U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1998
Commission file No. 0-18275
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
--------------------------------------------
(Name of small business issuer in its charter)
COLORADO 88-0218499
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3-5 Audrey Avenue
Oyster Bay, New York 11771
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 922-4170
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
-----------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to 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-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Issuer's revenues for its most recent Fiscal year. $247,000.
The aggregate market value of the 15,840,832 shares of voting stock held by
non-affiliates of the Registrant as of September 30, 1998 was $2,011,043
(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, 1998 was 25,999,900.
Documents Incorporated by Reference
See Exhibit List
<PAGE>
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
Environmental Remediation Holding Corporation (the "Company") is an
independent oil and gas company whose predecessor was formed in 1995. In 1997,
the Company focused on acquiring and servicing marginally-producing oil and
natural gas properties which contained the potential for increased value through
workovers and secondary recovery operations utilizing the Company's proprietary
horizontal drilling tool. Lower oil prices and increasing equipment costs in
1998 have reduced the economic feasibility of these activities at this time. The
Company 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 refocused its activities and has begun to acquire interests in
non-producing oil and gas properties, particularly high potential international
prospects in known oil-producing areas, which could benefit from the Company's
experienced executive team in managing the exploration of possible reserves.
In May 1997, the Company entered into an exclusive joint venture with the
Sao Tome, an archipelago island nation located in the Gulf of Guinea off the
coast of central West Africa, to manage the exploration, exploitation and
development of the potential oil and gas reserves onshore and offshore Sao Tome,
either through the venture or in collaboration with major international oil
exploration companies. The Company is currently in the initial phase of
exploration and is conducting geophysical, seismic, environmental and
engineering feasibility studies. In April 1998, the Government of Sao Tome
granted approval to the joint venture to proceed with the preparation and sale
of leases of its oil concession rights, which sales were expected to occur in
early 1999. In July 1998, The Company closed and formed the joint venture
national oil company with the Government of Sao Tome. This company is called
STPETRO. The Company owns 49% of STPETRO. In July, 1998, the formation of
STPETRO was promulgated into law. In September 1998, the Government of Sao Tome
and STPETRO entered into a TAA Agreement with Mobil. 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, known as the "Nueces River
Project", in the Nueces River area of south Texas, one of the largest producing
natural gas areas in the United States. In December 1997, the Company re-entered
the first of two existing shut-in wells on the property, and expected to
ultimately recover up to 5 BCF per well using 5% of the estimated possible gas
in place. Due to mechanical failure downhole, this well has been shut-in again.
The daily production rates from the second well cannot be determined until the
completion of the reentry. The Company is currently meeting with two potential
farm-out partners to work the project and believes it has negotiated an
arrangement to drill additional wells on the northern and southern portions of
the leasehold.
In addition, the Company acquired in February and March 1997 leases in oil
fields located in Rusk County and Wichita County, Texas. These oil fields, which
together comprise approximately 1,200 acres and 200 wells, have reserves
verified by Dr. Joseph Shoaf, P.E., an independent reservoir engineer. The
Company estimates that, after reworking the wells using various techniques
including its proprietary drilling tool, these wells could produce from 500 to
800 barrels of oil per day. Through December 1997, the Company had recompleted
18 oil wells and is currently producing and selling "test" oil from the Wichita
County field. Of these wells, 13 had mechanical failures. The Company is
evaluating feasible economic options including the potential sale of the Rusk
County and Wichita County properties.
<PAGE>
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 was estimated that the first approximately 36 wells would
be scheduled for recompletion and stimulation in the fall of 1998 and, the
Company estimated that, after initial workover operations were completed, these
wells could produce in excess of 3,900 barrels of oil per day. These estimates
were subject to internal verification by the Company. An independent reserve
report prepared by Richard Stephen Shuster, P.E. indicates , based on a study of
133 of such wells, which may or may not include any of the wells which are the
subject of the MIII joint venture, proven and producing reserves of
approximately 5.77 million barrels of oil and 23.4 BCF of natural gas on these
sites. The leases on the MIII project were never transferred to the Company and
it is currently evaluating its options with regard to this project.
In September 1997, the Company acquired net revenue interests ranging from
76% to 84% in oil and gas properties totaling 13,680 acres, located near the
MIII fields, currently producing approximately 70 barrels of oil per day from
six producing wells. As of December 31, 1997, these were the Company's only
commercially producing properties, which began realizing revenues for the
Company in November 1997. A 1997 independent reserve report prepared by Ralph L.
Nelms and Gerry Graham of the gross recoverable reserves of these properties are
approximately 2.624 million barrels of oil and 3.302 BCF of natural gas. The
Company is currently evaluating the existing reserve reports, underlying data on
these leases and the economic feasibility of increasing production in light of
current oil prices or of the sale or other disposition of these properties. The
Company is engaged in arbitration regarding this project and believes that a
settlement on all issues will be completed in January 1999.
The Company provides environmental remediation services to oil and gas
operators. All of the Company's revenues during the fiscal year ended September
30, 1997 were attributable to providing these services, which include
environmental engineering, hazardous waste (including naturally occurring
radioactive material) remediation and disposal, oil spill, soil decontamination
and non-hazardous oilfield waste cleanup, as well as "plug and abandonment" of
oil and gas wells, all in accordance with strict federal, state and local
environmental regulations. In April 1997, the Company entered into a master
service agreement with Chevron to rework, in order to draw additional production
from, approximately 400 depleting oil and gas wells and to remediate and "plug
and abandon" these and other wells when depleted, in Chevron's oil fields in
southern Louisiana along the Gulf of Mexico. The Chevron agreement provides for
a three-year work schedule, commencing upon the completion of the Company's 140
foot "plug and abandonment" barge. The Company has designed this specialized
"plug and abandonment" barge to remediate off shore well locations and is
capable of working in coastal waters as shallow as 19 inches. Due to the price
structure of the oil and gas business at this time, the Company does not believe
it is in its best interest to construct this barge. However, a substantial
increase in oil prices would cause the Company to reevaluate its decision
regarding such construction.
In addition, the Company has obtained rights to participate in 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
at such time as adequate financing is secured, of which there can be no
assurance.
To further penetrate the environmental remediation services market in
Louisiana. In February 1998, the Company sought to acquire a 70% equity interest
in Ven Virotek, Inc., a Louisiana corporation ("Virotek"), from its sole
shareholder, Recycling Remedies, Inc. Virotek owns and operates a NORM solid
waste disposal site in Houma, Lousiana and holds permits from Louisiana
environmental authorities to dispose of salt water, brine and naturally occuring
waste products. In March 1998, Virotek obtained two contracts from the U.S.
Department of Energy to dispose of salt water brine from the strategic petroleum
reserves located in Houma, Louisiana. Under the contracts, it is contemplated
initially that a total of 475,000 barrels of brine will be shipped to Virotek
for disposal, and Virotek will receive $1.00 per barrel for its services. In
August, 1998, this acquisiton was cancelled because during the due diligence
process the Company discovered (1) serious unresolved environmental issues, (2)
greater refurbishment expenses than originally estimated and (3) larger
liabilities than originally represented.
The Company commenced negotiations for remediation work in Mexico in
September 1998 and for remediation work in Venezuela in December 1998. Neither
negotiation has been reduced to contract at this time.
<PAGE>
In 1997, the Company believed that it was more economical and less
speculative to rework and recomplete existing wells than to drill exploratory
wells in search of new oil and gas deposits. Using the Company's proprietary
horizontal drilling system, known as the BAPCO Tool, the Company has had,
according to internal data, an 80% success ratio in increasing the level of
production from oil and natural gas wells that are suitable for enhancement of
primary recovery by use of the BAPCO Tool or candidates for secondary recovery.
Given adequate oil prices, 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. In the long run, the Company believes that the
BAPCO Tool will have greater applicability in the international market.
Beginning in the early 1990's, the combination of secondary recovery of oil
reserves in conjunction with environmental remediation of abandoned oil wells
have became major items of interest in the oil and gasindustry. 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 production, large independent oil companies have
typically outsourced some or all of the required "plug and abandonment" work to
third party contractors. By conducting enhanced primary or secondary recovery
operations utilizing the BAPCO Tool on the otherwise abandoned wells, the
Company believes that it is able to effectively extend the economic life of an
oil field and increase existing oil recovery by up to 30%, prior to formal
abandonment. The Company, which provides primary and secondary recovery, "plug
and abandonment" operations and environmental remediation services, believes
that, in the United States alone, there are hundreds of oil and natural gas
fields which could benefit from these services. The Company continues to believe
that at such time as oil prices rise to suitable levels, such activities
represent a potentially stable revenue source for them.
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) 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, (ii) at such time as oil prices are more favorable, continuing to
pursue environmental remediation service contracts for oil and gas well rework
and "plug and abandonment" services in the United States and internationally,
and (iii) exploiting the BAPCO Tool.
Key elements of the Company's growth strategy include:
1. 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.
2. Pursue Additional Environmental Remediation Contracts. The Company
continues to pursue 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.
3. Exploit the BAPCO Tool. The Company has an experienced management and
engineering team that focuses on acquisitions of projects where the BAPCO Tool
can be utilized to enhance primary and secondary recovery projects. The Company
has had an 80% success ratio for improved production from wells on which the
tool has been used.
Summary of Properties
<PAGE>
A summary of the Company's oil and gas properties is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Anticipated
Investment Anticipated
Nature of Date to Make Operational
Property Interest Acquired Cost Operational Date
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Sao Tome Joint Venture to May 1997 $5,000,000 $2,200,000 (1) Undetermined as of this
drill and develop concession fee, time. STPETRO
fields $4,000,000 of which formed and Technical
has been paid (2) Assistance Agreement
signed with Mobil.
Schlumberger seismic
work to commence
January 1999
- ------------------------------------------------------------------------------------------------------------------------
Nueces River 37.5% interest in a Oct 1997 $200,000 and $650,000(3) To be determined upon
Natural Gas 49,000 acre natural 50,000 shares of completion of
Prospect, Texas gas lease Common Stock negotiations with
two potential farm-out
partners
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Rusk and Wichita Leases in oil February and 500,000 shares Currently 5 wells currently
County Oil Fields, fields March 1997 Common Stock operational Operational
Texas (4)
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Uintah and Ouray Joint Venture with July 1997 $55,000 and Minimum (5)
Reservation (MIII MIII Corporation to contemplated $1,000,000
Project), Utah develop and operate issuance of 250,000 to
335 wells shares of Common $1,500,000
Stock to MIII
- ----------------------------------------------------------------------------------------------------------------------
Uinta Project, Net revenue September $250,000 and Currently 6 wells currently
Utah interests ranging 1997 1,000,000 shares Operational operational
from 76% to 84% Common Stock (6)
(and 100% working (7)
interest on all but 2
wells) in oil
and gas properties
of approximately
13,680 acres, with 22
wells
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has spent (i)$2,500,000 for data that had been purchased
through cash and stock as of March 1998, and (ii) $250,000 in expenses
preparatory to drilling. The Company anticipates spending $1,500,000 over the
next 12 months for additional seismic studies needed to determine the location
and depth of the targeted oil deposits and $700,000 for operating costs
associated with STPETRO in Sao Tome including salaries and improvements. 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. By Agreement dated August 18, 1998, Procura assigned and
transferred all of its rights and obligations in the venture to the Company. In
consideration of such assignment, the Company issued 2,000,000 shares of its
restricted stock to Procura. As of December 31, 1998 said shares had not been
delivered to Procura because Procura has made certain claims to the Company that
it or its principals are entitled to additional shares. The Company has
authorized further negotiations to settle any disputes with Procura. Under the
terms of the approved offer, Procura would receive 4,000,000 shares of
restricted Common Stock, $12,000 per month for 6 months and warrants to purchase
2,000,000 shares of Common Stock on a graduated basis beginning at $1.00 and
increasing to $3.00 exercisable in increments of 250,000 based upon production
levels. Based upon prior meetings with the principals of Procura, the Company
believes such offer will be accepted. See "--Managing Exploratory Activities -
Sao Tome."
<PAGE>
(2) As of December 31, 1998, the Company had paid $4,000,000 of this
concession fee and an additional $750,000 for certain costs and expenses
associated with the project. The Company believes that this additional $750,000
will be credited to the balance of the concession fee. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Expenditures and Business Plan
(3) The Company has already spent approximately $350,000 reworking the
first of two existing shut-in wells on the property. Due to mechanical failure
downhold, this well has been shut in again. The Company plans on spending
approximately $650,000 to $1,250,000 to bring the second well on line. Provided
financing is secured, the Company would also like to drill 15 to 20 new wells at
this site in 1999 and is currently negotiating with two potential farm-out
partners for wells in the northern and southern portions of the leasehold. The
Company is responsible for only half of the drilling cost of each well, as it
shares this cost with its operational co-venturer, Autry Stephens & Co. See
"-Workover and Recovery Activities."
(4) The Company expects to have to spend $1,200,000 to bring production up
to a commercial level. The Company is evaluating feasible economic options
including the potential sale of these properties. See "-Workover and Recovery
Activities."
(5) The leases on the MIII project were never transferred to the Company
and it is currently evaluating its options with regard to this project.
(6) 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 12
additional wells on line. It plans to plug and abandon 2 wells and do further
study on the remaining 2 wells. The Company anticipated utilizing funds acquired
through the Investment Agreement with Kingsbridge. Provided other financing of
$5,000,000 to $10,000,000 is secured, the Company is considering the most
feasible options to implement a recompilation and drilling program. The Company
has entered into a settlement agreement with regard to outstanding issues
between the parties. See "-Workover and Recovery Activities" and "Legal
Proceedings."
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.
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."
<PAGE>
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") and the management of such oil company by the
Company during that period. Under the agreement, the venture has the first right
to select the oil and gas concessions it desires to explore and develop in an
area approximately 64,550 square miles in the Gulf of Guinea. On behalf of Sao
Tome, the Company 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 failed to
make any remaining concession fee payment at the time Sao Tome determines, and
the United Nations accepts, the EEZ boundaries or fails to timely commence the
orderly development of the national oil and gas joint venture company. By
Agreement dated August 18, 1998, Procura assigned and transferred all of its
rights and obligations in the venture to the Company. In consideration of such
assignment, the Company issued 2,000,000 shares of its restricted stock to
Procura. As of December 31, 1998 said shares had not been delivered to Procura
because Procura has made certain claims to the Company that it or its principals
are entitled to additional shares. The Company has authorized further
negotiations to settle any disputes with Procura. Under the terms of the
approved offer, Procura would receive 4,000,000 shares of restricted Common
Stock, $12,000 per month for 6 months and warrants to purchase 2,000,000 shares
of Common Stock on a graduated basis beginning at $1.00 and increasing to $3.00
exercisable in increments of 250,000 based upon production levels. Based upon
prior meetings with the principals of Procura, the Company believes such offer
will be accepted.
In November 1997, the Company made an initial $2,000,000 payment in respect
of the initial concession fee from the net proceeds of its 1997 private
placement, in June 1998, paid $1,000,000 of this concession fee from the net
proceeds of the Third June 1998 Private Placement, in August, paid $1,000,000 of
this concession fee from the net proceeds of the July/August 1998 Financing. In
addition, the Company paid $250,000 out of the net proceeds of the September
1998 Financing and $500,000 out of the net proceeds of the October 1998
Financing, each of which payment were for certain expenses associated with Sao
Tome. The Company believes that these additional expense payment will be
credited to the concession fee. See "The Company - The Private Placement."
The Company is currently in the initial phase of project development and is
conducting seismic surveys, processing existing seismic data and reviewing
environmental and engineering feasibility studies. The Company has already
provided to Sao Tome initial feasibility studies including seismic interaction,
sedimentology, geochemistry and petrographics and diagnostics. The Company
expects to expend at least $2,300,000 in the initial phase of this project.
Following further studies, the Company anticipates coordinating the drilling of
a "test" well in early 1999. The costs associated with drilling and testing such
a well cannot be determined until the seismic data have been processed and
evaluated. In April 1998, the Government of Sao Tome granted approval to the
joint venture to proceed with the preparation and sale of leases of its oil
concession rights, which sales were expected to occur in early 1999. In June
1998, the Company and Sao Tome signed a letter of intent to award a contract to
Schlumberger to perform a marine seismic survey in anticipation of the license
round to be held in Sao Tome and to act as technical advisor and coordinator of
such license round. In July 1998, the Company closed and formed the joint
venture national oil company with the Government of Sao Tome. The oil company is
called the STPETRO. STPETRO is owned 51% by the Government of Sao Tome and 49%
by the Company. The Company previously was granted a 25-year management
arrangement with STPETRO in the 1997 Letter of Intent. In July 1998, the
Ministry of Cabinets and the Prime Minister executed the STPETRO formation
documents and they were promulgated into law by the President. In September
1998, the Government of Sao Tome and STPETRO entered into a TAA Agreement with
Mobil. Under such agreement, Mobil will perform a technical evaluation and
feasibility study of oil and gas exploration in certain designated acreage. The
agreement is for an initial term of 18 months and superceded the need for lease
sales in early 1999. Mobil retains a right of first refusal to acquire
development rights to all or a portion of the acreage which it is evaluating.
Mobil then executed an agreement with Schlumberger to perform the marine seismic
survey as previously agreed under the letter of intent with the Company signed
in June 1998. Under the Mobil/Schlumberger agreement, Schlumberger will perform
seismic work on the option blocks designated in the TAA Agreement. Such work is
to commence in January 1999.
<PAGE>
In September 1997, the Company expanded its joint venture agreement with
Sao Tome. Under the modified agreement, the venture was granted development
rights for an offshore logistics center. The projects contemplated by the
venture include a helicopter refueling station, seaport with dry dock facilities
and temporary accommodation facilities for employees and their families. The
Company believes that an offshore logistics base is essential to the development
of West Africa's oil and gas industry. The Company has not determined the
funding levels required for these projects at this time.
The Company believes that this venture provides it with a significant
foothold in the oil-rich Gulf of Guinea, in which the venture is the largest
single concession holder in the entire Gulf. The offshore oil potential of Sao
Tome has been studied by numerous oil companies, including Mobil Corp. and
Exxon, since at least the late 1970s. Over the next 20 years, industry experts
say, Western oil companies will invest between $40 billion and $60 billion in
the Gulf of Guinea alone.
AMCO Montenegro
In April 1998 the Company agreed to enter into a 50/50 joint venture with a
privately held Delaware corporation, AMCO Montenegro, Inc. and its related ABC
Group of companies ("AMCO") to construct and operate an "Off-Shore Logistics
Center" for the oil industry in the Gulf of Guinea, on the Island of Sao Tome.
AMCO Montenegro is a construction company based in Virginia. Due to political
conflict, the parties were uanble to finalizing the agreements. In April 1998,
Jugobanks AD Podgorica of Montenegro agreed to finance $50,000,000 for the
construction of the "Off-Shore Logistics Center" in Sao Tome. When funds were
blocked because of war in the region, the Company terminated its tentative
agreement with AMCO since AMCO could not perform at the time performance was
required. In April 1998, the Government of Sao Tome and the Company filed their
EEZ coordinates with the United Nations. The Company continues to maintain the
right to construct the Off-Shore Logistics Center and is seeking an appropriate
joint venture partner for the project There can be no assurance that the
financing or an appropriate partner will be available for this project.
.
Workover and Recovery Activities
In 1997, the Company concentrated its acquisition efforts on
marginally-producing properties which demonstrated 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 pursued a workover and recompletion program on the
properties it intends to commence some workover and recompletion in the future.
"Workovers" refer to the major repairs and modifications occasionally
required by producing oil and natural gas wells. Workovers may be done, for
example, to remedy equipment failures, deepen a well in order to complete a new
producing reservoir, plug back the bottom of a well to reduce the amount of
water being produced with the oil and natural gas, clean out and recomplete a
well if production has declined, repair leaks, or convert a producing well to an
injection well for secondary or enhanced recovery projects. These extensive
workover operations are normally carried out with a well-servicing type rig that
includes additional specialized accessory equipment, which may include rotary
drilling equipment, mud pumps, mud tanks and blowout preventers, depending upon
the particular type of workover operation. 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 completion
operations. The Company leases well servicing rigs for its projects and intends
to continue to do so in the future when such services are required. The
completion process may require from a few days to several weeks.
The Company's staff has focused on maximizing the value of the properties
within its reserve base. The results of their efforts are reflected in limited
increased production and additions to reserves.
For the fiscal year ended September 30, 1997, the Company spent
approximately $53,000 on workover and recompletion operations, involving nine
wells in Texas. The Company anticipated spending in excess of $1.825 million on
workover and recompletion operations during fiscal 1998. Through September 30,
1998, the Company has spent approximately $460,000 on these operations.
<PAGE>
In connection with this focus, the Company actively pursues operating cost
reductions on the properties it acquired. The Company believes that its cost
structure and operating practices generally result in improved operating
economies. The following is a brief discussion of significant developments in
the Company's recent workover and recompletion activities:
Nueces River Natural Gas Prospect
The Company has a 37.5% working interest in a 49,000 acre natural gas
lease, known as the "Nueces River Prospect," in the Nueces River area of
McMullen and LaSalle counties in south Texas, one of the largest producing
natural gas areas in the United States. In December 1997, the Company re-entered
the first of two existing shut-in wells on the property, and expected to
ultimately recover up to 5 BCF per well using 5% of the estimated possible gas
in place. Due to mechanical failure, this well has been shut in again. The daily
production rates, as well as the anticipated operational dates, from the second
well cannot be determined until the completion of the reentry. Following
revitalization, the Company estimates that such well has the possibility of
producing in excess of 500 MCF (million cubic feet) of natural gas per day. A
20-inch diameter Transcontinental Gas Pipeline is located approximately three
miles from the wells to provide access to a gas market. The Company jointly
operates the field with Autry Stephens & Co., a large independent operator in
west and south Texas. The Company acquired its interest in the Nueces River
Project in October 1997 in consideration for $200,000 and the issuance of 50,000
shares of Common Stock. In November 1998, the Company issued 491,646 shares of
its restricted stock to Autrey Stephens & Co. in lieu of payment of $338,007
which represented the Company's share of the costs to reenter the first well. In
addition, the Company issued 249,536 shares of its restricted stock to Hinge
Line Inc. in lieu of payment of $171,556 which Hinge Line Inc. had paid on
behalf of the Company as the Company's share of the yearly option fee which is
due each April for retention of the option on the remaining 49,000 acres. This
option fee is due each April for a period of 4 years and is total payment of
$34,000. The Company is currently meeting with two potential farm-out partners
to work the project and believes it has negotiated an arrangement to drill
additional wells on the northern and southern portions of this leasehold.
The Company plans on spending approximately $650,000 to $1,200,000 to bring
both wells on line. Provided financing is secured, the Company also expects to
drill 15 to 20 new wells at this site, at a cost of approximately $650,000 to
$1,200,000 per well. The Company is responsible for half of the drilling cost of
each well, as it shares this cost with its operational co-venturer, Autry
Stephens & Co. The anticipated operational dates of these wells depend on the
amount of funds raised by the Company in 1999.
Rusk and Wichita County Oil Fields
The Company holds directly leases on producing oil fields in Texas, known
as the Gunsite Formation in Wichita County, north Texas, and the Woodbine
Formation in Rusk County, east Texas. These oil fields together comprise
approximately 1,200 acres and 200 wells. A 1997 independent reserve report
prepared by Joseph Shoaf, P.E. has reserves verified. Through December 1997, the
Company had recompleted 18 wells, all of which were operational as of March 20,
1998. Of these wells, 13 had mechanical failures. The Company had located its
BAPCO Tool on site but it has since been removed. The Company anticipated
spending $1,200,000 in order to bring production on the fields up to a
commercial level. After reworking the fields using the BAPCO Tool and other
techniques, the Company believes that these wells could produce from 500 to 800
barrels of oil per day. The Company is evaluating feasible economic options
including the potential sale of the Rusk County and Wichita County properties.
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 $515,625.
<PAGE>
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 had 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 was estimated that the
first approximately 36 wells would be scheduled for recompletion and
restimulation by fall 1998, provided that the Company raised the required
funding. After initial workover operations were completed, the Company estimated
that these wells could produce in excess of 3,900 barrels of oil per day. These
estimates were subject to internal verification by the Company. An independent
reserve report prepared by Richard Stephen Shuster, P.E. indicates, based on a
study of 133 such wells, which may or may not include any of the wells which are
the subject of the MIII joint venture, proven and producing reserves of
approximately 5.77 million barrels of oil and 23.4 BCF of natural gas on these
sites. The Company's production estimates at this site are based predominately
on the multiple sandstone reservoirs of the Wasatch, transition zone and Green
River Formations that can occur at depths of 5,000 to 16,000 feet.
Under the terms of the joint venture agreement, once the production of
natural gas reached 5,000 MCF, MIII had agreed to construct a gas gathering
plant on such site, with the Company retaining a 25% interest in the plant. As
of this date, it is highly unlikely that such plant will be constructed.
The Company believed it had a 37.762% working interest in the wells located
on the MIII property, and would be entitled to receive a $2.50 per barrel
operator fee on production in the fields. The Company also believed it had the
right to receive an additional 5% working interest in the wells after start-up
costs of approximately $1.5 million had been 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 contemplated issuing 250,000 shares of
Common Stock to MIII in connection with entering into this venture. Such shares
were never issued. In 1998, the Company planned to recomplete and restimulate 36
wells and to drill five to seven development and extension wells at this site,
provided adequate financing was secured. The leases on the MIII project were
never transferred to the Company and it is currently evaluating its options with
regard to this project.
Uintah Project
In September 1997, the Company acquired net revenue interests ranging from
76% to 84% (and 100% working interest) in oil and gas properties totaling 13,680
acres, located near the MIII fields in the Uinta Basin with 22 oil and natural
gas wells, currently producing approximately 70 barrels of oil per day from six
producing wells. As of December 31, 1997, these were the Company's only
commercially producing properties, which began realizing revenue for the Company
in November 1997. A 1997 independent reserve report prepared by Ralph L. Nelms
and Gerry Graham of Sandwood Consultants indicated that the total ultimate gross
recoverable reserves of these properties are 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 Wasatch transition zone and lower Green
River Formations at depths ranging from 5,500 to 16,000 feet. The remaining net
revenue interests in these properties are held by the Ute Tribe.
At such time as oil prices rise, 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 12 more wells on line. It plans to plug and
abandon 2 wells and do further study on the remaining 2 wells. The Company
anticipated utilizing funds acquired under the Investment Agreement with
Kingsbridge. Provided other additional financing of about $5,000,000 to
$10,000,000 is secured, the Company plans extensive work in this field,
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
existing wells to test the viability of more shallow formations for potential
future development. The Company is currently evaluating the existing reserve
reports, underlying data on these leases and the economic feasibility of
increasing production in light of current oil prices or the sale or other
disposition of these properties. The Company is engaged in arbitration regarding
this project and believes that a settlement on all issues will be completed in
January 1999.
<PAGE>
Lower oil prices and higher equipment costs have reduced the economic
feasibility of drilling, workover and recompletion activities such that they are
marginal at best. Therefore, the Company has directed its primary focus to its
high potential international prospects and to a lesser extent to its remediation
activities.
Reserves
The following table sets forth estimates of the proven oil and gas reserves
(gross) of the Company as of December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Oil Equivalent
Oil Gas --------------
-------------------------------- ------------------------------- (millions of
(millions of barrels) (billion cubic feet) barrels)
Field (1) Developed Undeveloped Total Developed Undeveloped Total Total
----- --------- ----------- ----- --------- ----------- ----- -----
Nueces River Prospect, Texas. - - - - - - -
Rusk County Field, Texas..... - - - - - - -
Wichita County Field, Texas.. - - - - - - -
Uintah & Ouray Reservation,
Utah....................... - - - - - - -
Uinta Project, Utah.......... - - - - - - -
---- ----- ----- ---- ----- ------ -----
Total............. - - - - - - -
====== ====== ====== ===== ===== ====== ======
</TABLE>
- - ----------
(1) The Company is currently in the process of evaluating reserve reports
on these properties, and therefore, internally verified estimates for the
developed and undeveloped proven oil and gas reserves are not available at this
time.
Estimates of the Company's proved reserves have not been filed with, or
included in reports to, any Federal authority or agency, other than the
Securities and Exchange Commission.
The Company's non-producing proved reserves are largely "behind-pipe" in
fields which it operates. Undeveloped proved reserves are predominantly infill
drilling locations and secondary recovery projects.
The reserve data set forth in this Form 10-K represent only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of such estimate. Accordingly, reserve estimates often differ from the
quantities of oil and natural gas that are ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based.
For further information on the Company's oil and gas reserves and pricing,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BAPCO Tool
The Company's BAPCO Tool, which is used in most of its workover operations,
has two main functions: to provide a means of mechanically cutting a hole
through the casing and extending a flexible tubular pipe outward at least 50
feet from the bore hole. The system is made up of a skid mounted surface unit
with a command module, filter system and pumping package, and a down hole
assembly. The command module, which is approximately 10 feet long, 6 feet wide
and 8 feet high, is air conditioned, contains all the necessary controls and
data recording equipment and has a special tool storage area. The down hole tool
assembly is composed of a filter and filter body that removes the unwanted
material and prevents the material from entering the control section of the
tool. There are no limitations regarding casing thickness and cement sheath when
utilizing the BAPCO Tool.
<PAGE>
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. Given adequate oil prices, 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. In the long run, the
Company believes the BAPCO Tool will have greater applicability in the
international market.
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. At such time as production wells become economically feasible, the
Company plans to construct additional tools. The BAPCO Tool has been tested on
multiple wells in a variety of formations during the past 3 years. The BAPCO
Tool has been continuously updated and modified since the tool was first
designed and developed by Sam L. Bass, Jr., the Company's Chairman of the Board
and by Herman Schellstede, an engineering consultants..
Environmental Remediation Services
The Company provides environmental remediation services to oil and gas
operators. These services include environmental engineering, hazardous material
(including naturally occurring radioactive material) remediation and disposal,
and oil spill, soil decontamination and non-hazardous oilfield waste cleanup
related to the production of oil and natural gas, all in accordance with strict
federal, state and local environmental regulations. The Company also provides
"plug and abandonment" services for wells from which the oil and natural gas
have been depleted and further production has become uneconomical.
The Company's soil decontamination systems are capable of handling a
variety of different contamination problems utilizing 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 anticipates that its staff will be 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 will use 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.
Provided funds are available, of which there can be no assurance, the Company
expects to deliver emergency crews trained in chemical and oil spill containment
and clean-up throughout many parts of the world should such contracts become
available.
In April 1997, the Company entered into a master service agreement with
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 substantial
deposit was made by the Company to secure the barge. The Company believes the
original barge supplier will not be able to deliver since the owner of the
company died. The Company is attempting to recover the deposit and is seeking an
alternate supplier. It is estimated that the Company's barge could be ready to
operate 180 days following funding. To date, the Company has not determined the
exact level of financing that will be necessary for this project, but expects
$1.5 million is necessary to get the barge operational. The Chevron agreement
was originally entered into by BAPCO and BEW in September 1996, prior to the
acquisition of BAPCO by the Company in April 1997, and was assigned to the
Company with Chevron's consent at the time of the acquisition. The Company
issued 3,000,000 shares of Common Stock to BEW in connection with the assignment
of this agreement. Due to the price structure of the oil and gas business at
this time, the Companydoes not believe that it is in its best interest to
construct this barge. However, a substantial increase in oil prices would cause
the Company to reevaluate its decision regarding such construction.
<PAGE>
The Company's "plug and abandonment" services involve shutting down and
discontinuing the use of old, unsafe or marginally-producing oil or natural gas
wells, and restoring a site to its pre-drilling condition. There are many
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 sealings which can lead to "blow outs," spilling oil and gas
into the surrounding waters and creating 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.
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.
To assist in the Company's penetration of the environmental remediation
services market in Louisiana, in February 1998, the Company executed an
agreement to acquire a 70% equity interest in Virotek, a Louisiana corporation,
from its 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. Under the Company's agreement to acquire its
interest in Virotek, the Company paid an initial installment payment of $15,000
in cash and signed a promissory note in the amount of $300,000. The Company's
payment of the promissory note is pending its receipt from the seller of audited
financial statements for Virotek. The Company came to believe that such
financial statements would not be provided and that this transaction was not
likely to be completed. In August 1998, this acquisition was canceled because
during the due diligence process the Company discovered (1) serious unresolved
environmental issues, (2) greater refurbishment expenses than originally
estimated and (3) larger liabilities than originally represented.
In late September 1998, the Company commenced negotiations for a contract
with PEMEX in Mexico to process 150,000 tons of oil contaminated drill bit
cuttings. The process would involve moving a high temperature burner to a
central site in southern Mexico near the Yucatan Peninsula and incinerating the
oil contamination within the cuttings. The contract will require PEMEX to pay
the Company a processing fee of between $160-$170 per ton. The cost to
incinerate and process the cuttings is estimated to be approximately $103 per
ton including the cost to incinerate and transport the cuttings, salaries and
operating expenses and the 8% commission which the Company would be required to
pay to the Mexican agent. The Company estimates that it would require $1.8
million to complete this project, for which the Company would require additional
funding.
In late November 1998, the Company commenced negotiations for a contract
with a major international oil company in Venezuela to incinerate oil based
drill cuttings from 6 wells to be drilled. This is in the preliminary stages and
economic feasibility has not been determined.
The Company is evaluating the financial merit of each of these projects and
potential funding sources at this time.
Offshore Logistics Services
<PAGE>
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 rights to participate in a ten-year concession
agreement with the Panama Canal Commission. The concession grants the joint
venture the right to supply fuel and other petroleum supplies to tankers and
other commercial vessels traversing the Panama Canal. Historically,
approximately 45 such vessels traverse the Panama Canal daily. Pursuant to the
terms of the joint venture agreement, the Company is entitled to receive 66-2/3%
of all net profits of the venture, in exchange for the provision of a tug boat
and a 30,000 barrel fuel barge. The joint venture is currently in negotiations
to purchase a 1.5 million gallon fuel barge and an 85 foot flat deck tugboat.
These operations are expected to commence as such time as adequate financing is
secured, of which there can be no assurance. However, the Company believes that
all initial funds available to it will be focused initially on its Sao Tome
activities unless such funds are available solely for this project.
In connection with entering into such agreement with the Panama Canal
Commission, the venture received a commitment from Texaco Inc. to provide the
venture with the necessary fuel to comply with the requirements of the
concession. The Company anticipates that the venture would be able to provide a
minimum of 500,000 gallons of fuel a day at the start of the program and
increasing to one million gallons by the end of the first year of operation.
Based on a markup of $0.04 per gallon, the Company anticipates gross sales on
500,000 gallons to be in the range of $250,000 per day resulting in a gross
profit of $20,000 per day. There is no assurance that these anticipated profits
will be attained.
Marketing
During the fiscal year ended September 30, 1997, the Company did not have
any sales of oil or gas. Commencing in October 1997, the Company recorded sales
of crude oil from the Uinta properties and, in November 1997, recorded sales of
"test" oil from the Wichita Falls field in north Texas. As of December 31, 1998,
the Company continues to sell oil from both of these properties. All such sales
were made on the spot market. In the future, the Company intends to continue to
sell its crude oil and natural gas, and associated oil and gas products, on the
spot market.
Raw Materials
The Company believes that its source of supply for any materials or
equipment used in its business are adequate for its needs and that it is not
dependent upon any one supplier. No serious shortages or delays have been
encountered in obtaining any raw materials.
Governmental Regulation
Oil and natural gas operations are subject to extensive federal, state and
local laws and regulations relating to the exploration for, and the development,
production and transportation of, oil and natural gas, as well as safety
matters, which may be changed from time to time in response to economic or
political conditions. Matters subject to regulation by federal, state and local
authorities include permits for drilling operations, road and pipeline
construction, reports concerning operations, the space of wells, unitization and
pooling of properties, taxation and alterations to the Company's development
plans could have a material adverse effect on operations. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas.
Although the Company believes that it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and the
Company cannot predict the ultimate cost of compliance with these requirements
or their effect on operations. Significant expenditures may be required to
comply with governmental laws and regulations.
<PAGE>
Environmental Regulation and Claims
The Company's workover and environmental remediation services routinely
involve the handling of significant amounts of waste materials, some of which
are classified as hazardous substances. The Company's operations and facilities
are subject to numerous state and federal environmental laws, rules and
regulations, including, without limitation, laws concerning the containment and
disposal of hazardous materials, oilfield waste and other waste materials, the
use of underground storage tanks and the use of underground injection wells. The
Company contracts with third parties for monitoring environmental compliance and
arranging for remedial actions that may be required from time to time and also
uses outside experts to advise on and assist with the Company's environmental
compliance efforts. Costs incurred by the Company to investigate and remediate
contaminated sites are expensed unless the remediation extends the useful lives
of the assets employed at the site. Remediation costs that extend the useful
lives of the assets are capitalized and amortized over the remaining useful
lives of such assets. Liabilities are recorded when the need for environmental
assessments and/or remedial efforts becomes known or probable and the cost can
be reasonably estimated.
Laws protecting the environment have generally become more stringent that
in the past and are expected to continue to do so. Environmental laws and
regulations typically impose "strict liability" which means that in some
situations the Company could be exposed to liability for cleanup costs and other
damages as a result of conduct of the Company that was lawful at the time it
occurred or conduct of, or conditions caused by, others. Cleanup costs and other
damages arising as a result of environmental laws, and costs associated with
changes in environmental laws and regulations could be substantial.
Under the Comprehensive Environmental Response, Compensation and Liability
Act, also known as "Superfund," and related state laws and regulations,
liability can be imposed without regard to fault or the legality of the original
conduct on certain classes of persons that contributed to the release of a
"hazardous substance" into the environment. Changes to federal and state
environmental regulations may also negatively impact oil and natural gas
exploration and production companies, which in turn could have a material
adverse effect on the Company. For example, legislation has been proposed from
time to time in Congress which would reclassify oil and natural gas production
wastes as "hazardous wastes." Revision were made in July 1998. Suchlegislation
could dramatically increase operating costs for domestic oil and natural gas
companies and this could reduce the market for the Company's services by making
many wells and/or oilfield uneconomical to operate. The Company is evaluating
the impact, if any, of the revisions to its business activities.
Patents and Trademarks
The Company owns or has exclusive rights to use several U.S. patents on
designs for various types of oilfield equipment and on methods for conducting
certain oilfield activities, including discrete parts of the BAPCO Tool. The
Company uses some of these designs and methods to conduct its business. The
patents expire at various times over the next 4 to 14 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 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.
<PAGE>
Currently, there are a great number of new and successful secondary
recovery programs. Many of these methods are allowing for a much higher rate of
recovery than shown by the Company. The technique that the Company has chosen to
utilize, after consideration of other methods, by means of the BAPCO tool, is
that of the lateral drilling system. This technique, which calls for drilling a
50' long, 2 inch diameter horizontal drain hole into the formation is ideally
suited for both the Gunsite and Rusk County formations, as they are a
"fractured" type horizon, and the oil is being drained from existing fractures
in the formation. The drilling of horizontal drain holes is expected to
encounter many new fracture systems within the formation, resulting in
significant oil production increases from each well because it interconnects
various fracture systems, thus enhancing the recovery potential. Based on data
supplied by the Schellstede Company, initial production increases from 8 to 10
barrels per day are common in similar types of shallow wells laterally drilled
using the lateral drilling system.
Employees
As of September 30, 1998, the Company had 16 full-time employees, including
three petroleum engineers and one geologist. 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 Oyster Bay, New
York in approximately 1,100 square feet of leased office space. The Company
currently pays $850 per month in rent under its lease, which extends through
March 2000. The Company also leases approximately 7,000 square feet of its main
operational facility in Lafayette, Louisiana and pays $4,000 per month under a
lease extending through October 2002. The Company believes that additional
office and operational space will be required to accommodate planned expansion.
ITEM 3. LEGAL PROCEEDINGS
Piedra Drilling Company, Inc. ("PDC") commenced an action against the
Company in Denver, Colorado in July 1997. PDC brought this action to enforce a
contract for the issuance of 450,000 shares of the Company's common stock in
consideration for the sale by PDC to the Company of certain drilling equipment
and designs. The Company did not issue the shares to PDC because the necessary
equipment and designs were not delivered and/or validly assigned to the Company.
PDC obtained a default judgment in the amount of approximately $1.2 million,
which was vacated in November 1997. Colorado counsel for the Company filed an
answer, counterclaims and discovery demands in November 1997. The Company
believed it has a number of meritorious defenses and potential counterclaims and
vigorously defended this action. This case went to trial in August 1998 in
Denver and judgment was found in favor of the Company. The award is in excess of
$17,000, however, there local counsel believes that such judgment may not be
recoverable since PDC has few assets. The time for appeal has lapsed and the
Company is considering whether to seek recovery on the judgment.
Uinta Oil & Gas, Inc., ("Uinta") one of the three "joint" sellers under the
agreement to acquire the Uinta leases and certain other assets took certain
actions that were in contravention of the agreement when certain anticipated
funding to the Company did not occur. The Company gave Uinta notice of its
demand for arbitration under the agreement. Uinta commenced an action agains the
Company, BAPCO, Sam L. Bass, Jr., Noreen Wilson, Jim Griffin, Robert E. McKnight
and Robert Ballou (the Company's geologist) in Uintah County, Utah in April
1998. The complaint alleges fraud in the inducement, rescission of the
agreement, breach of contract and securities fraud and requests punitive damages
and appointment of a receiver. The Company then filed a formal demand for
arbitration. Uinta filed a request for a receiver to be appointed. This motion
was denied; however, the court held the issue of arbitration in abeyance pending
an evidentiary hearing on the allegations of Uinta's allegations of fraud since
Utah law contains an exception to mandatory arbitration when there are
allegations of fraud. Prior to the hearing on receivership, the other two
"joint" sellers, Coconino, S.M.A., Inc. and Pine Valley Exploration, Inc. filed
their formal demand for arbitration. The Company believes that it has numerous
meritorious defenses to this action. In the interim, the Company has made an
offer to settle this matter. The Company believes that a settlement on all
issues will be completed in January 1999. Under the terms of the executed
settlement, for the 500,000 shares of restricted stock which were issued at a
guarantee price of $2 per share, additional restricted shares will be issued
which reflect the difference between $2 and the price on October 16, 1998 and
December 30, 1998 and the 500,000 shares of restricted stock which were to be
issued in early 1998 will be issued and treated as if issued at the time such
deliverance was initially required. In addition, the parties will receive
additional shares equal to the difference between the value on a date certain in
January 1999 and $2 (the "Strike Price") for the second block of 500,000.
<PAGE>
The Company will reimburse certain filing fees, attorneys fees and will pay
for certain office equipment. The Company will receive a quitclaim deed and
assignments to perfect the Company's interest in the leases. In addition, (1)
Uinta will be issued shares of the Company's Common Stock the amount of which
shall be determined by dividing $250,000 by the Strike Price, half of which
shares shall be included in this registration and half of which shall be
restricted securities, (2) in exchange for assignment of a 4% overriding royalty
interest, Uinta will receive restricted shares the amount of which shall be
determined by dividing $677,000 by the Strike Price, (3) a deficiency value
equal to $41,200 for the Utah office building will be liquidated by issuance of
shares the amount of which shall be equal to $41,200 divided by the Strike
Price, which shares shall be included in this registration statement, (4) Uinta
will receive no more than $10,000 to cost its court costs and attorneys fees,
and (5) payment of outstanding production service invoices to third parties
totally $27,000 shall be paid in the form of shares included in this
registration statement, which shares shall be equal to $27,000 divided by the
Strike Price. See "Selling Shareholders".
On August 11, 1998, the Company and Kingsbridge agreed to enter into an
agreement to cancel the Kingsbridge Private Equity Line of Credit dated March
23, 1998. Pursuant to the terms of the proposed cancellation, the Company will
pay a penalty in the amount of $100,000 and will issue warrants to purchase up
to an additional 100,000 shares of the Company's Common Stock (the "Kingsbridge
Warrants"). The Company has decided to cancel the Kingsbridge Private Equity
Line of Credit because terms of certain of the third quarter 1998 fundings
require the Company to cancel this agreement so as to limit the number of shares
of the Company's Common Stock outstanding upon conversion of the Company's
convertible notes in the future. However, as of December 31, 1998, the Company
had not completed the terms of the anticipated cancellation, and therefore
continues to be obligated to register the potential Kingsbridge shares issuable
under the put option exercise notice and the Kingsbridge Warrant. Under the
terms of the cancellation, the Company will be responsible for the registration
of the additional warrants. On December 10, 1998, Kingsbridge made application
to the American Arbitration Association for arbitration of outstanding issues
between the parties, claiming beaches of contracts. The Company has filed an
Answer in such proceedings. The Company believes it has just and meritorious
defenses to the claims and intends to vigorously defend these claims.
Other than the above legal proceeding, the Company is not a party to any
other material pending or threatened legal proceeding.
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.
(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 commissions 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 31, 1997).............. 3-3/8 1-3/8
2nd Quarter (January 1 - March 31, 1998) ................. 2-3/16 7/8
3rd Quarter (April 1 - June 30, 1998) .................... 1-3/4 41/64
4th Quarter (July 1 - September 30, 1998)................ 1-1/8 11/16
Fiscal Year 1999
1st Quarter (October 1, - December 31, 1998)............. 53/64 1/4
<PAGE>
(2) Holders. The number of record holders of the Company's Common Stock as
of December 31, 1998 was 2075 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
Common Stock. The Company intends to retain earnings, if any, to finance the
development and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Future determinations regarding the payment
of dividends is subject to the discretion of the Board of Directors and will
depend upon a number of factors, including future earnings, capital
requirements, financial condition and the existence or absence of any
contractual limitations on the payment of dividends.
(B) Recent Sales of Unregistered Securities.
(1) The Company made the following unregistered sales of its securities
from October 1, 1997 through December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C>
DATE
OF TITLE OF
SALE SECURITIES AMOUNT CONSIDERATION PURCHASER
- ------- ------------------ -------------- --------------------- --------------------------
10/97 Common Stock 830,273 $913,000 Purchasers in Rule 506
(1) private placement (14
purchasers)
10/97 Common Stock 1,000,000 Oil reserves 1. Uinta Oil & Gas, Inc.
(2) and equipment 2. Pine Valley Exploration,
valued at $2,000,000 Inc.
3. Coconino, S.M.A., Inc.
4. Joseph H. Lorenzo
10/97 Common Stock 112,099 $115,609.15 Purchasers in Rule 506
(1) private placement (6
purchasers)
10/97 5.5% Convertible $4,300,000 $4,300,000 Accredited institutional
Senior principal investors (10 institutions)
Subordinated amount;
Notes convertible into
up to 3,440,000
shares of Common
Stock (1)
10/97 Warrants to Exercisable into No additional Accredited institutional
Purchase Common 283,800 shares consideration investors (11 institutions)
Stock (1) of Common Stock
10/97 Common Shares 100,000 Repayment of a Kenneth M. Waters
Loan to BAPCO
In the amount of
$295,000
10/97 Common Shares 50,000 3/8 Undivided Interest Hinge Line, Inc.
Gas reserves and
one natural gas well -
Valued at $148,750
10/97 Common Shares 45,000 Consulting Services Steve Boltax
Valued at $17,100
10/97 Common Shares 50,000 Consulting Services MyTec & Associates
rendered in connection
with Wichita and Rusk
Counties valued at
$148,500
10/97 Common Shares 50,000 Consulting Services Sheila Williams Bass
Valued at $144,000
10/97 Common Shares 100,000 Professional Services Senator Vance Hartke
Valued at $291,000
11/97 Common Shares 64,409 $67,750 Purchasers in Rule 506
(1) private placement (8
purchasers)
<PAGE>
12/97 Common Shares 10,000 Consulting Services C.D. Johnston, Jr.
Valued at $26,400
2/98 Common Shares 24,000 Part of acquisition of Craig Phillips
Utah office building Robert Ballou
Valued at $70,000
2/98 Common Shares 282,000 $180,250 Purchasers in Rule 506
(1) Private placement
(2 purchasers)
2/98 Common Shares 84,664 For services valued at Purchasers in Rule 506
$2,199,920 Private Placement
(5 purchasers)
2/98 Common Shares 23,200 Consulting Services Jerome Rappaport
Valued at $28,496 Andrew Racz
3/98 Warrant to Exercisable In connection with Kingsbridge Capital
Purchase into 100,000 entering into Limited
Common Stock shares of Investors Agreement
Common Stock
(1)
3/98 Common Stock 300,000 $236,250 Purchasers in Rule 506
(1) Private Placement
(1 Purchaser)
4/98 12.0% Convertible $300,000; $300,000 Accredited
Notes convertible into investors (9 institutions)
up to 200,000
shares of
Common Stock
(1)
4/98 Warrants to Exercisable into No additional Accredited
purchase 210,000 shares consideration investors (9 institutions)
Common Stock (1)
6/98 Warrants to Exercisable into $200,000 Accredited
purchase 1,050,000 shares investors (3 institutions)
Common Stock (1)
6/98 12.0% Subordinated $425,000; $425,000 Accredited
Convertible convertible into investors (5 institutions)
Notes up to 425,000
shares of
Common Stock
(1)
6/98 Warrants to Exercisable into No additional Accredited
purchase 531,250 shares consideration investors (5 institutions)
Common Stock (1)
6/98 5.5% $1,293,750 $1,250,000 Accredited
Convertible convertible into investor (1 institution)
Notes up to 1,798,124
shares of
Common Stock
(1)
6/98 Warrants to Exercisable No additional Accredited
purchase into 230,000 consideration investor (1 institution)
Common Stock shares (1)
6/98 Common Shares 234,200 $135,600 Purchasers in Rule 506
(1) Private placement
(15 purchasers)
6/98 Common Shares 62,420 For services Jerome Rappaport
Valued at $31,884 Ilona Minovskiy
Yvonne Montiel
Assonta LoGiudice
Maria Cardenas
HWK Consultants, Inc.
<PAGE>
7/98 8.0% $2,485,000 $2,485,000 Accredited
Convertible convertible into Investors (10 Institutions)
Notes up to 3,303,840
Shares of
Common Stock
(1)(3)
7/98 Warrants Exercisable No additional Accredited
to purchase into 223,650 consideration Investors (10 Institutions)
Common Stock shares (1)
8/98 Common Stock 47,0000 $23,500 Purchasers in Rule 506
(1) Private Placement
(9 Purchasers)
8/98 Common Stock 50,000 Consulting Services Andrew Racz
Valued at $25,000
8/98 Common Stock 4,700 Consulting Services Jerome Rappaport
Valued at $2,350
8/98 Common Stock 50,000 Penalty due on Don Hillin
Payment made
By Hinge Line, Inc.
In April to continue
Option on 49,000
Acres, valued at
$47,656
8/98 Common Stock 525,000 In connection with 1. Robert McKnight -
Services on the Company's 425,000
Board of Directors 2. Kenneth M. Waters-
Valued at $446,250 100,000
(4)
9/98 Common Stock 249,536 Payment on Hinge Line Inc.
Nueces in lieu of
Balance due of
$171,556
9/98 Common Stock 491,646 Payment on Autry C. Stephens
Nueces in lieu of
Balance due of
$338,007
10/98 20.0% $500,000 $500,000 Accredited
Convertible convertible Investor (1 Institution)
Note into up to 500,000
Shares of
Common Stock
(1)
10/98 Warrants Exercisable No additional Accredited
to purchase into 1,500,000 consideration Investor (1 Institution)
Common Stock shares (1)
10/98 12.0% $800,000 $800,000 Accredited
Convertible convertible into Investors (4 Institutions)
Notes up to 640,000
Shares of
Common Stock
(1)
10/98 Warrants Exercisable No additional Accredited
to purchase into 2,400,000 consideration Investors (4 Institutions)
Common Stock shares (1)
10/98 Common Stock 109,000 Consulting Services R&S Environmental Inc.
Valued at $45,984
10/98 Common Stock 8,000,000 In consideration 1. Sam Bass - 2,000,000
Of services to the 2. Jim Callender - 2,000,000
Company relative 3. Noreen Wilson -
To the finalization 2,000,000
Of contracts with 4. Jim Griffin - 2,000,000
Sao Tome and Mobil
Not Valued (5)
11/98 Common Stock 100,000 Consulting Services Richard Magar
Valued at $71,000
11/98 Common Stock 2,000,000 Payment in Settlement Procura
Of claims relative
To original Sao Tome
Agreement valued at
Not Valued (6)
</TABLE>
<PAGE>
(1) The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear the restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
(2) The Company was obligated to issue 1,000,000 of which 500,000 were
issued and the balance will be issued pursuant to the Uinta Settlement.
(3) A total of $412,350 of such convertible notes were converted in October
1998 and 1,210,686 shares issued on such conversions.
(4) Mr. Waters has returned his 100,000 shares to the Company due to tax
considerations, therefore no value has been attributed to such shares.
(5) The Board of Directors rescinded the issuance of 8,000,000 shares on
December 18, 1998, therefore no value has been attributed to such shares.
(6) The parties had agreed to settle matters relative to the Sao Tome
contract, and Procura is now disputing the settlement. The Company is holding
the shares until resolution of this matter, therefore no value has been
attributed to such shares. The Company has authorized an offer of a proposed
settlement, which based upon discussions with the principals of Procura, the
Company believes will be accepted.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company presented below as of September
30, 1998, have been derived from the Consolidated Financial Statements of the
Company, which Consolidated Financial Statements have been audited by Durland &
Company, CPAs, P.A., independent public accountants, and are included elsewhere
in this 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 Plans of Operations."
Fiscal Years ended September 30,
Statement of
Operations Data 1996 1997 1998
Revenues:
Environmental
Remediation
services $0 $108,944 $65,404
Crude Oil sales 0 0 147,782
Operating expenses 789,225 17,029,327 11,590,848
Income before
taxes and
extraordinary items (728,748) (16,913,052) (11,343,788)
Provision (benefit)
for income taxes 0 0 0
Net income(loss) (728,748) (16,913,052) (11,343,788)
Net income (loss)
per share (0.30) (1.61) (0.47)
Weighted average
common stock
outstanding 2,469,511 10,500,293 24,156,984
Balance Sheet Data (at end of period)
Property and
equipment 3,477,000 4,351,185 6,678,100
Total Assets 3,477,000 4,894,936 11,716,460
Total Liabilities 6,730 1,748,376 12,712,133
Stockholders equity 3,470,270 3,146,560 (995,673)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties that could cause actual results to
differ materially from historical results or those currently anticipated.
Overview
The Company is an independent oil and gas company engaged in the
exploration, development, production and sale of crude oil and natural gas
properties with current operations focused in Texas, Utah and Sao Tome in West
Africa. The Company's goal is to maximize its value through profitable growth in
its oil and gas reserves and production. The Company has taken steps to achieve
this goal through its growth strategy of (i) 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, (ii) at such times as pil prices are more favorable, continuing to
pursue environmental remediation service contracts for oil and gas well rework
and "plug and abandonment" services in the United States and internationally and
(iii) exploiting the BAPCO Tool.
The Company has acquired all of its oil and gas properties since 1997. The
Company's current development plans require substantial capital expenditures in
connection with the exploration, development and exploitation of oil and natural
gas properties. The Company has historically funded capital expenditures through
a combination of equity contributions and short-term financing arrangements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Form 10-K.
Results of Operations
Fiscal Year Ended September 30, 1998 compared to Fiscal year Ended
September 30, 1997
During fiscal 1998 the Company incurred a net loss of $11,343,788, compared
to a net loss of $16,913,052 in fiscal 1997, reflecting the Company's increased
level of business operations. In fiscal 1998 a total of $935,916 was accrued,
but not paid in cash, as compensation to three officers of the Company.
Depreciation and depletion equaled $504,314 in fiscal 1998 compared to $273,000
in fiscal 1997. Amortization of the beneficial conversion feature discount on
convertible debt was $1,364,063 for the period ended September 30, 1998 compared
to $0 for the period ended September 30, 1997. The net cash operating loss of
the Company for fiscal 1998 was $4,840,143 compared to $1,283,879 for fiscal
1997.
Officers' compensation, professional fees, travel, consultant fees and
miscellaneous expenses for the period ended September 30, 1998 compared to the
period ended September 30, 1997 increased significantly due to the Company's
business operations continuing to increase. Professional fees in the period
ended September 30, 1998 included legal, audit, petroleum engineering and other
engineering costs.
The Company had revenues of $247,060 in fiscal 1998 compared to $116,275 in
fiscal 1997. Included in fiscal 1998 were preparatory expenses of approximately
$200,000 related to the cost of bringing a delegation of government officials,
including the Prime Minister of Sao Tome, to the United States for meetings with
various committees of the United Nations and the United States government,
determining the boundaries of the concession and facilitating the passage of a
law in Sao Tome regarding the boundaries of the country.
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
1999 in part through additional debt or equity capital and in part through cash
flow from operations. A description of the Company's most recent financing
activities is included herein under the heading "The Company."
The Company presently intends to utilize any cash flow from operations as
follows: (i) seismic studies and fees for the Sao Tome joint venture; (ii)
production of wells in the Uintah Basin, (iii) production in the oil fields in
Texas; and (vi) working capital and general corporate purposes.
<PAGE>
Capital Expenditures and Business Plan
In May 1997, the Company entered into an exclusive joint venture with the
Democratic Republic of Sao Tome & Principe ("Sao Tome") to manage the
exploration, exploitation and development of the potential oil and gas reserves
onshore and offshore Sao Tome, either through the venture or in collaboration
with major international oil exploration companies. At that time, the Company
was required to pay a $5,000,000 concession fee to the Sao Tome government. In
September 1997, the Company received a Memorandum of Understanding from the Sao
Tome government which allows the Company to pay this concession fee within five
days after Sao Tome files the relevant official maritime claims maps with the
United Nations and the Gulf of Guinea Commission. In December 1997, the Company
paid $2,000,000 of this concession fee to Sao Tome from the net proceeds of the
1997 Private Placement, in June 1998, paid $1,000,000 of this concession fee
from the net proceeds of the Third June 1998 Private Placement, in August, paid
$1,000,000 of this concession fee from the net proceeds of the July/August 1998
Financing. Subsequent to September 30, 1998, $250,000 was paid from the net
proceeds of the September 1998 Financing and $500,000 was paid from the net
proceeds of the October 1998 Financing to pay other expenses and obligations
relative to Sao Tome which the Company believes will be credited to the
concession fee.
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 $2,200,000
over the next 12 months for additional studies necessary to determine the
location and depth of the targeted oil deposits. The Company has spent to date
$250,000 in preparatory expenses including determining the boundaries of the
concession and facilitating the passage of a law in Sao Tome regarding the
boundaries of the country. The costs of further development of this project
cannot be determined until a more definite development plan is established. The
costs depend on the Company's determination to either independently develop the
concession, take on operational partners or lease a portion of the concession
for third-party development.
In April 1998, the Government of Sao Tome granted approval to the joint
venture to proceed with the preparation and sale of leases of its oil concession
rights, which sales were expected to occur in early 1999. In June 1998, the
Company and Sao Tome signed a letter of intent to award a contract to
Schlumberger to perform a marine seismic survey in anticipation of the license
round to be held in Sao Tome, and to act as the technical advisor and
coordinator of such license round. Schlumberger is a seismic data service
company located in Great Britain. The exact number and size of the lease blocks
to be offered have not yet been determined. The Company intends to run the
survey and acquire the seismic data in late 1998 in order to proceed with the
licensing round commencing in early 1999. In July 1998, the Company closed and
formed the joint venture national oil company with the Government of Sao Tome.
The oil company is called the STPETRO. STPETRO is owned 51% by the Government of
Sao Tome and 49% by the Company. In addition, the Company was granted under the
original agreement with the government, a long term management arrangement with
STPETRO. In July 1998, the Ministry of Cabinets and the Prime Minister executed
the STPETRO formation documents and they were promulgated into law by the
President. In September 1998, the Government of Sao Tome and STPETRO entered
into a Technical Assistance Agreement with Mobil. Under such agreement, Mobil
will perform a technical evaluation and feasibility study of oil and gas
exploration in certain designated acreage. The agreement is for an initial term
of 18 months and superceded the need for lease sales in early 1999. Mobil
retains a right of first refusal to acquire development rights to all or a
portion of the acreage which it is evaluating. Mobil then executed an agreement
with Schlumberger to perform the marine seismic survey as previously agreed
under the letter of intent with the Company signed in June 1998. Under the
Mobil/Schlumberger agreement, Schlumberger will perform seismic work on the
option blocks designated in the TAA Agreement. Such work is to commence in
January 1999. The Company continues to maintain a right to construct the
Off-Shore Logistics Center and is seeking an appropriate joint venture partner
for the project.
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.
<PAGE>
In October 1997, the Company acquired a 37.5% interest in a 49,000 acre
natural gas lease, known as the "Nueces River Prospect," in the Nueces River
area of south Texas. The Company paid $200,000 and issued 50,000 shares of its
common stock to acquire the lease. The Company has spent more than $200,000
reworking the first of two existing shut-in wells on the property. Due to
mechanical failure downhole, this well has been shut in again. In 1998, the
Company planned on spending $650,000 to $1,200,000 to make the wells
operational, utilizing funds to be acquired under the Investment Agreement with
Kingsbridge. See "The Company -- The Kingsbridge Equity Line of Credit
Agreement." The Company is currently considering whether to conduct geophysics
surveys to aid in the selection of future drilling locations. The Company
believes that, assuming the entire lease is productive, there are about 75
locations to be drilled. In 1998, depending on the availability of funding, the
Company expected to drill 15 to 20 new wells at this site, at a cost of
approximately $650,000 to $1,200,000 per well. The Company is responsible for
only half of the drilling cost of each well, as it shares this cost with its
operational co-venturer, Autry Stephens & Co. The operational dates, as well as
the daily production rates, of the second well cannot be determined until the
completion of the reentry. The Company is currently meeting with two potential
farm-out partners to work the project and believes it will negotiate
arrangements to drill additional wells on the northern and southern portions of
the leasehold.
In February and March 1997, the Company acquired 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 1997, the Company had
recompleted 18 wells, all of which were operational as of March 20, 1998. Of
these wells, 13 had mechanical failures. The Company has located its BAPCO Tool
on site. The Company anticipates spending $1,200,000 in order to bring
production on the fields up to a commercial level. At the current time, the
Company is evaluating feasible economic options including the potential sale of
the Rusk County and Wichita County properties.
In July 1997, the Company entered into a joint venture with MIII
Corporation, a Native American oil and gas company, to workover, recomplete and
operate 335 existing oil and gas wells on the Uintah and Ouray Reservation in
northeastern Utah. At this time, none of the wells are operational. The Company
had designed a development program, under which it planned to recomplete and
restimulate 36 wells and to drill five to seven development and extension wells
at this site. This plan would require spending a minimum of $1,000,000 to
$1,500,000 in order to make the project operational. Subject to the availability
of such funds, the Company anticipated that the first wells would be on line by
fall 1998. The leases on the MIII project were never transferred to the Company
and it is currently evaluating its options with regard to this project.
In September 1997, the Company acquired net revenue interests ranging from
76% to 84% (and 100% working interest in all but 2 of the wells) in oil and gas
properties totaling 13,680 acres, located near the MIII fields in the Uinta
Basin with 22 oil and natural gas wells. These wells are currently producing
approximately 70 barrels of oil per day from six producing wells which began
realizing revenues for the Company in November 1997. The Company planned on
spending approximately $1,000,000 on additional equipment and up to $80,000 per
well on well stimulation in order to bring 12 more wells on line in 1999. The
Company plans to plug and abandon 2 more wells and to perform further study on
the other 2 wells. The Company planned on funding this plan through the use of
funds acquired under the Kingsbridge Investment Agreement. See "The Company -
The Kingsbridge Equity Line of Credit Agreement." To date, the Company has
received no funds under the Kingsbridge Investment Agreement, no longer intends
to take down any funds under this agreement, has negotiated terms to cancel this
agreement and Kingsbridge is seeking arbitration of the agreement and its
cancellation. Provided additional financing of $5,000,000 to $10,000,000 is
secured from another source, the Company would schedule to implement a
recompilation and drilling program on this project. The Company is currently
evaluating the existing reserve reports, the underlying data on these leases and
the economic feasibility of increasing production in light of the current oil
prices or of the sale or other disposition of these properties. The Company is
engaged in arbitration regarding this project and believes that a settlement on
all issues will be completed in January 1999.
<PAGE>
In April 1997, the Company entered into a master service agreement with
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 substantial
deposit was made by the Company to secure the barge. The Company believes the
original barge supplier will not be able to deliver since the owner of the
company died. The Company is attempting to recover the deposit and is seeking an
alternate supplier. Additional funding is being sought to purchase and equip the
barge. It is estimated that the Company's barge could be ready to operate 180
days following funding. Due to the price structure of the oil and gas business
at this time, the Company does not believe that it is in its best interest to
construct this barge. However, a substantial increase in oil prices would cause
the Company to reevaluate its decision regarding such construction. To date, the
Company has not yet determined the extent of financing that will be necessary
for this project. The Chevron agreement was originally entered into by BAPCO and
BEW in September 1996, prior to the acquisition of BAPCO by the Company in April
1997, and was assigned to the Company with Chevron's consent at the time of the
acquisition. The Company issued 3,000,000 shares of Common Stock to BEW in
connection with the assignment of this agreement.
During fiscal 1997, the Company issued 4,000,000 shares of its common stock
to acquire BAPCO, a non-operating oil production company with significant well
rework equipment assets.
The Company's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
its oil and natural gas properties. Historically, the Company has funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements. The Company believes that it will require a combination
of additional financing and cash flow from operations to implement future
development plans. Although Company management is exploring the private and/or
public equity markets as potential capital sources in connection with its
development plans, the Company currently does not have any binding arrangements
with respect to, or sources of, additional financing, and there can be no
assurance that any additional financing will be available to it on reasonable
terms or at all. Future cash flows and the availability of financing will be
subject to a number of variables, such as the level of production from existing
wells, prices of oil and natural gas and success in locating and producing new
reserves. To the extent that future financing requirements are satisfied through
the issuance of equity securities, shareholders of the Company may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on operations. If revenue were to decrease as a result of lower oil
and natural gas prices, decreased production or otherwise, and the Company had
no availability under a bank arrangement or other credit facility, the Company
could have a reduced ability to execute current development plans, replace
reserves or to maintain production levels, any of which could result in
decreased production and revenue over time.
Reserves and Pricing
Oil and natural gas prices fluctuate throughout the year. Generally, higher
natural gas prices prevail during the winter months of September through
February. A significant decline in prices would have a material effect on the
measure of future net cash flows which, in turn, could impact the value of the
Company's oil and gas properties Such decline occurred in fiscal 1998. This was
primarily due to excess oil supplies worldwide.
The Company's drilling and acquisition activities have increased its
reserve base and its productive capacity, and therefore, its potential cash
flow. Lower gas prices may adversely affect cash flow. The Company intends to
continue to acquire and develop oil and natural gas properties in its areas of
activity as dictated by market conditions and financial ability. The Company
retains flexibility to participate in oil and gas activities at a level that is
supported by its cash flow and financial ability. The Company intends to
continue to use financial leverage to fund its operations as investment
opportunities become available on terms that management believes warrant
investment of the Company's capital resources.
The Company expects to utilize the "successful efforts" method of
accounting for its oil and gas producing activities once it has reached the
producing stage. The Company expects to regularly assess proved oil and gas
reserves for possible impairment on an aggregate basis in accordance with SFAS
No. 121.
<PAGE>
Net Operating Losses
The Company has net operating loss carryforwards of $28,988,992 which
expire in the years 2010 through 2013. The Company has a $11,595,000 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.
Forward-Looking Statements
This Form 10-K includes "forward-looking statements" withing 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 forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results or developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic
market and 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
consequence to or effects on the Company or its business or operations. The
Company assumes no obligations to update any such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report ..............................................F-2
Consolidated Balance Sheets ...............................................F-3
Consolidated Statements of Operations ......................................F-4
Consolidated Statements of Stockholders' Equity ............................F-5
Consolidated Statements of Cash Flows .....................................F-6
Notes to Consolidated Financial Statements .................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO: The Board of Directors and Stockholders
Environmental Remediation Holding Corporation
We have audited the accompanying consolidated balance sheets of Environmental
Remediation Holding Corporation and subsidiary, (the "Company") as of September
30, 1997 and 1998 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Environmental Remediation Holding Corporation and subsidiary as of September 30,
1997 and 1998 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced operating losses since
inception. The Company's financial position and operating results raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Durland & Company, CPAs, P.A.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
December 18, 1998
F-2
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
September 30,
------------------------------------------
1997 1998
----------------- ------------------
ASSETS
CURRENT ASSETS
Cash $ 327,743 $ 16,359
Restricted cash 0 18,826
Accounts receivable 0 193,736
Prepaid expenses and other current assets 215,708 247,863
----------------- ------------------
Total current assets 543,451 476,784
----------------- ------------------
PROPERTY AND EQUIPMENT
Oil and gas properties (Successful efforts method) 515,625 1,240,175
Equipment 4,220,000 6,463,239
Deposit on purchase of equipment 136,560 0
----------------- ------------------
Total property and equipment before depreciation 4,872,185 7,703,414
Less: accumulated depreciation and depletion (521,000) (1,025,314)
----------------- ------------------
Net property and equipment 4,351,185 6,678,100
----------------- ------------------
OTHER ASSETS
Master service agreement 300 300
Investment in STPetro, S.A. 0 49,000
Due from STPetro, S.A. 0 482,276
DRSTP concession fee 0 4,000,000
Deferred offering cost 0 30,000
----------------- ------------------
Total other assets 300 4,561,576
----------------- ------------------
Total Assets $ 4,894,936 $ 11,716,460
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Stockholder loans payable $ 465,094 $ 748,571
Note payable - bank 175,000 0
Current portion of long-term debt 0 307,775
Accounts payable and accrued liabilities :
Accounts payable 111,054 1,228,541
Accrued officer salaries 960,000 1,729,816
Accrued interest 37,228 1,110,638
----------------- ------------------
Total current liabilities 1,748,376 5,125,341
----------------- ------------------
LONG TERM LIABILITIES
Long term bank loans 0 43,614
Convertible debt, net 0 7,543,178
----------------- ------------------
Total long term liabilities 0 7,586,792
----------------- ------------------
Total Liabilities 1,748,376 12,712,133
----------------- ------------------
Common stock issued under a repurchase agreement; issued and
outstanding 1,000,000 and 750,000 shares 2,000,000 1,500,000
----------------- ------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value; authorized 10,000,000 shares ;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares ;
issued and outstanding 21,989,526 and 25,999,900 2,199 2,600
Additional paid-in capital in excess of par 19,952,865 25,020,717
Additional paid-in capital - warrants 0 207,502
Deficit (17,645,204) (28,988,992)
Stock subscriptions receivable (913,300) 0
Beneficial conversion feature 0 1,387,500
Deferred compensation, net (250,000) (125,000)
----------------- ------------------
Total Stockholders' Equity (Deficit) 1,146,560 (2,495,673)
----------------- ------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 4,894,936 $ 11,716,460
================= ==================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
<TABLE>
<S> <C> <C> <C>
Year ended September 30,
-----------------------------------------------------------
1996 1997 1998
--------------- ------------- -----------------
REVENUE
Environmental remediation services $ 0 $ 108,944 $ 65,404
Crude oil 0 0 147,782
Other income 60,477 7,331 33,874
--------------- ------------- -----------------
Total revenue 60,477 116,275 247,060
--------------- ------------- -----------------
COSTS AND EXPENSES
Compensation :
Officers 147,326 1,185,000 1,793,000
Directors 0 3,492,981 446,250
Consulting fees 337,956 8,883,356 920,723
Geological data and reports 0 2,008,848 8,000
General and administrative expense 55,943 1,145,355 5,443,928
Depreciation and depletion 248,000 273,000 504,314
Interest expense 0 40,787 2,474,633
--------------- ------------- -----------------
Total costs and expenses 789,225 17,029,327 11,590,848
--------------- ------------- -----------------
Net loss $ (728,748) $ (16,913,052) $ (11,343,788)
=============== ============= =================
Weighted average number of shares outstanding 2,469,511 10,500,293 24,156,984
=============== ============= =================
Basic net loss per share, basic $ (0.30) $ (1.61) $ (0.47)
=============== ============= =================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Years ended September 30, 1996, 1997 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Beneficial
APIC Conv. Stk Subs Defr'd Accum. TTL S/H Eq.
APIC Warrants Feature Receivable Comp. Deficit (Deficit)
-------------------- ------------ ---------- ----------- ----------- -------- ------------ -------------
Number
of Shares Amount
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1995 1,639,450 $ 164 499,924 0 0 0 (500,000) (3,404) (3,316)
Common stock issued for :
10/01 - equipment 744,000 74 3,719,926 0 0 0 0 0 3,720,000
10/10 - cash 20,000 2 49,998 0 0 0 0 0 50,000
08/09 - cash 20,500 2 42,890 0 0 0 0 0 42,892
08/19 - reverse merger 356,317 36 (243,366) 0 0 0 0 0 (243,330)
08/19 - S-8 services 73,277 7 73,270 0 0 0 0 0 73,277
08/30 & 09/15 - cash and svcs 385,830 39 486,956 0 0 0 0 0 486,995
09/30 - deferred comp. amort. - 0 0 0 0 0 72,500 0 72,500
Net loss - 0 0 0 0 0 0 (728,748) (728,748)
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1996 3,239,374 324 4,629,598 0 0 0 (427,500) (732,152) 3,470,270
Common stock issued for :
02/10 - S-8 services 1,600,000 160 1,099,840 0 0 0 0 0 1,100,000
03/97 - oil wells/leases 500,000 50 515,575 0 0 0 0 0 515,625
03/13 - S-8 services 300,000 30 374,970 0 0 0 0 0 375,000
04/05 - Chevron contract 3,000,000 300 0 0 0 0 0 0 300
04/05 - services 1,342,981 134 1,342,847 0 0 0 0 0 1,342,981
04/05 - contributed to corp (100,000) (10) (99,990) 0 0 0 0 0 (100,000)
04/09 - BAPCO acquisition 4,000,000 400 499,600 0 0 0 0 0 500,000
05/14 - S-8 services 1,500,000 150 562,350 0 0 0 0 0 562,500
06/19 - services 150,000 15 28,110 0 0 0 0 0 28,125
07/08 - cash 800,000 80 399,920 0 0 0 0 0 400,000
07/25 - S-8 services 2,335,000 233 6,464,798 0 0 0 0 0 6,465,031
07/30 - services 1,500,000 150 2,249,850 0 0 0 0 0 2,250,000
07/97 and 08/97 - cash 221,000 23 294,977 0 0 0 0 0 295,000
09/04 - services 400,000 40 307,960 0 0 0 0 0 308,000
09/97 - cash stk subs rec'v 1,201,171 120 1,282,460 0 0 (913,300) 0 0 369,280
09/30 - deferred comp. amort. - 0 0 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 0 0 (16,913,052) (16,913,052)
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1997 21,989,526 2,199 19,952,865 0 0 (913,300) (250,000)(17,645,204) 1,146,560
Common stock issued for :
10/97 - stock subs rec'd - 0 0 0 0 913,300 0 0 913,300
10/97 - Uinta acquisition 1,000,000 100 1,999,900 0 0 0 0 0 2,000,000
10/97 - Nueces acquisition 50,000 5 148,745 0 0 0 0 0 148,750
1st quarter - services 355,000 36 921,964 0 0 0 0 0 922,000
1st quarter - cash 177,008 18 167,676 0 0 0 0 0 167,694
11/97 - bene conv feat create - 0 0 0 1,075,000 0 0 0 1,075,000
01/98 - building equity 24,000 2 69,998 0 0 0 0 0 70,000
2nd quarter - services 23,200 2 28,494 0 0 0 0 0 28,496
2nd quarter - cash 666,664 67 438,432 0 0 0 0 0 438,499
3rd quarter - services 162,420 16 102,868 0 0 0 0 0 102,884
06/98 - bene conv feat create - 0 0 0 312,500 0 0 0 312,500
3rd quarter - cash 234,200 23 135,577 200,000 0 0 0 0 135,600
4th quarter - services 479,700 48 473,552 0 0 0 0 0 473,600
4th quarter - cash 47,000 5 23,495 7,502 0 0 0 0 23,500
09/98 - Accounts payable 491,646 49 337,958 0 0 0 0 0 338,007
09/98 - option fee and penalty 299,536 30 219,193 0 0 0 0 0 219,223
09/30 - deferred comp. amort - 0 0 0 0 0 125,000 0 125,000
Net loss - 0 0 0 0 0 0 (11,343,788) (11,343,788)
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE September 30, 1998 25,999,900 $ 2,600 25,020,717 207,502 1,387,500 0 (125,000)(28,988,992) (2,495,673)
============ ======= ============ ========== =========== =========== ======== ============ =============
Common stock issued under a repurchase agreement:
BALANCE, September 30, 1996 0 $ 0 0 0 0 0 0 0 0
7/97 - DRSTP info 1,000,000 100 1,999,900 0 0 0 0 0 2,000,000
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1997 1,000,000 100 1,999,900 0 0 0 0 0 2,000,000
12/97 - cash repurchase (250,000) 0 (500,000) 0 0 0 0 0 (500,000)
------------ ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1998 750,000 $ 100 1,499,900 0 0 0 0 0 1,500,000
============ ======= ============ ========== =========== =========== ======== ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Years ended September 30,
-------------------------------------------------------
1996 1997 1998
---------------- ----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (728,748) $ (16,913,052) $ (11,343,788)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred compensation 72,500 177,500 125,000
Amortization of beneficial conversion feature 0 0 1,364,063
Stock issued for services rendered 385,000 12,292,829 1,526,980
Stock issued for DRSTP geological data 0 2,000,000 0
Depreciation and depletion 248,000 273,000 504,314
Other (60,477) (6,730) (22,987)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 0 0 (57,176)
(Increase) decrease in prepaid expenses and other current assets 0 (215,708) (32,155)
Increase (decrease) in accrued interest expense and penalties 0 37,228 1,043,467
Increase (decrease) in accounts payable 0 111,054 1,116,223
Increase (decrease) in accrued salaries 0 960,000 935,916
---------------- ----------------- ----------------
Net cash provided by (used by) operating activities (83,725) (1,283,879) (4,840,143)
---------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment 0 0 (4,000,000)
Investment in STPetro, S.A. 0 0 (49,000)
Acquisition of property and equipment (5,000) (131,560) (371,535)
---------------- ----------------- ----------------
Net cash provided by (used by) investing activities (5,000) (131,560) (4,420,535)
---------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 81,995 1,102,988 765,293
Proceeds of bank borrowing 0 175,000 0
Net proceeds from sale of convertible debt 0 0 7,763,687
Proceeds from loans payable to stockholders 22,730 760,481 868,230
Payments on stockholder loans payable (16,000) (295,287) (429,090)
---------------- ----------------- ----------------
Net cash provided by (used by) financing activities 88,725 1,743,182 8,968,120
---------------- ----------------- ----------------
Net increase (decrease) in cash 0 327,743 (292,558)
CASH, beginning of period 0 0 327,743
---------------- ----------------- ----------------
CASH, end of period $ 0 $ 327,743 $ 35,185
================ ================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 0 $ 3,559 $ 37,160
================ ================= ================
Non cash financing and investing activities:
Stock issued to acquire :
Option fee and penalty settlement $ 0 $ 0 $ 219,223
================ ================= ================
Accounts payable settlement $ 0 $ 0 $ 338,007
================ ================= ================
Equity in building $ 0 $ 0 $ 70,000
================ ================= ================
Environmental remediation equipment $ 3,720,000 $ 0 $ 0
================ ================= ================
BAPCO equipment $ 0 $ 500,000 $ 0
================ ================= ================
Oil and gas properties and equipment $ 0 $ 515,625 $ 2,148,750
================ ================= ================
Master service agreement $ 0 $ 300 $ 0
================ ================= ================
Convertible debt and warrants issued for services $ 0 $ 0 $ 51,252
================ ================= ================
Mortgage payable assumed $ 0 $ 0 $ 28,782
================ ================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
September 30, 1995, 1996 and 1997
(1) Summary of Significant Accounting Policies
The Company.
Environmental Remediation Holding Corporation, (ERHC), was incorporated on May
12, 1986 in Colorado as Valley View Ventures, Inc., (VVV). Its name was
changed to Regional Air Group Corporation, (RAGC), on September 20, 1988,
and then to Environmental Remediation Holding Corporation on August 29,
1996. VVV was created in 1986 as a blind pool to seek a merger opportunity
with a viable operating company. In 1988 the company acquired, via a
reverse merger, Mid- Continent Airlines which was a regional "feeder"
airline operating as Braniff Express. On September 28, 1989, Braniff
Airlines filed Chapter 11 Bankruptcy. This event proved to be catastrophic
to the then operating business of the Company. RAGC liquidated its assets
and liabilities shortly thereafter and remained dormant until its reverse
merger with Environmental Remediation Funding Corporation on August 19,
1996.
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and natural
gas production industry from its corporate headquarters in Oyster Bay, New
York, and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of
the statements of financial condition and revenues and expenses for the
years then ended. Actual results could differ significantly from those
estimates.
Principles of consolidation
The consolidated financial statements include the accounts of SSI and BAPCO,
its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Net loss per share
Net loss per common share - basic is computed by dividing the net loss by the
number of shares of common stock outstanding during the period. Net loss
per share - diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
DRSTP geological data
In July 1997, the Company acquired substantial geologic data and other
information from an independent source in exchange for one million shares
of the Company's common stock. This data was valued at $2,000,000 based the
agreement with the seller that Company would repurchase these shares for
$2,000,000 at a rate of 25% per quarter should the seller so choose. The
Company expensed this acquisition cost immediately.
(2) Significant Acquisitions
The Company acquired 100% of the issued and outstanding common stock of
Environmental Remediation Funding Corp., (ERFC), a Delaware corporation,
effective on August 19, 1996, in a reverse triangular merger, which has
been accounted for as a reorganization of ERFC. At the same time the
Company changed its name from RAGC. Prior to the merger ERFC had acquired
certain environmental remediation equipment in exchange for common stock.
ERFC then employed the seller of this equipment as an outside consultant in
exchange for common stock. Subsequently, ERFC was unable to enter into the
environmental remediation contracts it had hoped to and asked the
consultant to become the Chairman, President and CEO of ERFC.
At the time of the acquisition of ERFC by RAGC, ERFC owned 100% of Site
Services, Inc., (SSI). ERFC had acquired SSI from Bass Environmental
Services Worldwide, Inc., (BESW), a company controlled by the Chairman,
President and CEO of ERFC. SSI had always been an inactive company, except
for certain environmental remediation licences which it continues to hold.
On April 9, 1997, the Company acquired 100% of the issued and outstanding
common stock of Bass American Petroleum Company, (BAPCO), which was
accounted for as a purchase. BAPCO had been an inactive company for several
years previously, however BAPCO owned a variety of oil well production
enhancing equipment, which is proprietary to, but
F-7
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(2) Significant Acquisitions (Continued) 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.
(3) Basis of Presentation
The Company's current liabilities exceed its current assets by $4,476,000. The
Company has incurred net losses of $11,300,000 and $16,900,000 in 1998 and
1997. These conditions raise substantial doubt as to the ability of the
Company to continue as a going concern. The Company is in ongoing
negotiations to raise general operating funds and funds for specific
projects. However, there is no assurance that such financing will be
obtained. The Company is in preliminary discussions with several parties
regarding the potential sale of some to all of its US based crude oil
production fields.
(4) Equipment
Environmental remediation equipment was purchased by ERFC in exchange for common
stock. The Company recorded this equipment based on the fair value of the
common stock given up. At the date of acquisition, ERFC was a privately
held company, therefore there was no market for ERFC's stock. At the time
of negotiations for this transaction, it was an arms length transaction
between unrelated parties. The parties negotiated a value of $5 per share
for a total of 744,000 shares valuing this transaction at $3,720,000. The
Company has chosen to depreciate the equipment using the straight line
method over its estimated remaining useful life of fifteen years.
Expenditures for maintenance and repairs are charged to operations as
incurred.
In the BAPCO acquisition the Company acquired ownership of all rights to
BAPCO's proprietary oil well drilling system, "the BAPCO Tool" as well as
other oil and natural gas well reworking equipment. The control of this
proprietary tool has enhanced the Company's position to the extent that it
would not have been able to enter into the contract to control the Utah oil
fields and the reworking of the Indonesian oil fields. The control of this
tool also enabled the acquisition of the 200 Texas oil wells to be
economically feasible to a greater extent. The Company received two
completed "BAPCO" tools which were ready to be placed in service in this
transaction. The Company valued the equipment received at historical cost
amounting to $250,000 each for the two tools, totalling $500,000. BAPCO was
controlled by the CEO of ERHC at the time of the BAPCO acquisition,
therefore the Company believes historical cost is the appropriate basis for
valuing the transaction. The Company is depreciating this tool and
technology over ten years. Depreciation expense for the years ended
September 30, 1996, 1997 and 1998 was $248,000, $273,000 and $499,960
respectively.
(5) Crude oil reserves
At September 30, 1996, the Company had no oil and gas reserves. In March 1997,
the Company acquired an undivided 7/8 net revenue with a 100% working
interest in a 100 well lease located in the Gunsite Sand Lease in Ector,
Texas, in exchange for 300,000 shares of the Company's common stock. The
Company valued this transaction at the closing price of stock given up,
$1.03125, or a total of $309,375. The Company received an independent
evaluation of this field which reflected reserves. In March 1997, the
Company acquired an undivided 7/8 interest in a 100 well lease located in
the Woodbine Sand Lease Block in Henderson County, Texas, in exchange for
200,000 shares of the Company's common stock. The Company valued this
transaction at the closing price of the stock given up, $1.03125, or a
total of $206,250. The Company received an independent evaluation of this
field which reflected reserves.
Both acquisitions also included all existing equipment on site. The Company has
not recorded the fair market value of the equipment in place, as all of
such equipment has minimal scrap value, which is the only valuation method
available due to the non-operational status of the wells at acquisition.
The Company spent approximately $460,000 for the year ended September 30,
1998 on well equipment repairs and well rework, all on the Gunsite lease.
The Company expects to capitalize and depreciate repairs which are believed
to extend the useful life of such existing equipment beyond one year, as
well as the cost of replacement equipment.
On September 29, 1997, the Company entered into an agreement to acquire 22
wells on 7 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 Company received the lease
assignment. The terms of the acquisition are for the Company to pay
$250,000 in cash, issued 250,000 shares of the Company's common stock at
each of the following four dates : closing, December 30, 1997, March 30,
1998 and June 30, 1998. The Company also was required to guarantee that the
bid price on the date the rule 144 restrictions lapse will be no less than
$2.00 per share or the Company is required to either issue additional
shares or pay the difference in cash, at the Company's option. 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
F-8
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(5) Crude oil reserves (continued) for its use. The total valuation of this
transaction is $2,250,000 and is applied as $375,800 of oil and gas
reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the Company
to pay the seller $200,000 and 50,000 shares of the Company's common stock,
as well as to pay the Company's proportionate share of the costs to reenter
this well. The Company is also required to carry the seller's 1/8
proportionate share of the reentry costs, estimated between $250,000 and
$500,000, 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 4 years. The Company received the
initial lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data of these leases
as well as has contracted another independent appraiser to complete new
reserve reports for its use.
Oil production
During the year ended September 30, 1998, the Company completed repairs on well
equipment on 20 wells on the Gunsite Sand Lease. Two of these are employed
as water injection wells. 13 have had further mechanical failures. The
remaining 5 are producing approximately 6 barrels of crude oil per day. At
September 30, 1998, 3 of the 22 Utah wells are producing approximately 20
to 26 barrels per day. 5 more are temporarily off line for minor repairs
and produce approximately 69 to 85 barrels per day when operating. At the
current market price for crude oil at the wellhead, (approximately $8.00
per barrel), the Company does not find it economically feasible to complete
other than minor repairs in order to reestablish well production.
Furthermore, the Company is actively negotiating with several potential
purchasers for its East Texas leases. The Company is utilizing the
successful effort method of accounting for its oil and gas producing
activities. The Company regularly assesses oil and gas reserves for
possible impairment on an aggregate basis in accordance with SFAS 121.
Depletion
Depletion (including provisions for future abandonment and restoration costs) of
all capitalized costs of proved oil and gas producing properties are
expected to be expensed using the unit-of-production method by individual
fields as the proven developed reserves are produced. Depletion expense was
$0, $0 and $4,354 for each of the three years ended September 30, 1998.
(6) Master service agreement
In September 1996 Bass Environmental Services Worldwide, Inc., (BESW), entered
into a master service agreement with Chevron to plug and abandon oil wells
located in the Gulf of Mexico off the coast of Louisiana. In April 1997,
BESW assigned this contract to the Company in exchange for 3,000,000 shares
of the Company's common stock. Chevron has reissued the contract in the
Company's name. At the time of the acquisition, BESW was controlled by the
CEO of ERHC. The Company valued this acquisition on the basis of the par
value of the Company's common stock given up, or $300, because no
historical cost basis could be individually determined and the contract has
minimal value until the Company has built or purchased the equipment to
commercialize the contract. The Company hopes to begin commercializing the
agreement in fiscal 1999.
(7) Notes payable
The Company issued two notes payable to stockholders who are also officers and
directors in exchange for cash amounting to $233,398 and $1,236,161. These
notes carry no stated maturity date and an 8.5% rate of interest. The
Company has repaid $236,787 and $487,590 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, $21,273 and $29,943 for the period since inception ended
September 30, 1995 and for the years ended September 30, 1996, 1997 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 was 13.6875%. The Company and the bank had originally
expected to roll this note over into a long-term credit facility. The
Company chose not to accept the long-term facility due to the terms
offered. The Company repaid this loan in full plus accrued interest in
December 1997.
In November 1997, the Company issued 5.5% convertible senior subordinated
secured notes due 2002 in exchange for $4,300,000 in cash. These notes are
convertible into shares of the Company's common stock at a conversion price
no less
F-9
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(7) Notes payable (continued) 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 a with an exercise price
of $3.17 per share, or total additional proceeds of to the Company of
$817,860 in cash in the event ll of the warrants are exercised. The notes
are secured by the Company's non - MIII oil reserves in Utah. As the notes
are potentially convertible at a price below market, the Company recorded a
beneficial conversion feature discount of $1,075,000 in accordance with
FASB EITF Topic D-60. The discount is amortized over the period from
inception of the notes to the convertibility dates, 60, 90 and 120 days in
this case. The amount of amortization for the year ended September 30, 1998
was $1,075,000.
In April 1998, the Company issued 12% convertible subordinated unsecured notes
due January 1999 in exchange for $300,000 cash. These notes are convertible
into shares of the Company's common stock at a conversion price of $1.50
per share. If all of these notes are converted, the Company will be
required to issue 200,000 shares of common stock. These notes also carried
warrants for an additional 210,000 shares of common stock with an exercise
price of $1.25 per share, or total additional proceeds to the Company of
$262,500 in cash in the event all of the warrants are exercised.
In June 1998, the Company issued 12% convertible subordinated unsecured notes
due December 1999 in exchange for $425,000 cash. These notes are
convertible into shares of the Company's common stock at a conversion price
of $1.00 per share. If all of these notes are converted, the Company will
be required to issue 425,000 shares of common stock. These notes also
carried warrants for an additional 531,250 shares of common stock with an
exercise price of $0.50 per share for the first two years, and $0.85 per
share thereafter or total additional proceeds to the Company of $265,625 or
$451,563 in cash in the event all of the warrants are exercised.
In June 1998, the Company issued 5.5% convertible subordinated unsecured notes
due June 2000 in exchange for $1,250,000 cash and $43,750 of broker fees.
These notes are convertible into shares of the Company's common stock at a
conversion price to be determined by a stated formula. If all of these
notes are converted using the conversion price of the issuance date
($0.69517), the Company will be required to issue 1,798,124 shares of
common stock. These notes also carried warrants for an additional 230,000
shares of common stock with an exercise price of $0.8634 per share, or
total additional proceeds to the Company of $198,582 in cash in the event
all of the warrants are exercised. As the notes are potentially convertible
at a price below market, the Company recorded a beneficial conversion
feature discount of $312,000 in accordance with FASB EITF Topic D-60. The
discount is amortized over the period from inception of the notes to the
convertibility dates, 60, 90 and 120 days in this case. The amount of
amortization for the year ended September 30, 1998 was $289,062.50.
In July 1998, the Company issued 8.0% convertible subordinated unsecured notes
due July 2000 in exchange for $1,200,000 cash. These notes are convertible
into shares of the Company's common stock at a conversion price to be
determined by so stated formula. If all of these notes are converted using
the conversion price of the issuance date ($0.478723), the Company will be
required to issue 2,506,668 shares of common stock. In connection with this
funding, the Company issued warrants for 108,000 shares of common stock
with an exercise price of $0.74375 per share, or total proceeds to the
Company of $80,325 in cash if all of the warrants are exercised. The
Company recorded an expense discount to the notes amounting to $7,425 in
connection with this issuance as the warrant exercise price was below the
market price of the common stock at issuance.
In July 1998, the Company issued 8.0% convertible subordinated unsecured notes
due August 2000 in exchange for $275,000 cash. These notes are convertible
into shares of the Company's common stock at a conversion price to be
determined by so stated formula. If all of these notes are converted using
the conversion price of the issuance date ($0.644878), the Company will be
required to issue 426,437shares of common stock. In connection with this
funding, the Company issued warrants for 24,750 shares of common stock with
an exercise price of $0.73125 per share, or total proceeds to the Company
of $18,098 in cash if all of the warrants are exercised. The Company
recorded an expense discount to the notes amounting to $77 in connection
with this issuance as the warrant exercise price was below the market price
of the common stock at issuance.
In August 1998, the Company issued 8.0% convertible subordinated unsecured
notes due August 2000 in exchange for $1,010,000 cash. These notes are
convertible into shares of the Company's common stock at a conversion price
to be determined by so stated formula. If all of these notes are converted
using the conversion price of the issuance date ($0.979813), the Company
will be required to issue 90,900 shares of common stock. In connection with
this funding, the Company issued warrants for 108,000 shares of common
stock with an exercise price of $0.9938 per share, or total proceeds to the
Company of $90,336 in cash if all of the warrants are exercised. The
Company did not record an expense discount to the notes amounting to $7,425
in connection with this issuance as the warrant exercise price was below
the market price of the common stock was below the warrant exercise price
at issuance
F-10
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(8) Accrued salaries At September 30, 1996, 1997 and 1998 the Company has
accrued salaries of $0, $960,000 and $1,895,916, 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. If the three officers chose to convert all of the accrued salaries
to common stock, the Company would be required to issue 3,802,677 shares of
common stock.
(9) Income taxes The Company has a consolidated net operating loss
carry-forward amounting to $28,988,992, expiring as follows: $3,404 in
2010, $728,748 in 2011, $16,913,052 in 2012 and $11,343,788 in 2013. The
Company has an $11,595,000 deferred tax asset resulting from the loss
carry-forward, for which it has established a 100% valuation allowance.
Until the Company's current plans begin to produce earnings it is unclear
as to the ability of the Company to utilize these carry- forwards. The Tax
Reform Act of 1986 provided for a limitation on the use of net operating
loss carryforwards following certain ownership changes. Such a change in
ownership under the IRS rules and regulations potentially could occur
pursuant to the Company's S-1 amendment.
(10) Stockholders' equity The Company has authorized 950,000,000 shares of
$0.0001 par value common stock and 10,000,000 shares of $0.0001 par value
preferred stock. On September 30, 1995, the predecessor entity, ERFC, had
1,639,450 shares issued and outstanding, which had been issued during the
month since inception as 884,407 shares for $88 in cash and 755,043 shares
for a four year consulting agreement valued at $500,000 with a then
independent consultant who subsequently became the Company's Chairman,
President and CEO.
In October 1995, ERFC issued 744,000 shares in exchange for environmental
remediation equipment valued as discussed in note 1b at $3,720,000. This
equipment was acquired from the consultant who had received the 755,043
shares and subsequently became the Company's Chairman, President and CEO.
In October 1995, ERFC issued 20,000 shares for $50,000 in cash.
In August 1996, ERFC issued 20,500 shares in exchange for $42,892 in cash. On
August 19,1996, the sucessor Company issued 2,433,950 shares of common
stock to acquire 100% of the issued and outstanding common stock of ERFC.
At the time of the acquisition ERHC, then known as RAGC, had 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 in exchange for 300,000 shares of the Company's common stock
valued at $309,365. In March 1997, the Company acquired a 100 oil well
lease in exchange for 200,000 shares of the Company's common stock valued
at $206,250. In March 1997, the Company issued 300,000 shares of common
stock via an S-8 registration valued at $375,000 in exchange for public
relations services, of which approximately 150,000 had been earned at
fiscal year end. The balance will either be earned or returned to ERHC. In
April 1997, the Company issued 3,000,000 shares of common stock in exchange
for the assignment of the Chevron P&A master service agreement, valued at
$300. In April 1997, the Company issued 1,342,981 shares of common stock to
three directors in lieu of cash compensation for services rendered to the
Company valued at $1,342,981. In April 1997, a director contributed 100,000
shares of common stock back to the Company with a value of $100,000. In
April 1997, the Company issued 4,000,000 shares of common stock in exchange
for 100% of the issued and outstanding common stock of Bass American
Petroleum Company, (BAPCO), valued at historical costs at $500,000. In May
1997, the Company issued 1,500,000 shares of common stock via an S-8 in
exchange for consulting and professional services valued at $562,500. In
June 1997, the Company issued 150,000 shares of common stock to two
independent consultants for services valued at $28,125. One of these
consultants became an employee of the Company in September 1997.
In July 1997, the Company issued 800,000 shares under a Section 4(2) exemption
from registration to a previously unrelated party in exchange for $400,000
in cash. In July 1997, the Company acquired substantial geologic data and
other information from an independent source in exchange for 1,000,000
shares of the Company's common stock. This data was valued at $2,000,000
based the agreement with the seller that Company would repurchase these
shares for $2,000,000 at a rate of 25% per quarter should the seller so
choose. In July 1997, the Company issued 2,335,000 shares of common stock
F-11
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued) 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.
On September 29, 1997, the Company entered into an agreement to acquire 22
wells on 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 Company received the lease
assignment. The terms of the acquisition are for the Company to pay
$250,000 in cash, issued 250,000 shares of the Company's common stock at
each of the following four dates : closing, December 30, 1997, March 30,
1998 and June 30, 1998. The Company also was required to guarantee that the
bid price on the date the rule 144 restrictions lapse will be no less than
$2.00 per share or the Company is required to either issue additional
shares or pay the difference in cash, at the Company's option. 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 for its use. The total valuation of this transaction is
$2,250,000 and is applied as $375,800 of oil and gas reserves and
$1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the Company
to pay the seller $200,000 and 50,000 shares of the Company's common stock,
as well as to pay the Company's proportionate share of the costs to reenter
this well. The Company is also required to carry the seller's 1/8
proportionate share of the reentry costs, estimated between $250,000 and
$500,000, 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 4 years. The Company received the
initial lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data of these leases
as well as has contracted another independent appraiser to complete new
reserve reports for its use.
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 by
the Company relating to the 1,000,000 shares issued to acquire the DRSTP
geological data. In January 1998, the Company issued 24,000 shares valued
at $70,000 and assumed a mortgage payable of $28,782 to acquire a small
office in Utah, valued at $98,782 , from Unita Oil and Gas. In the 1st
quarter, the Company issued 177,008 shares in exchange for $167,694 in cash
and 355,000 shares in exchange for services valued at $922,000. In the 2nd
quarter, the Company issued 666,664 shares in exchange for $438,499 in cash
and 23,200 shares in exchange for services valued at $28,496. In the 3rd
quarter, the Company issued 234,200 shares in exchange for $135,600 in cash
and 162,420 shares for services valued at $102,884. In the 4th quarter, the
Company issued 47,000 shares in exchange for $23,500 in cash and 479,700
shares in exchange for services valued at $473,600. In September 1998, the
Company issued 491,646 shares to its working interest partner on the Nueces
project in exchange for its payable of $338,007. In September 1998, the
Company issued 299,536 shares for its portion of the annual option payment
on the Nueces project and a late payment penalty valued at $219,223.
Contingent issuances
The Company is contingently liable to issue up to three million shares of
restricted stock in total to three officers and directors of the Company
for their efforts in closing the Sao Tome & Principe contract. These shares
will be issued upon the joint venture oil production level of 20,000
barrels a day being attained. The Company is contingently liable to issue
up to two million shares of restricted stock to two officers and directors
of the Company for their efforts in closing the M III contract in Utah upon
the joint venture oil production level of 4,000 barrels a day being
attained. This two million shares includes the 500,000 shares the Company
is to issue to MIII. The Company is also contingently liable to issue an
additional two million shares upon the joint venture attaining production
of a total of 6,000 barrels a day. The Company is contingently liable to
issue 3,802,677 shares for the officer accrued salaries as of September 30,
1998.
Warrants
In March 1998, the Company issued a warrant for 100,000 shares of common stock
with an exercise price of $1.20 per share, or total proceeds of $210,000 in
cash for the Company if all of the warrants are exercised. This warrant was
issued in conjunction with entering into the Kingsbridge Investment
Agreement.
F-12
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
Warrants (continued) In June 1998, the Company received $200,000 in cash in
exchange for warrants for 1,050,000 shares of common stock with an exercise
price of $0.75 per share, or total proceeds to the Company of $787,500 in
cash if all of the warrants are exercised.
(11) Deferred compensation ERFC issued 755,043 shares of its common stock into
escrow in exchange for services to be rendered by a consultant under a four
year contract. These services were valued at $125,000 per year, therefore
the Company is amortizing this deferred compensation expense at a rate of
$31,250 per quarter. This consultant later became ERFC's Chairman,
President and CEO.
On August 30, 1996, the Company issued 10,000 shares of its common stock,
valued at $70,000, to an attorney for services to be rendered at below
market rates for a period of 4 months. Accordingly, the Company amortized
this expense over the term of the agreement.
(12) Commitments and contingencies The Company is committed to lease payments
for 10 vehicles under operating leases totalling $27,868, $7,826 and $3,913
for the years ended September 30, 1999, 2000 and 2001. The Company paid $0,
$52,500 and $58,161 in vehicle lease expense for the years ended September
30, 1996, 1997 and 1998, respectively. The Company currently leases its
office space and operating facilities on a two year lease and three year
lease respectively. The Company is committed to lease payments on the two
facilities totalling $67,108 and $60,808 for the years ending September 30,
1999 and 2000. The Company paid $8,550, $45,950 and $68,908 in facility
rent for the years ended September 30, 1996, 1997 and 1998 respectively.
(13) Segment information The Company has three distinct lines of business
through its two wholly owned subsidiaries, Site Services, Inc., (SSI), and
Bass American Petroleum Company, (BAPCO), and a joint venture agreement.
SSI operates in the environmental remediation industry and BAPCO will
operate in the oil and gas production industry. SSI's principal
identifiable assets consist of $3,224,000, (net), of environmental
equipment, and the Chevron P&A master service agreement valued at $300,
(net). Revenues of $65,000 relate to SSI. BAPCO's principal identifiable
assets consist of crude oil reserves valued at $1,240,175 and equipment
valued at $2,570,000. 1998 revenues of $148,000 relate to BAPCO. The
Company also expects to operate in the supply industry through a joint
venture agreement to supply fuel and other goods to ships transiting the
Panama Canal. No principal identifiable assets yet exist for this line of
business.
(14) Sao Tome concession payment When the Company entered into the joint venture
agreement in May 1997 with the Democratic Republic of Sao Tome and
Principe, (DRSTP), the Company was required to pay a $5,000,000 concession
fee to the DRSTP goverment. In September 1997, the Company received a
Memorandum of Understanding from the DRSTP government which allows the
Company to pay this concession fee within five days after the DRSTP files
the relevant official maritime claims maps with the United Nations and the
Gulf of Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP form the proceeds of the convertible note
offering. On July 2, 1998 the Company paid $1,000,000 of the Concession fee
to the government of the DRSTP. On July 31, 1998 the Company paid an
additional $1,000,000 of the concession fee to the government of the DRSTP.
(15) Subsequent events
a) Stockholder's equity
In October 1998, the Company received conversion notices on $419,848 of the
convertible debt issued in July and August, 1998. This debt was converted
into 800,172 shares of common stock.
b) Convertible notes
In October 1998, the Company issued 20%% convertible subordinated unsecured
notes due October 2000 in exchange for $500,000 cash. These notes are
convertible into shares of the Company's common stock at a conversion price
to be determined by so stated formula. If all of these notes are converted
using the conversion price of the issuance date ($1.00), the Company will
be required to issue 500,000 shares of common stock. These notes also
carried warrants for an additional 1,500,000 shares of common stock with an
exercise price of $0.40 per share, or total additional proceeds to the
Company of $600,000 in cash in the event all of the warrants are exercised.
In October 1998, the Company issued 12% convertible subordinated unsecured
notes due December 31, 1999 in exchange for $800,000 cash. These notes are
convertible into shares of the Company's common stock at a conversion price
to be
F-12
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(15) Subsequent events (continued)
Convertible notes (continued)
determined by so stated formula. If all of these notes are converted using the
conversion price of the issuance date ($1.25), the Company will be required
to issue 640,000 shares of common stock. These notes also carried "A" and
"B" warrants for an additional 1,200,000 and 1,200,000 shares of common
stock with exercise prices of $0.50 and $3.00 per share, or total
additional proceeds to the Company of $4,200,000 in cash in the event all
of the warrants are exercised.
F-14
<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 as of the date of this Amendment, are as
follows:
Name Age Position
- - ---- ----------
Sam L. Bass, Jr............ 63 Chairman of the Board and Vice President
James R. Callender, Sr..... 57 President, Chief Executive Officer and
Director
Noreen G. Wilson........... 45 Vice President, Chief Financial Officer
and Director (1)
James A. Griffin.......... 43 Secretary, Treasurer and Director
Robert McKnight........... 62 President of BAPCO and Director (1)
William Beaton............ 75 Director
Alfred L. Cotten.......... 46 Director
Kenneth M. Waters......... 73 Director
- -------------------
(1) Noreen G. Wilson's resignation as the Vice President, Chief Financial
Officer and as a Director was accepted on November 23, 1998. Robert McKnight was
appointed as the Acting Chief Financial Officer effective the same date.
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 since September 1996,
Vice President since September, 1998 and served as President and Chief Executive
Officer of the Company from September 1996 until September 1998. Mr. Bass also
serves as the Chief Executive Officer of Bass Environmental Waste, Inc., which
he founded in 1987, U.S. Energy, Inc., which he founded in 1984, and Bass
Stabilizers, Ltd., which he co-founded in 1978, each of which is a
privately-held company to which he devotes minimal time. From December 1993 to
September 1995, he served as President and Chief Executive Officer of Bass
Environmental World Wide Services, Inc. From January 1992 to September 1995, he
served as President and Chief Executive Officer of Bass Environmental Inc. Mr.
Bass is a pioneer in the field of downhole drilling and stabilization, and is
the inventor of seven drilling aids, many of which are being used around the
world. Mr. Bass founded a fire-fighting organization called Al-Wadhi, through
which he joined others in efforts to put out oil well fires in Kuwait,
immediately after the Gulf War, for a period of approximately 18 months in 1991
and 1992. Mr. Bass received a B.A. degree from McNeese State University in 1949
and an M.A. degree in Mechanical Engineering from Georgia Tech in 1952. Mr. Bass
is the father of Alfred L. Cotten.
James R. Callender, Sr. has served as the President since September 1998
and has served as the Chief Executive Officer since August 1997 and a Director
since September 1996. He previously served as the Vice President of the Company
from August 1997 until assuming the officer of the President. He has also been
the President and owner of Cal-Sons Co. Inc., an ostrich farm and cattle ranch
located in Louisiana, since November 1990. From July 1997 to August 1997, Mr.
Callender served as a Consultant to the Company. From March 1997 to April 1997,
he served as a Consultant to Forcenergy Inc., an independent oil and gas
company. From September 1996 to March 1997, Mr. Callender served as a Management
Consultant to Arctic Recoil, Inc., a maker of high pressure well control units.
He acted as an Investment Consultant to Coburn Inc., an oil field construction
and heavy equipment operator, from February 1996 to September 1996. From January
1993 to December 1995, Mr. Callender served as Chief Engineer to the Chief
Executive Officer and Senior Consultant at Unocal Corp., a fully integrated
energy resources company whose worldwide operations comprise many aspects of
energy production. Until December 1992, he served as Drilling Manager of
Worldwide Operations at Unocal Corp. Mr. Callender received a B.S. degree in
Geology and Engineering from Louisiana State University in 1964.
Noreen G. Wilson served as Chief Financial Officer of the Company from June
1997 until November 23, 1998. Prior to her resignation, she was a Director of
the Company from 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,
<PAGE>
and she devotes minimal time in this position. From February 1993 to December
1996, Mrs. Wilson served as an International Consultant for Imperial
International Design, a consulting company. She provided consulting services for
the financing of American builders and contractors overseas, primarily working
through OPIC, the Export/Import Bank and the World Bank. During the same time
period, Mrs. Wilson served as Vice President of Traditional Enterprises, a
financial consulting firm located in Roswell, Georgia. Ms. Wilson is the first
cousin of James A. Griffin.
James A. Griffin has been the Secretary, Treasurer and a Director of the
Company since September 1996. From April 1992 to April 1996, Mr. Griffin was a
founding and managing partner in the law firm of Griffin & Pellicane, Esq.
located in Westbury, New York. In April 1996, he formed the law firm of James A.
Griffin, Esq., but he is currently minimally involved in the practice of law. He
received his J.D. from Touro College, Jacob D. Fuchsberg Law Center, in 1987. He
received his B.A. degree from Dowling College in 1976 and his B.S. degree at the
State University of New York at Stony Brook, School of Allied Health Sciences,
in 1979. He is admitted to practice law in the State of New York and is a member
of the American Bar Association, the New York State Bar Association and the
Nassau County Bar Association. Mr. Griffin is the first cousin of Noreen G.
Wilson.
Robert McKnight has been the Acting Chief Financial Officer since November
23, 1998 and a Director since July, 1998. He has served as President of BAPCO
since August 1997. Previously, Mr. McKnight acted as a Consultant to the Company
from November 1996 until August 1997. From August 1991 until July 1996, Mr.
McKnight acted as a Consulting Engineer to Patriot Resources, an oil and gas
company located in Dallas, Texas. Mr. McKnight has 35 years of experience in
supervising and managing drilling and production operations, including reservoir
and field evaluations, reserve and cash flow determinations for property
acquisitions, and equity determinations. Mr. McKnight received his B.S. in
Petroleum Engineering from Texas
A&M University in 1957.
William Beaton has been a Director of the Company since September 1996. He
currently serves as the Chairman of The Institute of Petroleum (West of Scotland
Branch) and has been in that position for more than the past five years. He was
the General Manager of Clydesdale Bank of Glasgow, Scotland until his retirement
in 1982. Since his retirement from the Bank, he has worked as a self-employed
consultant to public and smaller independent companies. He has been involved in
the international oil and gas industry for almost 30 years, with more than 50
years of experience in management and finance.
Alfred L. Cotten has been a Director of the Company since December 1998.
Mr. Cotten is currently working for Noble Drilling. From 1993 until 1995, Mr.
Cotten was a Sub-Sea Engineer with Wilrig, U.S.A., Inc. in Lafayette, Louisiana.
From 1992 until 1993, Mr. Cotten worked for Bass Environmental, Inc. assisting
with the initial funding for operations and pulling samples for subsequent
remedial clean-up projects. From 1990 until 1992, Mr. Cotten was a sales and
service representative for P.S.D. Controls, in Lafayette. From 1986 until 1990,
Mr. Cotten obtained an OIM License and performed barge engineer duties for
Penrod Drilling Corporation in Dallas, Texas. From 1984 to 1986, Mr. Cotten was
a Sub-sea engineer for Sonat Offshore of Dallas, Texas, working in Malaysia.
From 1977 to 1984, Mr. Cotten was a Sub-sea engineer for Penrod Drilling. Mr.
Cotten pursued a Petroleum Engineering Degree from the University of Southern
Louisiana in 1977 and 1978, having previously attended Lousiana State University
in 1971 and 1972. Mr. Cotten is the son of Sam L. Bass.
Kenneth M. Waters has been a Director of the Company since July, 1998. He
previously served on the Advisory Board from September 1996 until his
appointment to the Board. From 1992 until the present, Mr. Waters has served as
the Vice President of Bulk Tank Inc. From 1984 to 1992, Mr. Waters was a rancher
and independent geological consultant. From 1980 until 1984, Mr. Waters worked
for Texoma Production Co., Houston, Texas, first as a Vice President for
Exploration and Production and then in 1981 until 1984 as President. From 1958
until 1980, Mr. Waters was a Vice President and Manager for Consolidated Natural
Gas Co., in New Orleans, Louisiana. From 1954 to 1958, Mr. Waters worked for the
California Co. which is now known as Chevron, in New Orleans, Louisiana, working
for the first 4 years in Geological and Geophysical Training, 2 years as an Area
Exploration Geologist and then 2 years as Assistant Chief Development Geologist.
After servicing in the U.S. Air Force in the Second World War, Mr. Waters earned
a MA degree from Indiana University in 1950 with a major in geology and a minor
in physics.
All directors hold office until the next annual meeting of shareholders and
until their successors are duly elected and qualified, unless their office is
vacated in accordance with the Certificate of Incorporation of the Company.
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. Except for the relationship
between Sam L. Bass and Al Cotton, who are father and son, and Noreen G. Wilson
and James A. Griffin, who are cousins, there are no family relationships among
the directors and officers of the Company.
Advisory Board
<PAGE>
The Company has established an Advisory Board comprised of three members
with experience in the areas of oil and gas production. The Advisory Board meets
periodically with the Company's Board of Directors and management to discuss
matters relating to the Company's business activities including establishing
commercial business alliances and working projects with corporations and
government agencies on an international basis. Members of the Advisory Board are
reimbursed by the Company for out-of-pocket expenses incurred in serving on the
Advisory Board.
Some of the members of the Advisory Board may serve as consultants to the
Company under consulting agreements for which they will receive compensation. To
the Company's knowledge, none of its Advisory Board members or other consultants
has any conflict of interest between their obligations to the Company and their
obligations to others. The members of the Company's Advisory Board and their
primary professional or academic affiliations are listed below:
Senator Vance Hartke has been a member of the Company's Advisory Board
since September 1996. Mr. Hartke was the United States Senator for Indiana from
1959 to 1977. While a Senator, he served on both the Finance Committee and the
Commerce Committee, two of the most powerful and prestigious committees of the
U.S. Senate. Prior to his senatorial term, he served as Mayor of the City of
Evansville, Indiana from 1956 to 1958, when he resigned to take his seat in the
U.S. Senate. Mr. Hartke's political career also includes service as a Deputy
Prosecuting Attorney, seven times as a delegate to the Democratic National
Convention, as Democratic County Chairman in Vanderburgh County, Indiana, and a
Chairman of the U.S. Senatorial Campaign Committee. He continues to practice law
at the law firm of Hartke & Hartke in Falls Church, Virginia. He currently sits
on the Board of Directors of McCrane & Co. He received his A.B. from the
University of Evansville in 1941 and his J.D. from Indiana University School of
Law in 1948, where he was Editor-in-Chief of the Indiana Law Journal.
Marvin Gibbons has been a member of the Company's Advisory Board since
September 1996. In 1990, Mr. Gibbons founded a private company seeking
investment capital for various development projects, including several Native
American India Developments. He opened a private domestic and international
import/export company, as well. During the past seven years, Mr. Gibbons became
a partner and Acting Secretary of CAL-NOR, Cal-Marine Industries, ESOP, and
Zenith Insurance Limited. He is currently involved in a number of Development
Projects both in the United States and internationally.
Committees of the Board of Directors
The Company expects to establish an Audit Committee and Compensation
Committee in early 1999, each of which will be comprised of at least two
independent directors. The Audit Committee will, among other things, make
recommendations to the Board of Directors regarding the independent auditors to
be nominated for ratification by the stockholders, review the independence of
those auditors and review audit results. The Compensation Committee will
recommend to the Board compensation plans and arrangements with respect to the
Company's executive officers and key personnel. It is contemplated that the
Audit and Compensation Committees will initially include William Beaton and
another independent director who the Company is currently in the process of
identifying. The Board of Directors does not currently have and does not intend
to establish a Nominating Committee as such functions are to be performed by the
entire Board of Directors.
Compensation of Directors
Non-employee directors of the Company currently receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. The Company does not intend
to separately compensate employees for serving as directors.
In June 1997, the Company issued 150,000 shares of the Company's Common
Stock to two independent consultants (75,000 each) for services valued at
$28,125. One of the consultants, Robert McKnight, subsequently joined the
Company as an employee of BAPCO in August 1997 and now serves as the Acting
Chief Financial Officer of the Company.
In July 1997, the Company issued to each of James R. Callender, Noreen G.
Wilson and William Beaton, directors of the Company, 500,000 shares of Common
Stock in connection with their serving on the Company's Board of Directors.
In October 1997, the Company issued 100,000 shares of Common Stock to
Kenneth M. Waters in repayment of loans made by him to BAPCO. In November 1997,
the Company issued 12,500 shares of Common Stock to Al Cotten for consulting
services performed by him for the Company.
<PAGE>
In October 1998, the Company, under a mistaken interpretation of a
contingent obligation of the Company to issue shares in connection with the
efforts to close the Sao Tome contract, issued 2,000,000 shares to each of Sam
L. Bass, Jr., James R. Callender, Sr., Noreen Wilson and James A. Griffin. When
it was discovered that such shares were issued in error, by vote of the Board of
Directors, on December 18, 1998, such issuance was rescinded. Mr. Bass, Mr.
Callender and Mr. Griffin have agreed to tender their shares immediately to the
transfer agent for cancellation. The transfer agent has been notified to place a
stop upon the shares of Ms. Wilson in the event her shares are not tendered in a
timely fashion. On the same date, the Company issued 425,000 shares to Robert
McKnight and 100,000 to Kenneth M. Waters in connection with their serving on
the Board of Directors. Such shares are not subject to the rescission. Mr.
Waters has tendered his shares back to the Company for cancellation because of
tax considerations.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth, in summary form, the cash compensation
earned during the period from October 1, 1997 to September 30, 1998 by its Chief
Executive Officer and the three other most highly compensated executive officers
whose compensation exceeded $100,000 during such period.
Summary Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C>
Annual Compensation (c, d, e) Long Term Compensation (f)
- - --------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
NAME AND FISCAL SALARY (2) BONUS OTHER ANNUAL RESTRICTED
PRINCIPAL YEAR (1) ($) COMPENSATION STOCK AWARDS
POSITION (3)
- - --------------------------------------------------------------------------------------------------------------------
Sam L. Bass, Jr. 1998 $480,000 0 $125,000 0
Vice President (4)
- - --------------------------------------------------------------------------------------------------------------------
James R. Callender 1998 $480,000 0 0 0
President and Chief
Executive Officer
- - --------------------------------------------------------------------------------------------------------------------
James A. Griffin, 1998 $120,000 0 0 0
Secretary, Treasurer
- ---------------------------------------------------------------------------------------------------------------------
Noreen G. Wilson, 1998 $480,000 0 0 0
Executive Vice President
and Chief Financial
Officer
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Sam L. Bass served as President and Chief Executive Officer and James
R. Callender served as Vice President in 1997 until September 12, 1998.
(2) Salaries for Sam L. Bass, Jr., James A. Griffin, and Noreen G. Wilson
were accrued and not paid in cash. Each individual has an option to convert all
or part of any accrued salary to Common Stock of the Company at a price
reasonably established by the Board of Directors at the time of exercise.
(3) The aggregate value of benefits to be reported under the "Other Annual
Compensation" column did not exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported for the named executive officer.
(4) Represents amortization of Common Stock of Environmental Remediation
Funding Corporation distributed in 1995 to Sam L. Bass, Jr.
Proposed Employment Agreements
The Company contemplates entering into three-year employment agreements
with each of Sam L. Bass, Jr., James A. Callender, Sr., and James A. Griffin to
serve in their respective positions. The Company is still in the process of
determining the terms and conditions of each employment agreement.
Proposed Stock Option Plan
The Company does not currently have a stock option plan or other similar
employee benefit plan for executives and/or other employees of the Company, and
no options have been granted or are currently outstanding. In October 1998, the
Company adopted a Consultant stock option plan under which 250,000 shares have
been issued and registered with the Securities and Exchange Commission on Form
S-8.
<PAGE>
The Board of Directors of the Company plans to approve and adopt a proposed
1998 Stock Option Plan (the "Plan"), pursuant to which officers, directors and
key employees of the Company will be eligible to receive incentive stock options
and non-qualified stock options to purchase shares of Common Stock. The Plan
would also provide for the grant of stock appreciation rights, restricted stock,
performance shares and performance units at the discretion of Company's Board of
Directors.
With respect to incentive stock options, the Plan would provide that the
exercise price of each such option be at least equal to 100% of the fair market
value of the Common Shares on the date that such option is granted (and 110% of
fair market value in the case of shareholders who, at the time the option is
granted, own more than 10% of the total outstanding Common Shares), and would
require that all such options have an expiration date not later than the date
which is one day before the tenth anniversary of the date of the grant of such
option (or the fifth anniversary of the date of grant in the case of 10% or
greater shareholders. However, with certain limited exceptions, in the event
that the option holder would cease to be associated with the Company, or would
engage in or be involved with any business similar to that of the Company, such
option holder's incentive options would immediately terminate. Pursuant to the
Plan, the aggregate fair market value, determined as of the date(s) of grant,
for which incentive stock options are first exercisable by an option holder
during any one calendar year will not exceed $ 100,000.
Limitation of Directors' Liability; Indemnification
The Company's Certificate of Incorporation limits the liability to the
Company of individual directors for certain breaches of their fiduciary duty to
the Company. The effect of this provision is to eliminate the liability of
directors for monetary damages arising out of their failure, through negligent
or grossly negligent conduct, to satisfy their duty of care, which requires them
to exercise informed business judgment. The liability of directors under the
federal securities laws is not affected. A director may be liable for monetary
damages only if a claimant can show a breach of an individual director's duty of
loyalty to the Company, a failure to act in good faith, intentional misconduct,
a knowing violation of the law, an improper personal benefit or an illegal
dividend or stock purchase.
The Company's Certificate of Incorporation also provides that each director
or officer of the Company serving as director or officer shall be indemnified
and held harmless by the Company to the fullest extent authorized by law,
against all expense, liability and loss (including attorneys fees, judgments,
fines, Employee Retirement Income Security Act, excise taxes or penalties and
amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership by Shareholders
The following table sets forth certain information as of September 30,
1998, with respect to the beneficial ownership of the Company's Common Shares by
each shareholder known by the Company to be the beneficial owner of more than 5%
of its outstanding shares, by each director of the Company, by the executive
officers named in the table below and by the directors and executive officers of
the Company as a group. Except as otherwise noted, the persons named in this
table, based upon information provided by such persons, have sole voting and
investment power with respect to all Common Shares beneficially owned by them.
None of the current directors and officers of the Company are participating in
this offering.
<PAGE>
Common Shares Beneficially Owned
------------------------------------------
Name (1) Number(2) Percentage
-------------------- --------- ----------
Sam L. Bass, Jr................... 7,951,568 (3) 30.58%
James R. Callender, Sr............ 500,000 1.92%
Noreen G. Wilson.................. 500,000 1.92%
James A. Griffin.................. 500,000 1.92%
Robert McKnight................... 75,000 *
William Beaton................... 500,000 1.92%
Alfred L. Cotten.................. 12,500 (4) *
Kenneth M. Waters ............... 100,000 *
All officers and directors as a group
(Eight (8) persons).......... 10,159,068 38.26%
* Represents less than 1% of outstanding Common Shares or voting power.
(1) The address of each beneficial owner is c/o Environmental Remediation
Holding Corporation, 3-5 Audrey Avenue, Oyster Bay, New York 11771.
(2) Shares beneficially owned and percentage of ownership are based on
25,999,900 Common Shares outstanding as of September 30, 1998. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or dispositive power with
respect to such shares.
(3) Includes shares of Common Stock beneficially owned by Mr. Bass
individually and through entities under his control and 50,000 shares owned by
Sheila Williams Bass, his wife.
(4) Alfred L. Cotten received his 12,500 shares from his father, Sam L.
Bass, Jr.
Selling Shareholders Pursuant to Mandated Form S-1
As of the date hereof, the Company has 39,613,436 shares of Common Stock
outstanding of which 1,210,686 relate to its registration statement filed on
Form S-1, as amended (the "Form S-1").
The 1997 Investor Private Placement
In November and December 1997, the Company raised gross proceeds of
$4,300,000 in two closings of a private placement of the Company's 5.5%
convertible senior subordinated secured notes due October 2002 (the "1997
Notes") and warrants to purchase Common Stock (the "1997 Warrants") to a limited
number of "accredited" institutional investors. The maximum number of shares of
Common Stock which may be issued by the Company upon the conversion of the 1997
Notes (at a base conversion rate of $1.25 per share, subject to certain limited
conditions) and the exercise of the 1997 Warrants (at an exercise price of $3.17
per share) is up to 3,440,000 shares and 283,800 shares, respectively. The Form
S-1 covers the maximum of up to 3,723,800 total shares of Common Stock issuable
upon the conversion of the 1997 Notes and the exercise of the 1997 Warrants. The
1997 Investors intend to sell the Common Stock acquired thereby from time to
time in the future upon conversion of the 1997 Notes and the exercise of the
1997 Warrants. Based on the number of outstanding shares of Common Stock of the
Company as of the date hereof, the number of shares issuable under the 1997
Notes and the 1997 Warrants represent approximately 9.69% of the outstanding
Common Stock of the Company. As of the date hereof, none of the 1997 Notes had
been converted and none of the 1997 Warrants had been exercised.
All of the Shares held or to be held by the 1997 Investors could be offered
under the Form S-1 except that, under the terms of the 1997 Notes, the holders
thereof could convert the original principal amount of the 1997 Notes only to
the extent of one-third of such amount on and after each of December 30, 1997,
January 29, 1998 and February 28, 1998. The conversion rate of the 1997 Notes is
equal to the lowest of (i) $2.83, representing 100% of the average closing bid
price per share of the Common Stock as quoted on the primary market or exchange
on which it trades (the "Average Share Price") for the five consecutive trading
days immediately preceding October 31, 1997 (the agreed upon date between the
parties) (ii) 100% of the Average Share Price for the five consecutive trading
days immediately preceding the first anniversary, or (iii) 80% of the Average
Share Price for the five consecutive trading days preceding the applicable
conversion date on which all or part of the 1997 Notes are converted. However,
the conversion price may not be less than $1.25 per share (the "Base Price"),
unless 80% of the Average Share Price is less than the Base Price for a period
of 90 consecutive calendar days, in which case the Base Price will no longer be
applicable.
<PAGE>
For purposes of registering the maximum number of shares of Common
Stock under the Form S-1, the conversion rate is assumed to be the Base Price.
Because the conversion rate of the 1997 Notes is based in part on future average
trading prices of the Common Stock, the number of shares which may actually be
sold pursuant to the Form S- 1 could differ significantly. For example, in the
event a notice of election to convert all the 1997 Notes were to have been
received on April 8, 1998, the lowest applicable conversion rate would have been
$.96 per share (80% of the Average Share Price for the five consecutive trading
days preceding such date), resulting in a total of 3,723,800 shares of Common
Stock issuable upon conversion (including 283,800 shares into which the 1997
Warrants are exercisable), subject to the elimination of the 90-day Base Price
provision described above. The 1997 Notes mature, unless prepaid at any time
after October 15, 1998, on October 15, 2002 and are secured by the Company's
proven crude oil reserves on its properties in Utah. The 1997 Notes do not
contain any covenants that would prohibit, limit or restrict, among other
matters, the Company's ongoing business operations, acquisitions of oil and gas
properties, payment of dividends or incurrence of additional indebtedness. The
1997 Warrants may be exercised at any time through October 15, 2002.
In connection with the sale of the 1997 Notes and the 1997 Warrants, the
Company entered into a Registration Rights Agreement with the 1997 Investors,
pursuant to which the Company agreed to register the Shares under the Securities
Act for resale by, and for the benefit of, such shareholders. The Company has
failed to register the shares into which the 1997 Notes are convertible and the
1997 Warrants are exercisable during the 120-day period following the completion
of this transaction. As a result, the Company is required to make certain
payments to the 1997 Investors. The Company is currently in negotiations with
these Investors to determine the amounts to be paid.
The public offering of the Shares by the 1997 Investors will terminate on
the earlier of October 15, 2000 or the date on which all Shares offered hereby
have been sold by the 1997 Investors.
The Kingsbridge Line of Credit Agreement
In March 1998, the Company entered into the Kingsbridge Investment
Agreement, pursuant to which the Company has the right to receive up to
$10,000,000 in equity financing from the sale of its Common Stock in tranches to
Kingsbridge. At the same time, the Company issued a three-year warrant to
purchase 100,000 shares of Common Stock (the "Kingsbridge Warrant"). Through the
Company's exercise of put options, Kingsbridge is required to purchase, and the
Company is required to sell, subject to certain closing conditions and
limitations on the timing of purchases and amount of Common Stock to be sold
with respect to exercises of individual put options, at least $3,000,000 in
shares of Common Stock at a purchase price equal to 79% of the average of the
lowest prices of the Common Stock on the trading day on which notice of exercise
of the put option is given and on the one trading day prior, and the two trading
days following, such put option exercise notice. The minimum market price for
sales of shares is $1.00 per share. For purposes of registering the maximum
number of shares of Common Stock under the Form S-1, the market price is assumed
to be $1.00. At a market price of $1.00, the maximum number of shares of Common
Stock which may be issued by the Company upon the exercise of the put options
and the number of shares which may be purchased on exercise of the Kingsbridge
Warrant are 12,658,228 shares and 100,000 shares respectively. The Form S-1
covers the maximum of up to 12, 758,228 total shares issued upon notice of a put
option exercise and exercise of the Kingsbridge Warrant. Because the purchase
price of the Common Stock is based in part on future average trading prices of
the Common Stock, the number of shares which may actually be sold pursuant to
the Form S- 1 could differ significantly. For example, in the event a notice of
election to exercise individual put options were to have been received on March
26, 1998, the lowest applicable purchase price would have been $0.98 per share
(79% of the lowest prices of the Common Stock for the applicable days before and
after the put option exercise notice), resulting in a total of 10,204,082 shares
of Common Stock offered under the Form S-1. Notwithstanding the foregoing, the
maximum number of shares issuable to Kingsbridge shall not exceed 19.9% of the
outstanding shares of Common Stock at the time of such exercise(s).
<PAGE>
In connection with entering into the Kingsbridge Investment Agreement, the
Company issued the Kingsbridge Warrant, a three-year warrant to purchase 100,000
shares of Common Stock at an exercise price of $1.20 per share (94% of the
market price calculated as of March 23, 1998), exercisable beginning on
September 24, 1998. As a condition precedent to the purchase and sale of shares
pursuant to the Kingsbridge Investment Agreement, among others, the Company is
required to register with the Commission under the terms of a Registration
Rights Agreement all of the shares of Common Stock subject to the put option, as
well as those into which the Kingsbridge Warrant is exercisable, for resale by
Kingsbridge. The Kingsbridge Investment Agreement has a term of two years, but
may be terminated by Kingsbridge earlier in the event the Common Stock subject
to the put options is not, or fails to be, registered for resale after specified
time periods lapse. Based on the number of outstanding shares of the Common
Stock of the Company as of the date hereof, if all of the shares were issued
pursuant to the put option exercise notice and the Kingsbridge Warrant, they
would represent approximately 33.22% of the outstanding Common Stock of the
Company. As of the date hereof, no put option exercise notices had been given to
Kingsbridge and none of the Kingsbridge Warrant had been exercised.
In connection with the Kingsbridge arrangement, the Company entered into a
Registration Rights Agreement, pursuant to which the Company agreed to register
the Shares under the Securities Act for resale by, and for the benefit of, such
shareholders. The Company has failed to register the shares into which the put
option exercise would be applied and the Kingsbridge Warrant is exercisable
during the 90-day period following the completion of this transaction. As a
result, the Company is required to make a lump sum payment in the amount of
$10,000. The Company is currently in negotiations with Kingsbridge regarding
such payment.
On August 11, 1998, the Company and Kingsbridge agreed to enter into an
agreement to cancel the Kingsbridge Private Equity Line of Credit dated March
23, 1998. Pursuant to the terms of the proposed cancellation, the Company will
pay a penalty in the amount of $100,000 and will issue warrants to purchase up
to an additional 100,000 shares of the Company's Common Stock (the "Kingsbridge
Warrants"). The Company has decided to cancel the Kingsbridge Private Equity
Line of Credit because terms of certain of the third quarter 1998 fundings
require the Company to cancel this agreement so as to limit the number of shares
of the Company's Common Stock outstanding upon conversion of the Company's
convertible notes in the future. However, as of December 31, 1998, the Company
had not completed the terms of the anticipated cancellation, and therefore
continues to be obligated to register the potential Kingsbridge shares issuable
under the put option exercise notice and the Kingsbridge Warrant. Under the
terms of the cancellation, the Company will be responsible for the registration
of the additional warrants. On December 10, 1998, Kingsbridge made application
to the American Arbitration Association for arbitration of outstanding issues
between the parties.
The Company has filed an Answer in such proceedings.
The April 1998 Financing
In April 1998, the Company raised gross proceeds of $300,000 in two
closings of a private placement of the Company's 12% convertible notes, which
are due on the earlier of January 1999 or at such time as the Company receives
the first draw-down under the Kingsbridge Investment Agreement (the "April 1998
Notes"), and warrants to purchase shares of Common Stock (the "April 1998
Warrants") to nine "accredited" investors. The maximum number of shares of
Common Stock which may be issued by the Company upon the conversion of the April
1998 Notes (at a base price of $1.50 per share), subject to certain adjustments,
and the exercise of the April 1998 Warrants (at an exercise price of $1.25 per
share) to 200,000 shares and 210,000 shares, respectively. The Firm S-1 covers
the 410,000 shares of Common Stock issuable upon the conversion of the April
1998 Notes and the exercise of the April 1998 Warrants. Based on the number of
outstanding shares of Common Stock of the Company as of the date hereof, the
shares issuable under the April 1998 Notes and April 1998 Warrants represent
approximately 1.07% of the outstanding Common Stock of the Company. As of the
date hereof, none of the April Notes had been converted and none of the Warrants
had been exercised
<PAGE>
All of the shares to be held upon conversion by the holders of the April
1998 Notes may be offered in that, under the terms of the April 1998 Notes, such
holders may convert 100% of the principal amount of the April 1998 Notes at any
time after the issuance date. The conversion rate of the April 1998 Notes is
equal to $1.50 per share and this price was used for purposes of registering the
maximum number of shares of Common Stock upon conversion of the April 1998 Notes
under the Form S-1. The April 1998 Notes are subordinated to any senior debt
incurred by the Company. All of the shares to be held upon exercise by the
holders of the April 1998 Warrants may be offered in that, under the terms of
the April 1998 Warrants, the holders thereof may exercise at any time up until
April 2001. The exercise price of the April 1998 Warrants is equal to $1.25 per
share and this price was used for purposes of registering the maximum number of
shares of Common Stock under the Form S-1 for exercise of the April 1998
Warrants. In connection with the sale of the April 1998 Notes and the April 1998
Warrants, the Company committed to register the April 1998 shares under the
Securities Act for resale by, and for the benefit of, such shareholders.
The First June 1998 Financing
In June 1998, the Company raised gross proceeds of $200,000 in a private
placement of warrants to purchase shares of Common Stock (the "June 1998
Warrants") to two "accredited" investors. The maximum number of shares of Common
Stock which may be issued upon the exercise of the June 1998 Warrants (at an
exercise price of $.75) is up to 1,050,000 shares. The Form S-1 covers the
1,050,000 shares of Common Stock issuable upon the exercise of the June 1998
Warrants. Based on the number of outstanding shares of Common Stock of the
Company as of the date hereof, the First June 1998 shares represent
approximately 2.73% of the outstanding Common Stock of the Company. As of the
date hereof, none of the June 1998 Warrants had been exercised.
All of the shares to be held by the Investors upon exercise of the First
June 1998 Warrants may be offered under the Form S-1 in that, under the terms of
the First June 1998 Warrants, the holders thereof may exercise at any time up
until 5 PM Eastern Standard Time on the first business day after the fourteen
month period following the date of the declaration of the effectiveness of the
Company's registration statement in which the First June 1998 Warrants are
registered. The exercise price of the First June 1998 Warrants is equal to $.75
per share and this price was used for purposes of registering the maximum number
of shares of Common Stock under the Form S-1 for exercise of the First June 1998
Warrants.
In the event that a holder of the First June 1998 Warrants exercises for
not less than 250,000 shares of the Company's Common Stock (25,000 in the case
of the 50,000 warrant holder), within 180 days of June 1, 1998 and exercise for
at least an additional 50,000 shares of Common Stock (5,000 in the case of the
50,000 warrant holder), within 360 days of June 1, 1998, the Company shall issue
to such holder of the First June 1998 Warrants additional warrants for the
purchase of a number of shares equal to the number of shares purchased under the
First June 1998 Warrants within 180 and 360 days of June 1, 1998. The exercise
price of these additional warrants is equal to $2.00 per share. Such additional
warrants may be exercised at any time up until 5 PM Eastern Standard Time on the
first business day after the twenty-four (24) month period following the date of
the effectiveness of the Company's registration statement in which the
additional warrants are registered.
In connection with the sale of the First June 1998 Warrants, the Company
committed to register the First June 1998 Funding shares under the Securities
Act for resale by, and for the benefit of, such shareholders. The Company has
committed to register the additional warrants within ninety (90) days of
issuance.
The Second June 1998 Financing
In June 1998, the Company raised gross proceeds of $425,000 in the private
placement of the Company's 12% subordinated convertible notes, which are due on
the earlier of December 1999 or upon the receipt by the Company of debt or
equity or revenue from the sale of leases or other property of not less than $4
million (the "Second June 1998 Notes"), and warrants to purchase shares of
Common Stock (the "Second June 1998 Warrants") to a limited number of
"accredited" investors. The maximum number of shares of Common Stock which may
be issued by the Company upon the conversion of the Second June 1998 Notes (at a
base conversion price of $1.00 per share), subject to certain adjustments, and
the exercise of the Second June 1998 Warrants (at an exercise price of $.50 per
share for the first two years and $.85 per share thereafter) is up to 425,000
shares and 531,250 shares, respectively.
<PAGE>
The Form S-1 covers the 956,250 shares of Common Stock issuable upon the
conversion of the Second June 1998 Notes and the exercise of the Second June
1998 Warrants. Based on the number of outstanding shares of Common Stock of the
Company as of the date hereof, the Second June 1998 shares represent
approximately 2.49% of the outstanding Common Stock of the Company. As of the
date hereof, none of the Second June 1998 Notes or the Second June 1998 Warrants
had been exercised.
All of the shares to be held upon conversion by the holders of the Second
June 1998 Notes may be offered in that, under the terms of the Second June 1998
Notes, such holders may convert 100% of the principal amount of the Second June
1998 Notes at any time after the issuance date. The conversion rate of the
Second June 1998 Notes is equal to $1.00 per share and this price was used for
purposes of registering the maximum number of shares of Common Stock upon
conversion of the Second June 1998 Notes under the Form S-1. The Second June
1998 Notes are subordinated to any senior debt incurred by the Company. All of
the shares to be held upon exercise by the holders of the Second June 1998
Warrants may be offered in that, under the terms of the Second June 1998
Warrants, holders may exercise at any time until June 2002. The exercise price
of the Second June 1998 Warrants is equal to $.50 per share for the first two
years and $.85 per share thereafter (subject to adjustment) and these prices
were used for purposes of registering the maximum number of shares of Common
Stock under the Form S-1 for exercise of the Second June 1998 Warrants. In the
event the Company has not registered the Second June Warrants within six months
of issuance, the exercise price for the entire term through June 14, 2000 shall
remain at $.50 per share. The Second June 1998 Warrants contain cashless
exercise and anti-dilution provisions which include, but are not limited to,
anti-dilutive protection against stock or management option issuances below $.50
per share. Additionally, the exercise price of the Second June 1998 Warrants
will be adjusted downward to 50% of fair market value when the registration
statement becomes effective, if after 90 days the share price of the Common
Stock falls below $.75 per share for more than five consecutive trading days or
seven out of ten trading days. In connection with the sale of the Second June
1998 Notes and the Second June 1998 Warrants, the Company committed to register
the Second June 1998 shares under the Securities Act for resale by, and for the
benefit of, such shareholders.
The Third June 1998 Financing
In June 1998, the Company raised gross proceeds of $1,250,000 in a private
placement of the Company's 5.5% convertible notes due in June 2000 (the "Third
June 1998 Notes") and warrants to purchase shares of Common Stock (the "Third
June 1998 Warrants") to one "accredited" investor. The conversion price is
calculated pursuant to a formula as the lower of (i) the average closing bid
price for the five days prior to the closing ($.7195) or (ii) 80% of the average
closing bide price for the five days prior to notice of intent to convert. In
the event that the lower price were the average closing bid price for the five
days prior to the closing, the maximum number of shares of Common Stock which
may be issued by the Company upon conversion of the Third June 1998 Notes would
be 1,798,124 shares. For purposes of registering the maximum number of shares of
Common Stock under the Form S-1, the conversion rate is assumed to be the base
price of $.7195. Because the conversion rate of the Third June 1998 Notes is
based in part on future average trading prices of the Common Stock, the number
of shares which may actually be sold pursuant to the Form S-1 could differ
significantly. For example, in the event the average closing bid price for the
five days prior to notice of intent to convert were $.7195, 80% of such number
would equal a share price of $.5756, resulting in a total of 2,247,655 shares of
Common Stock issuable upon conversion, exclusive of the exercise of any of the
Third June 1998 Warrants. The maximum number of shares of Common Stock which may
be issued by the Company upon the exercise of the Third June 1998 Warrants (at
an exercise price of 120% of the average closing bid price for the five (5) days
prior to the closing which is equal to $.8634) is 230,000 shares. Certain
penalties were to be paid to the Third June 1998 Note Investor in the event the
registration statement was not effective within sixty days. In lieu of such
payments, the Investor has elected to take 282,016 additional shares in full
liquidation of all penalties due through December 1998. The Form S-1 covers the
up to 2,310,140 total shares of Common Stock issuable, with certainty, upon the
conversion of the Third June 1998 Notes, the exercise of the Third June 1998
Warrants and payment of penalties through December 1998. Based on the number of
outstanding shares of Common Stock of the Company as of the date hereof, the
Third June 1998 shares represent approximately 6.02% of the outstanding Common
Stock of the Company. As of the date hereof, none of the Third June 1998 Notes
had been converted and none of the Third June 1998 Warrants had been exercised.
<PAGE>
All of the shares to be held upon conversion by the holders of the Third
June 1998 Notes may be offered, except that, under the terms of the Third June
1998 Notes, such holders could convert the original principal amount of the
Third June 1998 Notes only to the extent of one-third of such amount on and
after each of July 23, 1998, August 23, 1998 and September 23, 1998. The
conversion rate of the Third June 1998 Notes equal to $.72 per share was used
for purposes of registering the maximum number of shares of Common Stock upon
conversion of the Third June 1998 Notes under the Form S-1. The Third June 1998
Notes are subordinates to any senior debt incurred by the Company.
All of the shares to be held upon exercise by the Holders of the Third June
1998 Warrants may be offered in that, under the terms of the Third June 1998
Warrants, such holders may exercise at any time until June 23, 2003. The
exercise price of the Third June 1998 Warrants is equal to $.87 per share and
this price was used for purposes of registering the maximum number of shares of
Common Stock under the Form S-1 for exercise of the Third June 1998 Warrants. In
connection with the sale of the Third June 1998 Notes and the Third 1998 June
Warrants, the Company entered into a Registration Rights Agreement with the
Third June 1998 Investors, pursuant to which the Company agreed to register the
Third June 1998 shares under the Securities Act for resale by, and for the
benefit of, such shareholders.
The Company used $1,000,000 of the net proceeds as an additional concession
fee payment in connection with its Sao Tome joint venture. The balance was used
for working capital. The Company has failed to register the shares into which
the Third June 1998 Notes are convertible and the Third June 1998 Warrants are
exercisable during the 60-day period following the completion of this
transaction. As a result, the Company is required to make certain payments to
the Third June 1998 Investors. The Company is currently in negotiations with
these Investors to determine the amounts to be paid.
The firm of Joseph Charles & Associates which is located at Lenox Center,
3355 Lenox Road, #750, Atlanta, GA 30326 acted as the underwriter of this
placement.
The July/August 1998 Funding
In July and August 1998, the Company raised gross proceeds of $1,200,000,
$275,000 and $1,010,000 respectively in a private placement of up to $3,000,000
in three(3) tranches of the Company's 8.0% convertible notes due in July and
August 2000 (the "July Notes") to a limited number of "accredited" investors.
The conversion price of the July Notes is calculated by formula as the lower of
(i) 120% of the average closing bid price per share of the Company's Common
Stock for the five (5) days preceding the closing of the transaction or (ii) 75%
of the average closing bid price per share of the Company's Common Stock for the
five (5) days preceding the date upon which notice of conversion is given by the
investor to the Company. In the event that the lower price were the 120% of the
average closing bid price for the five (5) days prior to the closing bid price
for the five (5) days prior to the closing of each tranche, the maximum number
of shares of the Common Stock which may be issued by the Company upon conversion
of the July Notes (at a base price of $.8925, $.8775 and $1.19 respectively) is
2,506,668. However if 75% of the average closing bid price for the five (5) days
prior to the notice of intent to convert were the lower price, there is no way
to ascertain the maximum number of shares of Common Stock which may be issued by
the Company upon conversion of the July Notes at this time. Because the
conversion rate of the July Notes is based in part on future average trading
prices of the Common Stock, the number of shares which may actually be issued
upon conversion could differ significantly. For example, in the event the
average closing bid price for the five (5) days prior to the note of intent to
convert were $.74375, 75% of such number would equal a share price of $.55781
resulting in a total of 4,454,922 shares of Common Stock issuable upon
conversion exclusive of the exercise of any of the warrants. Warrants were
issued to the placement agent at the close of each tranche (the "July
Warrants"). The maximum number of shares of Common Stock which may be issued by
the Company upon the exercise of the July Warrants (at an exercise price of
$.74375, $.73125 and $.99375 respectively) is 223,650 shares. Based on the
number of outstanding shares of the Common Stock of the Company as of the date
hereof, the shares issuable under the July Notes and July Warrants represent
approximately 9.19% of the outstanding stock of the Company. In October 1998,
July Notes totally $412,350 and accrued interest thereon were converted at
prices ranging from $.321 to $.399 per shares for a total issuance of 1,210,686.
As of the date hereof, no other July notes had been converted and none of the
July Warrants had been exercised. The Form S-1 covers the maximum of up to
3,530,490 (2,506,668 total shares of Common Stock issuable upon conversion of
the July Notes at the base prices plus 800,172 total shares as an adjusted
amount to reflect the October conversions and 223,650 total shares issuable upon
exercise of the July Warrants).
<PAGE>
Under the terms of the July Notes, the holders thereof could convert the
original principal amount of the notes only to the extent of one-third of such
amount on and after each thirty (3) day period following the issuance date. The
July Notes are subordinate to any senior debt incurred by the Company.
Under the terms of the July Warrants, the holders thereof may exercise at
any time up until 5 PM Eastern Standard Time on July 30, 2003 and August 5, 1998
respectively. The exercise price of the July Warrants are equal to $.74375,
$.73125 and $.99375 respectively.
In connection with the sale of the July Notes and the July Warrants, the
Company entered into a Registration Rights Agreement with the Selling
Shareholders, pursuant to which the Company agreed to register the July 1998
Funding shares under the Securities Act for resale by, and for the benefit of,
such shareholders.
The Company used $1,000,000 of the net proceeds as an additional concession
fee payment in connection with its Sao Tome joint venture. The balance was used
for working capital. The Company has failed to register the shares into which
the July Notes are convertible and the July Warrants are exercisable during the
60-day period following the completion of this transaction. As a result, the
Company is required to make certain payments to the July/August Investors. The
Company is currently in negotiations with these Investors to determine the
amounts to be paid.
The firm of J.P. Carey Securities, Inc. which is located at Atlanta
Financial Center, East Tower, 3343 Peachtree Road, Suite 500, Atlanta, GA 30326
acted as the underwriter of this funding.
The September 1998 Financing
By documents dated September 1998, the Company raised gross proceeds of
$500,000 in October 1998 in a private placement of the Company's 20% convertible
note due in October 2000 (the "September 1998 Note") and a warrant to purchase
shares of Common Stock (the "September 1998 Warrant") to one "accredited"
investor. The conversion price is calculated pursuant to a formula as the lower
of (i) 90% of the average closing bid price for the five days prior to
conversion or (ii) $1.00. In the event that the lower price were $1.00 maximum
number of shares of Common Stock which may be issued by the Company upon
conversion of the September 1998 Note would be 750,000 (assuming the lower price
is $1.00 and pursuant to the terms of the September 1998 Note which require
registration to initially cover 150% of the shares underlying the September 1998
Note). For purposes of registering the maximum number of shares of Common Stock
under the Form S- 1, the conversion rate is assumed to be $1.00. Because the
conversion rate of the September 1998 Note is based in part on future average
trading prices of the Common Stock, the number of shares which may actually be
sold pursuant to the Form S-1 could differ significantly. For example, in the
event the average closing bid price for the five days prior to notice of intent
to convert were $.50, 90% of such number would equal a share price of $.45,
resulting in a total of 1,111,111 shares of Common Stock issuable upon
conversion, exclusive of the exercise of any of the September 1998 Warrant and
the requirement of registration of 150% would equal 1,666,666 shares of Common
Stock. The maximum number of shares of Common Stock which may be issued by the
Company upon the exercise of the September 1998 Warrant (at an exercise price of
$.40) is 1,500,000 shares. The Form S-1 covers the up to 2,250,000 total shares
of Common Stock issuable, with certainty, upon the conversion of the September
1998 Note and the exercise of the September 1998 Warrant. Based on the number of
outstanding shares of Common Stock of the Company as of the date hereof, the
September 1998 shares represent approximately 1.95% of the outstanding Common
Stock of the Company. As of the date hereof, none of the September 1998 Note had
been converted and none of the September 1998 Warrant had been exercised.
The September 1998 Note precludes the holder from converting all or any
part of said note prior to the first anniversary date of issuance (October 26,
1999). The conversion rate of the September 1998 Note equal to $1.00 per share
was used for purposes of registering the maximum number of shares of Common
Stock upon conversion of the September 1998 Note under the Form S-1. The
September 1998 Note is subordinates to any senior debt incurred by the Company.
Commencing on the first anniversary of the issuance of said note, the remaining
principal amount and all accrued and unpaid interest and fees, if any, shall
automatically and without further action on the part of the holder be payable in
twelve monthly installments commencing with a first payment on November 1, 1999
and a final payment on the maturity date. The Company has the option at any time
prior to the first anniversary of said note to prepay all or any portion of the
remaining principal plus an amount equal to twenty percent on the portion so
paid.
<PAGE>
Under the terms of the September 1998 Warrant , the holder may exercise at
any time from the issuance date until October 26, 2008, for up to 750,000 shares
of Common Stock and from October 26, 1999 until October 26, 2008, 750,000 shares
of Common Stock. The exercise price of the September 1998 Warrant is equal to
$.40 per share and this price was used for purposes of registering the maximum
number of shares of Common Stock under the Form S-1 for exercise of the
September Warrant.
In connection with the sale of the September 1998 Note and the September
1998 Warrant, the Company agreed (i) to use its best efforts to register 150% of
the September 1998 Note shares under the Securities Act for resale by, and for
the benefit of, such shareholders within one year of issuance and to have such
registration remain effective until the earlier of the date upon which the Note
is sold or the term of said note and further, granted the holder certain
piggy-back registration rights; and (ii) to use its best efforts to register
100% of the September 1998 Warrant under the Securities Act for resale by, and
for the benefit of, such shareholders within two years of issuance and to have
such registration remain effective until the earlier of the date upon which the
Warrant is sold or for the life of said warrant and further granted the holder
certain piggy-back registration rights.
The Company used $250,000 of the net proceeds to make certain payments
necessary for Sao Tome other than the concession fee and the balance was used
for working capital.
The October 1998 Financing
In October 1998, the Company commenced a the private placement for up to
$1,500,000 under which it has raised gross proceeds in three (3) closings
totaling 800,000 of the Company's 12% subordinated convertible notes, which are
due on December 31, 1999 (the "October 1998 Notes"), and "A" and "B" warrants to
purchase shares of Common Stock (the "October 1998 "A" and "B" Warrants") to a
limited number of "accredited" investors. The maximum number of shares of Common
Stock which may be issued by the Company upon the conversion of the October 1998
Notes (at a base conversion price of $1.25 per share), subject to certain
adjustments, the exercise of the October 1998 "A" Warrants (at an exercise price
of $.50 per share) and the exercise of the October 1998 "B" Warrants (at an
exercise price of $3.00 per share) is up to 640,000 shares, 1,200,000 shares and
1,200,000 shares, respectively. The Form S-1 covers the 3,040,000 shares of
Common Stock issuable upon the conversion of the October 1998 Notes and the
exercise of the October 1998 "A" and "B" Warrants. Based on the number of
outstanding shares of Common Stock of the Company as of the date hereof, the
October 1998 shares represent approximately 7.92% of the outstanding Common
Stock of the Company. As of the date hereof, none of the October 1998 Notes or
the October 1998 "A" or "B" Warrants had been exercised.
All of the shares to be held upon conversion by the holders of the October
1998 Notes may be offered in that, under their terms, such holders may convert
100% of the principal amount of said notes at any time after the issuance date.
The conversion rate of the October 1998 Notes is equal to $1.25 per share and
this price was used for purposes of registering the maximum number of shares of
Common Stock upon conversion of the October 1998 Notes under the Form S-1. The
October 1998 Notes are subordinated to any senior debt incurred by the Company.
All of the shares to be held upon exercise by the holders of the October "A"
1998 Warrants may be offered in that, under the terms of the October 1998 "A"
Warrants, holders may exercise at any time until December 31, 2003. The exercise
price of the October 1998 "A" Warrants is equal to $.50 per share (subject to
adjustment) and these prices were used for purposes of registering the maximum
number of shares of Common Stock under the Form S-1 for exercise of the October
1998 "A" Warrants. All of the shares to be held upon exercise by the holders of
the October "B" 1998 Warrants may be offered in that, under the terms of the
October 1998 "B" Warrants, holders may exercise at any time until the earlier of
(i) five years from the date of exercise of the October 1998 "A" Warrant or (ii)
December 31, 2008. The exercise price of the October 1998 "B" Warrants is equal
to $3.00 per share (subject to adjustment) and these prices were used for
purposes of registering the maximum number of shares of Common Stock under the
Form S-1 for exercise of the October 1998 "B" Warrants. The October 1998 Notes
and the October 1998 "A" and "B" Warrants have certain piggy-back registration
rights. The October 1998 "A" and "B" Warrants contain cashless exercise and
anti-dilution provisions which include, but are not limited to, anti-dilutive
protection against stock or management option issuances below $.50 per share.
The Company has the right to call the October 1998 "A" Warrant at any time after
the underlying shares are registered if the Common Stock of the Company exceeds
a price of $4.50 per share for an average of twenty consecutive trading days.
<PAGE>
The Company has the right to call the October 1998 "B" Warrants at any time
after eighteen months after the holder has exercised its October 1998 "A"
Warrant and after the underlying shares are registered if the Common Stock of
the Company exceeds a price of $9.00 per share for an average of twenty
consecutive trading days. The Company has agreed not to call the "A" and "B"
warrants simultaneously. In connection with the sale of the October 1998 Notes
and the October 1998 "A" and "B" Warrants, the Company committed to register the
October 1998 shares under the Securities Act for resale by, and for the benefit
of, such shareholders.
The Company used $500,000 of the net proceeds to fulfill its obligations
under its contract with Sao Tome and the balance was used to fund operating
costs relative to the Sao Tome operation and to provide working capital.
Uinta Settlement
In January 1999, the Company agreed to a settlement with Uinta. Pursuant to
such settlement, the maximum number of shares of Common Stock which may be
issued by the Company on or about January 18, 1999 (assuming the strike price is
the closing price on January 7, 1999 of $ .30 (the "Strike Price")) is
1,144,000. Since the Strike Price is based in part on future average trading
prices of the Common Stock, the number of shares which may actually be sold
pursuant to the Form S-1 could differ significantly. For example, in the event
the average closing bid price for the five days prior to January 18, 1999 were
less than the assumed Strike Price, such number of shares offered hereby would
be higher. The Form S-1 covers the up to 1,144,000 total shares of Common Stock
issuable, with certainty, upon the completion of the Uinta settlement. Based on
the number of outstanding shares of Common Stock of the Company as of the date
hereof, the Uinta settlement shares represent approximately 2.98% of the
outstanding Common Stock of the Company.
Under the terms of the executed settlement, for the 500,000 shares of
restricted stock which were issued at a guarantee price of $2 per share,
additional restricted shares will be issued which reflect the difference between
$2 and the price on October 16, 1998 and December 30, 1998 (under the formula
set forth in the agreement, 861,111 and 1,312,500 shares of restricted stock
respectively) and the 500,000 shares of restricted stock which were to be issued
in early 1998 will be issued and treated as if issued at the time such
deliverance was initially required, which shares bear registration rights and
are offered hereby . In addition, the parties will receive additional shares
equal to the difference between the value on a date certain in January 1999 and
$2 for the second block of 500,000 (assuming the Strike Price, 2,833,333 shares
of restricted stock). The Company will reimburse certain filing fees, attorneys
fees and will pay for certain office equipment. The Company will receive a
quitclaim deed and assignments to perfect the Company's interest in the leases.
In addition, (1) Uinta will be issued shares of the Company's Common Stock the
amount of which shall be determined by dividing $250,000 by the Strike Price,
half of which shares shall be included in this registration and half of which
shall be restricted securities (assuming the Strike Price, 416,667 shares of
restricted stock and 416,667 shares which bear registration rights and are
offered hereby) , (2) in exchange for assignment of a 4% overriding royalty
interest, Uinta will receive restricted shares the amount of which shall be
determined by dividing $677,000 by the Strike Price (assuming the Strike Price,
2,256,667 shares of restricted stock), (3) a deficiency value equal to $41,200
for the Utah office building will be liquidated by issuance of shares the amount
of which shall be equal to $41,200 divided by the Strike Price, (assuming the
Strike Price, 137,333 shares of Common Stock, which shares bear registration
rights and are offered hereby, (4) Uinta will receive no more than $10,000 to
cost its court costs and attorneys fees, and (5) payment of outstanding
production service invoices to third parties totally $27,000 shall be paid in
the form of shares included in this registration statement, which shares shall
be equal to $27,000 divided by the Strike Price (assuming the Strike Price,
90,000 shares which are offered hereby).
Stock Ownership
The following table sets forth the names of and the number of Shares
beneficially owned by each Selling Shareholder as of the date hereof. Since the
Selling Shareholders may sell all, some or none of their Shares, no estimate can
be made of the aggregate number of Shares that are to be offered hereby or the
number or percentage of Shares that each Selling Shareholder will own upon
completion of the offering to which the Form S-1 relates.
<PAGE>
Shares Owned Before the Offering (1)
--------------------------------------------
Name of Underlying Underlying Total
Selling Shareholder Notes Warrants Shares
- - ------------------- ----- -------- ------
1997 Investor Private Placement
- - -------------------------------
Banque Edouard Constant SA 320,000 24,000 344,000
11, Cours de Rive
Case Postale 3754
1211 - 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
JMG Capital Partners L.P. 320,000 24,000 344,000
c/o JMG Capital Management Inc.
1999 Avenue of the Stars
Suite 1950
Los Angeles, CA 90067
Triton Capital Investments, Ltd. 320,000 24,000 344,000
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, S.A. 400,000 30,000 430,000
1, Rue Toepffer
1206 - Geneva
Switzerland
Avalon Research Group, Inc. -- 25,800 25,800
1900 Glades Road, Suite 201
Boca Raton, FL 33431
<PAGE>
Kingsbridge Line of Credit
- - --------------------------
Kingsbridge Capital Limited 12,658,228 100,000 12,758,228
Main Street (2)
Kilcullen, County Kildare
Republic of Ireland
April 1998 Financing
- - --------------------
Robert and Jessica Baron 16,667 17,500 34,167
4664 Coco Plum Way
Delray Beach, FL 33445
Frank Ferrante 8,333 8,750 17,083
4 Twilight Place
Fort Monmouth, NJ 07758
Rosemary Friedman Trust 50,000 52,500 102,500
4420 Bocaire Boulevard
Boca Raton, FL 33487
Diane Hom 16,667 17,500 34,167
205 West End Avenue, #22J
New York, NY 10025
Stanley Katz 16,667 17,500 34,167
10 Bonnie Drive
Northport, NY 11768
Howard Talks/Carol Hall, JTWROS 50,000 52,500 102,500
249 Tradewind Drive
Palm Beach, FL 33480
Kenneth Tice 6,666 7,000 13,666
181 Drake Lane
Ledgewood, NJ 07852
Stephen Warner 25,000 26,250 51,250
8 Shannon Circle
West Palm Beach, FL 33401
David Warren 10,000 10,500 20,500
2004 Lake Osbourne Drive, #9
Lake Worth, FL 33461
First June 1998 Financing
- - -------------------------
Corporate Builders - 50,000 50,000
777 S. Flagler Drive
Suite 909
West Palm Beach, FL 33401
Legal Computer Technology, Inc. - 500,000 500,000
277 Royal Poinciana Way
Suite 155
Palm Beach, FL 33480
Howard Talks - 500,000 500,000
249 Tradewind Drive
Palm Beach, FL 33480
Second June 1998 Financing
- - --------------------------
Azriel and Sheila Nagar 25,000 31,250 56,250
342 Irving Avenue
South Orange, NJ 07079
Edward R. Rohquin 30,000 37,500 67,500
9906 White Sands Place
Bonita Springs, FL 34135
Joseph and Valerie Spano 100,000 125,000 225,000
150 Tamiami Trail North
Naples, FL 34102
David B. Thornburgh 100,000 125,000 225,000
420 W. San Marino Drive
Miami Beach, FL 33139
<PAGE>
David B. Thornburgh Family Trust 170,000 212,500 382,500
420 W. San Marino Drive
Miami Beach, FL 33139
Third June 1998 Financing
- - -------------------------
Intercontinental Holding Company 17,373 -- 17,373
8351 Roswell Road, #239
Atlanta, GA 30350
Joseph Charles & Associates 43,433 75,000 118,433
Lenox Center
3355 Lenox Road, #750
Atlanta, GA 30326
ProFutures Special
Equities Fund, L.P. 2,019,334 155,000 2,174,334
1310 Highway 620
Suite 200
Austin, TX 78734
July/August Funding
- ------------------------------------
Closing No. 1-
Atlantis Capital Fund Ltd. 907,371 - 907,371
c/o Thomas Kernaghan & (3)
Company Ltd.
365 Bay Street
10th Floor
Toronto, Ontario
Canada M5H 2V2
Atlas Capital Fund Ltd. 494,044 - 494,044
c/o Citco Fund Services (3)
(Cayman Island) Ltd.
Corporate Center
West Bay Road
P.O. Box 31106-SMB
Grand Cayman
Cayman Islands
British West Indies
Oscar Brito 168,067 - 168,067
Calle Neveri
Qnta Shanti
Colinas de Tamaneco 1080
Caracas, Venezuela
Correllus International Ltd. 112,045 - 112,045
c/o Azucena 37
Torreblanca del Sol
296 40 Fuengirola
Malaga, Spain
Sandro Grimaldi 168,067 - 168,067
Calle Neveri
Qnta Shanti
Colinas de Tamaneco 1080
Caracas, Venezuela
J.P. Carey - 108,000 108,000
Atlanta Financial Center
East Tower
3343 Peachtree Road
Suite 500
Atlanta, GA 30326
Closing No. 2 -
Holden Holding Ltd. 255,497 - 255,497
c/o City Trust (3)
3rd Floor
Murdoch House
South Quay
Douglas
Isle of Mann 1M1 5AS
<PAGE>
PrimeCap Management Group 170,940 - 170,940
Ltd.
c/o Midland Walwyn
#200
32555 Simon Avenue
Abbotsford
British Columbia
Canada V2T 4Ys
J.P. Carey - 24,750 24,750
Atlanta Financial Center
East Tower
3343 Peachtree Road
Suite 500
Atlanta, GA 30326
Closing No. 3 -
GPS America Fund Ltd. 434,170 - 434,170
c/o Citco Fund Services (3)
(Europe) B.V.
World Trade Center
Amsterdam
Tower B, 17th Floor
Strawinskylaan 1725
P.O. Box 7241
1007 JE Amsterdam
the Netherlands
Mohammed Khalifa 596,639 - 596,639
P.O. Box 3207
Dubai, U.A.E.
J.P. Carey - 90,900 90,900
Atlanta Financial Center
East Tower
3343 Peachtree Road
Suite 500
Atlanta, GA 30326
September 1998 Funding
- -------------------------------------
Talisman Capital Opportunity 750,000 1,500,000 2,250,000
Fund Ltd.
16101 La Grande Drive
Suite 100
Little Rock, AR 72211
October 1998 Funding
- -----------------------------------
David Abelove 80,000 300,000 380,000
7529 Foote Road (4)
Clinton, NY 13323
Prudential Securities Inc. C/F 240,000 900,000 1,140,000
David Thornburgh - IRA (4)
dated 3/10/98 A/C # AFG-813978 1 New York Plaza 11th Floor New York, NY
13323
Attn: Retirement Operations
1300 Windlass Corporation 80,000 300,000 380,000
Unit 1204 (4)
4401 Gulf Shore Boulevard
Naples, FL 34103
David B. Thornburgh Family 240,000 900,000 1,140,000
Trust (4)
420 W. San Marino Drive
Miami Beach, FL 33139
Uinta Settlement
- ----------------------------------
<PAGE>
Uinta Oil & Gas Inc. 478,517 - 478,517
3954 East 200
North East Highway 40
Ballard, UT 84066
Pine Valley Exploration, Inc. 185,650 - 185,650
19307 West Warren
Detroit, MI 48228
Coconino, S.M.A., Inc. 247,500 - 247,500
1567 W. Silver Springs Road
Park City, UT 84098
Joseph H. Lorenzo 5,000 - 5,000
Craig Phillips 82,400 - 82,400
Ballard, UT
Robert Ballou (5) 54,933 - 54,933
Stripper Operators Inc 60,000 - 60,000
Production Service Company 30,000 - 30,000
Total 24,644,208 6,528,700 31,172,908
(1) All Shares are beneficially owned and the sole voting and investment
power is held by the persons named.
(2) The number of shares beneficially owned by Kingsbridge will be modified
to reflect the number of such shares acquired by Kingsbridge, if any, from time
to time as set forth in a Prospectus Supplement to the Form S-1. Although the
shares associated with the put option exercise will not be issued until such
time as a put option exercise notice is given, pursuant to the terms of the
Registration Rights Agreement, the Company is required to register all of the
shares of Common Stock subject to the put option, as well as those into which
the Kingsbridge Warrant is exercisable.
(3) The Investor made partial conversion of its July Note in October 1998
(4) Half of which warrants are "A" and half of which warrants are "B".
(5) Robert Ballou is now employed as a geologist with the Company, but was
not affiliated at the time the original transaction was concluded.
The Company has agreed to indemnify the Selling Shareholders and the
Selling Shareholders have agreed to indemnify the Company against certain civil
liabilities, including liabilities under the Securities Act.
None of the Selling Shareholders has had any position, office or other
material relationship with the Company or any of its affiliates within the past
three years.
See Part II, Item 5. "Market for the Registrant's Common Stock and Related
Security Holder Matters - (b) Recent Sales of Unregistered Securities."
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.
<PAGE>
In April 1997, the Company acquired all of the outstanding capital
stock of BAPCO, a privately-held company controlled by Sam L. Bass, Jr., who was
then the Company's Chairman of the Board, President and Chief Executive Officer.
Through this acquisition, the Company acquired, among other assets, ownership of
all rights to the BAPCO Tool and assignment of the Chevron master service
agreement. The Company issued 4,000,000 shares of Common Stock to Mr. Bass in
exchange for the outstanding capital stock of BAPCO. In addition, the Company
issued 3,000,000 shares of Common Stock to BEW, a company controlled by Mr.
Bass, in connection with the assignment of the Chevron master service agreement.
See "Business - Environmental Remediation Services." Mr. Bass transferred 12,500
of his shares to his son, Alfred L. Cotten, currently a Director of the Company.
In June 1997, the Company issued 150,000 shares of its Common Stock to two
independent consultants (75,000 each) in exchange for services valued at
$28,125. One of the consultants, Robert McKnight subsequently became employed by
BAPCO and now serves as the Acting Chief Financial Officer and a Director of the
Company.
In July 1997, the Company issued 1,500,000 shares of its Common Stock,
500,000 each, to James R. Callender, Sr., Noreen G. Wilson and William Beaton.
In October 1998, the Company, under a mistaken interpretation of a
contingent obligation of the Company to issue shares in connection with the
efforts to close the Sao Tome contract, issued 2,000,000 shares to each of Sam
L. Bass, Jr., James R. Callender, Sr., Noreen Wilson and James A. Griffin. When
it was discovered that such shares were issued in error, by vote of the Board of
Directors, on December 18, 1998, such issuance was rescinded. Mr. Bass, Mr.
Callender and Mr. Griffin have agreed to tender their shares immediately to the
transfer agent for cancellation. The transfer agent has been notified to place a
stop upon the shares of Ms. Wilson in the event her shares are not tendered in a
timely fashion. On the same date, the Company issued 425,000 shares to Robert
McKnight and 100,000 to Kenneth M. Waters in connection with their serving on
the Board of Directors. Such shares are not subject to the rescission. Mr.
Waters has tendered his shares back to the Company for cancellation because of
tax considerations.
From time to time, Noreen G. Wilson and James A. Griffin, while executive
officers and directors of the Company, have advanced funds to the Company in the
total amount of $1,469,559 through September 30, 1998, pursuant to 8.5% demand
promissory notes, of which $724,377 was repaid through September 30, 1998, and
$748,571 remains outstanding at September 30, 1998. Such notes are convertible
into Common Stock at a conversion rate per share equal to the fair market value
of a share of Common Stock at the time of the advance.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(1) Index to Exhibit Pages
10.1 Master Service Order and Agreement, dated October 1, 1996, between the
Company and Chevron U.S.A. Inc. [incorporated herein by reference from the
Company's Annual Report on Form10-K for the fiscal year ended September 30,
1997, filed on December 29, 1997, Commission File No. 0-17325]
10.2 Joint Venture Agreement, dated December 12, 1996, between the Company
and Centram Marine Services, S.A. [incorporated herein by reference from the
Company's Annual Report on Form10-K for the fiscal year ended September 30,
1997, filed on December 29, 1997, Commission File No. 0-17325]
10.3 * Letter of Intent dated May 18, 1997, between Environmental
Remediation Holding Corporation, Procura Financial Consultants, and the
Democratic Republic of Sao Tome Principe.
10.4 Joint Venture Agreement, dated July 28, 1997, between the Company and
MIII Corporation. [incorporated herein by reference from the Company's Annual
Report on Form10-K for the fiscal year ended September 30, 1997, filed on
December 29, 1997, Commission File No. 0-17325]
10.5 Memorandum of Agreement, dated September 30, 1997, between the
Company, the Government of the Democratic Republic of Sao Tome & Principe, and
Procura Financial Consultants, c.c. [incorporated herein by reference from the
Company's Annual Report on Form10-K for the fiscal year ended September 30,
1997, filed on December 29, 1997, Commission File No. 0-17325]
10.6 Form of Securities Purchase Agreement, dated as of October 15,1997,
between the Company and each of the Purchasers listed therein, together with
forms of the 5.5% Convertible Senior Subordinated Secured Note and Warrant to
Purchase Common Stock.
<PAGE>
10.7 Form of Registration Rights Agreement, dated as of October 15, 1997,
between the Company and each of the Purchasers listed therein.
10.8 Private Equity Line of Credit Agreement, dated as of March 23, 1998,
between the Company and Kingsbridge Capital Limited.
10.9 Form of the Company's 12.% Convertible Note ("April 1998 Notes")
[incorporated herein by reference, previously filed as an exhibit to Form 10-Q
for the quarter ended March 31, 1998 , Commission File No. 0-18275]
10.10 Form of the Company's Warrants ("April 1998 Warrants") [ incorporated
herein by reference, previously filed as exhibit to Form 10-Q for the quarter
ended March 31, 1998, Commission File No. 0-18275]
10.11 Form of the Company's Warrants ("June 1998 Warrants) [previously
filed as an exhibit to Form 10-Q for the quarter ended June 30, 1998, Commission
File No. 0-17325]
10.12 Form of the Company's 12% Convertible Note ("Second June 1998 Notes")
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.13 Form of the Company's Warrant ("Second June 1998 Warrants")
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.14 Form of the Third June 1998 Financing Securities Purchase Agreement
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.15 Form of the Company's 5.5% Convertible Note ("Third June 1998 Notes"
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.16 Form of the Company's Warrant ("Third June 1998 Warrants")
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.17 Form of the Third June 1998 Financing Registration Rights Agreement
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.18 Form of the July/August 1998 Financing Securities Purchase Agreement
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.19 Form of the Company's 8% Convertible Note ("July Notes")
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.20 Form of the Company's Warrant and Warrant Agreement ("July Warrants)
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.21 Form of the July/August 1998 Financing Registration Rights Agreement
[incorporated herein by reference, previously files as an exhibit to Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-17325]
10.22 Joint Venture Formation of the Sao Tome Principe National Petroleum
Company executed July 9, 1998 (English translation) [incorporated herein by
reference, previously files as an exhibit to Form 10-Q for the quarter ended
June 30, 1998, Commission File No. 0-17325]
10.23 * Settlement Agreement dated August 18, 1998 between the Company and
Procura Financial Corporation relative to participation in Sao Tome
10.24 * Technical Assistance Agreement by and among Democratic Republic of
Sao Tome Principe and Sao Tome and Principe National Petroleum Company, S.A. and
Mobil Exploration and Producing Services Inc. [Partially Redacted - Subject to a
Confidential Treatment Application filed with the SEC]
10.25 * Form of the Securities Purchase Agreement ("September 1998
Financing")
10.26 * Form of the Company's 20% Convertible Note ("September 1998 Note")
10.27 * Form of the Company's Warrant ("September 1998 Warrant") and the
Warrant Agreement
<PAGE>
10.28 * Form of the Company's 12% Convertible Note ("October 1998
Notes")
10.29 * Form of the Company's Warrants ("October 1998 "A" and "B" Warrants)
and Warrant Agreement
10.30 * Memorandum of Compromise and Settlement Agreement between
Environmental Redmediation Holding Corporation, Pine Valley Exploration, Inc.,
Coconino, S.M.A., Inc., Uinta Oil & Gas, Inc., Craig Phillips, and Joseph H.
Lorenz dated January 4, 1999.
21.1 Subsidiaries of the Company. [Attached hereto]
27.1 Financial Data Schedule.
- - ------------------------------------
* Incorporated herein by reference to Amendment 3 to the Company's
Registration Statement on Form S- 1 expected to be filed on or about January 18,
1999.
(B) List of Exhibits and Reports on Form 8-K and 8K/A incorporated by
reference in this report:
Form 8K filed February 2, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lafayette, State of Louisiana, on the 13th day of January 1999.
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
By: /s/ James R. Callender, Sr.
------------------------------------------
James R. Callender, Sr.
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ Sam. L. Bass, Jr. Chairman of the Board January 13, 1999
- - --------------------------- and Vice President
Sam L. Bass, Jr.
/s/ James R. Callender, Sr. President and Chief Executiv January 13, 1999
- - --------------------------- Officer and Director
James R. Callender, Sr.
/s/ Robert McKnight Acting Chief Financial Officer January 13, 1999
- - --------------------------- President of BAPCO and
Robert McKnight Director (principal financial
or accounting officer)
/s/ James A. Griffin Secretary, Treasurer and January 13, 1999
- - --------------------------- Director
James A. Griffin
/s/ William Beaton Director January 13, 1999
- - ---------------------------
William Beaton
/s/ Alfred L. Cotten Director January 13, 1999
- -----------------------------
Alfred L. Cotten
<PAGE>
/s/ Kenneth M. Waters Director January 13, 1999
- ------------------------------
Kenneth M. Waters
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The Company has two subsidiaries, both of which it owns 100%, Bass American
Petroleum Company and Site Services Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF ENVIRONMENTAL REMEDIATION HOLDING CORPORATION FOR
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000799235
<NAME> Environmental Remediation Holding Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 35,185
<SECURITIES> 0
<RECEIVABLES> 193,736
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 476,784
<PP&E> 7,703,414
<DEPRECIATION> (1,025,314)
<TOTAL-ASSETS> 11,716,460
<CURRENT-LIABILITIES> 5,125,341
<BONDS> 0
0
0
<COMMON> 2,600
<OTHER-SE> (2,498,273)
<TOTAL-LIABILITY-AND-EQUITY> 11,716,460
<SALES> 213,186
<TOTAL-REVENUES> 247,060
<CGS> 0
<TOTAL-COSTS> 11,590,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,474,633
<INCOME-PRETAX> (11,343,788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,343,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,343,788)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
