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 December 31, 1997
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
420 Jericho Turnpike, Suite 321
Jericho, New York 11753
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (516) 433-4730
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of December 31, 1997 was 23,965,625
Documents Incorporated by Reference:
None
PART I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statements of Stockholders' Equity ............................F-4
Consolidated Statements of Cash Flows .....................................F-5
Notes to Consolidated Financial Statements .................................F-6
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
December 31,
Sep 30, 1997 Dec 31, 1997
------------------- -------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 327,743 797,102
Accounts receivable and other current assets 215,708 447,231
------------------- -------------------
Total Current Assets 543,451 1,244,333
------------------- -------------------
PROPERTY AND EQUIPMENT
Equipment (note ) 5,226,000 6,705,509
------------------- -------------------
Total Property and Equipment 5,226,000 6,705,509
------------------- -------------------
OTHER ASSETS
Deposits on fixed assets 136,560 300,705
Crude oil and natural gas reserves, net (note ) 12,500,000 13,011,533
Chevron P&A master service agreement (note ) 3,000,000 2,850,000
DRSTP Concession fee 0 2,008,300
Deferred compensation, net (note ) 250,000 0
------------------- -------------------
Total Other Assets 15,886,560 18,170,538
------------------- -------------------
Total Assets $ 21,656,011 26,120,380
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other current payable $ 111,054 569,220
Stockholder loans (note ) 465,094 475,008
Accrued interest (note ) 37,228 86,499
Accrued salaries (note ) 960,000 1,230,000
Short term bank loan (note ) 175,000 0
------------------- -------------------
Total Current Liabilities 1,748,376 2,360,727
------------------- -------------------
LONG-TERM LIABILITIES
Convertible debt, net, (note ) 0 3,838,825
------------------- -------------------
Total Long-Term Liabilities 0 3,838,825
------------------- -------------------
Total Liabilities 1,748,376 6,199,552
------------------- -------------------
STOCKHOLDERS' EQUITY
Common stock, $0.0001 par value; Authorized 950,000,000 shares: issued and
outstanding 22,989,526 at September 30, 1997 and 24,215,625 issued and
23,965,625 outstanding at December 31,
1997 (note ) 2,299 2,422
Preferred stock, $0.0001 par value; Authorized 10,000,000 shares;
issued and outstanding 0 at September 30, 1997 and December
31, 1997 0 0
Additional paid in capital in excess of par 38,686,840 40,433,161
Treasury stock 0 (500,000)
Stock subscriptions receivable (913,300) 0
Retained earnings (deficit) (17,868,204) (20,014,755)
------------------- -------------------
Total Stockholders' Equity 19,907,635 19,920,828
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 21,656,011 26,120,380
=================== ===================
The accompanying notes are an integral part of the financial statements
F-2
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
3 Months ended December 31,
(Unaudited)
1996 1997
---------------- ---------------
REVENUE
Sales - environmental remediation services $ 0 146,083
Sales - crude oil 0 96,914
------------------- -------------------
Total sales 0 242,997
------------------- -------------------
COST OF SALES
Cost of sales - environmental remediation services 0 8,511
Cost of sales - crude oil 0 35,851
------------------- -------------------
Total cost of sales 0 44,362
------------------- -------------------
Gross profit/(loss) 0 198,635
OPERATING EXPENSES
Advertising 0 11,855
Automotive expenses 0 33,537
Bank charges 0 398
Compensation - officers 31,250 520,000
Compensation - directors 0 0
Consultant fees 0 251,171
Amortization 0 150,000
Depreciation 93,000 114,311
Donations 0 6,175
Dues, fees, licenses and taxes 0 4,703
Insurance 0 16,268
Geological data and reports 0 0
Oil lease transfer fees 0 0
Office expenses 0 25,862
Oil well rework expenses 0 23,898
Professional fees 52,500 512,615
Research and development 0 0
Rent 0 39,184
Salaries 0 73,560
Telephone 0 24,380
Travel and entertainment 0 258,744
Utilities 0 6,626
Miscellaneous 0 216,413
------------------- -------------------
Total operating expenses 176,750 2,289,700
------------------- -------------------
Income(loss) from operations (176,750) (2,091,065)
Interest expense 0 (61,096)
Interest income 0 5,609
------------------- -------------------
Income(loss) before tax & extraordinary item (176,750) (2,146,552)
Extraordinary item - forgiveness of debt 0 0
------------------- -------------------
Income(loss) before taxes (176,750) (2,146,552)
Income tax expense/(benefit) 0 0
------------------- -------------------
Net income(loss) $ (176,750) (2,146,552)
=================== ===================
Weighted average number of shares outstanding 3,239,374 24,017,700
=================== ===================
Net loss per share $ (0.05) (0.09)
=================== ===================
The accompanying notes are an integral part of the financial statements.
F-3
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Stockholders' Equity
Number Comm Pf'd APIC Treasury Stk Subs Accumulated TTL S/H
of Shares Stk Stk Stk Receiv Deficit Equity
--------------- ------- ------ --------------- ------------- ----------- --------------- ----------------
BEGIN BALANCE,
September 30, 1996 3,239,374 $ 324 0 4,629,598 0 0 (856,152) 3,773,770
2/10 - S-8 services 1,600,000 160 0 1,099,840 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 0 4,999,970 0 0 0 5,000,000
3/5 - oil wells/leases 200,000 20 0 7,499,980 0 0 0 7,500,000
3/13 - S-8 services 300,000 30 0 374,970 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 2,999,700 0 0 0 3,000,000
4/5 - services 1,342,981 134 0 1,342,847 0 0 0 1,342,981
4/5 - contrib to corp (100,000) (10) 0 (99,990) 0 0 0 (100,000)
4/9 - BAPCO acquisit 4,000,000 400 0 2,249,600 0 0 0 2,250,000
5/14 - S-8 services 1,500,000 150 0 562,350 0 0 0 562,500
6/19 - services 150,000 15 0 28,110 0 0 0 28,125
7/8 - cash 800,000 80 0 399,920 0 0 0 400,000
7/15 - DRSTP information 1,000,000 100 0 1,999,900 0 0 0 2,000,000
7/25 - S-8 services 2,335,000 233 0 6,464,798 0 0 0 6,465,031
7/30 - services 1,500,000 150 0 2,249,850 0 0 0 2,250,000
7/30 - cash 147,000 15 0 146,985 0 0 0 147,000
8/8 - cash 74,000 8 0 147,992 0 0 0 148,000
9/4 - services 400,000 40 0 307,960 0 0 0 308,000
9/10 - cash stk subs recv 727,273 73 0 799,927 0 (800,000) 0 0
9/15 - cash & stk subs recv 473,898 47 0 482,533 0 (113,300) 0 369,280
Net loss - 0 0 0 0 0 (17,012,052) (17,012,052)
--------------- ------- ------ --------------- ------------- ----------- --------------- ----------------
BALANCE, Sept 30, 1997 22,989,526 $ 2,299 0 38,686,840 0 (913,300) (17,868,204) 19,907,635
10/97 - Stock Subs Rec'd - 0 0 0 0 913,300 0 913,300
10/8 - Uinta Acquisition 1,000,000 100 0 1,429,900 0 0 0 1,430,000
10/97-Neuces Acquisition 50,000 5 0 148,745 0 0 0 148,750
11/97 - cash ,net 176,099 18 0 167,676 0 0 0 167,694
12/15 - cash - 0 0 0 (500,000) 0 0 (500,000)
Net loss - 0 0 0 0 0 (2,146,551) (2,146,551)
--------------- ------- ------ --------------- ------------- ----------- --------------- ----------------
BALANCE, December
31, 1997 (Unaudited) 24,215,625 2,422 0 40,433,161 (500,000) 0 (20,014,755) 19,920,828
=============== ======= ====== =============== ============= =========== =============== ================
The accompanying notes are an integral part of the financial statements.
F-4
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
1996 1997
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (176,750) (2,146,552)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred compensation 83,750 250,000
Amortization of Chevron agreement 0 150,000
Crude oil depletion 0 17,217
Depreciation 93,000 114,311
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets 0 (231,523)
Increase (decrease) in accrued interest expense 0 49,271
Increase (decrease) in accrued expenses 0 458,166
Increase (decrease) in accrued salaries 0 270,000
------------------ ------------------
Net cash (used) provided by operating activities 0 (1,069,110)
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP Concession fee payment 0 (2,008,300)
Acquisition of fixed assets 0 (58,694)
Increase in deposits on fixed assets 0 (164,145)
------------------ ------------------
Net cash (used) provided by investing activities 0 (2,231,139)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 0 167,694
Convertible debt sold for cash 0 3,767,000
Payments on stockholder advances 0 (207,861)
Payments on funds advanced by third-parties 0 (175,000)
Funds advanced by stockholders 0 217,775
------------------ ------------------
Net cash (used) provided by financing activities 0 3,769,608
Net increase (decrease) in cash 0 469,359
CASH, beginning of period 0 327,743
------------------ ------------------
CASH, end of period $ 0 797,102
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 0 11,825
================== ==================
Non cash financing activities:
Stock issued to acquire natural gas well $ 0 148,750
================== ==================
Stock issued to acquire crude oil reserves and wells $ 0 1,430,000
================== ==================
The accompanying notes are an integral part of the financial statements.
F-5
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
The Company. Environmental Remediation Holding Corporation, (ERHC), is a
Colorado chartered corporation which operates in the environmental remediation
industry and the oil and natural gas production industry from its corporate
headquarters in Jericho, New York, its operating offices in Lafayette,
Louisiana.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the statements of
financial condition and revenues and expenses for the years then ended. Actual
results could differ significantly from those estimates. The financial
statements for the three months ended December 31, 1996 and 1997 include all
adjustments which in the opinion of management are necessary for fair
presentation. The following summarize the more significant accounting and
reporting policies and practices of the Company:
a) Basis of presentation The consolidated financial statements include the
accounts of Site Services, Inc. and Bass American Petroleum Company, its wholly
owned subsidiaries. Intercompany accounts and transactions have been eliminated
in consolidation.
b) Equipment The Company has chosen to depreciate the equipment using the
straight line method over its estimated remaining useful life of ten years and
its furniture and fixtures and vehicle over its estimated useful life of five
years. Expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation expense for thethree months ended December 31, 1996 and
1997 was $93,000 and $114,311.
c) Notes payable The Company issued two notes payable to stockholders who
are also officers and directors in exchange for cash amounting to $978,157.
These notes carry no stated maturity date and an 8.5% rate of interest. The
Company has repaid $503,148 on these notes, including interest on one. The
remaining note is convertible into restricted stock at 50% of the average bid
price for the month in which the loan was made. The conversion is at the option
of the noteholder.
In January 1997, the Company issued a note payable to a bank in exchange for
cash. This note carried a maturity date of March 15, 1997 and a 9.6875% interest
rate. The Company is in default on this note. The default interest rate is
13.6875%. The Company and the bank had originally expected to roll this note
over into a long-term credit facility. The Company chose not to accept the
long-term facility due to the terms offered. The Company has reached an
agreement with the bank regarding repayment terms. This note was paid in full in
December 1997.
In November and December 1997, the Company issued 5.5% convertible senior
subordinated secured notes due 2002 in exchange for approximately $4,300,000 in
cash. These notes are convertible into shares of the Company's common stock at a
conversion price to be determined by so stated formula, but at a price no less
than $1.25 per share. If all of the notes are converted at the lowest possible
price, the Company would be required to issue 3,440,000 shares of common stock.
These notes also carried warrants for an additional 258,000 shares of common
stock with an exercise price of $3.17 per warrant, or total proceeds to the
Company of $817,860 in the event all of the warrants are exercised. The notes
are secured by the Company's non-MIII oil reserves in Utah.
d) Deferred compensation ERFC issued 755,043 shares of its common stock
into escrow in exchange for services to be rendered by a consultant under a four
year contract. These services were valued at $125,000 per year, therefore the
Company is amortizing this deferred compensation expense at a rate of $31,250
per quarter. This consultant later became ERFC's Chairman, President and CEO.
The Company chose to write off the $250,000 balance of this deferred
compensation in the three months ended December 31, 1997.
e) Net loss per share Net loss per share is computed by dividing the net
loss by the number of shares outstanding during the period.
f) Crude oil and natural gas reserves In March 1997, the Company acquired
an undivided 7/8 interest in a 100 well lease located in the Gunsite Sand Lease
in Ector, Texas, in exchange for 300,000 shares of the Company's common stock.
The Company received an independent evaluation of this field which reflected
1,000,000 barrels of proven oil reserves. In March 1997, the Company acquired an
undivided 7/8 interest in a 100 well lease located in the Woodbine Sand Lease
Block in Henderson County, Texas, in exchange for 200,000 shares of the
Company's common stock. The Company received an independent evaluation of this
field which reflected 1,500,000 barrels of proven oil reserves. The Company has
valued the proven reserves at current market value, less lifting costs, less
projected well rework costs, less projected equipment repair/replacement costs,
less estimated dismantlement, restoration and abandonment costs and less a
discount of approximately 50% to allow for potential errors in the estimated
costs and reserve reports and fluctuations in the market value of crude oil. The
Company chose to value these acquisitions on the basis of the asset value
received rather than the value of the common stock given up as at the time of
the acquisition the stock price was highly volatile and thinly traded.
Both acquisitions also included all existing equipment on site. The Company has
not recorded the fair market value of the equipment in place, as all of such
equipment has minimal scrap value, which is the only valuation method available
due to the non-operational status of the wells at acquisition and for several
years prior to acquisition. The Company spent $53,000 for the year ended
September 30, 1997 on well equipment repairs and well rework, all on the Gunsite
lease. The Company expects to capitalize and depreciate repairs which are
believed to extend the useful life of such existing equipment beyond one year,
as well as the cost of replacement equipment.
F-6
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
f) Crude oil and natural gas reserves, continued On September 29, 1997, the
Company entered into an agreement to acquire 22 oil, gas and mineral leases
located in Uintah and Duchesne Counties, Utah from three joint owners. The
purchase agreement was closed on October 8, 1997, at which time the the Company
received the lease assignment. The terms of the acquisition are for the Company
pay $250,000 in cash, issue 250,000 shares of the Company's common stock at each
of the following four dates: closing; December 30, 1997; March 30, 1998 and June
30, 1998. The Company also was required to guarantee that the bid price on the
date the Rule 144 restrictions lapse will be no less than $2.00 per share or the
Company is required to either issue additional shares or to pay the difference
in cash, at the Company's option. The Company also granted the sellers a 4%
gross production receipts royalty to a maximum of $677,000. The Company is
currently evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to complete new
reserve reports for its use.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock, as well as to
pay the Company's proportinate share of the costs to reenter this well. The
Company is also required to carry the seller's 1/8 proportionate share of the
reentry costs until the well is producing. The seller also owns an undivided 50%
interest in the oil and gas lease on the 49,019 acres of land contiguous to the
initial well. The agreement allows the Company to acquire a 3/8 undivided
interest in this lease by paying to the seller approximately $343,000 each April
for four years. The Company received the initial lease assignment on December 1,
1997. The Company is currently evaluating the existing reserve reports and
underlying data on these leases as well as has contracted another independent
appraiser to complete new reserve reports for its use.
The Company expects to utilize the sucessful efforts method of accounting for
its oil and gas producing activities once it has reached the producing stage.
The Company expects to regularly assess proved oil and gas reserves for possible
impairment on an aggregate basis in accordance with SFAS 121.
g) Depletion Depletion (including provisions for future abandonment and
restoration costs) of all capitalized costs of proved oil and gas producing
properties are expensed using the unit-of-production method by individual fields
as the proven developed reserves are produced. Depletion expense amount to
$17,217 for the three months ended December 31, 1997.
h) Chevron master P&A service agreement In September 1996 Bass
Environmental Services Worldwide, Inc., (BESW), entered into a Master Service
Agreement with Chevron to plug and abandon oil wells located in the Gulf of
Mexico off the coast of Louisiana. In April 1997, BESW assigned this contract to
the Company in exchange for 3,000,000 shares of the Company's common stock.
Chevron has reissued the contract in the Company's name. The Company valued this
acquisition on the basis of the Company's bid price on the date the agreement
was signed, or $1 per share. The Company expects to begin commercializing the
agreement in fiscal 1998, and has begun amortizing this contract value over a
five year period beginning in fiscal 1998. Amortization expense was $150,000 for
the three months ended December 31, 1997.
i) Sao Tome concession payment When the Company entered into the joint
venture agreement in May 1997 with the Democratic Republic of Sao Tome and
Principe, (DRSTP), the Company was required to pay a $5,000,000 concession fee
to the DRSTP goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay this
concession fee within five days after the DRSTP files the relevant official
maritime claims maps with the United Nations and the Gulf of Guinea Commission.
In December 1997, the Company paid $2,000,000 of this concession fee to the
DRSTP form the proceeds of the convertible note offering.
(2) Income taxes The Company has a consolidated net operating loss carry-forward
amounting to $20,014,755, expiring as follows: $3,404 in 2010, $852,748 in 2011;
$17,012,052 in 2012 and $2,146,551 in 2013. The Company has a $8,000,000
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.
(3) Stockholders' equity The Company has authorized 950,000,000 shares of
$0.0001 par value common stock and 10,000,000 shares of $0.0001 par value
preferred stock. In November 1997, the Company issued 176,099 shares of common
stock under a Regulation D Rule 506 private placement in exchange for $167,694,
net, in cash.
On September 29, 1997, the Company entered into an agreement to acquire 22 oil,
gas and mineral leases located in Uintah and Duchesne Counties, Utah from three
joint owners. The purchase agreement was closed on October 8, 1997, at which
time the the Company received the lease assignment. The terms of the acquisition
are for the Company pay $250,000 in cash, issue 250,000 shares of the Company's
common stock at each of the following four dates: closing; December 30, 1997;
March 30, 1998 and June 30, 1998. The Company also was required to guarantee
that the bid price on the date the Rule 144 restrictions lapse will be no less
than $2.00 per share or the Company is required to either issue additional
shares or to pay the difference in cash, at the Company's option.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock, as well as to
pay the Company's proportinate share of the costs to reenter this well.
The Company is contingently liable to issue up to three million shares of
restricted stock in total to three officers and
F-7
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(3) Stockholders' equity, continued directors of the Company for their efforts
in closing the Sao Tome & Principe contract. These shares will be issued upon
the joint venture oil production level of 20,000 barrels a day being attained.
The Company is contingently liable to issue up to two million shares of
restricted stock to two officers and directors of the Company for their efforts
in closing the M III contract in Utah upon the joint venture oil production
level of 4,000 barrels a day being attained. This two million shares includes
the 500,000 shares the Company is to issue to MIII. The Company is also
contingently liable to issue an additional two million shares upon the joint
venture attaining production of a total of 6,000 barrels a day.
(4) Accrued salaries At December 31, 1996 and 1997 the Company has accrued
salaries of $0 and $1,230,000, respectively, for three officers. These officers
can, at their option, convert these salaries into common stock of the Company at
the rate of one-half of the average bid price of the Company's common stock for
the months in which the salary was earned.
(5) Commitments and contingencies The Company is committed to lease payments for
9 vehicles under operating leases totalling $52,292 and $20,043 for the years
ended September 30, 1998 and 1999, respectively. The Company currently leases
its office space and operating facilities on a month to month basis.
(6) Segment information The Company has three distinct lines of business through
its two wholly owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company, (BAPCO), and a joint venture agreement. SSI operates in the
environmental remediation industry and BAPCO operates in the oil and gas
production industry. SSI's principal identifiable assets consist of $2,976,000,
(net), of environmental equipment, a barge deposit of $131,000 and the Chevron
P&A master service agreement valued at $2,850,000, (net). Revenues of $146,083
and cost of sales of $8,511 relate to SSI. BAPCO's principal identifiable assets
consist of crude oil and natural gas reserves valued at $13,011,000, net, and
equipment valued at $2,250,000. Revenues of $96,914 and cost of sales of $35,851
relate to BAPCO. The Company also expects to operate in the supply industry
through a joint venture agreement to supply fuel and other goods to ships
transiting the Panama Canal. No pricipal identifiable assets yet exist for this
line of business.
F-8
Item 2. Management's Discussion and Analysis and Plan of Operation.
Environmental Remediation Holding Corporation is an independent oil and gas
company engaged in the exploration, development, production and sales of crude
oil and natural gas properties with current operations focused in Texas, Utah,
and the Democratic Republic of Sao Tome and Principe in West Africa.
The Company's strategy in the United States is to increase oil and natural gas
reserves, production, and cash flow through (1) the exploration of its existing
acreage position in Texas, Utah, and the Democratic Republic of Sao Tome and
Principe; (2) the acquisition of additional properties in known producing areas
that provide significant development and exploratory drilling potential; (3) the
exploration for oil and natural gas reserves; (4) the maintenance of a low
operating and cost structure; and, (5) environmental remediation as it relates
to the oil and gas industry.
The Company has acquired all of its oil and gas properties within the past year.
The Company's current development plans require substantial capital expenditures
in connection with the exploration, development and exploitation of oil and
natural gas properties. Although the Company has historically funded capital
expenditures through a combination of equity contribution and short-term
financing arrangements, the Company's ability to meet its estimated capital
expenditure in Fiscal year 1998 are dependent on the Company's ability to
realize the proceeds of the Company's contemplated debt offering.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto referred to in "Item 1. Financial
Statements.
RESULTS OF OPERATIONS
During the first quarter of fiscal 1998 the Company incurred a net loss of
$2,146,552, compared to a net loss of $176,750 in the first quarter of fiscal
1997. In the first quarter of fiscal 1998 a total of $960,000 was accrued, but
not paid in cash, as compensation to three officers of the Company. Depreciation
and amortization totalled $264,311 in the first quarter of fiscal 1998 compared
to $93,000 in the first quarter of fiscal 1997. Depletion expense was $17,217 in
the first quarter of fiscal 1998 compared to $0 the prior year. The net cash
operating loss of the Company for the first quarter of fiscal 1998 was
$1,345,024 compared to $0 for the first quarter of fiscal 1997.
The Company had revenues of $243,000 in first quarter of fiscal 1998 compared to
$0.00 in the first quarter of fiscal 1997. Cost of sales were $44,362 in first
quarter of fiscal 1998 compared to $0.00 in first quarter of fiscal 1997.
Included in the first quarter of fiscal 1998 expenses was the cost of bringing a
delegation of government officials, including the Prime Minister of Sao Tome to
the United States for meetings with various committees of the United Nations and
the US government. The cost of this trip was approximately $200,000.
CAPITAL EXPENDITURES
When the Company entered into the joint venture agreement in May 1997 with the
Democratic Republic of Sao Tome and Principe, (DRSTP), the Company was required
to pay a $5,000,000 concession fee to the DRSTP goverment. In September 1997,
the Company received a Memorandum of Understanding from the DRSTP government
which allows the Company to pay this concession fee within five days after the
DRSTP files the relevant official maritime claims maps with the United Nations
and the Gulf of Guinea Commission. In December 1997 the Company paid $2,000,000
of this concession fee to the DRSTP from the proceeds of the convertible note
offering.
On September 29, 1997, the Company entered into an agreement to acquire 22 oil,
gas and mineral leases located in Uintah and Duchesne Counties, Utah from three
joint owners. The purchase agreement was closed on October 8, 1997, at which
time the the Company received the lease assignment. The terms of the acquisition
are for the Company to pay $250,000 in cash, issue 250,000 shares of the
Company's common stock, valued at $1,430,000, at each of the following four
dates: closing; December 30, 1997; March 30, 1998 and June 30, 1998. The Company
also was required to guarantee that the bid price on the date the Rule 144
restrictions lapse will be no less than $2.00 per share or the Company is
required to either issue additional shares or to pay the difference in cash, at
the Company's option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently evaluating
the existing reserve reports and underlying data on these leases and has
contracted another independent appraiser to complete new reserve reports for its
use.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock valued at
$148,750, as well as to pay the Company's proportinate share of the costs to
reenter this well. The Company is also required to carry the seller's 1/8
proportionate share of the reentry costs until the well is producing. The seller
also owns an undivided 50% interest in the oil and gas lease on the 49,019 acres
of land contiguous to the initial well. The agreement allows the Company to
acquire a 3/8 undivided interest in this lease by paying to the seller
approximately $343,000 each April for four years. The Company received the
initial lease assignment on December 1, 1997. The Company is currently
evaluating the existing reserve reports and underlying data on these leases and
has contracted another independent appraiser to complete new reserve reports for
its use.
RESERVES AND PRICING
Oil and natural gas prices fluctuate throughout the year. Generally higher
natural gas prices prevail during the winter months of September through
February. A significant decline in prices would have a material effect on the
measure of future net cash flows which, in turn, could impact the value of the
Company's oil and gas properties.
The Company's drilling and acquisition activities have increased its reserve
base and its productive capacity and, therefore, its potential cash flow. Lower
gas prices may adversely affect cash flow. The Company intends to continue to
acquire and develop oil and gas properties in its areas of activity as dictated
by market conditions and financial ability. The Company retains flexibility to
participate in oil and gas activities at a level that is supported by its cash
flow and financial ability. Management believes that the Company's borrowing
capacities and cash flow are sufficient to fund its currently anticipated
activities. The Company intends to continue to use financial leverage to fund
its operations as investment opportunities become available on terms that
management believes warrant investment of the Company's capital resources.
The Company is currently evaluating the existing reserve reports and underlying
data on all leases and has contracted another independent appraiser to complete
new reserve reports.
The Company's non-producing proved reserves are largely "behind-pipe" in fields
which it operates. Undeveloped proved reserves are predominantly infill drilling
locations and secondary recovery projects.
The reserve data set forth in this Form 10-Q represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers often vary. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimate. Accordingly, reserve estimates often differ from the quantities of oil
and natural gas that are ultimately recovered. the meaningfulness of such
estimates is highly dependent upon the accuracy of the assumptions upon which
they were based.
Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-Q which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), wells to
be drilled or reworked, oil and gas prices and demand, exploitation and
exploration prospects, development and infill potential, drilling prospects,
expansion and other development trends of the oil and gas industry, business
strategy, production of oil and gas reserves, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results and developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic,
market or business conditions; the business opportunities (or lack thereof) that
may be presented to and pursued by the Company; changes in laws or regulation;
and other factors, most of which are beyond the control of the Company.
Consequently all of the forward-looking statements made in this Form 10-Q are
qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
PART II - Other Information
Item 1. Legal Proceedings.
Connecticut Bank of Commence commenced an action against the Company in
Lafayette Parish, Louisiana, on or about March 15, 1997. The Plaintiff brought
the action to enforce collection of a note in the principal amount of
$175,000.00. The action has been settled, and satisfied in full.
Other than the above legal proceeding and claim, and any other items previously
reported, the Company is not a party to any material pending or threatened legal
proceeding or claim.
Item 2. Changes in Securities
There have been no changes with respect to defining the rights of the holders of
any class of registered securities or otherwise.
In the first quarter of fiscal 1998, the Company issued 176,099 shares of common
stock in exchange for $190,859 in cash under a Regulation D Rule 506 private
placement memorandum offering.
In November and December 1997, the Company issued 5.5% convertible senior
subordinated secured notes due 2002 in exchange for approximately $4,300,000 in
cash. These notes are convertible into shares of the Company's common stock at a
conversion price to be determined by so stated formula, but at a price no less
than $1.25 per share. If all of the notes are converted at the lowest possible
price, the Company would be required to issue 3,440,000 shares of common stock.
These notes also carried warrants for an additional 258,000 shares of common
stock with an exercise price of $3.17 per warrant, or total proceeds to the
Company of $817,860 in the event all of the warrants are exercised. The notes
are secured by the Company's non-MIII oil reserves in Utah.
On September 29, 1997, the Company entered into an agreement to acquire 22 oil,
gas and mineral leases located in Uintah and Duchesne Counties, Utah from three
joint owners. The purchase agreement was closed on October 8, 1997, at which
time the the Company received the lease assignment. The terms of the acquisition
are for the Company pay $250,000 in cash, issue 250,000 shares of the Company's
common stock, valued at $1,430,000, at each of the following four dates:
closing; December 30, 1997; March 30, 1998 and June 30, 1998. The Company also
was required to guarantee that the bid price on the date the Rule 144
restrictions lapse will be no less than $2.00 per share or the Company is
required to either issue additional shares or to pay the difference in cash, at
the Company's option.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and abandoned
approximately 10 years ago. This agreement requires the Company to pay the
seller $150,000 and 50,000 shares of the Company's common stock valued at
$148,750, and to pay the Company's proportinate share of the costs to reenter
this well.
In December 1997, the Company repurchased 250,000 shares of its common stock for
$500,000 in cash. This was the first 25% quarterly repurchase agreed to by the
Company relating to the 1,000,000 shares issued to acquire the DRSTP geological
data.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized, this 17th day of
February, 1998.
Environmental Remediation Holding Corporation
By: /s/ Sam L. Bass, Jr., CEO
Sam L. Bass, Jr., CEO
By: /s/ Noreen Wilson, Vice President
Noreen Wilson, Vice President