U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
16101 La Grande Drive, Suite 100
Little Rock, AR 72223
(Address of principal executive offices) (Zip Code)
Copy of Communications to:
Mercedes Travis, Esq.
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
(561) 832-5696
Registrant's telephone number, including area code: (501) 821-2222
<PAGE>
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of August 12, 1999 was 495,229,675
Documents Incorporated by Reference:
See Exhibit List
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
September 30, June 30,
1998 1999
------------------ -------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 36,359 $ 34,629
Restricted cash 18,826 18,826
Accounts receivable 193,736 234,371
Prepaid expenses and other current assets 256,059 302,887
------------------ -------------------
Total current assets 504,980 590,713
------------------ -------------------
PROPERTY AND EQUIPMENT
Oil and gas properties 1,240,175 1,033,925
Equipment 6,435,113 2,227,113
------------------ -------------------
Total property and equipment before depreciation and depletion 7,675,288 3,261,038
Less: accumulated depreciation and depletion (1,020,626) (305,691)
------------------ -------------------
Net property and equipment 6,654,662 2,955,347
------------------ -------------------
OTHER ASSETS
Master service agreement 300
Investment in STPetro, S.A. 49,000 49,000
Due from STPetro, S.A. 452,276 921,880
DRSTP concession fee 4,000,000 4,000,000
Deferred offering costs 30,000 0
------------------ -------------------
Total other assets 4,531,576 4,970,880
------------------ -------------------
Total Assets $ 11,691,218 $ 8,516,940
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Stockholder loans payable $ 731,328 $ 714,968
Current portion of long-term debt 308,636 734,856
Suspended revenue 141,409 156,282
Accounts payable and accrued liabilities :
Accounts payable 1,365,764 1,833,634
Accrued officer salaries 1,673,985 2,068,035
Accrued interest 1,116,196 2,345,323
------------------ -------------------
Total current liabilities 5,337,318 7,853,098
------------------ -------------------
LONG TERM LIABILITIES
Long term loans 41,631 25,047
Convertible debt, net 7,543,178 8,254,621
------------------ -------------------
Total long term liabilities 7,584,809 8,279,668
------------------ -------------------
Total Liabilities 12,922,127 16,132,766
------------------ -------------------
Common stock issued under a repurchase agreement; issued and outstanding
1,000,000 and 750,000 shares 1,500,000 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 25,999,900 and 50,331,982 2,600 5,034
Additional paid-in capital in excess of par 25,020,717 23,716,360
Additional paid-in capital - warrants 207,502 207,502
Deficit (29,224,228) (34,432,222)
Beneficial conversion feature 1,387,500 1,387,500
Deferred compensation, net (125,000) 0
------------------ -------------------
Total Stockholders' Equity (Deficit) (2,730,909) (9,115,826)
------------------ -------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 11,691,218 $ 8,516,940
================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
(Unaudited)
Nine months ended June 30,
----------------------------------
1998 1999
(Unaudited) (Unaudited)
----------------- ----------------
REVENUE
<S> <C> <C>
Environmental remediation services $273,057 $ 0
Crude oil 119,219 0
Other income 11,684 0
----------------- ----------------
Total revenue 403,960 0
----------------- ----------------
COSTS AND EXPENSES
Compensation :
Officers 893,750 848,000
Directors 0 0
Consulting fees 830,865 732,202
General and administrative expense 3,916,647 1,730,562
Depreciation and depletion 380,675 327,564
Interest expense 251,104 1,507,166
----------------- ----------------
Total costs and expenses 6,273,041 5,145,494
----------------- ----------------
Net income (loss) $ (5,869,081)$ (5,145,494)
================= ================
Weighted average number of shares outstanding 23,497,260 27,411,406
================= ================
Net income (loss) per share - basic $ (0.25)$ (0.19)
================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Common Stock Beneficial Total
-------------------- --------- -------- --------- ---------- -------- ----------- ------------
Number APIC Conv. Stk .Subs. Defr'd Accum. S/H Equity
of Shares Amount APIC Warrants Feature Receivable Comp. Deficit (Deficit)
------------ ------ ---------- -------- --------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1997 21,989,526 $2,199 19,952,865 0 0 (913,300)(250,000) (17,645,204) 1,146,560
Year ended September 31, 1998
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
11/97 - bene conv feat create - 0 0 0 1,075,000 0 0 0 1,075,000
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
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
06/98 - bene conv feat create - 0 0 0 312,500 0 0 0 312,500
3rd quarter - services 162,420 16 102,868 0 0 0 0 0 102,884
3rd quarter - cash 234,200 23 135,577 200,000 0 0 0 0 135,600
09/98 - accounts payable 491,646 49 337,958 0 0 0 0 0 338,007
09/98 - option fee and penalty 229,536 30 219,193 0 0 0 0 0 219,223
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 - deferred comp. amort - 0 0 0 0 0 125,000 0 125,000
Net loss - 0 0 0 0 0 0 (11,582,428) (11,582,428)
------------ ------ --------- -------- --------- --------- -------- ------------ -------------
BALANCE September 30, 1998 25,999,900 2,600 25,020,717 207,502 1,387,500 0 (125,000) (29,224,228) (2,730,909)
Three months ended December
31, 1998 (Unaudited)
1st quarter - services 1,059,000 106 523,581 0 0 0 0 0 523,687
10/98 - conv. debt converted 1,210,686 121 365,999 0 0 0 0 0 366,120
11/98 - accounts payable 200,000 20 141,980 0 0 0 0 0 142,000
03/99 - deferred comp. amort. - 0 0 0 0 0 62,500 0 62,500
04/99 - reversal of acquisitions (4,144,000) (414) (3,383,636) 0 0 0 0 0 (3,384,050)
3rd quarter - cash 26,006,396 2,601 1,047,719 0 0 0 0 0 1,050,320
06/99 - deferred comp. amortization - 0 0 0 0 0 62,500 0 62,500
Net loss - 0 0 0 0 0 0 (5,145,484) (5,145,484)
------------ ------ ---------- ------- --------- --------- -------- ------------ -------------
BALANCE, June 30, 1999 (unaudited) 50,331,982 $5,034 23,716,360 207,502 1,387,500 0 0 (34,369,712) (9,053,316)
============ ====== ========== ======= ========= ========= ======== ============ =============
Common stock issued under a
repurchase agreement:
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
BALANCE, June 30, 1999 (Unaudited) 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-4
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended June 30,
-------------------------------------
1998 1999
(Unaudited) (Unaudited)
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (5,911,013) $ (5,145,484)
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of deferred compensation 93,750 125,000
Amortization of bene. conv. feat. and conv. debt expenses 0 205,625
Stock issued for services rendered 87,859 523,687
Convertible debt issued for services 43,750 0
Write-off of deferred offering costs 0 30,000
Depreciation and depletion 380,675 327,564
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 0 (40,635)
(Increase) decrease in prepaid expenses and other current assets (567,200) (46,828)
(Increase) decrease in due from STPetro, S.A. 0 (469,604)
Increase (decrease) in suspended revenue 0 14,873
Increase (decrease) in accounts payable 1,354,059 467,870
Increase (decrease) in accrued salaries 797,699 394,050
Increase (decrease) in accrued interest payable 190,402 1,229,127
----------------- -----------------
Net cash provided by (used by) operating activities (3,530,019) (2,384,755)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment (2,013,300) 0
Investment in ST Petro (20,000) 0
Increase on deposits on fixed assets (72,230) 0
Acquisition of property and equipment (166,916) 0
----------------- -----------------
Net cash provided by (used by) investing activities (2,272,446) 0
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank borrowings 9,840 0
Payments on bank borrowings (179,401) (16,575)
Proceeds from loans payable to stockholders 632,076 0
Payments on stockholder loans payable (617,090) (16,320)
Common stock and warrants sold for cash 919,794 1,050,320
Convertible debt sold for cash 6,230,786 1,365,600
----------------- -----------------
Net cash provided by (used by) financing activities 6,996,005 2,383,025
----------------- -----------------
Net increase (decrease) in cash 1,193,540 (1,730)
CASH, beginning of period 327,743 36,359
----------------- -----------------
CASH, end of period $ 1,521,283 $ 34,629
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 11,825 $ 0
================= =================
Non cash financing and investing activities: Stock issued to acquire :
Option fee and penalty settlement
Equity in building $ 61,218 $ 0
================= =================
Conversion of convertible debt $ 0 $ 366,120
================= =================
Conversion of accrued interest payable $ 0 $ 6,938
================= =================
Conversion of convertible debt discount $ 0 $ 53,168
================= =================
Oil and gas properties and equipment $ 2,148,750 $ 0
================= =================
Accounts payable settlement $ 0 $ 142,000
================= =================
Mortgage payable on building assumed $ 28,782 $ 0
================= =================
Stock retired for cancellation of acquisitions $ 0 $ (3,384,050)
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Little Rock, Arkansas.
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 the consolidation. The
consolidated financial statements for the six months ended June 30,
1998 and 1999 include all adjustments which in the opinion of
management are necessary for fair presentation
Cash equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
Concentration of risks
The Company primarily transacts its business with one financial
institution.
Accounts receivable
No allowance for uncollectible accounts has been provided. Management
has evaluated the accounts and believes they are all collectible.
Compensation for services rendered for stock
The Company issued shares of common stock in lieu of services rendered.
The costs of the services are valued according to the terms of relative
agreements, market value on the date of obligation, or based on the
requirements of Form S-8, if applicable. The cost of the services has
been charged to operations.
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.
(2) Going Concern
The Company's current liabilities exceed its current assets by
$7,262,385. The Company has incurred net losses of $5,869,081 and
$5,145,494 in the nine months ended June 30, 1998 and 1999
respectively. 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. In prior years, the Company was able
to raise funds in a timely manner, there is no evidence that they will
continue to do so in the future.
(3) Restricted Cash
A total balance of $18,826 in restricted cash, which is invested in
interest-bearing certificates of deposit, pledged as collateral for a
performance bond covering the Utah properties.
(4) Property, Equipment, Depreciation and Depletion
Property and equipment are valued at cost. Maintenance and repair costs
are charged to expense as incurred. When items of property or equipment
are sold or retired,the related costs are removed from the accounts and
F-6
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(4) Property, Equipment, Depreciation and Depletion (continued) gains or
losses are reflected as income. Depreciation is computed on the
straight-line method for financial reporting purposes, based on the
estimated useful lives of the assets. Autos and trucks are depreciated
over a three to five year life, field equipment over a five to fifteen
year life, office furniture over a three to five year life, and the
building over a thirty year life. Depreciation expense totaled
$380,675,and $327,564 for the nine months ended June 30, 1998 and 1999,
respectively. Depletion (including provisions for future abandonment
and restoration costs) of all capitalized costs of proved oil and gas
producing properties is expensed using the unit-of-production method by
individual fields as the proven developed reserves are produced.
Depletion expense was $3,955 and $690 for the nine months ended June
30, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
At June 30, major classes of property and equipment consisted of the
following :
1998 1999
-------------------- --------------------
<S> <C> <C>
Oil and gas properties $ 1,044,375 $ 1,033,925
Land 2,500 2,500
Building 96,282 96,282
Field equipment 6,229,859 2,009,859
Office furniture and equipment 35,896 79,800
Vehicles 0 38,672
Deposit on purchase of equipment 266,376 0
-------------------- --------------------
Total 7,675,288 3,261,038
Less: accumulated depreciation (1,020,626) (305,691)
-------------------- --------------------
Net property and equipment $ 6,654,662 $ 2,955,347
==================== ====================
</TABLE>
(5) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $2,054,710.
These notes carry no stated maturity date and an 8.5% rate of interest.
The Company has repaid $1,334,247 on these notes, including interest
and principal on one. The remaining note is convertible into restricted
stock at 50% of the average bid price for the month in which the loan
was made.
The conversion is at the option of the noteholder.
In 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 as 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 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.
In October 1998, the Company received conversion notices on $412,350 of
the convertible debt issued in July and August, 1998. This debt, and
accrued interest amounting to $6,938, was converted into 1,210,686
shares of common stock.
(6) Accrued Salaries
At June 30, 1998 and 1999 the Company has accrued salaries of
$1,673,985 and $2,068,035, respectively, for three officers. These
officers can, at their option, convert these salaries into common stock
of the Company
F-7
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
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.
(7) Accrued Interest
Accrued interest consisted of the following at March 31 :
<TABLE>
<CAPTION>
1998 1999
--------------------- --------------------
<S> <C> <C>
Accrued interest - other $ 145,624 $ 0
Accrued interest - convertible debt 0 645,198
Accrued penalties - convertible debt 0 1,700,125
--------------------- --------------------
Total $ 145,624 $ 2,345,323
===================== ====================
</TABLE>
(8) Oil Production
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.
(9) Income Taxes
The Company has a consolidated net operating loss carry-forward
amounting to $34,432,222, expiring as follows: $3,404 in 2015, $728,748
in 2016, $16,913,052 in 2017, $11,582,428 in 2018 and $5,145,484 in
2019. The Company has an $13,498,000 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.
During the first quarter of fiscal 1999, the Company issued 1,059,000
shares of common stock in exchange for services valued at $523,687. The
Company also issued 200,000 shares in settlement of a then outstanding
accounts payable amounting to $142,000. In October 1998, convertible
debt holders converted $412,350 of debt and $6,938 of accrued interest
into 1,210,686 shares of common stock. In April 1999, the Company
reversed the acquisition of the Henderson Oil Field, and canceled
200,000 shares. The Company also reversed the acquisitions of its
environmental equipment, the BAPCO tool and the Chevron Contract and
received back 7,744,000 shares. In May and June, the Company issued
26,006,396 shares in exchange for $1,050,320 in cash.
The Company filed an 8-K on May 21, 1999, decribing all of the actions
in detail. The Company filed an 8-K amendment to include pro-forma
financial statements as of September 30, 1998 and March 31, 1999,
giving effect to these transactions as if they had occurred at the
beginning of each period.
F-8
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(10) Stockholders' Equity (continued)
Rescinded and returned shares
In September 1998, the Board of Directors authorized the issuance of
100,000 shares to a director. This director returned the shares to the
Company due to personal tax considerations. In September 1998, the
Board of Directors authorized the issuance of 2,000,000 shares each to
four officers and directors in connection with the DRSTP Agreement. In
December 1998, the Board of Directors rescinded the issuance as if it
had never occurred.
Procura Financial Consultants, cc (PFC)
Under the May 1997 Agreement between the DRSTP and the Company, PFC is
a junior partner to the Agreement. The Company and PFC are negotiating
an agreement whereby the Company would issue shares to PFC in exchange
for PFC foregoing its rights under the May 1997 Agreement. The Company
has issued, but not delivered 2,000,000 shares in anticipation of
settling this negotiation. However, at the date of this report no final
agreement has been reached.
Arbitration settlements
The Company has notified Kingsbridge that it intends to cancel the
equity line of credit previously negotiated. The negotiated
cancellation agreement requires the Company to pay $100,000 in cash and
issue warrants for 100,000 shares of common stock. This settlement
agreement has not yet been funded and Kingsbridge filed for arbitration
in December 1998.
In April 1998, Uinta Oil and Gas, Inc. (Uinta) filed suit in Utah
relating to the Company's October 1997 acquisition of twenty two oil
and gas wells in Utah. The other two joint sellers of these wells,
along with Uinta, filed a formal demand for arbitration as the purchase
agreement requires. The Company has entered into negotiations to settle
this matter and expects to issue additional shares in this settlement.
However, at the date of this report, no final agreement has been
reached.
(11) Commitments and Contingencies
The Company is committed to lease payments for 10 vehicles under
operating leases totaling $50,598, $7,826 and $3,913 for the years
ended September 30, 1999, 2000 and 2001. The Company paid $19,160 and
$12,650 in vehicle lease expense for the three months ended December
31, 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 totaling $67,108 and $60,808 for the years ending
September 30, 1999 and 2000. The Company paid $11,487 and $17,227 in
facility rent for the nine months ended June 30, 1998 and 1999,
respectively.
(12) 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. BAPCO's principal
identifiable assets consist of crude oil reserves valued at $1,240,175,
equipment valued at $2,508,000 and land and building valued at $98,782.
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.
F-9
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(13) Sao Tome Concession
Concession fee payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay
this concession fee within five days after the DRSTP files the relevant
official maritime claims maps with the United Nations and the Gulf of
Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP from the proceeds of
(13) Sao Tome Concession (continued)
Concession fee payment (continued) 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.
Investment in STPetro, S.A.
In July 1998, the Government of the Democratic Republic of Sao Tome and
Principe established STPetro, S.A. as the national petroleum company.
The charter established the initial ownership of STPetro, S.A. as 51%
by the government and 49% by ERHC in exchange for $51,000 and $49,000
respectively. The Company immediately forwarded $20,000 of its $49,000
in cash, and believes that $29,000 of expenses it has paid on behalf of
STPetro, S.A. prior to its formation will be credited to it for the
balance owed.
Due from STPetro,S.A.
The Company has expended approximately $921,880 on behalf of STPetro,
S.A., principally prior to the formation of STPetro, S.A. The Company
believes that these expenses are recoverable from STPetro, S.A.
under its May 1997 agreement with the DRSTP.
(14) Suspended Revenue
The Company's oil and gas production revenue, amounting to $156,282 as
of June 30, 1999, has been placed in suspense as the Company has not
yet received valid complete division orders on its leases and wells
F-10
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations
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 to a limited extent in Texas and Utah
and primarily in 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
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. The Company is in the process of
seeking to exit from all of its domestic oil and gas properties.
The Company 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 in Sao Tome. The Company has historically funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements.
During the third quarter 1999, the Company was attempting to secure its
position in Sao Tome, but had insufficient cash flow to meet certain commitments
of STPETRO. As a result of information acquired as part of the annual audit
procedures, it became apparent that there was a cloud on certain of the
Company's assets. The Company filed a Form 8K so that it could investigate these
issues; however, such Form 8K effectively stopped all review of the Company's
amended Registration Statement filed in January 1999. At the same time, the
Company was facing increasing penalties and interest due to the failure to have
its Registration Statement declared effective. The Board of Directors was
considering all options available to the Company, including filing for
protections under the Bankruptcy Act.
In late March, the Company became aware of the fact that one of its
noteholders was interested in presenting an offer to the Company to acquire
control. An initial offer was considered by the Board on April 1, 1999; however,
the Board felt that additional negotiations were required.
On April 8, 1999, after investigation and due consideration of the
options available to the Company regarding the cloud upon certain of its assets,
the Board voted to realign assets between itself and its subsidiary, BAPCO.
Following such realignment, all of the previous transactions with Sam Bass and
his companies were rescinded, and BAPCO, as realigned, was transferred to a
corporation, unrelated to ERHC, formed for the benefit of Sam Bass or his
assigns. This corporation would exchange the shares Mr. Bass and such companies
returned from the rescinded transactions, for all shares in the new corporation.
Such exchanged shares were to be returned to the Company for cancellation. The
exchange occurred effective April 23,1999. See Item 5. "Other Information."
On April 8, 1999, ERHC Investor Group Inc.("ERHCIG") presented a revised
offer in the form of a letter of intent whereby they proposed to acquire
fifty-one percent (51%) of the issued and outstanding shares of the Company, on
a fully diluted basis (the "Letter of Intent"). The Letter of
<PAGE>
Intent relied upon certain prior actions of the board and final closing was
conditioned upon satisfactory terms and conditions in the form of a Securities
Purchase Agreement. The ERHCIG acquisition could be in one or more transactions
and ERHCIG was permitted to assign all or any part of its rights. The Letter of
Intent also provided for an Initial Closing at which ERHCIG would subscribe for
the requisite percentage of shares, subject only to the terms of the Final
Closing. The Company executed the Letter of Intent on April 9, 1999.
Pursuant to the Letter of Intent, ERHC was required to secure
Standstill Agreements from its convertible note holders. Each of the Standstill
Agreements was specific to the documents for such investment. However, all of
the Standstill Agreements contained at least the following: (1) each contained
as Exhibit A a copy of the executed Letter of Intent and Term Sheet; (2) each
contained a provision that stated that the information provided was
confidential, non-public information and required the investor to agree not to
disclose, use or trade on such information directly or indirectly in any manner
until the filing of the Company's Form 8-K; (3) all adjustments in the
Securities Purchase Agreement, if applicable, were deleted; (4) all conversion
prices were changed from that which was in the note to $.20 [thereby eliminating
the conversion formulas which were in a majority of the notes requiring
conversion at the lesser of some number at inception or some number at
conversion]; (5) to the extent the adjustment provisions in the note varied from
the note adjustment provisions attached as an exhibit to the Standstill
Agreements, all original provisions were deleted and the attached exhibit
provisions substituted in their place [thereby eliminating inconsistent
adjustment provisions in the notes]; (6) to the extent anti-dilution provisions
in the warrant varied from the warrant anti-dilution provisions attached as an
exhibit to the Standstill Agreement, the original provisions were deleted and
the attached exhibit provisions substituted in their place [thereby eliminating
inconsistent anti-dilution provisions in the warrants]; (7) to the extent the
note did not provide for the payment of interest in the form of Common Stock,
such note was amended to provide for the payment of interest in Common Stock;
(8) to the extent the note did not provide for the conversion of interest and
penalties, if any, into Common Stock, at the time of a voluntary conversion of a
part or all of the principal sum of the note, such provision was amended to
provide for the conversion of interest and penalties, if any, into Common Stock,
at the same time as the conversion of a part or all of the principal sum of the
note; (9) all interest on the note was waived from the date of the Initial
Closing until October 15, 1999 [thereby allowing the Company to stay current on
its interest payments]; (10) all penalties for failure to have a registration
statement declared effective within a specified period of time are waived from
the date of the Initial Closing until October 15, 1999 [thereby allowing the
Company to stay current on its penalty payments]; (11) each investor agreed,
from the date of the Initial Closing until October 15, 1999, not to convert all
or any part of their notes, not to declare a default or seek acceleration of any
payments under the notes; not to commence any foreclosure or bankruptcy actions
under the note; not to declare an event of default or commence any arbitration
action under any of the transaction document; (12) each investor waived all
rights in prior rights, adjustments or anti-dilution provisions relative to the
Letter of Intent and any settlement with Procura Financial Consultants; (13)
each investor agreed to accept shares of restricted Common Stock through the
Initial Closing date in lieu of payments in cash for all accrued and unpaid
interest and penalties on the notes at a conversion price of $.20 [thereby
allowing the Company to become current on all of its interest and penalty
payments]; (14) each investor agreed, to the extent any third party commenced
any bankruptcy or foreclosure action, to vote with the Company; (15) each
agreement provided that in the event no Final Closing occurred, that all
amendments, modification and consents would be void ab initio; and (16) each
investor ratified the acts of the Board taken in compliance with the Business
Judgment Rule from inception through the Initial Closing.
<PAGE>
The initial closing commenced on April 23, 1999; however not all
documentation was completed. The last required document was the subscription
agreement of ERHCIG or its assigns. By document dated April 27, 1999, but
delivered to the Company on May 14, 1999, ERHC Investor Group LLC, an assignee,
executed a Subscription Agreement for twenty-one (21) percentage points of
fifty-one (51) percentage points in consideration of the sum of $210,000; ERHC
Investor Group A LLC, an assignee, executed a Subscription Agreement for 2.805
percentage points of fifty-one (51) percentage points in consideration of the
sum of $165,000; and ERHC Investor Group A LLC, an assignee, executed a
Subscription Agreement for 27.195 percentage points of fifty-one (51) percentage
points in consideration of the sum of $2,625,000.
All of the Officers resigned effective April 30, 1999. In addition, Sam
Bass and Al Cotten resigned from the Board effective April 23, 1999 and William
Beaton was removed since he failed to participate in any actions of the Board
from prior to April 1, 1999 through April 23, 1999 and was generally
unavailable. It was later discovered that Mr. Beaton had been ill during this
period and unable to be reached. The remaining Board met on April 30, 1999 to
elect (i) three (3) replacement Directors, naming Ernest D. Chu, Stephen J.
Warner and Lee Hendelson; (ii) a new Chairman of the Board, naming Ernest D.
Chu; and (iii) new Officers for the Company, naming Stephen J. Warner as
President and Chief Operating Officer, Ernest D. Chu as Treasurer and Chief
Financial Officer and Lee Hendelson as Secretary. The Chairman, the New
Directors and the New Officers accepted and assumed their position effective the
date of the meeting. The four (4) remaining original Board members recused
themselves when the New Directors voted upon the Consulting Agreements,
Severance Agreement and Settlement Agreements with such remaining members and
former Officer, Directors, Employees and Consultants of the Company since such
remaining original Board members clearly had a vested interest in the outcome of
such vote. Such members also recused themselves while the New Directors voted
upon certain settlements negotiated with various parties relative to outstanding
claims and issues involving the Company, since such remaining original Board
members had not participated in these negotiations.
As of May 14, 1999, control of the Company effectively changed, subject
to the Final Closing.
Effective June 13, 1999, the Company received the first installment
under the Letter of Intent in that it received $1,096,000. Pursuant to the
Letter of Intent, the Company was obligated to issue a total of 79,887,802
shares which represented 15% of the 51% to be acquired. Of such shares,
20,920,000 were to be issued directly to members of one of the limited liability
companies with the balance to be issued to the limited liability companies
themselves.
The second installment of $1,000,000 under the Letter of Intent was to
be paid to the Democratic Republic of Sao Tome and Principe ("DRSTP") at such
time as a certain letter confirming the DRSTP's intention to honor the 5%
overriding royalty interest due to the Company upon payment of the last $1
million was secured by the Company. In this regard, the Company secured such
letters and in late June notified the limited liability companies that delivery
of the $1,000,000 for the benefit of the DRSTP was required. No response was
given to such request. On July 1, 1999, the four (4) remaining members of the
Board of Directors demanded word from the limited liability companies as to
their intentions to honor their commitments under the Subscription Agreements.
Such letter demanded payment of the $1 million within ten (10) days. No response
was given to such request and on July 15, 1999, counsel for the Company made
written demand for such payment within forty-eight (48) hours.
<PAGE>
Shortly thereafter, the Company was approached by one of its
Noteholders, Talisman Capital Opportunity Fund Ltd.. ("Talisman Capital"), which
had become aware of the failure of the limited liability companies to perform on
the second installment. Talisman Capital commenced negotiations with the Company
and made alternative proposals to fund it. On August 2, 1999, the Board of
Directors met to review the position of the limited liability companies and to
consider the final proposal offered by Talisman Capital on behalf of TC Hydro
Carbon Inc. ("TCHC"), a company under the control of principals in Talisman
Capital. After consideration of the alternatives and the risk of losing the
DRSTP position if the final payment were not made to the government, the Board
voted to find the limited liability companies in default and to accept the TCHC
offer. Further, the Board acknowledged receipt of the $1 million from the
members of the limited liability companies and agreed to release the 20,920,000
shares to such members.
On August 5, 1999, the Company and TCHC executed a Securities Purchase
Agreement ("TCHC SPA") under which the Company agreed to issue 375,000,000
shares (with additional shares to be issued if, after settlement of claims which
predate the TCHC SPA, the total shares on a fully diluted basis as determined
immediately prior to the execution of the TCHC SPA exceed 160,000,000) at an
aggregate purchase price of $1,000,000 and to execute an agreement with TCHC
whereby TCHC agreed to provide a working capital line of credit in the aggregate
amount of $4,000,000 to be drawn down by the Company over a twenty-four (24)
month period. The terms of such working capital line of credit allow for monthly
draw downs of no more than $350,000 and it is supported by a non-revolving
promissory note bearing eight percent (8%) interest per annum. Under such note
each installment is automatically convertible into shares of the Company at a
conversion rate of $.20 per share 180 days from the advance of each installment.
Under such promissory note, the maximum number of additional shares to be issued
is 20,000,000 if all $4,000,000 is drawn.
The $1,000,000 was deposited into an escrow account established in the
Company's name and was wired to the DRSTP on August 20, 1999 since new
management received sufficient assurances to meet the requirements enumerated in
the escrow agreement annexed to the TCHC SPA after representatives of Talisman
Capital met with the government of Sao Tome. The Company now has met its
commitment to the government and paid the concession fee in full. Approximately
$1.5 million is held in TCHC's account for advances under the working capital
line of credit of which an initial installment has been made to the Company. The
advances are to be used by the Company to liquidate outstanding accounts payable
and to fund ongoing operations including the STPETRO operations in DRSTP. In
this regard, the Company already has liquidated accounts payable to trade
creditors in excess of $225,000. The Company believes that such installments
will permit it to meet its commitments to the DRSTP and STPETRO and the Company
is in the process of establishing an office for STPETRO in Sao Tome.
Immediately following execution of the TCHC SPA, the four (4) remaining
original members of the Board met and removed Messrs. Chu, Warner and Hendelson
from the Board for cause due to the failure of performance under the Letter of
Intent and appointed Geoffrey Tirman, Laura Kleber Mark A. Lee, Brian Ladin and
Noreen Wilson to the Board, with Mr. Tirman appointed as Chairman. Thereafter
Messrs. McKnight, Waters and Griffin resigned leaving Mr. Callender as the only
remaining original Board member.
<PAGE>
The closing under the TCHC SPA occurred on August 6, 1999 when the
Company met all of its closing conditions and had the certificates for TCHC
issued. On such date, the Board met, accepted the resignations of Messrs.
McKnight, Waters and Griffin and elected Mr. Tirman as President and Chief
Executive Officer, Mr. Lee as Vice President, Ms. Kleber as Treasurer and Chief
Financial Office and Brian Ladin as Secretary.
As of August 6, 1999 control of the Company effectively changed.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Form 10Q.
Results of Operations
Third Quarter Ended June 30, 1999 compared to Third Quarter Ended June 30, 1998.
During the third quarter ended June 30, 1999, the Company incurred a
net loss of $5,145,494, compared to a net loss of $5,869,081 in the third
quarter ended June 30, 1998, reflecting the Company's decreased level of
business operations. In the third quarter ended June 30, 1999, a total of
394,050 was accrued, but not paid in cash, as compensation to officers.
Depreciation and depletion equaled 327,564 in the third quarter ended June 30,
1999 compared to 380,675 in the third quarter ended June 30, 1998. Amortization
of the beneficial conversion feature discount on convertible debt was 205,625
for the third quarter ended June 30, 1999 compared to -0- for the third quarter
ended June 30, 1998. The net cash operating loss of the Company for the third
quarter ended June 30, 1999 was 384,755 compared to 3,530,019 for the third
quarter ended June 30, 1998.
The Company had revenues of -0- in the third quarter ended June 30,
1999 compared to 403,960 in the third quarter ended June 30, 1998.
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
had expected 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. However, due to the fact that the Company's
Registration Statement had not been declared effective, the Company had found
additional debt and equity financing was unavailable to it. Under the terms of
the Letter of Intent, the Company secured Standstill Agreements from its
noteholders which allowed for the Company to become current on all of its debt
obligations, including interest and penalties through the date of the Initial
Closing, and waived further interest and penalties until October 15, 1999. The
Company believes that this standstill
<PAGE>
period places it in the position to review its financial structure and put
together a financial plan which will allow the Company to go forward with its
operations. However, it is possible that due to the closing under the TCHC SPA
rather than under the Letter of Intent, that the Standstill Agreements may be
deemed null and void. In that case, interest and penalties have been accruing
since April 23, 1999.
The Company presently intends to utilize any cash flow from operations
as follows: (i) seismic studies and fees for the Sao Tome joint venture; and
(ii) working capital and general corporate purposes.
Capital Expenditures and Business Plan
In May 1997, the Company entered into an exclusive joint venture with
the DRSTP to manage the exploration, exploitation and development of the
potential oil and gas reserves onshore and offshore of the islands, 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 DRSTP government. In September 1997, the Company received a
Memorandum of Understanding from the DRSTP government which allowed the Company
to pay this concession fee within five days after the DRSTP filed the relevant
official maritime claims maps with the United Nations and the Gulf of Guinea
Commission. In December 1997, the Company paid $2,000,000 of this concession fee
to the DRSTP from the net proceeds of the 1997 Private Placement; in June 1998,
it paid $1,000,000 of this concession fee from the net proceeds of the Third
June 1998 Private Placement; and in August, it d $1,000,000 of this concession
fee from the net proceeds of the July/August 1998 Financing. From the September
1998 and October 1998 funding transactions, $250,000 and $500,000, respectively,
were paid from the net proceeds to cover other expenses and obligations relative
to Sao Tome.
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 DRSTP government 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 the SDRSTP 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 had not been determined at that time. The Company intended to run
the survey and acquire the seismic data in late 1998 in order to proceed with
the licensing round
<PAGE>
which was scheduled to commence in early 1999. In July 1998, the Company closed
and formed the joint venture national oil company with the DRSTP. 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 DRSTP and STPETRO entered into a Technical
Assistance Agreement with Mobil (the "TAA Agreement"). Under such agreement,
Mobil agreed to perform a technical evaluation and feasibility study of oil and
gas exploration in certain designated acreage. The TAA Agreement has an initial
term of 18 months and superceded the need for lease sales in early 1999. Under
this agreement, Mobil retains a right of first refusal to acquire development
rights to all or a portion of the acreage which it is evaluating. Mobil
subsequently 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 began
performing seismic work on the option blocks designated in the TAA Agreement 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 U.S. based operational facility. The Company
believes that it will not be significantly affected by exchange rate
fluctuations in local African currencies relative to the U.S. dollar. The
Company believes that the effects of such fluctuations will be limited to wages
for local laborers and operating supplies, neither of which is expected to be
material to the Company's results of operations when the joint venture begins
more substantial operations in Sao Tome.
In October 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 spent more than $200,000
reworking the first of two existing shut-in wells on the property. Due to
mechanical failure downhole, this well was 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.
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 Company is
seeking a buyer or some other disposition of this property.
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, 1998. Of these
wells, 13 had mechanical failures. The Company had located the BAPCO Tool on
site. The Company anticipated 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 Wichita
County property. Pursuant to the realignment of BAPCO in April 1999, the Rusk
<PAGE>
County property was assigned to White Cloud Development Inc. ("White Cloud").
See Item 5. "Other Information."
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 have required 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.
Prior to the Letter of Intent, the Company placed a stop transfer order on
certain shares issued to MIII relative 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 planned 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 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, had negotiated terms
to cancel this agreement and currently is engaged in arbitration in which
Kingsbridge is its cancellation. The Company is currently negotiation for the
sale of this property under which the buyer will assume outstanding obligations
of the Company associated with such leasehold. The Company settled an
arbitration brought by the Uintah sellers regarding this project and executed a
settlement agreement in January 1999.
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 provided for a three-year work
schedule, commencing upon the completion of the Company's 140 foot "plug and
abandonment" barge. This barge was to 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. Upon learning of the death
of the owner of the barge supplier, the Company believed that such supplier
would not be able to deliver. The Company will continue to attempt to recover
the deposit. 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. Pursuant to the actions of the
Board on April 8, 1999, this asset was reassigned to BAPCO and transferred to
White Cloud. See Item 5. "Other Information."
<PAGE>
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. Pursuant to the actions of the Board on April 8,
1999, this asset was transferred to White Cloud.
See Item 5. "Other Information."
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 in Sao Tome. 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. Under the terms of the Letter of Intent, the Company
was to receive $3,000,000 for the acquisition of 51% percent of its stock on a
fully diluted basis. Under the TCHC SPA, the Company received $1 million which
was wired to the DRSTP on August 20, 1999 as the final payment on the concession
fee and a working capital line of credit which provides for up to $4 million
advanced in monthly draw downs of up to $350,000 over a period of two years. New
management believes that such working capital line of credit will provide
sufficient capital until production begins on the Sao Tome project. New
management is exploring the best alternatives for its development plans and
believes that sources through Talisman Capital would be in a position to provide
the long term financing needed by the Company to fully exploit the Company's Sao
Tome projects. 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 if the working capital line of credit
from TCHC is insufficient to meet its operational needs and the Company had no
availability under a bank arrangement or other alternative 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 does not
intend to continue to acquire and develop oil and natural gas properties in the
United States unless 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
<PAGE>
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.
Net Operating Losses
The Company has net operating loss carryforwards of __________________
which will expire in the years 2010 through 2019. The Company has a
__________________ 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 significant 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-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-Q which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), wells to
be drilled or reworked, oil and gas prices and demand, exploitation and
exploration prospects, development and infill potential, drilling prospects,
expansion and other development trends of the oil and gas industry, business
strategy, production of oil and gas reserves, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results 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-Q are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequence to or effects on the Company or its business or operations. The
<PAGE>
Company assumes no obligations to update any such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 was to
pay a penalty in the amount of $100,000 and was to issue warrants to purchase up
to an additional 100,000 shares of the Company's Common Stock (the "Kingsbridge
Warrants"). The Company 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 this date, the Company had not completed the
terms of the anticipated cancellation, and therefore technically 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 would have been 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 breaches of contracts. The Company filed an Answer
in such proceedings. Discovery is proceeding. The Company believes it has just
and meritorious defenses to the claims and intends to vigorously defend these
claims. Arbitration is scheduled for mid September 1999.
Other than the above legal proceeding, the Company is not a party to
any other material pending or threatened legal proceeding outside the course of
ordinary business.
Item 2. Changes in Securities and Use of Proceeds
There have been no changes with respect to defining the rights of
holders of any class of registered securities or otherwise other than those
described above relative to the Standstill Agreements executed under the Letter
of Intent.
In the third fiscal quarter 1999 and through the most practicable date,
the Company issued the following rights, shares and warrants of unregistered
securities:
April 1999 Letter of Intent
On April 8, 1999, after investigation and due consideration of the
options available to the Company regarding the cloud upon certain of its assets,
the Board voted to realign assets between itself and its subsidiary, BAPCO.
Following such realignment, all of the previous transactions with Sam Bass and
his companies were rescinded, and BAPCO, as realigned, was transferred to a
<PAGE>
corporation, unrelated to ERHC, formed for the benefit of Sam Bass or his
assigns. This corporation would exchange the shares Mr. Bass and such companies
returned from the rescinded transactions, for all shares in the new corporation.
Such exchanged shares were to be returned to the Company for cancellation. They
included the 4,000,000 shares issued to Mr. Bass in the BAPCO acquisition, the
744,000 shares issued to Mr. Bass's company, for the acquisition of the
environmental remediation equipment and the 3,000,000 shares issued to Mr.
Bass's company for the Chevron Master Service Agreement.
At the meeting of the Board of Directors on April 8, 1999, the Board
also reviewed certain prior actions of the Board.
The Board placed a stop transfer order on the 200,000 shares issued to
Mytec & Associates because the assignment of the Henderson leasehold was never
made to the Company and they were in default on their agreement.
The Board rescinded a distribution of a portion of the five percent
(5%) overriding royalty interest granted to several Board members, employees and
consultants in February 1999 when the Company was not otherwise able to pay
their salaries and fees. The original passage of such resolution was based upon
a mistaken interpretation of the ability of the Board to disburse a substantial
corporate asset on its own action.
The Board rescinded a conditional issuance of 3,000,000 shares to Mr.
Bass, Mr. Callender and Ms. Wilson in June 1997 relative to Sao Tome and certain
production levels.
The Board rescinded a conditional issuance granted under the MIII
agreement in July 1997 because certain obligations of the Seller under such
agreement were not met and there was a default.
The Board reviewed the extraordinary efforts of certain of its officers
and directors in assuring the formation of STPETRO, having STPETRO's formation
enacted into law and in negotiating the Technical Assistance Agreement between
STPETRO and Mobil. In appreciation of such efforts, the Board approved the
issuance of 2,000,000 shares of the Company's restricted Common Stock to Mr.
Bass, Mr. Callender, Ms. Wilson and Mr. Griffin.
As part of the Letter of Intent, the Company was required to secure
Standstill Agreements from its noteholders. Certain of the noteholders elected
to convert their notes, including principal, interest and penalties into Common
Stock rather than execute the Standstill Agreement. Of these, $750,000 of
principal notes were converted from the October 1997 Financing, and all of the
remaining notes from the July/August 1998 Financing were converted with the
exception of a total of $660,000 in face value which remains outstanding. Such
conversions resulted in the authorization on April 23, 1999 to issue 17, 472,989
shares of the Company's restricted Common Stock based upon the relevant
conversion prices on the dates of the conversion notices, with the holding
period commencing on the date each applicable note was issued. Of the remaining
unconverted notes, all of the noteholders executed Standstill Agreements.
The meeting continued with the Board authorizing the issuance of warrants
<PAGE>
in settlement of certain outstanding issues with one of its consultants, which
warrants are exercisable into 414,125 shares of restricted Common Stock.
Also, the Company authorized the issuance of 12,294,674 shares to cover
the accrued interest and penalties on all of the note transactions as required
by the Standstill Agreements.
After the election of the new Officers and three (3) New Directors at
the meeting of the Board on April 30, 1999, the four (4) remaining original
Board members recused themselves when the New Directors voted upon the
Consulting Agreements, Severance Agreement and Settlement Agreements with such
remaining members and former Officer, Directors, Employees and Consultants of
the Company since such remaining Board members clearly had a vested interest in
the outcome of such vote. Such members also recused themselves while the New
Directors voted upon certain settlements negotiated with various parties
relative to outstanding claims and issues involving the Company, since such
remaining original Board members had not participated in these negotiations.
Most of these agreements were contingent upon the closing under the Letter of
Intent and their legal status is being reviewed by new management.
Pursuant to the Consulting Agreements, Severance Agreements and
Settlement Agreements, 11,245,000 shares of restricted Common Stock were
authorized to be issued to former Officers, current and former Directors and
current and former Consultants of which 6,770,000 shares were taken in lieu back
salaries due to Noreen Wilson and James Griffin. In addition, pursuant to such
Consulting Agreements, Severance Agreements and Settlement Agreements, warrants
to purchase 4,725,000 shares of the Company's restricted Common Stock were
authorized to be granted to former Officers, current and former Directors and
current and former Consultants, which warrants contain graduated exercise prices
of $.25, $.50, $.75, $1.00 and $1.25 and require exercise within a period of
four (4) years. New management is reviewing each of these settlements to
determine their status in light of the failure of the limited liability
companies to close under the Letter of Intent.
Subsequent to the execution of the Letter of Intent, ERHCIG had
negotiated settlements of a number of outstanding matters which it felt were in
the best interest of the Company. Ms. Wilson, a former director of the Company,
elected to take a convertible note in exchange for unpaid expenses. Ms. Wilson
was a member of ERHCIG and was to have certain shareholdings relative to such
participation which were not issued due the default of ERHCIG's assignees. Mrs.
Wilson has been reappointed to the Board of Directors under the TCHC SPA.
Pursuant to the negotiated settlements, 3,143,665 shares of Common Stock were
authorized, including shares equal to $700,000 at $.20 per share in lieu of
repayment of a loan made to the Company by an outside party. In addition, the
ERHCIG appointed Directors granted warrants to purchase 1,000,000 shares of the
Company's Common Stock exercisable at $.25, which warrants expire in April,
2009, to Talisman Capital in exchange for its assistance in gaining cooperation
from other noteholders on the Standstill Agreements.
In June 1999, the Company received $1,046,000 as a result of deposits
made by the limited liability companies under the Letter of Intent into the
Company's account which ERHCIG's assignees represented had been used for the
benefit of the Company. On August 2, 1999, the Board acknowledged receipt of the
$1 million plus. Such funds originated with third party members of the limited
liability companies many of whom had previously invested in the Company's
<PAGE>
convertible notes. At the time of such acknowledgment, the Board agreed to
release the 20,920,000 shares to such members directly since such members were
not involved in the default of the limited liability companies.
After all actions taken, including the 20,920,000 issued to members of
the limited liability companies, and before issuance of the shares under the
TCHC SPA, the total number of shares of the Company's Common Stock issued and
outstanding, prior to other commitments which may be required to be met by the
Company, was 120,229,675. On August 6, 1999, the Company issued 375,000,000
shares to TCHC pursuant to the closing on the TCHC SPA.
Item 3. Defaults Upon Senior Securities
The Company was in default in the payment of the principal due on the
notes issued in the April 1998 Financing. These notes were due in January 1999;
however, under the terms of the Standstill Agreement with these noteholders, the
principal payment has been deferred until December 1999. In the event the TCHC
SPA is deemed to have negated the Standstill Agreements, then such principal is
currently due.
A requirement of funding provided to the Company in November, 1997 from
Avalon Research Group, Inc. ("Avalon") was that the Company would file its
registration statement within forty-five (45) days of the funding. The Form S-1
was filed by the Company on January 8, 1998; however, this eight (8) day
lateness was waived by the Avalon investors. In addition, the Company had agreed
to use its best efforts to have its registration statement declared effective
within one hundred twenty (120) days of the November 15, 1997 closing. The
Company believes that it has used its best efforts to have its registration
declared effective. The Avalon registration rights agreement required that in
the event that the registration statement was not effective within one hundred
twenty (120) days, that the Company would pay as liquidated damages an amount
equal to three percent (3%) of the aggregate amount of the notes per month. As a
result of the delay in declaring the Form S-1 as amended effective, the Company
owed the Avalon investors penalty payments from March 1998 to the present. These
outstanding amounts do not represent a default under the convertible senior
subordinated notes issued to the Avalon investors; however do represent a debt
due by the Company and a default under the Collateral Assignment Security
Agreement under which the Company granted to the Avalon investors a security
interest in the rights to certain oil and gas reserves located in Duchesne and
Uintah Counties, Utah.
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. Pursuant to the terms
of the agreements, 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 additional
shares in full liquidation of all penalties due through February 1999.
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
<PAGE>
the Company's 8.0% convertible notes due in July and August 2000 (the "July
Notes") to a limited number of "accredited" investors. Warrants were issued to
the placement agent at the close of each tranche (the "July Warrants"). 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 required by the agreements. As a
result, the Company is required to make certain payments to the July/August
Investors.
As part of the Standstill Agreements, the Company agreed to issue
shares of Common Stock sufficient to make it current on all outstanding interest
and penalties for all of the convertible note transactions. Pursuant to such
agreements to issue, the Company is current on all of its debt obligations
through April 22, 1999. Further, pursuant to such agreements, the noteholders
have waived interest and penalties through October 15, 1999. In the event the
TCHC SPA is deemed to have negated the Standstill Agreements, then interest and
penalties are due for the period commencing April 23, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On February 16, 1999, the Company reported that subsequent to the
filing of the Company's S-1/A3 and Amendment No. 1 to the Form 10K for the
Fiscal Year Ended September 30, 1998 ("10K/A1"), it was discovered that there
was a question of the ownership rights of the Company in the BAPCO tool and
other assets acquired from Sam Bass and his companies which created a cloud upon
the title to such assets (the "February 8-K").
The Board of Directors of the Company was given notice by Durland &
Company, CPAs, P.A., under Section 10A(b)(2) of the Securities and Exchange Act
of 1934 and filed the February 8-K in compliance with the requirements of
Section 10A(b)(3).
The Company and its independent auditors, Durland & Company, CPAs,
P.A., conducted a full investigation. It was determined that it would cause the
Company undue hardship to try to clarify and correct the cloud on the title to
the assets acquired from Sam Bass and his related companies and that the process
of such clarification might result in protracted litigation. The Board
determined that the best course for the Company and its shareholders was to
realign certain of its assets between itself and BAPCO, to rescind the
transactions with Mr. Bass and his related companies and to transfer BAPCO, as
realigned, to a new corporation held for the benefit of Mr. Bass or his assigns.
Upon return of the shares issued in the rescinded transactions, the shares in
the new corporation are to be released to Mr. Bass or his assigns.
On April 8, 1998, the Company and BAPCO entered into an agreement which
provided the following:
a. BAPCO assigned all rights, title and interest, if any, which it had
to ERHC in the leases in the Uintah property, the Wichita Falls
property, the Nueces property and the MIII property, consented to the
use of the agreement as evidence of such assignment and
<PAGE>
authorized ERHC to perfect the assignment of interest and to execute
any and all documents necessary to perfect such assignment on its
behalf and in its name.
b. BAPCO consented to its removal as the operator on the leases
assigned to ERHC in accordance with paragraph 1 above, consented to the
use of the agreement as evidence of such consent and authorized ERHC to
perfect such removal and to execute any and all documents necessary to
perfect such removal on its behalf and in its name.
c. ERHC assigned all rights, title and interest, if any, which it had
in the Schellstede-Lee, LLC license to BAPCO, which license is paid
through October 16, 1998.
d. ERHC assumed the liability for the accounts payable previously in
BAPCO's name incurred prior to the date of the Agreement, but only to
they extent they appeared in Schedule A to the Agreement.
e. ERHC assumed the liability for the accounts payable on the Wichita
Falls property incurred prior to the date of the Agreement, subject to
authentication and reconciliation.
f. ERHC assigned all rights, title and interest which it had in the
environmental remediation equipment to BAPCO.
g. ERHC assigned all rights, title and interest which it had in the
Chevron Master Service Agreement to BAPCO.
h. ERHC consented to the assignment of all rights, title and interest
in the remaining non- divested assets, the environmental remediation
equipment, the Chevron Agreement and all shares of BAPCO to a new
corporation whose shares were to be held for the benefit of Sam Bass,
Jr. or his assigns ("NEWBASSCORP") and to the attachment of the
Agreement to such assignment agreement subject to the promise of
NEWBASSCORP to (1) the return to ERHC of the four million (4,000,000)
shares issued to Sam Bass at the acquisition of BAPCO in April 1997 at
such time as such shares are tendered to NEWBASSCORP, (2) the return to
ERHC of the seven hundred forty four thousand (744,000) shares issued
to Sam Bass, Jr. and/or Bass World Wide Services for the environmental
remediation equipment at such time as such shares are tendered to
NEWBASSCORP, (3) the return to ERHC of the three million (3,000,000)
shares issued to Sam Bass, Jr. and/or Bass Environmental Services
Worldwide Inc. for the Chevron Agreement at such time as such shares
are tendered to NEWBASSCORP and (4) the delivery to ERHC of a full and
general release from Mr. Bass, Bass World Wide Services and Bass
Environmental Services Worldwide Inc. in favor of ERHC.
On April 8, 1999, the Company and White Cloud, the NEWBASSCORP required
by the realignment, entered into an agreement which provided for the following:
ERHC assigned all rights, title and interest in the shares of
BAPCO, all of its non- divested assets, its environmental remediation
equipment and its Chevron Master Service Agreement as set forth in the
agreement between the Company and BAPCO, subject only to the
liabilities specifically assumed as set forth therein to White Cloud.
<PAGE>
In exchange for the assignment contained in paragraph 1, White
Cloud agreed to hold all such acquired assets for the benefit of Sam
Bass or his assigns until such time as (1) Mr. Bass tendered the four
million (4,000,000) shares issued to him at the acquisition of BAPCO in
April 1997, (2) Mr. Bass and/or Bass World Wide Services tendered the
seven hundred forty four (744,000) shares issued to them for the
acquisition of the environmental remediation equipment, (3) Mr. Bass
and/or Bass Environmental Services Worldwide Inc. tendered the three
million (3,000,000) shares issued to them for the acquisition of the
Chevron Agreement, and (4) Mr. Bass, Bass World Wide Services and Bass
Environmental Services Worldwide Inc. executed and delivered a full and
general release in favor of ERHC relinquishing, among other things, all
claims relative to such shares, the original acquisition of such assets
and the transfer of BAPCO as realigned and its assets and all claims
relative to any part of the overriding royalty interest previously
granted to him relative to Sao Tome.
At such time as White Cloud received tender of any of the
shares to be relinquished in accordance with paragraph 2 above and the
delivery of the full and general release, White Cloud agreed to return
such shares and release to ERHC forthwith and to deliver the pro rata
portion of the shares in White Cloud held for the benefit of Mr. Bass
or his assigns to Mr. Bass or to his designated assignee.
White Cloud released and discharged ERHC from all claims or
actions relative to the original acquisition of BAPCO, the
environmental remediation equipment, the Chevron Agreement and the
issuance of shares for each such acquisition and accepted the
assignment as full consideration for the transaction subject only to
the full obligation of ERHC relative to the specific liabilities
assumed.
By Agreement effective April 23, 1999 between the White Cloud and Sam
Bass, individually and on behalf of Bass Environmental Worldwide Services Inc.,
Mr. Bass exchanged and released 7,744,000 shares of the Company's restricted
stock for 100% of the authorized and issued capital stock in White Cloud. Mr.
Bass delivered the Company's restricted shares previously issued to him and the
required release to White Cloud.
The Company does not believe that there need be any changes in the
legal or financial disclosure relative to the financial and legal effects of the
rescission of the related party agreements with Mr. Bass and his companies which
would require further amendment to its Form S-1 and Form 10K for the Fiscal Year
Ended September 30, 1998 and all other reports which has been filed since.
In addition, on May 21, 1999, the Company filed on Form 8K a report of
the change of control and the rescission of the Bass related transactions. Such
report stated that no changes have been made to the legal and financial
disclosure as a result of the completion of the investigation and the
realignment of BAPCO.
The May 21, 1999 Form 8K informed all parties that they could continue
to rely upon the previously filed audit opinion letter, financial statements and
the disclosures as to the BAPCO tool contained in the Company's Form S-1/A3 and
the Form 10K/A1. On July 20, 1999 the
<PAGE>
Company filed a pro forma statement for the periods ending September 30, 1998
and March 31, 1999 showing the effects of the rescission as if it had occurred
prior to the end of the 1998 Fiscal Year.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.31 Agreement between ERHC and BAPCO realigning assets dated April 8, 1999
10.32 Agreement between ERHC and White Cloud Development Inc.("White Cloud")
dated April 8, 1999 transferring BAPCO to White Cloud
10.33 Letter of Intent & Revised Term Sheet dated April 8, 1999 and executed
April 9, 1999.
10.34 Agreement between White Cloud Development Inc. and Sam Bass and Bass
Environmental Services Worldwide, Inc. effective April 23, 1999
10.35.1
to
10.35.8 Standstill Agreements under the Letter of Intent [See Exhibit 10.33
which is Exhibit A to each of these Agreements]
10.36.1
to
10.36.3 Subscription Documents dated April 27, 1999 representing the
purchase of 51% of the Company's Common Stock on a fully
diluted basis.
10.37 * Securities Purchase Agreement dated August 3, 1999 with TC Hydro
Carbon Inc.
[* filed herewith, all other exhibits, previously filed]
B. Reports on Form 8-K
Form 8K: reporting Letter of Intent to acquire 51% of the Company's
Common Stock on a fully-diluted basis filed May 21, 1999 (Form 8 K/A including
the financials filed July 20, 1999]
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of West Palm Beach, Florida
on the 23th day of August 1999.
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
By: /s/ Laura Kleber
-------------------------
Laura Kleber, Chief
Financial Officer and Director
[Signature Page 10Q-63099]
Exhibit 10.37
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of August 3, 1999, is
entered into by and between ENVIRONMENTAL REMEDIATION HOLDINGS CORPORATION, a
Colorado corporation (the "Company") and TC HYDRO CARBON INC., a Delaware
corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, Common Stock of the Company, $.0001 par value
per share, (the "Shares"), upon the terms and subject to the conditions of such
Shares, and subject to acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE
a. Purchase; Certain Definitions.
(i) Buyer hereby agrees to purchase from the Company 375,000,000
Shares for an aggregate purchase price of US$1,000,000. The
purchase price shall be payable in United States Dollars (the
"Purchase Price").
(ii) Buyer hereby agrees to provide the Company with a Working Capital
Line of Credit in the aggregate amount of US$4,000,000 to be
drawn down by the Company over a twenty four (24) month period
from the date hereof (the "Line"), such Line Agreement attached
hereto as Schedule A. (iii) As used herein, the term "Securities"
means the Shares.
b. Form of Payment. Buyer shall pay the purchase price for the Shares by
delivering immediately available good funds to the Company's Little
Rock, Arkansas bank account (the "Account") as identified in Section
1(d) herein.
c. Share Delivery. No later than the Closing Date (as defined below), the
Company shall deliver two certificates in equal amounts of 187,500,000
representing the Shares
<PAGE>
duly executed on behalf of the Company (collectively, the
"Certificates") to the Buyer.
d. Method of Payment. Payment into the Account of the Purchase Price for
the Shares shall be made by Buyer via wire transfer of same day funds
to:
Regions Bank
Little Rock, AR
Attn: Mary Edwards
ABA#: 0 6 2 - 0 0 5 - 6 9 0
A/C: Environmental Remediation Holdings Corporation
A/C#: 8 0 0 - 9 6 3 - 3 6 2 6
Not later than 1:00 p.m., Central Standard Time, on the date which is
one New York Stock Exchange trading day after the Company shall have
accepted this Agreement and returned a signed counterpart of this
Agreement to the Buyer by facsimile, Buyer shall deposit with the
Buyer the Purchase Price for the Shares.
2. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that to the best of
its knowledge and after reasonable due diligence:
a. Authorized Shares. The Shares have been duly authorized and, when
issued, will be duly and validly issued, fully paid and non-assessable and will
not subject the holder thereof to personal liability by reason of being such
holder. There are no preemptive rights of any shareholder of the Company, as
such, to acquire the Shares, except for such antidilution rights as may exist
under outstanding options and warrants, or rights existing under the Company's
Shareholder Rights Plan.
b. Company Status. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado and has
the requisite corporate power to own its properties and to carry on its business
as now being conducted. The Company is duly qualified as a foreign corporation
to do business and is in good standing in each jurisdiction where the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those jurisdictions in which the failure to so qualify
would not have a material adverse effect on the business, operations or
prospects or condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the 1934 Act, and the Common Stock is listed and
traded on the Over The Counter Bulletin Board ("OTC-BB").
c. Enforceability. This Agreement and all other documents relating to
this transaction and the transactions contemplated hereby and thereby, have been
duly and validly authorized by the Company, when executed and delivered by or on
behalf of the Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject, as to
enforceability, to general principles of equity and to bankruptcy, insolvency,
moratorium, and other similar laws affecting the enforcement of creditor's
rights generally.
<PAGE>
d. Non-contravention. The execution and delivery of this by the
Company, the issuance of the Securities, and the consummation by the Company of
the other transactions contemplated by this Agreement do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under (i) the articles of incorporation
or by-laws of the Company, each as currently in effect, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
(except as herein set forth), (iii) to its knowledge, any existing applicable
law, rule, or regulation or any applicable decree, judgment, or order of any
court, United States federal or state regulatory body, administrative agency, or
other governmental body having jurisdiction over the Company or any of its
properties or assets, or (iv) any listing agreement for its Common Stock, except
such conflict, breach or default which would not have a material adverse effect
on the transactions contemplated herein.
e. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the shareholder of the Company is required to be obtained
by the Company for the issuance and sale of the Securities to the Buyer as
contemplated by this Agreement, except such authorizations, approvals and
consents that have been obtained.
f. SEC Filings. None of the Company's SEC Reports, as amended,
contained, at the time they were filed, any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements made therein in light of the circumstances under which they
were made, not misleading.
g. Absence of Certain Changes. Since December 31, 1998, except as
disclosed in the Company's SEC Reports, there has been no material adverse
change and no material adverse development in the business, properties,
operations, condition (financial or otherwise), or results of operations of the
Company and its subsidiaries, taken as a whole, and the Company has not (i)
incurred or become subject to any material liabilities (absolute or contingent)
except liabilities incurred in the ordinary course of business consistent with
past practices; (ii) discharged or satisfied any material lien or encumbrance or
paid any material obligation or liability (absolute or contingent), other than
current liabilities paid in the ordinary course of business consistent with past
practices; (iii) declared or made any payment or distribution of cash or other
property to shareholders with respect to its capital stock, or purchased or
redeemed, or made any agreements to purchase or redeem, any shares of its
capital stock; (iv) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business
consistent with past practices; (v) suffered any substantial losses or waived
any rights of material value, whether or not in the ordinary course of business,
or suffered the loss of any material amount of existing business; (vi) made any
changes in employee compensation, except in the ordinary course of business
consistent with past practices; or (vii) experienced any material problems with
labor or management in connection with the terms and conditions of their
employment.
h. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally or as disclosed in the
Company's SEC Reports), that has not been disclosed in writing to the Buyer that
(i) would reasonably be expected to have a material adverse effect on the
business or financial condition of the Company or (ii) would reasonably be
expected to materially and adversely affect the ability of the Company to
perform its
<PAGE>
obligations pursuant to this Agreement or any of the agreements contemplated
hereby (collectively, including this Agreement, the "Transaction Agreements").
i. Absence of Litigation. The Company's SEC Reports, which the Buyer
has reviewed, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business or financial condition, results of operation or prospects
of the Company and its subsidiaries taken as a whole or the transactions
contemplated by any of the Transaction Agreements or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, any of the Transaction Agreements.
j. Prior Issues. During the twelve- (12) months preceding the date
hereof, to the best of the Company's knowledge the Company has not issued any
Common Stock, convertible or exchangeable securities in capital transactions
that have not been fully disclosed to the Buyer.
k. No Undisclosed Liabilities or Events. The Company has no liabilities
or obligations, other than those disclosed in the Company's SEC Reports or those
incurred in the ordinary course of the Company's business since December 31,
1998, which, individually or in the aggregate, do or would not have a material
adverse effect on the properties, business, condition (financial or otherwise),
results of operations or prospects of the Company and its subsidiaries, taken as
a whole. No event or circumstance has occurred or exists with respect to the
Company or its properties, business, condition (financial or otherwise), results
of operations or prospects, which, under applicable law, rule or regulation,
requires public disclosure or announcement prior to the date hereof by the
Company but which has not been so publicly announced or disclosed. The Buyer is
relying on all representations, both verbal and written, made by the Company in
connection with this transaction.
l. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property is bound.
3. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO NFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, covenants and agrees with, the
Company as follows:
a. Buyer represents that it is purchasing the Shares for its own
account for investment and not with a view towards the public sale or
distribution thereof and not with a view to or for sale in connection with any
distribution thereof.
b. The Buyer is (i) an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in any way by the Company
or any of its
<PAGE>
affiliates or selling agents), to protect its own interests in connection with
the transactions described in this Agreement, and the related documents, and
(iv) able to afford the entire loss of its investment in the Securities.
c. All subsequent offers and sales of the Shares shall be made pursuant
to registration of the Shares under the 1933 Act or pursuant to an exemption
from registration.
d. The Buyer understands that the Shares are being offered and sold to
it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying
upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of the Buyer to acquire the Shares.
e. The Buyer and its purchaser representative represent and acknowledge
that Buyer has been furnished with all materials relating to the business,
finances and operations of the Company and materials relating to the offer and
sale of the Shares which have been requested by the Buyer, and is relying on the
Company's representations, both verbal and written. The Buyer and its advisors,
if any, have been afforded the opportunity to ask questions of the Company and
have received complete and satisfactory answers to any such inquiries.
f. The Buyer understands that its investment in the Company is
speculative and that there can be no assurance that the Shares can be sold at or
above the Purchase Price.
g. The Buyer understands that no United States federal or state agency
or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors rights generally.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Shares
have not been registered under the 1933 Act and may not be sold, transferred or
otherwise disposed of unless (A) registered for resale under the 1933 Act or (B)
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that
such securities may be sold or transferred pursuant to an exemption from such
registration; (2) any sale of such securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not
<PAGE>
applicable, that any resale of such securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
another exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register such securities (other than pursuant to Section 4(c)
herein) under the 1933 Act or to comply with the terms and conditions of any
exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that, until
such time as the Shares have been registered for resale under the 1933 Act,
certificates and other instruments representing any of the Securities shall bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION, OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.
c. Use of Proceeds. The Company will use the proceeds from the sale of
the Shares for the final contract payment in the amount of US$1,000,000 to the
Democratic Republic of the Government of Sao Tome and Principe ("DRSTP"). The
release of the $1,000,000 to the DRSTP is subject to the satisfaction of the
items listed on the Escrow Release Agreement attached hereto as Schedule B. The
Company will use the proceeds from the draw down of the Line to fund its ongoing
operating expenses.
d. Anti-dilution. The Shares issued herein shall be subject to upward
adjustment if the Buyer should determine, in its sole discretion, that as of the
date hereof, the fully diluted common shares of the Company are in excess of
160,000,000 shares. If any or all settlements, offers to settle, or claims
against the Company of any nature whatsoever having a genesis that predates the
date hereof ("Predate Claims") results in the issuance of common shares of the
Company ("Settlement Shares") to satisfy or fulfill such Predate Claims, then
the Settlement Shares shall be added to the actual shares outstanding as of the
date of the issuance of such Settlement Shares. If and when the Company's fully
diluted common shares exceeds 160,000,000, then the Company shall issue to the
Buyer additional Shares (Anti-dilution Shares) so that immediately subsequent to
the issuance of such Anti-dilution Shares, the buyer shall continue to own 70.0%
or more of the Company's fully diluted shares outstanding. 5. DELIVERY
INSTRUCTIONS.
The Shares shall be delivered by the Company to the Buyer as detailed
in Section 11(c) hereof, on a delivery against payment basis, no later than on
the Closing Date.
<PAGE>
6. CLOSING DATE.
(i) The closing of the issuance and sale of the Shares shall occur on
the date (the "Closing Date") which is the first trading day after the
fulfillment or waiver of all closing conditions of Sections 7 and 8 herein or
such other date and time as is mutually agreed upon by the Company and the
Buyer. The date of an alternate Closing Date shall be the date specified by
either party upon at least three (3) business days advance notice to the other
party; provided, however, that it shall be a condition of an alternate Closing
Date that each of the conditions contemplated herein shall have been satisfied
or waived on or before such date.
(ii) The purchase and issuance of Shares shall occur at the offices of
the Buyer on the Closing Date no later than 12:00 Noon, Central Standard Time,
on such day, or at such other time as is mutually agreed upon by the Company and
the Buyer.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Shares
on the Closing Date to the Buyer pursuant to this Agreement is conditioned upon:
a. Acceptance by the Buyer of this Agreement, as indicated by execution
of this Agreement;
b. Delivery by the Buyer of good funds into the Account as payment in
full of the Purchase Price for the Shares and the delivery of verification
thereof to the Company;
c. The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date, and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date; and
d. There shall not be in effect any law, rule or regulation prohibiting
or restricting the transactions contemplated hereby, or requiring any consent or
approval that shall not have been obtained.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Shares on
the Closing Date is conditioned upon:
a. Acceptance by the Company of this Agreement, as indicated by
execution of this Agreement and the delivery to the Buyer of a duly executed
Board resolution authorizing and approving the transaction contemplated herein;
<PAGE>
b. Delivery by the Company to the Buyer of the certificate for the
Shares in accordance with this Agreement;
c. The accuracy in all material respects on the Closing Date of the
representations, covenants and warranties of the Company contained in this
Agreement as if made on the Closing Date, and the performance by the Company on
or before the Closing Date of all covenants and agreements of the Company
required to be performed on or before the Closing Date;
d. On the Closing Date, the Buyer has received an opinion of counsel
for the Company, dated the Closing Date in form, scope and substance reasonably
satisfactory to the Buyer;
e. On the Closing Date, the Buyer has received a fairness opinion from
the Accountant for the Company, dated the Closing Date in form, scope and
substance reasonably satisfactory to the Buyer;
f. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits or adversely
effects any of the transactions contemplated by this Agreement, and no
proceeding or investigation shall have been commenced or threatened which may
have the effect of prohibiting or adversely effecting any of the transactions
contemplated by this Agreement; and
g. Deliver by the Company to the Buyer of signed resignations from the
Board of Directors for Jim Griffith, Bob Knight, and Ken Waters, along with the
appointment to the Board of Laura Kleber, Mark A. Lee, Brian Ladin, Noreen
Wilson and Geoffrey Tirman as Chairman.
9. CONDITIONS OF RELEASE OF ESCROW FUNDS TO DEMOCRATIC REPUBLIC OF SAO TOME
AND PRINCIPE.
The release of the US$1,000,000 to the DRSTP is conditioned upon the
satisfaction of the items detailed in Escrow Release Agreement attached hereto
as Schedule B.
10. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Colorado for contracts to be wholly performed in
such state and without giving effect to the principles thereof regarding the
conflict of laws.
b. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto.
c. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
<PAGE>
d. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
e. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
f. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
g. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
h. Except as otherwise set forth herein, all costs and expenses,
including reasonable attorney's fees, incurred in the enforcement of this
Agreement shall be paid to the prevailing party by the non-prevailing party,
upon demand.
11. NOTICES. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given on the earliest of: (i) the date delivered, if delivered by personal
delivery as against written receipt therefor or by confirmed facsimile
transmission, (ii) the fourth business day after deposit, postage prepaid, in
the United States Postal Service by registered or certified mail, or (iii) the
third business day after mailing by international express courier, with delivery
costs and fees prepaid, in each case, addressed to each of the other parties
thereunto entitled at the following addresses (or at such other addresses as
such party may designate by advance written notice similarly given to each of
the other parties hereto):
COMPANY: ERHC
Attn: Jim Callender
777South Flager Drive, Suite 901, West Palm Beach, FL 33401
T: 318.258.3001; F: 318.258.5629
BUYER: TC Hydro Carbon Inc.
Attn: Geoffrey Tirman
16101 LaGrande Drive, Suite 100, Little Rock, AR 72223
T: 501.821.6800; F: 501.821.6888
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's
representations and warranties herein shall survive the execution and delivery
of this Agreement and the delivery of the Shares and the Purchase Price, and
shall inure to the benefit of the Buyer and its successors and assigns.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
as of the date first above written.
BUYER
TC Hydro Carbon, Inc.
By:/s/ Geoffrey Tirman
Print Name:
Date:
COMPANY
ERHC, Inc.
By:/s/ James Callender Sr.
Print Name: ____________________________
Date: __________________________________
By: /s/ James Griffin
Print Name: ____________________________
Date: __________________________________
By: /s/ Robert McKnight
Print Name: ____________________________
Date: _________________________________
By: /s/ Ken Waters
Print Name: ____________________________
Date: __________________________________
<PAGE>
SCHEDULE A
THE SECURITIES REPRESENTED HEREBY OR INTO WHICH THIS NOTE MAY BE CONVERTED HAVE
NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL AND FROM ATTORNEYS REASONABLY ACCEPTABLE TO THE COMPANY AND ITS COUNSEL,
THAT SUCH REGISTRATION IS NOT REQUIRED.
No. 1 August , 1999
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
SENIOR SECURED 8.00% EXCHANGEABLE PROMISSORY NOTE
DUE SEPTEMBER 1, 2004
FOR VALUE RECEIVED, ENVIRONMENTAL REMEDIATION HOLDING CORPORATION, a
Colorado corporation (the "Company") hereby promises to pay to TC HYDRO CARBON
INC., a Delaware corporation (the "Noteholder" or "Lender"), or registered
assigns, on or before September 1, 2004 (the "Maturity Date"), the principal sum
of Four Million Dollars (US$4,000,000.00) or such other or lesser amount as may
be outstanding from time to time. The principal and interest hereon shall be
payable in lawful money of the United States of America at the principal office
of the Noteholder or at such other place as the registered Noteholder may
designate from time to time in writing to the Company. The aggregate unpaid
amounts reflected on the records of the Noteholder shall be deemed rebuttably
presumptive evidence of the principal amount remaining outstanding and unpaid on
this Note. No failure of the Noteholder to record any advance or payment shall
limit or otherwise affect the obligation of the Company hereunder with respect
to any amounts advanced under this Note. All payments to be made by the Company
on account of principal and interest under this Note shall be made without set
off or counterclaim.
1. INTEREST. The Company agrees to pay interest from the date hereof on the
principal sum remaining unpaid at the rate of 8.00% per annum (or such higher
rate set forth in Section 3) based on a 360-day year. Interest shall accrue and
be convertible common stock of the Company pursuant to Section 4 herein.
Notwithstanding anything in this Note to the contrary, in no event shall the
rate of interest charged with respect to this Note exceed the highest rate of
interest
<PAGE>
which may be lawfully charged under the laws of any jurisdiction governing this
Note and the payment of interest thereon.
2. ADVANCES. Notwithstanding anything in this Note to the contrary, the
procedures for the requesting and making of advances under this Note (each, an
"Advance") shall be governed by this Section 2.
(a) The maximum aggregate amount of Advances to be made during any calendar
month shall average on a trailing six -(6) month basis $250,000.00 per month,
but shall not in any one calendar month be greater than $350,000.00.
(b) This Note is being issued in connection with the acquisition by the
Noteholder or an affiliate thereof of an approximate 70% equity interest in the
Company (the "Acquisition"). Until such time as a super-majority of the
Company's Board of Directors consists of appointees or representatives of the
Noteholder, the maximum aggregate amount of all Advances under this Note shall
not exceed $100,000.00.
(c) No Advance may be made or requested under this Note after September 1,
2001.
(d) The Company shall request an Advance under this Note by giving written
notice to the Noteholder at least three (3) business days before the proposed
Advance which notice shall indicate the date of the requested Advance which
shall not be less than three (3) business days from the date of the notice.
(e) This Note is not a revolving note, and amounts advanced hereunder may
not be reborrowed after they have been repaid.
(f) Advances under this Note may not be prepaid by the Company.
3. DEFAULT INTEREST. Notwithstanding the foregoing provisions of Section 1, upon
the occurrence and during the continuance of an Event of Default, the principal
of and unpaid interest on this Note shall bear interest, from the date of the
occurrence of the Event of Default until such Event of Default is cured or
waived, payable on demand in immediately available funds at a rate equal the
rate otherwise in effect pursuant to Section 1, plus 10.00% per annum.
4. NOTE EXCHANGE. Except as otherwise provided in Section 5, on the 180th day
following the date of each Advance, all of the principal and accrued interest
represented by such Advance shall be automatically converted (each such act
herein referred to as a "Conversion") into such number of fully paid, validly
issued and nonassessable shares of common stock of the Company (hereinafter the
"Common Stock" or the "Common Shares") as shall be determined by dividing (i)
the Conversion Amount, as determined in Section 4(b) herein, of the Advance by
(ii) the Conversion Price, as determined in Section 4(a) herein, in effect on
the Conversion Date, as determined in
<PAGE>
Section 4(c) herein (the Common Stock received by the Noteholder in each
Conversion shall be referred to as "Conversion Shares"). All Conversion Shares
shall be free and clear of any liens, claims or encumbrances. Each Conversion
shall reduce the face amount of the Note by a like amount.
(a) Determination of Conversion Price. The "Conversion Price" shall be
$0.20 per share of Common Stock of the Company subject to adjustment in
accordance with Sections 4(g), 4(h) and 4(i).
(b) Conversion Amount. The "Conversion Amount" for each Advance shall be
equal to the sum of (i) the principal amount of the Advance being Converted
plus (ii) any and all accrued and unpaid interest on the principal portion
of such Advance.
(c) Conversion Date. The 180th day following the date of each Advance shall
be the "Conversion Date" for such Advance.
(d) Conversion Mechanics. To the extent that any portion of the Note is
Converted, the rights of the Noteholder with respect to such portion of the
Note shall cease and the Noteholder shall be deemed to have become the
holder of record of the Conversion Shares represented thereby. No
fractional Common Shares shall be issued upon Conversion of the Note or any
part thereof. In lieu of any fractional share to which the Noteholder would
otherwise be entitled, the Company shall round up to the nearest whole
Common Share. In the case of a dispute as to the calculation of the
Conversion Price, the Noteholder's calculation shall be deemed conclusive
absent manifest error.
(e) Share Delivery. Within five (5) days after the Conversion Date, the
Company will deliver, either via Express Mail or DTC/DWAC electronic
transfer to the Noteholder a certificate or certificates representing the
number of Conversion Shares issuable by reason of each Conversion in the
name of the Noteholder in such denomination or denominations as the
Noteholder has specified.
(f) Common Share Reservation. The Company shall at all times have
authorized, reserved and set aside a sufficient number of Common Shares to
facilitate Conversion of the entire principal amount of this Note, together
with all accrued and unpaid interest thereon. The Company shall at all
times reserve and keep available, out of its authorized but unused shares
of Common Stock, solely for the purpose of effecting the Conversion of the
Note, the full number of shares deliverable upon Conversion of all the Note
from time to time outstanding. The Company shall, from time to time in
accordance with the laws of its state of formation, increase the authorized
number of shares of Common Stock if at any time the unused number of
authorized shares shall not be sufficient to permit the conversion of all
of the Note at the time outstanding. In such connection, the Company shall
hold a special meeting of stockholders for the purpose of authorizing
additional shares of Common Stock not later than 90 days after any date in
which the Company shall have insufficient shares of Common Stock so
reserved.
(g) Stock Dividends. If after the date hereof the number of outstanding
Common Shares is increased by a stock dividend payable in Common Shares or
F-2
<PAGE>
by a split-up of Common Shares or other similar event, then, on the effect
date thereof, the number of Common Shares issuable on conversion hereunder
shall be increased in proportion to such increase in outstanding Common
Shares and the then applicable conversion Price shall e correspondingly
decreased.
(h) Merger or Consolidation. If after the date hereof any capital
reorganization or reclassification of the Common Stock of the Company, or
consolidation or merger of the Company with another corporation, or the
sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful
and fair provision shall be made whereby the Noteholder shall thereafter
have the right to convert this Note and receive, upon the basis and upon
the terms and conditions specified in this Note and in lieu of the Common
Shares of the Company immediately theretofore receivable upon the
Conversion of this Note, such shares of stock, securities or assets as may
be issued or payable with respect to or in Conversion for the number of
outstanding Common Shares equal to the number of shares of such stock
immediately theretofore receivable upon the conversion of this Note, had
such reorganization, reclassification, consolidation, merger, or sale not
taken place and in such event appropriate provision shall be made with
respect to the rights and interests of the Noteholder to the end that the
provisions hereof shall thereafter be applicable, as nearly as may be in
relation to any share of stock hereof shall thereafter be applicable, as
nearly as may be in relation to any share of stock, securities, or assets
thereafter deliverable upon the Conversion of this Note. The Company shall
not effect any consolidation, merger, or sale unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing
such assets, shall assume by written instrument executed and delivered to
the Noteholder the obligation to deliver to the Noteholder such shares of
stock, securities, or assets as, in accordance with the foregoing
provisions, such Noteholder may be entitled to acquire upon Conversion of
this Note.
(i) Subsequent Share Issuance or Sale. Without the express prior written
consent of the Lender, which can be withheld in the sole discretion of the
Lender, the Company shall not issue any Common Stock or incur any
indebtedness.
(j) Taxes. The Company shall pay any and all issue and other taxes,
excluding federal, state or local income taxes, that may be payable in
respect of any issue or delivery of shares of Common Stock on Conversion of
this Note pursuant hereto; provided that the Company shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any
Noteholder in connection with any such Conversion.
5. EVENTS OF DEFAULT.
(a) Events of Default. The Company shall be in default under this Note upon
the occurrence of any of the events specified in Section 4 hereof and
failure to cure such default within the number of days specified in each
Subsection hereof, upon receipt of written notice thereof from the
<PAGE>
Noteholder, any such occurrence of any one or more of such events, herein
specified, being an "Event of Default":
(I) Failure to make any principal or interest payment required under this
Note on the due date of such payment, and such Event of Default not
being cured within ten (10) calendar days of such payment due date;
(II) If the Company shall default in the performance of or compliance with
any of its material covenants or agreements contained herein, whether
expressed or implied, and such default shall not have been remedied
within ten (10) calendar days after written notice thereof shall have
been delivered to the Company by the Noteholder;
(III)If the Company shall not, at the time of a scheduled Conversion, have
a sufficient number of authorized and unissued shares of its Common
Stock available for issuance to the Noteholder upon the scheduled
Conversion in accordance with the terms hereof, and such default shall
not have been remedied within twenty (20) calendar days from the
scheduled date of such Conversion;
(IV) If any representation or warranty made in writing by or on behalf of
the Company in this Note shall prove to have been false or incorrect
in any material respect, either by misstatement or omission, on the
date as of which made;
(V) If the Company or one of its subsidiaries shall become insolvent, make
an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts as they become due, or shall file a
voluntary petition in bankruptcy or shall have an order for relief
under the Bankruptcy Act granted against it or them, or shall be
adjudicated bankrupt or insolvent, or shall file any answer seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, or shall file any answer admitting or not
contesting the material allegations of a petition filed against the
Company or one of its subsidiaries in any such proceeding, or shall
seek or consent to or acquiesce in the appointment of any trustee,
custodian, receiver or liquidator of the Company or one of its
subsidiaries or of all or any substantial part of the properties of
the Company or one of its subsidiaries, or the Company or one of its
subsidiaries or its respective directors shall take any action looking
to the dissolution or liquidation of the Company or one of its
subsidiaries.
(b) Remedies and Acceleration Upon the Occurrence of an Event of Default.
Upon the occurrence of an Event of Default, the Company agrees that
monetary damages may be difficult or impossible to determine, and alone are
inadequate protections for the Noteholders. Therefore,
(I) The Noteholder shall have all the rights and remedies, at law and in
equity, by statute or otherwise, and no remedy herein conferred upon
the Noteholder is intended to be exclusive of any other remedy and
<PAGE>
each remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or now or hereafter existing at law, in
equity, by statute or otherwise.
(II) The Noteholder shall be able to call on injunctive relief and/or a
specific order for compliance as determined by the Noteholders in
their sole discretion and as so ordered by a court of law.
(III)If an Event of Default occurs under Section 4(a)(v) hereof, then the
outstanding principal of and all accrued interest on this Note shall
automatically become immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are expressly
waived.
(IV) If any other Event of Default occurs and is continuing, the
Noteholder, by written notice to the Company, may declare the
principal of and the accrued interest on this Note immediately due and
payable.
(V) The Noteholder may rescind an acceleration notice and its consequences
if all existing Events of Default have been cured or waived, such
waiver to be granted at the Noteholders sole discretion.
(VI) No course of dealing between the Company and the Noteholder or any
delay on the part of the Noteholder in exercising any rights hereunder
shall serve as a waiver of any right.
(VII)The Noteholder may seek to foreclose on all collateral associated
with this Note in the Event of Default.
(c) Suit for Enforcement. Upon the occurrence of any one or more Events of
Default, the Noteholder may proceed to protect and enforce its rights by
suit in equity, action at law or by other appropriate proceeding, whether
for specific performance of any covenant or agreement contained in this
Note or in the aid of the exercise of any power granted in this Note, or
may proceed to enforce the payment of this Note, or to enforce any other
legal or equitable right of the Noteholder of this Note. In case of any
default under this Note, the Company will pay to the Noteholder such amount
as shall be sufficient to cover the expenses and costs of the Noteholder
due to such default.
6. RANK.
This Note shall rank senior to all of the Company's existing obligations
and the Company shall not incur any indebtedness in the future ranking pari
passu with or senior to the Note.
<PAGE>
7. VOTING RIGHTS.
The Company shall provide the Noteholder with prior notification of any
meeting of the stockholders (and copies of proxy materials and all other
information sent to stockholders). If the Company takes a record of its
stockholders for the purpose of determining stockholders entitled to (a) receive
payment of any dividend or other distribution, any right to subscribe for,
purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the Company, or
any proposed merger, consolidation, liquidation, dissolution or winding up of
the Company, the Company shall mail a notice to the Lender, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier, but in no
event earlier than public announcement of such proposed transaction), of the
date on which any such record is to be taken for the purpose of such vote,
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such vote, dividend, distribution, right or other
event to the extent known at such time.
8. MISCELLANEOUS.
(a) Dividends. The Company shall not, while any or all of the principal
amount of this Note is outstanding, or while any amount of interest is
accrued, due and payable, declare, make or pay any dividend or other
distribution, whether in cash, securities or other property with
respect to its Common Shares.
(b) Maturity. Effective as of September 1, 2004, all remaining principal
amount of this Note not Converted, plus all accrued and unpaid
interest thereon, shall automatically, and without further action on
the part of such Noteholder, be Converted into the equity of the
Company at maturity pursuant to the terms herein.
(c) Security. It is intended that this Note will be secured by the
creation of a mortgage, security interest or other lien upon all of
the property and assets of the Company. The Company and the Noteholder
acknowledge that contemporaneously with the execution of this Note,
the Company and the Noteholder are executing a Security Agreement
(Stock); however, the Company agrees to execute any further collateral
documents which the Noteholder requests. (d) Registration of
Noteholder. The Company shall maintain at its principal office a
register of the Notes and shall record therein the names and addresses
of the registered holders of the Notes, the address to which notices
are to be sent and the address to which payments are to be made as
designated by the registered holder if other than the address of the
holder, and the particulars of all transfers, exchanges and
replacements of Notes. No transfer of a Note shall be valid unless the
registered holder or his or its duly appointed attorney request such
transfer to be made on such register, upon surrender thereof for
exchange as hereinafter provided, accompanied by an instrument in
writing. Each Note issued hereunder, whether originally or
<PAGE>
upon transfer, exchange or replacement of a Note, shall be registered
on the date of execution thereof by the Company. The registered holder
of a Note shall be that person or entity in whose name the Note has
been so registered by the Company. A registered holder shall be deemed
the owner of a Note for all purposes, and the Company shall not be
affected by any notice to the contrary.
(e) Replacement of Lost, Stolen or Destroyed Notes. Upon receipt of
evidence satisfactory to the Company of the loss, theft, destruction,
or mutilation of any Note and, if requested by the Company in the case
of any such loss, theft or destruction, upon delivery of an indemnity
bond or other agreement or security reasonably satisfactory to the
Company, or, in the case of any such mutilation, upon surrender and
cancellation of such Note, the Company will issue a new Note, of like
tenor, in the amount of unpaid principal of such Note, and dated the
date to which interest has been paid, in lieu of such lost, stolen,
destroyed or mutilated Note.
(f) Changes: Parties. This Note can only be changed by an agreement in
writing signed by the Company and the Noteholder. This Note shall
inure to the benefit of and be binding upon the Company and the
Noteholder and their respective successors and assigns.
(g) Waiver of Presentment. The Company hereby waives, presentment, demand,
notice, protest and all other demands and notices in connection with
the delivery acceptance, performance, default or enforcement of this
Note.
(h) Payments. All payments due under this Note shall be made in lawful
money of the United States of America.
(i) Covenants Bind Successors and Assigns. All covenants, stipulations,
promises and agreements in this Note made by or on behalf of the
Company shall bind its successors and assigns, whether so expressed or
not.
(j) Headings and Pronouns. All pronouns and any variation thereof shall
refer to the masculine, feminine or neuter, singular or plural, as the
context may require. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning
hereof.
(k) Governing Law. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO THE LAWS
OF THE STATE OF COLORADO WITHOUT GIVING EFFECT TO THE PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the Company has executed this Note as of the date
first written above.
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING
CORPORATION
By: /s/ James Callender, Sr.
Its: ________________________________
<PAGE>
SCHEDULE B
ESCROW RELEASE AGREEMENT
Dated as of the date of the Securities Purchase Agreement to Which This
Escrow Release Agreement Is Attached
These Escrow Release Conditions sets forth the items necessary (the
"Conditions") for the release of US$1,000,000 (the "Proceeds") to the Democratic
Republic of Sao Tome and Principe ("DRSTP") pursuant to the Securities Purchase
Agreement to which this document is attached.
The Conditions are written assurances from the Honorable President and
Honorable Prime Minister of DRSTP that:
(i) ERHC and its assigns and/or successors will retain an unencumbered 49%
ownership stake in STPetro;
(ii) ERHC's management and cost recovery terms shall remain intact as
outlined in the Act;
(iii)ERHC and its assigns and/or successors will retain a 5% over-ride on
all oil & gas production from within the DRSTP EEZ will remain in full
force and effect;
(iv) Island Oil/ERHC retain the rights to build and operate the logistics
center and deep water free-port, along with related services, in and
around DRSTP; and
(v) STPetro will retain the rights to a minimum of 4 offshore "blocks" of
its choice within the DRSTP EEZ.
Furthermore, ERHC and its assigns and/or successors will receive:
(i) A certified or equivalent copy and translation of the Act;
(ii) A certified or equivalent copy and translation of the Memorandum of
Agreement, as amended, between the DRSTP and ERHC;
(iii)A certified or equivalent copy and translation of the Memorandum of
Understanding, as amended, between the DRSTP and ERHC; and
<PAGE>
(iv) A certified or equivalent copy and translation of the Technical
Assistance Agreement, as amended, between the DRSTP, STPetro and Mobil
Exploration and Producing Services Inc.
Upon the fulfillment of the Conditions listed herein in a form satisfactory to
ERHC and TC Hydro Carbon in their sole discretion, then within 24 hours the
Proceeds shall be wire transferred pursuant to the account instructions provided
to ERHC by the DRSTP.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings provided in the Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000799235
<NAME> Environmental Remediation Holding Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Currency
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-START> Oct-1-1998
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 34,629
<SECURITIES> 0
<RECEIVABLES> 234,371
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 590,713
<PP&E> 2,955,347
<DEPRECIATION> 327,564
<TOTAL-ASSETS> 8,516,940
<CURRENT-LIABILITIES> 714,968
<BONDS> 0
0
0
<COMMON> 5,034
<OTHER-SE> (9,115,826)
<TOTAL-LIABILITY-AND-EQUITY> 8,516,940
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 5,145,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,507,166
<INCOME-PRETAX> (5,145,494)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,145,494)
<EPS-BASIC> (0.19)
<EPS-DILUTED> 0
</TABLE>
