oil and gas joint venture company. The Company is
currently exploring funding sources for this payment. In November 1997, the
Company made an initial $2,000,000 payment in respect of the initial concession
fee from the net proceeds of its 1997 private placement, and in June 1998, paid
$1,000,000 of this concession fee from the net proceeds of the Third June 1998
Private Placement. See "The Company - The Private Placement."
The Company is currently in the initial phase of project development
and is conducting seismic surveys, processing existing seismic data and
reviewing environmental and engineering feasibility studies. The Company has
already provided to Sao Tome initial feasibility studies including seismic
interaction, sedimentology biostatgraph, geochemistry and petrographics and
diagnostics. The Company expects to expend at least $2,300,000 in the initial
phase of this project. Following further studies, the Company anticipates
coordinating the drilling of a "test" well in late 1998. The costs associated
with drilling and testing such a well cannot be determined until the seismic
data have been processed and evaluated in mid to late 1998. In April 1998, the
Government of Sao Tome granted approval to the joint venture to proceed with the
preparation and sale of leases of its oil concession rights, which sales are
expected to occur in late 1998.
In September 1997, the Company expanded its joint venture agreement
with Sao Tome. Under the modified agreement, the venture was granted development
rights for an offshore logistics center. The projects contemplated by the
venture include a helicopter refueling station, seaport with dry dock facilities
and temporary accommodation facilities for employees and their families. The
Company believes that an offshore logistics base is essential to the development
of West Africa's oil and gas industry. The Company has not determined the
funding levels required for these projects at this time.
The Company believes that this venture provides it with a significant
foothold in the oil-rich Gulf of Guinea, in which the venture is the largest
single concession holder in the entire Gulf. The offshore oil potential of Sao
Tome has been studied by numerous oil companies, including Mobil Corp. and Elf
Aquitaine, since at least the late 1970s. Over the next 20 years, industry
experts say, Western oil companies will invest between $40 billion and $60
billion in the Gulf of Guinea alone.
AMCO Montenegro
In January 1998, the Company entered into a 50/50 joint venture with
AMCO Montenegro, a construction company based in Virginia and its group of
related companies, for the purpose of constructing and operating an off-shore
logistics center which would service off-shore drilling rigs in the Gulf of
Guinea. To date, the joint venture has been seeking financing to commence the
development of this project. There can be no assurance that the joint venture
will be able to obtain this financing and therefore commence operations.
Workover and Recovery Activities
The Company concentrates its acquisition efforts on
marginally-producing properties which demonstrate a potential for significant
additional development through workovers, behind-pipe recompletions, secondary
recovery operations utilizing the Company's BAPCO Tool and other exploitation
techniques. The Company has pursued a workover and recompletion program on the
properties it has acquired and intends to commence an extensive workover and
recompletion program in the future.
"Workovers" refer to the major repairs and modifications occasionally
required by producing oil and natural gas wells. Workovers may be done, for
example, to remedy equipment failures, deepen a well in order to complete a new
producing reservoir, plug back the bottom of a well to reduce the amount of
water being produced with the oil and natural gas, clean out and recomplete a
well if production has declined, repair leaks, or convert a producing well to an
injection well for secondary or enhanced recovery projects. These extensive
workover operations are normally carried out with a well-servicing type rig that
includes additional specialized accessory equipment, which may include rotary
drilling equipment, mud pumps, mud tanks and blowout preventers, depending upon
the particular type of workover operation. The Company's two workover rigs are
designed and equipped to handle the more complex workover operations. A workover
may last anywhere from a few days to several weeks.
The kinds of activities necessary to carry out a workover operation are
essentially the same as those that are required to "complete" a well when it is
first drilled. The "recompletion" process may involve selectively perforating
the well casing at the depth of discrete producing zones, stimulating and
28
<PAGE>
testing these zones and installing down-hole equipment. Independent oil and gas
production companies often find it more efficient to move a larger and more
expensive drilling rig off location after an oil or natural gas well has been
drilled and to move in a specialized well-servicing rig to perform completion
operations. The Company plans to acquire a well-servicing rig for this purpose.
The completion process may require from a few days to several weeks.
The Company's staff focuses on maximizing the value of the properties
within its reserve base. The results of their efforts are reflected in increased
production and additions to reserves.
For the fiscal year ended September 30, 1997, the Company spent
approximately $53,000 on workover and recompletion operations, involving nine
wells in Texas. The Company anticipates spending in excess of $1.825 million on
workover and recompletion operations during fiscal 1998, although there can be
no assurance it will have the funding to do so.
In connection with this focus, the Company actively pursues operating
cost reductions on the properties it acquires. The Company believes that its
cost structure and operating practices generally result in improved operating
economies.
The following is a brief discussion of significant developments in the
Company's recent workover and recompletion activities:
Nueces River Natural Gas Prospect
The Company has a 37.5% working interest in a 49,000 acre natural gas
lease, known as the "Nueces River Prospect," in the Nueces River area of
McMullen and LaSalle counties in south Texas, one of the largest producing
natural gas areas in the United States. In December 1997, the Company re-entered
the first of two existing shut-in wells on the property, and expects to
ultimately recover up to 5 BCF per well using 5% of the estimated possible gas
in place. The daily production rates, as well as the anticipated operational
dates, from these wells cannot be determined until the completion and evaluation
of the current well testing program, which should be completed in spring 1998.
Following revitalization, the Company estimates that such wells have the
possibility of producing in excess of 500 MCF (million cubic feet) of natural
gas per day. A 20-inch diameter Transcontinental Gas Pipeline is located
approximately three miles from the wells to provide access to a gas market. The
Company jointly operates the field with Autry Stephens & Co., a large
independent operator in west and south Texas. The Company acquired its interest
in the Nueces River Project in October 1997 in consideration for $200,000 and
the issuance of 50,000 shares of Common Stock.
In 1998, the Company plans on spending approximately $650,000 to
$1,200,000 to bring both wells on line. Provided financing is secured, the
Company also expects to drill 15 to 20 new wells at this site, at a cost of
approximately $650,000 to $1,200,000 per well. The Company is responsible for
half of the drilling cost of each well, as it shares this cost with its
operational co-venturer, Autry Stephens & Co. The anticipated operational dates
of these wells depend on the amount of funds raised by the Company in 1998.
Rusk and Wichita County Oil Fields
The Company holds directly two leases on producing oil fields in Texas,
known as the Gunsite Formation in Wichita County, north Texas, and the Woodbine
Formation in Rusk County, east Texas. These oil fields together comprise
approximately 1,200 acres and 200 wells. A 1997 independent reserve report
prepared by Joseph Shoaf, P.E. estimated that proven reserves ("behind pipe")
total 2.5 million barrels of oil. Through December 1997, the Company had
recompleted 18 wells, all of which were operational as of March 20, 1998. The
Company has located its BAPCO Tool on site and expects to use such tool
beginning in mid 1998. The Company anticipates spending $1,200,000 in order to
bring production on the fields up to a commercial level. After reworking the
fields using the BAPCO Tool and other techniques, the Company believes that
these wells could produce from 500 to 800 barrels of oil per day.
29
<PAGE>
The Company acquired the Rusk and Wichita County oil fields in February
and March 1997, respectively, in consideration for a total of 500,000 shares of
Common Stock, valued at a total of $14,335,646.
MIII Project in Utah
In July 1997, the Company entered into a joint venture with MIII
Corporation ("MIII"), a Native American oil and gas company based in Fort
Duchesne, Utah. Under the agreement, the Company has agreed to workover,
recomplete and operate 335 oil and gas wells located on the 4,000,000 acre
Uintah and Ouray Reservation in northeastern Utah. It is estimated that the
first approximately 36 wells will be scheduled for recompletion and
restimulation by fall 1998, provided that the Company raises the required
funding. After initial workover operations are completed, the Company estimates
that these wells could produce in excess of 3,900 barrels of oil per day, based
on estimates by its co-venturer, MIII. These estimates are subject to internal
verification by the Company. The Company's production estimates at this site are
based predominately on the multiple sandstone reservoirs of the Wasatch,
transition zone and Green River Formations that can occur at depths of 5,000 to
16,000 feet.
Under the terms of the joint venture agreement, once the production of
natural gas reaches 5,000 MCF, MIII has agreed to construct a gas gathering
plant on such site, with the Company retaining a 25% interest in the plant. As
of this date, there can be no assurance as to when, if ever, such plant will be
constructed.
The Company has a 37.762% working interest in the wells located on the
MIII property, and is entitled to receive a $2.50 per barrel operator fee on
production in the fields. The Company also has the right to receive an
additional 5% working interest in the wells after start-up costs of
approximately $1.5 million are repaid to certain original MIII investors from
overall production. The remaining working interests in the MIII property are
held by MIII, the Ute Tribe and the allotted members of the Ute Tribe. The
Company paid $55,000 and contemplates issuing 250,000 shares of Common Stock to
MIII in connection with entering into this venture. In 1998, the Company plans
to recomplete and restimulate 36 wells and to drill five to seven development
and extension wells at this site, provided adequate financing is secured.
Uinta Project
In October 1997, the Company acquired net revenue interests ranging
from 80% to 84% (and 100% working interest) in oil and gas properties totaling
13,680 acres, located near the MIII fields in the Uinta Basin with 24 oil and
natural gas wells, currently producing approximately 200 barrels of oil per day
from four producing wells. As of December 31, 1997, these were the Company's
only commercially producing properties, which began realizing revenue for the
Company in November 1997. A 1997 independent reserve report prepared by Sandwood
Consultants indicates that the total ultimate gross recoverable reserves from 23
wells located on these properties are approximately 1.923 million barrels of oil
and 2.075 BCF of natural gas. Wells in this field produce primarily from
multiple sandstone reservoirs of the Wasatch transition zone and lower Green
River Formations at depths ranging from 5,500 to 16,000 feet. The remaining net
revenue interests in these properties are held by the Ute Tribe.
The Company plans on spending approximately $1,000,000 on additional
equipment and up to $80,000 per well on well stimulation in order to bring 18
more wells on line in 1998, utilizing funds acquired under the Investment
Agreement with Kingsbridge. Provided additional financing of about $5,000,000 to
$10,000,000 is secured, the Company plans extensive work in this field during
1998, including a 20 well program to develop infill and field extension
locations, a 40-acre pilot waterflood project and the workover and recompletion
of the 22 existing wells to test the viability of more shallow formations for
potential future development.
30
<PAGE>
Reserves
The following table sets forth estimates of the proven oil and gas
reserves (gross) of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
Oil Equivalent
Oil Gas --------------
-------------------------------- ------------------------------- (millions of
(millions of barrels) (billion cubic feet) barrels)
Field Developed Undeveloped Total Developed Undeveloped Total Total
----- --------- ----------- ----- --------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Nueces River Prospect, Texas. - - - - - - -
Rusk County Field, Texas..... 1.5 - 1.5 - - - 1.5
Wichita County Field, Texas.. 1.0 - 1.0 - - - 1.0
Uintah & Ouray Reservation,
Utah(1).................. - - - - - - -
Uinta Project, Utah.......... .141 1.782 1.923 .119 1.956 2.075 2.269
---- ----- ----- ---- ----- ------ -----
Total............. 2.641 1.782 4.423 .119 1.956 2.075 4.769
====== ====== ====== ===== ===== ====== ======
</TABLE>
- ----------
(1) The Company is currently in the process of evaluating reserve reports on
these properties, and therefore, internally verified estimates for the
developed and undeveloped proven oil and gas reserves are not available at
this time.
Estimates of the Company's proved reserves set forth above have not
been filed with, or included in reports to, any Federal authority or agency,
other than the Securities and Exchange Commission.
The Company's non-producing proved reserves are largely "behind-pipe"
in fields which it operates. Undeveloped proved reserves are predominantly
infill drilling locations and secondary recovery projects.
The reserve data set forth in this Prospectus represent only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of such estimate. Accordingly, reserve estimates often differ from the
quantities of oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based.
For further information on the Company's oil and gas reserves and
pricing, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BAPCO Tool
The Company's BAPCO Tool, which is used in most of its workover
operations, has two main functions: to provide a means of mechanically cutting a
hole through the casing and extending a flexible tubular pipe outward at least
50 feet from the bore hole. The system is made up of a skid mounted surface unit
with a command module, filter system and pumping package, and a down hole
assembly. The command module, which is approximately 10 feet long, 6 feet wide
and 8 feet high, is air conditioned, contains all the necessary controls and
data recording equipment and has a special tool storage area. The down hole tool
assembly is composed of a filter and filter body that removes the unwanted
material and prevents the material from entering the control section of the
tool. There are no limitations regarding casing thickness and cement sheath when
utilizing the BAPCO Tool.
According to internal data, the Company has had an 80% success ratio in
increasing the level of production from oil and natural gas wells that are
suitable for secondary recovery. The Company believes that the BAPCO Tool serves
31
<PAGE>
as a competitive advantage for securing new workover projects from other oil and
gas operators, for attracting joint venture partners in large workover contracts
in the United States and internationally and for use on its own oil and gas
properties in Texas and Utah.
The BAPCO Tool was acquired by the Company in connection with the stock
acquisition of BAPCO in April 1997. The Company has constructed two BAPCO Tools
to date and is currently in the process of constructing a third tool. The
Company plans to construct three additional tools in 1998, provided it receives
adequate financing in the future. The BAPCO Tool has been tested on multiple
wells in a variety of formations during the past 18 months. The BAPCO Tool has
been continuously updated and modified since the tool was first designed and
developed in the early 1990s by Sam L. Bass, Jr., the Company's Chairman,
President and Chief Executive Officer.
Environmental Remediation Services
The Company provides environmental remediation services to oil and gas
operators. These services, which the Company is licensed to provide, include
environmental engineering, hazardous material (including naturally occurring
radioactive material) remediation and disposal, and oil spill, soil
decontamination and non-hazardous oilfield waste cleanup related to the
production of oil and natural gas, all in accordance with strict federal, state
and local environmental regulations. The Company also provides "plug and
abandonment" services for wells from which the oil and natural gas have been
depleted and further production has become uneconomical.
The Company's soil decontamination systems are capable of handling a
variety of different contamination problems. The Company standard Class 1-4
decontamination machines. The Class I machine is used to process soils
contaminated with gasoline and diesel and which require little or no soil
conditioning. The Class II machine offers increased temperatures to treat soil
with contaminants up to No. 6 fuel oil, lubricating oils, heavy oil residuals
and crude oils. The Class III machines are an upgrade to the Class II machines
and accommodate slightly higher temperatures and add acid gas neutralization for
handling chlorinated compounds. The Class IV machines are hazardous waste
incinerators.
The Company's staff is certified in the use of many types of products
used in tank and pit cleaning services and emergency response spill and
clean-up. The Company uses a "sludge-buster" robotic water cannon to expedite
the cleaning of tanks. The Company's staff is also experienced in the use of a
closed loop system for pit cleaning. The closed loop system separates solids
from liquids, chemically treats the liquids and solids in accordance with local
environmental standards. The Company can deliver emergency crews trained in
chemical and oil spill containment and clean-up throughout many parts of the
world.
In April 1997, the Company entered into a master service agreement with
Chevron Oil Company ("Chevron") to rework, in order to draw additional
production from, approximately 400 depleting oil and gas wells and to remediate
and "plug and abandon" these and other wells when depleted, in Chevron's oil
fields in southern Louisiana along the Gulf of Mexico. The Chevron agreement
provides for a three-year work schedule, commencing upon the completion of the
Company's 140 foot "plug and abandonment" barge. This barge will be used to
remediate offshore oil rigs and be capable of working in coastal waters as
shallow as 19 inches. A deposit of approximately $131,000 has been made by the
Company to secure the barge and additional funding is being sought to purchase
and equip the barge. It is estimated that the Company's barge would be ready to
operate 60 days following funding. To date, the Company has not determined the
exact level of financing that will be necessary for this project, but expects
$1.5 million is necessary to get the barge operational. The Chevron agreement
was originally entered into by BAPCO and Bass Environmental Services Worldwide,
Inc. ("BEW") in September 1996, prior to the acquisition of BAPCO by the Company
in April 1997, and was assigned to the Company with Chevron's consent at the
time of the acquisition. The Company issued 3,000,000 shares of Common Stock to
BEW in connection with the assignment of this agreement.
The Company's "plug and abandonment" services involve shutting down and
discontinuing the use of old, unsafe or marginally-producing oil or natural gas
wells, and restoring a site to its pre-drilling condition. There are many
32
<PAGE>
ecological ramifications if oil and gas wells are abandoned without following
federal Environmental Protection Agency and state Department of Environmental
Quality mandated guidelines. These ramifications are caused due to aging
equipment and pipe ceilings which can lead to "blow outs," oil and gas seepage
into the water and ground water contamination. If not "plugged," these problems
can lead to major environmental problems and expensive pollution cleanup for the
well owners or operators. "Plug and abandonment" also involves delivery of test
results indicating that well closure has been completed in compliance with
applicable regulations. This information is important to the customer because
the operation is subject to future regulatory review and audits. In addition,
the information may be required on a current basis if the operator is subject to
a pending regulatory compliance order.
The Company's environmental remediation customers are major and
medium-sized independent oil and gas exploration and production companies
operating in the Gulf Coast areas of Louisiana and Texas. During the fiscal year
ended September 30, 1997, approximately 60% of the Company's revenues were
derived from three major oil companies, including Chevron. Given current market
conditions and the nature of the services involved, management does not believe
that the loss of any single customer would have a material adverse effect on the
Company. Environmental remediation services are typically performed under
short-term time and materials contracts, which are obtained by direct
negotiation or bid. As most of the company's contracts with its customers are
cancelable upon limited notice, the Company's backlog is not significant at this
time.
To assist in the Company's penetration of the environmental remediation
services market in Louisiana, in February 1998, the Company executed an
agreement to acquire a 70% equity interest in Ven Virotek, Inc., a Louisiana
corporation ("Virotek"), from its only other shareholder, Recycling Remedis,
Inc. Virotek owns and operates a NORM solid waste disposal site in Houma,
Louisiana and holds permits from Louisiana environmental authorities to dispose
of salt water brine and naturally occurring waste products. Under the Company's
agreement to acquire its interest in Virotek, the Company paid an initial
installment payment of $15,000 in cash and signed a promissory note in the
amount of $300,000. The Company's payment of the promissory note is pending its
receipt from the seller of audited financial statements for Virotek. The Company
currently believes that such financial statements will not be provided and that
this transaction is not likely to be completed.
33
<PAGE>
Offshore Logistics Services
Panama Refueling Concession
In December 1996, the Company entered into a joint venture agreement
with Centram Marine Services,S.A., which was amended in March 1997, pursuant to
which the venture obtained a ten-year concession agreement with the Panama Canal
Commission. The concession grants the joint venture the right to supply fuel and
other petroleum supplies to tankers and other commercial vessels traversing the
Panama Canal. Historically, approximately 45 such vessels traverse the Panama
Canal daily. Pursuant to the terms of the joint venture agreement, the Company
is entitled to receive 66-2/3% of all net profits of the venture, in exchange
for the provision of a tug boat and a 30,000 barrel fuel barge. The joint
venture is currently in negotiations to purchase a 1.5 million gallon fuel barge
and an 85 foot flat deck tugboat. These operations are expected to commence by
mid-1998, provided adequate financing is secured.
In connection with entering into such agreement with the Panama Canal
Commission, the venture received a commitment from Texaco Inc. to provide the
venture with the necessary fuel to comply with the requirements of the
concession. The Company anticipates that the venture would be able to provide a
minimum of 500,000 gallons of fuel a day at the start of the program and
increasing to one million gallons by the end of the first year of operation.
Based on a markup of $0.04 per gallon, the Company anticipates gross sales on
500,000 gallons to be in the range of $250,000 per day resulting in a gross
profit of $20,000 per day. There is no assurance that these anticipated profits
will be attained.
Marketing
During the fiscal year ended September 30, 1997, the Company did not
have any sales of oil or gas. Commencing in October 1997, the Company recorded
sales of crude oil from the Uinta properties and, in November 1997, recorded
sales of "test" oil from the Wichita Falls field in north Texas. All such sales
were made on the spot market. In the future, the Company intends to sell its
crude oil and natural gas, and associated oil and gas products, on both the spot
market and under market-sensitive agreements with a variety of prospective
purchasers.
Raw Materials
The Company believes that its source of supply for any materials or
equipment used in its business are adequate for its needs and that it is not
dependent upon any one supplier. No serious shortages or delays have been
encountered in obtaining any raw materials.
34
<PAGE>
Governmental Regulation
Oil and natural gas operations are subject to extensive federal, state
and local laws and regulations relating to the exploration for, and the
development, production and transportation of, oil and natural gas, as well as
safety matters, which may be changed from time to time in response to economic
or political conditions. Matters subject to regulation by federal, state and
local authorities include permits for drilling operations, road and pipeline
construction, reports concerning operations, the space of wells, unitization and
pooling of properties, taxation and alterations to the Company's development
plans could have a material adverse effect on operations. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas.
Although the Company believes that it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company cannot predict the ultimate cost of compliance with these requirements
or their effect on operations. Significant expenditures may be required to
comply with governmental laws and regulations.
Environmental Regulation and Claims
The Company's workover and environmental remediation services routinely
involve the handling of significant amounts of waste materials, some of which
are classified as hazardous substances. The Company's operations and facilities
are subject to numerous state and federal environmental laws, rules and
regulations, including, without limitation, laws concerning the containment and
disposal of hazardous materials, oilfield waste and other waste materials, the
use of underground storage tanks and the use of underground injection wells. The
Company employs personnel responsible for monitoring environmental compliance
and arranging for remedial actions that may be required from time to time and
also uses outside experts to advise on and assist with the Company's
environmental compliance efforts. Costs incurred by the Company to investigate
and remediate contaminated sites are expensed unless the remediation extends the
useful lives of the assets employed at the site. Remediation costs that extend
the useful lives of the assets are capitalized and amortized over the remaining
useful lives of such assets. Liabilities are recorded when the need for
environmental assessments and/or remedial efforts becomes known or probable and
the cost can be reasonably estimated.
Laws protecting the environment have generally become more stringent
that in the past and are expected to continue to do so. Environmental laws and
regulations typically impose "strict liability" which means that in some
situations the Company could be exposed to liability for cleanup costs and other
damages as a result of conduct of the Company that was lawful at the time it
occurred or conduct of, or conditions caused by, others. Cleanup costs and other
damages arising as a result of environmental laws, and costs associated with
changes in environmental laws and regulations could be substantial.
Under the Comprehensive Environmental Response, Compensation and
Liability Act, also known as "Superfund," and related state laws and
regulations, liability can be imposed without regard to fault or the legality of
the original conduct on certain classes of persons that contributed to the
release of a "hazardous substance" into the environment. Changes to federal and
state environmental regulations may also negatively impact oil and natural gas
exploration and production companies, which in turn could have a material
adverse effect on the Company. For example, legislation has been proposed from
time to time in Congress which would reclassify oil and natural gas production
wastes as "hazardous wastes." If enacted, such legislation could dramatically
increase operating costs for domestic oil and natural gas companies and this
could reduce the market for the Company's services by making may wells and/or
oilfield uneconomical to operate. To date, such legislation has not made
significant progress toward enactment.
Patents and Trademarks
The Company owns or has exclusive rights to use several U.S. patents on
designs for various types of oilfield equipment and on methods for conducting
certain oilfield activities, including discrete parts of the BAPCO Tool. The
Company uses some of these designs and methods to conduct its business. The
patents expire at various times over the next five to 15 years. The Company also
35
<PAGE>
has several trademarks and service marks that it uses in various aspects of its
business. While management believes the Company's patent and trademark rights
are valuable, the expiration or loss thereof, other than parts of the BAPCO
Tool, would not have a material adverse effect on the Company's financial
condition or results of operations.
Competitive Conditions
Although the number of available rigs has materially decreased over the
past ten years, the workover and drilling industry remains very competitive. The
number of rigs continues to exceed demand, resulting in severe price
competition. Many of the total available contracts are currently awarded on a
bid basis, which further increases competition based on price. In all of the
Company's market areas, competitive factors also include the availability and
condition of equipment to meet both special and general customer needs, the
availability of trained personnel possessing the required specialized skills,
the overall quality of service and safety record, and domestically, the ability
to offer ancillary services such as "plug and abandonment" services. As an
enhancement to its competitive position, the Company has been able to establish
joint ventures in domestic and international markets.
The environmental remediation market is extremely fragmented and
composed of hundreds of small firms with one or only few regional offices.
Currently, there are a great number of new and successful secondary
recovery programs. Many of these methods are allowing for a much higher rate of
recovery than shown by the Company. The technique that the Company has chosen to
utilize, after consideration of other methods, by means of the BAPCO tool, is
that of the lateral drilling system. This technique, which calls for drilling a
50' long, 2 inch diameter horizontal drain hole into the formation is ideally
suited for both the Gunsite and Rusk County formations, as they are a
"fractured" type horizon, and the oil is being drained from existing fractures
in the formation. The drilling of horizontal drain holes is expected to
encounter many new fracture systems within the formation, resulting in
significant oil production increases from each well. Based on data supplied by
the Schellstede Company, production increases from 8 to 10 barrels per day are
common in similar types of shallow wells laterally drilled using the lateral
drilling system.
Properties
The Company's principal executive offices are located in Oyster Bay,
New York in approximately 1,100 square feet of leased office space. The Company
currently pays $850 per month in rent under its lease, which extends through
March 2000. The Company also leases approximately 7,000 square feet of its main
operational facility in Lafayette, Louisiana and pays $4,000 per month under a
lease extending through October 2002. The Company believes that additional
office and operational space will be required to accommodate planned expansion.
Employees
As of March 31, 1998, the Company had 25 full-time employees,
including three petroleum engineers and two geologists. None of its employees is
represented by a collective bargaining unit. Management believes that the
Company's relationship with its employees is excellent.
Legal Proceedings
Piedra Drilling Company, Inc. ("PDC") commenced an action against the
Company in Denver, Colorado in July 1997. PDC brought this action to enforce a
contract for the issuance of 450,000 shares of the Company's common stock in
consideration for the sale by PDC to the Company of certain drilling equipment
and designs. The Company did not issue the shares to PDC because the necessary
equipment and designs were not delivered and/or validly assigned to the Company.
PDC obtained a default judgment in the amount of approximately $1.2 million,
which was vacated in November 1997. Colorado counsel for the Company filed an
answer, counterclaims and discovery demands in November 1997. The Company
believes it has a number of meritorious defenses and potential counterclaims and
intends to vigorously defend this action.
Other than the above legal proceeding, the Company is not a party to
any other material pending or threatened legal proceeding.
36
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names and age of the directors and executive officers of the
Company, and their positions with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sam L. Bass, Jr............................ 63 Chairman of the Board, President and Chief
Executive Officer
James R. Callender, Sr..................... 57 Chief Operating Officer, Vice President and
Director
Noreen G. Wilson........................... 45 Chief Financial Officer, Vice President and
Director
James A. Griffin........................... 43 Secretary, Treasurer and Director
Robert McKnight............................ 62 President of BAPCO
William Beaton............................. 75 Director
</TABLE>
The principal occupations for the past five years (and, in some
instances, for prior years) of each of the directors and executive officers of
the Company are as follows:
Sam L. Bass, Jr. has been the Chairman of the Board, President and
Chief Executive Officer of the Company since September 1996. Mr. Bass also
serves as the Chief Executive Officer of Bass Environmental Waste, Inc., which
he founded in 1987, U.S. Energy, Inc., which he founded in 1984, and Bass
Stabilizers, Ltd., which he co-founded in 1978, each of which is a
privately-held company to which he devotes minimal time. From December 1993 to
September 1995, he served as President and Chief Executive Officer of Bass
Environmental World Wide Services, Inc. From January 1992 to September 1995, he
served as President and Chief Executive Officer of Bass Environmental Inc. Mr.
Bass is a pioneer in the field of downhole drilling and stabilization, and is
the inventor of seven drilling aids, many of which are being used around the
world. Mr. Bass founded a fire-fighting organization called Al-Wadhi, through
which he joined others in efforts to put out oil well fires in Kuwait,
immediately after the Gulf War, for a period of approximately 18 months in 1991
and 1992. Mr. Bass received a B.A. degree from McNeese State University in 1949
and an M.A. degree in Mechanical Engineering from Georgia Tech in 1952.
James R. Callender, Sr. has served as Chief Operating Officer and Vice
President of the Company since August 1997 and a Director since September 1996.
He has also been the President and owner of Cal-Sons Co. Inc., an ostrich farm
and cattle ranch located in Louisiana, since November 1990. From July 1997 to
August 1997, Mr. Callender served as a Consultant to the Company. From March
1997 to April 1997, he served as a Consultant to Forcenergy Inc., an independent
oil and gas company. From September 1996 to March 1997, Mr. Callender served as
a Management Consultant to Arctic Recoil, Inc., a maker of high pressure well
control units. He acted as an Investment Consultant to Coburn Inc., an oil field
construction and heavy equipment operator, from February 1996 to September 1996.
From January 1993 to December 1995, Mr. Callender served as Chief Engineer to
the Chief Executive Officer and Senior Consultant at Unocal Corp., a fully
integrated energy resources company whose worldwide operations comprise many
aspects of energy production. Until December 1992, he served as Drilling Manager
of Worldwide Operations at Unocal Corp. Mr. Callender received a B.S. degree in
Geology and Engineering from Louisiana State University in 1964.
37
<PAGE>
Noreen G. Wilson has served as Chief Financial Officer of the Company
since June 1997. She has been a Director of the Company since December 1996.
From January 1995 to the present time, Mrs. Wilson has served as President of
Supertrail Manufacturing Company, Inc., a real estate development firm located
in Aberdeen, Mississippi. Supertrail Manufacturing Company, Inc. filed for
Chapter 11 reorganization under the U.S. Bankruptcy Code in January 1995. At
that point in time, Mrs. Wilson became President, in order to guide and manage
the company through its reorganization, and she devotes minimal time in this
position. From February 1993 to December 1996, Mrs. Wilson served as an
International Consultant for Imperial International Design, a consulting
company. She provided consulting services for the financing of American builders
and contractors overseas, primarily working through OPIC, the Export/Import Bank
and the World Bank. During the same time period, Mrs. Wilson served as Vice
President of Traditional Enterprises, a financial consulting firm located in
Roswell, Georgia. Ms. Wilson is the first cousin of James A. Griffin.
James A. Griffin has been the Secretary, Treasurer and a Director of
the Company since September 1996. From April 1992 to April 1996, Mr. Griffin was
a founding and managing partner in the law firm of Griffin & Pellicane, Esq.
located in Westbury, New York. In April 1996, he formed the law firm of James A.
Griffin, Esq., but he is currently minimally involved in the practice of law. He
received his J.D. from Touro College, Jacob D. Fuchsberg Law Center, in 1987. He
received his B.A. degree from Dowling College in 1976 and his B.S. degree at the
State University of New York at Stony Brook, School of Allied Health Sciences,
in 1979. He is admitted to practice law in the State of New York and is a member
of the American Bar Association, the New York State Bar Association and the
Nassau County Bar Association. Mr. Griffin is the first cousin of Noreen G.
Wilson.
Robert McKnight has been the President of BAPCO since August 1997.
Previously, Mr. McKnight acted as a Consultant to the Company from November 1996
until August 1997. From August 1991 until July 1996, Mr. McKnight acted as a
Consulting Engineer to Patriot Resources, an oil and gas company located in
Dallas, Texas. Mr. McKnight has 35 years of experience in supervising and
managing drilling and production operations, including reservoir and field
evaluations, reserve and cash flow determinations for property acquisitions, and
equity determinations. Mr. McKnight received his B.S. in Petroleum Engineering
from Texas A&M University in 1957.
William Beaton has been a Director of the Company since September 1996.
He currently serves as the Chairman of The Institute of Petroleum (West of
Scotland Branch) and has been in that position for more than the past five
years. He was the General Manager of Clydesdale Bank of Glasgow, Scotland until
his retirement in 1982. Since his retirement from the Bank, he has worked as a
self-employed consultant to public and smaller independent companies. He has
been involved in the international oil and gas industry for almost 30 years,
with more than 50 years of experience in management and finance.
All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified, unless their office
is vacated in accordance with the Certificate of Incorporation of the Company.
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. Except for the relationship
between Noreen G. Wilson and James A. Griffin, who are cousins, there are no
family relationships among the directors and officers of the Company.
Advisory Board
The Company has established an Advisory Board comprised of three
members with experience in the areas of oil and gas production. The Advisory
Board meets periodically with the Company's Board of Directors and management to
discuss matters relating to the Company's business activities including
establishing commercial business alliances and working projects with
corporations and government agencies on an international basis. Members of the
Advisory Board are reimbursed by the Company for out-of-pocket expenses incurred
in serving on the Advisory Board.
38
<PAGE>
Some of the members of the Advisory Board may serve as consultants to
the Company under consulting agreements for which they will receive
compensation. To the Company's knowledge, none of its Advisory Board members or
other consultants has any conflict of interest between their obligations to the
Company and their obligations to others.
The members of the Company's Advisory Board and their primary
professional or academic affiliations are listed below:
Senator Vance Hartke has been a member of the Company's Advisory Board
since September 1996. Mr. Hartke was the United States Senator for Indiana from
1959 to 1977. While a Senator, he served on both the Finance Committee and the
Commerce Committee, two of the most powerful and prestigious committees of the
U.S. Senate. Prior to his senatorial term, he served as Mayor of the City of
Evansville, Indiana from 1956 to 1958, when he resigned to take his seat in the
U.S. Senate. Mr. Hartke's political career also includes service as a Deputy
Prosecuting Attorney, seven times as a delegate to the Democratic National
Convention, as Democratic County Chairman in Vanderburgh County, Indiana, and a
Chairman of the U.S. Senatorial Campaign Committee. He continues to practice law
at the law firm of Hartke & Hartke in Falls Church, Virginia. He currently sits
on the Board of Directors of McCrane & Co. He received his A.B. from the
University of Evansville in 1941 and his J.D. from Indiana University School of
Law in 1948, where he was Editor-in-Chief of the Indiana Law Journal.
Marvin Gibbons has been a member of the Company's Advisory Board since
September 1996. In 1990, Mr. Gibbons founded a private company seeking
investment capital for various development projects, including several Native
American India Developments. He opened a private domestic and international
import/export company, as well. During the past seven years, Mr. Gibbons became
a partner and Acting Secretary of CAL-NOR, Cal-Marine Industries, ESOP, and
Zenith Insurance Limited. He is currently involved in a number of Development
Projects both in the United States and internationally.
Ken Water has been a member of the Company's Advisory Board since
September 1996.
Committees of the Board of Directors
The Company expects to establish an Audit Committee and Compensation
Committee in late 1998, each of which will be comprised of at least two
independent directors. The Audit Committee will, among other things, make
recommendations to the Board of Directors regarding the independent auditors to
be nominated for ratification by the stockholders, review the independence of
those auditors and review audit results. The Compensation Committee will
recommend to the Board compensation plans and arrangements with respect to the
Company's executive officers and key personnel. It is contemplated that the
Audit and Compensation Committees will initially include William Beaton and
another independent director who the Company is currently in the process of
identifying. The Board of Directors does not currently have and does not intend
to establish a Nominating Committee as such functions are to be performed by the
entire Board of Directors.
Compensation of Directors
Non-employee directors of the Company currently receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. The Company does not intend
to separately compensate employees for serving as directors.
39
<PAGE>
In September 1996, the Company issued to each of James R. Callender,
Noreen G. Wilson, James A. Griffin and William Beaton, directors of the Company,
500,000 shares of Common Stock in connection with their serving on the Company's
Board of Directors.
Compensation of Executive Officers
The following table sets forth, in summary form, the cash compensation
earned during the period from October 1, 1996 to September 30, 1997 by its Chief
Executive Officer and the two other most highly compensated executive officers
whose compensation exceeded $100,000 during such period.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation (c, d, e) Long Term Compensation (f)
- ----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
NAME AND FISCAL SALARY (2) BONUS OTHER ANNUAL RESTRICTED
PRINCIPAL YEAR (1) ($) COMPENSATION STOCK AWARDS
POSITION (4)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sam L. Bass, Jr. 1997 $480,000 0 $125,000 500,000 shares
President and Chief (3)
Executive Officer
- ----------------------------------------------------------------------------------------------------
James A. Griffin, 1997 $120,000 0 0 500,000 shares
Secretary, Treasurer (5)
- ----------------------------------------------------------------------------------------------------
Noreen G. Wilson, 1997 $360,000 0 0 500,000 shares
Executive Vice President (5)
and Chief Financial
Officer
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Noreen G. Wilson joined the Company as Executive Vice President and Chief
Financial Officer in January 1997.
(2) Salaries for Sam L. Bass, Jr., James A. Griffin, and Noreen G. Wilson were
accrued and not paid in cash. Each individual has an option to convert all
or part of any accrued salary to Common Stock of the Company at a price
reasonably established by the Board of Directors at the time of exercise.
(3) Represents amortization of Common Stock of Environmental Remediation
Funding Corporation distributed in 1995 to Sam L. Bass, Jr.
(4) Restricted stock awards to Mr. Griffin, Ms. Wilson and Mr. Bass were
awarded in fiscal year 1997 and were vested as of the date of grant.
(5) The aggregate value of benefits to be reported under the "Other Annual
Compensation" column did not exceed the lesser of $50,000 or 10% of the
total of annual salary and bonus reported for the named executive officer.
40
<PAGE>
Proposed Employment Agreements
The Company contemplates entering into three-year employment agreements
with each of Sam L. Bass, Jr., James A. Callender, Sr., Noreen G. Wilson and
James A. Griffin to serve in their respective positions. The Company is still in
the process of determining the terms and conditions of each employment
agreement.
Proposed Stock Option Plan
The Company does not currently have a stock option plan or other
similar employee benefit plan for executives and/or other employees of the
Company, and no options have been granted or are currently outstanding.
The Board of Directors of the Company plans to approve and adopt a
proposed 1998 Stock Option Plan (the "Plan"), pursuant to which officers,
directors, key employees, and consultants of the Company will be eligible to
receive incentive stock options and non-qualified stock options to purchase
shares of Common Stock. The Plan would also provide for the grant of stock
appreciation rights, restricted stock, performance shares and performance units
at the discretion of Company's Board of Directors.
With respect to incentive stock options, the Plan would provide that
the exercise price of each such option be at least equal to 100% of the fair
market value of the Common Shares on the date that such option is granted (and
110% of fair market value in the case of shareholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Shares),
and would require that all such options have an expiration date not later than
the date which is one day before the tenth anniversary of the date of the grant
of such option (or the fifth anniversary of the date of grant in the case of 10%
41
<PAGE>
or greater shareholders. However, with certain limited exceptions, in the event
that the option holder would cease to be associated with the Company, or would
engage in or be involved with any business similar to that of the Company, such
option holder's incentive options would immediately terminate. Pursuant to the
Plan, the aggregate fair market value, determined as of the date(s) of grant,
for which incentive stock options are first exercisable by an option holder
during any one calendar year will not exceed $ 100,000.
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of March 31,
1998, with respect to the beneficial ownership of the Company's Common Shares by
each shareholder known by the Company to be the beneficial owner of more than 5%
of its outstanding shares, by each director of the Company, by the executive
officers named in the table below and by the directors and executive officers of
the Company as a group. Except as otherwise noted, the persons named in this
table, based upon information provided by such persons, have sole voting and
investment power with respect to all Common Shares beneficially owned by them.
None of the current directors and officers of the Company are participating in
this offering.
Common Shares Beneficially Owned
------------------------------------------
Name and Address (1) Number(2) Percentage
-------------------- --------- ----------
Sam L. Bass, Jr....................... 8,704,568(3) 35.3%
James R. Callender, Sr................ 500,000 2.0
Noreen G. Wilson...................... 500,000 2.0
James A. Griffin...................... 500,000 2.0
Robert McKnight....................... 75,000 *
William Beaton........................ 500,000 2.0
All officers and directors as a group
(six persons)...................... 10,754,568 43.6%
- ------------
* Represents less than 1% of outstanding Common Shares or voting power.
(1) The address of each beneficial owner is c/o Environmental Remediation
Holding Corporation, 3-5 Audrey Avenue, Oyster Bay, New York 11771.
(2) Shares beneficially owned and percentage of ownership are based on
24,676,289 Common Shares outstanding as of March 31, 1998. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or dispositive power with
respect to such shares.
(3) Includes shares of Common Stock beneficially owned by Mr. Bass individually
and through entities under his control.
43
<PAGE>
SELLING SHAREHOLDERS
The 1997 Investor Private Placement
From October to December 1997, the Company raised gross proceeds of
$4,300,000 in a private placement of the Company's 5.5% convertible senior
subordinated secured notes due 2002 (the "1997 Notes") and warrants to purchase
Common Stock (the "1997 Warrants") to a limited number of "accredited"
institutional investors. The maximum number of shares of Common Stock which may
be issued by the Company upon the conversion of the 1997 Notes (at a base
conversion rate of $1.25 per share, subject to certain limited conditions) and
the exercise of the 1997 Warrants (at an exercise price of $2.83 per share) is
up to 3,440,000 shares and 283,800 shares, respectively. This Prospectus covers
the maximum of up to 3,723,800 total shares of Common Stock issuable upon the
conversion of the 1997 Notes and the exercise of the 1997 Warrants. The 1997
Investors intend to sell the Common Stock acquired thereby from time to time in
the future upon conversion of the 1997 Notes and the exercise of the 1997
Warrants. Based on the number of outstanding shares of Common Stock of the
Company as of March 31, 1998, the shares issuable under the 1997 Notes and the
1997 Warrants represent approximately 15.8% of the outstanding Common Stock of
the Company. As of March 31, 1998, none of the 1997 Notes had been converted and
none of the 1997 Warrants had been exercised.
All of the Shares held or to be held by the 1997 Investors may be
offered hereunder except that, under the terms of the 1997 Notes, the holders
thereof may convert the original principal amount of the 1997 Notes only to the
extent of one-third of such amount on and after each of December 30, 1997,
January 29, 1998 and February 28, 1998. The conversion rate of the 1997 Notes is
equal to the lowest of (i) $2.83, representing 100% of the average closing bid
price per share of the Common Stock as quoted on the primary market or exchange
on which it trades (the "Average Share Price") for the five consecutive trading
days immediately preceding October 15, 1997, the date of the initial issuance of
the 1997 Notes (the "Issuance Date"), (ii) 100% of the Average Share Price for
the five consecutive trading days immediately preceding October 22, 1998 or the
first anniversary of the Issuance Date, or (iii) 80% of the Average Share Price
for the five consecutive trading days preceding the applicable conversion date
on which all or part of the 1997 Notes are converted. However, the conversion
price may not be less than $1.25 per share (the "Base Price"), unless 80% of the
Average Share Price is less than the Base Price for a period of 90 consecutive
calendar days, in which case the Base Price will no longer be applicable. For
purposes of registering the maximum number of shares of Common Stock under this
Prospectus, the conversion rate is assumed to be the Base Price. Because the
conversion rate of the 1997 Notes is based in part on future average trading
prices of the Common Stock, the number of shares which may actually be sold
pursuant to this Prospectus could differ significantly. For example, in the
event a notice of election to convert all the 1997 Notes were to have been
received on April 8, 1998, the lowest applicable conversion rate would have been
$.96 per share (80% of the Average Share Price for the five consecutive trading
days preceding such date), resulting in a total of 3,723,800 shares of Common
Stock issuable upon conversion (including 283,800 shares into which the 1997
Warrants are exercisable), subject to the elimination of the 90-day Base Price
provision described above. The 1997 Notes mature, unless prepaid at any time
after October 15, 1998, on October 15, 2002 and are secured by the Company's
proven crude oil reserves on its properties in Utah. The 1997 Notes do not
contain any covenants that would prohibit, limit or restrict, among other
matters, the Company's ongoing business operations, acquisitions of oil and gas
properties, payment of dividends or incurrence of additional indebtedness. The
1997 Warrants may be exercised at any time through October 15, 2002.
In connection with the sale of the 1997 Notes and the 1997 Warrants,
the Company entered into a Registration Rights Agreement with the 1997
Investors, pursuant to which the Company agreed to register the Shares under the
Securities Act for resale by, and for the benefit of, such shareholders. The
Company has failed to register the shares into which the 1997 Notes are
convertible and the 1997 Warrants are exercisable during the 120-day period
following the completion of this transaction. As a result, the Company is
required to make certain payments to the 1997 Investors. The Company is
currently in negotiations with these Investors to determine the amounts to be
sold.
The public offering of the Shares by the 1997 Investors will terminate
on the earlier of October 15, 2000 or the date on which all Shares offered
hereby have been sold by the 1997 Investors.
44
<PAGE>
The Kingsbridge Line of Credit Agreement*
In March 1998, the Company entered into the Kingsbridge Investment
Agreement, pursuant to which the Company has the right to receive up to
$10,000,000 in equity financing from the sale of its Common Stock in tranches to
Kingsbridge. Through the Company's exercise of put options, Kingsbridge is
required to purchase, and the Company is required to sell, subject to certain
closing conditions and limitations on the timing of purchases and amount of
Common Stock to be sold with respect to exercises of individual put options, at
least $3,000,000 in shares of Common Stock at a purchase price equal to 79% of
the average of the lowest prices of the Common Stock on the trading day on which
notice of exercise of the put option is given and on the one trading day prior,
and the two trading days following, such put option exercise notice. The minimum
market price for sales of shares is $1.00 per share. For purposes of registering
the maximum number of shares of Common Stock under this Prospectus, the market
price is assumed to be $1.00. At a market price of $1.00, the maximum number of
shares of Common Stock which may be issued by the Company upon the exercise of
the put options is 12,658,228 shares. Because the purchase price of the Common
Stock is based in part on future average trading prices of the Common Stock, the
number of shares which may actually be sold pursuant to this Prospectus could
differ significantly. For example, in the event a notice of election to exercise
individual put options were to have been received on March 26, 1998, the lowest
applicable purchase price would have been $0.98 per share, resulting in a total
of 10,204,082 shares of Common Stock offered hereby. Notwithstanding the
foregoing, the maximum number of shares issuable to Kingsbridge shall not exceed
19.9% of the outstanding shares of Common Stock at the time of such exercise(s).
In connection with entering into the Kingsbridge Investment Agreement, the
Company issued to Kingsbridge a three-year warrant to purchase 100,000 shares of
Common Stock at an exercise price of $1.20 per share (94% of the market price
calculated as of March 23, 1998), exercisable beginning on September 24, 1998.
As a condition precedent to the purchase and sale of shares pursuant to the
Kingsbridge Investment Agreement, among others, the Company is required to
register with the Commission under the terms of a Registration Rights Agreement
all of the shares of Common Stock subject to the put option, as well as those
into which the Kingsbridge Warrant is exercisable, for resale by Kingsbridge.
The Kingsbridge Investment Agreement has a term of two years, but may be
terminated by Kingsbridge earlier in the event the Common Stock subject to the
put options is not, or fails to be, registered for resale after specified time
periods lapse.
- ---------------
* This page will be modified to reflect the number of shares of Common Stock
acquired by Kingsbridge from time to time as set forth in a Prospectus
Supplement.
45
<PAGE>
The April 1998 Financing
In April 1998, the Company raised gross proceeds of $300,000 in a
private placement of the Company's 12% convertible notes, which are due on the
earlier of January 1999 or at such time as the Company receives the first
draw-down under the Kingsbridge Investment Agreement (the "April 1998 Notes"),
and warrants to purchase shares of Common Stock (the "April 1998 Warrants") to
nine "accredited" investors. The maximum number of shares of Common Stock which
may be issued by the Company upon the conversion of the April 1998 Notes (at a
base price of $1.50 per share), subject to certain adjustments, and the exercise
of the April 1998 Warrants (at an exercise price of $1.25 per share) to 200,000
shares and 210,000 shares, respectively. This Prospectus covers the 410,000
shares of Common Stock issuable upon the conversion of the April 1998 Notes and
the exercise of the April 1998 Warrants. Based on the number of outstanding
shares of Common Stock of the Company as of March 31, 1998, the shares issuable
under the April 1998 Notes and April 1998 Warrants represent approximately 1.7%
of the outstanding Common Stock of the Company. As of July 10, 1998, none of the
April Notes had been converted and none of the Warrants had been exercised
All of the shares to be held upon conversion by the holders of the
April 1998 Notes may be offered in that, under the terms of the April 1998
Notes, such holders may convert 100% of the principal amount of the April 1998
Notes at any time after the issuance date. The conversion rate of the April 1998
Notes is equal to $1.50 per share and this price was used for purposes of
registering the maximum number of shares of Common Stock upon conversion of the
April 1998 Notes under this Prospectus. The April 1998 Notes are subordinated to
any senior debt incurred by the Company. All of the shares to be held upon
exercise by the holders of the April 1998 Warrants may be offered in that, under
the terms of the April 1998 Warrants, the holders thereof may exercise at any
time up until April 2001. The exercise price of the April 1998 Warrants is equal
to $1.25 per share and this price was used for purposes of registering the
maximum number of shares of Common Stock under this Prospectus for exercise of
the April 1998 Warrants. In connection with the sale of the April 1998 Notes and
the April 1998 Warrants, the Company committed to register the April 1998 shares
under the Securities Act for resale by, and for the benefit of, such
shareholders.
The First June 1998 Financing
In June 1998, the Company raised gross proceeds of $175,000 in a
private placement of warrants to purchase shares of Common Stock (the "June 1998
Warrants") to two "accredited" investors. The maximum number of shares of Common
Stock which may be issued upon the exercise of the June 1998 Warrants (at an
exercise price of $.75) is up to 1,140,000 shares. This Prospectus covers the
1,140,000 shares of Common Stock issuable upon the exercise of the June 1998
Warrants. Based on the number of outstanding shares of Common Stock of the
Company as of March 31, 1998, the First June 1998 shares represent approximately
4.6% of the outstanding Common Stock of the Company. As of July 10, 1998, none
of the June 1998 Warrants had been exercised.
All of the shares to be held by the Investors upon exercise of the
First June 1998 Warrants may be offered hereunder in that, under the terms of
the First June 1998 Warrants, the holders thereof may exercise at any time up
until 5 PM Eastern Standard Time on the first business day after the fourteen
month period following the date of the declaration of the effectiveness of the
Company's registration statement in which the First June 1998 Warrants are
registered. The exercise price of the First June 1998 Warrants is equal to $.75
per share and this price was used for purposes of registering the maximum number
of shares of Common Stock under this Prospectus for exercise of the First June
1998 Warrants.
In the event that the holders of the First June 1998 Warrants exercise
for not less than 250,000 shares of the Company's Common Stock, within 180 days
of June 1, 1998 and exercise for at least an additional 50,000 shares of Common
Stock, within 360 days of June 1, 1998, the Company shall issue to the holders
of the First June 1998 Warrants additional warrants for the purchase of a number
of shares equal to the number of shares purchased under the First June 1998
Warrants within 180 and 360 days of June 1, 1998. The exercise price of these
additional warrants is equal to $2.00 per share. Such additional warrants may be
exercised at any time up until 5 PM Eastern Standard Time on the first business
day after the twenty-four (24) month period following the date of the
effectiveness of the Company's registration statement in which the additional
warrants are registered.
In connection with the sale of the First June 1998 Warrants, the
Company committed to register the First June 1998 Funding shares under the
Securities Act for resale by, and for the benefit of, such shareholders. The
Company has committed to register the additional warrants within ninety (90)
days of issuance.
46
<PAGE>
The Second June 1998 Financing
In June 1998, the Company raised gross proceeds of $425,000 in the
private placement of the Company's 12% subordinated convertible notes, which are
due on the earlier of December 1999 or upon the receipt by the Company of debt
or equity or revenue from the sale of leases or other property of not less than
$4 million (the "Second June 1998 Notes"), and warrants to purchase shares of
Common Stock (the "Second June 1998 Warrants") to five "accredited" investors.
The maximum number of shares of Common Stock which may be issued by the Company
upon the conversion of the Second June 1998 Notes (at a base conversion price of
$1.00 per share), subject to certain adjustments, and the exercise of the Second
June 1998 Warrants (at an exercise price of $.50 per share for the first two
years and $.85 per share thereafter) is up to 425,000 shares and 531,250 shares,
respectively. This Prospectus covers the 956,250 shares of Common Stock issuable
upon the conversion of the Second June 1998 Notes and the exercise of the Second
June 1998 Warrants. Based on the number of outstanding shares of Common Stock of
the Company as of March 31, 1998, the Second June 1998 shares represent
approximately 3.9% of the outstanding Common Stock of the Company. As of July
10, 1998, none of the Second June 1998 Notes or the Second June 1998 Warrants
had been exercised.
All of the shares to be held upon conversion by the holders of the
Second June 1998 Notes may be offered in that, under the terms of the Second
June 1998 Notes, such holders may convert 100% of the principal amount of the
Second June 1998 Notes at any time after the issuance date. The conversion rate
of the Second June 1998 Notes is equal to $1.00 per share and this price was
used for purposes of registering the maximum number of shares of Common Stock
upon conversion of the Second June 1998 Notes under this Prospectus. The Second
June 1998 Notes are subordinated to any senior debt incurred by the Company. All
of the shares to be held upon exercise by the holders of the Second June 1998
Warrants may be offered in that, under the terms of the Second June 1998
Warrants, holders may exercise at any time until June 2002. The exercise price
of the Second June 1998 Warrants is equal to $.50 per share for the first two
years and $.85 per share thereafter (subject to adjustment) and these prices
were used for purposes of registering the maximum number of shares of Common
Stock under this Prospectus for exercise of the Second June 1998 Warrants. The
Second June 1998 Warrants contain cashless exercise and anti-dilution provisions
which include, but are not limited to, anti-dilutive protection against stock or
management option issuances below $.50 per share. Additionally, the exercise
price of the Second June 1998 Warrants will be adjusted downward to 50% of fair
market value when the registration statement becomes effective, if after 90 days
the share price of the Common Stock falls below $.75 per share for more than
five consecutive trading days or seven out of ten trading days. In connection
with the sale of the Second June 1998 Notes and the Second June 1998 Warrants,
the Company committed to register the Second June 1998 shares under the
Securities Act for resale by, and for the benefit of, such shareholders.
The Third June 1998 Financing
In June 1998, the Company raised gross proceeds of $1,250,000 in a
private placement of the Company's 5.5% convertible notes due 2000 (the "Third
June 1998 Notes") and warrants to purchase shares of Common Stock (the "Third
June 1998 Warrants") to one "accredited" investor. The conversion price is
calculated pursuant to a formula as the lower of (i) the average closing bid
price for the five days prior to the closing ($.72) or (ii) 80% of the average
closing bide price for the five days prior to notice of intent to convert. In
the event that the lower price were the average closing bid price for the five
days prior to the closing, the maximum number of shares of Common Stock which
may be issued by the Company upon conversion of the Third June 1998 Notes would
be 1,798,124 shares. For purposes of registering the maximum number of shares of
Common Stock under this Prospectus, the conversion rate is assumed to be the
base price of $.72. Because the conversion rate of the Third June 1998 Notes is
based in part on future average trading prices of the Common Stock, the number
of shares which may actually be sold pursuant to this Prospectus could differ
significantly. For example, in the event the average closing bid price for the
five days prior to notice of intent to convert were $.72, 80% of such number
would equal a share price of $.58, resulting in a total of 2,247,655 shares of
Common Stock issuable upon conversion, exclusive of the exercise of any of the
Third June 1998 Warrants. The maximum number of shares of Common Stock which may
be issued by the Company upon the exercise of the Third June 1998 Warrants (at
an exercise price of 120% of the average closing bid price for the five (5) days
prior to the closing which is equal to $.8634) is 230,000 shares. This
Prospectus covers the up to 2,028,124 total shares of Common Stock issuable,
with certainty, upon the conversion of the Third June 1998 Notes and the
exercise of the Third June 1998 Warrants. Based on the number of outstanding
shares of Common Stock of the Company as of March 31, 1998, the Third June 1998
shares represent approximately 8.2% of the outstanding Common Stock of the
Company. As of July 10, 1998, none of the Third June 1998 Notes had been
converted and none of the Third June 1998 Warrants had been exercised.
<PAGE>
All of the shares to be held upon conversion by the holders of the
Third June 1998 Notes may be offered, except that, under the terms of the Third
June 1998 Notes, such holders may convert the original principal amount of the
Third June 1998 Notes only to the extent of one-third of such amount on and
after each of July 23, 1998, August 23, 1998 and September 23, 1998. The
conversion rate of the Third June 1998 Notes equal to $.72 per share was used
for purposes of registering the maximum number of shares of Common Stock upon
conversion of the Third June 1998 Notes under this Prospectus. The Third June
1998 Notes are subordinates to any senior debt incurred by the Company.
All of the shares to be held upon exercise by the Holders of the Third
June 1998 Warrants may be offered in that, under the terms of the Third June
1998 Warrants, such holders may exercise at any time until June 2003. The
exercise price of the Third June 1998 Warrants is equal to $.87 per share and
this price was used for purposes of registering the maximum number of shares of
Common Stock under this Prospectus for exercise of the Third June 1998 Warrants.
In connection with the sale of the Third June 1998 Notes and the Third 1998 June
Warrants, the Company entered into a Registration Rights Agreement with the
Third June 1998 Investors, pursuant to which the Company agreed to register the
Third June 1998 shares under the Securities Act for resale by, and for the
benefit of, such shareholders.
Stock Ownership
The following table sets forth the names of and the number of Shares
beneficially owned by each Selling Shareholder as of July 10, 1998. Since
the Selling Shareholders may sell all, some or none of their Shares, no estimate
can be made of the aggregate number of Shares that are to be offered hereby or
the number or percentage of Shares that each Selling Shareholder will own upon
completion of the offering to which this Prospectus relates.
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Before Shares and
the Offering (1) Percentage
-------------------------------------------- Shares to be Owned
Name of Underlying Underlying Total Sold in After the
Selling Shareholder Notes Warrants Shares the Offering Offering
- ------------------- ----- -------- ------ ------------ ---------
1997 Investor Private Placement
- -------------------------------
<S> <C> <C> <C> <C> <C>
Banque Edouard Constant SA 320,000 24,000 344,000 344,000 --
11, Cours de Rive
Case Postale 3754
1211 - Geneva
Switzerland
Elara Ltd. 600,000 45,000 645,000 645,000 --
P.O. Box 438
Tropic Isle Building
Wickhams Cay
Road Town, Tortola
British Virgin Islands
c/o Talisman Capital
1601 LaGrande Drive, Suite 100
Little Rock, AR 72211
Keyway Investments Ltd. 720,000 54,000 774,000 774,000 --
19 Mount Havelock
Douglas, Isle of Man
1M1 2QG
British Islands
c/o Midland Walwyn Capital, Inc.
BCE Place
181 Bay Street, Suite 500
Toronto, Ontario M5J 2V8
Canada
JMG Capital Partners L.P. 320,000 24,000 344,000 344,000 --
c/o JMG Capital Management Inc.
1999 Avenue of the Stars
Suite 1950
Los Angeles, CA 90067
Triton Capital Investments, Ltd. 320,000 24,000 344,000 344,000 --
c/o JMG Capital Management Inc.
1999 Avenue of the Stars
Suite 1950
Los Angeles, CA 90067
Porter Partners L.P. 320,000 24,000 344,000 344,000 --
c/o Porter Capital Management Co.
100 Shoreline Highway, Suite 211B
Mill Valley, CA 94941
EDJ Limited 80,000 6,000 86,000 86,000 --
c/o Porter Capital Management Co.
100 Shoreline Highway, Suite 211B
Mill Valley, CA 94941
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Before Shares and
the Offering (1) Percentage
-------------------------------------------- Shares to be Owned
Name of Underlying Underlying Total Sold in After the
Selling Shareholder Notes Warrants Shares the Offering Offering
- ------------------- ----- -------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Cranshire Capital, L.P. 240,000 18,000 258,000 258,000 --
3000 Dundee Road
Suite 105
Northbrook, IL 60062
Legion Fund, Ltd. 120,000 9,000 129,000 129,000 --
c/o Porter Capital Management Co.
100 Shoreline Highway, Suite 211B
Mill Valley, CA 94941
Banque Franck, S.A. 400,000 30,000 430,000 430,000 --
1, Rue Toepffer
1206 - Geneva
Switzerland
Avalon Research Group, Inc. -- 25,800 25,800 25,800 --
1900 Glades Road, Suite 201
Boca Raton, FL 33431
Kingsbridge Line of Credit
- --------------------------
Kingsbridge Capital Limited(2) -- -- 100,000 100,000 --
Main Street
Kilcullen, County Kildare
Republic of Ireland
April 1998 Financing
- --------------------
Robert and Jessica Baron 16,667 17,500 34,167 34,167 --
4664 Coco Plum Way
Delray Beach, FL 33445
Frank Ferrante 8,333 17,083 17,083 8,750 --
4 Twilight Place
Fort Monmouth, NJ 07758
Rosemary Friedman Trust 50,000 52,500 102,500 102,500 --
4420 Bocaire Boulevard
Boca Raton, FL 33487
Diane Hom 16,667 17,500 34,167 34,167 --
205 West End Avenue, #22J
New York, NY 10025
Stanley Katz 16,667 17,500 34,167 34,167 --
10 Bonnie Drive
Northport, NY 11768
Howard Talks/Carol Hall, JTWROS 50,000 52,500 102,500 102,500 --
249 Tradewind Drive
Palm Beach, FL 33480
Kenneth Tice 6,666 7,000 13,666 13,666 --
181 Drake Lane
Ledgewood, NJ 07852
Stephen Warner 25,000 26,250 51,250 51,250 --
8 Shannon Circle
West Palm Beach, FL 33401
David Warren 10,000 10,500 20,500 20,500 --
2004 Lake Osbourne Drive, #9
Lake Worth, FL 33461
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Before Shares and
the Offering (1) Percentage
-------------------------------------------- Shares to be Owned
Name of Underlying Underlying Total Sold in After the
Selling Shareholder Notes Warrants Shares the Offering Offering
- ------------------- ----- -------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C>
First June 1998 Financing
- -------------------------
Corporate Builders -- 140,000 140,000 140,000 --
777 S. Flagler Drive
Suite 909
West Palm Beach, FL 33401
Legal Computer Technology, Inc. -- 500,000 500,000 500,000 --
277 Royal Poinciana Way
Suite 155
Palm Beach, FL 33480
Howard Talks -- 500,000 500,000 500,000 --
249 Tradewind Drive
Palm Beach, FL 33480
Second June 1998 Financing
- --------------------------
Azriel and Sheila Nagar 25,000 31,250 56,250 56,250 --
342 Irving Avenue
South Orange, NJ 07079
Edward R. Rohquin 30,000 37,500 67,500 67,500 --
9906 White Sands Place
Bonita Springs, FL 34135
Joseph and Valerie Spano 100,000 125,000 225,000 225,000 --
150 Tamiami Trail North
Naples, FL 34102
David B. Thornburgh 100,000 25,000 225,000 225,000 --
420 W. San Marino Drive
Miami Beach, FL 33139
David B. Thornburgh Family Trust 170,000 212,500 382,500 382,500 --
420 W. San Marino Drive
Miami Beach, FL 33139
Third June 1998 Financing
- -------------------------
Intercontinental Holding Company 17,373 -- 17,373 17,373 --
8351 Roswell Road, #239
Atlanta, GA 30350
Joseph Charles & Associates 43,433 75,000 118,433 118,433 --
Lenox Center
3355 Lenox Road, #750
Atlanta, GA 30326
ProFutures Special
Equities Fund, L.P. 1,737,318 155,000 1,892,318 1,895,318 --
1310 Highway 620
Suite 200
Austin, TX 78734
Total 5,863,124 2,303,383 8,358,174 8,352,841 --
</TABLE>
- -------------
(1) All Shares are beneficially owned and the sole voting and investment power
is held by the persons named.
(2) The number of shares beneficially owned by Kingsbridge will be modified to
reflect the number of such shares acquired by Kingsbridge from time to time
as set forth in a Prospectus Supplement.
The Company has agreed to indemnify the Selling Shareholders and the
Selling Shareholders have agreed to indemnify the Company against certain civil
liabilities, including liabilities under the Securities Act.
None of the Selling Shareholders has had any position, office or other
material relationship with the Company or any of its affiliates within the past
three years.
47
<PAGE>
CERTAIN TRANSACTIONS
The Company's predecessor, Environmental Remediation Funding
Corporation ("ERFC"), was incorporated under the laws of the State of Delaware
in September 1995. In August 1996, the stockholders of ERFC exchanged all of
their shares of ERFC for 2,433,950 authorized and unissued shares of common
stock, representing 87.2% of such then outstanding shares, of Regional Air Group
Corporation ("RAIR"), a Colorado corporation. RAIR was a publicly-owned
corporation which had ceased operations and as a result had only nominal assets
and liabilities. ERFC was then merged into RAIR. Following the acquisition of
control, the stockholders of RAIR approved the change in the Company's name to
Environmental Remediation Holding Corporation.
In April 1997, the Company acquired all of the outstanding capital
stock of BAPCO, a privately-held company controlled by Sam L. Bass, Jr., who was
then the Company's Chairman of the Board, President and Chief Executive Officer.
Through this acquisition, the Company acquired, among other assets, ownership of
all rights to the BAPCO Tool and assignment of the Chevron master service
agreement. The Company issued 4,000,000 shares of Common Stock to Mr. Bass in
exchange for the outstanding capital stock of BAPCO. In addition, the Company
issued 3,000,000 shares of Common Stock to BEW, a company controlled by Mr.
Bass, in connection with the assignment of the Chevron master service agreement.
See "Business - Environmental Remediation Services."
From time to time, Noreen G. Wilson and James A. Griffin, both
executive officers and directors of the Company, have advanced funds to the
Company in the total amount of $978,250 through December 1997, pursuant to 8.5%
demand promissory notes, of which $503,148 was repaid through December 31, 1997,
and $475,000 remains outstanding at December 31, 1997. Such notes are
convertible into Common Stock at a conversion rate per share equal to the fair
market value of a share of Common Stock at the time of the advance.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 950,000,000
shares of Common Stock, par value $.0001 per share ("Common Shares"), of which
23,965,625 shares were outstanding on December 31, 1997, and 10,000,000 shares
of Preferred Stock, par value $.001 per share ("Preferred Shares"), issuable in
series, none of which are outstanding.
Common Shares
Holders of the Common Shares are entitled to one vote for each share
held of record by them. The Common Shares have no redemption, preemptive or
sinking fund rights. Holders of the Common Shares are entitled to dividends as
and when declared by the Board of Directors from funds legally available
therefor and, upon liquidation, dissolution or winding-up of the Company, to
participate ratably in all assets remaining after payment of all liabilities.
The Common Shares are not redeemable and do not have any conversion rights or
preemptive rights. All Common Shares issued and outstanding are, and those
offered hereby when issued will be fully paid and non-assessable. See "Dividend
Policy."
Preferred Shares
The Company's Certificate of Incorporation provides that the Board of
Directors of the Company has the authority, without further action by the
holders of the outstanding Common Shares, to issue up to 10,000,000 Preferred
Shares from time to time in one or more classes or series, to fix the number of
shares constituting any class or series and the stated value thereof, if
different from the par value, and to fix the terms of any such series or class,
including dividend rights, dividend rates, conversion or exchange rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company does not have any Preferred Shares outstanding and has no present
intention to issue any Preferred Shares.
Reports
The Company intends to furnish to its shareholders annual reports
containing audited financial statements and make available quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information. In addition, the Company is required to file periodic
reports on Forms 8-K, 10-Q and 10-K with the U.S. Securities and Exchange
Commission and make such reports available to its shareholders.
Limitation of Directors' Liability; Indemnification
The Company's Certificate of Incorporation limits the liability to the
Company of individual directors for certain breaches of their fiduciary duty to
the Company. The effect of this provision is to eliminate the liability of
directors for monetary damages arising out of their failure, through negligent
or grossly negligent conduct, to satisfy their duty of care, which requires them
to exercise informed business judgment. The liability of directors under the
federal securities laws is not affected. A director may be liable for monetary
damages only if a claimant can show a breach of an individual director's duty of
loyalty to the Company, a failure to act in good faith, intentional misconduct,
a knowing violation of the law, an improper personal benefit or an illegal
dividend or stock purchase.
The Company's Certificate of Incorporation also provides that each
director or officer of the Company serving as director or officer shall be
indemnified and held harmless by the Company to the fullest extent authorized by
law, against all expense, liability and loss (including attorneys fees,
judgments, fines, Employee Retirement Income Security Act, excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith.
Listing on OTC Bulletin Board
The Common Shares are listed on the OTC Bulletin Board under the symbol
"ERHC."
Transfer Agent
The transfer agent for the Common Shares is Corporate Stock Transfer,
Inc. of Denver, Colorado.
49
<PAGE>
PLAN OF DISTRIBUTION
The sale or distribution of the Shares may be effected directly to
purchasers by the Selling Shareholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) in the
over-the-counter market, (ii) in transactions otherwise than in the
over-the-counter market or (iii) through the writing of options (whether such
options are listed on an options exchange or otherwise) on, or settlement of
short sales of, the Shares. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the Selling Shareholders or by
agreement between one or more Selling Shareholders and underwriters, brokers,
dealers or agents, or purchasers. If the Selling Shareholders effect such
transactions by selling Shares to or through underwriters, brokers, dealers or
agents, such underwriters, brokers, dealers or agents may receive compensation
in the form of discounts, concessions or commissions from the Selling
Shareholders or commissions from purchasers of Shares for whom they may act as
agent (which discounts, concessions or commissions as to particular
underwriters, brokers, dealers or agents may be in excess of those customary in
the types of transactions involved). The Selling Shareholders and any brokers,
dealers or agents that participate in the distribution of the Shares may be
deemed to be underwriters, and any profit on the sale of Shares by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
To the extent required under the Securities Act, a supplemental
prospectus will be filed, disclosing (a) the name of any such broker-dealers;
(b) the number of Shares involved; (c) the price at which such Shares are to be
sold; (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable; (e) that such broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this Prospectus, as supplemented; and (f) other facts material to the
transaction.
Under the securities laws of certain states, the Shares may be sold in
such states only through registered or licensed brokers or dealers. In addition,
in certain states the Shares may not be sold unless the Shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
The Company will pay all of the expenses, estimated to be approximately
$100,000, incident to the registration, offering and sale of the Shares to the
public hereunder other than commissions, fees and discounts of underwriters,
brokers, dealers and agents. The Company has agreed to indemnify the Selling
Shareholders and any underwriters against certain liabilities, including
liabilities under the Securities Act. The Company will not receive any of the
proceeds from the sale of any of the Shares by the Selling Shareholders.
Each Selling Shareholder will, if applicable, comply with Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, in connection
with any distribution by such Selling Shareholder of the Shares offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, New York, New
York.
EXPERTS
The consolidated balance sheets as of September 30, 1995, 1996 and
1997, and the consolidated statements of income, retained earnings, and cash
flows for each of the three years in the period ended September 30, 1995, 1996
and 1997, have been included herein in reliance on the report of Durland &
Company, CPA's, P.A. independent public accountants, given on the authority of
that firm as experts in auditing and accounting.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"SEC"). Such reports and other information can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. and at the following regional offices of the SEC:
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048; and Chicago Regional Office, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661-2511. Copies of such material can also be obtained from
the public reference section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The SEC maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC,
including the Company.
This Prospectus does not contain all of the information set forth in
the Registration Statement on Form S-1, of which this Prospectus forms a part,
and the exhibits thereto which the Company has filed with the SEC under the
Securities Act, to which reference is hereby made for further information
concerning the Company and the shares of Common Stock.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report .................................................................................F-2
Consolidated Balance Sheets ..................................................................................F-3
Consolidated Statements of Operations .........................................................................F-4
Consolidated Statements of Stockholders' Equity ...............................................................F-5
Consolidated Statements of Cash Flows ........................................................................F-6
Notes to Consolidated Financial Statements ....................................................................F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO: The Board of Directors and Stockholders
Environmental Remediation Holding Corporation
We have audited the accompanying consolidated balance sheets of Environmental
Remediation Holding Corporation and subsidiary, (the "Company") as of September
30, 1996 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Environmental Remediation Holding Corporation and subsidiary as of September 30,
1996 and 1997 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
December 12, 1997
F-2
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 0 $ 327,743
Prepaid expenses and other current assets 0 215,708
------------ ------------
Total current assets 0 543,451
------------ ------------
PROPERTY AND EQUIPMENT
Oil and gas properties
(Successful efforts method) 0 515,625
Equipment 3,720,000 4,220,000
Deposit on purchase of equipment 5,000 136,560
Total property and equipment before depreciation 3,725,000 4,872,185
Less: accumulated depreciation and depletion (248,000) (521,000)
------------ ------------
Net property and equipment 3,477,000 4,351,185
------------ ------------
OTHER ASSETS
Master service agreement 0 300
Total other assets 0 300
Total Assets $ 3,477,000 $ 4,894,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder loans payable $ 6,730 $ 465,094
Note payable - bank 0 175,000
Accounts payable and accrued liabilities:
Accrued salaries 0 960,000
Accrued interest 0 37,228
Other 0 111,054
------------ ------------
Total current liabilities 6,730 1,748,376
------------ ------------
Total Liabilities 6,730 1,748,376
Common stock issued under a repurchase agreement; 1,000,000 shares 0 2,000,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value; authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares;
issued and outstanding 3,239,374 and 21,989,526 324 2,199
Additional paid in capital in excess of par 1,629,598 19,952,865
Deficit (732,152) (17,645,204)
Stock subscriptions receivable 0 (913,300)
Deferred compensation, net (427,500) (250,000)
Total Stockholders' Equity 3,470,270 1,146,560
Total Liabilities and Stockholders' Equity $ 3,477,000 $ 4,894,936
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Environmental remediation services $ 0 $ 0 $ 108,944
Other income 0 60,477 7,331
------------ ------------ ------------
Total revenue 0 60,477 116,275
------------ ------------ ------------
COSTS AND EXPENSES
Compensation:
Officers 0 147,326 1,185,000
Directors 0 0 3,492,981
Consulting fees 0 337,956 8,883,356
Geological data and reports 0 0 2,008,848
General and administrative expense 3,404 55,943 1,145,355
Depreciation and depletion 0 248,000 273,000
Interest expense 0 0 40,787
------------ ------------ ------------
Total costs and expenses 3,404 789,225 17,029,327
------------ ------------ ------------
Net loss $ (3,404) $ (728,748) $(16,913,052)
============ ============ ============
Weighted average number of shares outstanding 398,643 2,469,511 10,500,293
============ ============ ============
Net loss per share $ (0.01) $ (0.30) $ (1.61)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Common Stock
---------------------
Number APIC Stk Subs Defr'd Accumulated TTL S/H
of Shares Amount Receivable Comp. Deficit Equity
----------- --------- ------------ ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE, September 5, 1995 0 $ 0 0 0 0 0 0
Year Ended September 30, 1995
Common stock issued for :
9/23 - cash 884,407 88 0 0 0 0 88
9/25 - services 755,043 76 499,924 0 (500,000) 0 0
Net loss - 0 0 0 0 (3,404) (3,404)
----------- --------- ------------ ---------- ----------- -------------- ------------
BALANCE, September 30, 1995 1,639,450 164 499,924 0 (500,000) (3,404) (3,316)
Year Ended September 30, 1996
Common stock issued for :
10/1 - equipment 744,000 74 3,719,926 0 0 0 3,720,000
10/10 - cash 20,000 2 49,998 0 0 0 50,000
8/9 - cash 20,500 2 42,890 0 0 0 42,892
8/19 - reverse merger 356,317 36 (243,366) 0 0 0 (243,330)
8/19 - S-8 services 73,277 7 73,270 0 0 0 73,277
8/30 - services 10,000 1 69,999 0 0 0 70,000
9/15 - services 55,000 6 384,994 0 0 0 385,000
9/15 - cash 320,830 32 31,963 0 0 0 31,995
9/30 - deferred comp. amort. - 0 0 0 72,500 0 72,500
Net loss - 0 0 0 0 728,748 728,748
----------- --------- ------------ ---------- ----------- -------------- ------------
BALANCE, September 30, 1996 3,239,374 324 4,629,598 0 (427,500) (732,152) 3,470,270
Year Ended September 30, 1997
Common stock issued for :
2/10 - S-8 services 1,600,000 160 1,099,840 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 309,345 0 0 0 309,375
3/5 - oil wells/leases 200,000 20 206,230 0 0 0 206,250
3/13 - S-8 services 300,000 30 374,970 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 0 0 0 300
4/5 - services 1,342,981 134 1,342,847 0 0 0 1,342,981
4/5 - contributed to corp (100,000) (10) (99,990) 0 0 0 (100,000)
4/9 - BAPCO acquisition 4,000,000 400 499,600 0 0 0 500,000
5/14 - S-8 services 1,500,000 150 562,350 0 0 0 562,500
6/19 - services 150,000 15 28,110 0 0 0 28,125
7/8 - cash 800,000 80 399,920 0 0 0 400,000
7/25 - S-8 services 2,335,000 233 6,464,798 0 0 0 6,465,031
7/30 - services 1,500,000 150 2,249,850 0 0 0 2,250,000
7/30 - cash 147,000 15 146,985 0 0 0 147,000
8/8 - cash 74,000 8 147,992 0 0 0 148,000
9/4 - services 400,000 40 307,960 0 0 0 308,000
9/10 - cash stk subs recv 727,273 73 799,927 (800,000) 0 0 0
9/15 - cash & stk subs recv 473,898 47 482,533 (113,300) 0 0 369,280
9/30 - deferred comp. amort. - 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 (16,913,052) (16,913,052)
----------- --------- ------------ ---------- ----------- -------------- ------------
BALANCE, September 30, 1997 21,989,526 $ 2,199 19,952,865 (913,300) (250,000) (17,645,204) 1,146,560
=========== ========= ============ ========== =========== ============== ============
Common stock issued under a repurchase
agreement
7/97 - DRSTP info 1,000,000 $ 100 1,999,900 0 0 0 2,000,000
=========== ========= ============ ========== =========== ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,404) $ (728,748) $(16,913,052)
Adjustments to reconcile net loss to net cash used for operating
activities:
Amortization of deferred compensation 0 72,500 177,500
Stock issued for services rendered 0 385,000 12,292,829
Stock issued for DRSTP geological data 0 0 2,000,000
Depreciation 0 248,000 273,000
Other 0 (60,477) (6,730)
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses 0 0 (215,708)
Increase (decrease) in accrued interest expense 0 0 37,228
Increase (decrease) in accrued expenses 3,316 0 111,054
Increase (decrease) in accrued salaries 0 0 960,000
------------ ------------ ------------
Net cash provided by (used by) operating activities (88) (83,725) (1,283,879)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment 0 (5,000) (131,560)
------------ ------------ ------------
Net cash provided by (used by) investing activities 0 (5,000) (131,560)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 88 81,995 1,102,988
Proceeds of bank borrowing 0 0 175,000
Proceeds from loans payable to stockholders 0 22,730 760,481
Payments on stockholder loans payable 0 (16,000) (295,287)
------------ ------------ ------------
Net cash provided by (used by) financing activities 88 88,725 1,743,182
------------ ------------ ------------
Net increase (decrease) in cash 0 0 327,743
CASH, beginning of period 0 0 0
------------ ------------ ------------
CASH, end of period $ 0 $ 0 $ 327,743
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 0 $ 0 $ 3,559
============ ============ ============
Non cash financing and investing activities:
Stock issued to acquire :
Environmental remediation equipment $ 0 $ 3,720,000 $ 0
============ ============ ============
BAPCO equipment $ 0 $ 0 $ 500,000
============ ============ ============
Oil and gas properties $ 0 $ 0 $ 515,625
============ ============ ============
Master service agreement $ 0 $ 0 $ 300
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
September 30, 1995, 1996 and 1997
(1) Summary of Significant Accounting Policies
The Company.
Environmental Remediation Holding Corporation, (ERHC), was incorporated
on May 12, 1986 in Colorado as Valley View Ventures, Inc., (VVV). Its
name was changed to Regional Air Group Corporation, (RAGC), on
September 20, 1988, and then to Environmental Remediation Holding
Corporation on August 29, 1996. VVV was created in 1986 as a blind pool
to seek a merger opportunity with a viable operating company. In 1988
the company acquired, via a reverse merger, Mid-Continent Airlines
which was a regional "feeder" airline operating as Braniff Express. On
September 28, 1989, Braniff Airlines filed Chapter 11 Bankruptcy. This
event proved to be catastrophic to the then operating business of the
Company. RAGC liquidated its assets and liabilities shortly thereafter
and remained dormant until its reverse merger with Environmental
Remediation Funding Corporation on August 19, 1996.
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Jericho, New York, and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the statements of financial condition and revenues
and expenses for the years then ended. Actual results could differ
significantly from those estimates. The following summarize the more
significant accounting and reporting policies and practices of the
Company:
Principles of consolidation
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Net loss per share
Net loss per share is computed by dividing the net loss by the number
of shares outstanding during the period.
DRSTP geological data
In July 1997, the Company acquired substantial geologic data and other
information from an independent source in exchange for one million
shares of the Company's common stock. This data was valued at
$2,000,000 based the agreement with the seller that Company would
repurchase these shares for $2,000,000 at a rate of 25% per quarter
should the seller so choose. The Company expensed this acquisition cost
immediately.
(2) Significant Acquisitions
The Company acquired 100% of the issued and outstanding common stock
of Environmental Remediation Funding Corp., (ERFC), a Delaware
corporation, effective on August 19, 1996, in a reverse triangular
merger, which has been accounted for as a reorganization of ERFC. At
the same time the Company
The accompanying notes are an Integral part of the financial statements
F-7
<PAGE>
(2) Significant Acquisitions (Continued)
changed its name from RAGC. Prior to the merger ERFC had acquired
certain environmental remediation equipment in exchange for common
stock. ERFC then employed the seller of this equipment as an outside
consultant in exchange for common stock. Subsequently, ERFC was unable
to enter into the environmental remediation contracts it had hoped to
and asked the consultant to become the Chairman, President and CEO of
ERFC.
At the time of the acquisition of ERFC by RAGC, ERFC owned 100% of Site
Services, Inc., (SSI). ERFC had acquired SSI from Bass Environmental
Services Worldwide, Inc., (BESW), a company controlled by the Chairman,
President and CEO of ERFC. SSI had always been an inactive company,
except for certain environmental remediation licences which it
continues to hold.
On April 9, 1997, the Company acquired 100% of the issued and
outstanding common stock of Bass American Petroleum Company, (BAPCO),
which was accounted for as a purchase. BAPCO had been an inactive
company for several years previously, however BAPCO owned a variety of
oil well production enhancing equipment, which is proprietary to, but
not patented by BAPCO. The transaction was in essence an asset
acquisition. At the time of the acquisition BAPCO was 100% owned by the
Chairman, President and CEO of ERHC. As such, the acquisition was
accounted for at historical cost. The Company has begun using BAPCO as
the operator of the various oil and natural gas leases it has acquired.
(3) Liquidity
The Company's current liabilities exceed its current assets by
$1,200,000, reflecting a possible lack of liquidity. The Company is in
ongoing negotiations to raise general operating funds and funds for
specific projects. As discussed in note 14a, the Company raised an
additional $1,100,000 in October 1997 and $4,300,000 in November 1997.
As discussed in note 14f, the Company has also received a letter of
intent for a firm commitment from a registered broker/dealer to raise
an additional $50,000,000 in convertible debt.
However there is no assurance that such financing will be obtained.
(4) Equipment
Environmental remediation equipment was purchased by ERFC in exchange
for common stock. The Company recorded this equipment based on the fair
value of the common stock given up. At the date of acquisition, ERFC
was a privately held company, therefore there was no market for ERFC's
stock. At the time of negotiations for this transaction, it was an arms
length transaction between unrelated parties. The parties negotiated a
value of $5 per share for a total of 744,000 shares valuing this
transaction at $3,720,000. The Company has chosen to depreciate the
equipment using the straight line method over its estimated remaining
useful life of fifteen years. Expenditures for maintenance and repairs
are charged to operations as incurred.
In the BAPCO acquisition, the Company acquired ownership of all rights
to BAPCO's proprietary oil well reworking tool, the "BAPCO Tool" as
well as other oil and natural gas well reworking equipment. The control
of this proprietary tool has enhanced the Company's position to the
extent that it would not have been able to enter into the contract to
control the Utah oil fields and the reworking of the Indonesian oil
fields. The control of this tool also enabled the acquisition of the
200 Texas oil wells to be economically feasible to a greater extent.
The Company received two completed "BAPCO" tools which were ready to be
placed in service in this transaction. The Company valued the equipment
received at historical cost amounting to $250,000 each for the two
tools, totalling $500,000. BAPCO was controlled by the CEO of ERHC at
the time of the BAPCO acquisition, therefore the Company believes
historical cost is the appropriate basis for valuing the transaction.
The Company is depreciating this tool and technology over ten years.
Depreciation expense for the period since inception ended September 30,
1995 was of $0 and for the years ended September 30, 1996 and 1997 was
$248,000 and $273,000 respectively.
F-8
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(5) Crude oil reserves
At September 30, 1996, the Company had no oil and gas reserves. In
March 1997, the Company acquired an undivided 7/8 interest in a 100
well lease located in the Gunsite Sand Lease in Ector, Texas, in
exchange for 300,000 shares of the Company's common stock. The Company
valued this transaction at the closing price of stock given up,
$1.03125, or a total of $309,375. The Company received an independent
evaluation of this field which reflected 1,000,000 barrels of proved
oil reserves. In March 1997, the Company acquired an undivided 7/8
interest in a 100 well lease located in the Woodbine Sand Lease Block
in Henderson County, Texas, in exchange for 200,000 shares of the
Company's common stock. The Company valued this transaction at the
closing price of the stock given up, $1.03125, or a total of $206,250.
The Company received an independent evaluation of this field which
reflected 1,500,000 barrels of proved oil reserves. These reserve
reports, as amended in March 1998, reflect values of $4,831,323 for
Gunsite and $9,504,323 for Woodbine. A separate reserve report is in
the process of being prepared, which the Company will use to adjust the
quantity of barrels of reserves if the subsequent report is materially
different.
Both acquisitions also included all existing equipment on site. The
Company has not recorded the fair market value of the equipment in
place, as all of such equipment has minimal scrap value, which is the
only valuation method available due to the non-operational status of
the wells at acquisition. The Company spent $53,000 for the year ended
September 30, 1997 on well equipment repairs and well rework, all on
the Gunsite lease. The Company expects to capitalize and depreciate
repairs which are believed to extend the useful life of such existing
equipment beyond one year, as well as the cost of replacement
equipment.
The Company expects to utilize the successful efforts method of
accounting for its oil and gas producing activities once it has reached
the producing stage. The Company expects to regularly assess proved oil
and gas reserves for possible impairment on an aggregate basis in
accordance with SFAS
Depletion
Depletion (including provisions for future abandonment and restoration
costs) of all capitalized costs of proved oil and gas producing
properties are expected to be expensed using the unit-of-production
method by individual fields as the proven developed reserves are
produced. Depletion expense was $0 for each of the three years in the
period ended September 30, 1997.
F-9
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(6) Master service agreement
In September 1996 Bass Environmental Services Worldwide, Inc., (BESW),
entered into a master service agreement with Chevron to plug and
abandon oil wells located in the Gulf of Mexico off the coast of
Louisiana. In April 1997, BESW assigned this contract to the Company in
exchange for 3,000,000 shares of the Company's common stock. Chevron
has reissued the contract in the Company's name. At the time of the
acquisition, BESW was controlled by the CEO of ERHC. The Company valued
this acquisition on the basis of the par value of the Company's common
stock given up, or $300, because no historical cost basis could be
individually determined and the contract has minimal value until the
Company has built or purchased the equipment to commercialize the
contract. The Company expects to begin commercializing the agreement in
fiscal 1998.
(7) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $233,398 and
$526,883. These notes carry no stated maturity date and an 8.5% rate of
interest. The Company has repaid $236,787 and $58,500 on these notes,
including interest on one. The remaining note is convertible into
restricted stock at 50% of the average bid price for the month in which
the loan was made. The conversion is at the option of the noteholder.
Accrued interest on these notes is $0, $0 and $21,273 for the period
since inception ended September 30, 1995 and for the years ended
September 30, 1996 and 1997.
In January 1997, the Company issued a note payable to a bank in
exchange for $175,000 cash. This note carried a maturity date of March
15, 1997 and a 9.6875% interest rate. The Company is in default on this
note. The default interest rate is 13.6875%. The Company and the bank
had originally expected to roll this note over into a long-term credit
facility. The Company chose not to accept the long-term facility due to
the terms offered. The Company has reached an agreement with the bank
regarding repayment terms amounting to $175,000 plus accrued interest.
Accrued interest on this note is $0, $0 and $15,955 for the period
since inception ended September 30, 1995 and for the years ended
September 30, 1996 and 1997.
(8) Accrued salaries
At September 30, 1995, 1996 and 1997 the Company has accrued salaries
of $0, $0 and $960,000, respectively, for three officers. These
officers can, at their option, convert these salaries into common stock
of the Company at the rate of one-half of the average bid price of the
Company's common stock for the months in which the salary was earned.
(9) Income taxes
The Company has a consolidated net operating loss carry-forward
amounting to $17,645,204, expiring as follows: $3,404 in 2010, $728,748
in 2011 and $16,913,052 in 2012. The Company has a $7,058,000 deferred
tax asset resulting from the loss carry-forward, for which it has
established a 100% valuation allowance. Until the Company's current
plans begin to produce earnings it is unclear as to the ability of the
Company to utilize these carry-forwards.
(10) Stockholders' equity
The Company has authorized 950,000,000 shares of $0.0001 par value
common stock and 10,000,000 shares of $0.0001 par value preferred
stock. On September 30, 1995, the predecessor entity, ERFC, had
1,639,450 shares issued and outstanding, which had been issued during
the month since inception as 884,407 shares for $88 in cash and 755,043
shares for a four year consulting agreement valued at $500,000 with a
then independent consultant who subsequently became the Company's
Chairman, President and CEO.
F-10
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
In October 1995, ERFC issued 744,000 shares in exchange for
environmental remediation equipment valued as discussed in note 1b at
$3,720,000. This equipment was acquired from the consultant who had
received the 755,043 shares and subsequently became the Company's
Chairman, President and CEO. In October 1995, ERFC issued 20,000 shares
for $50,000 in cash.
In August 1996, ERFC issued 20,500 shares in exchange for $42,892 in
cash. On August 19,1996, the sucessor Company issued 2,433,950 shares
of common stock to acquire 100% of the issued and outstanding common
stock of ERFC. At the time of the acquisition ERHC, then known as RAGC,
had 356,317 shares issued and outstanding as a result of a 1 for 2,095
share reverse stock split. On August 19, 1996, the Company issued
73,277 shares of common stock to a consultant in exchange for services
valued at $1.00 per share related to the merger. In August 1996, the
Company issued 10,000 shares of its common stock, valued at $70,000, to
an attorney for services to be rendered at below market rates for a
period of 4 months. In September 1996, the Company issued 55,000 shares
of its common stock under three consulting contracts previously
negotiated, valued at $385,000. In September 1996, the Company issued
320,830 shares of its common stock in exchange for $31,995 in cash
In February 1997, the Company issued 1,600,000 shares of common stock
via an S-8 registration in exchange for consulting and professional
services valued at $1,100,000. In March 1997, the Company acquired a
100 oil well lease with one million barrels of proven oil reserves in
exchange for 300,000 shares of the Company's common stock valued at
309,375. In March 1997, the Company acquired a 100 oil well lease with
one and one-half million barrels of proven oil reserves in exchange for
200,000 shares of the Company's common stock valued at $206,250. In
March 1997, the Company issued 300,000 shares of common stock via an
S-8 registration valued at $375,000 in exchange for public relations
services, of which approximately 150,000 had been earned at fiscal year
end. The balance will either be earned or returned to ERHC. In April
1997, the Company issued 3,000,000 shares of common stock in exchange
for the assignment of the Chevron P&A master service agreement, valued
at $300. In April 1997, the Company issued 1,342,981 shares of common
stock to three directors in lieu of cash compensation for services
rendered to the Company valued at $1,342,981. In April 1997, a director
contributed 100,000 shares of common stock back to the Company with a
value of $100,000. In April 1997, the Company issued 4,000,000 shares
of common stock in exchange for 100% of the issued and outstanding
common stock of Bass American Petroleum Company, (BAPCO), valued at
historical costs at $500,000. In May 1997, the Company issued 1,500,000
shares of common stock via an S-8 in exchange for consulting and
professional services valued at $562,500. In June 1997, the Company
issued 150,000 shares of common stock to two independent consultants
for services valued at $28,125. One of these consultants became an
employee of the Company in September 1997.
In July 1997, the Company issued 800,000 shares under a Section 4(2)
exemption from registration to a previously unrelated party in exchange
for $400,000 in cash. In July 1997, the Company acquired substantial
geologic data and other information from an independent source in
exchange for 1,000,000 shares of the Company's common stock. This data
was valued at $2,000,000 based the agreement with the seller that
Company would repurchase these shares for $2,000,000 at a rate of 25%
per quarter should the seller so choose. In July 1997, the Company
issued 2,335,000 shares of common stock to three independent
consultants for services valued at $6,465,031, principally relating to
the Company's acquisition of the MIII agreement. In July 1997, the
Company issued 1,500,000 shares of common stock to three directors in
lieu of cash compensation for services rendered to the Company valued
at $2,250,000. In July 1997, the
F-11
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
Company issued 147,000 shares of common stock under a Regulation D Rule
506 private placement in exchange for $147,000 in cash. In August 1997,
the Company issued 74,000 shares of common stock under a Regulation D
Rule 506 private placement in exchange for $148,000 in cash. In
September 1997, the Company issued 400,000 shares of common stock to an
independent consultant for services valued at $308,000. In September
1997, the Company issued 370,898 shares of common stock under a
Regulation D Rule 506 private placement in exchange for $407,988 in
cash. In September 1997, the Company received stock subscription
agreements for $913,300 in cash under a Regulation D Rule 506 private
placement representing 830,273 shares of common stock. The Company is
contingently liable to issue up to 3,000,000 shares of restricted
stock in total to three officers and directors of the Company for their
efforts in closing the Sao Tome & Principe contract. These shares will
be issued upon the joint venture oil production level of 20,000 barrels
a day being attained. The Company is contingently liable to issue up to
2,000,000 shares of restricted stock to two officers and directors of
the Company for their efforts in closing the MIII contract in Utah upon
the joint venture oil production level of 4,000 barrels a day being
attained. This two million shares includes the 500,000 shares the
Company is to issue to MIII. The Company is also contingently liable to
issue an additional 2,000,000 shares upon the joint venture attaining
production of a total of 6,000 barrels a day.
(11) Deferred compensation
ERFC issued 755,043 shares of its common stock into escrow in exchange
for services to be rendered by a consultant under a four year contract.
These services were valued at $125,000 per year, therefore the Company
is amortizing this deferred compensation expense at a rate of $31,250
per quarter. This consultant later became ERFC's Chairman, President
and CEO.
(11) Deferred compensation (continued)
On August 30, 1996, the Company issued 10,000 shares of its common
stock, valued at $70,000, to an attorney for services to be rendered at
below market rates for a period of four months. Accordingly, the
Company amortized this expense over the term of the agreement.
(12) Commitments and contingencies
The Company is committed to lease payments for nine vehicles under
operating leases totalling $52,292 and $20,043 for the years ended
September 30, 1998 and 1999, respectively. The Company paid $0, $0 and
$52,500 in vehicle lease expense for the period since inception ended
September 30, 1995 and for the years ended September 30, 1996 and 1997,
respectively. The Company currently leases its office space and
operating facilities on a month to month basis. The Company paid $0,
$8,550 and $45,950 in facility rent for the period since inception
ended September 30, 1995 and for the years ended September 30, 1996 and
1997.
(13) Segment information
The Company has three distinct lines of business through its two wholly
owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company (BAPCO), and a joint venture agreement. SSI operates
in the environmental remediation industry and BAPCO will operate in the
oil and gas production industry. SSI's principal identifiable assets
consist of $3,224,000, (net), of environmental equipment, a barge
deposit of $131,000 and the Chevron P&A master service agreement valued
at $300, (net). All of the Company's 1997 revenues of $109,000 and cost
of sales of $54,000 relate to SSI. BAPCO's principal identifiable
assets consist of crude oil reserves valued at $515,625 and equipment
valued at $475,000. The Company also expects to operate in the supply
industry through a joint venture agreement to supply fuel and other
goods to ships transiting the Panama Canal. No pricipal identifiable
assets yet exist for this line of business.
F-12
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(14) Subsequent events
a) Stockholder's equity
The 830,273 shares of common stock were issued by the Company upon
receiving the $913,300 in cash in October 1997 which had been
subscribed for at September 30, 1997. In October and November 1997, the
Company issued 175,599 additional shares of common stock in exchange
for $183,359 in cash under the same private placement memorandum
offering in August and September 1997.
b) Convertible notes
In November and December 1997, the Company issued 5.5% convertible
senior subordinated secured notes due 2002 in exchange for
approximately $4,300,000 in cash. These notes are convertible into
shares of the Company's common stock at a conversion price to be
determined by so stated formula, but at a price no less than $1.25 per
share. If all of the notes are converted at the lowest possible price,
the Company would be required to issue 3,440,000 shares of common
stock. These notes also carried warrants for an additional 258,000
shares of common stock with an exercise price of $3.17 per warrant, or
total proceeds to the Company of $817,860 in the event all of the
warrants are exercised. The notes are secured by the Company's non-MIII
oil reserves in Utah.
c) Sao Tome concession payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay
this concession fee within five days after the DRSTP files the relevant
official maritime claims maps with the United Nations and the Gulf of
Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP form the proceeds of the convertible
note offering. In June 1998, another $1,000,000 of this concession fee
was paid.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 restrictions lapse will be no
less than $2.00 per share or the Company is required to either issue
additional shares or to pay the difference in cash, at the Company's
option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to
complete new reserve reports for its use. The total valuation of this
transaction is $2,250,000 and is applied as $375,800 of oil and gas
reserves and $1,874,200 of equipment.
e) Olmos Nueces River Prospect oil and natural gas lease
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $150,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs until the
well is producing. The seller also owns an undivided 50% interest in
the oil and gas lease on the 49,019 acres of land contiguous to the
initial well. The agreement allows the Company to acquire a 3/8
undivided interest in this lease by paying to the seller approximately
$343,000 each April for four years. The Company received the initial
lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases and has contracted another independent appraiser to complete new
reserve reports for its use. The Company estimates that it will cost
between $259,000 and $500,000 to re-enter this well.
F-13
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(14) Subsequent events (continued)
f) Letter of intent
In December 1997, the Company received a letter of intent from a
registered brokerage house which contemplates a firm commitment public
offering of approximately $50,000,000 of convertible debt securities.
This offering, if it proceeds, is contemplated for early 1998. There is
no assurance that such offering will be consummated.
g) Test oil production
In late November 1997, test oil production amounting to approximately
444 barrels was picked up from the tanks at the Gunsite Sand lease. At
that time the Company had approximately 9 wells back on line and
pumping. In late November and early December 1997, test oil production
amounting to approximately 1,292 barrels was picked up from the tanks
at the 22 leases in Uintah and Duchesne Counties, Utah.
h) Stock repurchase
In December 1997, the Company repurchased 250,000 shares of its common
stock for $500,000 in cash. This was the first 25% quarterly repurchase
agreed to by the Company relating to the 1,000,000 shares issued to
acquire the DRSTP geological data.
F-14
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
SUPPLEMENTARY INFORMATION
----
(UNAUDITED)
F-15
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
September 30, 1995, 1996 and 1997
-----
(Unaudited)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Developed oil and gas properties $ 0 0 515,625
Undeveloped oil and gas properties-- 0 0 0
--------- ---------- ----------
0 0 515,625
Accumulated depreciation, depletion and valuation
allowance 0 0 0
--------- ---------- ----------
Net capitalized cost $ 0 0 515,625
</TABLE>
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
Period since inception ended September 30, 1995 and years
ended September 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Acquisition of properties:
Developed $ 0 0 515,625
Undeveloped 0 0 0
Exploration costs, excluding valuation allowance 0 0 0
Development costs $ 0 0 0
</TABLE>
See accompanying notes to supplementary information.
F-16
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW RELATING TO PROVED OIL AND GAS RESERVES
Period since inception ended September 30, 1995 and years
ended September 30, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $ 0 0 54,799,039
Future production and development costs 0 0 (24,574,717)
Future income tax expenses 0 0 0
----------- ----------- -----------
Future net cash inflows 0 0 30,224,322
10% annual discount for estimated timing of cash flow 0 0 (15,888,676)
Standardized measure of discounted future net cash flow $ 0 0 14,335,646
</TABLE>
See accompanying notes to supplementary information.
F-17
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW AND CHANGES THEREIN RELATING
TO PROVED OIL AND GAS RESERVES
Period since inception ended September 30, 1995 and years
ended September 30, 1996 and 1997
----
(Unaudited)
The following are the principal sources of change in the standardized measure of
discounted future net cash flows during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales of oil and gas produced, net of production costs $ 0 0 0
Net changes in prices and production costs 0 0 0
Extensions, discoveries and improved recovery, 0
Less recovery costs 0 0
Revisions of previous quantity estimates 0 0 0
Reserves purchases, net of development costs 0 0 14,335,646
Reserves sold 0 0 0
Accretion of discount 0 0 0
Net change in income taxes 0 0 0
Other 0 0 0
---------- ---------- ----------
Net change 0 0 14,335,646
Standardized measure of discounted future net cash flow:
Beginning of year 0 0 0
---------- ---------- ----------
End of year $ 0 0 14,335,646
========== ========== ==========
</TABLE>
See accompanying notes to supplementary information.
F-18
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
RESERVE QUANTITY INFORMATION
Period since inception ended September 30, 1995 and years
ended September 30, 1996 and 1997
----
(Unaudited)
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Gas Oil Gas Oil Gas Oil
(MCF) (bbls.) (MCF) (bbls.) (MCF) (bbls.)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year 0 0 0 0 0 0
Extensions, discoveries and 0 0 0 0 0 0
improved recovery
Revisions of previous 0 0 0 0 0 0
estimates (1)
Sales 0 0 0 0 0 0
Purchases 0 0 0 0 0 2,500,000
Production 0 0 0 0 0 0
End of year 0 0 0 0 0 2,500,000
Proved developed reserves 0 0 0 0 0 2,500,000
</TABLE>
See accompanying notes to supplementary information.
F-19
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
Period since inception ended September 30, 1995 and years
ended September 30, 1996 and 1997
----
(Unaudited)
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ---------------- -----------------
Revenue:
<S> <C> <C> <C>
Oil and gas sales $ 0 0 0
Costs and expenses: 0 0 0
Lease operating expenses 0 0 0
Exploration costs 0 0 0
Depreciation and depletion 0 0 0
Income tax (benefit) expense 0 0 0
------------------- ---------------- -----------------
Results of operation from producing activities
(excluding corporate overhead and interest costs) $ 0 0 0
</TABLE>
See accompanying notes to supplementary information.
F-20
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
NOTES TO SUPPLEMENTARY INFORMATION
----
(Unaudited)
1. PRESENTATION OF RESERVE DISCLOSURE INFORMATION
Reserve disclosure information is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 69 ("SFAS
69"), Disclosures About Oil and Gas Producing Activities
2. DETERMINATION OF PROVED RESERVES
The estimates of the Company's proved reserves were determined by an
independent petroleum engineer in accordance with the provisions of
SFAS 69. The estimates of proved reserves are inherently imprecise and
are continually subject to revision based on production history,
results of additional exploration and development and other factors.
Estimated future net revenues were computed by applying current prices
of oil and gas received by the Company to estimated future production
of reserves, less estimated future development and production costs,
based on current costs.
3. RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities were
prepared in accordance with the provisions of SFAS 69. General and
administrative expenses, interest costs and other unrelated costs are
not deducted in computing results of operations from oil and gas
activities.
4. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves and the changes of the standardized
measure of discounted future net cash flows relating to proved oil and
gas reserves were prepared in accordance with the provisions of SFAS
69.
Future production and development costs are computed estimating the
expenditures to be incurred in developing and producing the oil and gas
reserves at year-end, based on year-end costs and assuming continuation
of existing economic conditions.
Future income tax expenses are calculated by applying the year-end U.S.
tax rate to future pre-tax cash inflows relating to proved oil and gas
reserves, less the tax basis of properties involved. Future income tax
expenses give effect to permanent differences and tax credits and
allowances relating to the proved oil and gas reserves.
Future net cash flows are discounted at a rate of 10% annually
(pursuant to SFAS 69) to derive the standardized measure of discounted
future net cash flows. This calculation does not necessarily represent
an estimate of fair market value or present value of such cash flows
since future prices and costs can vary substantially from year-end and
the use of a 10% discount figure is arbitrary.
F-21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets .............................................................F-23
Consolidated Statements of Operations ....................................................F-24
Consolidated Statements of Stockholders' Equity ..........................................F-25
Consolidated Statements of Cash Flows ...................................................F-26
Notes to Consolidated Financial Statements ...............................................F-27
</TABLE>
F-22
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1997 March 31, 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 327,743 $ (34,848)
Prepaid expenses and other current assets 215,708 844,386
------------ ------------
Total current assets 543,451 809,538
------------ ------------
PROPERTY AND EQUIPMENT
Oil and gas properties (Successful efforts method) 515,625 1,044,375
Equipment 4,220,000 6,505,807
Deposit on purchase of equipment 136,560 273,995
------------ ------------
Total property and equipment before depreciation 4,872,185 7,824,177
Less: accumulated depreciation and depletion (521,000) (767,548)
------------ ------------
Net property and equipment 4,351,185 7,056,629
------------ ------------
OTHER ASSETS
Master service agreement 300 300
DRSTP concession fee 0 2,008,300
------------ ------------
Total other assets 300 2,008,600
------------ ------------
Total Assets $ 4,894,936 $ 9,874,767
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder loans payable $ 465,094 $ 421,185
Note payable - bank 175,000 0
Accounts payable and accrued liabilities:
Accrued salaries 960,000 1,529,532
Accrued interest 37,228 145,624
Other 111,054 794,920
------------ ------------
Total current liabilities 1,748,376 2,891,261
------------ ------------
LONG-TERM LIABILITIES
Mortgage 0 38,622
Convertible debt 0 3,838,825
------------ ------------
Total long term liabilities 0 3,877,447
------------ ------------
Total Liabilities 1,748,376 6,768,708
------------ ------------
Common stock issued under a repurchase agreement; issued and
outstanding 1,000,000 and 750,000 2,000,000 1,500,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value; authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares;
issued and outstanding 21,989,526 and 23,926,289 2,199 2,393
Additional paid in capital in excess of par 19,952,865 22,784,992
Deficit (17,645,204) (20,775,076)
Stock subscriptions receivable (913,300) (218,750)
Deferred compensation, net (250,000) (187,500)
------------ ------------
Total Stockholders' Equity 1,146,560 1,606,059
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,894,936 $ 9,874,767
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six months ended March 31,
------------------------------------
1997 1998
------------ ------------
<S> <C> <C>
REVENUE
Environmental remediation services $ 36,944 $ 226,035
Crude oil 0 265,302
Other income 6,730 11,490
------------ ------------
Total revenue 43,674 502,827
------------ ------------
COSTS AND EXPENSES
Compensation :
Officers 62,500 712,500
Directors 0 0
Consulting fees 1,656,250 387,534
Geological data and reports 0 41,932
General and administrative expense 435,302 2,123,964
Depreciation and depletion 124,000 246,548
Interest expense 7,236 120,221
------------ ------------
Total costs and expenses 2,285,288 3,632,699
------------ ------------
Net loss $ (2,241,614) $ (3,129,872)
============ ============
Weighted average number of shares outstanding 3,804,209 24,255,383
============ ============
Net loss per share $ (0.59) $ (0.13)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number Stk Subs Defr'd Accumulated TTL S/H
of Shares Amount APIC Receivable Comp. Deficit Equity
------------- --------- ------------ ---------------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE, September 30, 1996 3,239,374 $ 324 4,629,598 0 (427,500) (732,152) 3,470,270
Year Ended September 30, 1997
Common stock issued for :
2/10 - S-8 services 1,600,000 160 1,099,840 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 309,345 0 0 0 309,375
3/5 - oil wells/leases 200,000 20 206,230 0 0 0 206,250
3/13 - S-8 services 300,000 30 374,970 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 0 0 0 300
4/5 - services 1,342,981 134 1,342,847 0 0 0 1,342,981
4/5 - contributed to corp (100,000) (10) (99,990) 0 0 0 (100,000)
4/9 - BAPCO acquisition 4,000,000 400 499,600 0 0 0 500,000
5/14 - S-8 services 1,500,000 150 562,350 0 0 0 562,500
6/19 - services 150,000 15 28,110 0 0 0 28,125
7/8 - cash 800,000 80 399,920 0 0 0 400,000
7/25 - S-8 services 2,335,000 233 6,464,798 0 0 0 6,465,031
7/30 - services 1,500,000 150 2,249,850 0 0 0 2,250,000
7/30 - cash 147,000 15 146,985 0 0 0 147,000
8/8 - cash 74,000 8 147,992 0 0 0 148,000
9/4 - services 400,000 40 307,960 0 0 0 308,000
9/10 - cash stk subs recv 727,273 73 799,927 (800,000) 0 0 0
9/15 - cash & stk subs recv 473,898 47 482,533 (113,300) 0 0 369,280
9/30 - deferred comp. amort. - 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 (16,913,052) (16,913,052)
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, September 30, 1997 21,989,526 $ 2,199 19,952,865 (913,300) (250,000) (17,645,204) 1,146,560
Six months ended March 31, 1998
10/97 - stock subs. rec'd - 0 0 913,300 0 0 913,300
10/08 - Uinta acquisition 1,000,000 100 1,999,900 0 0 0 2,000,000
10/97 - Neuces acquisition 50,000 5 148,745 0 0 0 148,750
11/97 - cash, net 176,099 18 167,676 0 0 0 167,694
01/98 - equity in building 24,000 2 61,216 0 0 0 61,218
02/98 - services 104,664 10 55,648 0 0 0 55,658
02/98 - cash 282,000 28 180,222 0 0 0 180,250
03/98 - subscription rec'd. 300,000 30 218,720 (218,750) 0 0 0
Deferred comp. amort. - 0 0 0 62,500 0 62,500
Net loss - 0 0 0 0 (3,129,872) (3,129,872)
------------- --------- ------------ ---------------------- -------------- ------------
BALANCE, March 31, 1998 (unaudited) 23,926,289 $ 2,392 22,784,992 (218,750) (187,500) (20,775,076) 1,606,058
============= ========= ============ ====================== ============== ============
Common stock issued under a repurchase
agreement
BEGINNING BALANCE, September 30, 1996 0 $ 0 0 0 0 0 0
7/97 - DRSTP info 1,000,000 100 1,999,900 0 0 0 2,000,000
BALANCE, September 30, 1997 1,000,000 100 1,999,900 0 0 0 2,000,000
12/97 - cash repurchase (250,000) 0 (500,000) 0 0 0 (500,000)
BALANCE, March 31, 1998 (unaudited) 750,000 $ 100 1,499,900 0 0 0 1,500,000
============= ========= ============ ====================== ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended March 31,
----------------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,241,614) $(3,129,872)
Adjustments to reconcile net loss to net cash used for operating
activities:
Amortization of deferred compensation 115,000 62,500
Stock issued for services rendered 1,725,000 55,658
Depreciation and depletion 124,000 246,548
Other (6,730) 0
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets 0 (628,678)
Increase (decrease) in accrued interest expense 7,235 108,396
Increase (decrease) in accrued expenses 0 683,866
Increase (decrease) in accrued salaries 0 569,532
----------- -----------
Net cash provided by (used by) operating activities (277,109) (2,032,050)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment 0 (2,008,300)
Increase in deposits on fixed assets (70,000) (137,435)
Acquisition of property and equipment 0 (208,532)
----------- -----------
Net cash provided by (used by) investing activities (70,000) (2,354,267)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 0 393,970
Convertible debt sold for cash 0 3,838,825
Proceeds from bank borrowings 175,000 9,840
Payments on bank borrowings 0 (175,000)
Proceeds from loans payable to stockholders 179,672 445,821
Payments on stockholder loans payable (5,000) (489,730)
----------- -----------
Net cash provided by (used by) financing activities 349,672 4,023,726
----------- -----------
Net increase (decrease) in cash 2,563 (362,591)
CASH, beginning of period 0 327,743
----------- -----------
CASH, end of period $ 2,563 $ (34,848)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 0 $ 11,825
=========== ===========
Non cash financing and investing activities:
Stock issued to acquire:
Equity in building $ 0 $ 61,218
=========== ===========
Oil and gas properties and equipment $ 515,625 $ 2,148,750
=========== ===========
Mortgage payable on building assumed $ 0 $ 28,782
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-26
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997 and 1998
(1) Summary of Significant Accounting Policies
The Company.
Environmental Remediation Holding Corporation, (ERHC), was incorporated
on May 12, 1986 in Colorado as Valley View Ventures, Inc., (VVV). Its
name was changed to Regional Air Group Corporation, (RAGC), on
September 20, 1988, and then to Environmental Remediation Holding
Corporation on August 29, 1996. VVV was created in 1986 as a blind pool
to seek a merger opportunity with a viable operating company. In 1988
the company acquired, via a reverse merger, Mid-Continent Airlines
which was a regional "feeder" airline operating as Braniff Express. On
September 28, 1989, Braniff Airlines filed Chapter 11 Bankruptcy. This
event proved to be catastrophic to the then operating business of the
Company. RAGC liquidated its assets and liabilities shortly thereafter
and remained dormant until its reverse merger with Environmental
Remediation Funding Corporation on August 19, 1996.
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Jericho, New York, and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the statements of financial condition and revenues
and expenses for the years then ended. Actual results could differ
significantly from those estimates. The following summarize the more
significant accounting and reporting policies and practices of the
Company:
Principles of consolidation
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements for the six months ended March 31, 1997 and 1998
include all adjustments which in the opinion of management are
necessary for fair presentation.
Net loss per share
Net loss per share - basic is computed by dividing the net loss by the
number of shares outstanding during the period. Net loss per share -
diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
DRSTP geological data
In July 1997, the Company acquired substantial geologic data and other
information from an independent source in exchange for one million
shares of the Company's common stock. This data was valued at
$2,000,000 based the agreement with the seller that Company would
repurchase these shares for $2,000,000 at a rate of 25% per quarter
should the seller so choose. The Company expensed this acquisition cost
immediately.
F-27
<PAGE>
(2) Significant Acquisitions
The Company acquired 100% of the issued and outstanding common stock of
Environmental Remediation Funding Corp., (ERFC), a Delaware
corporation, effective on August 19, 1996, in a reverse triangular
merger, which has been accounted for as a reorganization of ERFC. At
the same time the Company changed its name from RAGC. Prior to the
merger ERFC had acquired certain environmental remediation equipment in
exchange for common stock. ERFC then employed the seller of this
equipment as an outside consultant in exchange for common stock.
Subsequently, ERFC was unable to enter into the environmental
remediation contracts it had hoped to and asked the consultant to
become the Chairman, President and CEO of ERFC.
At the time of the acquisition of ERFC by RAGC, ERFC owned 100% of Site
Services, Inc., (SSI). ERFC had acquired SSI from Bass Environmental
Services Worldwide, Inc., (BESW), a company controlled by the Chairman,
President and CEO of ERFC. SSI had always been an inactive company,
except for certain environmental remediation licences which it
continues to hold.
On April 9, 1997, the Company acquired 100% of the issued and
outstanding common stock of Bass American Petroleum Company, (BAPCO),
which was accounted for as a purchase. BAPCO had been an inactive
company for several years previously, however BAPCO owned a variety of
oil well production enhancing equipment, which is proprietary to, but
not patented by BAPCO. The transaction was in essence an asset
acquisition. At the time of the acquisition BAPCO was 100% owned by the
Chairman, President and CEO of ERHC. As such, the acquisition has been
accounted for at historical cost. The Company has begun using BAPCO as
the operator of the various oil and natural gas leases it has acquired.
(3) Liquidity
The Company's current liabilities exceed its current assets by
$2,081,723, reflecting a possible lack of liquidity. The Company is in
ongoing negotiations to raise general operating funds and funds for
specific projects. As discussed in notes 10 and 7, the Company raised
an additional $1,100,000 in October 1997 and $4,300,000 in November
1997. The Company has negotiated two lines of credit, one for
$15,000,000 and one for $5,000,000. These lines of credit cannot be
drawn upon until the Company's current registration statement on form
S-1 is declared effective. Both of these lines of credit are
convertible into shares of the Company's common stock on terms similar
to the convertible debt discussed in note 7. As discussed in note 5 and
16a, the Company has also received a letter of intent for a firm
commitment from a registered broker/dealer to raise an additional
$50,000,000 in convertible debt. However there is no assurance that
such financing will be obtained.
(4) Equipment
Environmental remediation equipment was purchased by ERFC in exchange
for common stock. The Company recorded this equipment based on the fair
value of the common stock given up. At the date of acquisition, ERFC
was a privately held company, therefore there was no market for ERFC's
stock. At the time of negotiations for this transaction, it was an arms
length transaction between unrelated parties. The parties negotiated a
value of $5 per share for a total of 744,000 shares valuing this
transaction at $3,720,000. The Company has chosen to depreciate the
equipment using the straight line method over its estimated remaining
useful life of fifteen years. Expenditures for maintenance and repairs
are charged to operations as incurred.
In the BAPCO acquisition, the Company acquired ownership of all rights
to BAPCO's proprietary oil well reworking tool, the "BAPCO Tool" as
well as other oil and natural gas well reworking equipment. The control
of this proprietary tool has enhanced the Company's position to the
extent that it would not have been able to enter into the contract to
control the Utah oil fields and the reworking of the Indonesian oil
fields. The control of this tool also enabled the acquisition of the
200 Texas oil wells to be economically feasible to a greater extent.
The Company received two completed "BAPCO" tools which were ready to be
F-28
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(4) Equipment (continued)
placed in service in this transaction. The Company valued the equipment
received at historical cost amounting to $250,000 each for the two
tools, totalling $500,000. BAPCO was controlled by the CEO of ERHC at
the time of the BAPCO acquisition, therefore the Company believes
historical cost is the appropriate basis for valuing the transaction.
The Company is depreciating this tool and technology over ten years.
Depreciation expense for the six months ended March 31, 1997 and 1998
was $124,000 and $244,210 respectively.
(5) Crude oil reserves
At September 30, 1996, the Company had no oil and gas reserves. In
March 1997, the Company acquired an undivided 7/8 interest in a 100
well lease located in the Gunsite Sand Lease in Ector, Texas, in
exchange for 300,000 shares of the Company's common stock. The Company
valued this transaction at the closing price of stock given up,
$1.03125, or a total of $309,375. The Company received an independent
evaluation of this field which reflected 1,000,000 barrels of proved
oil reserves. In March 1997, the Company acquired an undivided 7/8
interest in a 100 well lease located in the Woodbine Sand Lease Block
in Henderson County, Texas, in exchange for 200,000 shares of the
Company's common stock. The Company valued this transaction at the
closing price of the stock given up, $1.03125, or a total of $206,250.
The Company received an independent evaluation of this field which
reflected 1,500,000 barrels of proved oil reserves. These reserve
reports, as amended in March 1998, reflect values of $4,831,323 for
Gunsite and $9,504,323 for Woodbine. A separate reserve report is in
the process of being prepared, which the Company will use to adjust the
quantity of barrels of reserves if the subsequent report is materially
different.
Both acquisitions also included all existing equipment on site. The
Company has not recorded the fair market value of the equipment in
place, as all of such equipment has minimal scrap value, which is the
only valuation method available due to the non-operational status of
the wells at acquisition. The Company spent $53,000 for the year ended
September 30, 1997 on well equipment repairs and well rework, all on
the Gunsite lease. The Company expects to capitalize and depreciate
repairs which are believed to extend the useful life of such existing
equipment beyond one year, as well as the cost of replacement
equipment.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 one-year sale restriction lapses
will be no less than $2.00 per share or the Company is required to
either issue additional shares or to pay the difference in cash, at the
Company's option. The Company also granted the sellers a 4% gross
production receipts royalty to a maximum of $677,000. The Company is
currently evaluating the existing reserve reports and underlying data
on these leases as well as has contracted another independent appraiser
to complete new reserve reports for its use. The total valuation of
this transaction is $2,250,000 and is applied as $375,800 of oil and
gas reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $150,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs until the
well is producing. The seller also owns an undivided 50% interest in
the oil and gas lease on the 49,019 acres of land contiguous to the
initial well. The agreement allows the Company to acquire a 3/8
undivided interest in this lease by paying to the seller approximately
$343,000 each April for four years. The Company received the initial
lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases and has contracted another independent appraiser to complete new
reserve reports for its use. The Company estimates that it will cost
between $250,000 and $500,000 for re-enter this well.
Test oil production
In late November 1997, test oil production amounting to approximately
444 barrels was picked up from the tanks at the Gunsite Sand lease. At
that time the Company had approximately 9 wells back on line and
pumping. In late November and early December 1997, test oil production
amounting to approximately 1,292 barrels was picked up from the tanks
at the 22 leases in Uintah and Duchesne Counties, Utah.
The Company expects to utilize the successful efforts method of
accounting for its oil and gas producing activities once it has reached
the producing stage. The Company expects to regularly assess proved oil
and gas reserves for possible impairment on an aggregate basis in
accordance with SFAS 121.
F-29
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
Depletion
Depletion (including provisions for future abandonment and restoration
costs) of all capitalized costs of proved oil and gas producing
properties are expected to be expensed using the unit-of-production
method by individual fields as the proven developed reserves are
produced. Depletion expense for the six months ended March 31, 1997 and
1998 was $0 and $2,338 respectively.
(6) Master service agreement
In September 1996 Bass Environmental Services Worldwide, Inc., (BESW),
entered into a master service agreement with Chevron to plug and
abandon oil wells located in the Gulf of Mexico off the coast of
Louisiana. In April 1997, BESW assigned this contract to the Company in
exchange for 3,000,000 shares of the Company's common stock. Chevron
has reissued the contract in the Company's name. At the time of
the acquisition, BESW was controlled by the CEO of ERHC. The Company
valued this acquisition on the basis of the par value of the Company's
common stock given up, or $300, because no historical cost basis could
be individually determined and the contract has minimal value until the
Company has built or purchased the equipment to commercialize the
contract. The Company expects to begin commercializing the agreement in
mid 1998. interest. The Company has repaid $503,148 on these notes,
including interest on one. The remaining note
(7) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $1,206,102.
These notes carry no stated maturity date and an 8.5% rate of interest.
The Company has repaid $784,917 on these notes, including interest on
one. The remaining note is convertible into restricted stock at 50% of
the average bid price for the month in which the loan was made. The
conversion is at the option of the noteholder. Accrued interest on
these notes is, $0 and $145,624 for the six months ended March 31,
1997 and 1998.
F-30
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(7) Notes payable (continued)
In January 1997, the Company issued a note payable to a bank in
exchange for $175,000 cash. This note carried a maturity date of March
15, 1997 and a 9.6875% interest rate. The Company is in default on this
note. The default interest rate is 13.6875%. The Company and the bank
had originally expected to roll this note over into a long-term credit
facility. The Company chose not to accept the long-term facility due to
the terms offered. The Company repaid this loan in full plus accrued
interest on December 31, 1997.
Convertible notes
In November and December 1997, the Company issued 5.5% convertible
senior subordinated secured notes due 2002 in exchange for $4,300,000
in cash. These notes are convertible into shares of the Company's
common stock at a conversion price to be determined by so stated
formula, but at a price no less than $1.25 per share. If all of the
notes are converted at the lowest possible price, the Company would be
required to issue 3,440,000 shares of common stock. These notes also
carried warrants for an additional 258,000 shares of common stock with
an exercise price of $3.17 per warrant, or total proceeds to the
Company of $817,860 in the event all of the warrants are exercised. The
notes are secured by the Company's non-MIII oil reserves in Utah.
(8) Accrued salaries
At March 31, 1997 and 1998 the Company has accrued salaries of, $0 and
$1,529,532, respectively, for three officers. These officers can, at
their option, convert these salaries into common stock of the Company
at the rate of one-half of the average bid price of the Company's
common stock for the months in which the salary was earned.
(9) Income taxes
The Company has a consolidated net operating loss carry-forward
amounting to $20,775,076, expiring as follows: $3,404 in 2010, $728,748
in 2011, $16,913,052 in 2012 and $3,129,872 in 2013. The Company has a
$8,310,000 deferred tax asset resulting from the loss carry-forward,
for which it has established a 100% valuation allowance. Until the
Company's current plans begin to produce earnings it is unclear as to
the ability of the Company to utilize these carry-forwards.
(10) Stockholders' equity
The Company has authorized 950,000,000 shares of $0.0001 par value
common stock and 10,000,000 shares of $0.0001 par value preferred
stock. On September 30, 1995, the predecessor entity, ERFC, had
1,639,450 shares issued and outstanding, which had been issued during
the month since inception as 884,407 shares for $88 in cash and 755,043
shares for a four year consulting agreement valued at $500,000 with a
then independent consultant who subsequently became the Company's
Chairman, President and CEO.
In October 1995, ERFC issued 744,000 shares in exchange for
environmental remediation equipment valued as discussed in note 1b at
$3,720,000. This equipment was acquired from the consultant who had
received the 755,043 shares and subsequently became the Company's
Chairman, President and CEO. In October 1995, ERFC issued 20,000 shares
for $50,000 in cash.
In August 1996, ERFC issued 20,500 shares in exchange for $42,892 in
cash. On August 19,1996, the sucessor Company issued 2,433,950 shares
of common stock to acquire 100% of the issued and outstanding common
stock of ERFC. At the time of the acquisition ERHC, then known as RAGC,
had
F-31
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
356,317 shares issued and outstanding as a result of a 1 for 2,095
share reverse stock split. On August 19, 1996, the Company issued
73,277 shares of common stock to a consultant in exchange for services
valued at $1.00 per share related to the merger. In August 1996, the
Company issued 10,000 shares of its common stock, valued at $70,000, to
an attorney for services to be rendered at below market rates for a
period of 4 months. In September 1996, the Company issued 55,000 shares
of its common stock under three consulting contracts previously
negotiated, valued at $385,000. In September 1996, the Company issued
320,830 shares of its common stock in exchange for $31,995 in cash.
In February 1997, the Company issued 1,600,000 shares of common stock
via an S-8 registration in exchange for consulting and professional
services valued at $1,100,000. In March 1997, the Company acquired a
100 oil well lease with one million barrels of proven oil reserves in
exchange for 300,000 shares of the Company's common stock valued at
309,375. In March 1997, the Company acquired a 100 oil well lease with
one and one-half million barrels of proven oil reserves in exchange for
200,000 shares of the Company's common stock valued at $206,250. In
March 1997, the Company issued 300,000 shares of common stock via an
S-8 registration valued at $375,000 in exchange for public relations
services, of which approximately 150,000 had been earned at fiscal year
end. The balance will either be earned or returned to ERHC. In April
1997, the Company issued 3,000,000 shares of common stock in exchange
for the assignment of the Chevron P&A master service agreement, valued
at $300. In April 1997, the Company issued 1,342,981 shares of common
stock to three directors in lieu of cash compensation for services
rendered to the Company valued at $1,342,981. In April 1997, a director
contributed 100,000 shares of common stock back to the Company with a
value of $100,000. In April 1997, the Company issued 4,000,000 shares
of common stock in exchange for 100% of the issued and outstanding
common stock of Bass American Petroleum Company, (BAPCO), valued at
historical costs at $500,000. In May 1997, the Company issued 1,500,000
shares of common stock via an S-8 in exchange for consulting and
professional services valued at $562,500. In June 1997, the Company
issued 150,000 shares of common stock to two independent consultants
for services valued at $28,125. One of these consultants became an
employee of the Company in September 1997.
In July 1997, the Company issued 800,000 shares under a Section 4(2)
exemption from registration to a previously unrelated party in exchange
for $400,000 in cash. In July 1997, the Company acquired substantial
geologic data and other information from an independent source in
exchange for 1,000,000 shares of the Company's common stock. This data
was valued at $2,000,000 based the agreement with the seller that
Company would repurchase these shares for $2,000,000 at a rate of 25%
per quarter should the seller so choose. In July 1997, the Company
issued 2,335,000 shares of common stock to three independent
consultants for services valued at $6,465,031, principally relating to
the Company's acquisition of the MIII agreement.
In July 1997, the Company issued 1,500,000 shares of common stock to
three directors in lieu of cash compensation for services rendered to
the Company valued at $2,250,000. In July 1997, the Company issued
147,000 shares of common stock under a Regulation D Rule 506 private
placement in exchange for $147,000 in cash. In August1997, the Company
issued 74,000 shares of common stock under a Regulation D Rule 506
private placement in exchange for $148,000 in cash. In September 1997,
the Company issued 400,000 shares of common stock to an independent
consultant for services valued at $308,000. In September 1997, the
Company issued 370,898 shares of common stock under a Regulation D Rule
506 private placement in exchange for $407,988 in cash. In September
1997, the Company received stock subscription agreements for $913,300
in cash under a Regulation D Rule 506 private placement representing
830,273 shares of common stock.
F-32
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
The 830,273 shares of common stock were issued by the Company upon
receiving the $913,300 in cash in October 1997 which had been
subscribed for at September 30, 1997. In October and November 1997, the
Company issued 175,599 additional shares of common stock in exchange
for $183,359 in cash under the same private placement memorandum
offering in August and September 1997.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 one-year sale restriction lapses
will be no less than $2.00 per share or the Company is required to
either issue additional shares or to pay the difference in cash, at the
Company's option. The Company also granted the sellers a 4% gross
production receipts royalty to a maximum of $677,000. The Company is
currently evaluating the existing reserve reports and underlying data
on these leases as well as has contracted another independent appraiser
to complete new reserve reports for its use. The total valuation of
this transaction is $2,250,000 and is applied as $375,800 of oil and
gas reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $150,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs until the
well is producing. The seller also owns an undivided 50% interest in
the oil and gas lease on the 49,019 acres of land contiguous to the
initial well. The agreement allows the Company to acquire a 3/8
undivided interest in this lease by paying to the seller approximately
$343,000 each April for four years. The Company received the initial
lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases and has contracted another independent appraiser to complete new
reserve reports for its use. The Company estimates that it will cost
between $250,000 and $500,000 for re-enter this well.
In December 1997, the Company repurchased 250,000 shares of its common
stock for $500,000 in cash. This was the first 25% quarterly repurchase
agreed to by the Company relating to the 1,000,000 shares issued to
acquire the DRSTP geological data. The Company is contingently liable
to issue up to three million shares of restricted stock in total to
three officers and directors of the Company for their efforts in
closing the Sao Tome & Principe contract. These shares will be issued
upon the joint venture oil production level of 20,000 barrels a day
being attained. The Company is contingently liable to issue up to two
million shares of restricted stock to two officers and directors of the
Company for their efforts in closing the M III contract in Utah upon
the joint venture oil production level of 4,000 barrels a day being
attained. This two million shares includes the 500,000 shares the
Company is to issue to MIII. The Company is also contingently liable to
issue an additional two million shares upon the joint venture attaining
production of a total of 6,000 barrels a day.
(11) Deferred compensation
ERFC issued 755,043 shares of its common stock into escrow in exchange
for services to be rendered by a
F-33
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(11) Deferred compensation (continued)
consultant under a four year contract. These services were valued at
$125,000 per year, therefore the Company is amortizing this deferred
compensation expense at a rate of $31,250 per quarter. This consultant
later became ERFC's Chairman, President and CEO.
On August 30, 1996, the Company issued 10,000 shares of its common
stock, valued at $70,000, to an attorney for services to be rendered at
below market rates for a period of 4 months. Accordingly, the Company
amortized this expense over the term of the agreement.
(12) Commitments and contingencies
The Company is committed to lease payments for 9 vehicles under
operating leases totalling $52,292 and $20,043 for the fiscal years
ended September 30, 1998 and 1999, respectively. The Company currently
leases its office space and operating facilities on a month to month
basis.
(13) Segment information
The Company has three distinct lines of business through its two wholly
owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company, (BAPCO), and a joint venture agreement. SSI operates
in the environmental remediation industry and BAPCO will operate in the
oil and gas production industry. SSI's principal identifiable assets
consist of $3,720,600, of environmental equipment, a barge deposit of
$131,000 and the Chevron P&A master service agreement valued at $300,
(net). Revenues of $226,035 relate to SSI. BAPCO's principal
identifiable assets consist of crude oil and natural gas reserves
valued at $1,044,375 and equipment valued at $2,570,000. Revenues of
$265,302 relate to BAPCO. The Company also expects to operate in the
supply industry through a joint venture agreement to supply fuel and
other goods to ships transiting the Panama Canal. No principal
identifiable assets yet exist for this line of business.
(14) Sao Tome concession payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay
this concession fee within five days after the DRSTP files the relevant
official maritime claims maps with the United Nations and the Gulf of
Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP from the proceeds of the convertible
note offering. In June 1998, another $1,000,000 of this concession fee
was paid.
(15) Letter of intent
In December 1997, the Company received a letter of intent from a
registered brokerage house which contemplates a firm commitment public
offering of approximately $50,000,000 of convertible debt securities.
This offering, if it proceeds, is contemplated for early 1998. There is
no assurance that such offering will be consummated.
(16) Subsequent events
a) Letter of intent
In May 1998, the Company received a letter of intent from another
registered brokerage firm as a replacement of the December 1997 letter
of intent. This new letter of intent is for the same terms and
conditions as the one it replaces.
F-34
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation.
------------------
TABLE OF CONTENTS
Page
Prospectus Summary ..................................................... 2
Risk Factors............................................................ 6
The Company............................................................. 13
Use of Proceeds......................................................... 14
Dilution................................................................ 14
Price Range for Common Stock............................................ 15
Dividend Policy......................................................... 15
Selected Financial Data................................................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 17
Business................................................................ 23
Management.............................................................. 37
Principal Shareholders ................................................. 43
Selling Shareholders.................................................... 44
Certain Transactions.................................................... 48
Description of Capital Stock............................................ 49
Plan of Distribution.................................................... 50
Legal Matters........................................................... 50
Experts................................................................. 50
Available Information................................................... 50
Index to Consolidated Financial Statements.............................. F-1
------------------
<PAGE>
================================================================================
Environmental
Remediation Holding
Corporation
------------------
Prospectus
------------------
July____, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts shown
are estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.
Securities and Exchange Commission registration fee............. $ 6,852.01
Accounting fees and expenses.................................... 40,000.00
Legal fees and expenses......................................... 50,000.00
Miscellaneous expenses.......................................... 3,147.99
-----------
Total $100,000.00
===========
- --------------------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers
Sections 7-109-103 and 7-109-109 of the Colorado Business Corporation
Act (the "CBCA") provides generally and in pertinent part that a Colorado
corporation may indemnify its directors and officers against expenses,
judgments, fines and settlements actually and reasonably incurred by them in
connection with any civil suit or action by or in the right of the corporation,
or any administrative or investigative proceeding if, in connection with the
matters in issue, they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
in connection with any criminal suit or proceeding, if in connection with the
matters in issue, they had no reasonably cause to believe their conduct was
unlawful. Sections 7-109-103 and 7-109-107 further provide that in connection
with the defense or settlement of any action by or in the right of the
corporation, a Colorado corporation may indemnify its directors and officers
against expenses actually and reasonably believed to be in, or not opposed to,
the best interests of the corporation. Sections 7-109-103 and 7-109-107 permit a
Colorado corporation to grant its directors and officers additional rights of
indemnification through by-law provisions and otherwise to the extent such
provisions do not conflict with the CBCA and to purchase indemnity insurance on
behalf of its directors and officers.
Item 15. Recent Sales of Unregistered Securities.
(a) The Company made the following unregistered sales of its securities from
September 30, 1994 through March 31, 1998:
<TABLE>
<CAPTION>
DATE
OF TITLE OF
SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ---- ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
8/96 Common Stock 2,433,950 Acquisition of 100% of Environmental Remediation
issued and outstanding Funding Corp.
shares of ERFC
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
DATE
OF TITLE OF
SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ---- ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
8/96 Common Stock 10,000 Legal services for a Ken Krauseman
period of four months
9/96 Common Stock 320,830 $31,995 Purchaser
3/97 Common Stock 300,000 100 oil well lease in Mytec & Associates
Texas - valued at
$4,831,323
3/97 Common Stock 200,000 100 oil well lease in Mytec & Associates
Texas - valued at
$9,504,323
4/97 Common Stock 3,000,000 Assignment of Chevron Bass Environmental
Master Service Agreement Services Worldwide, Inc.
- valued at $300
4/97 Common Stock 1,342,981 In consideration for 1. Senator James
service on the Company's Day's Trust - 500,000
Board of Directors 2. James A. Griffin - 500,000
3. Marvin Gibbons - 342,981
4/97 Common Stock 4,000,000 In exchange for 100% of Sam L. Bass, Jr. as Sole
issued and outstanding Shareholder of Bass
shares of Bass American American Petroleum Co.
Petroleum Co. (BAPCO) - (BAPCO)
valued at $500,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE
OF TITLE OF
SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ---- ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
6/97 Common Stock 150,000 Consulting Services - 1. Robert McKnight - 75,000
valued at $28,125 2. Herman Shellstead - 75,000
7/97 Common Stock 800,000 $400,000 Central Florida
Investments
7/97 Common Stock 1,000,000 Geologic data and other Christian Hellinger
information - valued at
$2,000,000
7/97 Common Stock 1,500,000 In consideration for 1. James R. Callender, Sr.
service on the Company's 2. Noreen G. Wilson
Board of Directors 3. William Beaton
(500,000 each)
7/97 Common Stock 147,000 $147,000 Purchasers in Rule 506
private placement (17
purchasers)
8/97 Common Stock 74,000 $148,000 Purchasers in Rule 506
private placement (15
purchasers )
9/97 Common Stock 400,000 Consulting Services - Senator Vance Hartke
valued at $308,000
9/97 Common Stock 370,898 $407,988 Purchasers in Rule 506
private placement (23
purchasers)
10/97 Common Stock 803,273 $913,000 Purchasers in Rule 506
private placement (14 purchasers)
10/97 Common Stock 500,000 Oil reserves 1. Uinta Oil & Gas, Inc.
and ops - valued at 2. Pine Valley Exploration, Inc.
$1,000,000 3. Coconino, S.M.A., Inc.
4. Joseph H. Lorenzo
10/97 Common Stock 105,099 $115,609.15 Purchasers in Rule 506
private placement (6 purchasers)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
DATE
OF TITLE OF
SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ---- ---------- ------ ------------- ---------
<S> <C> <C> <C> <C>
10/97 5.5% Convertible $4,300,000 $4,300,000 Accredited institutional
Senior principal investors (10 institutions)
Subordinated amount;
Notes convertible into
up to 3,440,000
shares of Common
Stock
10/97 Warrants to Exercisable into No additional Accredited institutional
Purchase Common 283,800 shares consideration investors (11 institutions)
Stock of Common Stock
11/97 Common Shares 63,500 $67,750 Purchasers in Rule 506
private placement (8 purchasers)
12/97 Common Shares 50,000 Gas reserves and Hinge Line, Inc.
one natural gas well -
value undetermined
3/98 Warrant to Exercisable In connection with Kingsbridge Capital
Purchase into 100,000 entering into Limited
Common Stock shares of Investors Agreement
Common Stock
4/98 12.0% Convertible $300,000; $300,000 Accredited
Notes convertible into investors (9 institutions)
up to 200,000
shares of
Common Stock
4/98 Warrants to Exercisable into No additional Accredited
purchase 210,000 shares consideration investors (9 institutions)
Common Stock
6/98 Warrants to Exercisable into Accredited
purchase 1,140,000 shares $175,000 investors (2 institutions)
Common Stock
6/98 12.0%
Subordinated $425,000; $425,000 Accredited
Convertible convertible into investors (5 institutions)
Notes up to 425,000
shares of
Common Stock
6/98 Warrants to Exercisable into No additional Accredited
purchase 531,250 shares consideration investors (5 institutions)
Common Stock
6/98 5.5% $1,250,000; $1,250,000 Accredited
Convertible convertible into investor (1 institution)
Notes up to 1,798,124
shares of
Common Stock
6/98 Warrants to Exercisable into No additional Accredited
purchase 230,000 shares consideration investor (1 institution)
Common Stock
</TABLE>
<PAGE>
(b),(c) The above transactions were private transactions not involving
a public offering and were exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The sale
of securities was without the use of an underwriter, and the certificates
evidencing the shares bear the restrictive legend permitting the transfer
thereof only upon registration of the shares or an exemption under the
Securities Act of 1933, as amended.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of the Company, as amended.
3.2 By-Laws of the Company, as amended.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel.
10.1 Master Service Order and Agreement, dated October 1, 1996,
between the Company and Chevron U.S.A. Inc.(1)
10.2 Joint Venture Agreement, dated December 12, 1996, between the
Company and Centram Marine Services, S.A. (1)
10.3 Joint Venture Agreement, dated July 28, 1997, between the
Company and MIII Corporation. (1)
10.4 Memorandum of Agreement, dated September 30, 1997, between the
Company, the Government of the Democratic Republic of Sao Tome
& Principe, and Procura Financial Consultants, c.c. (1)
II-4
<PAGE>
10.5 Form of Securities Purchase Agreement, dated as of October 15,
1997, between the Company and each of the Purchasers listed
therein, together with forms of the 5.5% Convertible Senior
Subordinated Secured Note and Warrant to Purchase Common
Stock.
10.6 Form of Registration Rights Agreement, dated as of October 15,
1997, between the Company and each of the Purchasers listed
therein.
*10.7 Private Equity Line of Credit Agreement, dated as of March 23,
1998, between the Company and Kingsbridge Capital Limited.
21.1 Subsidiaries of the Company.
*23.1 Consent of Durland & Company, independent public accountants.
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel
(included in the opinion filed as Exhibit 5.1).
*23.3 Consent of Dr. Joseph Shoaf, P.E.
*23.4 Consent of Gerry A. Graham for Sandwood Consultants.
24.1 Power of Attorney (set forth on signature page of the
Registration Statement).
27.1 Financial Data Schedule.
- ------------------------------------
Unless otherwise indicated, all exhibits have been filed.
* Filed herewith
(1) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997, filed on December 29,
1997.
(b) Financial Statement Schedules.
None.
Item 17. Undertakings.
1. The undersigned Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement;
provided, however, that paragraphs (a)(i) and (a)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement;
(b) that, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
II-5
<PAGE>
(c) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act of 1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lafayette, State of Louisiana, on the ___ day of July 1998.
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
By: /s/ James A. Griffin
------------------------------------------
James A. Griffin
Secretary, Treasurer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Chairman of the Board, July __, 1998
- --------------------------- President and Chief Executive
Sam L. Bass, Jr. Officer (principal executive
officer)
* Chief Financial Officer, July __, 1998
- --------------------------- Vice President and
Noreen G. Wilson Director (principal financial
or accounting officer)
/s/ James A. Griffin
- --------------------------- Secretary, Treasurer and July __, 1998
James A. Griffin Director
* Chief Operating Officer,
- --------------------------- Vice President and Director July __, 1998
James R. Callender, Sr.
* Director July __, 1998
- ---------------------------
William Beaton
* By: /s/ James A. Griffin
----------------------
James A. Griffin
Attorney-in-Fact
II-7
<PAGE>
================================================================================
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
ENVIRONMENTAL REMEDIATION HOLDING CORP.
dated as of March 23, 1998
================================================================================
<PAGE>
PRIVATE EQUITY LINE OF CREDIT AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
ENVIRONMENTAL REMEDIATION HOLDING CORP.
dated as of March 23, 1998
This PRIVATE EQUITY LINE OF CREDIT AGREEMENT is entered into as of the
23rd day of March, 1998 (this "Agreement"), by and between Kingsbridge Capital
Limited (the "Investor"), an entity organized and existing under the laws of the
British Virgin Islands, and Environmental Remediation Holding Corp., a
corporation organized and existing under the laws of the State of Colorado (the
"Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase, up to
$10,000,000 of the Common Stock (as defined below) and the Warrant (as defined
below); and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2) ") and Regulation D ("Regulation D") of the
United States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Common Stock to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Adjustment Period" See Section 2.4(b).
Section 1.2 "Bid Price" shall mean the closing bid price (as reported
by Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Blackout Shares" shall have the meaning assigned to them
in Section 2.7.
Section 1.4 "Capital Shares" shall mean the Common Stock and any
shares of any other class of common stock whether now or hereafter authorized,
having the right to participate in the distribution of dividends (as and when
declared) and assets (upon liquidation of the Company).
1
<PAGE>
Section 1.5 "Closing" shall mean one of the closings of a purchase
and sale of the Common Stock pursuant to Section 2. 1
Section 1.6 "Closing Date" shall mean, with respect to a Closing, the
third Trading Day following the Put Date related to such Closing, provided all
conditions to such Closing have been satisfied on or before such Trading Day.
Section 1.7 "Commitment Amount" shall mean the $10,000,000 up to
which the Investor has agreed to provide to the Company in order to purchase Put
Shares pursuant to the terms and conditions of this Agreement.
Section 1.8 "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earlier to occur of (x) the date on which the Investor shall have purchased Put
Shares pursuant to this Agreement for an aggregate Purchase Price of
$10,000,000, (y) the date this Agreement is terminated pursuant to Section 2.5,
or (z) the date occurring twenty four (24) months from the date of commencement
of the Commitment Period.
Section 1.9 "Common Stock" shall mean the Company's common stock,
$0.0001 par value per share.
Section 1.10 "Common Stock Equivalents" shall mean any securities that
are convertible into or exchangeable for Common Stock or any warrants, options
or other rights to subscribe for or purchase Common Stock or any such
convertible or exchangeable securities.
Section 1.11 "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2 of this Agreement.
Section 1.12 "Damages" mean any losses, claims, damages, liabilities,
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.13 "Effective Date" shall mean the date on which the SEC
first declares effective a Registration Statement registering resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.14 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended and the rules and regulations promulgated thereunder.
Section 1.15 "Floor Price" shall mean one dollar ($1.00) per share.
Section 1.16 "Investment Amount" shall mean the dollar amount (within
the range specified in Section 2.2) to be invested by the Investor to purchase
Put Shares with respect to any Put Date as notified by the Company to the
Investor in accordance with Section 2.2 hereof.
2
<PAGE>
Section 1.17 "Investor Note" shall mean the Subordinated Note with a
principal amount of $200,000 issued by the Company to Banque Franck on behalf of
the Investor.
Section 1.18 "Legend" shall have the meaning set forth in Section 8.1.
Section 1.19 "Market Price" on any given date shall mean the average of
the lowest intra-day trade prices of the Common Stock over the Valuation Period.
"Lowest intra-day price" shall mean the lowest price of the Common Stock (as
reported by Bloomberg L.P.) during any Trading Day.
Section 1.20 "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (a) this Agreement, (b) the Registration Rights
Agreement, and (c) the Warrant.
Section 1.21 "Maximum Put Amount" shall mean, with respect to any Put,
(i) two hundred fifty thousand dollars ($250,000) if the average trading volume
for the Common Stock over the twenty (20) Trading Days preceding the applicable
Put Date equals or exceeds twenty thousand (20,000) shares per Trading Day and
is less than or equal to forty thousand (40,000) shares per Trading Day and (ii)
five hundred thousand dollars ($500,000) if the average trading volume for the
Common Stock over the twenty (20) Trading Days preceding the applicable Put Date
exceeds forty thousand (40,000) shares per Trading Day.
Section 1.22 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.23 "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively the "Shares"), shall mean, at any date as of which
the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not refer to any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.24 "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.25 "Preferred Stock" shall mean the Company's preferred
stock, par value $.0001 per share.
Section 1.26 "Principal Market" shall mean the OTC Bulletin Board (the
"Bulletin Board"), the Nasdaq National Market, the Nasdaq Small-Cap Market, the
American Stock Exchange or the New York Stock Exchange, whichever is at the time
the principal trading exchange or market for the Common Stock.
3
<PAGE>
Section 1.27 "Purchase Price" shall mean, with respect to a Put,
seventy-nine percent (79%) of the Market Price on a the applicable Put Date (or
such other date on which the Purchase Price is calculated in accordance with the
terms and conditions of this Agreement).
Section 1.28 "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investor to purchase a
discretionary amount of the Company's Common Stock, subject to the terms and
conditions of this Agreement.
Section 1.29 "Put Date" shall mean the Trading Day during the
Commitment Period that a Put Notice to sell Common Stock to the Investor is
deemed delivered pursuant to Section 2.2(b) hereof.
Section 1.30 "Put Notice" shall mean a written notice to the Investor
setting forth the Investment Amount that the Company intends to require the
Investor to purchase pursuant to the terms of this Agreement.
Section 1.31 "Put Shares" shall mean all shares of Common Stock issued
or issuable pursuant to a Put that has been exercised or may be exercised in
accordance with the terms and conditions of this Agreement.
Section 1.32 "Registrable Securities" shall mean the (i) Put Shares,
(ii) the Warrant Shares, (iii) the Blackout Shares and (iv) any securities
issued or issuable with respect to any of the foregoing by way of exchange,
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise. As
to any particular Registrable Securities, once issued such securities shall
cease to be Registrable Securities when (w) the Registration Statement has been
declared effective by the SEC and all Registrable Securities have been disposed
of pursuant to the Registration Statement, (x) all Registrable Securities have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (y) such time as all Registrable Securities have been
otherwise transferred to holders who may trade such shares without restriction
under the Securities Act, and the Company has delivered a new certificate or
other evidence of ownership for such securities not bearing a restrictive legend
or (z) in the opinion of counsel to the Company, which counsel shall be
reasonably acceptable to the Investor, all Registrable Securities may be sold
without registration or the need for an exemption from any registration
requirements and without any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
Section 1.33 "Registration Rights Agreement" shall mean the agreement
entered into as of the date hereof between the Investor and the Company
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investor as of
the Subscription Date.
Section 1.34 "Registration Statement" shall mean a registration
statement on Form S-3 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
4
<PAGE>
the SEC for which the Company then qualifies and which counsel for the Company
shall deem appropriate and which form shall be available for the resale of the
Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement, and the Warrant
and in accordance with the intended method of distribution of such securities),
for the registration of the resale by the Investor of the Registrable Securities
under the Securities Act.
Section 1.35 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.36 "SEC" shall mean the Securities and Exchange Commission.
Section 1.37 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.38 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.39 "SEC Documents" shall mean the Company's latest Form 10-K
as of the time in question, all Forms 10-Q and 8-K filed thereafter, and the
Proxy Statement for its latest fiscal year as of the time in question until such
time the Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.40 "Subordinated Notes" shall mean the Convertible Senior
Subordinated Secured Notes issued by the Company to certain purchasers
(including the Investor) as of October 15, 1997, with an aggregate principal
amount of $4,300,000.
Section 1.41 "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.
Section 1.42 "Trading Cushion" shall mean the mandatory twenty (20)
Trading Days between Put Dates.
Section 1.43 "Trading Day" shall mean any day during which the
Principal Market shall be open for business.
Section 1.44 "Underwriter" shall mean any underwriter participating
in any disposition of the Registrable Securities on behalf of the Investor
pursuant to the Registration Statement.
Section 1.45 "Valuation Event" shall mean an event in which the
Company at any time during a Valuation Period takes any of the following
actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares, except for dividends paid with
respect to the Preferred Stock;
5
<PAGE>
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing Subsections (a)
and (b) above, at a price per share less, or for other consideration
lower, than the Bid Price in effect immediately prior to such issuance,
or without consideration, except as a result of conversion of any or
all of the Subordinated Notes;
(d) issues any warrants, options or other rights to subscribe
for or purchase any Additional Capital Shares and the price per share
for which Additional Capital Shares may at any time thereafter be
issuable pursuant to such warrants, options or other rights shall be
less than the Bid Price in effect immediately prior to such issuance,
except issuances to employees in connection with the proposed 1998
Stock Option Plan as described in the Form S- I Registration Statement,
filed by the Company with the SEC on January 8, 1998,
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional
Capital Shares may at any time hereafter be issuable pursuant to the
terms of such convertible or exchangeable securities shall be less than
the Bid Price in effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in
liquidation or by way of return of capital or other than as a dividend
payable out of earnings or surplus legally available for dividends
under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets
(other than under the circumstances provided for in the foregoing
subsections (a) through (e); or
(g) takes any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing
Subsections (a) through (f) hereof, inclusive, which in the opinion of
the Company's Board of Directors, determined in good faith. would have
a materially adverse effect upon the rights of the Investor at the time
of a Put or exercise of the Warrant.
Section 1.46 "Valuation Period" shall mean the period of four (4)
Trading Days during which the Purchase Price of the Common Stock is valued,
which period shall be with respect to the Purchase Price on any Put Date, the
one (1) Trading Day preceding and the two (2) Trading Days following the Trading
Day on which a Put Notice is deemed to be delivered, as Agreement as well as the
Trading Day on which such notice is deemed to be delivered; provided, however,
that if a Valuation Event occurs during any Valuation Period, a new Valuation
Period shall begin on the Trading Day immediately after the occurrence of such
Valuation Event and end on the fourth Trading Day thereafter.
Section 1.47 "Warrant" shall have the meaning set forth in. Section 2.6
of this Agreement.
Section 1.48 "Warrant Shares" shall mean all shares Of Common Stock
issued or issuable pursuant to exercise of the Warrant.
6
<PAGE>
ARTICLE II
Purchase and Sale of Common Stock
Section 2.1 Investments.
(a) Puts. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII hereof),
on any Put Date the Company may exercise a Put by the delivery of a Put
Notice. The number of Put Shares that the Investor shall receive
pursuant to such Put shall be determined by dividing the Investment
Amount specified in the Put Notice by the Purchase Price on such Put
Date.
(b) Minimum Amount of Puts. The Company shall, in accordance
with Section 2.2(a), issue and sell Put Shares to the Investor and the
Investor shall purchase Put Shares from the Company totaling (in
aggregate Purchase Prices) at least $3,000,000. If the Company for any
reason fails to issue and deliver such Put Shares during the Commitment
Period, on the first Trading Day after the expiration of the Commitment
Period, the Company shall deliver to Investor a sum in cash equal to
$100,000 minus the product of (x) $100,000 and (y) a fraction, the
numerator of which is aggregate Investment Amounts of the Put Shares
delivered to the Investor hereunder (up to $3,000,000) and the
denominator of which is $3,000,000.
(c) Maximum Amount of Puts. Unless the Company obtains the
requisite approval of its shareholders in accordance with the corporate
laws of Colorado and the applicable rules of the Principal Market, no
more than 19.9 % of the Outstanding shares of Common Stock may be
issued and sold pursuant to Puts.
Section 2.2 Mechanics.
(a) Put Notice. At any time during the Commitment Period,
the Company may deliver a Put Notice to the Investor, subject to the
conditions set forth in Section 7.2; provided, however, the Investment
Amount for each Put as designated by the Company in the applicable Put
Notice shall be neither less than $200,000 nor more than the Maximum
Put Amount.
(b) Date of Delivery of Put Notice. A Put Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or
otherwise by the Investor if such notice is received prior to 12:00
noon New York time, or (ii) the immediately succeeding Trading Day if
it is received by facsimile or otherwise after 12:00 noon New York time
on a Trading Day or at any time on a day which is not a Trading Day. No
Put Notice may be deemed delivered, on a day that is not a Trading Day.
Section 2.3 Closings; Prepayment of the Investor Note.
(a) On each Closing Date for a Put, (i) the Company shall
deliver into escrow one or more certificates, at the Investor's option,
representing the Put Shares to be purchased by the Investor pursuant to
7
<PAGE>
Section 2.1 herein, registered in the name of the Investor and (ii)
subject to Section 2.3(b) below, the Investor shall deliver into escrow
the Investment Amount specified in the Put Notice by wire transfer of
immediately available funds to an account designated by the Company on
or before the Closing Date. In addition, on or prior to such Closing
Date, each of the Company and the Investor shall deliver to the other
all documents, instruments and writings required to be delivered or
reasonably requested by either of them pursuant to this Agreement in
order to implement and effect the transactions contemplated herein.
Payment of the Investment Amount to the Company and delivery of the
certificate(s) to the Investor shall occur out of escrow in accordance
with the escrow agreement referred to in Section 7.2(p); provided,
however, that to the extent the Company has not paid the fees, expenses
and disbursements of the Investor's counsel in accordance with Section
12.1, the amount of such fees, expenses and disbursements shall be paid
in immediately available funds, at the direction of the Investor, to
Investor's counsel with no reduction in the number of Put Shares
issuable to the Investor on such Closing Date.
(b) If any portion of the Investor Note is outstanding on
any Put Date, the Company shall deliver to the Investor at the same
time as it delivers the applicable Put Notice, a prepayment Notice (as
defined in the Investor Note) providing for the prepayment of all or a
portion of the Investor Note, in accordance with the terms of the
Investor Note, in an amount equal to the following portion of the
Investment Amount: (i) if the Investment Amount specified in the
applicable Put Notice is $300,000 or less, twenty-five percent (25%) of
such Investment Amount shall be applied for such prepayment, (ii) if
the Investment Amount specified in the applicable Put Notice is greater
than $300,000, thirty-five percent (35%) of such Investment Amount
shall be applied for such prepayment and (iii) a lesser percentage of
such Investment Amount shall be applied for such prepayment if
sufficient to prepay in full the Investor Note in accordance with the
terms of the Investor Note (the "Prepayment Amount").
The Investor shall deliver into escrow in connection with the Closing
of the applicable Put the Investment Amount specified in the Put Notice minus
the Prepayment Amount, and there shall be no reduction in the number of Put
Shares issued to the Investor on the Closing Date for the applicable Put. For
purposes only of implementing prepayment of the Investor Note pursuant to this
Section 2.3, the Investor hereby waives (i) the thirty-day period required
between the Prepayment Notice and the Prepayment Date, as provided for in
Sections 4(a) and (c) of the Investor Note and (ii) the requirement to provide
evidence of the availability of funds, as provided for in Section 4(d) of the
Investor Note.
Section 2.4 Special Circumstances; Adjustment Period.
(a) Adjustment Period Notice. In the event that the Company
shall in good faith anticipate executing an agreement of acquisition,
merger or consolidation within ninety (90) days after giving the
Investor Adjustment Period Notice (as defined below), the Company may,
at its sole discretion, give the Investor at least twenty-one (21)
days' irrevocable advance notice, in the form of Exhibit A hereto
8
<PAGE>
("Adjustment Period Notice"), that the Company shall initiate an
Adjustment Period (as defined below). The Company shall not give such
Adjustment Period Notice if it constitutes the disclosure of material
non-public information to the Investor.
(b) During the Adjustment Period:
1. the Purchase Price shall be seventy-four percent
(74%) of the Market Price on the applicable Put Date;
2. the duration of the Trading Cushion shall be
shortened to ten (10) Trading Days until the expiration of
five (5) consecutive weeks after the date on which the
Adjustment Period Notice was given (the "Adjustment Period ");
and
3. the Company may not deliver a Put Notice such
that the number of Put Shares to be purchased by the Investor
upon the applicable Closing, when aggregated with all other
shares of Common Stock then owned by the Investor beneficially
or deemed beneficially owned by the Investor, would result in
the Investor owning more than 4.9 % of all of such Common
Stock as would be outstanding on such Closing Date, as
determined in accordance with Section 13(d) of the Exchange
Act and the regulations promulgated thereunder. For purposes
of this Section 2.4(c), in the event that the amount of Common
Stock outstanding as determined in accordance with Section
13(d) of the Exchange Act is greater on a Closing Date than on
the date upon which the Put Notice associated with such
Closing Date is given, the amount of Common Stock outstanding
on such Closing Date shall govern for purposes of determining
whether the Investor, when aggregating all purchases of Common
Stock made pursuant to this Agreement and. if any, Warrant
Shares, would own more than 4.9% of the Common Stock,
following such Closing Date.
Section 2.5 Termination of Investment Obligation. The obligation of
the Investor to purchase shares of Common Stock shall terminate permanently
(including with respect to a Closing Date that has not yet occurred) in the
event that (i) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate of thirty (30)
Trading Days during the Commitment Period, for any reason other than deferrals
or suspension in accordance with Section 1. 1 (f) of the Registration Rights
Agreement, as a result of corporate development subsequent to the Subscription
Date that would require such Registration Statement to be amended to reflect
such event in order to maintain its compliance with the disclosure requirements
of the Securities Act or (ii) the Company shall at any time fail to comply with
the requirements of Section 6.3, 6.4, 6.5 or 6.6.
Section 2.6 The Warrant. On the Subscription Date, the Company shall
issue to the Investor a warrant (the "Warrant"), exercisable beginning on the
181st day after the Subscription Date and continuing to be exercisable at any
time and from time to time over the three-year period thereafter, to purchase an
aggregate of 100,000 Warrant Shares at the Exercise Price (as defined in the
Warrant). The Warrant shall be delivered by the Company to the Investor upon
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execution of this Agreement by the parties hereto. The Warrant Shares shall be
registered for resale pursuant to the Registration Rights Agreement.
Section 2.7 Blackout Shares. In the event that, (a) within five
Trading Days following any Closing Date, the Company gives a Blackout Notice to
the Investor of a Blackout Period in accordance with Section 1. 1 (e) of the
Registration Rights Agreement, and (b) the Bid Price on the Trading Day
immediately preceding such Blackout Period ("Old Bid Price") is greater than the
Bid Price on the first Trading Day following such Blackout Period that the
Investor may sell its Registrable Securities pursuant to an effective
Registration Statement ("New Bid Price"), then the Company shall issue to the
Investor the number of additional shares of Registrable Securities (the
"Blackout Shares") equal to the difference between (X) the product of the number
of Registrable Securities held by Investor immediately prior to the Blackout
Period multiplied by the Old Bid Price, divided by the New Bid Price, and (Y)
the number of Registrable Securities held by Investor immediately prior to the
Blackout Period.
Section 2.8 Liquidated Damages
1 1. The parties hereto acknowledge and agree that the sum payable
under Section 2. 1 (b) and the requirement to issue Blackout Shares under
Section 2.7 above shall give rise to liquidated damages and not penalties. The
parties further acknowledge that (a) the amount of loss or damages likely to be
incurred is incapable or is difficult to precisely estimate, (b) the amounts
specified in such Sections bear a reasonable proportion and am not plainly or
grossly disproportionate to the probable loss likely to be incurred by the
Investor in connection with the failure by the Company to make Puts with
aggregate Purchase Prices totaling at least S3,000,000 or in connection with a
Blackout Period under Section 1. 1 (e) of the Registration Rights Agreement, and
(c) the parties are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
ARTICLE III
Representations and Warranties of Investor
The Investor represents and warrants to the Company that:
Section 3.1 Intent. The Investor is entering into this Agreement for
its own account and the Investor has no present arrangement (whether or not
legally binding) at any time to sell the Common Stock to or through any person
or entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2 Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
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the merits and risks of an investment in Common Stock. The Investor acknowledges
that an investment in the Common Stock is speculative and involves a high degree
of risk.
Section 3.3 Authority. This Agreement has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 3.4 Not an Affiliate. The Investor is not an officer,
director or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the company.
Section 3.5 Organization and Standing.Investor is duly organized,
validly existing, and in good standing under the laws of the British Virgin
Islands.
Section 3.6 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument contemplated hereby, and the
consummation of the transactions contemplated thereby, and compliance with the
requirements thereof, will not (a) violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Investor, or, to the
Investor's knowledge, (b) violate any provision of any indenture, instrument or
agreement to which Investor is a party or is subject, or by which Investor or
any of its assets, is bound, (c) conflict with or constitute a material default
thereunder, (d) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (e) require the
approval of any third-party (that has not been obtained) pursuant to any
material contract to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.7 Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Investor has
reviewed or received copies of the SEC Documents.
Section 3.8 Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investor that:
Section 4.1 Organization of the Company. The Company is a corporation
duly organized and existing in good standing under the laws of the State of
Colorado and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. Except as set forth in the SEC
Documents, the Company does not have any subsidiaries. Except as set forth in
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the SEC Documents, the Company does not own more than fifty percent (50%) of or
control any other business entity. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, and the Warrant and to issue the
Put Shares, the Warrant, the Warrant Shares and the Blackout Shares; (ii) the
execution and delivery of this Agreement and the Registration Rights Agreement,
and the execution, issuance and delivery of the Warrant, by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required; and (iii) each of this Agreement and the Registration Rights Agreement
has been duly executed and delivered, and the Warrant has been duly executed,
issued and delivered, by the Company and constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 4.3 Capitalization. As of December 31, 1997, the authorized
capital stock of the Company consisted of 950,000,000 shares of Common Stock, of
which 23,965,625 shares were issued and outstanding, and 10,000,000 shares of
Preferred Stock, none of which were issued and outstanding. Except for the (i)
options to purchase shares of Common Stork that are described in the SEC
Documents; and (ii) warrants to purchase not more than 258,000 shares of Common
Stock with purchase prices of not less than $2.83 per share, there are no
options, warrants, or rights to subscribe to, securities, rights or obligation
convertible into or exchangeable for or giving any right to subscribe for any
shares of capital stock of the Company. All of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued and are
fully paid and nonassessable.
Section 4.4 Common Stock. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the Bulletin Board.
Section 4.5 SEC Documents. The Company has delivered or made
available to the Investor true and complete copies of the SEC Documents
(including, without limitation. proxy information and solicitation materials).
The Company has not provided to the Investor any information that, according to
applicable law, rule or regulation, should have been disclosed publicly prior to
the date hereof by the Company, but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
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requirements of the Securities Act or the Exchange Act, as the case may be, and
other federal, state and local laws, rules and regulations applicable to such
SEC Documents, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form and
substance in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
Section 4.6 Exemption from Registration; Valid Issuances. The sale
and issuance of the Warrant, the Warrant Shares, the Put Shares and any Blackout
Shares in accordance with the terms and on the bases of the representations and
warranties set forth in this Agreement, may and shall be properly issued
pursuant to Rule 4(2), Regulation D and/or any applicable state law. When issued
and paid for as herein provided, the Put Shares, the Warrant Shares and any
Blackout Shares shall be duly and validly issued, fully paid, and nonassessable.
Neither the sales of the Put Shares, the Warrant, the Warrant Shares or any
Blackout Shares pursuant to, nor the Company's performance of its obligations
under, this Agreement, the Registration Rights Agreement, or the Warrant shall
(i) result in the creation or imposition of any liens, charges, claims or other
encumbrances upon the Put Shares, the Warrant Shares, any Blackout Shares or any
of the assets of the Company, or (ii) entitle the holders of Outstanding Capital
Shares to preemptive or other rights to subscribe to or acquire the Capital
Shares or other securities of the Company, except as provided for in the
Subordinated Notes. The Put Shares, the Warrant Shares and any Blackout Shares
shall not subject the Investor to personal liability by reason of the ownership
thereof.
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, the Warrant, the-
Warrant Shares or any Blackout Shares, or (ii) made any offers or sales of any
security or solicited any offers to buy any security under any circumstances
that would require registration of the Common Stock under the Securities Act.
Section 4.8 Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
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Section 4.9 No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including, without limitation, the issuance of
the Put Shares, the Warrant, the Warrant Shares and the Blackout Shares do not
and will not (i) result in a violation of the Certificate or By-Laws or (ii)
conflict with, or constitute a material default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture, instrument or any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company is a party, or (iii)
result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and sure securities
laws and regulations) applicable to the Company or by which any property or
asset of the Company is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not individually or in the aggregate, have a Material Adverse Effect) nor is the
Company otherwise in violation of, conflict with or in default under any of the
foregoing; provided, however, that for purposes of the Company's representations
and warranties as to violations of foreign law, rule or regulation referenced in
clause (iii), such representations and warranties are made only to the best of
the Company's knowledge insofar as the execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby axe or may be affected by the status of the
Investor under or pursuant to any such foreign law, rule or regulation. The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate do nor and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock or the Warrant in accordance with
the terms hereof (other than any SEC, NASD or state securities filings that may
be required to be made by the Company subsequent to any Closing, any
registration statement that may be filed pursuant hereto, and any shareholder
approval required by the rules applicable to companies whose common stock trades
on the Nasdaq Small Cap Market); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 4.10 No Material Adverse Change. Since September 30, 1997,
no event has occurred that would have a Material Adverse Effect on the Company,
except as disclosed in the SEC Documents.
Section 4.11 No Undisclosed Liabilities. The Company has no
liabilities or obligations that are material, individually or in the aggregate,
and that are not disclosed in the SEC Documents or otherwise publicly announced,
other than those incurred in the ordinary course of the Company's businesses
since September 30, 1997 and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect on the Company.
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Section 4.12 No Undisclosed Events or Circumstances. Since September
30, 1997, no event or circumstance has occurred or exists with respect to the or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.13 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.
Section 4.14 Litigation and Other-Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect, Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.
Section 4.15 No Misleading or Untrue Communication. The Company, any
Person representing the Company, and, to the knowledge of the Company, any other
Person selling or, offering to sell the Put Shares, the Warrant, the Warrant
Shares or the Blackout Shares in connection with the transactions contemplated
by this Agreement, have not made, at any time, any oral communication in
connection with the offer or sale of the same which contained any untrue
statement of a material fact or omitted to state any material fact necessary in
order to make the statements, in the light of the circumstances under which they
were made, not misleading.
Section 4.16 Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, a negative effect on the price of the Common
Stock or (ii) according to applicable law, rule or regulation. should have been
disclosed publicly by the Company prior to the date hereof but which has been so
disclosed.
ARTICLE V
Covenants of the Investor
The Investor's trading activities with respect to shares of the
Company's Common Stock will be in compliance with all applicable state and
federal securities laws, rules and regulations and the rules and regulations of
the Principal Market on which the Company's Common Stock is listed.
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ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has available and the Company shall reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to satisfy any obligation to issue the Put Shares, the
Warrant Shares and the Blackout Shares; such amount of shares of Common Stock to
be reserved shall be calculated based upon the minimum Purchase Price for the
Put Shares under the terms and conditions of this Agreement and the Exercise
price of the Warrant and a good faith estimate by the Company in consultation
with the Investor of the number of Blackout Shares that will need to be issued.
The number of shares so reserved from time to time, as theretofore increased or
reduced as hereinafter provided, may be reduced by the number of shares actually
delivered hereunder.
Section 6.3 Listing of Common Stock. The Company shall maintain the
listing of the Common Stock on a Principal Market, and as soon as practicable
(but in any event prior to the commencement of the Commitment Period) will cause
the Put Shares, the Warrant Shares and any Blackout Shares to be listed on the
Principal Market. The Company further shall, if the Company applies to have the
Common Stock traded on any other Principal Market, include in such application
the Put Shares, the Warrant Shares and any Blackout Shares, and shall take such
other action as is necessary or desirable in the opinion of the Investor to
cause the Common Stock to be listed on such other Principal Market as promptly
as possible. The Company shall take use its reasonable best efforts to continue
the listing and trading of its Common Stock on the Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.4 Exchange Act Registration. The Company shall (i) cause
its Common Stock to continue to be registered under Section 12(g) or 12(b) of
the Exchange Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any document
(whether or not permitted by said Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Act. The Company shall take all reasonable action to
continue the listing and trading of its Common Stock on the Principal Market and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the NASD and the Principal Market.
Section 6.5 Legends. The certificates evidencing the Put Shares, the
Warrant Shares and the Blackout Shares shall be free of legends, except as
provided for in Article VIII.
Section 6.6 Corporate Existence. The Company shall take a steps
necessary to preserve and continue the corporate existence of the Company.
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Section 6.7 Additional SEC Documents. The Company shall deliver to
the Investor, as and when the originals thereof are submitted to the SEC for
filing, copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8 Notice of Certain Events Affecting Registration;
Suspension of Right to Make a Put. The Company shall immediately notify the
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the registration statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination dig a post-effective amendment to the registration
statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events.
Section 6.9 Expectations Regarding Put Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company undertakes to notify the
Investor as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter. if any, through the issuance of Put Notices.
Such notification shall constitute only the Company's good faith estimate with
respect to such calendar quarter and shall in no way obligate the Company to
raise such amount during such calendar quarter or otherwise limit its ability to
deliver Put Notices during such calendar quarter. The failure by the Company to
comply with this provision can be cured by the Company's notifying the Investor
at any time as to its reasonable expectations with respect to the current
calendar quarter.
Section 6.10 Consolidation; Merger. The Company shall not, at any
time after the date hereof, effect any merger or consolidation of the Company
with or into, or a transfer of all or substantially all of the assets of the
Company to, another entity unless the resulting successor or acquiring entity
(if not the Company) assumes by written instrument the obligation to deliver to
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the Investor such shares of stock and/or securities as the Investor is entitled
to receive pursuant to this Agreement and the Warrant.
Section 6.11 Issuance of Put Shares, Blackout Shares and Warrant
Shares. The sale of the Put Shares, the issuance of the Warrant Shares pursuant
to exercise of the Warrant and the issuance of any Blackout Shares shall be made
in accordance with the provisions and requirements of Regulation D and any
applicable state law. Issuance of the Warrant Shares pursuant to exercise of the
Warrant through a cashless exercise shall be made in accordance with the
provisions and requirements of Section 3(a)(9) under the Securities Act and any
applicable state law.
Section 6.12 Legal Opinion on Subscription Date. The Company's
independent counsel shall deliver to the Investor upon execution of this
Agreement an opinion in the form of Exhibit B, except for paragraph 7 thereof.
ARTICLE VII
Conditions to Delivery of
Put Notices and Conditions to Closing
Section 7.1 Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the Investor incident to each Closing is subject to
the satisfaction, at or before each such Closing, of each of the conditions set
forth below.
(a) Accuracy of the Investor's Representation and
Warranties. The representations and Warranties of the Investor shall be
true and correct in all material respects as of the date of this
Agreement and as of the date of each such Closing as though made at
each such time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Investor at or prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to
Deliver a Put Notice and the Obligation of the Investor to Purchase Put Shares.
The right of the Company to deliver a Put Notice and the obligation of the
Investor hereunder to acquire and pay for the put Shares incident to a Closing
is subject to the satisfaction, on (i) the date of delivery of such Put Notice
and (ii) the applicable Closing Date (each a "Condition Satisfaction Date"), of
each of the following conditions:
(a) Registration of the Registrable Securities with the SEC.
As set forth in the Registration Rights Agreement, the Company shall
have filed with the SEC a Registration Statement with respect to the
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resale of the Registrable Securities by the Investor that shall have
been declared effective by the SEC prior to the first Put Date, but in
no event later than ninety (90) days after Subscription Date.
(b) Effective Registration Statement. As set forth in the
Registration Rights Agreement, the Registration Statement shall have
previously become effective and shall remain effective on each
Condition Satisfaction Date and (i) neither the Company nor the
Investor shall have received notice that the SEC has issued or intends
to issue a stop order with respect to the Registration Statement or
that the SEC otherwise has suspended or withdrawn the effectiveness of
the Registration Statement, either temporarily or permanently, or
intends or has threatened to do so (unless the SEC's concerns have been
addressed and the Investor is reasonably satisfied that the SEC no
longer is considering or intends to take such action), and (ii) no
other suspension of the use or withdrawal of the effectiveness of the
Registration Statement or related prospectus shall exist.
(c) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company shall be
true and correct as of each Condition Satisfaction Date as though made
at each such time (except for representations and warranties
specifically made as of a particular date) with respect to all periods,
and as to all events and circumstances occurring or existing to and
including each Condition Satisfaction Date, except for any conditions
which have temporarily caused any representations or warranties herein
to be incorrect and which have been corrected with no continuing
impairment to the Company or the Investor.
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement, the Registration
Rights Agreement and the Warrant to be performed, satisfied or complied
with by the Company at or prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or adopted by any court or governmental authority of
competent jurisdiction that prohibits or directly and adversely affects
any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced that may have the effect of
prohibiting or adversely affecting any of the transactions contemplated
by this Agreement.
(f) Adverse Changes. Since the date of filing of the Company's
most recent SEC Document, no event that had or is reasonably likely to
have a Material Adverse Effect has occurred.
(g) No Suspension of Trading In or Delisting Of Common
Stock. The trading of the Common Stock shall not have been suspended by
the SEC, the Principal Market or the NASD and the Common Stock shall
have been approved for listing or quotation on and shall not have been
delisted from the Principal Market. The issuance of shares of Common
Stock with respect to the applicable Closing, if any, shall not violate
the shareholder approval requirements of the Principal Market.
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(h) Legal Opinion. The Company shall have caused to be
delivered to the Investor, within five (5) Trading Days of the
effective date of the Registration Statement, an opinion of the
Company's independent counsel in the form of Exhibit B hereto,
addressed to the Investor.
(i) Due Diligence. No dispute between the Company and the
Investor shall exist pursuant to Section 7.3 as to the adequacy of the
disclosure contained in the Registration Statement.
(j) Ten Percent Limitation. On each Closing Date, the number
of Put Shares then to be purchased by the Investor shall not exceed the
number of such shares that, when aggregated with all other shares of
Registrable Securities then owned by the Investor beneficially or
deemed beneficially owned by the Investor, would result in the Investor
owning no more than 9.9% of all of such Common Stock as would be
outstanding on such Closing Date, as determined in accordance with
Section 16 of the Exchange Act and the regulations promulgated
thereunder. For purposes of this Section 7.2(j), in the event that the
amount of Common Stock outstanding as determined in accordance with
Section 16 of the Exchange Act and the regulations promulgated
thereunder is greater on a Closing Date than on the date upon which the
Put Notice associated with such Closing Date is given, the amount of
Common Stock outstanding on such Closing Date shall govern for purposes
of determining whether the Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement and, if any, Warrant
Shares and Blackout Shares, would own more than 9.9% of the Common
Stock following such Closing Date.
(k) Minimum Bid Price. The Bid Price equals or exceeds the
Floor Price from the Trading Day immediately preceding the date on
which such Notice is deemed delivered until the Trading Day immediately
preceding the Closing Date (as adjusted for stock splits, stock
dividends, reverse stock splits, and similar events).
(l) Minimum Average Trading Volume. The average trading
volume for the Common Stock over the previous twenty (20) Trading Days
equals or exceeds (i) twenty thousand (20,000) shares per Trading Day
if the Investment Amount for the applicable Put is $250,000 or less and
(ii) forty thousand (40,000) shares per Trading Day if the Investment
Amount for the applicable Put is greater than $250,000 and is equal to
or less than $500,000.
(m) No Knowledge. The Company shall have no knowledge of any
event more likely than not to have the effect of causing such
Registration Statement to be suspended or otherwise ineffective (which
event is more likely than not to occur within the fifteen Trading Days
following the Trading Day on which such Notice is deemed delivered).
(n) Trading Cushion. The Trading Cushion shall have elapsed
since the immediately preceding Put Date.
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(o) Shareholder Vote. The issuance of shares of Common Stock
with respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the Principal Market.
(p) Escrow Agreement. The parties hereto shall have entered
into an escrow agreement in the form of Exhibit C hereto.
(q) Other. On each Condition Satisfaction Date, the Investor
shall have received and been reasonably satisfied with such other
certificates and documents as shall have been reasonably requested by
the Investor in order for the Investor to confirm the Company's
satisfaction of the conditions set forth in this Section 7.2.,
including, without limitation, a certificate in substantially the form
and substance of Exhibit D hereto, executed in either case by an
executive officer of the Company and to the effect that all the
conditions to such Closing shall have been satisfied as at the date of
each such certificate.
Section 7.3 Due Diligence Review; Non-Disclosure of Non-Public
Information.
(a) The Company shall make available for inspection and
review by the Investor, advisors to and representatives of the Investor
(who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), and any Underwriter, the
following: any Registration Statement or amendment or supplement
thereto or any blue sky, NASD or other filing, all financial and other
records, all SEC Documents and other filings with the SEC, and all
other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the
Company's officers, directors and employees to supply all such
information reasonably requested by the Investor or any such
representative, advisor or Underwriter in connection with such
Registration Statement (including, without limitation, in response to
all questions and other inquiries reasonably made or submitted by any
of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of
enabling the Investor and such representatives, advisors and
Underwriters and their respective accountants and attorneys to conduct
initial and ongoing due diligence with respect to the Company and the
accuracy of the Registration Statement.
(b) Each of the Company, its officers, directors, employees
and agents shall in no event disclose non-public information to the
Investor, advisors to or representatives of the Investor (including,
without limitation, in connection with the giving of the Adjustment
Period Notice pursuant to Section 2.4) unless prior to disclosure of
such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to
disclosing any nonpublic information hereunder, require the Investor's
advisors and representatives to enter into a confidentiality agreement
in form reasonably satisfactory to the Company and the Investor.
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(c) Nothing herein shall require the Company to disclose
non-public information to the Investor or its advisors or
representatives, and the Company represents that it does not
disseminate non-public information to any investors who purchase stock
in the Company in a public offering, to money managers or to securities
analysts; provided, however, that notwithstanding anything herein to
the contrary, the Company shall, as hereinabove provided, immediately
notify the advisors and representatives of the Investor and any
Underwriters of any event or the existence of any circumstance (without
any obligation to disclose the specific event or circumstances) of
which it becomes aware, constituting non public information (whether or
not requested of the Company specifically or generally during the
course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements, therein, in light of the circumstances in which they were
made, not misleading. Nothing contained in this Section 7.3 shall be
construed to mean that such persons or entities other than the Investor
(without the written consent of the Investor prior to disclosure of
such information) may not obtain non-public information in the course
of conducting due diligence in accordance with the terms and conditions
of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such
due diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits a
material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE VIII
Legends
Section 8.1 Legends. Each of the Warrant and, unless otherwise
provided below, each certificate representing Registrable Securities will bear
the following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT
FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS
CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY
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SET FORTH IN A PRIVATE EQUITY LINE OF CREDIT AGREEMENT BETWEEN
ENVIRONMENTAL REMEDIATION HOLDING CORP. AND KINGSBRIDGE CAPITAL LIMITED
DATED AS OF MARCH 23, 1998. A COPY OF THE PORTION OF THE AFORESAID
AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE 0BTAINED FROM THE
COMPANY'S EXECUTIVE OFFICES.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit E hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions. as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:
(a) At any time after the Effective Date, upon surrender of
one or more certificates evidencing Common Stock that bear the Legend,
to the extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered; provided
that (i) the Registration Statement shall then be effective; and (ii)
if requested by the transfer agent the Investor confirms to the
transfer agent that the Investor has Complied with the prospectus
delivery requirement of the Securities Act.
(b) At any time upon any surrender of one or more
certificates evidencing Registrable Securities that bear the Legend, to
the extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered and
containing representations that (i) the Investor is permitted to
dispose of such Registrable Securities without limitation as to amount
or manner of sale pursuant to Rule 144(k) under the Securities Act or
(ii) the Investor has sold, pledged or otherwise transferred or agreed
to sell, pledge or otherwise transfer such Registrable Securities in a
manner other than pursuant to an effective registration statement, to a
transferee who shall upon such transfer be entitled to freely tradeable
securities.
Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 8.1 has been or shall be placed on the
share certificates representing the Common Stock and no instructions or "stop
transfers orders, " so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article VIII.
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Section 8.3 Investor's Compliance. Nothing in this Article VIII shall
affect in any way the Investor' s obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE IX
Choice of Law
Section 9.1 Choice of Law. This Agreement shall be construed under the
laws of the State of New York.
ARTICLE X
Assignment: Entire Agreement, Amendment; Termination
Section 10.1 Assignment. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such person, and (b) the Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any entity
controlled by the Investor or to one of its principals, without the prior
consent of the Company or, in the Company's sole discretion, to any other person
or entity upon the prior written consent of the Company.
Section 10.2 Termination. This Agreement shall terminate twenty four
(24) months after the commencement of the Commitment Period; provided, however,
that the provisions of Articles VI, VIII. IX, X, and XI and Section 7.3 shall
survive the termination of this Agreement.
Section 10.3 Entire Agreement, Amendment; Waiver. This Agreement, the
Registration Rights Agreement and the Warrant constitute the fall and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth in this Agreement or therein. Except as expressly
provided in this Agreement, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by both parties hereto. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof, but no
such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No waiver
by any party of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion.
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ARTICLE XI
Notices; Indemnification
Section 11.1 Notices. Except as set forth in the last sentence of
this Section 11.1, all notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice given in accordance herewith. Any notice or
other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to. such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
if to the Company
Sam L. Bass, Jr.
Chairman and Chief Executive Officer
Environmental Remediation Holding Corp.
1686 General Mouton
Lafayette, Louisiana 70508
Telephone: (318) 264-9657
Facsimile: (318) 264-9940
with a copy (which communication shall not constitute notice) to:
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel P.A.
200 Park Avenue, 15th Floor
New York, New York 10166
Attention: Andrew J. Cosentino, Esq.
Telephone: (212) 801-9200
Facsimile: (212) 801-6400
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and if to the Investor:
Adam Gurney
Kingsbridge Capital Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which communication shall not constitute notice) to:
Rogers & Wells
200 Park Avenue, 52nd Floor
New York. NY 10166
Attention: Sara Hanks, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 11.1 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto. Notwithstanding anything to the contrary set forth above, only Put
Notices and other communications related to Puts and Closings will be deemed to
have been duly given if delivered by facsimile in accordance with the above
procedures.
Section 11.2 Indemnification. The Company agrees to indemnify and
hold harmless the Investor, its partners, affiliates, officers, directors,
employees, and duly authorized agents, and each Person or entity, if any, who
controls the Investor within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, together with the Controlling Persons (as
defined in the Registration Rights Agreement) from and against any Damages,
joint or several, and any action in respect thereof to which the Investor, its
partners, affiliates, officers, directors, employees, and duly authorized
agents, and any such Controlling Person becomes subject to, resulting from,
arising out of or relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Company contained in this Agreement, as such Damages are incurred, unless such
Damages result primarily from the Investor's breach of its representations and
warranties under this agreement or its gross negligence, recklessness or bad
faith in performing its obligations under this Agreement; provided, however,
that Company shall have no liability for indemnification hereunder in excess of
(i) the amount of such Damages actually incurred to the extent they include only
losses, claims, liabilities, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements and costs and expenses of expert
witnesses and investigation) of the Investor, its partners, affiliates,
officers, directors, employees, and duly authorized agents, and any such
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Controlling Person, plus (ii) one hundred and twenty-seven percent (127%) of the
aggregate Investment Amounts of Puts made hereunder, with respect to Damages not
covered by clause (i).
Section 11.3 Method of Asserting Indemnification Claims. All claims
for indemnification by any Indemnified Party (as defined below) under Section
11.2 shall be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which any
person claiming indemnification under any provision of Section 11.2 (an
"Indemnified Party") might seek indemnity under Section 11.2 is
asserted against or sought to be collected from such Indemnified Party
by a person other than the Company, the Investor or any affiliate of
the Company or (a "Third Party Claim"), the Indemnified Party shall
deliver a written notification, enclosing a copy of all papers served,
if any, and specifying the nature of and basis for such Third Party
Claim and for the Indemnified Party's claim for indemnification that is
being asserted under any provision of Section 12.2 against any person
(the "Indemnifying Party"), together with the amount or, if not then
reasonably ascertainable, the estimated amount, determined in good
faith, of such Third Party Claim (a "Claim Notice") with reasonable
promptness to the Indemnifying Party. If the Indemnified Party fails to
provide the Claim Notice with reasonable promptness after the
Indemnified Party receives notice of such Third Party Claim, the
Indemnifying Party shall not be obligated to indemnify the Indemnified
Party with respect to such third party Claim to the extent that the
Indemnifying Party's ability to defend has been irreparably prejudiced
by such failure of the Indemnified Party. The Indemnifying Party shall
notify the Indemnified Party as soon as practicable within the period
ending thirty (30) calendar days following receipt by the Indemnifying
Party of either a Claim Notice or an Indemnity Notice (as defined
below) (the "Dispute Period") whether the Indemnifying Party disputes
its liability or the amount of its liability to the Indemnified Party
under Section 11.2 and whether the Indemnifying Party desires, at its
sole cost and expense, to defend the Indemnified Party against such
Third Party Claim.
1. If the Indemnifying Party notifies the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Indemnified Party
with respect to the Third Party Claim pursuant to this Section
11.3(a), then the Indemnifying Party shall have the right to
defend, with counsel reasonably satisfactory to the
Indemnified Party, at the sole cost and expense of the
Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings shall be vigorously and
diligently prosecuted by the Indemnifying Party to a final
conclusion or will be settled at the discretion of the
Indemnifying Party (but only with the consent of the
Indemnified Party in the case of any settlement that provides
for any relief other than the payment of monetary damages or
that provides for the payment of monetary damages as to which
the Indemnified Party shall not be indemnified in full
pursuant to Section 11.2). The Indemnifying Party shall have
full control of such defense and proceedings, including any
compromise or settlement thereof, provided, however, that the
Indemnified Party may, at the sole cost and expense of the
Indemnified Party, at any time prior to the Indemnifying
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Party's delivery of the notice referred to in the first
sentence of this clause (i), file any motion, answer or other
pleadings or take any other action that the Indemnified Party
reasonably believes to be necessary or appropriate to protect
its interests; and provided further, that if requested by the
Indemnifying Party, the Indemnified Party will, at the sole
cost and expense of the Indemnifying Party, provide reasonable
cooperation to the Indemnifying Party in contesting any Third
Party Claim that the Indemnifying Party elects to contest. The
Indemnified Party may participate in, but not control, any
defense or settlement of any Third Party Claim controlled by
the Indemnifying Party pursuant to this clause W, and except
as provided in the preceding sentence, the Indemnified Party
shall bear its own costs and expenses with respect to such
participation. Notwithstanding the foregoing, the Indemnified
Party may take over the control of the defense or settlement
of a Third Party Claim at any time if it irrevocably waives
its right to indemnity under Section 11.2 with respect to such
Third Party Claim.
2. If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Third Party Claim
pursuant to Section 11.3 (a), or if the Indemnifying Party
gives such notice but fails to prosecute vigorously and
diligently or settle the Third Party Claim, or if the
Indemnifying Party fails to give any notice whatsoever within
the Dispute Period, then the Indemnified Party shall have the
right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted by the
Indemnified Party in a reasonable manner and in good faith or
will be settled at the discretion of the Indemnified Party
(with the consent of the Indemnifying Party, which consent
will not be unreasonably withheld). The Indemnified Party will
have full control of such defense and proceedings, including
any compromise or settlement thereof; provided, however, that
if requested by the Indemnified Party, the Indemnifying Party
will, at the sole cost and expense of the Indemnifying Party,
provide reasonable cooperation to the Indemnified Party and
its counsel in contesting any Third Party Claim which the
Indemnified Party is contesting. Notwithstanding the foregoing
provisions of this clause (ii), if the Indemnifying Party has
notified the Indemnified Party within the Dispute Period that
the Indemnifying Party disputes its liability or the amount of
its liability hereunder to the Indemnified Party with respect
to such Third Party Claim and if such dispute is resolved in
favor of the Indemnifying Party in the manner provided in
clause (iii) below, the Indemnifying Party will not be
required to bear the costs and expenses of the Indemnified
Party's defense pursuant to this clause (ii) or of the
Indemnifying Party's participation therein at the Indemnified
Party's request, and the Indemnified Party shall reimburse the
Indemnifying Party in full for all reasonable costs and
expenses incurred by the Indemnifying Party in connection with
such litigation. The Indemnifying Party may participate in,
but not control, any defense or settlement controlled by the
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Indemnified Party pursuant to this clause (ii), and the
Indemnifying Party shall bear its own costs and expenses with
respect to such participation.
3. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute its liability or
the amount of its liability to the Indemnified Party with
respect to the Third Party Claim under Section 11.2 or fails
to notify the Indemnified Party within the Dispute Period
whether the Indemnifying Party disputes its liability or the
amount of its liability to the Indemnified Party with respect
to such Third Party Claim, the Loss in the amount specified in
the Claim Notice shall be conclusively deemed a liability of
the Indemnifying Party under Section 11.2 and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified
Party on demand. If the Indemnifying Party has timely disputed
its liability or the amount of its liability with respect to
such claim, the Indemnifying Party and the Indemnified Party
shall proceed in good faith to negotiate a resolution of such
dispute, and if not resolved through negotiations within the
Resolution Period, such dispute shall be resolved by
arbitration in accordance with paragraph (c) of this Section
11.3.
(b) In the event any Indemnified Party should have a claim
under Section 11.2 against the Indemnifying Party that does not involve
a Third Party Claim, the Indemnified Party shall deliver a written
notification of a claim for indemnity under Section 11.2 specifying the
nature of and basis for such claim, together with the amount or, if not
then reasonably ascertainable, the estimated amount, determined in good
faith, of such claim (an "Indemnity Notice") with reasonable promptness
to the Indemnifying Party. The failure by any Indemnified Party to give
the Indemnity Notice shall not impair such party's rights hereunder
except to the extent that the Indemnifying Party demonstrates that it
has been irreparably prejudiced thereby. If the Indemnifying Party
notifies the Indemnified Party that it does not dispute the claim or
the amount of the claim described in such Indemnity Notice or fails to
notify the Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes the claim or the amount of the claim
described in such Indemnity Notice, the Loss in the amount specified in
the Indemnity Notice will be conclusively deemed a liability of the
Indemnifying Party under Section 11.2 and the Indemnifying Party shall
pay the amount of such Loss to the Indemnified Party on demand. If the
Indemnifying Party has timely disputed its liability or the amount of
its liability with respect to such claim, the Indemnifying Party and
the Indemnified Party shall proceed in good faith to negotiate a
resolution of such dispute, and if not resolved through negotiations
within the Resolution Period, such dispute shall be resolved by
arbitration in accordance with paragraph (c) of this Section 11.3.
(c) Any dispute under this Agreement or the Warrant shall be
submitted to arbitration (including, without limitation, pursuant to
this Section 12.3) and shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three (3) members
(the "Board of Arbitration") selected as hereinafter provided. Each of
the Indemnified Party, and the Indemnifying Party shall select one (1)
member and the third member shall be selected by mutual agreement of
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the other members, or if the other members fail to reach agreement on a
third member within twenty (20) days after their selection, such third
member shall thereafter be selected by the American Arbitration
Association upon application made to it for such purpose by the
Indemnified Party. The Board of Arbitration shall meet on consecutive
business days in New York County, New York or such other place as a
majority of the members of the Board of Arbitration determines more
appropriate, and shall reach and render a decision in writing
(concurred in by a majority of the members of the Board of Arbitration)
with respect to the amount. if any, which the Indemnifying Party is
required to pay to the Indemnified Party in respect of a claim filed by
the Indemnified Party. In connection with rendering its decisions, the
Board of Arbitration shall adopt and follow such rules and procedures
as a majority of the members of the Board of Arbitration deems
necessary or appropriate. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30)
calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to
be delivered to the Indemnified Party and the Indemnifying Party. Any
decision made by the Board of Arbitration (either prior to or after the
expiration of such thirty (30) calendar day period) shall be final,
binding and conclusive on the Indemnified Party and the Indemnifying
Party and entitled to be enforced to the fullest extent permitted by
law and entered in any court of competent jurisdiction. Each party to
any arbitration shall bear its own expense in relation thereto,
including but not limited to such party's attorneys' fees, if any, and
the expenses and fees of the Board of Arbitration shall be divided
between the Indemnifying Party and the Indemnified Party in the same
proportion as the portion of the related claim determined by the Board
of Arbitration to be payable to the Indemnified Party bears to the
portion of such claim determined not to be so payable.
ARTICLE XII
Miscellaneous
Section 12.1 Fees and Expenses. Each of the Company and the Investor
agrees to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of the Investor's counsel in an amount not to exceed $25,000.
Section 12.2 Brokerage. Each of the parties hereto represents that it
has had no dealings in connection with this transaction with any finder or
broker who will demand payment of any fee or commission from the other party.
The Company on the one hand, and the Investor, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any persons claiming brokerage commissions or finder's fees on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
Section 12.3 Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be executed by less than all of the parties and
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shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.
Section 12.4 Entire Agreement. This Agreement, the Annex and Exhibits
hereto, the Warrant, and the Registration Rights Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as if fully set forth herein.
Section 12.5 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision, provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.6 Title and Subtitles. The titles and subtitles used in
this Agreement arc used for the convenience of reference and are not to be
considered in construing or interpreting this Agreement.
Section 12.7 Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of
the Investor and the Company shall be required to employ any other reporting
entity.
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IN WITNESS WHEREOF, the parties hereto have caused this Private Equity
Line of Credit Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.
KINGSBRIDGE CAPITAL LIMITED
By: /s/ Valentine O'Donoghue
------------------------
Valentine O'Donoghue
Director
ENVIRONMENTAL REMMEDIATION
HOLDING CORP.
By: /s/ Noreen G. Wilson
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Noreen G. Wilson
Chief Financial Officer
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Environmental Remediation Holding Corporation
3-5 Audrey Avenue
Oyster Bay, New York 11771
INDEPENDENT AUDITOR'S CONSENT
Ladies and Gentlemen:
We hereby consent to the use in this Registration Statement of Environmental
Remediation Holding Corporation on Amendment No. 1 to Form S-1 of our report
dated December 12, 1997 on the consolidated financial statements of the company,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ Durland & Company, CPAs, P.A.
Palm Beach, Florida
July 23, 1998
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CONSENT
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The undersigned hereby (i) acknowledges that it has reviewed the
portions of the Registration Statement on Form S-1 (No. 333-43919) of
Environmental Remediation Holding Corporation, in which the undersigned is
referred to, (ii) consents to the use and context of its name, and (iii)
confirms that the statements referring to it in the Registration Statement are a
materially accurate summary of the reserve reports for which the undersigned is
responsible.
Dated: June __, 1998
Very truly yours,
/s/ Joseph Shoaf
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Joseph Shoaf, P.E.
Registered Engineer #1428, Colorado
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CONSENT
The undersigned hereby (I) acknowledges that it has reviewed the portion of the
Registration Statement on Form S-1 (No. 333-4319) of Environmental Remediation
Holding Corporation, Inc. in which the undersigned is referred to (ii) consents
to the use and context of its name, and (iii) confirms that the statements
referring to it in the Registration Statement are a materially accurate summary
of the reserve reports for which the undersigned is responsible.
Dated June __, 1998
Very truly yours,
/s/ Gerry A. Graham
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Gerry A. Graham
Sandwood Consultants
Registered Professional
Petroleum Engineer
