U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1997
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
3-5 Audrey Avenue
Oyster Bay, New York 11771
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (516) 922-4170
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of December 31, 1997 was 23,965,625
Documents Incorporated by Reference:
None
<PAGE>
PART I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statements of Stockholders' Equity ............................F-4
Consolidated Statements of Cash Flows .....................................F-5
Notes to Consolidated Financial Statements .................................F-6
F-1
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
ASSETS September 30, 1997 December 31, 1997
CURRENT ASSETS (Unaudited)
Cash $ 327,743 797,102
Accounts receivable and other current assets 215,708 447,231
------------------- -------------------
Total Current Assets 543,451 1,244,333
------------------- -------------------
PROPERTY AND EQUIPMENT
Equipment (note 1b) 2,733,274 4,597,072
------------------- -------------------
Total Property and Equipment 2,733,274 4,597,072
------------------- -------------------
OTHER ASSETS
Deposits on fixed assets 136,560 300,705
Crude oil and natural gas reserves, net (note 1f) 14,335,646 15,042,979
Chevron P&A master service agreement (note 1h) 300 300
DRSTP Concession fee 0 2,008,300
------------------- -------------------
Total Other Assets 14,472,506 17,352,284
------------------- -------------------
Total Assets $ 17,749,231 23,193,689
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other current payable $ 111,054 569,220
Stockholder loans (note 1c) 465,094 475,008
Accrued interest 37,228 86,499
Accrued salaries (note 4) 960,000 1,230,000
Short term bank loan (note 1c) 175,000 0
------------------- -------------------
Total Current Liabilities 1,748,376 2,360,727
------------------- -------------------
LONG-TERM LIABILITIES
Convertible debt, net, (note 1c) 0 3,838,825
------------------- -------------------
Total Long-Term Liabilities 0 3,838,825
------------------- -------------------
Total Liabilities 1,748,376 6,199,552
------------------- -------------------
Common stock issued under repurchase agreement; (1,000,000
shares at 9/30/97 and 750,000 at 12/31/97) (note 7) 2,000,000 1,500,000
STOCKHOLDERS' EQUITY
Common stock, $0.0001 par value; Authorized 950,000,000 shares: issued and
outstanding 22,989,526 at September 30, 1997 and 23,215,625 issued and
22,965,625 outstanding at December 31, 1997 (note 3) 2,199 2,322
Preferred stock, $0.0001 par value; Authorized 10,000,000 shares;
issued and outstanding 0 at September 30 and December 31 0 0
Additional paid in capital in excess of par 32,658,586 34,974,907
Stock subscriptions receivable (913,300) 0
Deferred compensation, net (note 1d) (250,000) (218,750)
Retained earnings (deficit) (17,496,630) (19,264,342)
------------------- -------------------
Total Stockholders' Equity 14,000,855 15,494,137
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 17,749,231 23,193,689
=================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
3 Months ended December 31,
(Unaudited)
<TABLE>
<S> <C> <C>
1996 1997
------------------- -------------------
REVENUE
Sales - environmental remediation services $ 0 146,083
Sales - crude oil 0 96,914
------------------- -------------------
Total sales 0 242,997
------------------- -------------------
COST OF SALES
Cost of sales - environmental remediation services 0 8,511
Cost of sales - crude oil 0 35,851
------------------- -------------------
Total cost of sales 0 44,362
------------------- -------------------
Gross profit/(loss) 0 198,635
OPERATING EXPENSES
Advertising 0 11,855
Automotive expenses 0 33,537
Bank charges 0 398
Compensation - officers 31,250 301,250
Compensation - directors 0 0
Consultant fees 0 251,171
Depreciation 43,428 104,221
Donations 0 6,175
Dues, fees, licenses and taxes 0 4,703
Insurance 0 16,268
Geological data and reports 0 0
Oil lease transfer fees 0 0
Office expenses 0 25,862
Oil well rework expenses 0 23,898
Professional fees 52,500 512,615
Research and development 0 0
Rent 0 39,184
Salaries 0 73,560
Telephone 0 24,380
Travel and entertainment 0 258,744
Utilities 0 6,626
Miscellaneous 0 216,413
------------------- -------------------
Total operating expenses 127,178 1,910,860
------------------- -------------------
Income(loss) from operations (127,178) (1,712,225)
Interest expense 0 (61,096)
Interest income 0 5,609
------------------- -------------------
Income(loss) before tax & extraordinary item (127,178) (1,767,712)
Extraordinary item - forgiveness of debt 0 0
------------------- -------------------
Income(loss) before taxes (127,178) (1,767,712)
Income tax expense/(benefit) 0 0
------------------- -------------------
Net income(loss) $ (127,178) (1,767,712)
=================== ===================
Weighted average number of shares outstanding 3,239,374 24,017,700
=================== ===================
Net loss per share $ (0.04) (0.07)
=================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number Common Pf'd APIC Stk Subs Def Accumulated TTL S/H
of Shares Stock Stk Receiv Comp Deficit Equity
----------- ------ ----- ------------ --------- ----------- ----------------- ----------------
BEGIN BALANCE,
September 30, 1996 3,239,374 $ 324 0 3,515,298 0 (427,500) (657,865) 2,430,257
2/10 - S-8 services 1,600,000 160 0 1,099,840 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 0 4,831,293 0 0 0 4,831,323
3/5 - oil wells/leases 200,000 20 0 9,504,303 0 0 0 9,504,323
3/13 - S-8 services 300,000 30 0 374,970 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 0 0 0 0 300
4/5 - services 1,342,981 134 0 1,342,847 0 0 0 1,342,981
4/5 - contributed to corp (100,000) (10) 0 (99,990) 0 0 0 (100,000)
4/9 - BAPCO acquisition 4,000,000 400 0 499,600 0 0 0 500,000
5/14 - S-8 services 1,500,000 150 0 562,350 0 0 0 562,500
6/19 - services 150,000 15 0 28,110 0 0 0 28,125
7/8 - cash 800,000 80 0 399,920 0 0 0 400,000
7/25 - S-8 services 2,335,000 233 0 6,464,798 0 0 0 6,465,031
7/30 - services 1,500,000 150 0 2,249,850 0 0 0 2,250,000
7/30 - cash 147,000 15 0 146,985 0 0 0 147,000
8/8 - cash 74,000 8 0 147,992 0 0 0 148,000
9/4 - services 400,000 40 0 307,960 0 0 0 308,000
9/10 - cash/stk subs recv 727,273 73 0 799,927 (800,000) 0 0 0
9/15 - cash/stk subs recv 473,898 47 0 482,533 (113,300) 0 0 369,280
Deferred comp amort - 0 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 0 (16,838,765) (16,838,765)
----------- ----- ----- ------------ --------- ----------- ----------------- ----------------
BALANCE,
September 30, 1997 21,989,526 2,199 0 32,658,586 (913,300) (250,000) (17,496,630) 14,000,855
10/97 - Stock Subs Rec'd - 0 0 0 913,300 0 0 913,300
10/8 - Uinta Acquisition 1,000,000 100 0 1,999,900 0 0 0 2,000,000
10/97-Neuces Acquisition 50,000 5 0 148,745 0 0 0 148,750
11/97 - cash ,net 176,099 18 0 167,676 0 0 0 167,694
Deferred comp amort - 0 0 0 0 31,250 0 31,250
Net loss - 0 0 0 0 0 (1,767,712) (1,767,712)
----------- ----- ----- ------------ --------- ----------- ----------------- ----------------
BALANCE, December
31, 1997 (Unaudited) 23,215,625 $ 2,322 0 34,974,907 0 (218,750) (19,264,342) 15,494,137
=========== ===== ===== ============ ========= =========== ================= ================
Common Stock issued under a repurchase agreement
7/15 - DRSTP information 750,000 $ 100 0 1,499,900 0 0 0 1,500,000
=========== ===== ===== ============ ========= =========== ================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
1996 1997
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (176,750) (1,767,712)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred compensation 83,750 31,250
Crude oil depletion 0 17,217
Depreciation 93,000 104,221
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets 0 (231,523)
Increase (decrease) in accrued interest expense 0 49,271
Increase (decrease) in accrued expenses 0 458,166
Increase (decrease) in accrued salaries 0 270,000
------------------ ------------------
Net cash (used) provided by operating activities 0 (1,069,110)
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP Concession fee payment 0 (2,008,300)
Acquisition of fixed assets 0 (58,694)
Increase in deposits on fixed assets 0 (164,145)
------------------ ------------------
Net cash (used) provided by investing activities 0 (2,231,139)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 0 167,694
Convertible debt sold for cash 0 3,767,000
Payments on stockholder advances 0 (207,861)
Payments on funds advanced by third-parties 0 (175,000)
Funds advanced by stockholders 0 217,775
------------------ ------------------
Net cash (used) provided by financing activities 0 3,769,608
Net increase (decrease) in cash 0 469,359
CASH, beginning of period 0 327,743
------------------ ------------------
CASH, end of period $ 0 797,102
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 0 11,825
================== ==================
Non cash financing activities:
Stock issued to acquire natural gas well $ 0 148,750
================== ==================
Stock issued to acquire crude oil reserves and equipment $ 0 2,000,000
================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
The Company- Environmental Remediation Holding Corporation, (ERHC), is a
Colorado chartered corporation which operates in the environmental
remediation industry and the oil and natural gas production industry
from its corporate headquarters in Oyster Bay, New York, its operating
offices in Lafayette, Louisiana.
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 financial statements for the
three months ended December 31, 1996 and 1997 include all adjustments
which in the opinion of management are necessary for fair presentation.
The following summarize the more significant accounting and reporting
policies and practices of the Company:
a) Basis of presentation- The consolidated financial statements include the
accounts of Site Services, Inc and Bass American Petroleum Company, its
wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
b) Equipment- The Company has chosen to depreciate the equipment using the
straight line method over its estimated remaining useful life of ten
or fifeteen years and its furniture and fixtures and vehicle over its
estimated useful life of five years. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation expense for
the 3 months ended December 31, 1996 and 1997 was $43,428 and $104,221.
c) Notes payable- The Company issued two notes payable to stockholders who
are also officers and directors in exchange for cash amounting to
$978,157. These notes carry no stated maturity date and an 8.5% rate of
interest. The Company has repaid $503,148 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.
In January 1997, the Company issued a note payable to a bank in
exchange for $175,000 in 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. This note was paid in full in December 1997.
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.
d) 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. Amortization of this deferred
compensation in the three months ended December 31, 1996 and 1997 was
$31,250 and $31,250.
e) Net loss per share- Net loss per share is computed by dividing the net
loss by the number of shares outstanding during the period.
f) Crude oil and natural 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 received an independent evaluation
of this field which reflected 1,000,000 barrels of proven 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 received an independent evaluation of this field
which reflected 1,500,000 barrels of proven oil reserves. These reserve
F-6
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
f) Crude oil and natural gas reserves, continued- 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 process of being prepared,
which the Company will use to adjust the valuation if the subsequent
report is materially different. The Company chose to value these
acquisitions on the basis of the asset value received rather than the
value of the common stock given up as at the time of the acquisition
the stock price was highly volatile and thinly traded.
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 and for several years prior to 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
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 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.
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 proportinate 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 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.
The Company expects to utilize the sucessful 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.
g) Depletion- Depletion (including provisions for future abandonment and
restoration costs) of all capitalized costs of proved oil and gas
producing properties are expensed using the unit-of-production method
by individual fields as the proven developed reserves are produced.
Depletion expense was $17,217 for the 3 months ended December 31, 1997.
h) Chevron master P&A 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. The Company valued this acquisition on the basis of the
par value of the stock issued. The Company expects to begin
commercializing the agreement in fiscal 1998, and has begun amortizing
this contract value over a five year period beginning in fiscal 1998.
i) 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
F-7
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
i) Sao Tome concession payment, continued- 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.
(2) Income taxes- The Company has a consolidated net operating loss
carryforward amounting to $19,264,342, expiring as follows: $3,404 in
2010, $654,461 in 2011; $16,838,765 in 2012 and $1,767,712 in 2013. The
Company has a $7,705,700 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.
(3) 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. In November 1997, the Company issued 176,099
shares of common stock under a Regulation D Rule 506 private placement
in exchange for $167,694, net, in cash.
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 pay the difference in cash at the Company's option
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 proportinate share of the
costs to reenter this well.
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.
(4) Accrued salaries- At December 31, 1996 and 1997 the Company has accrued
salaries of $0 and $1,230,000, 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.
(5) Commitments and contingencies- The Company is committed to lease payments
for 9 vehicles under operating leases totalling $52,292 and $20,043 for
the years ended September 30, 1998 and 1999, respectively. The Company
currently leases its office space and operating facilities on a month
to month basis.
(6) 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 operates in the oil and gas production industry. SSI's principal
identifiable assets consist of $2,214,772, (net), of environmental
equipment, a barge deposit of $131,000 and the Chevron P&A master
service agreement valued at $300, (net). Revenues of $146,083 and cost
of sales of $8,511 relate to SSI. BAPCO's principal identifiable assets
consist of crude oil and natural gas reserves valued at $15,024,345,
net, and equipment valued at $2,289,845 (net). Revenues of $96,914 and
cost of sales of $35,851 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.
(7) Common 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 geologic data.
F-8
<PAGE>
Item 2. Management's Discussion and Analysis and Plan of Operation.
Environmental Remediation Holding Corporation is an independent oil and gas
company engaged in the exploration, development, production and sales of crude
oil and natural gas properties with current operations focused in Texas, Utah,
and the Democratic Republic of Sao Tome and Principe in West Africa.
The Company's strategy in the United States is to increase oil and natural gas
reserves, production, and cash flow through (1) the exploration of its existing
acreage position in Texas, Utah, and the Democratic Republic of Sao Tome and
Principe; (2) the acquisition of additional properties in known producing areas
that provide significant development and exploratory drilling potential; (3) the
exploration for oil and natural gas reserves; (4) the maintenance of a low
operating and cost structure; and, (5) environmental remediation as it relates
to the oil and gas industry.
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. Although the Company has historically funded capital
expenditures through a combination of equity contribution and short-term
financing arrangements, the Company's ability to meet its estimated capital
expenditure in Fiscal year 1998 are dependent on the Company's ability to
realize the proceeds of the Company's contemplated debt offering.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto referred to in "Item 1. Financial
Statements.
RESULTS OF OPERATIONS
During the first quarter of fiscal 1998 the Company incurred a net loss of
1,910,860, compared to a net loss of $127,178 in the first quarter of fiscal
1997. In the first quarter of fiscal 1998 a total of $960,000 was accrued, but
not paid in cash, as compensation to three officers of the Company. Depreciation
and amortization totaled $104,221 in the first quarter of fiscal 1998 compared
to $43,428 in the first quarter of fiscal 1997. Depletion expense was $17,217 in
the first quarter of fiscal 1998 compared to $0 the prior year. The net cash
operating loss of the Company for the first quarter of fiscal 1998 was
$1,069,110 compared to $0 for the first quarter of fiscal 1997.
The Company had revenues of $243,000 in first quarter of fiscal 1998 compared to
$0 in the first quarter of fiscal 1997. Cost of sales were $44,362 in first
quarter of fiscal 1998 compared to $0.00 in first quarter of fiscal 1997.
Included in the first quarter of fiscal 1998 expenses was 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 US government. The cost of this trip was approximately $200,000.
CAPITAL EXPENDITURES
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.
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 to pay $250,000 in cash, issue 250,000 shares of the
Company's common stock, valued at $2,000,000, 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 and has
contracted another independent appraiser to complete new reserve reports for its
use.
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 valued at
$148,750, as well as to pay the Company's proportinate 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
10
<PAGE>
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.
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 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. Management believes that the Company's borrowing
capacities and cash flow are sufficient to fund its currently anticipated
activities. 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 is currently evaluating the existing reserve reports and underlying
data on all leases and has contracted another independent appraiser to complete
new reserve reports.
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 Form 10-Q represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and 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.
Forward-Looking Statements
This Form 10-Q 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
Form 10-Q 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, 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 regulation;
and other factors, most of which are beyond the control of the Company.
Consequently all of the forward-looking statements made in this Form 10-Q 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.
PART II - Other Information
Item 1. Legal Proceedings.
Connecticut Bank of Commence commenced an action against the Company in
Lafayette Parish, Louisiana, on or about March 15, 1997. The Plaintiff brought
the action to enforce collection of a note in the principal amount of
$175,000.00. The action has been settled, and satisfied in full.
Other than the above legal proceeding and claim, and any other items previously
reported, the Company is not a party to any material pending or threatened legal
proceeding or claim.
11
<PAGE>
Item 2. Changes in Securities
There have been no changes with respect to defining the rights of the holders of
any class of registered securities or otherwise.
In the first quarter of fiscal 1998, the Company issued 176,099 shares of common
stock in exchange for $190,859 in cash under a Regulation D Rule 506 private
placement memorandum offering.
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.
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, valued at $2,000,000, 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.
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 valued at
$148,750, and to pay the Company's proportinate share of the costs to reenter
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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, this 6th day of
April, 1998.
Environmental Remediation Holding Corporation
By: /s/ Sam L. Bass, Jr., CEO
Sam L. Bass, Jr., CEO
By: /s/ Noreen Wilson, Vice President
Noreen Wilson, Vice President
12
<PAGE>
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This schedule contains summary financial information extracted from the
financial statements of Environmental Remediation Holding Corporation for
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<NAME> Environmental Remediation Holding Corporation
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