U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 2
to
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Name of small business issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
420 Jericho Turnpike, Suite 321
Jericho, New York 11753
(Address of principal executive office)
Registrant's telephone number, including area code: (516) 433-4730
Securities registered under 12 (b) of the Exchange act: none Securities
registered under Section 12 (g) of the Exchange Act:
Common Stock $.0001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 15 (d ) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form10-K [ ]
Issuer's revenue for its most recent Fiscal Year were: $108,944
The aggregate market value of the 12,234,958 shares of voting stock held by
non-affiliates of the Registrant as of September 30,1997 was $36,704,874
(assuming solely for the purpose of this calculation that all directors,
officers and greater than 5% stockholders of the Registrant are "affiliated").
The number of shares outstanding of the Registrant's Common Stock , par value
$.0001 per share, as of September 30, 1997 was 22,989,526
Documents Incorporated by Reference:
None
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market For The Registrant's Common
Stock and Related Security Holders 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and
Analysis of Plan of Operations 19
Item 8. Financial Statements and Supplementary Data F-1
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of The Company 42
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain
Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits and Financial Statements Schedule 49
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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. 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 on 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 project development and is conducting
geophysical, seismic, environmental and engineering feasibility studies. 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 October 1997, the
Company acquired a 37.5% interest in a 49,000 acre natural gas lease in the
Nueces River area of south Texas, known as the "Nueces River Prospect," one of
the largest producing natural gas field areas in the United States. According to
independent reserve reports prepared by David K. Davies and Associates, Inc. and
Gerry Graham of Sandwood Consulting, it is estimated that this area contains 100
billion cubic feet ("BCF") of natural gas per 640 acre section. 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 inplace reserves. The daily production rates from these wells cannot
be determined at this time 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 on 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 29, 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 estimates that
after initial workover operations are completed, these wells could produce in
excess of 3,900 barrels of oil per day. An independent reserve report prepared
by Richard Stephen Shuster, P.E. indicates, based on a study of 133 of such
wells, proven and producing reserves of approximately 5.77 million barrels of
oil and 23.4 BCF of natural gas on these sites. 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, currently producing approximately 200 barrels of oil per day from eight
producing wells. As of December 29, 1997, these are the Company's only
commercially producing properties, which began realizing revenues for the
Company in November 1997. Independent reserve reports prepared in 1997 by Ralph
L. Nelms and Gerry Graham of Sandwood Consulting indicate the gross recoverable
reserves of these properties total approximately 2.624 million barrels of oil
and 3.302 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 disposal
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<PAGE>
(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 it will
be 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 fracture-enhancing horizontal drilling tool, known as the
Bass American Petroleum Company ("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 contracted
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 oil recovery by up to 30%, prior to
formal abandonment. The Company, which provides primary and secondary recovery,
"plug and abandonment" 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.
Key elements of the Company's growth strategy include:
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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.
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.
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 of Mexico which
require "plug and abandonment" services for old and depleted fields.
Summary of Properties
A summary of the Company's oil and gas properties is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Anticipated
Investment
Nature of to Make Anticipated
Property Interest Acquired Date Cost Operational Operational Date
Sao Tome Joint Venture to May 1997 $5,000,000 $1,500,000 (1) Undetermined
drill and concession fee, at this time.
develop fields $2,000,000 of The Company
which has been believes that it
paid by the will be in a
Company position to
auction off
leases by the
end of 1998.
Nueces River 37.5% interest Oct 1997 $200,000 and (2) To be
Prospect, in a 49,000 acre 50,000 shares of determined
Texas natural gas lease Common Stock upon
completion and
evaluation of
the current well
testing program
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Rusk and Two leases in Feb and 500,000 shares Currently 18 wells
Wichita County oil fields March 1997 of ERHC operational (3) currently
Fields, Texas Common Stock operational
Uintah and Joint Venture July 1997 $55,000 and Minimum of Fall 1998
Ouray with MIII contemplated $1,000,000 to
Reservation, Corporation to issuance of $1,500,000
Utah develop and 250,000 shares
operate 335 of Common
wells Stock to MIII
Unita Net Revenue Oct 1997 $250,000 and Currently 4 wells
Project, Interests 1,000,000 operational (4) currently
Utah ranging from shares of the operational
80% to 84% Company's
(and 100% Common Stock
working
interest) in
oil and gas
properties of
about 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 1996, 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.
(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 to spend approximately
$650,000 to $1,200,000 to bring both wells on line. The Company is responsible
for only half the drilling cost of each well, as it shares this cost with its
operational co-venturer, Autry Stephens & Co. Providing financing is secured,
the Company also would like to drill 15 to 20 new wells at this site in 1998.
(3) Providing financing is secured, the Company plans to spend $1,200,000 to
bring production up to a commercial level.
(4) The Company plans to spend 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. Providing additional financing of $5,000,000 to $10,000,000 is
secured, the Company would like to implement a recompilation and drilling
program.
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.
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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 encompassing 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 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 $3 million at the time Sao Tome
determines, and the United Nations accepts and approves, 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. The Company is currently exploring funding sources for this payment. In
November 1997, the Company made an initial $2 million payment in respect of the
concession fee from the proceeds of its 1997 private placement. (See Part II,
Item 5. "Market for Registrant's Common Stock and Related Security Holders
Matters" - (b) Recent Sales of Unregistered Securities.")
The Company is currently in the initial phase of project development
and is conducting seismic surveys, processing existing seismic data and
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 $2.3 million 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 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 potentially 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.
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
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<PAGE>
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
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 recompletion
operations. The Company plans to acquire a well-servicing rig for this purpose.
The recompletion 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 additions
and revisions to reserves.
For the fiscal year ended September 30 1997, the Company spent
approximately $53,000 on workover and recompletion operations, involving 9 wells
in Texas. The Company anticipates spending in excess of $1,825,000 on workover
and recompletion operations during fiscal 1998, although there can be no
assurance it will have 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 natural gas
field areas in the United States. A 1997 independent reserve report prepared by
Gerry Graham of Sandwood Consultants of Nacogdoches, Texas estimated that the
field contains 100 BCF of natural gas per 640 acre section. 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
inplace reserves. The daily production rates from these wells cannot be
determined at this time 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 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.
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<PAGE>
Providing financing is secured, the Company also hopes to drill 15 to 20 new
wells at this site. 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 Dr. Joseph Shoaf, P.E. estimated that proven reserves
("behind pipe") total 2.5 million barrels of oil. Through December 29, 1997, the
Company had recompleted 18 wells and is currently producing and selling "test"
oil from the Wichita County field. The Company has located its BAPCO Tool on
site and expects to use such tool beginning in spring 1998. The Company
anticipates spending $1,200,000 in order to bring production on the field up to
a commercial level. After reworking the fields using the BAPCO Tool and other
drilling techniques, the Company believes that these wells could produce from
500 to 800 barrels of oil per day.
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.
Independent reserve report dated 1993 prepared by Richard Stephen Shuster, P.E.
indicates, based on a study of 133 of such wells, proven and producing reserves
of approximately 5.77 million barrels of oil and 23.4 BCF of natural gas at this
site. The Company's production estimates at this site are based predominately on
the multiple sandstone reservoirs of the Wasatch, a 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.
Unita 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 Unita Basin with 24 oil and
natural gas wells, currently producing approximately 200 barrels of oil per day
from four producing wells. As of
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<PAGE>
December 29, 1997, this is the Company's only commercially producing property,
which began realizing revenue for the Company in November 1997. Independent
reserve reports prepared in 1997 by Ralph L. Nelms and Gerry Graham indicate
that gross recoverable reserves of these properties total approximately 2.624
million barrels of oil and 3.302 BCF of natural gas. Wells in this field produce
primarily from multiple sandstone reservoirs of the lower Green River Formation
at depths roughly 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. 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.
Reserves
The following table sets forth estimates of the proved oil and gas
reserves of the Company as of September 30, 1997:
Oil
Equivalent
OIL GAS (millions of
(millions of barrels) (billions of cubic feet) Barrels)
Field Develop- Undevel- Total Develop- Undevel- Total Total
ed oped ed oped
Nueces - - - - - - -
River
Prospect,
Texas
Rusk Co. 1.5 - 1.5 - - - 1.5
Field,
Texas
Wichita 1.0 - 1.0 - - - 1.0
County
Field,
Texas
Uintah, 0 0 0 0 0 0 0
Ouray
Reserva-
tion, Utah
Unita 0 0 0 0 0 0 0
Project,
Utah
Total 2.5 0 2.5 0 0 0 2.5
Estimates of the Company's proved reserves set forth above have not been
filed with, or included in reports to any
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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 Form 10-K 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.
For further information on reserves, costs relating to oil and gas
activities and results of operations from producing activities. See Item 7.
"Management's Discussion and Analysis of Plan 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
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 other oil and
gas operators. These services, which the Company is licensed to provide, include
environmental engineering, hazardous material disposal (including naturally
occurring radioactive material), remediation and disposal, and oil spills, 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 regulation. 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.
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The Company's soil decontamination systems are capable of handling a
variety of different contamination problems. The Company utilizes 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 will be ready to
operate 60 days following funding. The Company has not determined as of this
date how much funding 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 it's 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. There are many 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 further penetrate the environmental remediation services market in
Louisiana, the Company has been negotiating for the purchase of approximately
70% equity interest in Ven Virotek, Inc., a Louisiana corporation
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("Virotek"). These negotiations are with Virotek's only other shareholder,
Recycling Remedies, 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. Virotek projects, for the year ending December 31, 1997, revenue of
$658,000, net income of $332,000 and total assets of $1,035,000. As currently
negotiated, the Company plans to acquire the interest in Virotek in
consideration of $15,000 in cash and assumption of a $300,000 bank note.
Providing funds are secured, the Company plans on acquiring the interest in
Virotek on February 1998.
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 66.667% of all net profits of the venture in exchange for
the provisions 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 1,000,000 gallons by the end of the first year
of operation. Based on a market up 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 October 1997, the Company recorded sales of
crude oil from the Unita properties and, in November 1997 recorded sales of
"test" oil from the Wichita County field in north Texas. All such sales are
expected initially to be 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 the 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.
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
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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 recompletion services operations 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 clean-up 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. Clean-up 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 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 fifty years. The Company also 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
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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, 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
Woodbine formations in Wichita and Rusk Counties in Texas, as they are a
"fractured" type horizon, and the oil is being drained from existing fractures
in the formation. The drilling of horizontal drainage 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. The Company believes that if this tool is applied to the wells
in both the Rusk and Wichita Counties, production will be increased to 500 to
800 barrels per day.
Employees
As of December 29, 1997, 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.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Jericho, New
York in approximately 1,200 square feet of leased office space. The Company
currently pays $1,200 per month in rent under its lease, which extends through
February 1998. 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.
ITEM 3. LEGAL PROCEEDINGS
Piedra Drilling Company, Inc. ("PDC") commenced an action against the
Company in District Court, 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 because the
necessary equipment and designs were not delivered and/or validity assigned to
the Company. PDC obtained a default judgement in the amount of approximately
$1.2 million, which was vacated in November 1997. Colorado counsel 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.
Connecticut Bank of Commerce commenced an action against the Company in
Lafayette Parish, Louisiana, on or about March 15, 1997. The Plaintiff brought
this action to enforce collection of a note in the principal amount of
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<PAGE>
$175,000. The Company did not pay the note because of a dispute with respect to
the amount of interest and other charges that were due. The Company and the
Plaintiff resolved such issues. Funds have been set aside in an escrow account
for payment of an amount agreed upon by Plaintiff and the Company. Final payment
is to be made upon execution of the settlement papers.
Other than the above legal proceedings and claim, the Company is not a
party to any other material pending or threatened legal proceeding or claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDERS MATTERS
(a) Market Information.
(1) 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.
High Low
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 29, 1997).......... 3-3/8 1-3/8
(2) Holders. The number of record holders of the Company's common stock as
of December 29, 1997, was 1,967 based on the records of the transfer agent.
(3) Dividends. 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
Commons 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 are subject to the discretion of the Board of Directors and will
depend upon a number of factors, including future earnings, capital
requirements, financial conditions and the existence or absence of any
contractual limitations on the payment of dividends.
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(b) Recent Sales of Unregistered Securities
During the period from October 1, 1996, through September 30, 1997, the
Company raised approximately $1,103,000 in a private placement of the Common
Stock of the Company in exchange for 1,391,898 shares of its common stock.
During the period from October 1, 1996, through September 30, 1997, the
Company issued 10,792,981 shares of its common stock in consideration for: (i)
appraisals and engineering services for the Sao Tome project valued at
$2,000,000; (ii) Services of directors and officers valued at $3,829,106; (iii)
oil wells/leases valued at $ 12,500,000; (iv) assignment of Chevron contract
valued at $3,000,000; and, (v) BAPCO acquisition valued at $2,250,000.
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
subordinate secured notes due 2002 (the "Notes") and warrants to purchase Common
Stock (the "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 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 Form 10-K does not cover the up to 3,723,800
total shares of Common Stock which will be issuable upon conversion of the Notes
and the exercise of the Warrants for which registration or an exemption from
registration under the Act will be required. See Part III, Item 12. "Security
Ownership of Certain Beneficial Owners and Management" - "Selling Shareholders
Pursuant to Mandated Form S-1." 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 Part I, Item 1. "Description of Business - Managing Exploratory
Activities."; Part II, Item 7. "Management's Discussion and Analysis of Plan of
Operations" - "Results of Operations: Capital Expenditures."
Such common stock was issued in reliance upon Section 4(2) and Section
506 of Regulation D.
ITEM 6. 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, CPA's, P.A., independent public
accountants, and are included elsewhere in this Form 10-K. 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
Plan of Operations."
Fiscal Years ended
September 30,
Statement of 1995(1) 1996(2) 1997(3)
Operations
Data:
Revenues:
Environmental $0 $0 $108,944
remediation
services
Crude Oil Sales 0 0 0
Cost of sales
and expenses:
Environmental 0 0 53,991
remediation
services
Crude Oil 0 0 0
Operating 3,404 714,938 16,860,262
expenses
Other income 0 60,477 (33,456)
and expenses
Income before (3,404) (714,938) (16,845,495)
taxes and
extraordinary items
Provision 0 0 0
(benefit)for
income taxes
Net income (3,404) (654,461) (16,838,765)
(loss) (4)
Net income (0.01) (0.27) (1.60)
(loss) per share
Weighted 398,643 2,469,511 10,500,293
average
Common Stock
outstanding
Balance Sheet Data
(at end of period)
Property and 0 2,431,987 2,733,724
Equipment
Total Assets 0 2,436,987 17,749,231
Total Liabilities 3,316 6,730 1,748,376
Stockholders (3,316) 2,430,257 14,000,855
equity
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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 Part I, Item 1. "Description of Business - Environmental
Remediation Services."
(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 Part I, Item 1. "Description of Business - BAPCO Tool."
(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 Part III,
Item 7. "Management's Discussion and Analysis of Plan of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
The following Management's Discussion and Analysis of Plan 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
"Forward-Looking Statements" contained in this item and other sections of this
Form 10-K, 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 sales 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
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 substantially 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 contribution and sh
ort-term financing arrangements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto referred to in "Item 8.
Financial Statements and Supplemental Data", and "Items 1 and 2. Business and
Properties.
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RESULTS OF OPERATIONS
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 geological 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 $366,213. 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 1996. Cost of sales were $53,991 in fiscal 1997 and none in fiscal 1996. All
such revenues and costs 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
oil field waste clean-up.
The Company had no oil and gas production during fiscal 1997.
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 primarily through cash flow from operations.
The Company presently intends to utilize any cash flow from operations
as follows: (i) recompletion of wells in the Unita Basin; (ii) gas drilling at
the Nueces River Prospect; (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 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.
The Company paid $2,000,000 of this concession fee to Sao Tome from the proceeds
of the convertible note offering. See Part II, Item 4. ""Market for the
Registrant's Common Stock and Related Security Holders Matters" - (b) "Recent
Sales of Unregistered Securities.".
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
concessions 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.
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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 October 1977, 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
providing financing is secured. 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
funds, 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 rate, of these wells cannot be determined until the
completion of the evaluation of the well testing program which is currently
underway and should be completed in spring 1998.
The Company acquired in February and March 1997 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 500,000 shares of
its Common Stock to acquire the leases. Through December 29, 1997, the Company
recompleted 18 wells, and hopes to have all of them operational by March, 1998.
The Company plans to locate 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 an gas company, to workover, recomplete and
operate 335 existing oil and gas wells on the Uintah and Ouray Reservation in
northeaster Utah. None of the wells are operational at this time. 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. 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 Unita basis 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, provided financing is secured. Also,
provided additional financing of $5,000,000 to $10,000,000 is secured, the
Company plans to implement a recompiliation and drilling program in 1998.
During fiscal 1997 the Company issued 3,000,000 shares of its Common
Stock to acquire the Chevron master service agreement for "plug and abandonment"
work. The Company is in the process of determining what amount will need to be
spent to develop this contract, which amount will be subject to the availability
of additional funding.
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.
21
<PAGE>
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 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 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 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 expects to utilize the "successful efforts" method of
accounting for its oil and gas producing activities once it has reached the
producing state. The Company expects to regularly assess proved oil and gas
reserves for possible impairment on an aggregate basis in accordance with SFAS
No. 121.
Net Operating Losses
The Company has net operating loss carryforwards of $17,496,630, which
expire in the years 2010 through 2012. The Company has a $6,998,652 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>
Forward-Looking Statements
This Form 10-K 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-K 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 forwardlooking
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-K 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
obligations to update any such forward-looking statements.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report ..............................................F-2
Balance Sheets ............................................................F-3
Statements of Operations ...................................................F-4
Statements of Stockholders' Equity .........................................F-5
Statements of Cash Flows ..................................................F-6
Notes to Financial Statements ..............................................F-7
Supplementary information .................................................F-12
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO: The Board of Directors and Stockholders
Environmental Remediation Holding Corporation
Jericho, New York
We have audited the accompanying balance sheets of Environmental Remediation
Holding Corporation, (the "Company") as of September 30, 1995, 1996 and 1997 and
the related statements of operations, stockholders' equity and cash flows for
the period since inception and the two years then ended. 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.
Except as discussed in the following paragraph, 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.
As more fully described in notes 1f and 3, the Company acquired two East Texas
oil leases in February 1997. The Company recorded these transactions based on
the reserve report provided them at the time and updated more recently. We have
engaged another independent petroleum engineer to evaluate the data and produce
another reserve report. The Company expects to adjust the recorded valuation to
this new report basis if any material differences exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of September 30,
1995, 1996 and 1997 and the results of its operations and its cash flows for the
the period since inception and two years then ended in conformity with generally
accepted accounting principles.
/s/Durland & Company, CPAs, P.A.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
December 12, 1997
F-2
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
September 30,
<TABLE>
<S> <C> <C> <C>
ASSETS 1995 1996 1997
CURRENT ASSETS
Cash $ 0 0 327,743
Prepaid expenses and other current assets 0 0 215,708
--------------- -------------- -----------------
Total Current Assets 0 0 543,451
--------------- -------------- -----------------
PROPERTY AND EQUIPMENT
Equipment (note 1b) 0 2,431,987 2,733,274
--------------- -------------- -----------------
Total Property and Equipment 0 2,431,987 2,733,274
--------------- -------------- -----------------
OTHER ASSETS
Deposits on fixed assets 0 5,000 136,560
Crude oil reserves, net (note 1f) 0 0 14,335,646
Chevron P&A master service agreement (note 1h) 0 0 300
--------------- -------------- -----------------
Total Other Assets 0 5,000 14,472,506
--------------- -------------- -----------------
Total Assets $ 0 2,436,987 17,749,231
=============== ============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other current payable $ 3,316 0 111,054
Stockholder loans (note 1c) 0 6,730 465,094
Accrued interest (note 1c) 0 0 37,228
Accrued salaries (note 4) 0 0 960,000
Short term bank loan (note 1c) 0 0 175,000
--------------- -------------- -----------------
Total Current Liabilities 3,316 6,730 1,748,376
--------------- -------------- -----------------
LONG-TERM LIABILITIES
Long-term debt 0 0 0
--------------- -------------- -----------------
Total Long-Term Liabilities 0 0 0
--------------- -------------- -----------------
Total Liabilities 3,316 6,730 1,748,376
--------------- -------------- -----------------
Common stock issued under a repurchase agreement;
1,000,000 shares (note 1i ) 0 0 2,000,000
STOCKHOLDERS' EQUITY
Common stock, $0.0001 par value; Authorized
950,000,000 shares: issued and outstanding 1,639,450
at September 30, 1995; 3,239,374 at September 30,
1996 and 21,989,526 at September 30, 1997 (note 3) 164 324 2,199
Preferred stock, $0.0001 par value, authorized
10,000,000 shares; issued and outstanding 0 at
September 30, 1995, 1996 and 1997. 0 0 0
Additional paid in capital in excess of par 499,924 3,515,298 32,658,586
Stock subscriptions receivable 0 0 (913,300)
Deferred compensation, net (note 1d) (500,000) (427,500) (250,000)
Retained earnings (deficit) (3,404) (657,865) (17,496,630)
--------------- -------------- -----------------
Total Stockholders' Equity (3,316) 2,430,257 14,000,855
--------------- -------------- -----------------
Total Liabilities and Stockholders' Equity $ 0 2,436,987 17,749,231
=============== ============== =================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
For the period since inception ended September 30, 1995, and the years
ended September 30, 1996 and 1997
<TABLE>
<S> <C> <C> <C>
1995 1996 1997
-------------- ------------- ---------------
REVENUE
Sales - environmental remediation services $ 0 0 108,944
Sales - crude oil 0 0 0
-------------- ------------- ----------------
Total sales 0 0 108,944
-------------- ------------- ----------------
COST OF SALES
Cost of sales - environmental remediation services 0 0 53,991
Cost of sales - crude oil 0 0 0
-------------- ------------- ----------------
Total cost of sales 0 0 53,991
-------------- ------------- ----------------
Gross profit/(loss) 0 0 54,953
OPERATING EXPENSES
Automotive expenses 0 7,257 55,864
Bank charges 0 184 421
Compensation - officers 0 147,326 1,185,000
Compensation - directors 0 0 3,492,981
Consultant fees 0 337,956 8,883,356
Depletion 0 0 0
Depreciation 0 173,713 198,713
Donations 0 0 10,500
Dues, fees, licenses and taxes 0 0 9,552
Insurance 0 0 204,099
Geological data and reports (note 1i) 0 0 2,008,848
Oil lease transfer fees 0 0 55,000
Office expenses 0 1,072 97,226
Oil well rework expenses 0 0 53,355
Professional fees 3,404 19,500 244,230
Research and development 0 0 17,000
Rent 0 8,550 45,950
Telephone 0 0 48,528
Travel and entertainment 0 19,380 235,856
Miscellaneous 0 0 13,783
-------------- ------------- ----------------
Total operating expenses 3,404 714,938 16,860,262
-------------- ------------- ----------------
Income(loss) from operations (3,404) (714,938) (16,805,309)
Interest expense 0 0 (40,787)
Interest income 0 0 601
-------------- ------------- ----------------
Income(loss) before tax & extraordinary item (3,404) (714,938) (16,845,495)
Extraordinary item - forgiveness of debt 0 60,477 6,730
-------------- ------------- ----------------
Income(loss) before taxes (3,404) (654,461) (16,838,765)
Income tax expense/(benefit) 0 0 0
-------------- ------------- ----------------
Net income(loss) $ (3,404) (654,461) (16,838,765)
============== ============= ================
Weighted average number of shares outstanding 398,643 2,469,511 10,500,293
============== ============= ================
Net loss per share $ (0.01) (0.27) (1.60)
============== ============= ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
September 30, 1995, 1996 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number Common Pf'd APIC Stk Subs Defr'd Accumulated TTL S/H
of Shares Stock Stock Receivable Comp Deficit Equity
------------- ---------- ------- ------------- ------------ ----------- --------------- ----------------
BEGIN BALANCE,
September 5, 1995 0 $ 0 0 0 0 0 0 0
9/23 - cash 884,407 88 0 0 0 0 0 88
9/25 - services 755,043 76 0 499,924 0 (500,000) 0 0
Net loss - 0 0 0 0 0 (3,404) (3,404)
------------- ---------- ------- ------------- ------------ ----------- --------------- ----------------
BALANCE,
September 30, 1995 1,639,450 164 0 499,924 0 (500,000) (3,404) (3,316)
10/1 - equipment 744,000 74 0 2,605,626 0 0 0 2,605,700
10/10 - cash 20,000 2 0 49,998 0 0 0 50,000
8/9 - cash 20,500 2 0 42,890 0 0 0 42,892
8/19 - reverse merger 356,317 36 0 (243,366) 0 0 0 (243,330)
8/19 - S-8 services 73,277 7 0 73,270 0 0 0 73,277
8/30 - services 10,000 1 0 69,999 0 0 0 70,000
9/15 - services 55,000 6 0 384,994 0 0 0 385,000
9/15 - cash 320,830 32 0 31,963 0 0 0 31,995
9/30 - def comp amort - 0 0 0 0 72,500 0 72,500
Net loss - 0 0 0 0 0 (654,461) (654,461)
------------- ---------- ------- ------------- ------------ ----------- --------------- ----------------
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 - contrib 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 rec 473,898 47 0 482,533 (113,300) 0 0 369,280
9/30 - 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
============= ========== ======= ============= ============ =========== =============== ================
Common Stock issued under a repurchase agreement
7/97 - DRSTP info 1,000,000 100 0 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
For the period since inception ended September 30, 1995, and the years
ended September 30, 1996 and 1997
<TABLE>
<S> <C> <C> <C>
1995 1996 1997
-------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (3,404) (654,461) (16,838,765)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred compensation 0 72,500 177,500
Non-cash gain on forgiveness of debt 0 (60,477) (6,730)
Stock issued for services rendered 0 385,000 12,292,829
Stock issued for DRSTP geological data 0 0 2,000,000
Depreciation 0 173,713 198,713
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 (used) provided by operating activities (88) (83,725) (1,283,879)
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 0 (5,000) (131,560)
-------------- --------------- ----------------
Net cash (used) provided by investing activities 0 (5,000) (131,560)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 88 81,995 1,102,988
Payments on stockholder advances 0 (16,000) (295,287)
Funds advanced by third-parties 0 0 175,000
Funds advanced by stockholders 0 22,730 760,481
-------------- --------------- ----------------
Net cash (used) provided 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:
Interest paid in cash $ 0 0 3,559
============== =============== ================
Non cash financing activities:
Stock issued to acquire environmental remediation equipment $ 0 2,605,698 0
============== =============== ================
Stock issued to acquire crude oil reserves and wells $ 0 0 14,335,646
============== =============== ================
Stock issued to acquire Chevron master P&A service agmt $ 0 0 300
============== =============== ================
Stock issued to acquire BAPCO $ 0 0 500,000
============== =============== ================
</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. ERHC operates in
the environmental remediation industry and the oil and natural gas
production industry from its corporate headquarters in Jericho, 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 following summarize the more
significant accounting and reporting policies and practices of the
Company:
a) Basis of presentation- 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, but
for certain enviornmental 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. The Company has begun using BAPCO
as the operator of the various oil and natural gas leases it has
acquired.
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
b) Equipment- Environmental remediation equipment was purchased by ERFC in
exchange for common stock. The fair market value of the ERFC stock
exchanged was undeterminable, therefore the Company chose to value the
equipment received using an estimate of historical cost, based on an
independent evaluation of replacement cost at acquisition date, the
Consumer Price Index to original acquisition date, less accumulated
depreciation to the date ERFC acquired the equipment. This was
calculated because the historical cost records had been inadvertently
destroyed. This adjusted calculated historical cost was $2,605,700. 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. Depreciation expense for the period since inception ended
September 30, 1995 was $0 and for the years ended September 30, 1996
and 1997 was $173,713 and $173,713.
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.
F-7
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
b) Equipment, continued- The Company valued the equipment received at
historical cost amounting to $500,000. The Company's common stock was
highly volatile in price and extremely thinly traded which led the
Company to determine that the equipment was the easier to value under
APB 16. The Company is depreciating these tools and technology over
ten years. Depreciation expense for the period since inception ended
September 30, 1995 was $0 and for the years ended September 30, 1996
and 1997 was $0 and $25,000.
c) 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.
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.
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.
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 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 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
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 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 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.
F-8
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
g) 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.
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 Company's common stock given up. The Company expects
to begin commercializing the agreement in fiscal 1998.
i) 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) Income taxes- The Company has a consolidated net operating loss
carry-forward amounting to $17,496,630, expiring as follows: $3,404 in
2010, $654,461 in 2011 and $16,838,765 in 2012. The Company has a
$6,998,652 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. 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
$2,605,700. 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
valued at $4,831,323 in exchange for 300,000 shares of the Company's
common stock. In March 1997, the Company acquired a 100 oil well lease
with one and one-half million barrels of proven oil reserves valued at
$9,504,323 in exchange for 200,000 shares of the Company's common
stock. 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 cost of $500,000.
F-9
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(3) Stockholders' equity, continued- 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. 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
M III. 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 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.
(5) Commitments and contingencies- The Company is committed to lease
payments for 9 vehicles under operating leases totaling $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.
(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 will operate in the oil and gas production industry. SSI's
principal identifiable assets consist of $2,258,274, (net), of
environmental equipment, a barge deposit of $131,000 and the Chevron
P&A master service agreement valued at $300. 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 $14,335,646 and equipment valued at $475,000 (net). 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.
(7) 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.
F-10
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(7) Subsequent events, continued
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.
d) Utah oil wells and reserves-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 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.
f) Firm commitment letter of intent-In December 1997, the Company received
a firm commitment letter of intent form a registered brokerage house
which contemplates a public offering of approximately $50,000,000 of
the Company's debt securities. This offering, if it proceeds, is
contemplated for early 1998.
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 acauire the DRSTP geological data.
F-11
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
SUPPLEMENTARY INFORMATION
----
(UNAUDITED)
F-12
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
September 30, 1995, 1996 and 1997
-----
(Unaudited)
<TABLE>
<S> <C> <C> <C>
1995 1996 1997
Developed oil and gas properties $ 0 0 14,335,646
Undeveloped oil and gas properties-- 0 0 0
------------------ ---------------- -----------------
0 0 14,335,646
Accumulated depreciation, depletion and valuation
allowance 0 0 0
------------------ ---------------- -----------------
Net capitalized cost $ 0 0 14,335,646
</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>
<S> <C> <C> <C>
1995 1996 1997
------------------ ---------------- -----------------
Acquisition of properties:
Developed $ 0 0 14,335,646
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-13
<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>
<S> <C> <C> <C>
1995 1996 1997
------------------ ---------------- -----------------
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-14
<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>
<S> <C> <C> <C>
1995 1996 1997
------------------ ---------------- -----------------
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-15
<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>
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997
----------------------- -------------------- ------------------------
Gas Oil Gas Oil Gas Oil
(MCF) (bbls.) (MCF) (bbls.) (MCF) (bbls.)
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-16
<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>
<S> <C> <C> <C>
1995 1996 1997
------------------- ---------------- -----------------
Revenue:
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-17
<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-18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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:
Name Age Position
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
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 of the since September 1996. Mr. Bass also
serves as the Chief Executive Officer of Bass Environmental Waste, Inc., of the
which he founded in 1987, U.S. Energy, Inc., which he founded in 1984, and Bass
Stabilizers, Ltd., which he of the co-founded in 1978, each of which is a
privately-held company to which he devotes minimal time. From of the December
1993 to September 1995, he served as President and Chief Executive Officer of
Bass Environmental of the World Wide Services, Inc. From January 1992 to
September 1995, he served as President and Chief Executive Officer of the of
Bass Environmental Inc. Mr. Bass is a pioneer in the field of downhole drilling
and stabilization, and is the the inventor of seven drilling aids, many of which
are being used around the e the world. Mr. Bass founded a fire-fighting
organization called Al-Wadhi, through which he joined others in efforts to
putthe 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 n
1991 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 CalSons 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 991 worldwide operations comprise many
aspects of energy production. Until December 1992, he served as Drilling Manager
of Worldwide oprations at Unocal Corp. Mr. Callender received a B.S. degree in
Geology and Engineering from Louisiana State University in 1964.
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 the financing of American builders and contractors
overseas, primarily working through 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.
42
<PAGE>
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 Clydsedale Bank of Glasgow, Scotland until his retirement
in 1982. the Since his retirement from the Bank, he has worked as a
self-employed consultant to public and smaller independent the companies. He has
been involved in the international oil and gas industry for almost 30 years,
with more than 50 the 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.
elected Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are ted appointed. Except for the relationship
between Noreen G. Wilson and James A. Griffin, who are cousins, there arere ted
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 ares 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
governmental agancies 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.
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 are 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 are 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 ing 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 the International Human Assistance
Programs, the New York Hall of Science and Technology, the New York Commission
for the Development of Flushing Meadows, Federated Finance Corp., First
Federated Savings Bank, and 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.
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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 Indian 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 al 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.
All directors hold office until the next annual meeting of shareholders and
until their successors are dully elected and qualified, unless their office is
vacated in accordance with the Articles of the Company. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed.
Committees of the Board of Directors
The Company expects to establish an Audit Committee and Compensation
Committee in early 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 shareholders, 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.
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 Common Shares in connection with their serving on the Company's Board of
Directors.
ITEM 11.EXECUTIVE COMPENSATION
The following table sets forth, in summary form, the cash compensation
earned during the period from October 31, 1996 to September 30, 1997 by its
Chief Executive Officer of the Company and by the two other most highly
compensated executive officers whose compensation exceeded $100,000 during the
year ended September 30, 1997:
SUMMARY COMPENSATION TABLE
Annual Compensation(c,d,e) Long-Term Compensation(f)
(a) (b) (c) (d) (e) (f)
NAME AND RESTRICTED
PRINCIPAL FISCAL OTHER ANNUAL STOCK
POSITION YEAR SALARY BONUS COMPENSATION AWARDS
(1) (2) (4)
Sam L. Bass, Jr. 1997 $480,000 0 $125,000 500,000
CEO, President (3) shares
James R. 1997 $100,000 0 0 500,000
Callender, Chief (5) shares
Operating Officer,
Director
James A. Griffin 1997 $120,000 0 0 500,000
Secretary, shares
Treasurer, shares
Director shares
Noreen G. Wilson 1997 $360,000 0 0 500,000
Executive Vice shares
President, Chief
Financial Officer
(1) James R. Callender joined the Company as its Chief Operating Officer in July
1997. Noreen G.Wilson joined the shares 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 are
accrued and not paid in cash. Each shares individual has an option to convert
all or part of any accrued salary to Common Stock of the Company at a price
shares reasonably established by the Board of Directors at the time of exercise.
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(3) Represents amortization of Common Stock of ERFC distributed in 1995 to Sam
L. Bass, Jr.
(4) Restricted stock awards to Messrs. Griffin and Callender and Ms. Wilson were
awarded in fiscal year 1997 and shares were vested as of the date of grant.
(5) This amount was paid in cash and represents salary for a 2.5 month period.
(6)The aggregate value of benefits to be reported under the "Other Annual
Compensation" column did not exceed the shares lesser of $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
Proposed Employment Agreements
The Company contemplates entering into three-year employment agreements
with each of Sam L. Bass, Jr., James shares A. Callender, Sr., Noreen G. Wilson
and James A. Griffin to serve in their respective positions. The Company is
still shares 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 shares 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 shares "Plan"), pursuant to which officers,
directors, key employees, and consultants of the Company will be eligible to
shares receive incentive stock options and non-qualified stock options to
purchase Common Shares. The Plan would also shares 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 be
shares 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% or res 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 options will first be exercisable
by an option holder during any one calendar year will not exceed $ 100,000.
Limitation of Liability and 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 negligence
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.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership by Shareholders
The following table sets forth certain information as of December 29, 1997,
with respect to the beneficial ownership of the Company's Common Stock 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 le respect to all Common Stock beneficially owned by them.
Common Shares Beneficially Owned
Name and Address (1) Number (2) Percentage
Sam L. Bass, Jr............................. 8,704,568 39.11%
James R. Callender, Sr...................... 500,000 2.1
Noreen G. Wilson............................ 500,000 2.1
James A. Griffin............................ 500,000 2.1
Robert McKnight............................. 75,000 *
William Beaton.............................. 500,000 2.1
All officers and directors as a group....... 10,779,568 45.95%
(six persons)
* Represents less than 1% of outstanding Common Shares or voting power.
(1) The address of each beneficial owner is c/o Environmental Remediation le
Holding Corporation, 420 Jericho Turnpike, Suite 321, Jericho, New York 11753.
(2) Shares beneficially owned and percentage of ownership are based on
23,458,125 Common Stock outstanding as of December 29, 1997. 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.
Selling Shareholders Pursuant to Mandated Form S-1
General
From October to December 1997, the Company raised gross proceeds of
$4,300,000 in a private placement of the Company's 5 Notes and 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 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 Form 10-K does not cover the maximum of up to 3,723,800 total shares of
Commons Stock issuable upon the conversion of the Notes and the exercise of the
Warrants for which registration or an exemption from registration under the Act
will be required. In connection with the sale of the Notes and Warrants, the
Company entered into a Registration Rights Agreement with the certain
shareholders, pursuant to which the Company agreed to register the Shares under
the Act for resale by, and for the benefit of, such shareholders. In this
regard, the Company has commenced the preparation of a registration on Form S-1
relative to these shares (the "Form S-1"). Pursuant to such Form S-1, certain
selling shareholders as described herein ("Selling Shareholders") intend to sell
the Common Stock acquired thereby from time to time in the future ('the
"Shares") upon conversion of the Notes and the exercise of the Warrants. Based
on the number of outstanding shares of Common Stock of the Company as of
December 29, 1997, the Shares represent approximately 15.8% of the outstanding
46
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Common Stock of the Company. As of December 29, 1997, none of the Notes had been
converted and none of the Warrants had been exercised.
All of the Shares held or to be held by the Selling Shareholders may be
offered pursuant to such Form S-1, except that, under the terms of the Notes,
the holders thereof may convert the original principal amount of the 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 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 Notes (the "Issuance Date"), (ii) 100% of the Average Share
Price for the five consecutive trading days immediately preceding October 22,
1997 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 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 not longer be
applicable. Because the conversion rate of the Notes is based on future average
trading prices of the Common Stock, the number of shares which may actually be
sold could differ significantly. The Notes mature, unless prepaid at any time
after October 28, 1998 on October 15, 2002 and are secured by the Company's
proven crude oil reserves on its properties in Utah. The 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 Warrants may
be exercised at any time through October 15, 2002.
Stock Ownership
The following table sets forth the names of and the number of Shares
beneficially owned by each Selling Shareholder as of December 29, 1997. All
Shares are beneficially owned and the sole voting and investment power is held
by the persons named.
Name of Selling Underlying Notes Underlying Warrants Total Shares
Shareholder
Banque Edouard 320,000 24,000 344,000
Constant SA
11 Cours de Rive
Case Postale 3754
1221 - Geneva
Switzerland
Elara Ltd. 600,000 45,000 645,000
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
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
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JMG Capital Partners 320,000 24,000 344,000
L.P.
c/o JMG Capital
Management Inc.
1999 Avenue of the Stars
Suite 1950
Los Angeles, CA 90067
Triton Capital 320,000 24,000 344,000
Investments, Ltd.
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
c/o Porter Capital
Management Co.
100 Shoreline Highway
Suite 211B
Mill Valley, CA 94941
EDJ Limited 80,000 6,000 86,000
c/o Porter Capital
Management Co.
100 Shoreline Highway
Suite 211B
Mill Valley, CA 94941
Cranshire Capital L.P. 240,000 18,000 258,000
3000 Dundee Road
Suite 105
Northbrook, IL 60062
Legion Fund Ltd. 120,000 9,000 129,000
c/o Porter Capital
Management Co.
100 Shoreline Highway
Suite 211B
Mill Valley, CA 94941
Banque Franck, SA 400,000 30,000 430,000
1 Rue Toepffer
1206 - Geneva
Switzerland
Avalon Research Group, 0 25,800 25,800
Inc.
1900 Glades Road
Suite 201
Boca Raton, FL 33431
Total 3,440,000 283,800 3,723,800
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 Act.
None of the Selling Shareholders has had any position, office or other material
relationship with the Company or any of its affiliated within the past three
years.
See Part II, Item. "Market for the Registrant's Common Stock and Related
Security Holders Matters" - (b) "Recent Sales of Unregistered Securities."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 has been the
Company's Chairman of the Board, President and Chief Executive any 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 Common Shares to Mr. Bass in exchange
for the outstanding capital stock of BAPCO. In addition, the Company issued
3,000,000 Common Shares to BEW, a company controlled by Mr. Bass, in connection
with the assignment of the Chevron master service agreement. See " Item 1.
Description of 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 approximately $760,500, pursuant to 8.5% the demand promissory
notes of which $295,300 was repaid during the fiscal year ended September 30,
1997, and $465,200 the remains outstanding. The balance of such notes are
convertible into Common Stock at a conversion rate per share the equal to the
fair market value of a share of Common Stock at the time of the advance.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
Index to Exhibits Page
10.1 Chevron Master Service Order and Letter Agreement dated 10/1/96
[previously supplied]
10.2 Centram Marine Services, S.A. Joint Venture Agreement dated 12/6/96
[previously supplied]
10.3 Memorandum of Agreement Between M III Corporation and ERHC dated 6/28/97
[previously supplied]
10.4 Sao Tome Memorandum of Understanding dated 9/30/97 [previously supplied]
21 List of Subsidiaries [previously supplied]
27 Financial Data Schedule [previously supplied]
List of Exhibits and Reports on Form 8-K and 8K/A incorporated by reference in
this report:
Form 8K filed July 7, 1997
Form 8K filed July 7, 1997
Form 8K filed July 23, 1997
Form 8K filed July 25, 1997
Form 8K files August 14, 1997
49
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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, thereunder duly authorized.
Dated: April 6, 1998
Environmental Remediation Holding Corporation
By:/s/Sam L. Bass, Jr.
Sam L. Bass, Jr., CEO and Chairman of the Board
By:/s/Noreen Wilson
Noreen Wilson, Vice President
Pursuantto the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/James A. Griffin Secretary April 6, 1998
James A. Griffin, Esq. and Director
/s/Sam L. Bass, Jr.
Sam L. Bass, Jr. CEO and Director April 6, 1998
/s/James Callender
James Callender Director April 6, 1998
/s/William Beaton
William Beaton Director April 6, 1998
/s/Noreen Wilson Vice President
Noreen Wilson and Director April 6, 1998
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