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, 1998
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
3-5 Audrey Avenue
Oyster Bay, New York 11771
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (516) 922-4170
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of June 30, 1998 was 23,965,625
Documents Incorporated by Reference:
Form 8-K filed on April 13, 1998
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statement of Stockholders' Equity .............................F-4
Consolidated Statements of Cash Flows .....................................F-5
Notes to Consolidated Financial Statements .................................F-6
F-1
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
September 30,
1997 June 30, 1998
----------------- --------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 327,743 1,521,283
Prepaid expenses and other current assets 215,708 782,908
----------------- --------------------
Total current assets 543,451 2,304,191
----------------- --------------------
PROPERTY AND EQUIPMENT
Oil and gas properties (Successful efforts method) 515,625 1,240,175
Equipment 4,220,000 6,314,418
Deposit on purchase of equipment 136,560 208,790
----------------- --------------------
Total property and equipment before depreciation 4,872,185 7,763,383
Less: accumulated depreciation and depletion (521,000) (901,675)
----------------- --------------------
Net property and equipment 4,351,185 6,861,708
----------------- --------------------
OTHER ASSETS
Master service agreement 300 300
Investment in ST PETRO, S.A. 0 20,000
DRSTP concession fee 0 2,013,300
----------------- --------------------
Total other assets 300 2,033,600
----------------- --------------------
Total Assets $ 4,894,936 11,199,499
================= ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder loans payable $ 465,094 480,080
Note payable - bank 175,000 0
Accounts payable and accrued liabilities :
Accrued salaries 960,000 1,757,699
Accrued interest 37,228 227,630
Other 111,054 1,465,113
----------------- --------------------
Total current liabilities 1,748,376 3,930,522
----------------- --------------------
LONG-TERM LIABILITIES
Long-term bank loans 0 34,221
Convertible debt, net 0 6,274,536
----------------- --------------------
Total long term liabilities 0 6,308,757
----------------- --------------------
Total Liabilities 1,748,376 10,239,279
----------------- --------------------
Common stock issued under a repurchase agreement; issued and
outstanding 1,000,000 and 750,000 shares 2,000,000 1,500,000
----------------- --------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value; authorized 10,000,000 shares ;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares ;
issued and outstanding 21,989,526 and 24,222,909 2,199 2,422
Additional paid in capital in excess of par 19,952,865 22,970,263
Additional paid in capital - warrants 0 200,000
Deficit (17,645,204) (23,556,215)
Stock subscriptions receivable (913,300) 0
Deferred compensation (250,000) (156,250)
----------------- --------------------
Total Stockholders' Equity 1,146,560 (539,780)
----------------- --------------------
Total Liabilities and Stockholders' Equity $ 4,894,936 11,199,499
================= ====================
The accompanying notes are an integral part of the financial statements
F-2
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
Nine months ended June 30,
-----------------------------------------
1997 1998
----------------- -----------------
REVENUE (Unaudited) (Unaudited)
Environmental remediation services $ 120,944 273,057
Crude oil 0 119,219
Other income 6,730 11,684
----------------- -----------------
Total revenue 127,674 403,960
----------------- -----------------
COSTS AND EXPENSES
Compensation :
Officers 93,750 893,750
Directors 1,352,981 0
Consulting fees 1,454,625 830,865
Geological data and reports 0 41,932
General and administrative expense 652,817 3,916,647
Depreciation and depletion 196,417 380,675
Interest expense 17,727 251,104
----------------- -----------------
Total costs and expenses 3,768,317 6,314,973
----------------- -----------------
Net loss $ (3,640,643) (5,911,013)
================= =================
Weighted average number of shares outstanding 6,382,302 23,497,260
================= =================
Net loss per share, basic $ (0.57) (0.25)
================= =================
The accompanying notes are an integral part of the financial statements
F-3
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statement of Stockholders' Equity
Common Stock
-----------------------
Number APIC - Stk Subs Defr'd Accumulated TTL S/H
of Shares Amount APIC Warrants Receivable Comp. Deficit Equity
------------ ---------- ----------- ----------- ----------- --------- ------------- -------------
BEGINNING BALANCE,
September 30, 1996 3,239,374 $ 324 4,629,598 0 0 (427,500) (732,152) 3,470,270
Year ended September 30, 1997
Common stock issued for :
2/10 - S-8 services 1,600,000 160 1,099,840 0 0 0 0 1,100,000
3/4 - oil wells/leases 300,000 30 309,345 0 0 0 0 309,375
3/5 - oil wells/leases 200,000 20 206,230 0 0 0 0 206,250
3/13 - S-8 services 300,000 30 374,970 0 0 0 0 375,000
4/5 - Chevron contract 3,000,000 300 0 0 0 0 0 300
4/5 - services 1,342,981 134 1,342,847 0 0 0 0 1,342,981
4/5 - contributed to corporation (100,000) (10) (99,990) 0 0 0 0 (100,000)
4/9 - BAPCO acquisition 4,000,000 400 499,600 0 0 0 0 500,000
5/14 - S-8 services 1,500,000 150 562,350 0 0 0 0 562,500
6/19 - services 150,000 15 28,110 0 0 0 0 28,125
7/8 - cash 800,000 80 399,920 0 0 0 0 400,000
7/25 - S-8 services 2,335,000 233 6,464,798 0 0 0 0 6,465,031
7/30 - services 1,500,000 150 2,249,850 0 0 0 0 2,250,000
7/30 - cash 147,000 15 146,985 0 0 0 0 147,000
8/8 - cash 74,000 8 147,992 0 0 0 0 148,000
9/4 - services 400,000 40 307,960 0 0 0 0 308,000
9/10 - cash & stk subs receivable 727,273 73 799,927 0 (800,000) 0 0 0
9/15 - cash & stk subs receivable 473,898 47 482,533 0 (113,300) 0 0 369,280
9/30 - deferred comp amortization - 0 0 0 0 177,500 0 177,500
Net loss - 0 0 0 0 0 (16,913,052) (16,913,052)
------------ ---------- ----------- ----------- ----------- --------- ------------- -------------
BALANCE, September 30, 1997 21,989,526 2,199 19,952,865 0 (913,300) (250,000) (17,645,204) 1,146,560
Nine months ended March 31, 1998
10/97 - stock subs received in cash - 0 0 0 913,300 0 0 913,300
10/08 - Uinta acquisition 1,000,000 100 1,999,900 0 0 0 0 2,000,000
10/97 - Neuces acquisition 50,000 5 148,745 0 0 0 0 148,750
11/97 - cash, net 176,099 18 167,676 0 0 0 0 167,694
01/98 - equity in building 24,000 2 61,216 0 0 0 0 61,218
02/98 - services 104,664 10 55,648 0 0 0 0 55,658
02/98 - cash 282,000 28 180,222 0 0 0 0 180,250
03/98 - stock subs receivable 300,000 30 236,220 0 (236,250) 0 0 0
04/98 - stock subs received in cash - 0 0 0 236,250 0 0 236,250
06/98 - cash 234,200 24 135,576 0 0 0 0 135,600
06/98 - services 62,420 6 32,195 0 0 0 0 32,201
06/98 - cash - 0 0 200,000 0 0 0 200,000
6/30 - deferred comp amortization - 0 0 0 0 93,750 0 93,750
Net loss - 0 0 0 0 0 (5,911,011) (5,911,011)
------------ ---------- ----------- ----------- ----------- --------- ------------- -------------
BALANCE, June 30, 1998 (unaudited) 24,222,909 $ 2,422 22,970,263 200,000 0 (156,250) (23,556,215) (539,780)
============ ========== =========== =========== =========== ========= ============= =============
Common stock issued under a repurchase agreement
BEGINNING BALANCE,
September 30, 1996 0 $ 0 0 0 0 0 0 0
7/97 - DRSTP info 1,000,000 100 1,999,900 0 0 0 0 2,000,000
------------ ---------- ----------- ----------- ----------- --------- ------------- -------------
BALANCE, September 30, 1997 1,000,000 100 1,999,900 0 0 0 0 2,000,000
12/97 - cash repurchase (250,000) 0 (500,000) 0 0 0 0 (500,000)
------------ ---------- ----------- ----------- ----------- --------- ------------- -------------
BALANCE, June 30, 1998 (unaudited) 750,000 $ 100 1,499,900 0 0 0 0 1,500,000
============ ========== =========== =========== =========== ========= ============= =============
The accompanying notes are an integral part of the financial statements
F-4
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
Nine months ended June 30,
-----------------------------------
1997 1998
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net loss $ (3,640,643) (5,911,013)
Adjustments to reconcile net loss to net cash used for operating activities:
Amortization of deferred compensation 146,250 93,750
Stock issued for services rendered 2,876,356 87,859
Convertible debt issued for services 0 43,750
Depreciation and depletion 196,417 380,675
Other (6,730) 0
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets 0 (567,200)
Increase (decrease) in accrued interest expense 17,726 190,402
Increase (decrease) in accrued expenses 0 1,354,059
Increase (decrease) in accrued salaries 0 797,699
-------------- ----------------
Net cash provided by (used by) operating activities (410,624) (3,530,019)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment 0 (2,013,300)
Investment in ST PETRO S.A. 0 (20,000)
Increase in deposits on fixed assets (126,000) (72,230)
Acquisition of property and equipment 0 (166,916)
-------------- ----------------
Net cash provided by (used by) investing activities (126,000) (2,272,446)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock sold for cash 0 719,794
Common stock warrants sold for cash 0 200,000
Convertible debt sold for cash 0 6,230,786
Proceeds from bank borrowings 175,000 9,840
Payments on bank borrowings 0 (179,401)
Proceeds from loans payable to stockholders 400,529 632,076
Payments on stockholder loans payable (22,968) (617,090)
-------------- ----------------
Net cash provided by (used by) financing activities 552,561 6,996,005
-------------- ----------------
Net increase (decrease) in cash 15,937 1,193,540
CASH, beginning of period 0 327,743
-------------- ----------------
CASH, end of period $ 15,937 1,521,283
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 0 11,825
============== ================
Non cash financing and investing activities: Stock issued to acquire :
BAPCO $ 500,000 0
============== ================
Equity in building $ 0 61,218
============== ================
Oil and gas properties and equipment $ 515,625 2,148,750
============== ================
Mortgage payable on building assumed $ 0 28,782
============== ================
The accompanying notes are an integral part of the financial statements
F-5
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
June 30, 1997 and 1998
(Unaudited)
(1) Summary of Significant Accounting Policies
The Company.
Environmental Remediation Holding Corporation, (ERHC), was incorporated
on May 12, 1986 in Colorado as Valley View Ventures, Inc., (VVV). Its
name was changed to Regional Air Group Corporation, (RAGC), on
September 20, 1988, and then to Environmental Remediation Holding
Corporation on August 29, 1996. VVV was created in 1986 as a blind pool
to seek a merger opportunity with a viable operating company. In 1988
the company acquired, via a reverse merger, Mid-Continent Airlines
which was a regional "feeder" airline operating as Braniff Express. On
September 28, 1989, Braniff Airlines filed Chapter 11 Bankruptcy. This
event proved to be catastrophic to the then operating business of the
Company. RAGC liquidated its assets and liabilities shortly thereafter
and remained dormant until its reverse merger with Environmental
Remediation Funding Corporation on August 19, 1996.
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Jericho, New York, and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the statements of financial condition and revenues
and expenses for the years then ended. Actual results could differ
significantly from those estimates. The following summarize the more
significant accounting and reporting policies and practices of the
Company:
Principles of consolidation
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements for the nine months ended June 30, 1997 and 1998
include all adjustments which in the opinion of management are
necessary for fair presentation.
Net loss per share
Net loss per share - basic is computed by dividing the net loss by the
number of shares outstanding during the period. Net loss per share -
diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
DRSTP geological data
In July 1997, the Company acquired substantial geologic data and other
information from an independent source in exchange for one million
shares of the Company's common stock. This data was valued at
$2,000,000 based the agreement with the seller that Company would
repurchase these shares for $2,000,000 at a rate of 25% per quarter
should the seller so choose. The Company expensed this acquisition cost
immediately.
(2) Significant Acquisitions
The Company acquired 100% of the issued and outstanding common stock of
Environmental Remediation Funding Corp., (ERFC), a Delaware
corporation, effective on August 19, 1996, in a reverse triangular
merger, which has been accounted for as a reorganization of ERFC. At
the same time the Company changed its name from RAGC. Prior to the
merger ERFC had acquired certain environmental remediation equipment in
F-6
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(2) Significant Acquisitions (Continued)
exchange for common stock. ERFC then employed the seller of this
equipment as an outside consultant in exchange for common stock.
Subsequently, ERFC was unable to enter into the environmental
remediation contracts it had hoped to and asked the consultant to
become the Chairman, President and CEO of ERFC.
At the time of the acquisition of ERFC by RAGC, ERFC owned 100% of Site
Services, Inc., (SSI). ERFC had acquired SSI from Bass Environmental
Services Worldwide, Inc., (BESW), a company controlled by the Chairman,
President and CEO of ERFC. SSI had always been an inactive company,
except for certain environmental remediation licences which it
continues to hold.
On April 9, 1997, the Company acquired 100% of the issued and
outstanding common stock of Bass American Petroleum Company, (BAPCO),
which was accounted for as a purchase. BAPCO had been an inactive
company for several years previously, however BAPCO owned a variety of
oil well production enhancing equipment, which is proprietary to, but
not patented by BAPCO. The transaction was in essence an asset
acquisition. At the time of the acquisition BAPCO was 100% owned by the
Chairman, President and CEO of ERHC. As such, the acquisition was
accounted for at historical cost. The Company has begun using BAPCO as
the operator of the various oil and natural gas leases it has acquired.
(3) Liquidity
The Company's current liabilities exceed its current assets by
$1,626,331, reflecting a possible lack of liquidity. The Company is in
ongoing negotiations to raise general operating funds and funds for
specific projects. As discussed in notes 7, 10 and 17, the Company
raised an additional $1,100,000 in October 1997, $4,300,000 in November
1997, $536,000 in April 1998, $2,011,000 in June 1998 and $1,475,000 in
July and August 1998. The Company has negotiated two lines of credit,
one for $15,000,000 and one for $5,000,000. These lines of credit
cannot be drawn upon until the Company's current registration statement
on form S-1 is declared effective. Both of these lines of credit are
convertible into shares of the Company's common stock on terms similar
to the convertible debt discussed in note 7. As discussed in note 5 and
16a, the Company has also received a letter of intent for a firm
commitment from a registered broker/dealer to raise an additional
$50,000,000 in convertible debt. However there is no assurance that
such financing will be obtained.
(4) Equipment
Environmental remediation equipment was purchased by ERFC in exchange
for common stock. The Company recorded this equipment based on the fair
value of the common stock given up. At the date of acquisition, ERFC
was a privately held company, therefore there was no market for ERFC's
stock. At the time of negotiations for this transaction, it was an arms
length transaction between unrelated parties. The parties negotiated a
value of $5 per share for a total of 744,000 shares valuing this
transaction at $3,720,000. The Company has chosen to depreciate the
equipment using the straight line method over its estimated remaining
useful life of fifteen years. Expenditures for maintenance and repairs
are charged to operations as incurred.
In the BAPCO acquisition the Company acquired ownership of all rights
to BAPCO's proprietary oil well reworking tool, "the BAPCO Tool" as
well as other oil and natural gas well reworking equipment. The control
of this proprietary tool has enhanced the Company's position to the
extent that it would not have been able to enter into the contract to
control the Utah oil fields and the reworking of the Indonesian oil
fields. The control of this tool also enabled the acquisition of the
200 Texas oil wells to be economically feasible to a greater extent.
The Company received two completed "BAPCO" tools which were ready to be
placed in service in this transaction. The Company valued the equipment
received at historical cost amounting to $250,000 each for the two
tools, totalling $500,000. BAPCO was controlled by the CEO of ERHC at
the time of the BAPCO acquisition, therefore the Company believes
historical cost is the appropriate basis for valuing the transaction.
F-7
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(4) Equipment (Continued)
The Company is depreciating this tool and technology over ten years.
Depreciation expense for the nine months ended June 30, 1997 and 1998
was $196,417and $377,080 respectively.
(5) Crude oil reserves
At September 30, 1996, the Company had no oil and gas reserves. In
March 1997, the Company acquired an undivided 7/8 interest in a 100
well lease located in the Gunsite Sand Lease in Ector, Texas, in
exchange for 300,000 shares of the Company's common stock. The Company
valued this transaction at the closing price of stock given up,
$1.03125, or a total of $309,375. The Company received an independent
evaluation of this field which reflected 1,000,000 barrels of proved
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 valued this transaction at the
closing price of the stock given up, $1.03125, or a total of $206,250.
The Company received an independent evaluation of this field which
reflected 1,500,000 barrels of proved oil reserves. These reserve
reports, as amended in March 1998, reflect values of $4,831,323 for
Gunsite and $9,504,323 for Woodbine. A separate reserve report is in
the process of being prepared, which the Company will use to adjust the
quantity of barrels of reserves if the subsequent report is materially
different.
Both acquisitions also included all existing equipment on site. The
Company has not recorded the fair market value of the equipment in
place, as all of such equipment has minimal scrap value, which is the
only valuation method available due to the non-operational status of
the wells at acquisition. The Company expects to capitalize and
depreciate repairs which are believed to extend the useful life of such
existing equipment beyond one year, as well as the cost of replacement
equipment.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 restrictions lapse will be no
less than $2.00 per share or the Company is required to either issue
additional shares or to pay the difference in cash, at the Company's
option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to
complete new reserve reports for its use. The total valuation of this
transaction is $2,250,000 and is applied as $375,800 of oil and gas
reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $200,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs 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
F-8
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(5) Crude oil reserves (Continued)
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.
Oil production
In late November 1997, test oil production amounting to approximately
444 barrels was picked up from the tanks at the Gunsite Sand lease. At
that time the Company had approximately 9 wells back on line and
pumping. In late November and early December 1997, test oil production
amounting to approximately 1,292 barrels was picked up from the tanks
at the 22 leases in Uintah and Duchesne Counties, Utah. The Company has
11 wells in production in the Utah filed which pumped approximately
6,300 barrels of oil in the third quarter. The Company is utilizing the
successful efforts method of accounting for its oil and gas producing
activities. The Company expects to regularly assess proved oil and gas
reserves for possible impairment on an aggregate basis in accordance
with SFAS 121.
Depletion
Depletion (including provisions for future abandonment and restoration
costs) of all capitalized costs of proved oil and gas producing
properties are expensed using the unit-of-production method by
individual fields as the proven developed reserves are produced.
Depletion expense for the nine months ended June 30, 1997 and 1998 was
$0 and $3,595 respectively.
(6) Master service agreement
In September 1996 Bass Environmental Services Worldwide, Inc., (BESW),
entered into a master service agreement with Chevron to plug and
abandon oil wells located in the Gulf of Mexico off the coast of
Louisiana. In April 1997, BESW assigned this contract to the Company in
exchange for 3,000,000 shares of the Company's common stock. Chevron
has reissued the contract in the Company's name. At the time of the
acquisition, BESW was controlled by the CEO of ERHC. The Company valued
this acquisition on the basis of the par value of the Company's common
stock given up, or $300, because no historical cost basis could be
individually determined and the contract has minimal value until the
Company has built or purchased the equipment to commercialize the
contract. The Company expects to begin commercializing the agreement in
late 1998.
(7) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $1,362,906.
These notes carry no stated maturity date and an 8.5% rate of interest.
The Company has repaid $881,790 on these notes, including interest on
one. The remaining note is convertible into restricted stock at 50% of
the average bid price for the month in which the loan was made. The
conversion is at the option of the noteholder. Accrued interest on
these notes is, $0 and $155,824 for the nine months ended June 30, 1997
and 1998.
In January 1997, the Company issued a note payable to a bank in
exchange for $175,000 cash. This note carried a maturity date of March
15, 1997 and a 9.6875% interest rate. The Company is in default on this
note. The default interest rate is 13.6875%. The Company and the bank
had originally expected to roll this note over into a long-term credit
facility. The Company chose not to accept the long-term facility due to
the terms offered. The Company repaid this loan in full plus accrued
interest on December 31, 1997.
In November and December 1997, the Company issued 5.5% convertible
senior subordinated secured notes due 2002 in exchange for $4,300,000
in cash. These notes are convertible into shares of the Company's
F-9
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(7) Notes payable (continued)
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 share, or total additional proceeds to
the Company of $817,860 in cash in the event all of the warrants are
exercised. The notes are secured by the Company's non- MIII oil
reserves in Utah.
In April 1998, the Company issued 12% convertible subordinated
unsecured notes due January 1999 in exchange for $300,000 cash. These
notes are convertible into shares of the Company's common stock at a
conversion price of $1.50 per share. If all of these notes are
converted, the Company will be required to issue 200,000 shares of
common stock. These notes also carried warrants for an additional
210,000 shares of common stock with an exercise price of $1.25 per
share, or total additional proceeds to the Company of $262,500 in cash
in the event all of the warrants are exercised.
In June 1998, the Company issued 12% convertible subordinated unsecured
notes due December 1999 in exchange for $425,000 cash. These notes are
convertible into shares of the Company's common stock at a conversion
price of $1.00 per share. If all of these notes are converted, the
Company will be required to issue 425,000 shares of common stock. These
notes also carried warrants for an additional 531,250 shares of common
stock with an exercise price of $0.50 per share for the first two
years, and $0.85 per share thereafter, or total additional proceeds to
the Company of $265,625 or $451,563 in cash in the event all of the
warrants are exercised.
In June 1998, the Company issued 5.5% convertible subordinated
unsecured notes due June 2000 in exchange for $1,250,000 cash. These
notes are convertible into shares of the Company's common stock at a
conversion price to be determined by so stated formula. If all of these
notes are converted, using the conversion price of the issuance date
($0.69517), the Company will be required to issue 1,798,124 shares of
common stock. These notes also carried warrants for an additional
230,000 shares of common stock with an exercise price of $0.8634 per
share, or total additional proceeds to the Company of $198,582 in cash
in the event all of the warrants are exercised.
(8) Accrued salaries
At June 30, 1997 and 1998 the Company has accrued salaries of, $0 and
$1,757,699, 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.
(9) Income taxes
The Company has a consolidated net operating loss carry-forward
amounting to $23,556,215, expiring as follows: $3,404 in 2010, $728,748
in 2011, $16,913,052 in 2012 and $5,911,013 in 2013. The Company has a
$9,420,000 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.
(10) Stockholders' equity
The Company has authorized 950,000,000 shares of $0.0001 par value
common stock and 10,000,000 shares of $0.0001 par value preferred
stock. On September 30, 1995, the predecessor entity, ERFC, had
1,639,450 shares issued and outstanding, which had been issued during
the month since inception as 884,407 shares for
F-10
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
$88 in cash and 755,043 shares for a four year consulting agreement
valued at $500,000 with a then independent consultant who subsequently
became the Company's Chairman, President and CEO.
In October 1995, ERFC issued 744,000 shares in exchange for
environmental remediation equipment valued as discussed in note 1b at
$3,720,000. This equipment was acquired from the consultant who had
received the 755,043 shares and subsequently became the Company's
Chairman, President and CEO. In October 1995, ERFC issued 20,000 shares
for $50,000 in cash.
In August 1996, ERFC issued 20,500 shares in exchange for $42,892 in
cash. On August 19,1996, the sucessor Company issued 2,433,950 shares
of common stock to acquire 100% of the issued and outstanding common
stock of ERFC. At the time of the acquisition ERHC, then known as RAGC,
had 356,317 shares issued and outstanding as a result of a 1 for 2,095
share reverse stock split. On August 19, 1996, the Company issued
73,277 shares of common stock to a consultant in exchange for services
valued at $1.00 per share related to the merger. In August 1996, the
Company issued 10,000 shares of its common stock, valued at $70,000, to
an attorney for services to be rendered at below market rates for a
period of 4 months. In September 1996, the Company issued 55,000 shares
of its common stock under three consulting contracts previously
negotiated, valued at $385,000. In September 1996, the Company issued
320,830 shares of its common stock in exchange for $31,995 in cash
In February 1997, the Company issued 1,600,000 shares of common stock
via an S-8 registration in exchange for consulting and professional
services valued at $1,100,000. In March 1997, the Company acquired a
100 oil well lease with one million barrels of proven oil reserves in
exchange for 300,000 shares of the Company's common stock valued at
309,375. In March 1997, the Company acquired a 100 oil well lease with
one and one-half million barrels of proven oil reserves in exchange for
200,000 shares of the Company's common stock valued at $206,250. In
March 1997, the Company issued 300,000 shares of common stock via an
S-8 registration valued at $375,000 in exchange for public relations
services, of which approximately 150,000 had been earned at fiscal year
end. The balance will either be earned or returned to ERHC. In April
1997, the Company issued 3,000,000 shares of common stock in exchange
for the assignment of the Chevron P&A master service agreement, valued
at $300. In April 1997, the Company issued 1,342,981 shares of common
stock to three directors in lieu of cash compensation for services
rendered to the Company valued at $1,342,981. In April 1997, a director
contributed 100,000 shares of common stock back to the Company with a
value of $100,000. In April 1997, the Company issued 4,000,000 shares
of common stock in exchange for 100% of the issued and outstanding
common stock of Bass American Petroleum Company, (BAPCO), valued at
historical costs at $500,000. In May 1997, the Company issued 1,500,000
shares of common stock via an S-8 in exchange for consulting and
professional services valued at $562,500. In June 1997, the Company
issued 150,000 shares of common stock to two independent consultants
for services valued at $28,125. One of these consultants became an
employee of the Company in September 1997.
In July 1997, the Company issued 800,000 shares under a Section 4(2)
exemption from registration to a previously unrelated party in exchange
for $400,000 in cash. In July 1997, the Company acquired substantial
geologic data and other information from an independent source in
exchange for 1,000,000 shares of the Company's common stock. This data
was valued at $2,000,000 based the agreement with the seller that
Company would repurchase these shares for $2,000,000 at a rate of 25%
per quarter should the seller so choose. In July 1997, the Company
issued 2,335,000 shares of common stock to three independent
consultants for services valued at $6,465,031, principally relating to
the Company's acquisition of the MIII agreement
In July 1997, the Company issued 1,500,000 shares of common stock to
three directors in lieu of cash
F-11
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
compensation for services rendered to the Company valued at $2,250,000.
In July 1997, the Company issued 147,000 shares of common stock under a
Regulation D Rule 506 private placement in exchange for $147,000 in
cash. In August1997, the Company issued 74,000 shares of common stock
under a Regulation D Rule 506 private placement in exchange for
$148,000 in cash. In September 1997, the Company issued 400,000 shares
of common stock to an independent consultant for services valued at
$308,000. In September 1997, the Company issued 370,898 shares of
common stock under a Regulation D Rule 506 private placement in
exchange for $407,988 in cash. In September 1997, the Company received
stock subscription agreements for $913,300 in cash under a Regulation D
Rule 506 private placement representing 830,273 shares of common stock.
The 830,273 shares of common stock were issued by the Company upon
receiving the $913,300 in cash in October 1997 which had been
subscribed for at September 30, 1997. In October and November 1997, the
Company issued 175,599 additional shares of common stock in exchange
for $183,359 in cash under the same private placement memorandum
offering in August and September 1997.
On September 29, 1997, the Company entered into an agreement to acquire
22 oil, gas and mineral leases located in Uintah and Duchesne Counties,
Utah from three joint owners. The purchase agreement was closed on
October 8, 1997, at which time the the Company received the lease
assignment. The terms of the acquisition are for the Company pay
$250,000 in cash, issue 250,000 shares of the Company's common stock at
each of the following four dates: closing; December 30, 1997; March 30,
1998 and June 30, 1998. The Company also was required to guarantee that
the bid price on the date the Rule 144 restrictions lapse will be no
less than $2.00 per share or the Company is required to either issue
additional shares or to pay the difference in cash, at the Company's
option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently
evaluating the existing reserve reports and underlying data on these
leases as well as has contracted another independent appraiser to
complete new reserve reports for its use. The total valuation of this
transaction is $2,250,000 and is applied as $375,800 of oil and gas
reserves and $1,874,200 of equipment.
In October 1997, the Company entered into an agreement to acquire a 3/8
undivided interest in a natural gas well that had been plugged and
abandoned approximately 10 years ago. This agreement requires the
Company to pay the seller $200,000 and 50,000 shares of the Company's
common stock, as well as to pay the Company's proportionate share of
the costs to reenter this well. The Company is also required to carry
the seller's 1/8 proportionate share of the reentry costs, estimated
between $250,000 and $500,000, until the well is producing. The seller
also owns an undivided 50% interest in the oil and gas lease on the
49,019 acres of land contiguous to the initial well. The agreement
allows the Company to acquire a 3/8 undivided interest in this lease by
paying to the seller approximately $343,000 each April for 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
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. In January 1998, the Company issued
24,000 shares valued at $61,218 and assumed a mortgage payable of
$28,782 to acquire a small office building in Utah, valued at $90,000,
from Unita Oil and Gas. In February 1998, the Company issued 282,000
shares in exchange for $180,250 in cash and 104,664 shares in exchange
for services valued at $55,658. In March 1998, the Company issued
300,000 shares in exchange for a subscription receivable of $236,250,
which was received in cash in April 1998. In
F-12
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(10) Stockholders' equity (continued)
June 1998, the Company issued 234,200 shares in exchange for $135,600
in cash and 62,420 shares in exchange for services valued at $32,201.
Contingent issues
The Company is contingently liable to issue up to two million shares of
restricted stock to two officers and directors of the Company for their
efforts in closing the M III contract in Utah upon the joint venture
oil production level of 4,000 barrels a day being attained. This two
million shares includes the 500,000 shares the Company is to issue to
MIII. The Company is also contingently liable to issue an additional
two million shares upon the joint venture attaining production of a
total of 6,000 barrels a day.
The Company is contingently liable to issue up to three million shares
of restricted stock in total to three officers and directors of the
Company for their efforts in closing the Sao Tome & Principe contract.
These shares will be issued upon the joint venture oil production level
of 20,000 barrels a day being attained.
Warrants
In March 1998 the Company issued a warrant for 100,000 shares of common
stock with an exercise price of $1.20 per share, or total proceeds of
$120,000 in cash for the Company if all of the warrants are exercised.
This warrant was issued in conjunction with entering into the
Kingsbridge Investment Agreement.
In June 1998 the Company received $200,000 in cash in exchange for
warrants for 1,050,000 shares of common stock with an exercise price of
$ 0.75 per share, or total proceeds to the Company of $787,500 in cash
if all of the warrants are exercised.
(11) Deferred compensation
ERFC issued 755,043 shares of its common stock into escrow in exchange
for services to be rendered by a consultant under a four year contract.
These services were valued at $125,000 per year, therefore the Company
is amortizing this deferred compensation expense at a rate of $31,250
per quarter. This consultant later became ERFC's Chairman, President
and CEO.
On August 30, 1996, the Company issued 10,000 shares of its common
stock, valued at $70,000, to an attorney for services to be rendered at
below market rates for a period of 4 months. Accordingly, the Company
amortized this expense over the term of the agreement.
(12) Commitments and contingencies
The Company is committed to lease payments for 9 vehicles under
operating leases totalling $52,292 and $20,043 for the fiscal years
ended September 30, 1998 and 1999, respectively. The Company currently
leases its office space and operating facilities on a month to month
basis.
(13) Segment information
The Company has three distinct lines of business through its two wholly
owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company, (BAPCO), and a joint venture agreement. SSI operates
in the environmental remediation industry and BAPCO will operate in the
oil and gas production industry. SSI's principal identifiable assets
consist of $3,720,000, of environmental equipment, a barge deposit of
$131,000 and the Chevron P&A master service agreement valued at $300.
Revenues of $273,057 relate to SSI. BAPCO's principal identifiable
assets consist of crude oil and natural gas reserves valued at
$1,240,175 and equipment valued at $2,570,000. Revenues of $119,219
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
F-13
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(13) Segment information (Continued)
transiting the Panama Canal. The Company is in final negotiations for a
loan which would allow it to begin its operations in Panama. No
principal identifiable assets yet exist for this line of business.
(14) Sao Tome concession payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the
DRSTP government which allows the Company to pay this concession fee
within five days after the DRSTP files the relevant official maritime
claims maps with the United Nations and the Gulf of Guinea Commission.
In December 1997, the Company paid $2,000,000 of this concession fee to
the DRSTP from the proceeds of the convertible note offering.
(15) Letter of intent
In December 1997, the Company received a letter of intent from a
registered brokerage house which contemplates a firm commitment public
offering of approximately $50,000,000 of convertible debt securities.
This offering, if it proceeds, is contemplated for late 1998. There is
no assurance that such offering will be consummated.
In May, 1998, the Company received a letter of intent from another
registered brokerage firm as a replacement of the December 1997, letter
of intent. This new letter of intent is for the same terms and
conditions as the one it replaces.
(16) Investment in ST PETRO, S.A.
In June 1998, in anticipation of the legal formation of ST PETRO, S.A.
by the government of the DRSTP, the Company forwarded $20,000 of its
expected $49,000 initial investment in ST PETRO, S.A. Once the entire
amount is paid, ERHC will own 49% of the then total issued and
outstanding common stock of ST PETRO. ERHC will also effectively
control ST PETRO, S.A. by virtue that the CEO and President of ST PETRO
are ERHC's CFO and COO respectively.
(17) Subsequent events
a) Sao Tome concession payments
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
b) Notes payable
In July/August 1998 the Company issued 8% convertible subordinated
unsecured notes due July/August 2000 in exchange for $1,200,000 and
$275,000 cash. These notes are convertible into shares of the Company's
common stock at a conversion price to be determined by so stated
formula. If all of the notes are converted, the Company will be
required to issue 1,657,928 shares of common stock based on the formula
on the dates of closing (an average of $0.88966). Warrants were also
issued to the placement agent for an additional 132,750 shares of
common stock with an exercise price of $0.74375 and $0.73125 per share,
or total additional proceeds to the Company of $98,423 in cash in the
event all of the warrants are exercised.
F-14
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 ("DRSTP").
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 DRSTP; (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 public debt offering of $50
million.
Should the Company's contemplated debt offering not proceed as planned, the
Company will continue to seek alternative sources of funding to enable the
Company to meet its demands for cash to commercialize the various agreements it
has entered into. The Company has sought alternative sources of funding to
provide interim financing until such time as the anticipated debt offering can
be completed.
The Private Stock Offering:
In order to meet certain current operating expenses, during the period of April
1998 through June 1998, the Company received gross proceeds in the amount of
$371,850.00 from the sale of a total of 534,200 shares of the restricted stock
in the Company, $.001 par value per share (the "Restricted Stock") and received
gross proceeds in the amount of $32,200.65 from the issuance of stock for
services for a total of 62,420 shares of the Company's Restricted Stock.
The April 1998 Funding:
In order to meet the funding need of the Company, on April 9, 1998, the Company
raised proceeds of $300,000 as a bridge loan in a private placement of the
Company's (1) 12.0% convertible notes due on the earlier of January 8, 1999 or
at such time as the Company receives the first draw under the Kingsbridge
Capital Limited("Kingsbridge")Private Equity Line of Credit dated as of March
23, 1998 (the "Notes") and (2) warrants to purchase shares of Common Stock (the
"Warrants") to nine (9) investors. The shares to be issued upon conversion of
the Notes and exercise of the Warrants shall be Rule 144 restricted shares. The
maximum number of shares of Common Stock which may be issued by the Company upon
the conversion of the Notes (at a base conversion rate of $1.50 per share,
(subject to certain limitations) and the exercise of the Warrants (at an
exercise price of $1.25) is up to 200,000 shares and 210,000 respectively. The
shares covered by the conversion of the Notes and exercise of the Warrants are
entitled to piggyback registration rights and were included in Amendment No. 2
to the Form S-1 currently filed. The Notes are convertible at any time after
issuance, and the Warrants are exercisable at any time prior to April 8, 2001.
The Company used the gross proceeds to finance further production and for
working capital. As of August 19, 1998, none of the Notes have been converted
and none of the Warrants have been exercised.
The First June 1998 Funding
In June 1998, the Company raised gross proceeds of $200,000 in a private
placement of warrants to purchase Common Stock (the"June Warrants") to two
"accredited" investors. The maximum number of shares of Common Stock which may
be issued upon the exercise of the June Warrants (at an exercise price of $.75)
is up to 1,050,000 shares. The June Warrants may exercise at any time up until 5
PM Eastern Standard Time on the first business day after the fourteen (14) month
period following the date of the declaration of the effectiveness of the
Company's registration statement in which the June Warrants are registered.
In the event that a holder of the June Warrants exercises for not less than
250,000 (25,000 in the case of the 50,000 warrant holder) shares of the
Company's Common Stock within 180 days of June 1, 1998 and exercises for at
least an additional 50,000 (5,000 in the case of the 50,000 warrant holder)
shares of Common Stock within 360 days of June 1, 1998, the Company shall issue
of the June Warrants additional warrants for the purchase of a number of shares
equal to the number of shares purchased under the June Warrants within 180 and
360 days of June 1, 1998. The exercise price of these additional warrants is
equal to $2.00 per share. Such additional warrants may be exercised at any time
up until 5 PM Eastern Standard Time on the first business day after the
twenty-four (24) month period following the date of the effectiveness of the
Company's registration statement in which the additional warrants are
registered.
16
In connection with the sale of the June Warrants, the Company included the
shares to be issued upon exercise of the June Warrants in Amendment No. 2 to the
Form S-1 currently filed. The Company has committed to register the additional
warrants within ninety (90) days of issuance. The Company used the net proceeds
of this financing for working capital. As of August 19, 1998, none of the June
Warrants have been exercised.
The Second June 1998 Funding
In June 1998, the Company raised gross proceeds of $425,000 in the private
placement of the Company's 12..0% subordinated convertible notes due on the
earlier of December 1999 or upon the receipt by the Company of debt or equity or
revenue from the sale of leases or other property of $4 million or more (the
"June Notes") and warrants to purchase Common Stock (the "Second June Warrants")
to a limited number of "accredited" investors. The maximum number of shares of
Common Stock which may be issued by the Company upon the conversion of the June
Notes (at a base conversion price of $1.00 per share), subject to designated
adjustments, and the exercise of the Second June Warrants (at an exercise price
of $.50 per share for the first two years and $.85 per share thereafter) is up
to 425,000 shares and 531,250 shares, respectively. As of August 19, 1998, none
of the June Notes or the Second June Warrants had been exercised.
The holders of the June Notes may convert 100% of the principal amount of the
June Notes at any time after the issuance date. The conversion rate of the June
Notes is equal to $1.00 per share. The June Notes are subordinated to any senior
debt incurred by the Company.
The holders of the Second June Warrants may exercise at any time up until 5 PM
Eastern Standard Time on June 14, 2002. The exercise price of the Second June
Warrants is equal to $.50 per share for the first two years and $.85 per share
thereafter, these prices are subject to adjustment. In the event the Company
does not register the Second June Warrants within six (6) months of issuance,
the exercise price for the entire term through June 14, 2002 shall remain at
$.50 per share. Additionally, the price of the Second June Warrants will be
adjusted downward to 50% of market when the registration statement becomes
effective, if after 90 days the share price of the Company's Common Stock falls
below $.75 per share for more than five (5) consecutive trading days or seven
(7) out of ten (10) trading days. The Second June Warrants contain cashless
exercise and anti-dilution provisions which include, but are not limited to,
anti-dilution protection against stock or management option issuances below $.50
per share.
In connection with the sale of the June Notes and the Second June Warrants, the
Company included such notes and warrants in Amendment No. 2 to the Form S-1
currently filed. The Company used the net proceeds of this financing for working
capital. As of August 19, 1998 none of the June Notes have been converted and
none of the Second June Warrants have been exercised.
The Third June 1998 Funding
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 2000 (the "Second June
Notes") and warrants to purchase Common Stock (the "Third June Warrants") to one
"accredited" investor. The conversion price is calculated by formula as the
lower of (i) the average closing bid price for the five (5) days prior to the
closing or (ii) 80% of the average closing bid price for the five (5) days prior
to notice of intent to convert. In the event that the lower price were the
average closing bid price for the five (5) days prior to the closing, the
maximum number of shares of Common Stock which may be issued by the Company upon
conversion of the Second June Notes (at a base price of $.7195) is 1,798,124.
However, if 80% of the average closing bid price for the five (5) days prior to
the notice of intent to convert were the lower price, there is no way to
ascertain the maximum number of shares of Common Stock which may be issued by
the Company upon conversion of the Second June Notes at this time. Because the
conversion rate of the Second June Notes is based in part on future average
trading prices of the Common Stock, the number of shares which may actually be
issued on conversion could differ significantly. For example, in the event the
average closing bid price for the five (5) days prior to notice of intent to
convert were $.7195, 80% of such number would equal a share price of $.5756,
resulting in a total of 2,247,655 shares of Common Stock issuable upon
conversion exclusive of the exercise of any of the Third June Warrant. The
maximum number of shares of Common Stock which may be issued by the Company upon
the exercise of the Third June Warrants (at an exercise price of 120% of the
average closing bid price for the five (5) days prior to the closing which is
equal to $.8634) is 230,000 shares. As of August 19, 1998, none of the Second
June Notes had been converted and none of the Third June Warrants had been
exercised.
Under the terms of the Second June Notes, the holders thereof may convert the
original principal amount of the Second June Notes only to the extent of
one-third of such amount on and after each of July 23, 1998, August 23, 1998 and
September 23, 1998. The Second June Notes are subordinate to any senior debt
incurred by the Company.
All of the shares to be held by the Investors upon exercise of the Third June
Warrants, under the terms of the Third June Warrants, the holders thereof may
exercise at any time up until 5 PM Eastern Standard Time on June 23, 2003. The
exercise price of the Third June Warrants is equal to $.8634 per share.
17
In connection with the sale of the Second June Notes and the Third June
Warrants, the Company entered into a Registration Rights Agreement with the
Selling Shareholders, pursuant to which the Company agreed to register the Third
June 1998 Funding shares under the Securities Act for resale by, and for the
benefit of, such shareholders. The Second June Notes and the Third June Warrants
were included in Amendment No. 2 to the Form S-1 currently filed. The Company
used $1,000,000 of the net proceeds as an additional concession fee payment in
connection with its Sao Tome joint venture. The balance was used for working
capital.
The July/August 1998 Funding
In July and August 1998, the Company raised gross proceeds of $1,200,000 and
$275,000 respectively in a private placement of up to $3,000,000 in two (2)
tranches of the Company's 8.0% convertible notes due in 2000 (the "July Notes")
to a limited number of "accredited" investors. The Company anticipates closing
an additional tranche representing gross proceeds of $300,000 on or before
August 18, 1998. The conversion price of the July Notes is calculated by formula
as the lower of (i) 120% of the average closing bid price per share of the
Company's Common Stock for the five (5) days preceding the closing of the
transaction or (ii) 75% of the average closing bid price per share of the
Company's Common Stock for the five (5) days preceding the date upon which
notice of conversion is given by the investor to the Company. In the event that
the lower price were the average closing bid price for the five (5) days prior
to the closing bid price for the five (5) days prior to the closing of each
tranche, the maximum number of shares of the Common Stock which may be issued by
the Company upon conversion of the July Notes (at a base price of $.74375 and
$.73125 respectively) is 1,657,928. However if 75% of the average closing bid
price for the five (5) days prior to the notice of intent to convert were the
lower price, there is no way to ascertain the maximum number of shares of Common
Stock which may be issued by the Company upon conversion of the July Notes at
this time. Because the conversion rate of the July Notes is based in part on
future average trading prices of the Common Stock, the number of shares which
may actually be issued upon conversion could differ significantly. For example,
in the event the average closing bid price for the five (5) days prior to the
note of intent to convert were $.74375, 75% of such number would equal a share
price of $.55781 resulting in a total of 2,644,257 shares of Common Stock
issuable upon conversion exclusive of the exercise of any of the warrants.
Warrants were issued to the placement agent at the close of each tranche (the
"July Warrants"). The maximum number of shares of Common Stock which may be
issued by the Company upon the exercise of the July Warrants (at an exercise
price of $.74375 and $.73125 respectively) is 132,750 shares. As of August 19,
1998, none of the July Notes had been converted and none of the July Warrants
had been exercised.
Under the terms of the July Notes, the holders thereof may convert the original
principal amount of the notes only to the extent of one-third of such amount on
and after each thirty (3) day period following the issuance date. The July Notes
are subordinate to any senior debt incurred by the Company.
Under the terms of the July Warrants, the holders thereof may exercise at any
time up until 5 PM Eastern Standard Time on July 30, 2003 and August 5, 1998
respectively. The exercise price of the July Warrants are equal to $.74375 and
$.73125.
In connection with the sale of the July Notes and the July Warrants, the Company
entered into a Registration Rights Agreement with the Selling Shareholders,
pursuant to which the Company agreed to register the July 1998 Funding shares
under the Securities Act for resale by, and for the benefit of, such
shareholders. The July Notes and the July Warrants were not included in
Amendment No. 2 to the Form S-1 currently filed. The Company used $1,000,000 of
the net proceeds as an additional concession fee payment in connection with its
Sao Tome joint venture. The balance was used for working capital.
18
Operations
During the third quarter 1998, the Company focused on the funding of the
additional concession fee due to DRSTP. A substantial portion of the financing
arranged during this quarter was paid over as part of this concession fee. ERHC
continues to believe that the Sao Tome Project needs to be the primary focus of
its activities due to the extensive interest and financial commitments of the
major exploration and production companies in the Gulf of Guinea.
In April, 1998, the Government of Sao Tome granted approval to the joint venture
to proceed with the preparation and sale of leases of its oil concession rights,
which sales are expected to occur in early 1999.
On April 20, 1998, the government of DRSTP and ERHC filed the two hundred (200)
mile exclusive economic zone coordinates with the United Nations. This is the
last step necessary to establish the exclusive economic zone for international
recognition.
In June 1998, the Company and Sao Tome signed a letter of intent to award a
contract to Schlumberger Geco-Prakla to perform a marine seismic survey in
anticipation of the license round to be held in Sao Tome, and to act as the
technical advisor and coordinator of such license round. Schlumberger
Geco-Prakla is a seismic data service company located in Great Britain. The
exact number and size of the lease blocks to be offered have not yet been
determined. The Company intends to run the survey and acquire the seismic data
in late 1998 in order to proceed with the licensing round commencing in early
1999.
In July 1998, the Company closed and formed the joint venture national oil
company with DRSTP. This oil company is called the Sao Tome Principe National
Petroleum Company S.A. ("STPETRO"). STPETRO is owned fifty one percent (51%) by
DRSTP and forty nine percent (49$) by ERHC. In additional, ERHC has been granted
under the original agreement with the government a long term management
arrangement of STPETRO. On July 9, 1998, the Ministry of Cabinets and the Prime
Minister executed the STPETRO formation documents and they were promulgated into
law by the President.
During this quarter, the Company put back on line five (5) additional wells at
the Wichita Falls fields located in North Texas. These wells, and the thirteen
(13) which were previously opened, are currently producing approximately twenty
(20) barrels a day in total. ERHC has determined that with oil prices down, it
is not economically feasible at this time to continue with the redevelopment of
this field or to rework the wells for increased production. At such time as oil
prices reach $15 to $18 per barrel, the Company will reconsider its position.
At the Nueces River Project, the Company is currently meeting with potential
farm-out partners to work the project. ERHC believes Nueces River still holds
tremendous development potential; however, until such time as the Company
secures long term funding, of which there can be no assurance, it intends to
look for alternative methods to develop this project.
At the Uinta Project, ERHC continues to currently operate four (4) wells. At
such time as additional funding is available, the Company intends to rework
additional wells.
During the third quarter 1998, the Company awaited additional financing and an
increase in oil prices in order to be able to move forward with the rework and
development of the MIII project at the Uintah and Ouray Reservation, Utah.
In October 1997, the Company received a letter of intent to secure $50 million
in debt financing from Dirks & Company of New York. This transaction was not
brought to fruition for a number of reasons, but principally because certain
parties employed by such firm who would have been primarily involved with the
placement of this offering, left the firm. After several months, such parties
became employed by Security Capital Trading, Inc. During the second quarter
1998, the Company renegotiated this transaction and on May 7, 1998, Security
Capital Trading Inc. issued a letter of intent in connection with the proposed
offering of $50 million of public debt. This offering is conditioned upon filing
of a Registration Statement on Form S-1 covering the proposed debt offering. The
Company believes that until such time as its current Form S-1, as amended
becomes effective, that it is not in a position to file another Form S-1.
Accordingly the Company intends to proceed with the Security Capital Trading
Inc. debt offering immediately upon the effectiveness of its current Form S-1,
as amended.
On May 7, 1998, Security Capital Trading Inc. also issued a letter of intent to
act as the placement agent for the private placement of convertible preferred
stock of the Company(the "Preferred Stock"). The offer is for the placement of a
minimum of $2,000,000 and a maximum of $5,000,000 at an anticipated offering
price per share of Preferred Stock of $10.00. This Preferred Stock shall be
offered to accredited investors pursuant to Regulation D under the Securities
Act of 1933 in units of $50,000. Each share of Preferred Stock shall have a
liquidation value of $10.00 and shall be convertible into shares of Common Stock
at a rate which is mutually acceptable to Security Capital Trading Inc. and the
Company. The Company intends to proceed with this offering.
19
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 third quarter of fiscal 1998 the Company incurred a net loss of
$2,781,000, compared to a net loss of $1,399,000 in the third quarter of fiscal
1997. In the third quarter of fiscal 1998 a total of $270,000 was accrued, but
not paid in cash, as compensation to three officers of the Company. Depreciation
and amortization totaled $133,000 in the third quarter of fiscal 1998 compared
to $72,000 in the third quarter of fiscal 1997. Depletion expense was $1,000 in
the third quarter of fiscal 1998 compared to $0 the prior year. The net cash
operating loss of the Company for the third quarter of fiscal 1998 was
$1,498,000 compared to $134,000 for the third quarter of fiscal 1997.
Officers compensation, professional fees, travel, consultant fees and
miscellaneous expense for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997 increased dramatically because the Company had
not been funded at that time and only began its operations by December 31, 1996.
Professional fees included legal, audit and petroleum engineering and other
engineering costs.
The Company had revenues of $100,000 in third quarter of fiscal 1998, after
adjustments for misclassifications and overaccruals made in error, compared to
$84,000 in the third quarter of fiscal 1997.
CAPITAL EXPENDITURES
When the Company entered into the joint venture agreement in May 1997 with the
DRSTP, 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 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 a convertible note offering.
On April 15, 1998, the Company agreed to enter into a joint venture with a
privately held Delaware corporation, AMCO Montenegro, Inc. and its related ABC
Group of companies ("AMCO") to construct and operate an "Off-Shore Logistics
Center" for the oil industry in the Gulf of Guinea, on the Island of Sao Tome.
The Company is in the process of finalizing the contracts with AMCO.
This Off-Shore Logistics Center will include a dry dock facility. Currently the
oil industry in the area utilizes a dry dock in Cape Town, South Africa. The
location of a dry dock facility on San Tome its expected to be a great benefit
to the industry, including the Company's activities, as it is expected to reduce
the down time by a minimum of four (4) days due to Sao Tome's strategic
location.
AMCO and its related ABC Group of companies, including A.B.C. AeroEngineering
Ltd. have designed, developed and constructed civilian and military airports,
airport refueling and re-fueling stations, road construction, military
facilities, hospitals, healthcare facilities, business and warehouse facilities
and various other industrial support structures. The Company has entered into
preliminary discussions with marine transport and air support companies for the
use of this logistics center. AMCO is responsible for funding this project.
The Off-Shore Logistics Center will be an on-shore based operation on Sao Tome
which can service off-shore drilling rigs and act as the central depository,
storage and service area for the drilling and oil production in the area. The
facility will be designed to provide services and supplies to support drilling
off-shore wells, including, pipe, casing and other tubular goods, fuel, water,
drilling mud facilities and supplies, rental tools and a dry dock facility. In
addition, it is intended to provide helicopter, fixed wing and marine
facilities, such as crew and transport boats and will encompass housing and
business facilities for oil company personnel.
In April 22, 1998, Jugobanks AD Podgorica of Montenegro agreed to finance
$50,000,000 for the construction the Off-Shore Logistics Center in Sao Tome. The
Company and AMCO are working with the bank on the final loan documentation.
On July 2, 1998, the Company paid an additional payment on the concession fee
due to DRSTP in the amount of $1,000,000 out of the proceeds of the Third June
1998 Financing and on July 31,1998, the Company made another additional payment
in the amount of $1,000,000 out of the proceeds of the July/August 1998 Funding.
20
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 Company received the lease assignment. The terms of the acquisition are
for the Company to pay $250,000 in cash, issue 250,000 shares of the Company's
common stock, valued at $2,000,000, at each of the following four dates:
closing; December 30, 1997; March 30, 1998 and June 30, 1998. The Company also
was required to guarantee that the bid price on the date the Rule 144
restrictions lapse will be no less than $2.00 per share or the Company is
required to either issue additional shares or to pay the difference in cash, at
the Company's option. The Company also granted the sellers a 4% gross production
receipts royalty to a maximum of $677,000. The Company is currently evaluating
the existing reserve reports and underlying data on these leases and has
contracted another independent appraiser to complete new reserve reports for its
use. The 250,000 shares of the Company's Common Stock due on June 30, 1998 were
issued in accordance with the agreement.
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 proportionate share of the costs to
reenter this well. The Company is also required to carry the seller's 1/8
proportionate share of the reentry costs 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 continues to
evaluate the existing reserve reports and underlying data on these leases and
awaits another independent appraiser to complete new reserve reports for its
use.
To further penetrate the environmental remediation services market in Louisiana,
in February 1998, the Company acquired a 70% equity interest in Ven Virotek,
Inc., a Louisiana corporation ("Virotek"), from its sole shareholder, Recycling
Remedies, Inc. Virotek owns and operates a NORM solid waste disposal site in
Houma, Louisiana and holds permits from Louisiana environmental authorities to
dispose of salt water brine and naturally occurring waste products. For the year
ended December 31, 1997, Virotek had revenues, net income and total assets of
approximately $658,000, $332,000, and $1,035,000, respectively. The Company
acquired its interest in Virotek in consideration for $15,000 in cash and the
assumption of a $300,000 bank note.
In March 1998, Virotek obtained two contracts from the U.S. Department of Energy
to dispose of salt water brine from the strategic petroleum reserve located in
Houma, Louisiana. Under the contracts, it is contemplated initially that a total
of 475,000 barrels of brine will be shipped to Virotek for disposal, and Virotek
will receive $1.00 per barrel for its services. There were no further
developments with Virotek during the third quarter 1998.
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 with 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.
21
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.
Other than any items previously reported, the Company is not a party to any
material pending or threatened legal proceeding or claim.
Item 2. Changes in Securities
(a) There have been no changes with respect to defining the rights of the
holders of any class of registered securities or otherwise.
(b) There have been no changes with respect to materially limiting or qualifying
rights of any class of registered securities or otherwise.
(c) Recent Sales of Unregistered Securities
The Private Offering:
In order to meet certain current operating expenses, during the period of April
1998 through June 1998, the Company received gross proceeds in the amount of
$371,850.00 from the sale of a total of 534,200 shares of the restricted stock
in the Company, $.001 par value per share (the "Restricted Stock") to a limited
number of "accredited investors" in an offering conducted pursuant to Section
4(2) of the Securities Act of 1933, as amended (the "Act") and Rule 506 of
Regulation D promulgated thereunder ("Rule 506"). In addition, and the Company
received gross proceeds in the amount of $32,200.65 from the issuance of stock
for services for a total of 62,420 shares of the Company's Restricted Stock
under terms substantially similar to those offered to the investors. No
underwriter was used in connection with this offering.
22
The April 1998 Funding:
In order to meet the funding need of the Company, on April 9, 1998, the Company
raised proceeds of $300,000 as a bridge loan in a private placement of the
Company's (1) 12.0% convertible notes due on the earlier of January 8, 1998 or
at such time as the Company receives the first draw under the Kingsbridge
Private Equity Line of Credit dated as of March 23, 1998 (the "Notes") and (2)
warrants to purchase shares of Common Stock (the "Warrants") to nine (9)
"accredited investors". The shares to be issued upon conversion of the Notes and
exercise of the Warrants shall be Rule 144 restricted shares. The maximum number
of shares of Common Stock which may be issued by the Company upon the conversion
of the Notes (at a base conversion rate of $1.50 per share, (subject to certain
limitations) and the exercise of the Warrants (at an exercise price of $1.25) is
up to 200,000 shares and 210,000 respectively. The shares covered by the
conversion of the Notes and exercise of the Warrants are entitled to piggyback
registration rights and were included in Amendment No. 2 to the Form S-1
currently filed. The Notes are convertible at any time after issuance, and the
Warrants are exercisable at any time prior to April 8, 2001. The Company used
the gross proceeds to finance further production and for working capital. As of
August 19, 1998, none of the Notes have been converted and none of the Warrants
have been exercised. No underwriter was used in connection with this funding.
The First June 1998 Funding
In June 1998, the Company raised gross proceeds of $200,000 in a private
placement of warrants to purchase Common Stock (the"June Warrants") to two
"accredited" investors. The maximum number of shares of Common Stock which may
be issued upon the exercise of the June Warrants (at an exercise price of $.75)
is up to 1,050,000 shares. The June Warrants may exercise at any time up until 5
PM Eastern Standard Time on the first business day after the fourteen (14) month
period following the date of the declaration of the effectiveness of the
Company's registration statement in which the June Warrants are registered.
In the event that a holder of the June Warrants exercises for not less than
250,000 (25,000 in the case of the 50,000 warrant holder) shares of the
Company's Common Stock within 180 days of June 1, 1998 and exercises for at
least an additional 50,000 (5,000 in the case of the 50,000 warrant holder)
shares of Common Stock within 360 days of June 1, 1998, the Company shall issue
of the June Warrants additional warrants for the purchase of a number of shares
equal to the number of shares purchased under the June Warrants within 180 and
360 days of June 1, 1998. The exercise price of these additional warrants is
equal to $2.00 per share. Such additional warrants may be exercised at any time
up until 5 PM Eastern Standard Time on the first business day after the
twenty-four (24) month period following the date of the effectiveness of the
Company's registration statement in which the additional warrants are
registered.
In connection with the sale of the June Warrants, the Company included the
shares to be issued upon exercise of the June Warrants in Amendment No. 2 to the
Form S-1 currently filed. The Company has committed to register the additional
warrants within ninety (90) days of issuance. The Company used the net proceeds
of this financing for working capital. As of August 19, 1998, none of the June
Warrants have been exercised. No underwriter was used in connection with this
funding.
The Second June 1998 Funding
In June 1998, the Company raised gross proceeds of $425,000 in the private
placement of the Company's 12..0% subordinated convertible notes due on the
earlier of December 1999 or upon the receipt by the Company of debt or equity or
revenue from the sale of leases or other property of $4 million or more (the
"June Notes") and warrants to purchase Common Stock (the "Second June Warrants")
to a limited number of "accredited" investors. The maximum number of shares of
Common Stock which may be issued by the Company upon the conversion of the June
Notes (at a base conversion price of $1.00 per share), subject to designated
adjustments, and the exercise of the Second June Warrants (at an exercise price
of $.50 per share for the first two years and $.85 per share thereafter) is up
to 425,000 shares and 531,250 shares, respectively. As of August 19, 1998, none
of the June Notes or the Second June Warrants had been exercised.
The holders of the June Notes may convert 100% of the principal amount of the
June Notes at any time after the issuance date. The conversion rate of the June
Notes is equal to $1.00 per share. The June Notes are subordinated to any senior
debt incurred by the Company.
23
The holders of the Second June Warrants may exercise at any time up until 5 PM
Eastern Standard Time on June 14, 2002. The exercise price of the Second June
Warrants is equal to $.50 per share for the first two years and $.85 per share
thereafter, these prices are subject to adjustment. In the event the Company
does not register the Second June Warrants within six (6) months of issuance,
the exercise price for the entire term through June 14, 2002 shall remain at
$.50 per share. Additionally, the price of the Second June Warrants will be
adjusted downward to 50% of market when the registration statement becomes
effective, if after 90 days the share price of the Company's Common Stock falls
below $.75 per share for more than five (5) consecutive trading days or seven
(7) out of ten (10) trading days. The Second June Warrants contain cashless
exercise and anti-dilution provisions which include, but are not limited to,
antidilutive protection against stock or management option issuances below $.50
per share.
In connection with the sale of the June Notes and the Second June Warrants, the
Company included such notes and warrants in Amendment No. 2 to the Form S-1
currently filed. The Company used the net proceeds of this financing for working
capital. As of August 19, 1998 none of the June Notes have been converted and
none of the Second June Warrants have been exercised. No underwriter was used in
connection with this funding.
The Third June 1998 Funding
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 2000 (the "Second June
Notes") and warrants to purchase Common Stock (the "Third June Warrants") to one
"accredited investor". The conversion price is calculated by formula as the
lower of (i) the average closing bid price for the five (5) days prior to the
closing or (ii) 80% of the average closing bide price for the five (5) days
prior to notice of intent to convert. In the event that the lower price were the
average closing bid price for the five (5) days prior to the closing, the
maximum number of shares of Common Stock which may be issued by the Company upon
conversion of the Second June Notes (at a base price of $.7195) is 1,798,124.
However, if 80% of the average closing bid price for the five (5) days prior to
the notice of intent to convert were the lower price, there is no way to
ascertain the maximum number of shares of Common Stock which may be issued by
the Company upon conversion of the Second June Notes at this time. Because the
conversion rate of the Second June Notes is based in part on future average
trading prices of the Common Stock, the number of shares which may actually be
issued on conversion could differ significantly. For example, in the event the
average closing bid price for the five (5) days prior to notice of intent to
convert were $.7195, 80% of such number would equal a share price of $.5756,
resulting in a total of 2,247,655 shares of Common Stock issuable upon
conversion exclusive of the exercise of any of the Third June Warrant. The
maximum number of shares of Common Stock which may be issued by the Company upon
the exercise of the Third June Warrants (at an exercise price of 120% of the
average closing bid price for the five (5) days prior to the closing which is
equal to $.8634) is 230,000 shares. As of August 19, 1998, none of the Second
June Notes had been converted and none of the Third June Warrants had been
exercised.
Under the terms of the Second June Notes, the holders thereof may convert the
original principal amount of the Second June Notes only to the extent of
one-third of such amount on and after each of July 23, 1998, August 23, 1998 and
September 23, 1998. The Second June Notes are subordinate to any senior debt
incurred by the Company.
All of the shares to be held by the Investors upon exercise of the Third June
Warrants, under the terms of the Third June Warrants, the holders thereof may
exercise at any time up until 5 PM Eastern Standard Time on June 23, 2003. The
exercise price of the Third June Warrants is equal to $.8634 per share.
In connection with the sale of the Second June Notes and the Third June
Warrants, the Company entered into a Registration Rights Agreement with the
Selling Shareholders, pursuant to which the Company agreed to register the Third
June 1998 Funding shares under the Securities Act for resale by, and for the
benefit of, such shareholders. The Second June Notes and the Third June Warrants
were included in Amendment No. 2 to the Form S-1 currently filed. The Company
used $1,000,000 of the net proceeds as an additional concession fee payment in
connection with its Sao Tome joint venture. The balance was used for working
capital.
The firm of Joseph Charles & Associates which is located at Lenox Center, 3355
Lenox Road, #750, Atlanta, GA 30326 acted as the underwriter of this placement.
The July/August 1998 Funding
In July and August 1998, the Company raised gross proceeds of $1,200,000 and
$275,000 respectively in a private placement of up to $3,000,000 in two (2)
tranches of the Company's 8.0% convertible notes due in 2000 (the "July Notes")
to a limited number of "accredited" investors. The Company anticipates closing
an additional tranche representing gross proceeds of $300,000 on or before April
15, 1998. The conversion price of the July Notes is calculated by formula as the
24
lower of (i) 120% of the average closing bid price per share of the Company's
Common Stock for the five (5) days preceding the closing of the transaction or
(ii) 75% of the average closing bid price per share of the Company's Common
Stock for the five (5) days preceding the date upon which notice of conversion
is given by the investor to the Company. In the event that the lower price were
the average closing bid price for the five (5) days prior to the closing bid
price for the five (5) days prior to the closing of each tranche, the maximum
number of shares of the Common Stock which may be issued by the Company upon
conversion of the July Notes (at a base price of $.74375 and $.73125
respectively) is 1,657,928. However if 75% of the average closing bid price for
the five (5) days prior to the notice of intent to convert were the lower price,
there is no way to ascertain the maximum number of shares of Common Stock which
may be issued by the Company upon conversion of the July Notes at this time.
Because the conversion rate of the July Notes is based in part on future average
trading prices of the Common Stock, the number of shares which may actually be
issued upon conversion could differ significantly. For example, in the event the
average closing bid price for the five (5) days prior to the note of intent to
convert were $.74375, 75% of such number would equal a share price of $.55781
resulting in a total of 2,644,257 shares of Common Stock issuable upon
conversion exclusive of the exercise of any of the warrants. Warrants were
issued to the placement agent at the close of each tranche (the "July
Warrants"). The maximum number of shares of Common Stock which may be issued by
the Company upon the exercise of the July Warrants (at an exercise price of
$.74375 and $.73125 respectively) is 132,750 shares. As of August 19, 1998, none
of the July Notes had been converted and none of the July Warrants had been
exercised.
Under the terms of the July Notes, the holders thereof may convert the original
principal amount of the notes only to the extent of one-third of such amount on
and after each thirty (3) day period following the issuance date. The July Notes
are subordinate to any senior debt incurred by the Company.
Under the terms of the July Warrants, the holders thereof may exercise at any
time up until 5 PM Eastern Standard Time on July 30, 2003 and August 5, 1998
respectively. The exercise price of the July Warrants are equal to $.74375 and
$.73125.
In connection with the sale of the July Notes and the July Warrants, the Company
entered into a Registration Rights Agreement with the Selling Shareholders,
pursuant to which the Company agreed to register the July 1998 Funding shares
under the Securities Act for resale by, and for the benefit of, such
shareholders. The July Notes and the July Warrants were not included in
Amendment No. 2 to the Form S-1 currently filed. The Company used $1,000,000 of
the net proceeds as an additional concession fee payment in connection with its
Sao Tome joint venture. The balance was used for working capital.
The firm of J.P. Carey Securities, Inc. which is located at Atlanta Financial
Center, East Tower, 3343 Peachtree Road, Suite 500, Atlanta, GA 30326 acted as
the underwriter of this funding.
Exemption from Registration Claimed
While no offering memorandum was used in connection with the stock offering or
any of the fundings in this third quarter 1998, the business plan of the Company
as set forth in the Form S-1 filed on January 8, 1998 with the Securities and
Exchange Commission and in subsequent amendments thereto filed April 15, 1998
and July 24, 1998 was disclosed to each prospective investor. The additional
facts relied upon by the Company to make the federal exemption available include
the following (1) as a reporting company, the Company made available to each
potential investor the type of information required by Rule 502(b)(2)(ii); (2)
the Company made available to each purchaser at a reasonable time prior to his
purchase an opportunity to ask questions and receive answers concerning the
terms and conditions of the offering or to obtain any additional information;
(3) no general solicitation or advertising was conducted by the Company in
connection with the offering of any of the shares; (4) the Company made
reasonable inquiry to determine that the purchasers were not underwriters within
the meaning of Section 2(11) of the Act; (4) as to each purchaser who was not an
accredited investor, the Company determined that either alone or with his
purchaser representative, had such knowledge and experience in financial and
business matters that the purchaser was capable of evaluating the merits and
risks of the prospective investment, or the Company reasonably believed that
prior to making such sale, that such purchaser came within this description.
25
Item 3. Defaults Upon Senior Securities.
None. A requirement of funding provided to the Company on November 15, 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
owes the Avalon investors $136,500 for a part of the month of March and for the
full months of April, May and June 1998 and a additional amount of $39,000 for
the month of July 1998. 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 pursuant to which the
Company and its subsidiary currently enjoys the right to exploit certain oil and
gas reserves thereon.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
4.1 April 1998 Funding Convertible Note (1)
4.2 April 1998 Funding Warrant (1)
* 4.3 First June 1998 Funding Warrant
* 4.4 Second June 1998 Funding Note
* 4.5 Second June 1998 Funding Warrant
* 4.6 Third June 1998 Funding Securities Purchase Agreement
* 4.7 Third June 1998 Funding Note
* 4.8 Third June 1998 Funding Warrant
* 4.9 Third June 1998 Registration Rights Agreement
* 4.10 July/August 1998 Funding Securities Purchase Agreement
* 4.11 July/August 1998 Funding Note
* 4.12 July/August 1998 Funding Warrant Agreement and Warrant
* 4.13 July/August 1998 Funding Registration Rights Agreement
4.14 Security Capital Trading Inc. Letter of Intent - $50
Mio. Debt Offering (1)
4.15 Security Capital Trading Inc. Letter of Intent - $2
to $5 Mio. Preferred Stock (1)
10.1 Joint Venture Formation of the Sao Tome Principe
National Petroleum Company executed July 9, 1998, (in
original Portugese)(2)
* 10.2 Joint Venture Formation of the Sao Tome Principe
National Petroleum Company executed July 9, 1998,
(English translation)
26
(b) Reports on Form 8-K - There was one filing on Form 8-K for
the third quarter 1998
Form 8-K regarding Item 2, Acquisition of Assets, filed
April 13, 1998. (3)
- ----------------
* (filed herewith)
(1) Incorporated herein by reference to the Company Second Quarterly Report
on Form 10-Q for the quarter ended March 30, 1998, as amended and filed
on June 24, 1998.
(2) Filed on Form SE.
(3) Incorporated herein by reference.
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 19th day of
August, 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
EXHIBIT INDEX
EXHIBIT DESCRIPTION
4.3 First June 1998 Funding Warrant
4.4 Second June 1998 Funding Note
4.5 Second June 1998 Funding Warrant
4.6 Third June 1998 Funding Securities Purchase Agreement
4.7 Third June 1998 Funding Note
4.8 Third June 1998 Funding Warrant
4.9 Third June 1998 Registration Rights Agreement
4.10 July/August 1998 Funding Securities Purchase Agreement
4.11 July/August 1998 Funding Note
4.12 July/August 1998 Funding Warrant Agreement and Warrant
4.13 July/August 1998 Funding Registration Rights Agreement
10.2 Joint Venture Formation of the Sao Tome Principe National Petroleum
Company executed July 9, 1998 (English translation)
27