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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM _______________ TO _______________
EUROGAS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 33-1381-D 87-0427676
--------------------------- ------------------ ---------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
942 East 7145 South, Suite 101A
Midvale, Utah 84047
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 255-0862
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value None
--------------------------------- ----------------------------
(Title of Class) (Name of each exchange on
which registered)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on March 31, 2000, based upon the
closing bid price for the Common Stock of $1.125 per share on March
31, 2000, was approximately $101,238,432. Common Stock held by each
officer and director and by each other person who may be deemed to be
an affiliate of the Registrant have been excluded. As of
March 31, 2000, the Registrant had 100,736,979 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the Registrants
2000 Annual Meeting of Shareholders are incorporated by reference in
Part III of this Report
INDEX TO FORM 10-K
ITEMS 1 & 2. BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . 4
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY DESCRIPTION OF CURRENT ACTIVITIES . . . . . . . . . . . . 4
ACTIVITIES IN CANADA. . . . . . . . . . . . . . . . . . . . . . . 7
Big Horn Resources Limited . . . . . . . . . . . . . . . . . . 7
Beaver River Natural Gas Field . . . . . . . . . . . . . . . . 7
ACTIVITIES IN POLAND. . . . . . . . . . . . . . . . . . . . . . . 8
Polish Methane Gas Concessions . . . . . . . . . . . . . . . . 9
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields . . . 9
Carpathian Nw Concession . . . . . . . . . . . . . . . . . . . 10
Energetyka Lubuska Power Plant . . . . . . . . . . . . . . . . 10
Zielona Gora Natural Gas Reservoirs. . . . . . . . . . . . . . 10
ACTIVITIES IN UKRAINE . . . . . . . . . . . . . . . . . . . . . . 11
Two Oil and Methane Gas Properties in Western Ukraine. . . . . 11
Kamienska Natural Gas Reservoir. . . . . . . . . . . . . . . . 11
Chemihivnaftogasgeologiya Project. . . . . . . . . . . . . . . 11
Donetsk Coal Basis Methane Gas . . . . . . . . . . . . . . . . 11
Coal-Bed methane Gas Projects. . . . . . . . . . . . . . . . . 13
ACTIVITIES IN SLOVAKIA. . . . . . . . . . . . . . . . . . . . . . 13
Slovakian Oil & Gas Joint Venture. . . . . . . . . . . . . . . 13
Maseva Natural Gas Reservoir . . . . . . . . . . . . . . . . . 14
Gemerska Talc Deposit. . . . . . . . . . . . . . . . . . . . . 15
ACTIVITIES IN THE SAKHA REPUBLIC. . . . . . . . . . . . . . . . . 15
TAKT Exploration Blocks Near Lensk . . . . . . . . . . . . . . 15
ACTIVITIES IN SLOVENIA. . . . . . . . . . . . . . . . . . . . . . 16
ACTIVITIES IN GERMANY . . . . . . . . . . . . . . . . . . . . . . 17
DISCLOSURE OF OIL AND GAS OPERATIONS. . . . . . . . . . . . . . . 17
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EMPLOYEES AND CONSULTANTS . . . . . . . . . . . . . . . . . . . . 19
OPERATIONAL HAZARDS AND INSURANCE . . . . . . . . . . . . . . . . 19
OFFICE FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . 19
HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CERTAIN DEVELOPMENTS SINCE DECEMBER 31, 1999. . . . . . . . . . . 21
Purchase, Loan and Merger Transactions with Teton Petroleum
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Issuance of Convertible Debentures . . . . . . . . . . . . . . 23
Resignation of Chief Financial Officer . . . . . . . . . . . . 23
WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . 23
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS . . . 24
FACTORS THAT MAY AFFECT FUTURE RESULTS . . . . . . . . . . . . . . 24
Need for Significant Funds . . . . . . . . . . . . . . . . . . 24
Absence of Revenues. . . . . . . . . . . . . . . . . . . . . . 25
Existence of Default judgment. . . . . . . . . . . . . . . . . 25
Exploration Risks. . . . . . . . . . . . . . . . . . . . . . . 25
Lack of Infrastructure . . . . . . . . . . . . . . . . . . . . 26
Political, Socio-Economic, and Other Location-Related Risks. . 26
Future Licences. . . . . . . . . . . . . . . . . . . . . . . . 26
1
SEC Investigation and Other Legal Matters. . . . . . . . . . . 26
No Assurance of Commercial Production from the Company's
Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Dependence on Officers, Key Employees, and Consultants . . . . 27
Risk of Impairment of Recorded Value of Unproved Properties. . 27
Risks of Adverse Weather . . . . . . . . . . . . . . . . . . . 27
Volatility of Commodity Prices and Markets . . . . . . . . . . 28
Operating Hazards and Uninsured Risks. . . . . . . . . . . . . 28
Intense Competition in the Oil and Gas Industry. . . . . . . . 28
Environmental Regulations. . . . . . . . . . . . . . . . . . . 28
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . 29
Substantial Warrants, Options and Debentures Outstanding . . . 29
Issuance of Additional Common Stock. . . . . . . . . . . . . . 29
No Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Proposed Merger With Teton May Not Be Consummated. . . . . 30
Issuance of Shares in the Merger Will Create Substantial
Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Properties Obtained As a Result of the Merger may Prove to
Have No Value . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 33
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 33
MARKET FOR COMMON STOCK . . . . . . . . . . . . . . . . . . . . . 33
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
RECENT SALES OF UNREGISTERED SECURITIES . . . . . . . . . . . . . 34
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . 34
CERTAIN FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 35
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . 36
OUTLOO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . 39
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3
PART I
This Annual Report on Form 10-K for the year ended December 31, 199
9 (this "FORM 10-K") contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), that involve risks and uncertainties.
The reader is cautioned that the actual results of EuroGas, Inc.
and its consolidated subsidiaries( "WE," "EUROGAS" or the "COMPANY")
will differ (and may differ materially) from the results discussed in
such forward-looking statements. Factors that could cause or contribute
to such differences include those factors discussed herein under
"Factors That May Affect Future Results" and elsewhere in this Form
10-K generally. The reader is also encouraged to review other filings
made by the Company with the Securities and Exchange Commission (the
"COMMISSION" or the "SEC") describing other factors that may affect
future results of the Company.
ITEMS 1 & 2. BUSINESS AND PROPERTIES
GENERAL
EuroGas is primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, and other hydrocarbons.
Eurogas has acquired interests in several large exploration concessions
and is in various stages of identifying industry partners, farming out
exploration rights, undertaking exploration drilling, and seeking to
develop production. Eurogas is also involved in co-generation and
several mineral reclamation projects. Unless otherwise indicated in
this Report, all dollar amounts are reflected in United States dollars.
When used herein, the "Company" includes EuroGas, Inc., and its wholly
owned subsidiaries, Euro Gas (UK) Limited, Danube International
Petroleum Company ("DANUBE"), EuroGas GmbH Austria ("EG," previously
OMVJ), EuroGas Polska Sp. zo.o. ("EUROGAS POLSKA") and Energy Global
A.G. ("ENERGY GLOBAL"), and the subsidiaries of each of these
subsidiaries, including GlobeGas B.V. ("GLOBEGAS"), Pol-Tex
Methane, Sp zo.o. ("POL-TEX"), McKenzie Methane Jastrzebie Sp. zo.o.
("MMJ"), Energetyka Lubuska, Danube International Petroleum Holding
B.V. ("DANUBE NETHERLANDS"), and the NAFTA Danube Association
("DANUBE SLOVAKIA"). See "--History."
SUMMARY DESCRIPTION OF CURRENT ACTIVITIES
Canada.
The Company holds two oil and natural gas interests in Canada.
The first is a 15% interest in the "Beaver River" natural gas project
which is an attempt to reestablish commercial production in an old
Amoco field now being explored and operated by Wascana Energy, a
wholly-owned subsidiary of Canadian Occidental Petroleum Limited. The
second is an equity interest of slightly more than 50% of the capital
stock of Big Horn Resources Ltd. ("BIG HORN"), a Canadian full-service
oil and gas producer. Big Horn's business is conducted primarily in
western Canada, particularly in the provinces of Alberta and
Saskatchewan, and its stock is currently traded on the Toronto Stock
Exchange. See "--Activities in Canada."
Poland.
One of the Company's early projects was a coal bed methane gas
concession in Poland that was sold in 1997, with a retained net profits
interest, to a subsidiary of Texaco, Inc. ("TEXACO"). Texaco drilled
six wells to complete its appraisal and evaluation of the
concession and spent over $12 million, but determined not to
proceed with the project due to early gas production
figures received from the project which were considered un-economical.
On March 19, 1999, EuroGas Polska entered into a purchase agreement
providing for the acquisition of the Texaco coal-bed methane project
3
in Poland in exchange for a payment in the amount of $175,000.
The agreement is subject to approval by the Poland Ministry of
Environmental Protection, Natural Resources and Forestry. The Company
also has entered into joint venture arrangements to exploit other
concessions in Poland which are not affected by the Texaco decision.
The Company has subsequently been granted another concession in Poland
and has also entered into several letters of intent with Ukrainian
oil and gas concerns to expand potential exploration in the Ukraine.
EuroGas Polska has created a consortium with National Power Plc.,
the largest power generation company in Great Britain, and with VEW
Energie AG, a large utility company in Germany, to develop a power
project in Zielona Gora (Western Poland). As an initial step
the company "Energetyka Lubuska" was created and registered. The
Company will submit the proposal to the Polish partner EC Zielona
Gora as soon as privatization of existing plant will be completed.
It is expected that Ministry of Treasury will make final decision on
this matter in first half of 2000. The power plant is expected to
deliver 180 Mega Watts of electricity and 180 Mega Watt Thermal
(generated heat to be used for district heating system).
Separately "Energetyka Lubuska"
executed a Letter of Intent to develop
new power plant in the area of the
biggest Polish oil Field BMB. The
Company will construct the 5 MW power
plant using gas produced by BMB field
and sell electricity to de-sulfurisation
plant owned by Polish Oil and Gas
Company. It is expected that the plant
will be developed before end of 2000.
In the fall of 1997, the Company entered
into an agreement with Polish Oil and
Gas Company ("POGC") to jointly explore
1.9 million acres in which POGC holds,
or has the right to acquire, oil and
natural gas interests. The Company is
presently exploring for oil and natural
gas under this agreement in southeastern
Poland. See "--Activities in Poland."
Ukraine.
The Company has identified several
possible projects and is currently in
the process of completing a plan to
proceed in the Ukraine. See
"--Activities in Ukraine."
Slovakia.
The Company now has four projects in
Slovakia. The first is a joint venture
to develop a natural gas field with
NAFTA Gbely a.s. ("NAFTA"), an energy
concern that was formerly part of the
Czechkoslovakian national oil and gas
company. The second is the majority
ownership in an adjacent oil and gas
concession known as Maseva. The third
is a project for the exploration for oil
and gas reserves in the Carpathian
Mountains adjacent to the Polish and
Ukrainian borders. The fourth is a
minority interest in development of a
talc deposit; the majority interest
being held by Belmont Resources, Ltd, a
Vancouver British Columbia entity, which
is affiliated with a director of
EuroGas. See "--Activities in Slovakia."
Sakha Republic.
In 1997, the Company acquired EuroGas
Austrian GmbH ("EG"), formerly known as
OMV (Jakutien) Exploration GmbH, from
OMV Group ("OMV"), Austria's largest
industrial company. EJ holds a 50%
interest in a joint venture established
to explore for oil and gas in the Sakha
Republic in northeastern Siberia. See
"--Activities in the Sakha Republic."
The following table provides a brief
summary of the principal projects in
which EuroGas is presently engaged.
These projects are described in greater
detail in the pages that follow the
table.
4
SUMMARY OF EXISTING EUROGAS PROJECTS
Ownership
Country Nature/Name of Project Interest Status of Project
------- ---------------------- --------- -----------------
Canada .Big Horn Resources Ltd. 51% Subsidiary Producing 1,200 barrels
of oil equivalent per day;
proven reserves of 806,400
barrels of oil equivalent at
December 31, 1999.
.Bear River Natural Gas Field 15%-Joint Venture Drilling to Revive
Abandoned Natural Gal
Field.
Poland .Polish Methane Gas Concessions
+Pol-Tex Concession (Nr. 134/93) 100%-Subsidiary Shut-in Wells.
+One Additional Concession 70%-Joint Venture Early Exploration.
+New 112 sq. km. Concession 100%-Subsidiary Finalizing Agreement;
Pre-Exploration.
.Carpathian Flysh/Foredeep Oil 100%-Subsidiary Evaluating Seismic Data
and Gas Field Prior to Drilling.
.Carpathian New Concession Agreement tentatively
securing right to Seeking final grant of
develop concession to explore
1,100,000 acres in South-
Eastern Poland
.Energetyka Lubuska 100%-Subsidiary Government Evaluating
Proposal to Construct.
.Zielona Gora Natural Gas 12.5%-Subsidiary Negotiating Joint Venture;
Reserviors and Plant Pre-Exploration.
Ukraine .2 Oil and Methane Gas Properties 70%-Joint Venture Letter of Intent of Acquire;
in Western Ukraine Pre-exploration.
.Kamienska Natural Gas Reservoir Operation Agreement w/ Pre-exploration; Partners
State-owned Company have studied reserves.
.Chemihivnaftogasgeologiya Project Operation Agreement w/ Studying Reservoir.
Ukranian Oil Company
.Donetsk Coal Basin Methane Gas 50%-Joint Venture Testing/Drilling estimated
2000
.300 sq. km. Coal-Bed Methane Gas 50%-Joint Venture Testing/Drilling estimated
Project 2000.
Slovakia .Slovakian Oil & Gas Joint Venture 50%-Joint Venture Testing/Drilling (some
Trebisov Natural Gan Reservoir proved reserves; title
issued).
.Maseva Natural Gas Reservoir 67.5%-Joint Venture Pre-Exploration.
.Gemerska Talc Deposit 23%-2nd Tier Subsidiary Testing Complete; Seeking
Financial for Development.
5
Sakha TAKT Exploration Blocks Near 50%-Joint Venture Exploring Property Using
Republic Lensk Seismic Techniques.
Slovenia .Operating Lubricant Refinery Agreement to Purchase Negotiations in Process.
Germany .Convertible Loan to Seiler Toxic $500,000 Loan Loan due May 28, 1999;
Waste Company Ability to collect is
uncertain.
ACTIVITIES IN CANADA
Big Horn Resources
Limited
On October 5, 1998, EuroGas entered into
a stock purchase agreement with Oxbridge
Limited, Rockwell Limited, and Conquest
Financial Corporation, three individual
shareholders of Big Horn Resources
Limited ("BIG HORN") and EuroGas
referred to herein collectively as
"ORC." ORC had the right to purchase
10,000,000 shares of Big Horn common
stock at $0.42 U.S. ($0.65 Canadian) per
share. Under the terms of the stock
purchase agreement and a stock
subscription agreement, EuroGas acquired
the rights of ORC to purchase 8,500,000
shares of Big Horn common stock and paid
Big Horn $4,205,500 U.S. ($6,500,000
Canadian) on October 17, 1998. After
receiving approval of the transaction
from the Toronto Stock Exchange in
January 1999, Big Horn issued 8,500,000
Big Horn common shares to EuroGas and
issued 1,500,000 Big Horn common shares
to ORC. The 1,500,000 shares were paid
for by EuroGas but were issued directly
to ORC as a finder's fee. In addition,
EuroGas paid ORC $500,000 U.S. as a
finder's fee and for an option to
purchase an additional 3,000,000 Big
Horn common shares at $0.53 U.S. ($0.80
Canadian) per share from ORC and to
purchase warrants held by ORC to acquire
2,000,000 Big Horn common shares at
$0.97 U.S. ($1.50 Canadian) per share
from Big Horn.
ORC verbally agreed further on October
5, 1998 to sell and EuroGas agreed to
purchase 5,600,000 common shares of Big
Horn held by ORC, including the
4,500,000 common shares described above,
for $2,940,224 U.S. ($4,480,000
Canadian) or $0.53 U.S. ($0.80 Canadian)
per share. On March 31, 1999, EuroGas
completed the acquisition of the
5,600,000 shares of Big Horn common
stock by execution of promissory notes
in the aggregate amount of $1,840,224
U.S. and by the cancellation of a June
1998 note receivable from Rockwell
Limited in the amount of $1,100,000 U.S.
As a result, the Company has slightly
more than a 50% interest in Big Horn.
Big Horn currently has production
equivalent to approximately 1,200
barrels of oil equivalent per day. At
December 31, 1999, Big Horn had
estimated proven reserves of
approximated 806,400 barrels of oil and
7,772,800 mcf of natural gas. Its
estimated net future discounted cash
flows at December 31, 1999 were
approximately $12.4 million U.S. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations".
During 1999, Big Horn acquired the
assets of Edinburgh Resources, Ltd. for
approximately $1,700,000 U.S.
($2,480,000 Canadian). Edinburgh's
assets include various working interests
in producing natural gas properties
located north of Calgary, Alberta
Canada, and a gas processing facility.
Beaver River Natural Gas Field
In October 1997, the Company entered into an option agreement to
acquire an interest in the Beaver River natural gas field located in
northeastern British Columbia. The gas field was originally
discovered and developed by Amoco Canada in the 1960s and was one of
the largest producing gas fields in British Columbia, producing at a
daily rate of approximately 250 to 300 MMcf. Technical problems, due
to over production of natural gas, led to excess water production and
Amoco shut-in the field in 1978. In 1997 Wascana, a subsidiary of
6
Canadian Occidental Petroleum, entered into an agreement to
attempt to reestablish commercial natural gas production in the project
using up-to-date technology. The contracting parties amended the terms
and structure of the transaction to some degree so that the Company has
exercised a portion of its option by first purchasing 993,333 units of
United Gunn Resources, Ltd. (one share of common and one warrant), for
a total of approximately $950,000. United Gunn Resources, Ltd. holds
an approximately 12% working interest in the project. In April 1998,
the Company entered into an Asset Exchange Agreement with Beaver
River Resources, Ltd., pursuant to which the Company has subsequently
acquired all of the issued and outstanding shares of Beaver River
Resources, Ltd. Beaver River Resources, Ltd. currently owns a
direct 16% percent working interest in the project.
The operator of the Beaver River property,
Wascana, is a wholly-owned subsidiary of Canadian
Occidental Petroleum Ltd. Since April 1997,
Wascana has re-completed one of the two
extraction wells on the field and a new salt
water disposal well next to the B-2 well.
Drilling operations have moved to a second well
site to complete a work-over of that well.
However, once Wascana has spent all amounts
required to earn its interest, the parties will
be bearing their relative percentages of the
cost. The Company expects that its carrying
costs, directly and indirectly, will be
approximately $16,000 per month as Wascana has
notified the parties that it had spent
$20,000,000 CDN through the end of December 31,
1998. In early March of 1999, Wascana informed
the parties that it has begun test production on
one of the re-completed wells.
ACTIVITIES IN POLAND
The Company believes that Poland offers an
attractive environment in which to explore for
and develop methane gas. The Republic of Poland
is bordered on the north by the Baltic Sea and
Russia, on the west by Germany, on the south by
the Czech Republic and Slovakia and on the east
by Lithuania, Belarus, and Ukraine. Poland is
comprised of approximately 120,000 square miles,
with a population of approximately 40 million
people. Between 1945 and 1989, Poland's
communist political and economic systems were
directly influenced by the former Soviet Union.
In 1989, Poland peacefully asserted its
independence and adopted a new constitution,
which established a parliamentary democracy, and
began Poland's transition to a market-based economy.
In August 1991, the United States Environmental
Protection Agency (the "EPA") and the United
States Agency for International Development
("AID") published a joint study on the
possibility of economic recovery of methane gas
associated with Poland's extensive hard coal
reserves. The joint study concluded that coal
bed methane was an abundant underdeveloped
natural gas resource in Poland and that the
development and exploitation of this resource
could provide a much less environmentally harmful
source of energy for Poland than its extensive
reliance on coal. The joint study stated that
the potential methane reserves were significant,
estimating a total methane resource associated
with all coal mine concessions in Poland (both
active and inactive mines) of in excess of 1.3
trillion cubic meters. Shortly thereafter,
Poland began to solicit bids for concessions to
explore for coal bed methane gas.
Coal bed methane gas production has been
occurring for some time in the United States and
has drawn attention in Poland due in part to the
joint EPA/AID study. Methane is a component of
natural gas that is used as a fuel in various
industries and as a source of residential
heating. Before natural gas is used as a fuel,
heavy hydrocarbons such as butane, propane, and
natural gasoline are separated to meet pipeline
specifications. The "heavy hydrocarbons" are
typically sold separately. The remaining gas
constitutes "dry gas" composed of methane and
ethane. Once produced and separated, there is no
substantial difference between natural gas and
methane. The demand in Europe for both natural
and methane gas has been traditionally high and
the price generally runs significantly higher
than prices in the United States, although the
price for natural gas in Poland is generally
lower than in the rest of the European market.
Gas production typically competes with coal and
oil but is generally considered to be a preferred
product because of recent environmental concerns
expressed by governments in Europe.
The Company's Polish concessions were originally
pursued by management of GlobeGas as they
realized that there was a growing demand in
Europe for this type of gas that is a cleaner and
more efficient source of energy than coal. In
1989, the Polish government adopted the position
that production of the potential methane reserves
would not only benefit the country economically
but could also significantly reduce air pollution
and acid rain in the country. Management
believes that Poland's extensive collection
pipeline network may facilitate the transmission
and sale of any gas discovered on the Company's
concessions.
7
Polish Methane Gas Concessions
In January 1993, the Company's wholly-owned
subsidiary, Pol-Tex, was awarded exploration
rights for coal bed methane gas in a concession
located in the Upper Silesian Coal Basin in
Poland (the "POL-TEX CONCESSION"). In September
1993, the Company's wholly owned subsidiary,
GlobeGas, entered into a joint venture agreement
with Rybnicka Spolka Weglowa SA to form McKenzie
Methane Ribnik Sp. zo.o. ("MMR") to exploit a
second concession located in the Upper Silesian
Coal Basin. In March 1996, the Company's
85%-owned subsidiary, McKenzie Methane Jastrzebie
Sp. zo.o. ("MMJ"), entered into a joint venture
agreement relating to a third concession in the
same area. These three concessions (the "POLISH
CONCESSIONS") cover approximately 92,000 acres in
south central Poland.
In August 1997, the Company completed an
agreement with a Texaco subsidiary to sell the
Pol-Tex Concession, the largest of the coal bed
methane gas concessions held by the Company, to
Texaco in exchange for an initial payment of
$500,000. The transaction included the sale of
assets and equipment having a fair market value
of approximately $200,000. Subsequent to the
sale, Texaco drilled six exploratory wells on the
Pol-Tex Concession to complete its appraisal and
evaluation of the concession and spent over $12
million. However, Texaco determined not to
proceed with the project due to early gas
production figures received from the project
which were considered uneconomic for Texaco. As
a result, Texaco elected to curtail its Polish
operations. On March 19, 1999, EuroGas Polska
and Texaco executed a purchase agreement
providing for Texaco's transfer of the usufruct
agreement to EuroGas Polska in exchange for a
payment of $175,000. The agreement is subject to
approval by the Ministry of Environmental
Protection, Natural Resources and Forestry. In
addition, the Company granted Texaco a right of
first refusal to acquire control of the Company's
MMR and MMJ coal bed methane concessions in
Poland, at a price to be determined either by the
parties or a third party appraiser. For now, the
Company will continue to operate the MMR and MMJ
concessions.
EuroGas Polska currently anticipates that it will
place seven wells in test production on the
Pol-Tex Concession before the end of 2000.
Because these wells were previously drilled by
Texaco and Pol-Tex, EuroGas Polska anticipates
that the cost of putting these wells into
production will be approximately $800,000.
As of December 31, 1999, the Company re-evaluated
its estimate of net cash flows from the Pol-Tex
Concession and recognized an impairment of
$7,217,426 impairment against the Pol-Tex
concession.
On October 13, 1997, the Company received an
additional concession from the Polish Ministry of
Environmental Protection of Natural Resources and
Forestry to explore and potentially develop a 112
square kilometer coal bed methane concession
located near MMJ concessions. The Company
conducted a feasibility study to explore the
possibilities of drilling gas wells for a
combined heat and power plant project or other
uses. The agreement requires expenditure of
$40,000 per year pending completion of a
feasibility study and negotiations with third
parties for the eventual purchase of natural gas
if found. In addition the plan of development
for the drilling works was prepared. The plan
calls to drill three exploratory wells in 2000.
Carpathian Flysch and Tectonic
ForeDeep Oil & Gas Fields
On October 23, 1997, EuroGas Polska completed an
agreement with Polish Oil & Gas ("POGC") to
undertake additional appraisal and development
activities for a large area located in the
Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total
expenditure by the Company of $15 million over a
three-year period. The parties established a
joint team whose initial work is the
interpretation of the data generated by a $1.5
million wide-line seismic work program which was
conducted in the Rymanow-Leske area of the
Carpathian Mountains in southeastern Poland. In
the framework of the agreement, a study for the
Rymanow-Lesko block (southeastern Poland) was
prepared. The results of the study, based on the
seismic exploration and geological evaluation,
identified substantial potential for oil and gas
accumulations exceeding 50 billion cubic meters
of gas and 60 million barrels of oil. The
potential reserves estimates are those of POGC
and its engineering staff and have not been
independently verified by the Company. The
processing of wide line seismic for the area of
Rymanow-Lesko has been concluded. The final
report from POGC was received.
8
Carpathian New Concession
On December 20, 1999, the Company executed an
usufruct agreement with the Poland Ministry of
Environmental Protection, Natural Resources and
Forestry. This agreement tentatively secures the
exclusive rights to explore for and develop
hydrocarbons in the area of over 1,100,000 acres
in South-Eastern Poland. The Company expects
that the final concession will be granted in
first half of year 2000. The Company currently
anticipates that it will drill the first well in
the spring of 2001. The technical team expects
to use the interpreted data to select the site
for drilling a deep well up to the depth of 5,000
meters.
Since the Company does not currently have the
funds necessary to meet the proposed development
budget, it may seek to obtain an established
industry partner to participate in the proposed
joint venture. There can be no assurance that
the Company will be able to do so or that such
participation would be on terms favorable to the
Company.
Energetyka Lubuska Power Plant
In February of 1999, the Company formed a
consortium with National Power Plc. (the largest
power generation company in the UK) and with a
large German utility company, VEW Energie AG, to
develop a power generation project in Zielona
Gora, Western Poland. Pursuant to the agreement,
the Company has created a joint venture company
"Energetyka Lubuska." The venture submitted an
offer to regional power company EC Zielona Gora
to build a gas-fired combined heat and power
plant. The proposed power plant has been
designed to deliver up to 180 Mwe and 80MWt. The
Company currently anticipates that the total
investment required to develop the project will
be approximately $150 million. Of that amount,
it is proposed that National Power Plc. and VEW
Energie AG will pay approximately 55% and 37.5%,
respectively, of the total project costs.
Although the Company currently owns 100% of the
venture, once funding has commenced, it is expect
that National Power Plc will own 50%, VEW Energie
AG 37%, and the Company 12.5% of "Energetyka
Lubuska." It is expected that the Company will
be required to pay approximately 7.5% of the
project cost.
Separately "Energetyka Lubuska" executed a
Letter of Intent to develop a new power plant in
the area of the biggest Polish oil Field BMB.
The Company will construct the 5 MW power plant
using gas produced by BMB field and sell
electricity to de-sulfurisation plant owned by
Polish Oil and Gas Company. It is expected that
the plant will be developed before end of 2000.
Zielona Gora Natural Gas Reservoirs and Plant
The Company has executed a memorandum of
understanding with Erdol und Erdgas Gommern,
("EEG"), a unit of Gaz de France, Paris, and
Bayernwerk/VIAG of Munich, Germany, to enter into
negotiations to develop several sizable proven
gas reservoirs in Western Poland and to build gas
treatment facilities and gas transmission systems
to supply natural gas to the power plant in
Zielona Gora. The agreement calls for creation
of a 50/50 joint venture with the Polish partner.
The Company presently anticipates that the
project will need an investment of approximately
$80 million, in addition to the $40 million
already invested by Polish O&G Co.
ACTIVITIES IN UKRAINE
Two Oil and Methane Gas
Properties in Western Ukraine
EuroGas has entered into a letter of intent with
an Ukrainian state-owned company,
Zahidukrgeologia, to acquire 2 Ukrainian oil and
gas properties, which include both standard oil
and gas and coal bed methane projects located in
the western Ukraine. The Company has not yet
undertaken exploration of such properties and has
no definitive plans with respect to exploration.
Kamienska Natural Gas Reservoir
The Company has signed joint operation agreements
with each of ZahidUkrGeologyia and
Chemihivnaftogasgeologyia. The joint operation
agreement with ZahidUkrGeologyia calls for study
and development of Kamienska natural gas
reservoir with potential reserves exceeding 20
billion cubic meters. The projected reserves are
those of ZahidUkrGeologyia and its engineers, and
have not been independently verified by the
Company. The Company has not yet undertaken
exploration of such properties and has no
definitive plans with respect to exploration.
9
Chemihivnaftogasgeologiya Project
The joint operation agreement with
Chemihivnaftogasgeologiya calls for evaluation of
two potential reservoirs, the Selukivska oil
reservoir, with potential reserves exceeding 100
million barrels, and the Pivdinno-Berestivska
oil-gas-condensate reservoir. In addition, the
Company will conduct exploration works for
U-prospect in the Donetsk-Dniepr Depression.
According to Ukrainian engineering estimates,
these multiple oil and gas exploration
concessions contain potential oil reserves
exceeding 1 billion barrels, in place, and
potential total gas reserves exceeding 500
billion cubic meters, in place. The projected
reserves are those of Chemihivnaftogasgeologiya
and its engineers, and have not been
independently verified by the Company. The
Company has not yet undertaken exploration of
such properties and has no definitive plans with
respect to exploration.
Donetsk Coal Basin Methane Gas
In October 1998, the Company formed a joint
venture, EuroDonGas, with MGO (Ukrainian Mining
Company) to explore and develop coal bed methane
and natural gas reservoirs in the Donetsk Coal
Basin. MGO engineering documentation places the
potential recoverable reserves in excess of 20
billion cubic meters to a depth of 1500 meters.
Such estimates have not been independently
verified by the Company. The first exploration
well in the concession area is expected to be
drilled in the first quarter of 2000.
The Company has also executed an agreement to
create a new joint venture with a private
Ukrainian company, Vuhlegas. The project is a
coal-bed methane recovery and utilization
operation. The concession area is approximately
300 square km. Vuhlegas estimates that the area
contains 6-10 Tcf of natural gas. Such estimates
have not been independently verified by the
Company. A foundation of the a joint venture
company Eurovuglegas was created in December
1998. The joint venture will create an equal
partnership between EuroGas and Vuhlegas after
the payback of the investment. EuroGas will
receive 70% of the revenues until the payback is
complete. The joint venture will drill six coal
bed methane/gas wells in the area of Gorska mine
(Donetsk area) as a part of a program to be
financed by Global Environmental Fund of the
World Bank. This program is expected to be
completed in 2000.
Coal-Bed Methane Gas Projects
The Company also is in the process of developing
coal bed methane in Western Ukraine. The first
well was drilled to the depth of 850 meters. The
results obtained from drilling are promising and
currently the Company proceeds with further tests.
10
ACTIVITIES IN SLOVAKIA
Slovakia was until recently part of
Czechoslovakia. On January 1, 1993, the Czech
Republic and Slovakia emerged as separate
independent nations. Slovakia is bounded on the
north by Poland, on the east by Ukraine, on the
south by Hungary, and on the west by Austria and
the Czech Republic. Slovakia has an area of
approximately 19,000 square miles and a
population of approximately 5.5 million people.
Slovakia has not been as quick to adopt free
market reforms as Poland and the Czech Republic
and the former communist party, Party of the
Democratic Left, remains a major political force.
Slovakia is a member of the International
Monetary Fund and the European Bank for
reconstruction and development and an associate
member of the European Union. Bratislava is the
capital of Slovakia and its largest city.
The main economic segments of Slovakia are
agriculture and manufacturing. Various foreign
companies have located manufacturing plants in
Slovakia, taking advantage of skilled, cheap
professionals and other labor, as well as the
close proximity to "Western" Europe. A prime
example of this is Volkswagen A.G., which has
located manufacturing facilities in Slovakia.
Energy in Slovakia is primarily provided by
massive gas and oil imports from countries
formerly a part of the Soviet Union. Domestic
production of oil and gas cover only a small
percentage of Slovakia's energy needs.
Slovakian Oil & Gas Joint Venture
As part of its effort to diversify and expand its
interests in Europe, in July 1996, the Company
acquired Danube International Petroleum Company
("DANUBE"), which held rights to participate in
exploration for natural gas in Slovakia and the
Czech Republic. See "--History." Since the
acquisition, the Company has focused its efforts
on the development of the Slovakian project, and
abandoned its interest in the Czech Republic
during 1997. Danube is a partner in a joint
venture agreement (the "SLOVAKIAN OIL & GAS JOINT
VENTURE") with NAFTA Gbely A.S. ("NAFTA"). The
principal focus of the Slovakian Oil & Gas Joint
Venture is natural gas exploration and
development under a license covering 128,000
acres located in the East Slovakian Basin, a
northeastern extension of the Pannonian Basin
which covers large parts of Hungary and the
southeastern part of Slovakia
The activities of the Slovakian Oil & Gas Joint
Venture are conducted pursuant to a four-year
exploration permit granted on April 24, 1995 (the
"LICENSE"). As it continues its exploration and
development on the area subject to the License,
the Slovakian Oil & Gas Joint Venture will seek
to acquire additional permits that have not yet
been granted. The Company is presently in
discussions with officials of NAFTA and Slovakian
Governmental officials to discuss extension of or
re-issue of the present License, which has
expired. Early negotiation indicate low risk
potential for License not to be extended or
re-issued. Prior to the Company's acquisition of
its interest in the Slovakia Oil & Gas Joint
Venture, eleven wells were drilled in the area
covered by the License. All of these wells had
gas shows, although none were completed for
commercial production. The Company believes that
new wells can be drilled offsetting the old wells
and that, if the new wells have similar gas
shows, they can be completed with routine
techniques that now exist for the recovery of gas
from these types of formations.
The Slovakian Oil & Gas Joint Venture drilled its
initial well, Trebisov 5R, in what is known as
the South Cluster. In the course of such
drilling, the Company encountered a 980 meter
thick gas column subdivided into an upper
interval (appearing at 1575 meters - 2100 meters
below ground level) and a lower interval (2100
meters - 2555 meters deep). In December of 1996,
after hydrological fracturing, the upper interval
tested 1 million cubic feet of gas ("MMCF") per
day through a 10 millimeter choke with a flowing
pressure of 450 pounds per square inch ("PSI")
and the lower interval tested 0.4 MMcf per day
through a 8 millimeter choke, with a flowing
pressure of 275 psi. The preliminary testing ,
conducted by Slumberger, a well known oil and gas
service company, was conducted prior to the
cleaning up of the well and removing water from
the well.
Based upon the initial test results, the Company
has engaged Ryder Scott, a leading petroleum
engineering firm, to prepare a reserve analysis
on the Trebisov reservoir. The joint venture
also completed a 148 sq. km. Three-dimensional
seismic survey covering the South Cluster and a
prospective area to the north. A survey to map
anomalous concentrations of gas in the surface
soil samples was completed in the licensed
acreage to highlight areas for new seismic
surveys. In 1998, the Slovakian Oil & Gas Joint
Venture completed the remaining three wells of
the six wells planned for initial drilling. No
drilling is planned in the licensed area during
2000.
11
Under the terms of the joint venture agreement,
the Company was obligated to provide 75% ($4.98
million) of the projected initial test phase
funding of $6.64 million (including seismic
testing) and 60% ($4.08 million) of the projected
capital investment cost for the initial
production phase of $6.8 million All funds
required for the initial test phase have been
expended and the drilling is now being paid 60%
by the Company and 40% by NAFTA. When the cost
of development and production exceeds $6.8
million, additional funds will be paid 50% by the
Company and 50% by NAFTA. The current
projections indicate that this limit will be
exceeded during 2000.
During March 1998, the Company was informed by
NAFTA that there may be certain title problems
related to areas of mutual interest proposed to
be explored and developed by the Slovakian Oil &
Gas Joint Venture outside of the Trebisov area.
All of the wells drilled by the Company to date
are located in the Trebisov area and the Company
is not aware of any title problems in that area.
The disputed area is located in the southern
portion of the property covered by the
designations contained in the joint venture
agreement and was subject to a competing claim of
ownership by a private Slovakian company. To the
extent that the Slovakian Oil & Gas Joint Venture
does not have the right to explore certain areas
as previously contemplated, the Company's
expansion beyond the Trebisov area may be
limited. The Company has notified the former
shareholders of Danube of a claim against them by
reason of this recent problem. See "Item 3.
Legal Proceedings."
The Slovakian Oil & Gas Joint Venture has not
established the extent of any reservoir that may
have been tapped by its activities to date and
has not entered into any contracts for the sale
or transportation of any gas that might be
recovered. If the Slovakian Oil & Gas Joint
Venture is unable to obtain the necessary permits
or if it is unable to establish ongoing
production and sell the gas at a sufficiently
high price to pay the associated production
costs, provide a return on the capital
expenditures made, provide funds for ongoing
activities, and provide a profit, it may be
unable to continue its exploration and
development activities or successfully produce
any natural gas that may be discovered.
Maseva Natural Gas Reservoir
The Company recently completed an agreement with
NAFTA to acquire a majority interest in an oil
and gas concession adjacent to the Trebisov
concession. The new concession, known as Maseva,
has overlapping claims with the Company's other
concessions and the Company expects to conduct
appraisal and exploration work in the Trebisov
area during 2000. The Company completed
exploration work consisting of a survey to map
anomalous concentrations of gas in surface soil
samples to define areas for new seismic surveys.
The Company plans to conduct a three dimensional
seismic survey during 2000. The approximate cost
will be $1.5 to $2.5 million. Based upon the
survey results, the Company intends to draft a
comprehensive development plan. No drilling is
planned in the licensed area during 2000.
The Maseva agreement provides for the Company's
acquisition of the Maseva interest in exchange
for the issuance of 2,500,000 shares of the
Company's common stock and the grant of two-year
warrants enabling the holder to purchase up to
2,500,000 shares of the Company's common stock
for $2.50 per share (adjusted from an original
$5.00 per share warrant price because of the
decline of the price of the Company's common
stock.) The division of the working interest for
this territory will now be 67.5% for the Company,
rather than the 50% split which governs the
adjacent Trebisov joint venture, provided that
the Company carries the cost of drilling the
first two wells in the previously disputed area.
By the purchase of the Maseva concession, the
Company believes it will solve any title problems
it had with its original venture and acquire
additional property. The Company has notified
the former shareholders of Danube of a claim
against them by reason of the requirement to pay
additional consideration for concession interests
originally represented as owned by Danube.
In September of 1998, the Company acquired a 51%
interest in Envigeo s.r.o., a Slovakian private
company which owns a 2,300 square kilometer
appraisal and survey concession in the northeast
corner of Slovakia, referred to as the Carpathian
Flysch region, expiring in August 2001. This
region extends into Poland and Ukraine, where
extensive discoveries of oil and gas have been
found. The acquisition was made from McCallan
Oil and Gas GmbH of Austria. The total price for
the 51% participation interest was $1,500,000,
consisting of an initial payment of $500,000,
which was made in September 1998, and the balance
of $1,000,000, which was paid in December 1998.
McCallan Oil has spent over $300,000 in
exploratory activities.
12
Gemerska Talc Deposit
In March 1998, the Company acquired a 55%
interest in RimaMuran s.r.o. ("RIMAMURAN"), a
closely-held entity whose principal asset is a
43% interest in Rozmin s.r.o., the operator which
holds the Gemerska Talc Deposit located in
Roznava, Slovakia, approximately 50 kilometers
west of Kosice in eastern Slovakia. Belmont
Resources, Ltd, a Vancouver British Columbia
entity which is affiliated with a director of
EuroGas, holds the remaining ownership interest
in Rozmin s.r.o. which holds the interest in the
Gemerska Talc Deposit. Exploratory holes drilled
between 1987 and 1994 confirmed the existence of
a large talc deposit located approximately 350
meters, or 1150 feet, below the surface. The
Feasibility study was prepared by one of
Germany's leading engineering groups, Hansa
GeoMin Consult, GmbH for DEG (Deutsche
Investitions- u. Entwicklungsgesellschaft mbH).
RimaMuran has the obligation to fund 43% of the
projected $12 million of capital costs over the
next two and one-half years. RimaMuran does not
have the assets necessary to meet this
obligation, and it is anticipated that the
necessary funding will be provided by the
Company.
The Company's majority owned subsidiary,
RimaMuran, and the other joint venture
participants have continued to work on the
Gemerska Talc Deposit. The Company's believes
the exploitation of the talc deposit will be
particularly favorable due to a strong
feasibility study and, the willingness of DEG, a
wholly-owned financing subsidiary of the German
government, to participate. The joint venture
has negotiated a non-recourse financing package
which would give DEG a 10% equity participation
in the project in exchange for financing of which
9% would be contributed by RimaMuran and 1% by
Belmont.. The completion of the loan package is
subject to the receipt by DEG of a guarantee from
certain entities to purchase a portion of the
mined talc. To date, the Company has advanced a
total of $1,433,651, in the way of shareholder
loans and other forms of investment, to RimaMuran
to fund its participation in the project.
During the fourth quarter 1998, Rosmin s.r.o.
entered into discussions with Lucenac, a member
of the Rio Tinto Group, which is considered to be
the largest mining company in the world. As a
result of these discussions, Lucenac has asked
for drilling of two more core holes in order to
confirm previous test results and the data that
is contained in the feasibility study that was
done by Thyssen and Dorfner.
ACTIVITIES IN THE SAKHA REPUBLIC
The Republic of Sakha(Yakutia) (often referred to
as "Yakutia" in English and as "Jakutien" in
German) is thinly populated (just over 1,000,000
people) and covers approximately 3,100,000 square
kilometers that the United States Geological
Service has rated as extremely rich in natural
resources. There has been limited commercial
exploitation of hydrocarbons in Yakutia and
current production is generally limited to
providing fuel for heat and energy to local urban
and industrial complexes, partly because of the
general remoteness of the area and the poor
transportation network currently in existence.
Since 1991, the Yakutian government has put in
place an economic and legal system that is
designed to encourage foreign investment and the
export of hydrocarbons. The Company's interest
in acquiring EG was based in large part on the
Company's belief that EG's joint venture
operations are well-positioned to participate in
the potential international gas export project
which has been envisioned pursuant to feasibility
studies conducted by Korean, Chinese, and
Japanese consortiums.
TAKT Exploration Blocks Near Lensk
On June 11, 1997, the Company acquired all of the
issued and outstanding stock of OMV (Jakutien)
Exploration GmbH from OMV A.G., Austria's largest
industrial concern, in exchange for (a) the
payment of $6,252,754, (b) the grant of an option
to acquire up to 2,000,000 shares of the
Company's common stock at a per share exercise
price of $4.00 to $6.00 on yearly sliding scale
(c) a five percent interest in the acquired
company's net profits from identified preliminary
oil and gas licenses, and (d) a one percent
interest in the gross production of the TAKT
Joint Venture outside such licenses. In January
of 1999 the subsidiary's name was changed to
EuroGas Austria GmbH ("EG").
13
EG's primary asset is a 50% interest in the joint
venture (known as "TAKT") with Sakhaneftegas, the
national oil and gas company of Yakutia. The
conversion of TAKT to a joint stock company with
limited liability was approved by the Company and
Sakhaneftegas on December 1, 1997 and is expected
to be finalized in the first half of 2000. TAKT
was formed to appraise, explore, and develop,
and, when appropriate, export oil and gas
reserves, in two large areas of interest located
in Yakutia. Yakutia has the largest land area of
the members of the Russian Federation and is
located in the far eastern portion of what was
formerly the Soviet Union. TAKT has negotiated a
detailed agreement with Yakutia and the Russian
Federation for the exploration, production, and
development of hydrocarbons located in the areas
of interest.
TAKT currently holds two exploration blocks
located near the city of Lensk, which cover
approximately 21,300 square kilometers
(approximately 8,225 square miles) located in the
southeast section of the East Siberian platform
or East Siberian Basin. An application to extend
the two exploration licenses for an additional 20
years was submitted to the Sakha Ministry of
Justice in January 1998. TAKT also holds rights
of first refusal on Sakha oil and gas projects
offered by Sakhaneftegas to third parties. TAKT
has been conducting activities within the two
blocks for the past six years, employing modern
seismic and exploration techniques with
encouraging results. The exploration for and, if
justified, the production of, hydrocarbons, in
Yakutia is made more difficult by the climatic
conditions, the general remoteness of the area,
and the lack of infrastructure. The area is
subject to extreme arctic conditions and does not
have any facilities for transporting hydrocarbons
to existing markets. The Company's ability to
exploit any potential benefit from this project
will rely in part on the activities of other
independent entities in constructing the
necessary infrastructure and establishing markets
for hydrocarbons.
Principal work undertaken by TAKT during 1998
consisted of reprocessing 1700 kilometers of
seismic lines. The reprocessing work was
completed in January 1999 by Yakutskgeofisika,
the geophysical arm of Sakhaneftegas, in Yakutsk.
TAKT has completed a preliminary interpretation
of the first 400 kilometers of reprocessed data
in the vicinity of the 314-2 well that
successfully tested gas in a large structure in
1992. A pilot survey was conducted in the
vicinity of this well to test the applicability
of a soil sampling method for detecting anomalous
concentrations of gas in surface soils. Results
are expected in the next 90 days.
The Company presently anticipates that during
2000 TAKT will complete the interpretation and
mapping of the reprocessed seismic lines and will
select a well location. The date for commencement
of this well will depend on technical discussions
with local drilling contractors and the ability
of Sakhaneftegas to provide its 50% contribution
to the well cost. If the results of the above
mentioned soil survey are positive, a new survey
will be planned to cover an extensive part of the
license area.
ACTIVITIES IN SLOVENIA
During 1999, the Company entered into an
arrangement to purchase and interest in an
operating lubricant refinery facility in
Slovenia. At present, the company that controls
the refinery, "Mapetrol," is owned by the
Slovenian government. In order to participate,
the Company was required to fund a letter of
credit in the amount of $359,760 (which cash
bond is refundable if the transaction is not
completed). It is anticipated that the
privatization will take a number of months, after
which additional cash and stock will be required
to finance the total package, all the details of
which have yet to be negotiated. The refinery is
presently producing high quality lubricating oils
that have wide distribution potential.
ACTIVITIES IN GERMANY
The Company has provided a short term loan to
Seiler Trenn-Schmelzanlagen Betriebs GmbH of
Freiberg, Germany ("SEILER"). Seiler specializes
in toxic waste disposal using a proprietary
methodology. Seiler presently has an operating
plant in Freiberg. The Company loaned Seiler
$500,000 that was due and payable on May 28,
1999. The note has not been repaid, and its
collectibility is uncertain. The Company is
presently evaluating the possibility of
proceeding with a possible equity investment into
Seiler, which would likely consist of conversion
of the existing the loan to equity. Seiler TSB
GmbH is a subsidiary of Seiler SPCS Inc., a U.S.
corporation.
14
During 1999, the Company made an investment of
$600,000 into Hansa GeoMin Exploration Ltd. of
Duisburg, Germany. Hansa GeoMin Exploration Ltd.
is involved in numerous mineral reclamation
projects, particularly gold, on the African
continent. During the third quarter of 1999, the
Company recognized an impairment of the full
value of such investment.
DISCLOSURE OF OIL AND GAS OPERATIONS
Reserves Reported to Other Agencies. No reserves
were reported to any other Federal agency or
authority for the year ended December 31, 1998 or
for the year ended December 31, 1999.
Oil and Gas Production and Production Costs.
The following table sets forth the average sales
price per unit of oil and gas produced and the
average production cost per unit of production.
During the following periods, oil and gas
production related solely to operations in
Canada.
For the year ended For the year ended
December 31, 1999 Decembmer 31, 1998
----------------- ------------------
Average sales prices
Liquids, per barrell $13.56 $9.02
Natural Gas per thousand cubic
feet (Mcf) $ 1.55 $1.51
Average production cost, per
barrell of equivalent oil (1) $ 3.90 $3.13
(1) Natural gas converted to barrels of equivalent oil at a
rate of 10 mcf = 1 barrel of equivalent oil.
Except for the oil and gas produced by Big Horn
Resources, Ltd. in Canada and described above,
the Company has not produced any gas or oil in
any geographic area during its history.
Productive Wells. The following table sets
forth the number of gross productive wells and
net productive wells in which the Company has a
working interest.
PRODUCTIVE OIL AND GAS WELLS AT DECEMBER 31, 1999
Production Oil Wells(1) Production Gas Wells(1)
------------------------ ----------------------
Gross(2) Net(2) Gross(2) Net(2)
-------- ------ -------- ------
Canada 57 15.8 43 10.0
Eastern Europe and Russia - - - -
Total 57 15.8 43 10.0
(1) Includes wells producing or capable of
producing and injection wells temporarily
functioning as producing wells. Wells that produce
both oil and gas are classified as oil wells.
(2) Gross wells include the total number of
wells in which the Company has an interest.
Net wells are the sum of the Company's
fractional interest in gross wells.
Developed and Undeveloped Acres. -- An acre is
deemed to be developed if wells have been drilled on
such acre to a point that would permit the
production of commercial quantities of oil. The
following table sets forth the number of gross and
net developed and undeveloped acres in which the
Company has a working interest.
ACERAGE (*) AT DECEMBER 31, 1999
Undeveloped Developed Total
------------------------ --------------- --------------------
Gross Net Gross Net Gross Net
--------- --------- ------ ----- --------- ---------
Canada 18,244 6,719 22,500 8,000 40,744 14,719
Eastern Europe and Russia 6,444,506 3,586,671 - - 6,444,506 3,586,671
Total 6,462,750 3,593,390 22,500 8,000 6,485,250 3,601,390
15
(*) Gross acreage includes the total number of acres
in all tracts in which the Company has an
interest. Net acreage is the sum of the Company's
fractional interests in gross acreage.
Drilling Activities. The following
table sets forth the number of development wells
(productive and dry) and exploratory wells
(productive and dry) for which drilling was
completed during each of the four years ended
December 31, 1999, 1998, 1997 and 1996.
DRILILNG ACTIVITIES
Development Wells Drilled Exploratory Wells Drilled
------------------------ -----------------------
Productive Dry Productive Dry
Wells(2) Wells(1) Wells(2) Wells(1)
---------- -------- ----------- --------
For the Year Ended
December 31, 1999:
Canada 1.2 0.1 3.6 0.5
Eastern Europe
and Russia 0 0 0 0
Total 1.2 0.1 3.6 0.5
For the Year Ended
December 31, 1998:
Canada 0.4 0 0.9 0
Eastern Europe
and Russia 0 0 0 0
Total 0.4 0 0.9 0
For the Year Ended
December 31, 1997:
Canada 0 0 0 0
Eastern Europe
and Russia 0 0 0 12.0
Total 0 0 0 12.0
For the Year Ended
December 31, 1996:
Canada 0 0 0 0
Eastern Europe
and Russia 0 0 0 0
Total 0 0 0 0
(1) A dry well is any well found
to be incapable of producing either oil
or gas in sufficient quantities to justify
completion as an oil or gas well.
(2) A productive well is any well other than a dry well.
As of April 14, 2000, the Company and its
wholly- or partially-owned subsidiaries are
presently in the process of drilling
(including wells temporarily suspended but
not those for which drilling is planned) the
following exploratory and developed wells.
Development Wells Drilling Exploratory Wells Drilling
-------------------- --------------------
Gross Net Gross Net
As of December 31, 1999
Canada 1.0 0.5 2.0 1.1
Eastern Europe and
Russia 6.0 3.0 1.0 0.5
Total 7.0 3.5 3.0 1.6
COMPETITION
In seeking to explore for, develop, and produce
oil and gas resources, the Company competes with
some of the largest corporations in the world, in
addition to many smaller entities involved in
this area. Many of the entities that the Company
competes with have access to far greater
financial and managerial resources than the
Company. As a result of the exclusive nature of
the concessions held by the Company, to the
extent that it is able to successfully explore
for, develop, and produce hydrocarbon resources,
the Company will be able to exclude any
competitor from production of the resources
located on the concessions, but it cannot exclude
competitors from providing natural gas or other
energy sources at prices or on terms that
purchasers deem more beneficial.
16
EMPLOYEES AND CONSULTANTS
As of December 31, 1999, the Company had two
administrative employees located in Salt Lake
City, Utah; three administrative employees
located in London; and six technical and field
workers in Poland. The Company's four principal
consultants are located in Europe. None of the
Company's employees is represented by a
collective bargaining organization, and the
Company considers its relationship with its
employees to be satisfactory. In addition to its
employees, the Company regularly engages
technical and other consultants to provide
specific geological, geophysical, and other
professional services. Because the Company has
concentrated primarily on acquiring concessions
for later exploitation rather than operating them
during 1999, the Company has relied principally
on consultants who are paid one-time fees for
their work and assistance. The Company expects
to rely substantially on consultants through 2000
but expects thereafter to rely more on employees
and permanent operating personnel.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the exploration for
methane and natural gas and the drilling of wells
and, as such, its operations are subject to the
usual hazards incident to the industry. These
hazards include blowouts, cratering, explosions,
uncontrollable flows of gas or well fluids,
fires, pollution, releases of toxic gas, and
other environmental hazards and risks. These
hazards can cause personal injury and loss of
life, severe damage to and destruction of
property and equipment, pollution or
environmental damage, and suspension of
activities. The Company has not obtained any
hazard insurance although it has applications
pending. The occurrence of a significant adverse
event that is not covered by insurance would
have a material adverse effect on the Company.
OFFICE FACILITIES
The Company leases the 35th floor and penthouse
of the building located at 80 Broad Street, New
York, New York, consisting of approximately 8,800
square feet, under the terms of a sublease ending
on August 31, 2000. The rent under this lease is
$11,025 per month and required an initial prepaid
rent of $481,100 on execution. The Company
received a rent allowance equal to the first four
months of the lease term commencing on September
1, 1996. The monthly lease payments are subject
to annual escalation, based on the operating
expenses of the building. The offices are also
currently occupied by the Company's public and
shareholder relations firm that currently
provides services to the Company in lieu of rent.
The offices serve as the Company's
representative location in the Financial District
of New York City. The Company is using the New
York offices periodically for its board meetings
as well as other meetings with members of the
investment community such as investment firms and
banks.
The New York office maintains the Company's
Website at http://www.eugs.com and also has
available, for interested shareholders, maps and
other material concerning the Company's activities.
On October 1, 1999, the Company extended until
September 30, 2002 its lease for property located
at 942 East 7145 South, #101A, Midvale, Utah.
Rent for such lease is currently $1,836. The
lease provides for annual increases in the lease
payment in an amount equal to the increase in
Consumer Price Index; provided that, such annual
increase shall be not less than 6% or greater
than 10%.
The Company has an oral month-to-month lease on
office with approximately 2,230 square feet in
Warsaw, Poland. The rental amount on such lease
is included in the compensation of one of the
Company's Poland-based technical employees.
The Company maintains an office (approximately
2,500 square feet) at 22 Upper Brook Street,
Mayfair, London, UK. The Company has subleased
the remaining space to two other companies. In
November 1998, the Company entered into a
ten-year lease that provides for a deposit of
approximately $500,000 and an annual payment of
$1,740,000, of which the Company's portion is
approximately $580,000.
17
The Company's subsidiary GlobeGas maintains
office space under an agreement with First
Alliance Trust, at Herengracht 466, Amsterdam,
The Netherlands. Under this agreement First
Alliance provides office space, accounting and
legal functions for GlobeGas. The agreement
calls for payment for these services on an as
needed basis.
HISTORY
The Company was incorporated in the State of Utah
under the name Northampton, Inc. ("NORTHAMPTON"),
on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange
agreement with EnergyGlobal, pursuant to which
the former owners of EnergyGlobal obtained voting
control of Northhampton and EnergyGlobal became a
wholly-owned subsidiary of Northhampton. Energy
Global had been formed as a holding company for
GlobeGas, an oil and gas operating entity in
which Energy Global held a minority interest.
The minority interest in GlobeGas was initially
reported on the equity method on Northampton's
financial statements. The agreement with
EnergyGlobal required that Northampton complete a
stock consolidation of one share for each twenty
four shares previously issued and outstanding and
deliver a sufficient number of post-consolidation
shares of the Company's common stock to the
former owners of EnergyGlobal to reduce the prior
Shareholder' interest to approximately 10%.
Thus, the former Shareholder of EnergyGlobal
became the controlling Shareholder of the
Company, which changed its name to EuroGas, Inc.
The original asset of EnergyGlobal was a 16%
minority interest in GlobeGas, a Netherlands
corporation that held, through Pol-Tex, a
concession in Poland. (GlobeGas was an 85%
partner with a formerly state-owned Polish coal
company in Pol-Tex and held additional interest
in two other concessions for the exploration and
exploitation of methane coal bed gas reserves in
the Upper Silesian region of Poland.) From
September of 1994 through May of 1995, the
Company raised $3,380,963 in cash which was used
to acquire additional interests in GlobeGas and
increased the Company's participation in GlobeGas
to 19.13%. In May 1995, the Company acquired the
remaining 80.87% interest in GlobeGas in exchange
for $1,150,000 in cash, the issuance of 2,256,560
shares of Common Stock, and the issuance of
2,391,968 shares of newly created Preferred
Stock, convertible at the rate of two shares of
Common Stock for each share of said series of
Preferred Stock. The Company originally booked
its interest in GlobeGas as an interest in a
minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas
has restated its financial presentation to
reflect the historical cost basis of the assets
held by GlobeGas rather than the Company's
purchase price, substantially reducing the
carrying value of these assets on the Company's
balance sheets. Since the operations of
EnergyGlobal and Northampton prior to the
reorganization were immaterial, the transaction
has been accounted for as if GlobeGas were the
acquiring entity.
In 1996, the Company acquired the remaining 15%
interest in the Pol-Tex held by the Polish state
coal company. In 1997, the Company received
additional concession rights in the form of a
usufruct from the Polish ministry of
Environmental Protection of Natural Resource and
Forestry to explore and potentially develop a 111
square kilometer coal bed methane concession.
This concession was granted Pol-Tex by the
Ministry of Environmental Protection, Natural
Resources and Forestry in April of 1998 according
to Polish Government documents. In 1996, the
Company continued in its quest to acquire
additional gas interests in Eastern Europe by
acquiring Danube. Danube was a participant in
joint ventures for the exploration and production
of natural gas in Slovakia and the Czech
Republic. In connection with the transaction,
the Company also issued 12,500,000 shares of
restricted Common Stock to Chemilabco, which held
an interest in the operating subsidiaries of
Danube and held options to participate in the
Czech and Slovakian operations of Danube. The
issuance of the 12.5 million share to Chemilabco
was subject to Chemilabco providing a minimum of
$5,000,000 of financing to the Company in 1996.
In mid-1997, the Company acquired all of the
issued and outstanding stock of EG from OMV Inc.,
Austria's largest industrial concern. EG's
primary asset is a 50% interest in the TAKT joint
venture with Sakhaneftegas, the national oil and
gas company of the Sakha Republic. In late 1997,
Pol-Tex completed an agreement with Polish O&G
Co. to undertake additional appraisal and
development activities for a large area located
in the Carpathian Flysch and tectonic Foredeep
areas of Poland. In late 1997, the Company
entered into an option agreement to acquire an
interest in the Beaver River natural gas field
located in northeastern British Columbia.
18
In early 1998, the Company acquired a 55%
interest in RimaMuran, a closely-held entity
whose principal asset is a 43% interest in Rozmin
s.r.o., a joint venture which holds the Gemerska
Talc Deposit located in Roznava, Slovakia. In
early 1998, the Company entered into an
arrangement to participate in a refinery facility
in Slovenia. In mid 1998, the Company completed
an agreement to acquire a majority interest in an
adjacent oil and gas concession known as Maseva
which had overlapping claims with the Company's
other concessions and expects to conduct
appraisal and exploration work in that area
during 2000. In mid 1998, the Company acquired
a 51% interest in Envigeo, a Slovakian private
company, which owns a 2,300 square kilometer
appraisal and survey concession in the North East
corner of Slovakia, referred to as the Carpathian
Flysh region. In October 1998, the Company
entered into an agreement with Big Horn to
purchase a 31% interest in Big Horn. As part of
the transaction, three parties that arranged the
Company's participation in Big Horn granted the
Company a first right to purchase all of their
interest in Big Horn, at fair market prices, with
the intent of the Company to acquire a
controlling interest in Big Horn. Effective
October 1998, the Company gained control of the
stock and warrants held by such third parties and
now has slightly over 50% of the total interest
in Big Horn.
CERTAIN DEVELOPMENTS SINCE DECEMBER 31, 1999
Purchase, Loan and Merger
Transactions with Teton Petroleum Company
On April 5, 2000, the Company entered into a
Master Transaction Agreement (the "TETON MASTER
AGREEMENT") with Teton Petroleum Company, a
Delaware corporation ("TETON") and Goltech
Petroleum, LLC, a Texas limited liability company
and wholly-owned subsidiary of Teton ("GOLTECH").
The Teton Master Agreement and accompanying
documents describe and contemplate the following
three interrelated transactions (described in
greater detail below): (i) the merger of Teton
with and into a wholly-owned subsidiary of
EuroGas, (ii) the purchase by EuroGas of a 35%
membership interest in Goltech for $2,300,000,
and (iii) EuroGas' providing an up to $4,000,000
credit facility for Goltech. Neither Teton nor
EuroGas has completed due diligence with respect
to the Teton Master Agreement, and the Teton
Master Agreement contemplates a due diligence
period extending until at least April 21, 2000.
The Teton Master Agreement and the other
documents entered in connection therewith are all
terminable by either party without penalty (other
than a $300,000 deposit paid by EuroGas) at any
time prior to the completion of due diligence.
Teton's primary asset is its 100% ownership
interest in Goltech, and Goltech's primary asset
is its ownership of 70.59% of a Russian closed
joint stock company known as Goloil ("GOLOIL").
Teton has represented to EuroGas that Goloil is
the operator of the Eguryakhskiy License
Territory, also referred to as the Goloil
Project, a 187 square kilometer (46,200 acre)
territory centrally located in the southern half
of the West Siberian basin in Russia (the "GOLOIL
LICENSE AREA"). According to an independent
engineering report supplied by Teton, as of
December 31, 1999, the Goloil License Area had
net (to Goloil) proven reserves of 45.76 million
barrels of oil, and probable reserves estimated
at a minimum of 36 million barrels. Goltech is
in the early stages of the process of
constructing an approximately 20 mile-long
pipeline from the Goiloil License Area to an
existing pipeline in order to make efficient
delivery of the oil extracted from the Goloil
License Area feasible.
The Teton Merger. Pursuant to a Merger Agreement
dated of even date with the Teton Master
Agreement (the "TETON MERGER AGREEMENT"), Teton
has agreed to merge with and into a wholly-owned
subsidiary of EuroGas, with such wholly-owned
subsidiary surviving the merger (the "MERGER").
In the Merger, subject to adjustment as described
below, each outstanding share of Teton common
stock will be converted into the right to receive
one share of EuroGas Common Stock (and any
options, warrants and other right to purchase
Teton common stock will become rights to purchase
EuroGas Common Stock). As of the April 5, 2000,
Teton represented that it had 13,621,744 shares
of Teton common stock outstanding and 2,599,249
shares of Teton common stock subject to options
warrants and other rights to purchase Teton
common stock.
In the event that the number of shares of EuroGas
Common Stock outstanding on or before the date
180 days following the consummation of the
proposed Merger exceeds 136,000,000 shares, the
aggregate number of shares of EuroGas Common
Stock issuable with respect to each outstanding
share of Teton common stock will increased so
that the percentage of outstanding shares of
EuroGas Common Stock received by the Teton
shareholders as a group is equal to the (a) the
number of shares of Teton common stock
outstanding on the date of consummation of the
Merger, divided by (b) 136,000,000. Shares of
EuroGas Common Stock issuable upon the exercise
of outstanding options, warrants and other rights
to purchase Teton common stock will also be
adjusted proportionately.
19
Teton's obligation to close the Merger is
contingent upon the occurrence of several events,
including without limitation (i) approval of the
Merger by the shareholders of Teton and EuroGas,
(ii) EuroGas' compliance with certain loan and
purchase obligations under the Teton Master
Agreement, and (iii) neither Teton nor EuroGas
terminating the Master Agreement at the end of
the due diligence period ending approximately
April 21, 2000.
Purchase of Goltech Membership Interest.
Pursuant to the Teton Master Agreement, EuroGas
has agreed to purchase a 35% interest in Goltech
for a total purchase price of $2,300,000.
EuroGas paid $300,000 of the purchase price at
closing and (assuming the Teton Master Agreement
is not terminated at the end of the due diligence
period) is expected (subject to certain
exceptions) to complete its purchase of such
membership interest by making five monthly
installments of $400,000 beginning ten days after
the effective date of the registration statement
registering the shares EuroGas intends to sell to
fund the purchase. Goltech has agreed to apply
the proceeds from the five installment payments
toward construction of the proposed pipeline from
its Goloil License Area to an existing pipeline
and the development of the Goloil License Area.
$4,000,000 Credit Facility. Pursuant to the
Teton Master Agreement, EuroGas has agreed to
lend Goltech sums of money not to exceed
$4,000,000 in aggregate principal amount in
periodic advances of up to $1,000,000 (the "LOAN
COMMITMENT"). The aggregate principal amount
advanced pursuant to the Loan Commitment shall
bear interest at the rate of fifteen percent
(15%) per annum. Accrued interest is due at the
end of each calendar quarter, and all principal
and interest is due on April 5, 2001. Assuming
the Teton Master Agreement is not terminated at
the end of the due diligence period, EuroGas is
obligated to have made advances totaling
$1,000,000 at the end of such period, after which
(subject to certain contingencies) it is
obligated to make advances of $1,000,000 per
month beginning thirty days after the effective
date of the registration statement registering
the shares EuroGas intends to sale to fund the
Loan Commitment; provided, however, whether or
not the registration statement is effective,
EuroGas is obligated to advance $500,000 per
month beginning on June 1, 2000. Goltech has
agreed to apply the proceeds from the Loan
Commitment toward construction of the proposed
pipeline from its the Goloil License Area to an
existing pipeline and the development of the
Goloil License Area.
Each of the Teton Master Agreement and the Teton
Merger Agreement contain liquidated damages
provisions. In the event either Teton or EuroGas
breaches its obligations under either of the
Master Agreement or the Teton Merger Agreement,
the other party may terminate the Teton Master
Agreement, the Teton Merger Agreement and all
related documents require the party in default
to pay $1,000,000 in liquidated damages.
Issuance of Convertible Debentures
On or about January 12, 2000, EuroGas issued four
Convertible Debentures in the aggregate face
amount of $3,000,000 (the "Convertible
Debentures") to several individual investors in
exchange for an aggregate of $3,000,000 cash. The
Convertible Debentures accrue interest at the
rate of prime plus two percent (currently 10.2%)
per annum. Payment of the principal amount of the
Convertible Debentures is due on February 10, 2001,
and accrued interest is payable annually beginning on
January 8, 2001. Each Convertible Debenture is
convertible into (a) shares of Common Stock at
the rate of one share per $0.35 indebtedness (for
a total of 2,857,143 shares per Convertible
Debenture), and (b) warrants to purchase one
share Common Stock at the rate of two warrants
for each $0.35 in indebtedness (for a total of
5,714,286 warrants per Convertible Debenture).
Each such warrant entitles the holder to purchase
one share of Common Stock for an exercise price
of $0.35.
The private placement of the Convertible
Debentures was effected in reliance upon the
exemption for sales of securities not involving a
public offering, as set forth in Section 4(2) of
the Securities Act of 1933, as amended, based
upon the following based upon the following: (a)
the investors confirmed to the Company that they
were "accredited investors," as defined in Rule
501 of Regulation D promulgated under the
Securities Act and had such background,
education, and experience in financial and
business matters as to be able to evaluate the
merits and risks of an investment in the
securities; (b) there was no public offering or
general solicitation with respect to the
offering; (c) the investors were provided with
any and all other information requested by the
investors with respect to the Company, (d) the
investors acknowledged that all securities being
purchased were "restricted securities" for
purposes of the Securities Act, and agreed to
transfer such securities only in a transaction
registered with the SEC under the Securities Act
or exempt from registration under the Securities
Act; and (e) a legend was placed on the
Convertible Debentures and other documents
representing each such security stating that it
was restricted and could only be transferred if
subsequently registered under the Securities Act
or transferred in a transaction exempt from
registration under the Securities Act.
20
As of March 31, 2000, the holders of all four
Convertible Debentures exercised their rights to
convert the Convertible Debentures to Common
Stock. Subject to confirmation through an audit
that the original purchase price for the
Convertible Debentures has been received, the
Company is obligated to issue 8,571,428 shares of
Common Stock. (The number (100,736,979) of
outstanding shares of Common Stock as of March
31, 2000 that we have used throughout this Form
10-K assumes that all 8,571,428 of such shares
have been issued and are outstanding.). In
addition, the Company is obligated to issue
warrants to purchase 17,142,858 shares of Common
Stock at an exercise price of $0.35 per share.
Resignation of Chief Financial Officer
Hank Blankenstein, the Company's former Chief
Financial Officer and a former director,
resigned from his employment with the Company and
participation on the board of directors in March,
2000. The Company is presently seeking to hire a
qualified replacement. Because the Company has
not found a new chief financial officer as of the
date it is filing this Form 10-K, Karl Arleth,
the President of the Company, is temporarily
acting as the Company's principal financial officer.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly, and current
reports, proxy statements, and other information
with the SEC. You may read and copy any reports,
statements, or other information that the Company
files at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The
SEC also maintains an Internet site
(http://www.sec.gov) that makes available to
the public reports, proxy statements, and other
information regarding issuers, such as the
Company, that file electronically with the SEC.
In addition, the Company will provide, without
charge, to each person to whom this Form 10-K is
delivered, upon written or oral request of any
such person, a copy of any or all of the
foregoing documents (other than exhibits to such
documents which are not specifically incorporated
by reference in such documents). Please direct
written requests for such copies to the Company
at 942 East 7145 South, #101A, Midvale, Utah
84047, Attention: Principal Financial Officer.
Telephone requests may be directed to the office
of the Company at (801) 255-0862.
The Company also maintains an Internet Website at
http://www.eugs.com and also has available, for
interested shareholders, maps and other material
concerning the Company's activities.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
The information set forth as "NOTE 8 - GEOGRAPHIC
INFORMATION" of the consolidated financial
statements of the Company included in this Form
10-K contains information regarding financial
information about foreign and domestic operations
of the Company and its subsidiaries.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K contains certain forward-looking
statements and information relating to the
Company and its business that are based on the
beliefs of management of the Company and
assumptions made based on information currently
available to management. Such statements can be
identified by the use of the words "anticipate,"
"estimate," "project," "likely," "believe,"
"intend," "expect" or similar words.
Forward-looking statements reflect the current
views of management of the Company and are not
intended to be accurate descriptions of the
future. When considering such statements, the
reader should bear in mind the cautionary
information set forth in this section and other
cautionary statements throughout this Form 10-K
and set forth in the Company's other filings with
the Commission. All forward-looking statements
are based on management's existing beliefs about
present and future events outside of management's
control and on assumptions that may prove to be
incorrect. The discussion
21
of the future business
prospects of the Company is subject to a number
of risks and assumptions, including those
identified below. Should one or more of these or
other risks materialize or if the underlying
assumptions of management prove incorrect, actual
results of the Company may vary materially from
those anticipated, estimated, projected or
intended. Among the factors that may affect the
Company's results are the Company's ability to
establish beneficial relationships with industry
partners to provide funding and expertise to the
Company's projects, the Company's efforts to
locate commercial deposits of hydrocarbons on the
Company's concessions and licenses, the
negotiation of additional licenses and permits
for the exploitation of any reserves located, the
success of the Company's exploratory activities,
the completion of wells drilled by the Company,
its joint venture partners and other parties
allied with the Company's efforts, the economic
recoverability of in-place reservoirs of
hydrocarbons, technical problems in completing
wells and producing gas, the ability of the
Company to obtain the necessary financing to
successfully pursue its business strategy,
operating hazards and uninsured risks, and the
intense competition and price volatility
associated with the oil and gas industry and
international and domestic economic conditions.
RISKS RELATED TO GENERAL ACTIVITIES
Need for Significant Funds
EuroGas has historically been undercapitalized.
We had a working capital deficit of approximately
$14 million on December 31, 1999, and most of
our partially- or wholly-owned projects require
significantly more capital than is currently
available to us. Although we are unable to
determine at this time the additional amount of
outside capital we will need or be able to raise
in the future, the interest of our shareholders
will continue to be diluted as we seek funding
through the sale of additional securities or
through joint venture or industry partnering
arrangements. We have entered into a
Subscription Agreement dated May 29, 1998 (the
"SERIES B SUBSCRIPTION AGREEMENT") with Thomson
Kernaghan & Co., Ltd. (the "SERIES B PURCHASER")
to which it, as agent for itself and certain
beneficial holders, has agreed to purchase an
additional 6,500 shares of our 1998 Series B
Convertible Preferred Stock at the rate of $1,000
per share for a total of $6,500,000, assuming
certain market conditions are met. One such
condition precedent to the Series B Purchaser's
obligation to purchase additional shares of our
1998 Series B Convertible Preferred Stock is that
the market price of the Common Stock be at least
$3.00 per share. The closing sale price for a
share of the Common Stock on March 31, 2000 was
$1.125 per share. Accordingly, the Series B
Purchaser is presently under no obligation to
purchase any additional shares of 1998 Series B
Convertible Preferred Stock. We have not entered
into other arrangements under which any person is
required, subject to conditions precedent or
otherwise, to purchase any of our securities.
Even if all conditions to the Series B
Purchaser's obligations to purchase the 1998
Series B Convertible Preferred Stock are
satisfied in the near future, and the Series B
Purchaser elects to purchase such 6,500 shares of
1998 Series B Convertible Preferred Stock, such
funding will likely be inadequate to meet our
projected needs. We can provide no assurance
that we will be able to raise through any means
the funds necessary to fulfill our current
corporate plans or maintain our current
operations.
Absence of Revenues
Prior to our acquisition of an approximately 50%
interest in a Canadian gas production entity in
1998, we had not earned any cash revenues since
our incorporation, other than a one-time $500,000
payment received in 1997 in connection with
transferring certain interests to Texaco.
Because revenues earned by the recently acquired
Canadian entity will probably not be distributed
to EuroGas in the immediate future, we do not
currently have a source of revenues, do not
anticipate any revenues in the near term and
expect to continue to incur operating losses in
the foreseeable future. As a result, we are
entirely dependent on our existing working
capital, financing from the sale of securities or
loans in the future, and/or amounts made
available by industry partners in the future.
We expect to continue to incur significant costs
as part of our ongoing and planned projects and
do not anticipate that these costs will be offset
fully, if at all, by revenues for the foreseeable
future. If we are unable to raise capital from
the sale of securities, loans, or industry
partnerships in the future, we will have to scale
back our operations and may, at some point,
become insolvent.
22
Existence of Default Judgment
On March 16, 2000, the United States District
Court, District of Utah, Central Division entered
a default judgment against EuroGas in the amount
of $19,773,113 in a case styled Finance & Credit
Development Corporation Ltd., an Ireland
Corporation vs. EuroGas, Inc., a Utah
corporation, Case No. 2:00VC-1024K. See "Item 3.
Legal Proceedings." Since this judgment was a
"default judgment," it was entered without
consideration of the merits based solely on the
Company's failure to comply with procedural
requirements and on affidavits from the plaintiff
setting forth its view of the amount of its
damages. We have engaged counsel with respect to
the matter and directed such counsel to
vigorously pursue all available remedies,
defenses and potential counterclaims. We expect
to file a motion to have the default judgment set
aside so that the case may be tried on its
merits. If the case is heard on the merits, we
believe that we have viable defenses.
Nonetheless, we can provide no assurance that a
motion to have the judgment set aside will be
granted or that, if such motion is granted and
the case is tried on the merits, EuroGas will
prevail. If our motion to set aside the judgment
and other defenses and potential counterclaims
are not successful, we do not presently have the
capital to satisfy a $19,773,133 judgment. .
See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of
Operations - Results of Operations -1999, 1998,
and 1997 Fiscal Years."
Exploration Risks
Our assets and interests are primarily in methane
gas, natural gas, and fuel exploration and
development projects. All such projects are
highly speculative, whether we are still at the
exploratory stage or have commenced development.
We can provide no assurance that any drilling,
testing, or other exploration project will locate
recoverable gases or other fuels in sufficient
quantities to be economically extracted. Several
test wells are typically required to explore each
concession or field. We may continue to incur
significant exploration costs in specific fields,
even if initial test wells are plugged and
abandoned or, if completed for production, do not
result in production of commercial quantities of
natural gas or other fuel.
Lack of Infrastructure
The projects in which we have invested are
located in areas of the world, primarily eastern
Europe and the former Soviet Union, in which we
believe there are significant reserves of natural
gas, methane gas, or other valuable hydrocarbons.
These areas are also locations in which the
necessary infrastructure for transporting,
delivering, and marketing any natural gas,
methane gas or other fuels that may be recovered
is significantly underdeveloped or, in some
cases, nonexistent. Even if we are able to locate
natural gas, methane gas, or other valuable fuels
in commercial quantities, we may be required to
invest significant amounts in developing the
infrastructure necessary to support the
transportation and delivery of such fuels. We do
not currently have a source of funding available
to meet these costs.
Political, Socio-Economic, and Other
Location-Related Risks
Our operations in Poland, Slovakia, Ukraine, and
the Sakha Republic carry with them certain risks
in addition to the risks normally associated with
the exploration for, and development of, natural
gas and other fuels. Although recent political
and socio-economic trends in these countries have
been toward the development of market economies
that encourage foreign investment, the risks of
political instability, a change of government,
unilateral renegotiation of concessions or
contracts, nationalization, foreign exchange
restrictions, and other uncertainties must be
taken into account when operating in these areas
of the world. The terms of the agreements
governing our projects are subject to
administration by the various governments and
are, therefore, subject to changes in the
government itself, changes in government
personnel, the development of new administrative
policies or practices, the adoption of new laws,
and many other factors.
Moreover, we will be required to obtain licenses
and permits on an ongoing basis in connection
with the drilling of wells, the construction of
transportation facilities and pipelines, the
marketing of any fuel that may be produced, and
financial transactions necessary for all of the
foregoing. The rules, regulations, and laws
governing all such matters are subject to change
by the various governmental agencies involved.
We can provide no assurance that the laws,
regulations, and policies applicable to our
interests in various countries in which our
projects are located will not be radically and
adversely altered at some future date.
23
Future Licenses
In general, we have the right to conduct basic
exploration on all concessions or fields in which
we have an interest. However, in order to drill
for, recover, transport or sell any gas or other
hydrocarbons, we will generally be required to
obtain additional licenses and permits and enter
into agreements with various land owners and/or
government authorities. The issuance of most such
permits and licenses will be contingent upon the
consent of national and local governments having
jurisdiction over the production area. Moreover,
even if obtained, such licenses, permits, and
agreements will generally contain numerous
restrictions and require payment by us of a
development/exploration fee, typically based on
the market value of the economically recoverable
reserves. The amount of any such fee and other
terms of any such license, permit, or agreement
will affect the commercial viability of any
extraction project. We can provide no assurance
that we will be able to obtain the necessary
licenses, permits, and agreements. Even if we do
obtain such items, the associated costs, delays
and restrictions may significantly affect our
ability to develop the affected project.
SEC Investigation and Other Legal Matters
We are presently subject to a formal order of
investigation issued by the SEC on August 1, 1995
to investigate whether violations of applicable
law may have occurred. In connection with such
investigation, we have produced numerous
documents for the SEC, and the SEC has questioned
our current and past officers, directors, former
accountants, and other agents. We have not been
contacted by the SEC with respect to this matter
for more than two and one-half years, however, we
cannot currently predict the duration or outcome
of this investigation.
If the SEC concludes that we or our
representatives have violated the securities
laws, it has available a large range of civil and
criminal remedies. Such remedies include the
suspension of trading in the Common Stock, the
levying of substantial fines, and the exclusion
of the current officers and directors of the
Company from participating in a public company.
In addition, we are subject to certain other
pending or threatened legal claims. (See
"DESCRIPTION OF BUSINESS AND PROPERTIES OF THE
COMPANY-Legal Proceedings.") The adverse
resolution of the SEC investigation or any
pending litigation affecting the Company would
have a material adverse effect on our operations
and proposed business.
No Assurance of Commercial Production from the
Company's Projects
Other than the production of an average of
approximately 1,200 barrels of oil equivalent per
day by Big Horn Resources Ltd., a Canadian
company in which we have an approximate 50%
ownership interest, none of the projects in which
we own an interest is presently producing gas or
other hydrocarbons. Texaco drilled and
abandoned test wells on the concession in Poland
in which we own an interest, and we have drilled
test wells on our Slovakia concessions. None of
these wells has been developed or commenced
production, and we can provide no assurance that
any of our projects will at any time commence
production of any valuable resource.
Dependence on Officers, Key Employees, and
Consultants
We are dependent on the services of Mr. Karl
Arleth, the President of the Company. We are
also dependent on certain key employees,
including Andrew J. Andraczke in connection with
our business activities. Mr. Andraczke has been
instrumental in establishing our operations in
Poland. The loss of one or more of these
individuals could materially and adversely impact
our operations. We have not entered into
employment agreements with any of these
individuals other than Mr. Arleth, and do not
maintain key-man life insurance on any EuroGas
officers or employees. (See "MANAGEMENT
Executive Officers and Directors.")
Risk of Impairment of Recorded Value of Unproved
Properties
We capitalize costs related to unproved gas
properties and recognize the expenses for
drilling and other exploration costs that do not
result in proved reserves at the time the well is
plugged and abandoned. We review our unproved
properties periodically to assess whether an
impairment allowance should be recorded. At
December 31, 1999, we had capitalized costs
related to the acquisition of oil and gas
properties not subject to amortization in the
amount of approximately $26,862,072. Should
future events, such as the drilling of dry holes,
evidence that an impairment of recorded value has
taken place, the adverse impact on our results of
operations for the period in which the impairment
is recognized could be significant.
24
Risks of Adverse Weather
Severe weather conditions frequently interrupt
much of our exploratory and testing work. Heavy
precipitation sometimes make travel to
exploration sites or drilling locations difficult
or impossible. Extremely cold temperatures may
delay or interrupt drilling, well servicing, and
production (if commenced, of which we can give no
assurance). The temperatures in the Sakha
Republic are especially extreme and include some
of the coldest areas of the northern hemisphere.
The average temperature of the entire region from
October to April is below freezing with winter
temperatures dipping to minus 70 to 80 degrees
Fahrenheit. Even if recoverable reserves are
discovered in the Sakha Republic or other regions
prone to severe weather, the above-described
adverse weather conditions may limit production
volumes, increase production costs, or otherwise
prohibit production during extended portions of
the year.
RISK FACTORS RELATED TO THE OIL AND GAS INDUSTRY
Volatility of Commodity Prices and Markets
The prices of oil, natural gas, methane gas and
other fuels have been, and are like to continue
to be, volatile and subject to wide fluctuations
in response to numerous factors, including the
following:
- changes in the supply and demand for such fuels;
- political conditions in oil, natural gas, and
other fuel-producing areas;
- the extent of domestic production and importation
of such fuels and substitute fuels in relevant markets;
- weather conditions;
- the competitive position of each such fuel as a source
of energy as compared to other energy sources;
- the refining capacity of crude purchasers;
- the effect of governmental regulation on the production,
transportation, and sale of oil, natural gas, and other
fuels.
Low prices and/or highly volatile
prices for any fuel being explored or produced at
one of our projects will adversely affect our
ability to secure financing or enter into
suitable joint ventures or other arrangements
with industry participants. In addition, in the
event we commence recovery of fuel at any of our
projects, a low or volatile price for the fuel
being recovered will adversely affect revenue and
other operations.
Operating Hazards and Uninsured Risks
Exploring for fuel, drilling wells, and producing
fuel involves numerous hazards, including the
following:
- hazards such as fire, explosions, blowouts, pipe
failures, casing collapses, unusual or unexpected
formations and pressures;
- environmental hazards such as spills, leaks, ruptures,
and discharges of toxic substances.
If any such event occurs, we may be forced to
cease any or all of our exploration, drilling, or
production activities on a temporary or permanent
basis. In addition, such events may lead to
environmental damage, personal injury, and other
harm resulting in substantial liabilities to
third-parties. We do not maintain insurance
against these risks. Even if we obtain
insurance, we may not be insured against all
losses or liabilities which may arise from such
hazards because such insurance may be unavailable
at economic rates, because of limitations in the
insurance policies, or because of other factors.
Any uninsured loss may have a material adverse
impact on our business and operations.
25
Intense Competition in the Oil and Gas Industry
The oil and gas industry is highly competitive.
Most of our current and potential competitors
have far greater financial resources and a
greater number of experienced and trained
managerial and technical personnel than we do.
We can provide no assurance that we will be able
to compete with, or enter into cooperative
relationships with, any such firms.
Environmental Regulations
Our operations are subject to environmental laws
and regulations in the various countries in which
they are conducted. Such laws and regulations
frequently require completion of a costly
environmental impact assessment and government
review process prior to commencing exploratory
and/or development activities. In addition, such
environmental laws and regulations may restrict,
prohibit, or impose significant liability in
connection with spills, releases, or emissions of
various substances produced in association with
fuel exploration and development.
We believe that we are currently in material
compliance with applicable laws and regulations.
However, we can provide no assurance of such
compliance or that applicable regulations or
administrative policies or practices will not be
changed by the various governmental entities. The
cost of compliance with current laws and
regulations or changes in environmental laws and
regulations could require significant
expenditures. Moreover, if we breach any
governing laws or regulations, we may be
compelled to pay significant fines, penalties, or
other payments. Costs associated with
environmental compliance or noncompliance may
have a material adverse impact on our financial
condition or results of operations in the future.
DILUTION AND OTHER RISKS RELATING TO THE COMMON STOCK
Shares Eligible for Future Sale
Most of the approximately 100,736,979 shares of
the Common Stock currently issued and
outstanding: (i) are free-trading; (ii) have
been held for in excess of one year and are
eligible for resale under Rule 144 promulgated
under the Securities Act; or (iii) will be
registered for resale in a registration statement
that the Company is contractually obligated to
file. Although the resale of certain of these
shares are subject to the volume limitations and
other restrictions under Rule 144, the possible
resale of the remaining shares may have an
adverse effect on the market price for the Common
Stock.
Substantial Warrants, Options and Debentures
Outstanding
As of December 31, 2000, there are outstanding
warrants and options to purchase up to 13,850,000
shares of Common Stock at exercise prices ranging
from $0.45 to $11.79. In addition, as set forth
in "Certain Developments Since December 31,
1999--Issuance of Convertible Debentures" above,
the Company is obligated to issue 17,142,858
warrants to purchase shares of Common Stock at
the exercise price of $0.35 per share. The
existence of such warrants and options may hinder
future equity offerings by the Company, and the
exercise of such warrants and options may further
dilute the interests of all EuroGas shareholders.
Future resale of the shares of Common Stock
issuable on the exercise of such warrants and
options may have an adverse effect on the
prevailing market price of the Common Stock.
Furthermore, the holders of warrants and options
may exercise them at a time when the Company
would otherwise be able to obtain additional
equity capital on terms more favorable to the
Company.
Issuance of Additional Common Stock
The Company has authorized capital of 325,000,000
shares of Common Stock, par value $0.001 per
share, and 5,000,000 shares of preferred stock,
par value $0.001 per share (the "PREFERRED
STOCK"). As of March 31, 2000, 100,736,979
shares of Common Stock and 2,392,228 shares of
Preferred Stock were issued and outstanding. In
addition, there are 12,550,000 shares of Common
Stock reserved for issuance on the exercise or
conversion of outstanding warrants, options, and
similar rights to acquire Common Stock, and
17,142,858 shares of Common Stock will need to be
reserved for issuance upon exercise of warrants
issuable in connection with the Convertible
26
Debentures. The Company has no means to control
the timing of the conversion of convertible
securities. The Company's board of directors has
authority, without action or vote of the
Company's shareholders, to issue all or part of
the authorized but unissued shares. Any such
issuance will dilute the percentage ownership of
the Company's shareholders and may dilute the
book value of the Common Stock.
No Dividends
The Company has not paid, and does not plan to
pay, dividends on its Common Stock in the
foreseeable future, even if it becomes
profitable. Earnings, if any, are expected to be
used to advance the Company's activities and for
general corporate purposes, rather than to make
distributions to shareholders.
RISKS RELATED TO PROPOSED TETON TRANSACTIONS
The Proposed Merger With Teton May Not Be
Consummated
As described in "Items 1 & 2 Business and
Properties--Certain Developments Since December
31, 1999," the Company has entered into the Teton
Merger Agreement, pursuant to which Teton is
expected to merge with and into a wholly-owned
subsidiary of the Company. Teton's obligation to
consummate the Merger is subject to numerous
conditions precedent, including, without
limitation the following:
- Neither Teton nor EuroGas shall have terminated the
Teton Master Agreement and the Teton Merger
Agreement at the end of the due diligence period
ending approximately April 21, 2000;
- The Merger shall have been approved by the shareholders
of Teton and EuroGas;
- Neither Teton nor EuroGas shall have terminated the
Teton Merger Agreement or Teton Master Agreement as
a result of a breach by the other party;
- The holders of no more than 10% of the outstanding
shares of EuroGas Common Stock or Teton common
stock shall have exercised appraisal
rights under governing corporate law;
- There shall have been no material adverse change in
the business, operations, properties or assets of
EuroGas.
For the reasons set forth above, and other
possible reasons, the Merger may not be
consummated. In the event the Merger is not
consummated, EuroGas will not realize any
anticipated benefits of the Merger, particularly
the acquisition of all of Teton's rights in the
Goloil License Area.
Issuance of Shares in the Merger Will Create
Substantial Dilution
As described in "Items 1 & 2 Business and
Properties--Certain Developments Since December
31, 1999, in the Merger, each of the outstanding
shares of Teton common stock outstanding shall be
converted into the right to receive one share of
EuroGas Common Stock, and each outstanding
option, warrant or other right to purchase a
share of Teton common stock shall become the
right to purchase one share of EuroGas Common
Stock (each subject to adjustment if the number
of outstanding shares of EuroGas Common Stock
exceeds 136,000,000 at any time within 180 days
of closing). Teton presently has outstanding
13,621,744 shares of Teton common stock and
2,599,249 warrants, options and other rights to
purchase Teton common stock. In addition, it is
anticipated that Teton will issue approximately
500,000 shares of Teton common stock prior to
consummation of the Merger. The issuance of such
shares of EuroGas Common Stock in connection with
the Merger may substantially dilute the interest
of EuroGas shareholders.
Properties Obtained As a Result of the Merger May
Prove to Have No Value
Our primary motivation in entering into the
Master Agreement and Merger Agreement is in order
to obtain all or part of the rights presently
held by Goltech (through its interest in Goloil)
in the Goloil Oil Field. Even if the Merger and
transaction contemplated by the Master Agreement
are consummated, the amount of extractable oil in
28
the Goloil Oil Field may be less than reserve
estimates and/or extracting or transporting such
oil may be economically or logistically
impracticable. We can provide no assurance that,
even if the Merger and Goltech purchase
transaction are consummated, our interest in the
Goloil Oil Field will generate revenues in excess
of costs or otherwise prove valuable to the Company.
ITEM 3. LEGAL PROCEEDINGS
On December 30, 1999, Finance & Credit
Development Corporation Ltd., an Ireland
corporation, commenced an action against EuroGas
in a case styled Finance & Credit Development
Corporation Ltd., an Ireland Corporation vs.
EuroGas, Inc., a Utah corporation, Case No.
2:00VC-1024K. The complaint in such action
alleges that EuroGas breached its contractual
obligation to file with the SEC a registration
statement registering 5,533,333 shares of EuroGas
Common Stock on or about September 15, 1997 and
requests relief in the form of damages in an
amount to be proven at trial (but believed to
exceed $10 million), costs and reasonable
attorneys fees. EuroGas did not file an answer
or other responsive motion to such complaint.
Accordingly, following the filing of a Motion for
Default Judgment and supportive papers by the
plaintiff, on March 16, 2000, the federal
district court issued a default judgment against
EuroGas in the amount of $19,773,113. Since this
judgment was a "default judgment," it was entered
without consideration of the merits based solely
on the Company's failure to comply with
procedural requirements and on affidavits from
the plaintiff setting forth its view of the
amount of its damages. We have engaged counsel
with respect to the matter and directed such
counsel to vigorously pursue all available
remedies, defenses and counterclaims. See "Item
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -
Results of Operations -1999, 1998, and 1997
Fiscal Years". We expect to file a motion to
have the default judgment set aside so that the
case may be tried on its merits. If the case is
heard on the merits, we believe that we have
viable defenses and potential counterclaims.
Nonetheless, we can provide no assurance that a
motion to have the judgment set aside will be
granted or that, if such motion is granted and
the case is tried on the merits, EuroGas will
prevail.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately
and on behalf of the Unsecured Creditors Trust of
the Bankruptcy Estate of McKenzie Methane
Corporation (McKenzie Methane Corporation was an
affiliate of the former owner of Pol-Tex),
asserted certain claims against Pol-Tex and
GlobeGas in connection with lending activities
between McKenzie Methane Corporation and the
management of GlobeGas prior to its acquisition
by the Company. The claim asserted that funds
that were loaned to prior GlobeGas management may
have been invested in GlobeGas and, therefore,
McKenzie Methane Corporation might have had an
interest in GlobeGas at the time of the
acquisition of GlobeGas by the Company. These
claims were resolved pursuant to a settlement
agreement entered into in November 1996 (the
"KUKUI SETTLEMENT AGREEMENT"). Under the terms
of the settlement agreement, the Company issued
to the Bishop's Estate (KUKUI's parent) 100,000
shares of Common Stock and an option to purchase
up to 2,000,000 shares of Common Stock at any
time prior to December 31, 1998. The option
exercise price was $3.50 per share if exercised
within 90 days of the execution of the Company's
1997 agreement with Texaco (the "TEXACO
AGREEMENT"); $4.50 per share if exercised prior
to December 31, 1997; and $6.00 per share if
exercised prior to December 31, 1998. The
Company also granted registration rights with
respect to the securities.
In March 1997, a trustee over certain of the
McKenzie parties and other related entities
asserted a claim to the proceeds that the Company
would receive from the Texaco Agreement and
exploitation of the Pol-Tex Concession in an
action entitled: Harven Michael McKenzie,
debtor; Timothy Stewart McKenzie, debtor; Steven
Darryl McKenzie, debtor (case no. 95-48397-H2-7,
Chapter 7; case no. 95-48474-H2-7, Chapter 7; and
case no. 95-50153-H2-7, Chapter 7, respectively)
W. Steve Smith, trustee, plaintiff v. McKenzie
Methane Poland Co., Francis Wood McKenzie,
EuroGas, Inc., GlobeGas, B.V. and Pol-Tex
Methane, Sp. zo.o., defendants (Adv. No. 97-4114
in the United States Bankruptcy Court for the
Southern District of Texas Houston Division).
The trustee's claim alleges that the Company paid
inadequate consideration for its acquisition of
GlobeGas (which indirectly controlled the Pol-Tex
Concession) from persons who were acting as
nominees for the McKenzie parties or in fact may
be operating as a nominee for the McKenzie
parties, and, therefore, the creditors of the
McKenzie parties are the true owners of the
proceeds received from the development of the
Pol-Tex Concession. (KUKUI is also the principal
creditor of the McKenzie parties in these other
cases.) The Company believes that the litigation
is without merit based on its belief that the
28
prior settlement with KUKUI bars any such claim,
that the trustee over the McKenzie parties has no
jurisdiction to bring such claim against a Polish
corporation (Pol-Tex) and the ownership of Polish
mining rights, that the Company paid substantial
consideration for GlobeGas, and that there is no
evidence that the creditors of the McKenzie
parties invested any money in the Pol-Tex
Concession. In October 1999, the Trustee filed a
Motion for Leave to Amend and Supplement
Pleadings and Join Additional Parties in this
action and in adversary proceeding 97-4155
(described below) in which he is seeking to add
new parties and additional causes of action
including claims for damages based on fraud,
conversion, breach of fiduciary duties,
concealment and perjury. In January, 2000, such
motion was approved by the bankruptcy court.
In June 1999, the Trustee filed another suit in
the same bankruptcy cases styled "Steve Smith,
Trustee, Plaintiff vs. EuroGas , Inc., Globegas,
B.V., Pol-Tex Methane, Sp. z.o.o., et al."
Adversary #99-3287. That suit sought sanctions
against the Defendants for actions allegedly
taken by the Defendants during the bankruptcy
cases which the Trustee considered improper. The
Defendants filed a motion to dismiss the lawsuit,
which was granted in August 1999. In July 1999,
the Trustee also filed a suit in the same
bankruptcy cases styled "Steve Smith, Trustee,
Plaintiff, vs. EuroGas, Inc., Globegas, B.V.,
Pol-Tex Methane, Sp. z.o.o." Adversary #99-3444.
This suit seeks damages in excess of $170,000
for the Defendants alleged violation of an
agreement with the Trustee executed in March
1997, which agreement, in part, allowed the
Texaco Agreement to proceed. EuroGas disputes
the allegations and has filed a motion to dismiss
or alternatively, to abate this suit which motion
is currently pending before the court.
Nonetheless, in order to avoid additional costs
associated with extended litigation, the Company
is engaged in settlement discussions in an
attempt to reach a negotiated resolution of the
dispute.
On August 21, 1997, KUKUI asserted a claim
against the Company in an action entitled KUKUI,
Inc. v. EuroGas, Inc., Case No. H-972864 United
States District for the Southern District of
Texas, Houston Division. KUKUI's claim is based
upon an alleged breach of the KUKUI Settlement
Agreement as a result of the Company's failure to
file and obtain the effectiveness of a
registration statement for the resale by KUKUI of
100,000 shares of Common Stock delivered to KUKUI
in connection with the settlement. In addition,
Bishop Estate, KUKUI's parent, has entered a
claim for failure to register the resale of
shares of Common Stock subject to its option to
purchase up to 2,000,000 shares of Common Stock.
The Company has denied any liability and has
filed a counterclaim against KUKUI and Bishop's
Estate for breach of contract. The parties are
engaged in settlement discussions in an attempt
to reach a negotiated resolution of the dispute.
In early December, 1999, EuroGas signed a
settlement agreement with Kukui, the Bishop
Estate and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in
part, requires EuroGas to pay $900,000 over the
next 12 months and issue 100,000 shares of
registered common stock to the Bishop Estate by
June 30, 2000. Recently, the Trustee declared
that certain conditions precedent set forth in
the settlement agreement have not been met, and
the Trustee does not intend to seek bankruptcy
court approval of the agreement. EuroGas is now
evaluating what effect this has on the agreement.
If the settlement agreement does not resolve the
foregoing litigation, EuroGas intends to
vigorously defend the litigation. Pursuant to
the settlement, EuroGas has made monthly payments
to Kukui and has executed all pleadings required
to be submitted to the United States District
Court, District of Utah.
In July 1999, an action was commenced by Randy
Crawford styled "Randy Crawford, PhD. P.E.,
Plaintiff, v. EuroGas, Inc., Danube International
Petroleum company, Ltd., Danube Acquisition
Corp., and Martin Schuepback, Defendant," in the
State District Court, Dallas, Texas, Cause # DV
9805298. In this litigation, Crawford asserts
that the Defendants breached a service agreement
under which he was employed to provide consulting
and engineering services and that he is now owed
$159,500 and the right to purchase 284,000 shares
of common stock at the price of $1.50. Mediation
is on-going in an effort to resolve this dispute.
The trial date is set forth June 5, 2000.
On October 11, 1999, an action was filed against
EuroGas entitled "Fred L. Oliver. Petroleum
Ventures of Texas, Inc. R.A. Morse and R.A.
Morse, Trustee, Plaintiffs vs. EuroGas, Inc. and
Beaver River Resources, Ltd., Defendants" in the
State District Court of Dallas County, Texas,
Cause #DV99-08032-A. In this action, Plaintiffs
assert that EuroGas breached an agreement by
failing to seek registration of certain
restricted and unregistered shares issued to
Plaintiffs in connection with EuroGas'
acquisition of its interest in Beaver River
Resources, Ltd. The action seeks rescission of
the agreement, or in the alternative, damages,
and includes claims for costs, attorneys fees and
interest. EuroGas has filed an answer denying
the allegations contained in the lawsuit. This
motion is currently set for trial on July 31, 2000.
29
On or about November 1, 2999, a settlement was
reached with Stephen Jeu and Susanna Calvo
resolving their claims in a suit filed in the
District Court, Harris County, Texas, 55th
Judicial District. EuroGas has not fully
performed the terms of the settlement agreement
and is seeking to amend the settlement. If the
amendment is not obtained, an Agreed Judgment for
$550,000 may be presented by the plaintiffs for
entry by the district court.
For the 1992 year, the Kingdom of the Netherlands
assessed a tax against GlobeGas, a subsidiary of
the Company, in the amount of approximately
$911,000 even though it had significant operating
losses. The amount fluctuates on the financial
statements of the Company due to adjustments in
exchange ratios. At December 31, 1999, the
income tax liability recorded in the Company's
financial statements was $692,431. The Company
has appealed the assessment and has proposed a
settlement which would result in a reduction in
the tax to $42,000. Pending final resolution, a
liability for the total amount assessed will
continue to be reflected in the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
______________________________________________________________
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Common Stock is quoted on the OTC Bulletin Board
market maintained by the National Association of
Securities Dealers under the symbol "EUGS" and is
traded under the symbols "EUGF" on the Frankfurt
Stock Exchange. As of March 31, 2000, there were
100,736,979 shares of Common Stock issued and
outstanding, held by approximately 249 holders of
record (2,000 estimated beneficial owners).
The following table sets forth the approximate range
of high and low bids for the Common Stock during the
periods indicated. Such quotations reflect
interdealer prices, without retail markup, markdown,
commissions, or other adjustments and may not
necessarily represent actual transactions in the
Common Stock.
Quarter Ended High Bid Low Bid
Year Ended December 31, 1998
----------------------------
March 31, 1998 6.8125 3.9375
June 30, 1998 5.75 3.625
September 30, 1998 4.97 2.0625
December 31, 1998 2.25 1.1875
Year Ended December 31, 1999
----------------------------
March 31, 1999 2.50 1.0312
June 30, 1999 1.0938 0.5469
September 30, 1999 0.9375 0.5469
December 31, 1999 0.7969 0.4531
The liquidity of the Common Stock may be limited,
and the reported price quotes may not be indicative
of prices that could be obtained in actual
transactions. On March 31, 2000, the high and low
bids for the Common Stock on the OTC Bulletin Board
were $ 1.1562 and $1.0938 respectively.
30
DIVIDENDS
No dividends have been paid on the Common Stock, and
the Company does not have retained earnings from
which to pay dividends. The Company accrued
cumulative preferred dividends of $1,442,345,
$2,861,301 and $423,530 in 1999, 1998 and 1997,
respectively. Of this amount, $1,301,376 was
paid in 1999 and $165,008 was paid in 1998 by the
issuance of shares of Common Stock in connection
with the conversion of a portion of the preferred
stock. All cumulative dividends with respect to
the Company's preferred stock would be required to
be paid prior to the Company declaring or paying any
dividend on the Common Stock. Even if the Company
were able to generate the necessary earnings, it is
not anticipated that dividends will be paid in the
foreseeable future, except to the extent required by
the terms of the cumulative preferred stock
currently issued and outstanding.
RECENT SALES OF UNREGISTERED SECURITIES
On November 4, 1999, the Company
completed a private placement of 1,800 shares of
Series C Preferred Stock to an accredited investor,
resulting in net proceeds to the Company of
approximately $1,651,500 to be used for general
working capital. The private placement of the
Series C Preferred Stock was effected in reliance
upon the exemption for sales of securities not
involving a public offering, as set forth in Section
4(2) of the Securities Act of 1933, as amended,
based upon the following based upon the following:
(a) the investor represented and warranted to the
Company that it was an "accredited investor," as
defined in Rule 501 of Regulation D promulgated
under the Securities Act and had such background,
education, and experience in financial and business
matters as to be able to evaluate the merits and
risks of an investment in the securities; (b) there
was no public offering or general solicitation with
respect to the offering, and the investor
represented and warranted that it was acquiring the
securities for its own account and not with an
intent to distribute the such securities; (c) the
investor was provided with copies of the Company's
most recent Annual Report on Form 10-K and any and
all other information requested by the investor with
respect to the Company, (d) the investor
acknowledged that all securities being purchased
were "restricted securities" for purposes of the
Securities Act, and agreed to transfer such
securities only in a transaction registered with the
SEC under the Securities Act or exempt from
registration under the Securities Act; and (e) a
legend was placed on the certificates and other
documents representing each such security stating
that it was restricted and could only be transferred
if subsequently registered under the Securities Act
or transferred in a transaction exempt from
registration under the Securities Act. During the
first quarter of 2000, all such shares of Series C
Preferred Stock were converted in exchange for
5,329,713 shares of Common Stock.
During 1999, the Company completed two
private placements of 1998 Series B Convertible
Preferred Stock to an existing shareholder of the
Company pursuant to the Series B Subscription
Agreement (described in greater detail below). The
company sold an aggregate of 6,500 shares of Series
B Convertible Preferred Stock, resulting in net
proceeds to the Company of approximately $6,012,500.
The private placements of the Series B Convertible
Preferred Stock were effected in reliance upon the
exemption for sales of securities not involving a
public offering, as set forth in Section 4(2) of the
Securities Act of 1933, as amended, based upon the
Company's pre-existing relationship with the
purchaser and representations and warranties
provided by the purchaser. During 1999, such 6,500
shares of 1998 Series B Convertible Preferred Stock
(in addition to 1,500 shares of 1998 Series B
Convertible Preferred Stock issued in prior periods)
were converted into 10,576,208 shares of Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance
sheet data were derived from the consolidated
financial statements of the Company. The
consolidated financial statements of the Company
have been audited by the Company's independent
certified public accountants. The selected
financial data below should be read in conjunction
with the consolidated financial statements of the
Company and the notes thereto included with this
filing and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of
Operations" set forth in this Report.
31
Statement of Operations Data
Statement of Operation Data
- - ---------------------------
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
Net Sales $ 4,973,508 $ 879,404 $ - $ - $ -
Loss from Operations $21,825,075 $11,024,180 $11,501,899 $ 6,413,183 $4,327,581
Loss per Common Share $ 0.28 $ 0.22 $ 0.22 $ 0.16 $ 0.13
Balance Sheet Data
- - ------------------
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
Total Assets $53,968,578 $65,334,387 $40,754,543 $15,902,139 $7,680,367
Long-Term Obligations $ - $ 1,788,294 $ 3,157,789 $10,631,547 $4,011,750
Cash Dividends per
Common Share $ - $ - $ - $ - $ -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Company is engaged primarily in the
acquisition of rights to explore for and exploit
oil, natural gas, coal bed methane gas and
mineral mining. The Company has also extended its
business into co-generation (power and heat)
projects. The Company has acquired interests in
a number of large exploration concessions, for
oil, natural gas and coal bed methane gas, and is
in various stages of identifying industry
partners, farming out exploration rights,
undertaking exploration drilling, and seeking to
develop production. The Company currently has
several projects in various stages of
development, including a coal bed methane gas
project in Poland, a natural gas project and
several additional undeveloped concession areas
in Slovakia, a natural gas project in the Sakha
Republic (a member of the Russian Federation
located in eastern Siberia) and an interest in a
talc deposit in Slovakia. The Company has at
least seven joint venture projects in the Ukraine
to explore for and exploit oil, natural gas and
coal bed methane gas with various Ukrainian State
and private companies. The Company has also
created a consortium with the largest power
generation company in Great Britain, and with a
large utility company in Germany, to develop a
co-generation power project in Western Poland.
The Company has also acquired holdings in several
oil and natural gas projects in Canada. One
acquisition has given the Company a majority
interest in a full-service oil and gas producing
company. The other project is a joint venture
with a major oil and gas company to reclaim one
of Canada's largest natural gas fields. In
addition, as further described in "Items 1 & 2.
Business and Properties-Certain Developments
Since December 31, 1999," the Company has entered
into agreements to fund the production of a
pipeline for, and then acquire through merger,
Teton Petroleum Company, which has a 70.59%
interest in a oil field in the Western Siberian
Basin.
The Company's principal assets consist of both
proven and developed properties, as well as
unproven and undeveloped properties. All costs
incidental to the acquisition, exploration, and
development of such properties are capitalized,
including costs of drilling and equipping wells
and directly-related overhead costs, which
include the costs of Company-owned equipment.
Since the Company has limited proven reserves and
established production, most of its holdings have
not been amortized. In the event that the
Company is ultimately unable to establish
production or sufficient reserves on some of
these properties to justify the carrying costs,
the value of the assets will need to be written
down and the related costs charged to operations,
resulting in additional losses. The Company
periodically evaluates its properties for
impairment and if a property is determined to be
impaired, the carrying value of the property is
reduced to its net realizable amount.
RECENT DEVELOPMENTS
Funding Activities. On November 4, 1999, the
Company sold 1,800 shares of Series C Preferred
Stock, resulting in net proceeds to the Company
of approximately $1,651,500. At December 31,
1999, the Company had approximately $1.5 million
in cash and cash equivalents and $14.5 million
in negative working capital.
As further described in "Items 1 & 2 Business and
Properties-Certain Developments Since December
31, 1999," on or about January 12, 2000, the
Company issued four Convertible Debentures in the
aggregate face amount of $3,000,000 to several
individual investors in exchange for an aggregate
of $3,000,000 cash. As of March 31, 2000, the
holders of all four Convertible Debentures
exercised their rights to convert the Convertible
Debentures to Common Stock. Subject to
confirmation through an audit that the original
purchase price for the Convertible Debentures has
been received, the Company is obligated to issue
8,571,429 shares of Common Stock. In addition,
the Company is obligated to issue warrants to
purchase 17,142,858 shares of Common Stock at an
exercise price of $0.35 per share.
Capital Expenditures. Effective as of October
1998, the Company completed its acquisition of
approximately 51% of the shares of capital stock
of Big Horn Resources Ltd., of Calgary, Alberta,
Canada ("BIG HORN"). Big Horn is a full-service
producer of oil and natural gas, producing the
equivalent of approximately 1,200 barrels of oil
a day. At December 31, 1999, Big Horn had
estimated proven reserves of approximated 806,400
barrels of oil and 7,772,800 mcf of natural gas.
Its estimated net future discounted cash flows at
December 31, 1999 were approximately $12.4
million.
OUTLOOK
In the past, the Company has focused its
resources on pre-exploration or early-exploration
stage natural gas, coal bed methane gas, and
other hydrocarbon projects with little short-term
revenue potential. The Company believes that its
investment in such early-stage projects will
prove profitable in the long-run and may continue
to invest in additional early-stage projects from
time to time in the future. Nonetheless, present
management believes that, in order to balance out
its holdings, the focus of the Company's
acquisition, investment and development strategy
should be on hydrocarbon projects that have the
potential to generate revenues within 1-5 years
of the date of investment and is actively seeking
such investments.
RESULTS OF OPERATIONS-1999, 1998, AND 1997 FISCAL
YEARS
The following table sets forth consolidated
income statement data and other selected
operating data for the years ended December 31,
1999, 1998 and 1997.
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Oil and Gas Sales. . . . . . . . . . . . . . . . . . $ 4,973,508 $ 879,404 $ -
Costs and Operating Expenses
Oil and gas production . . . . . . . . . . . . . . 1,330,526 305,009 -
Impairment of mineral interests and equipment. . . 7,217,426 3,512,792 1,972,612
Depreciation, depletion, and amortization . . . . 1,810,176 293,955 25,637
Settlement costs . . . . . . . . . . . . . . . . . 4,400,000 - -
General and administrative . . . . . . . . . . . . 9,491,347 7,804,401 6,716,365
------------- ------------ ------------
Total Costs and Operating Expenses . . . . . . . 24,249,475 11,916,157 8,714,614
------------- ------------ ------------
Other Income (Expenses)
Interest income. . . . . . . . . . . . . . . . . . 179,538 593,570 517,845
Other income . . . . . . . . . . . . . . . . . . . 103,878 152,776 43,123
Interest expense . . . . . . . . . . . . . . . . . (567,195) (465,371) (3,680,090)
Loss on sale and impairment of securities
and equipment . . . . . . . . . . . . . . . . . . (1,682,045) - -
Foreign exchange net gains (losses). . . . . . . . 170,315 (130,419) 331,837
Minority interest in income of subsidiary. . . . . (753,599) (137,983) -
------------- ------------ ------------
Total Other Income (Expense) . . . . . . . . . . (2,549,108) 12,573 (2,787,285)
------------- ------------ ------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . $ (21,825,075) $(11,024,180) $(11,501,899)
------------- ------------ ------------
Basic and Diluted Loss Per Common Share. . . . . . . $ (0.28) $ (0.22) $ (0.22)
============= ============ ============
Weighted Average Number of Common
Shares Used In Per Share Calculation . . . . . . . 83,368,053 64,129,062 54,705,726
============= ============ ============
Revenues. Prior to 1998, the Company had not
generated any revenues from oil and gas sales.
As a result of the Company's acquisition of the
controlling interest in Big Horn, the Company's
results of operations for 1999 and 1998 reflect
oil and gas sales of approximately $4,973,508 and
$879,404. For the 1997 year, the only material
revenues received by the Company resulted from a
one-time sale of mineral interest and equipment
in 1997, resulting in revenues of approximately
$500,000.
Operating Expenses. Operating expenses include
general and administrative expenses, depreciation
depletion and amortization, settlement costs, cost of
mineral interests and equipment and impairment of
mineral interests and equipment. Oil and gas
production expenses were $1,330,526 in 1999,
$305,009 in 1998 and $0 in 1997. All oil and gas
production expenses of the Company are those of
its majority owned subsidiary, Big Horn. The
increase in oil and gas production expenses from
1997 through 1999 reflects the fact that the
Company acquired its interest in Big Horn
effective October, 1998; accordingly, none of Big
Horn's production expenses are recognized by the
Company for 1997, only a fraction for 1998, and
the Company's full 51% of such expenses for 1999.
General and administrative expenses were
$9,491,347 for 1999, compared to $7,804,401 for
1998, an increase of 22%. General and
administrative expenses for 1998 reflected an
increase of 16% from 1997 general and
administrative expenses of $6,716,365. The
principal factors that contributed to the
increase from 1998 to 1999 were legal expenses
incurred in connection with sales of registered
and unregistered securities, ongoing securities
compliance, litigation issues, additional
consulting fees, reduction of a number of staff
members and closing of several offices. The
increase from 1997 to 1998 was due primarily to
payment of legal expenses incurred in connection
with sales of registered and unregistered
securities, ongoing securities compliance,
litigation issues, hiring of new staff members,
opening new offices and the engagement of
additional consultants. Depreciation, depletion
and amortization expenses were $1,810,176 for
1999 compared to $293,955 for 1998. During 1999,
there was a significant increase in properties
that were amortized as compared to 1998.
Impairment of mineral interests and expenses were
$7,217,426 in 1999, $3,512,792 in 1998, and
$1,972,612 in 1997. The principal factor that
contributed to the increase in impairment
expenses from 1998 to 1999 was the recognition of
a $7,217,426 impairment against the Pol-Tex
concession as of December 31, 1999 based upon the
Company's reassessment of estimated future net
cash flows. Settlement costs for financial
statement purposes increased from none in 1997
and 1998 to $4,400,000 in 1999. The primary
cause of this increase in settlement costs was
the issuance of a default judgment against the
Company on March 16, 2000 in the amount of
$19,773,113 in a case styled Finance & Credit
Development Corporation Ltd., an Ireland
Corporation vs. EuroGas, Inc., a Utah
corporation, Case No. 2:00VC-1024K.. As
discussed in "Item 3. Litigation," such judgment
was entered based on the Company's failure to
comply with procedural rules, not following a
hearing on the merits, and the Company intends to
aggressively pursue its litigation options,
including potential counterclaims of a least
$6,300,000, arising from a note payable from the
plaintiff to EuroGas. The Company expects that
the actual amount it will be obligated to pay
Finance & Credit Development Corporation Ltd., if
any, will be a fraction of the face value of the
current default judgment.
Income Taxes. Historically, the Company has not
been required to pay income taxes, due to the
Company's absence of net profits. For future
years, the Company anticipates that it will be
able to utilize a substantial portion of its
accumulated deficit, which was approximately
$69.3 million as of December 31, 1999, to offset
profits, if and when achieved, resulting in a
reduction in income taxes payable.
Net Loss. The Company incurred net losses of
approximately $21.8 million, $11.0 million and
$11.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. These losses
were due in part to the absence of revenues,
combined with continued expansion of the
Company's activities, primarily as a result of
acquisition and the growth of the Company's
administrative expenses. In addition, a
substantial portion of the recognized net losses
in 1999 are the result of $7,217,426 in
impairment of mineral interests recognized
against the Pol-Tex Concession and the default
judgment entered against the Company on March 16,
2000. The Company did recognize approximately $5
million of revenue in 1999 as a result of its
majority interest in Big Horn.
Due to the highly inflationary economies of the
Eastern European countries in which the Company
operates, the Company is subject to extreme
fluctuations in currency exchange rates that can
result in the recognition of significant gains or
losses during any period. Approximately
$170,315, ($130,419), and $331,837 in gains
(losses) were recognized as a result of currency
transactions in the three years ended December
31, 1999, 1998, and 1997, respectively. The
Company had a cumulative foreign currency
translation adjustment of ($2,797,088) at
December 31, 1999. The Company does not
currently employ any hedging techniques to
protect against the risk of currency fluctuations.
CAPITAL AND LIQUIDITY
The Company had an accumulated deficit of
$69,350,207 at December 31, 1999, substantially
all of which has been funded out of proceeds
received from the issuance of stock and the
incurrence of payables. At December 31, 1999, the
Company had total current assets of approximately
$4.9 million and total current liabilities of
approximately $19.4 million (which number
includes the Company's estimated obligation with
respect to the default judgment entered against
the Company on March 16, 2000) resulting in
negative working capital of approximately $14.5
million. As of December 31, 1999, the Company's
balance sheet reflected approximately $21.5 million
in mineral interests in properties not subject to
amortization, net of valuation allowance. These
properties are held under licenses or concessions
that contain specific drilling or other
exploration commitments and that expire within
one to three years, unless the concession or
license authority grants an extension or a new
concession license, of which there can be no
assurance. If the Company is unable to establish
production or resources on these properties, is
unable to obtain any necessary future licenses or
extensions, or is unable to meet its financial
commitments with respect to these properties, it
could be forced to write off the carrying value
of the applicable property.
Throughout its existence, the Company has relied
on cash from financing activities to provide the
funds required for acquisitions and operating
activities. The Company's financing activities
provided net cash of approximately $6.5 million
and $12 million during the years ended December
31, 1999 and 1998, respectively. Such net cash
has been used principally to fund net losses of
approximately $21.8 million and $11 million during
the years ended December 31, 1999 and December 31,
1998, respectively. During the year ended
December 31, 1999 and 1998, the
Company's operating activities used net cash of
approximately $3.8 million and $8.3 million,
respectively. A portion of the Company's cash
was used in acquiring mineral interests, property
and equipment, either directly or indirectly
through the acquisition of subsidiaries, with
approximately $8.9 million and $13.6 million used
in investing activities for the years ended
December 31, 1999 and 1998, respectively, of
which approximately $7.4 million and $9.3
million, respectively, was used in acquiring
mineral interests.
While the Company had cash of approximately $1
million at December 31, 1999, it has substantial
short-term and long-term financial commitments
with respect to exploration and drilling
obligations related to the mineral properties in
which it has an interest, potential litigation
liabilities and its commitments to Teton
Petroleum Company under the Teton Master
Agreement. Excluding potential litigation costs
and liabilities, the Company estimates its
financial commitments for the first nine months
of 2000 will be approximately $7 million. Many of
the Company's projects are long-term and will
require the expenditure of substantial amounts
over a number of years before the establishment,
if ever, of production and ongoing revenues. As
noted above, the Company has relied principally
on cash provided from equity and debt
transactions to meet its cash requirements. The
Company does not have sufficient cash to meet its
short-term or long-term needs and it will require
additional cash, either from financing
transactions or operating activities, to meet its
immediate and long term obligations. There can
be no assurance that the Company will be able to
obtain additional financing, either in the form
of debt or equity, or that, if such financing is
obtained, it will be available to the Company on
reasonable terms. If the Company is able to
obtain additional financing or structure
strategic relationships in order to fund existing
or future projects, existing shareholders will
likely continue experience further dilution of
their percentage ownership of the Company.
If the Company is unable to establish production
or reserves sufficient to justify the carrying
value of its assets or to obtain the necessary
funding to meet its short and long-term
obligations or to fund its exploration and
development program, all or a portion of the
mineral interests in unproven properties will be
charged to operations, leading to significant
additional losses.
INFLATION
The amounts presented in the Company's
consolidated financial statements do not provide
for the effect of inflation on the Company's
operations or its financial position. Amounts
shown for property, plant and equipment and for
costs and expenses reflect historical costs and
do not necessarily represent replacement costs or
charges to operations based on replacement costs.
The Company's operations, together with other
sources, are intended to provide funds to replace
property, plant and equipment as necessary. Net
income would be lower than reported if the
effects of inflation were reflected either by
charging operations with amounts that represent
replacement costs or by using other inflation
adjustments. Due to inflationary problems in
Eastern Europe reflected in currency exchange
losses, the Company has seen losses on its assets
values in those countries.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company conducts business in many foreign
currencies. As a result, it is subject to
foreign currency exchange rate risk due to
effects that foreign exchange rate movements of
those currencies have on the Company's costs and
on the cash flows which it receives from its
foreign operations. The Company believes that it
currently has no other material market risk
exposure. To date, the Company has addressed its
foreign currency exchange rate risks principally
by maintaining its liquid assets in U.S. Dollars,
in interest-bearing accounts, until payments in
foreign currency are required, but does not
reduce this risk by hedging. For further
discussion of the Company's policies regarding
derivative financial instruments and foreign
currency translation, see Note 1 to the
Consolidated Financial Statements of the Company
contained in "Item 8. Financial Statements and
Supplementary Data."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the
Company and its subsidiaries, together with note
and supplementary data related thereto are set
forth following pages F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information required by this
Item is incorporated by reference to the section
entitled "Election of Directors" in the Company's
definitive proxy statement to be filed with the
Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this
Item is incorporated by reference to the section
entitled "Executive Compensation" in the
Company's definitive proxy statement to be filed
with the Commission
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this
Item is incorporated by reference to the section
entitled "Security Ownership of Certain
Beneficial Owners and Management" in the
Company's definitive proxy statement to be filed
with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information required by this
Item is incorporated by reference to the section
entitled "Certain Relationships and Related
Transactions" in the Company's definitive proxy
statement to be filed with the Commission
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED
1. Financial Statements. The following consolidated financial
Statements of the Company and report of independent
accountants are included immediately following the
signature page of this Report.
A. Report of Hansen, Barnett & Maxwell, independent
certified public accountants, for the years ended
December 31, 1999, 1998 and 1997
B. Consolidated Balance Sheets at December 31, 1999
and 1998
C. Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997
D. Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1998 and 1999
E. Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
F. Notes to Consolidated Financial Statements
2. Exhibits
Exhibit
Number Title of Document Location
- - ------ ---------------------------------------------- ------------------
2.1 Exchange Agreement between Northamption, Inc., Report on form 8-K
and Energy Global, A.G. dated August 3, 1994,
Exhibit No. 1*
2.2 Agreement and Plan of Merger between EuroGas, Report on Form 8-K
Inc., and Danube International Petroleum dated July 12, 1996
Company, Inc. dated July 3, 1996, as Exhibit No. 5*
amended.
2.3 English translation of Transfer Agreement Report on form 8-K
between EutoGas and OMV, Inc. for the dated June 11, 1997
Acquisition of OMV (Yakut) Exploration Exhibit No. 1*
GmbH dated June 1, 1997
2.4 Asset Exchange Agreement between EuroGas, Inc., Report on Form S-1
and Beaver River Resources, Ltd., dated April dated July 23, 1998
1, 1988 Exhibit No. 2.03*
3.1 Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
3.2 Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
3.3 Designation of Rights, Quarterly Report on
Privileges and Preferences Form 10-QSB dated
of 1995 Series Preferred Stock March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights Report on Form 8-K
Privileges and Preferences dated July 12, 1996
of 1996 Series Preferred Stock Exhibit No. 1*
3.5 Designation of Rights Report on form 8-K
Privileges and Preferences dated May 30 1997
1997 Series A Convertible Exhibit No. 1*
3.6 Deisgnation of Rights, Privileges Report on Form S-1
and Preferences of 1998 Series B Dated July 23, 1998
Convertible Preferred Stock Exhibit No. 3.06*
3.7 Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
3.8 Designation of Rights, Privileges, Registration Statement
and Preferences of 1999 Series C on Form S-1, File No.
6% Convertible Preferred Stock 333-92009, filed on
December 2, 1999
4.1 Subscription Agreement between Report on Form S-1
EuroGas, In., and Thomas Kernaghan dated July 23, 1998
& Co., Ltd, dated May 292, 1998 Exhibit No. 4.01*
4.2 Warrant Agreement dated July 12, 1996, Report on Form 8-K
with Danube Shareholder dated July 12, 1996
Exhibit No. 2*
4.3 Registration Rights Agreement Between Report on Form S-1
EuroGas, In., and Thomas Kernaghan dated July 23, 1998
& co., Ltd, dated May 29, 1998 Exhibit No. 4.02*
4.4 Registration Rights Agreement dated Report on Form 8-K
July 12, 1996, with Danube Shareholder dated July 12, 1996
Exhibit No. 3*
4.5 Registration Rights Agreement by and Report on Form S-1
among EuroGas, Inc., and Finance dated July 23, 1998
Credit & Development Corporation, Ltd. Exhibit No. 4.06*
dated June 30, 1997
4.6 Option granted to the Trustees of the Annual Report on
Estate of Bernice Pauahi Bishop Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*
4.7 Registration Rights Agreement by and Annual Report on
among EuroGas, Inc., and Kakui, Inc, and Form 10-KSB for the
the Trustees of the Estate of Bernice fiscal year ended
Pauahi Bishop December 31, 1995,
Exhibit No. 11*
4.8 Option issued to OMV Aktiengesellschaft Annual Report on
to acquire up to 2,000,000 shares of Form 10-KSB for
restricted common stock the fiscal year
ended December 31,
1996, Exhibit No.
13*
4.9 Form of Convertible Debenture issued Filed herewith.
on January 12, 2000.
5.2 Opinion of Parr Waddoups Brown Gee & Registration Statement
Loveless on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.1 English translation of Mining Usufruct Quarterly Report on
Contract between The Minister of Form 10-Q dated
Environmental Protection, Natural September 30, 1997
Resources and Forestry of the Republic Exhibit No. 1*
of Poland and Pol-Tex Methane, dated
October 3, 1997
10.2 Agreement between Polish Oil and Gas Quarterly Report on
Mining Joint Stock Company and EuroGas, Form 10-Q dated
Inc., dated October 23, 1997 September 30, 1997
Exhibit No. 2*
10.3 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.4 Settlement Agreement by and among Annual Report on
Kukui, Inc., and Pol-tex Methane, Sp Form 10-KSB for the
zo.o., McKenzie Methane Rybnik, fiscal year ended
McKenzie Methane Jastrzebie, GlobeGas, December 31, 1995,
B.V. (formerly known as McKenzie Exhibit No. 15*
Methane Poland, B.V.), and the
Unsecured Creditors' Trust of the
Bankruptcy Estate of McKenzie Methane
Corporation
10.5 Acquisition Agreement between EuroGas, Report on Form S-1
Inc., and Belmont Resources, Inc., dated dated July 23, 1998
July 22, 1998 Exhibit No. 10.20*
10.6 General Agreement governing the operation of Report on Form 8-K
McKenzie Methane Poland, B.V. dated August 3, 1994
Exhibit No. 2*
10.7 Concessions Agreement between Ministry of Annual Report on
Environmental Protection, Natual Resources, Form 10-KSB for the
and Forestry and Pol-tex Methane Ltd. fiscal year ended
December 31, 1995
Exhibit No. 18*
10.8 Association Agreement between NAFTA a.s. Annual Report on
Gbely and Danube International Petroleum Form 10-KSB for the
Company fiscal year ended
December 31, 1995,
Exhibit No. 19*
10.9 Agreement between Moravske' Naftove' Annual Report on
Doly a.s. and Danube International Form 10-KSB for the
Petroleum Company fiscal year ended
December 31, 1995
Exhibit No. 20*
10.10 Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*
10.11 Form of Promissory Note, as amended, Annual Report on
with attached list of shareholders Form 109-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*
10.12 Amendment #1 to the Association Annual Report on
Agreement Entered on 13th of July Form 10-KSB for the
1995, between NAFTA a.s. Gbely and Fiscal year ended
Danube International Petroleum December 31, 1996,
Company Exhibit No. 25*
10.13 Acquisition Agreement by and among Form 10-Q
Belmont Resources, In., EuroGas Dated September 30,
Incorporated, dated October 9, 1998 1998
Exhibit No. 1*
10.14 Letter of Intent by and between Annual Report on
Polish Oil and Gas Company and Form 10-KSB for the
Pol-Tex Methane, dated April 28, Fiscal year ended
1997 December 31, 1996,
Exhibit No. 27*
10.15 Purchase and Sale Agreement between Report on Form 8-K
Texaco Slaskk Sp. zo.o., Pol-Tex Dated March 24, 1997
Methane Sp. zo.o and GlobeGas Exhibit No. 1*
B.V.
10.16 English translation of Articles of Report on Form 8-K/A
Association of the TAKT Joint Venture Dated June 11, 1997
dated June 7, 1991, as amended April Exhibit No. 3*
4, 1993
10.17 English transalation of Proposed Report on Form 8-K/A
Exploration and Production Sharing Dated June 11, 1997
contract for Hydrocarbons between Exhibit No. 4*
the Republic of Sakha (Yakutia) and
the Russian Federation and the TAKT
Joint Venture
10.18 English translation of Agreement on Registration Statement
Joint Investment and Production on Form S-1 dated July
Actuvities between EuroGas, Inc., and 23, 1998 Exhibit No.
Zahidukrgeologia, dated May 14, 1998 10.21*
10.19 English translation of Statutory Agreement Registration Statement
of Association of Limited Liability on Form S-1 dated July
Company with Foreign Investments between 23, 1998 Exhibit No.
EuroGas, Inc., and Makyivs'ke Girs'ke 10.22*
Tovarystvo, dated June 17, 1998
10.20 Partnership Agreement between EuroGas, Inc. Amendment No. 1 dated
and RWE-DEA Altiengesellschaft for August 3, 1998 Exhibit
Mineraloel and Chemie AG, dated No. 10.23
July 22, 1998
10.21 Mining Usufruct Contract between The Quarterly Report on
Minister of Environmental Protection, Form 10-Q dated
Natural Resources and Forestry of the September 30, 1997
Republic of Poland and Pol-Tex Exhibit No. 1*
Methane, dated October 3, 1997
10.22 Agreement between Polish Oil and Gas Quarterly Report on
Mining Joint Stock Companyh and EuroGas, Form 10Q dated
Inc., dted October 232, 1997 September 30, 1997
Exhibit No. 2*
10.23 Agreement for Acquisition of 5% Interest Quarterly Report on
in a Subsidiary by and between EuroGas, Form 10-Q dated
Inc., B. Grohe, and T. Koerfer, dated September 30, 1997
November 11, 1997 Exhibit No. 3*
10.24 Option Agreement by and between EuroGas, Quarterly Report on
Inc., and Beaver River Resources, Ltd., Form 10-Q dated
dated October 31, 1997 September 30, 1997
Exhibit No. 4*
10.25 Lease Agreement dated September 3, 1996, Registration Statement
between Potomac Corporation and the on Form S-1, File No.
Company; Letter of Amendment dated 333-92009, filed on
September 30, 1999 December 2, 1999
10.26 Sublease dated November 2, 1999, between Registration Statement
Scotdean Limited and the Company on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.27 Securities Purchase Agreement dated Registration Statement
November 4, 1999, between the Company on Form S-1, File No.
and Arkledun Driver LLC 333-92009, filed on
December 2, 1999
10.28 Registration Rights Agreement dated Registration Statement
November 4, 1999, between the Company and on Form S-1, File No.
Arkledun Drive LLC 333-92009, filed on
December 2, 1999
10.29 Supplemental Agreement dated November 4, Registration Statement
1999, between the Company and Arkledun Drive on Form S-1, File No.
LLC 333-92009,filed on
December 2, 1999
10.30 Executive Employment Agreement dated Registration Statement
April 20, 1999 between the Company and Karl on Form S-1, File No.
Arleth 333-92009, filed on
December 2, 1999
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
23.1 Consent of Ryder Scott Company, Registration Statement
Petroleum Engineers on Form S-1 dated July
23, 1998*
27.1 Financial Data Schedule Filed herewith
-----------------------------
*Incorporated by reference
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1999, the
Company did not file any reports on Form 8-K.
(c) Exhibits
Exhibits to this Report are attached following Page F-____ hereof.
(d) Financial Statement Schedules
None
SIGNATURES
Pursuant to the requirements of section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended,
the Company has caused this report to be signed on
its behalf by the undersigned, hereunto duly
authorized.
EUROGAS, INC.
Dated: April 13, 2000
By
/S/ KARL ARLETH
--------------------------------
Karl Arleth, President
(Principal Executive Officer)
Dated: April 13, 2000
By
/S/ KARL ARLETH
--------------------------------
Karl Arleth, President
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY AND ADDITIONAL SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, this Form 10-K has been signed
by the following persons in the capacities and on
the dates indicated. Each person whose signature to
this Form 10-K appears below hereby constitutes and
appoints Karl Arleth as his true and lawful
attorney-in-fact and agent, with full power of
substitution, to sign on his behalf individually and
in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments
and post-effective amendments to this Form 10-K, and
any and all instruments or documents filed as part
of or in connection with this Form 10-K or the
amendments thereto and each of the undersigned does
hereby ratify and confirm all that said
attorney-in-fact and agent, or his substitutes,
shall do or cause to be done by virtue hereof.
Dated: April 13, 2000
By
/S/ KARL ARLETH
--------------------------------
Karl Arleth, Director
Dated: April 13, 2000
By
/S/ DR. GREGORY P. FONTANA
--------------------------------
Dr. Gregory P. Fontana, Director
Dated: April 13, 2000
By
/S/ ANDREW ANDRACZKE
--------------------------------
Andrew Andraczke, Director
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants. . . . . . . . . . . F-2
Consolidated Balance Sheets-December 31, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999 . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-9
Supplemental Information Regarding Oil and Gas Producing Activities . . F-27
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associate Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of EuroGas,
Inc., a Utah corporation, and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EuroGas,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 in the
financial statements, the Company has suffered recurring losses from
operations and negative cash flows from operating activities. At December
31, 1999, the Company has negative working capital. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 16, 2000
F-2
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 1,047,141 $ 7,489,510
Investment in securities available-for-sale. . . . . . . 317,084 1,088,488
Trade accounts receivable. . . . . . . . . . . . . . . . 907,269 1,107,508
Value added tax receivables. . . . . . . . . . . . . . . 1,057,628 431,235
Receivable from joint venture partners . . . . . . . . . 1,217,149 1,751,292
Other receivables. . . . . . . . . . . . . . . . . . . . 74,696 788,291
Other current assets . . . . . . . . . . . . . . . . . . 236,044 457,899
------------ ------------
Total Current Assets . . . . . . . . . . . . . . . . . 4,857,011 13,114,223
------------ ------------
Property and Equipment - Full Cost Accounting
Oil and gas properties subject to amortization . . . . . 21,553,571 18,064,186
Oil and gas properties not subject to amortization . . . 26,862,072 32,763,353
Other mineral interests. . . . . . . . . . . . . . . . . 755,539 709,570
Other property and equipment . . . . . . . . . . . . . . 1,052,098 580,017
------------ ------------
Total Property and Equipment . . . . . . . . . . . . . 50,223,280 52,117,126
------------ ------------
Less: accumulated depletion depreciation
and amortization . . . . . . . . . . . . . . . . . . . (2,060,386) (307,054)
------------ ------------
Net Property and Equipment . . . . . . . . . . . . 48,162,894 51,810,072
------------ ------------
Other Investments at Cost. . . . . . . . . . . . . . . . . 358,857 -
Long-Term Notes Receivable . . . . . . . . . . . . . . . . 500,000 -
Receivable From Related Party. . . . . . . . . . . . . . . - 200,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . 89,816 210,092
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $ 53,968,578 $ 65,334,387
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 4,289,836 $ 4,060,125
Accrued liabilities. . . . . . . . . . . . . . . . . . . 4,251,703 2,618,014
Accrued income taxes . . . . . . . . . . . . . . . . . . 708,931 870,836
Accrued settlement obligation. . . . . . . . . . . . . . 4,400,000 -
Notes payable - current portion. . . . . . . . . . . . . 4,155,492 4,010,729
Notes payable to related parties . . . . . . . . . . . . 1,554,367 1,346,204
------------ ------------
Total Current Liabilities. . . . . . . . . . . . . . . 19,360,329 12,905,908
------------ ------------
Long-Term Liabilities
Notes payable. . . . . . . . . . . . . . . . . . . . . . - 1,226,816
Notes payable to related parties . . . . . . . . . . . . - 613,408
------------ ------------
Total Long-Term Liabilities. . . . . . . . . . . . . . - 1,840,224
------------ ------------
Minority Interest. . . . . . . . . . . . . . . . . . . . . 3,824,903 2,865,376
------------ ------------
Stockholders' Equity
Preferred stock, $.001 par value; 3,661,968 shares
authorized; issued and outstanding: 1999 - 2,394,028
shares, 1998 - 2,393,728 shares; 1999 liquidation
preference: $2,561,291. . . . . . . . . . . . . . . . . 2,394 2,394
Common stock, $.001 par value; 325,000,000 shares
authorized; issued and outstanding: 1999 - 86,835,838
shares, 1998 - 76,254,630 shares. . . . . . . . . . . . 86,836 76,255
Additional paid-in capital . . . . . . . . . . . . . . . 103,910,264 94,563,961
Accumulated deficit. . . . . . . . . . . . . . . . . . . (69,350,207) (46,082,787)
Accumulated other comprehensive loss . . . . . . . . . . (3,865,941) (836,944)
------------ ------------
Total Stockholders' Equity . . . . . . . . . . . . . . 30,783,346 47,722,879
------------ ------------
Total Liabilities and Stockholders' Equity . . . . . . . . $ 53,968,578 $ 65,334,387
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Oil and Gas Sales. . . . . . . . . . . . . . . . . . $ 4,973,508 $ 879,404 $ -
------------ ------------ ------------
Costs and Operating Expenses
Oil and gas production . . . . . . . . . . . . . . 1,330,526 305,009 -
Impairment of mineral interests and equipment. . . 7,217,426 3,512,792 1,972,612
Depreciation, depletion, and amortization . . . . 1,810,176 293,955 25,637
Settlement costs . . . . . . . . . . . . . . . . . 4,400,000 - -
General and administrative . . . . . . . . . . . . 9,491,347 7,804,401 6,716,365
------------- ------------ ------------
Total Costs and Operating Expenses . . . . . . . 24,249,475 11,916,157 8,714,614
------------- ------------ ------------
Other Income (Expenses)
Interest income. . . . . . . . . . . . . . . . . . 179,538 593,570 517,845
Other income . . . . . . . . . . . . . . . . . . . 103,878 152,776 43,123
Interest expense . . . . . . . . . . . . . . . . . (567,195) (465,371) (3,680,090)
Loss on sale and impairment of securities
and equipment . . . . . . . . . . . . . . . . . . (1,682,045) - -
Foreign exchange net gains (losses). . . . . . . . 170,315 (130,419) 331,837
Minority interest in income of subsidiary. . . . . (753,599) (137,983) -
------------- ------------ ------------
Total Other Income (Expense) . . . . . . . . . . (2,549,108) 12,573 (2,787,285)
------------- ------------ ------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . (21,825,075) (11,024,180) (11,501,899)
Preferred Dividends. . . . . . . . . . . . . . . . . 1,442,345 2,861,301 423,530
------------- ------------ ------------
Loss Applicable to Common Shares . . . . . . . . . . $ (23,267,420) $(13,885,481) $(11,925,429)
============= ============ ============
Basic and Diluted Loss Per Common Share. . . . . . . $ (0.28) $ (0.22) $ (0.22)
============= ============ ============
Weighted Average Number of Common
Shares Used In Per Share Calculation . . . . . . . 83,368,053 64,129,062 54,705,726
============= ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
------------------------ ----------------------- Paid-in Accumulated Compre- Equity
Shares Amount Shares Amount Capital Deficit hensive Loss (Deficit)
------------ ---------- ------------ ---------- ------------ ------------ ---------- ------------
Balance - December
31, 1996 . . . . . . 3,641,968 $ 3,642 49,143,862 $ 49,144 $ 14,842,922 $(20,271,877) $ (14,749) $ (5,390,918)
Net loss. . . . . . . - - - - - (11,501,899) - (11,501,899)
Dividends on preferred
shares . . . . . . . - - - - - (423,530) - (423,530)
------------
Comprehensive loss. . (11,925,429)
------------
Issuance of common
stock and 2,200,000
options for cash, net
of $75,000 offering
costs. . . . . . . . - - 4,929,999 4,930 20,170,070 - - 20,175,000
Conversion of notes
payable and related
interest . . . . . . - - 2,646,907 2,647 10,945,344 - - 10,947,991
Issuance for cash,
net of $1,750,000
offering costs . . . 15,000 15 50,000 50 13,249,935 - - 13,250,000
Warrants granted in
connection with
acquisition of OMV
(Jakutien) Exploration
GmbH . . . . . . . . - - - - 1,150,000 - - 1,150,000
Conversion of 1996 Series
Preferred shares and
related accrued
dividends. . . . . . (1,250,000) (1,250) 2,500,001 2,500 71,524 - - 72,774
Conversion of 1997 Series
Preferred shares and
related dividends. . (14,740) (15) 2,763,165 2,763 229,800 - - 232,548
Issuance to acquire
minority interest in
subsidiary . . . . . - - 250,000 250 999,750 - - 1,000,000
------------ ---------- ------------ ---------- ------------ ------------ ---------- ------------
Balance - December
31, 1997. . . . . . . 2,392,228 2,392 62,283,934 62,284 61,659,345 (32,197,306) (14,749) 29,511,966
------------
Net loss . . . . . . . - - - - - (11,024,180) - (11,024,180)
Dividends on preferred
shares. . . . . . . . - - - - - (2,861,301) - (2,861,301)
Net change in unrealized
losses on securities. - - - - - - (379,266) (379,266)
Translation adjustments - - - - - - (442,929) (442,929)
------------
Comprehensive loss . . (14,707,676)
------------
Issuance of 1998 Series
Preferred Shares for
cash, net of $1,275,005
offering costs. . . . 17,000 18 50,000 50 15,724,927 - - 15,724,995
Beneficial conversion
feature recognized
on 1998 Series B
Preferred Shares. . . - - - - 2,550,000 - - 2,550,000
Conversion of 1998
Series Preferred
shares and related
dividends . . . . . . (15,500) (16) 8,860,196 8,860 156,163 - - 165,007
Issuance for financing
and other services. . - - 60,500 61 226,064 - - 226,125
Issuance upon exercise
of stock options
for cash. . . . . . . - - 100,000 100 149,900 - - 150,000
Issuance of stock
and warrants for
oil and gas property
interests . . . . . . - - 4,900,000 4,900 14,097,562 - - 14,102,462
------------ ---------- ------------ ---------- ------------ ------------ ---------- ------------
Balance - December
31, 1998. . . . . . . 2,393,728 $ 2,394 76,254,630 $ 76,255 $ 94,563,961 $(46,082,787) $ (836,944) $ 47,722,879
============ ========== ============ ========== ============ ============ ========== ============
F-5
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
------------------------ ----------------------- Paid-in Accumulated Compre- Equity
Shares Amount Shares Amount Capital Deficit hensive Loss (Deficit)
------------ ---------- ------------ ---------- ------------ ------------ ---------- ------------
Balance - December
31, 1998. . . . . . . 2,393,728 $ 2,394 76,254,630 $ 76,255 $ 94,563,961 $(46,082,787) $ (836,944) $ 47,722,879
------------
Net loss . . . . . . . - - - - - (21,825,075) - (21,825,075)
Dividends on preferred
shares. . . . . . . . - - - - - (1,442,345) - (1,442,345)
Net change in unrealized
losses on securities. - - - - - - (2,360,980) (2,360,980)
Reclassification
adjustment for realized
losses on securities
included in net loss. - - - - - - 1,671,393 1,671,393
Translation adjustments - - - - - - (2,339,410) (2,339,410)
------------
Comprehensive loss . . (26,296,417)
------------
Issuance of Series B
1998 preferred stock
for proceeds of
$6,500,000 less
$487,500 in issuance
costs . . . . . . . . 6,500 6 - - 6,012,494 - - 6,012,500
Beneficial conversion
feature of 1998 Series
preferred shares. . . - - - - 901,875 - - 901,875
Conversion of Series B
preferred stock plus
accrued dividends of
49,729 shares, or
$39,501 . . . . . . . (8,000) (8) 10,576,208 10,576 28,933 - - 39,501
Issuance of Series C
preferred stock for
proceeds of $1,800,000
less $148,530 in
issuance costs. . . . 1,800 2 - - 1,651,468 - - 1,651,470
Beneficial conversion
feature of Series C
preferred shares. . . - - - - 360,000 - - 360,000
Compensation related to
the grant of stock
options . . . . . . . - - - - 366,088 - - 366,088
Issuance as payment
of interest . . . . . - - 5,000 5 25,445 - - 25,450
------------ ---------- ------------ ---------- ------------ ------------ ----------- -----------
Balance - December
31, 1999. . . . . . . 2,394,028 $ 2,394 86,835,838 $ 86,836 $103,910,264 $(69,350,207) $(3,865,941) $30,783,346
============ ========== ============ ========== ============ ============ =========== ===========
(1) Accumulated other comprehensive loss consisted of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Cumulative translation adjustments . . . . . .$ (2,797,088) $ (457,678)
Unrealized loss on investments in
securities-available-for-sale . . . . . . . . (1,068,853) (379,266)
------------ ------------
Accumulated Other Comprehensive Loss . . . . .$ (3,865,941) $ (836,944)
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash Flows From Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . . . $(21,825,075) $(11,024,180) $(11,501,899)
Adjustments to reconcile net loss to cash
provided by operating activities:
Impairment of mineral interests and equipment. . 7,217,426 3,512,792 1,972,612
Accrued settlement obligations . . . . . . . . . 4,400,000 - -
Depreciation depletion and amortization. . . . . 1,810,176 293,955 25,637
Amortization of discount on notes payable. . . . 39,074 - -
Expenses paid by issuance of notes payable . . . - - 1,321,295
Interest expense by issuance of common stock . . 25,450 - -
Compensation paid by issuance of common stock. . - 226,125 -
Compensation paid by reduction of note receivable 200,000 - -
Compensation from stock options. . . . . . . . . 366,088 - -
Minority interest in income of subsidiary. . . . 753,599 137,983 -
Loss on sale of securities available for sale. . 1,671,393 - -
Exchange (gain) loss . . . . . . . . . . . . . . (170,315) 130,419 (331,837)
Changes in assets and liabilities, net
of acquisitions:
Trade receivables. . . . . . . . . . . . . . . (68,235) (72,121) -
Other receivables. . . . . . . . . . . . . . . (238,945) 549,973 26,510
Prepaid expense. . . . . . . . . . . . . . . . (125,475) (337,723) -
Accounts payable . . . . . . . . . . . . . . . 873,836 (751,640) 1,814,545
Accrued liabilities. . . . . . . . . . . . . . 1,269,007 (812,107) 3,271,805
Other. . . . . . . . . . . . . . . . . . . . . - (115,783) 156,451
------------ ------------ ------------
Net Cash Used in Operating Activities. . . . (3,801,996) (8,262,307) (3,244,881)
------------ ------------ ------------
Cash Flows From Investing Activities
Expenditure for other investments. . . . . . . . . (358,857) - -
Purchases of mineral interests, property
and equipment . . . . . . . . . . . . . . . . . . (7,004,275) (9,291,719) (5,391,568)
Proceeds from sale of interest in gas property
and equipment . . . . . . . . . . . . . . . . . . 207,509 - 501,646
Acquisition of subsidiaries, net of cash acquired. - (2,159,363) (6,314,287)
Net change in deposits and long-term prepayments . 408,391 (168,575) -
Investment in securities available-for-sale. . . . (1,656,434) (1,467,754) -
Proceeds from sale of securities
available-for-sale. . . . . . . . . . . . . . . . 66,858 - -
Payments for notes receivable. . . . . . . . . . . (600,000) (500,000) -
------------ ------------ ------------
Net Cash Used In Investing Activities. . . . (8,936,808) (13,587,411) (11,204,209)
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable to
related parties . . . . . . . . . . . . . . . . . - - 339,191
Principal payments on notes payable to
related parties . . . . . . . . . . . . . . . . . (218,355) (999,439) (905,866)
Proceeds from issuance of notes payable. . . . . . 57,506 - 1,135,729
Principal payments on notes payable. . . . . . . . (981,611) (3,192,109) (2,707,551)
Proceeds from issuance of common stock, net of
offering costs. . . . . . . . . . . . . . . . . . - 150,000 20,175,000
Proceeds from issuance of preferred stock, net
of offering costs . . . . . . . . . . . . . . . . 7,663,970 15,724,995 13,250,000
Dividends paid on preferred stock. . . . . . . . . - (260,139) -
Proceeds from issuance of common stock
by subsidiary . . . . . . . . . . . . . . . . . . - 592,568 -
------------ ------------ ------------
Net Cash Provided By Financing Activities. . 6,521,510 12,015,876 31,286,503
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents. . . . . . . . . . . . . . . . . . (225,075) 75,685 (232,351)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (6,442,369) (9,758,157) 16,605,062
Cash and Equivalents at Beginning of Period. . . . . 7,489,510 17,247,667 642,605
------------ ------------ ------------
Cash and Equivalents at End of Period. . . . . . . . $ 1,047,141 $ 7,489,510 $ 17,247,667
============ ============ ============
(Continued)
F-7
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest . . . . . . . . . . . . . . $ 376,700 $ 485,157 $ 362,622
Supplemental Schedule of Noncash Investing and
Financing Activities
Common stock and stock options issued to
acquire property . . . . . . . . . . . . . . . . . $ - $ 14,102,462 $ -
Common stock issued upon conversion of notes
payable and accrued interest . . . . . . . . . . . 25,450 - 10,947,991
Common stock issued as payment of preferred
dividends. . . . . . . . . . . . . . . . . . . . . 39,502 165,008 305,322
Beneficial conversion feature granted in connection
with preferred stock . . . . . . . . . . . . . . . 1,261,875 2,550,000 -
Common stock issued to acquire minority interest
in subsidiary. . . . . . . . . . . . . . . . . . . - - 1,000,000
Assigned note receivable in satisfaction of
note payable . . . . . . . . . . . . . . . . . . . 600,000 - -
Cash paid in connection with business acquisitions:
Fair value of assets acquired. . . . . . . . . . $ 11,923,200 $ 7,506,621
Excess property cost over fair value . . . . . . 3,512,792 -
Liabilities assumed and incurred . . . . . . . . (7,484,675) (28,317)
Obligation to sellers. . . . . . . . . . . . . . - -
Minority interest recognized . . . . . . . . . . (2,112,348) -
Common stock issued. . . . . . . . . . . . . . . - -
Stock options granted. . . . . . . . . . . . . . - (1,150,000)
------------ ------------
Cash paid . . . . . . . . . . . . . . . . . . 5,838,969 6,328,304
Less cash acquired . . . . . . . . . . . . . . . (3,679,606) (14,017)
------------ ------------
Net Cash Paid (Received) . . . . . . . . . . $ 2,159,363 $ 6,314,287
============ ============
The accompanying notes are an integral part of these financial statements.
F-8
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- EuroGas, Inc. and its subsidiaries ("EuroGas" or the
"Company") are engaged primarily in the evaluation, acquisition, exploration
and disposition of mineral interests, and rights to exploit oil, natural
gas, coal bed methane gas and other minerals. EuroGas has also begun
efforts to participate in the development of co-generation (power and heat)
projects. EuroGas is in various stages of identifying industry partners,
farming out exploration rights, undertaking exploration drilling, and
seeking to develop production. During 1998, EuroGas acquired a controlling
interest in Big Horn Resources Ltd., an exploration and production company
operating in Western Canada. EuroGas has an interest in a joint venture to
reclaim a natural gas field in Western Canada. EuroGas holds and is
developing properties in Eastern Europe including coal bed methane gas
properties in Poland, proved natural gas properties and unproved oil and gas
concessions in Slovakia, unproved natural gas properties in Eastern Russia
and an interest in a talc deposit in Slovakia. EuroGas has entered into and
is in the process of entering into joint ventures in the Ukraine to explore
for and develop oil, natural gas and coal bed methane gas with various
Ukrainian State and private companies.
Business Condition--Through the activities explained above, EuroGas and its
subsidiaries have accumulated deficits of $69,350,207 since their inception
in 1995 through December 31, 1999. They have had losses from operations and
negative cash flows from operating activities during each of the three years
in the period ended December 31, 1999. These conditions raise substantial
doubt regarding the Company's ability to continue as a going concern.
Although the Company had positive working capital and stockholders' equity
at December 31, 1998 and had positive stockholders' equity at December 31,
1999, realization of the investment in properties and equipment is dependent
on EuroGas obtaining financing for the exploration, development and
production of those properties. If exploration of unproved properties is
unsuccessful, all or a portion of recorded amount of those properties will
be recognized as impairment losses. Further, EuroGas is dependent on
improvement in oil and gas prices in order to establish profitable
operations from oil and gas production. As in the past, management plans to
finance operations and acquisitions through issuance of additional equity
securities, the realization of which is not assured.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of all majority-owned subsidiaries and
EuroGas' share of properties held through joint ventures from the date of
acquisition. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of expenses during the reporting period. Actual results could differ from
those estimates.
Mineral Interests in Properties -- The full cost method of accounting is
used for oil and gas properties. Under this method, all costs associated
with acquisition, exploration, and development of oil and gas properties are
capitalized on a country by country basis. Costs capitalized include
acquisition costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling and equipping productive and
non-productive wells. Drilling costs include directly related overhead
costs. Proceeds from disposal of properties are applied as a reduction of
cost without recognition of a gain or loss except where such disposal would
result in a major change in the depletion rate. Capitalized costs are
categorized either as being subject to amortization or not subject to
amortization. The cost of properties not subject to amortization are
assessed periodically and any resulting provision for impairment which may
be required is charged to operations. The assessment for impairment is based
upon estimated fair value of the properties. Fair value is determined based
upon estimated future discounted net cash flows.
F-9
Capitalized costs of properties subject to amortization and estimated future
costs to develop proved reserves are amortized and depreciated using the
unit-of-production method based on the estimated proven oil and natural gas
reserves as determined by independent engineers. Units of natural gas are
converted into barrels of equivalent oil based on the relative energy
content basis. Capitalized costs of properties subject to amortization, net
of accumulated amortization and depreciation, are limited to estimated
future discounted net cash flows from proven reserves, based upon year-end
prices, and any resulting impairment is charged to operations.
Other Property and Equipment--Other property and equipment are stated at
cost. Minor repairs, enhancements and maintenance costs are expensed when
incurred; major improvements are capitalized. Depreciation of other property
and equipment is provided on a straight-line basis over the estimated useful
lives, as follows: buildings-- 40 years and equipment--3 to 5 years. Upon
retirement, sale, or other disposition of other property and equipment, the
cost and accumulated depreciation are eliminated from the accounts, and gain
or loss is included in operations. Depreciation expense for the three years
in the period ended December 31, 1999, was $238,658, $78,765, and $83,885,
respectively, of which $33,482, $19,229 and $65,639 were capitalized in
mineral interests and equipment in 1999, 1998 and 1997, respectively.
Political Risk --EuroGas has mineral interest property and interests in
projects in Poland, Slovakia, Slovenia, Ukraine, and in the Sakha Republic
(Eastern Russia). Although recent political and economic trends in these
countries have been toward the development of market economies that
encourage foreign investment, EuroGas has a concentration of risk related to
its Eastern Europe and Russian properties and interests which are subject to
political instability, changes in government, unilateral renegotiation of
concessions or contracts, nationalization, foreign exchange restrictions, or
other uncertainties.
Financial Instruments --EuroGas considers all highly-liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents. The amounts reported as cash and cash equivalents, investment
in securities available-for-sale, trade and other receivables, accounts
payable and notes payable are considered to be reasonable approximations of
their fair values. The fair value estimates presented herein were based on
estimated future cash flows. The amounts reported as investment in
securities available-for-sale are based upon quoted market prices. The cost
of securities sold is based on the average purchase price per share.
EuroGas had cash in foreign banks at December 31, 1999 in excess of $980,000
which cash is not insured by the U.S. Federal Deposit Insurance Corporation.
Included in that amount is cash held in Polish banks in the amount of
approximately $300,000 for which EuroGas would incur certain taxes if the
cash were transferred out of Poland.
Derivative Financial Instruments -- EuroGas and its international
subsidiaries occasionally incur obligations payable in currencies other than
their functional currencies. This subjects EuroGas to the risks associated
with fluctuations in foreign currency exchange rates. EuroGas does not
reduce this risk by utilizing hedging. The amount of risk is not material to
EuroGas' financial position or results of operations.
Loss Per Share -- Basic loss per common share is computed by dividing net
loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
during periods of income reflect potential dilution which could occur if all
potentially issuable common shares from stock purchase warrants and options,
convertible notes payable and preferred stock resulted in the issuance of
common stock. In the present position, diluted loss per share is the same as
basic loss per share because 19,179,713, 17,004,647 and 13,450,000
potentially issuable common shares at December 31, 1999, 1998 and 1997,
respectively, would have decreased the loss per share and have been excluded
from the calculation.
F-10
Foreign Currency Translation -- Effective January 1, 1998, the functional
currencies of the subsidiaries operating in Poland and Slovakia were changed
from the U.S. dollar to the local currencies due to those economies ceasing
to be considered highly inflationary. The change had no effect on
consolidated financial position at the date of the change or on the
consolidated results of operations for periods prior to the change. The
effect of changes in exchange rates during the year ended December 31, 1998,
and in the future with respect to those subsidiaries, has been and will be
recognized as a separate component of comprehensive loss whereas those
changes were previously recognized in the results of operations. Where the
functional currencies of foreign subsidiaries continue to be the U.S.
dollar, financial statements are translated into U.S. dollars using
historical exchange rates and net foreign exchange gains and losses from
those subsidiaries are reflected in the results of operations. Exchange
gains and losses from holding foreign currencies and having liabilities
payable in foreign currencies are included in the results of operations.
Income Taxes--Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of
existing assets and liabilities on the Company's financial statements and
their respective tax bases and attributable to operating loss carry
forwards. Deferred taxes are computed at the enacted tax rates for the
periods when such amounts are expected to be realized or settled.
Stock Based Compensation--Prior to 1999, EuroGas accounted for stock-based
compensation from stock options granted to employees and consultants based
on the intrinsic value of the options on the date granted. Since January 1,
1998, EuroGas has accounted for stock options granted to employees based on
the intrinsic value of the options on the date granted and has accounted for
options granted to consultants and other non-employees based on the fair
value of the options as required by FAS 123.
New Accounting Standards--In June 1999, SFAS No.133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No.133 was issued and
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 is effective for year beginning
January 1, 2000 and, is not expected to have a material impact on the
financial condition or results of operations of EuroGas.
Prior Year Presentation -- Certain 1998 amounts have been reclassified in
order to conform with the 1999 presentation.
NOTE 2--PROPERTY ACQUISITIONS
Acquisition of Big Horn Resources, Ltd. -- Effective October 5, 1998,
EuroGas acquired slightly more than a 50% interest in Big Horn Resources
Ltd. ("Big Horn"), an oil and gas exploration and production company
operating in Western Canada. EuroGas acquired the majority interest by cash
payments of $4,723,498 on October 17, 1998, by executing promissory notes
effective October 1998, in the aggregate amount of $1,840,224, and by
EuroGas' cancellation of a note receivable from one of Big Horn shareholders
in the amount of $1,100,000. These payments, and the face amount of the
notes, were discounted $70,238 to October 5, 1998 using a 10% discount rate.
The acquisition was accounted for under the purchase method of accounting;
the total purchase price of $7,593,484 was determined based upon the fair
value of the consideration paid. The purchase price was allocated to the
acquired net assets of Big Horn based upon their fair values on the
effective date of the acquisition. The fair value of the acquired properties
was based upon a reserve report prepared by independent petroleum engineers.
The purchase price exceeded the fair value of the net assets acquired by
$3,512,792 which was recognized as a non-recurring impairment expense at the
date of the acquisition. The operations of Big Horn have been included in
the consolidated results of operations of EuroGas since acquisition.
Summary unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997, assuming the acquisition of Big Horn had
occurred on January 1, 1997, excluding non-recurring items, are as follows:
1998 1997
------------- -------------
Revenues. . . . . . . . . . . . .$ 2,138,415 $ 1,916,000
Net loss. . . . . . . . . . . . . (7,528,473) (14,538,000)
Net loss applicable to common
shares . . . . . . . . . . . . (10,389,774) (14,962,000)
Net loss per common share . . . . (0.16) (0.27)
F-11
Acquisition of Maseva Gas s.r.o. -- During October 1998, EuroGas acquired a
90% interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company which holds a
850 square kilometer concession to explore for oil and natural gas. The
concession is adjacent to the southern boarder of the Trebisov concession
held by EuroGas through the Nafta/Danube joint venture in Slovakia. EuroGas
purchased Maseva by issuing 2,500,000 common shares and warrants to purchase
an additional 2,500,000 shares at $2.50 per share within two years. The
purchase price was $6,527,462 based upon the $2.00 per share quoted market
value of the EuroGas common shares issued, and the fair value of the
warrants on the acquisition date. The fair value of the options was
determined by using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0.0%, expected volatility of 63.2%,
risk-free interest rate of 5.0% and an expected life of 2 years. The
unproved oil and gas concession is the primary asset acquired. Maseva has
had no operations. The acquisition is considered to be the purchase of
properties. Accordingly, pro forma amounts are not presented. The cost of
the acquisition was allocated to oil and gas properties not subject to
amortization.
Acquisition of Beaver River Project--In March 1998, EuroGas exercised its
option to acquire a 16% carried interest in the Beaver River Project in
British Columbia, Canada in exchange for $300,000 and the issuance of
2,400,000 common shares which were valued at $3.16 per share. The
acquisition has been valued at $7,875,000. The interest in the Beaver River
Project has been classified as oil and gas properties not subject to
amortization. EuroGas retains the right to purchase back 1,900,000 of the
2,400,000 common shares issued any time prior to April 15, 1999 by returning
the carried interest if EuroGas determines that the results produced do not
warrant the continued holding of the carried interest.
Acquisition of Oil Refinery-- During 1999, EuroGas made a $385,857 payment
towards the purchase of a 40% interest in an operating oil refinery in
Slovenia, subject to approval by the Slovienian Government. Upon governmental
approval, EuroGas will be obligated to make an additional investment of
approximately $500,000 for the interest.
Acquisition of Talc Mineral Interest -- During 1998, EuroGas acquired a 24%
interest in an undeveloped talc deposit in Eastern Slovakia through an
investment in a joint venture company. The investment in the talc mineral
interest and related mining equipment was $755,539 and $709,570 during 1999
and 1998, respectively. At December 31, 1999 and 1998 EuroGas had a
receivable for advances to the joint venture company in the amount of $517,738.
Acquisition of Majority Interest in Envigeo Trade s.r.o.--During September
1998, EuroGas acquired a 51% interest in Envigeo Trade s.r.o. ("Envigeo"),
a private Slovakian company which owns a 2,300 square kilometer oil and gas
concession in Northeast Slovakia. The concession expires in August 2001.
EuroGas paid $500,000 at the date of the acquisition, and the balance of
$1,000,000 during November 1998. The unproved oil and gas concession is the
primary asset acquired and Envigeo has had no operations of any
significance. The acquisition is considered to be the purchase of
properties. Accordingly, pro forma amounts are not presented. The cost of
the acquisition was allocated to oil and gas properties not subject to
amortization. To date, EuroGas has invested $1,620,000 in the Envigeo
properties.
Acquisition of OMV (Jakutien) Exploration Gasellschaft m.b.H. -- On June 11,
1997 EuroGas acquired all the issued and outstanding stock of OMV
(Jakutien) Exploration Gasellschaft m.b.H. (OMVJ), in exchange for
$6,252,724 in cash, options to purchase 2,000,000 common shares valued at
$1,150,000, and a 5% interest in OMVJ's net profits. OMVJ's primary asset is
a 50% interest in a joint venture in the Republic of Sakha (commonly known
as Yakutia) of the Russian Federation. Expenses relating to the purchase
were $75,580.
F-12
The acquisition was accounted for under the purchase method of accounting
with the total purchase price of $7,478,304 determined based upon the
consideration paid and the fair value of the options granted. The purchase
price was allocated to the acquired assets and liabilities of OMVJ based
upon their fair values on the date of the acquisition. During 1999, the
purchased entity's name was changed to EuroGas Austria GmbH. The operations
of EuroGas Austria GmbH have been included in the consolidated results of
operations of EuroGas since the acquisition date.
NOTE 3--RECEIVABLE FROM RELATED PARTIES
On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a
promissory note with an officer and member of management in the amount of
$200,000. During March 1999, the note was forgiven in exchange for services
performed by the director. The Company recognized $200,000 as consulting
expense related to this transaction.
NOTE 4--NOTES RECEIVABLE
During 1999, the Company executed a promissory note in the amount of
$600,000 to an independent third party. During the fourth quarter of 1999
this note was assigned in satisfaction of notes payable.
On October 28, 1998, EuroGas executed a promissory note in the amount of
$500,000 to an independent third party. Terms of the note dictate that
interest accrues at7.5%. The balance was due on May 28, 1999 and is unpaid
at December 31, 1999.
NOTE 5--INVESTMENT IN EQUITY SECURITIES
Equity securities purchased during 1999 were recorded at cost because their
resale was restricted and their fair value was not readily determinable. The
investments consisted of $1,000,000 of 20% cumulative convertible preferred
stock of Intergold Corporation and $600,000 in share capital of Hansageomyn
GmbH, both of which are mining companies.
During the third quarter of 1999, EuroGas determined not to further invest
in the two companies. The value of the underlying common shares to the
preferred stock have dropped substantially, and management has determined
there has been an other than temporary decline in the fair value of both
investments. Accordingly, during the third quarter, EuroGas recognized a
$1,600,000 impairment of the investments.
During the first quarter of 1998, EuroGas acquired 993,333 units of United
Gunn Resources, Ltd. (each unit consisting of one share of common stock and
one warrant) through a private placement subscription agreement for
$962,398. United Gunn Resources, Ltd. holds an approximate 12% working
interest in the Beaver River Project. Through December 31, 1998, EuroGas
acquired an additional 613,500 shares of United Gunn through market
purchases at a cost of $491,460. Through the purchase of equity securities,
EuroGas held approximately 9% of the outstanding United Gunn shares at
December 31, 1998. The United Gunn Resources, Ltd. shares have been
accounted for as investment in securities available-for-sale and are carried
at market value.
Investment in securities available-for-sale consisted of the following:
December 31, December 31,
1999 1998
-------------- ------------
Cost. . . . . . . . . . . . . . . . . $ 1,385,937 $ 1,467,754
Gross unrealized losses . . . . . . . (1,068,853) (379,266)
------------- -------------
Estimated fair value. . . . . . . . . $ 317,084 $ 1,088,488
============= =============
F-13
EuroGas sold 139,000 shares of United Gunn during the year ended December
31, 1999, for $100,557 which resulted in a realized loss of $71,801. The
cost of securities sold was determined by the average cost method.
NOTE 6--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
Impairment of Properties -- In August 1997, EuroGas closed a transaction
with a subsidiary of Texaco for the exploration and potential development of
EuroGas' coal bed methane gas interests held by a concession in Poland.
EuroGas retained a 14% to 20% carried interest in the net profits from the
property, and transferred the remaining interest in the property to Texaco
in exchange for an initial payment of $500,000. The payment received during
1997 was applied as a reduction of the cost of the properties without
recognition of a gain or loss. EuroGas has since reacquired the interest
known as the Pol-Tex concession for $172,000.
During February 2000, the Company assessed the capitalized costs of
properties not subject to amortization based on estimated future discounted
net cash flows. Accordingly, an impairment of $7,217,426 was charged to
operations for the year ended December 31, 1999 related to the Pol-Tex
concession.
Amortization of Mineral Interest Properties -- Prior to 1998, EuroGas had no
property subject to amortization. Through the acquisition of Big Horn,
EuroGas acquired properties with both proved and unproved reserves. Certain
of the Big Horn reserves are in production and are being amortized. In
addition to the Canadian property, the extent of reserves relating to
Company's interests in the Slovak Trebisov oil and gas properties was
established in May 1998 when an independent reserve report relating to those
properties was obtained and which reported proved reserves of oil and gas.
Accordingly, the cost of those properties were reclassified in 1998 as oil
and gas properties subject to amortization. The wells drilled on the
property have been completed; however, a gas gathering system is yet to be
constructed. As described more fully in Note 15 Commitments and
Contingencies, a dispute arose as a result of a conflicting property claim,
and work to bring the wells into production has been suspended. Amortization
will begin when and if production begins from wells on that property.
F-14
The following is a summary of changes to oil and gas properties:
December 31,
----------------------------------------
1999 1998 1997
Properties Subject to Amortization
Cost at beginning of period . . . . . . . . . . . . $ 18,064,186 $ - $ -
Reclassification from
properties not subject to
amortization . . . . . . . . . . . . . . . . . . . 333,465 8,333,863 -
Acquisition costs . . . . . . . . . . . . . . . . . 1,752,245 8,784,050 -
Development costs . . . . . . . . . . . . . . . . . 2,830,308 4,459,065 -
Proceeds from sale of property. . . . . . . . . . . (167,371) - -
Less ceiling test and valuation
adjustments . . . . . . . . . . . . . . . . . . . - (3,512,792) -
Translation adjustments . . . . . . . . . . . . . . (1,259,262) - -
----------- ----------- -----------
Cost at end of period . . . . . . . . . . . . . . . 21,553,571 18,064,186 -
Less depreciation, depletion and
amortization . . . . . . . . . . . . . . . . . . . (1,817,371) (220,600) -
----------- ----------- -----------
Net Properties Subject to Amortization $19,736,200 $17,843,586 $ -
=========== =========== ===========
Properties Not Subject To Amortization
Cost at beginning of period . . . . . . . . . . . . $32,763,353 $22,723,660 $14,252,754
Acquisition costs . . . . . . . . . . . . . . . . . 1,259,696 17,804,072 7,574,601
Exploration costs . . . . . . . . . . . . . . . . . 1,327,737 573,569 3,368,917
Reclassification to properties subject
to amortization . . . . . . . . . . . . . . . . . (333,465) (8,333,863) -
Proceeds from sale of property. . . . . . . . . . . (53,232) - (500,000)
Less accumulated valuation and
adjustments . . . . . . . . . . . . . . . . . . . (6,775,114) - (1,972,612)
Translation adjustment. . . . . . . . . . . . . . . (1,326,903) (4,085) -
----------- ----------- -----------
Net Property Not Subject to
Amortization at End of Period . . . . . . . . . . $ 26,862,072 $32,763,353 $22,723,660
============ =========== ===========
Other Mineral Interest Property
Cost at beginning of year . . . . . . . . . . . . $ 709,570 $ - $ -
Property costs. . . . . . . . . . . . . . . . . . 45,969 - -
Acquisition costs . . . . . . . . . . . . . . . . - 709,570 -
------------ ----------- -----------
Net Other Mineral Interest Property . . . . . . . $ 755,539 $ 709,570 $ -
F-15
NOTE 7 OTHER PROPERTY AND EQUIPMENT
Other property and equipment consisted of the following:
December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Land . . . . . . . . . . . . . . . . $ - $ - $ 22,156
Buildings . . . . . . . . . . . . . - 19,571 92,914
Equipment . . . . . . . . . . . . . 1,052,098 560,446 895,702
------------ ------------ ------------
1,052,098 580,017 1,010,772
Less: Accumulated depreciation . . . (243,015) (86,454) (767,177)
------------ ------------ ------------
Net Other Property and Equipment. . . $ 809,083 $ 493,563 $ 243,595
============ ============ ============
NOTE 8 GEOGRAPHIC INFORMATION
EuroGas and its subsidiaries operate primarily in the oil and gas
exploration and production industry. Accordingly, segment information is
not presented separately from the accompanying balance sheets and statements
of operations. Property and equipment and other non-current assets were
located in the following geographic areas:
December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Canada . . . . . . . . . . . . . . . $ 20,039,572 $ 15,995,000 $ -
Eastern Europe and Russia . . . . . . 28,571,995 36,025,164 23,303,815
------------ ------------ -------------
Total Property and Equipment and
Other Assets . . . . . . . . . . . . $ 48,611,567 $ 52,020,164 $ 23,303,815
============ ============ ============
Sales and net loss were in the following geographic areas:
December 31,
--------------------------------------------
1999 1998 1997
------------- ------------ ------------
Oil and Gas Sales - Canada . . . . . . . . $ 4,973,508 $ 879,404 $ -
============ ============ ============
Net Loss
United States (Corporate) . . . . . . . . $(26,573,266) $(2,625,306) $ (4,915,997)
Canada . . . . . . . . . . . . . . . . . 757,781 (3,362,517) -
Eastern Europe and Russia . . . . . . . . (12,016,615) (5,036,357) (6,585,902)
------------ ------------ ------------
Net Loss $(37,832,100) $(11,024,180) $(11,501,899)
============ ============ ============
F-16
NOTE 9--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties were as follows:
December 31,
----------------------------
1999 1998
------------ -----------
Loan from a former director, due on demand
with interest at 10%, unsecured. . . . . . . . $ 225,206 $ 290,206
Loans from companies associated with a director,
due in 1999 with interest at 7.0% to 10%,
unsecured . . . . . . . . . . . . . . . . . . . 600,983 960,481
Loan from a director, due in 1999 and 2000,
interest:
7.5% to 10%, unsecured . . . . . . . . . . . 613,221 606,951
Loans from a former director and his affiliates,
interest at 7.5% to10%, due on demand,
unsecured . . . . . . . . . . . . . . . . . . . 119,284 119,284
Less: discount on note. . . . . . . . . . . . . . (4,327) (17,310)
Total Notes Payable to Related Parties. . . . . . 1,554,367 1,959,612
Less: Current Portion . . . . . . . . . . . . . . (1,554,367) (1,346,204)
------------ -----------
Notes Payable to Related Parties -
Long-Term . . . . . . . . . . . . . . . . . . . $ - $ 613,408
============ ===========
NOTE 10--NOTES PAYABLE
Other loans and notes payable were as follows:
December 31,
----------------------------
1999 1998
------------ -----------
Loans due 1999, interest at 10%, unsecured. . . $ 329,907 $ 336,359
Line of credit with a bank, payable by a
subsidiary on demand with interest at 1%
above the bank's prime, and secured by all of
the subsidiaries assets . . . . . . . . . . . 3,314,136 3,708,990
7.5% Notes due in 2000, unsecured . . . . . . . 520,105 1,226,816
Less: Discount on note. . . . . . . . . . . . . (8,656) (34,620)
----------- -----------
Total Notes Payable . . . . . . . . . . . . . . 4,155,492 5,237,545
Less: Current Portion . . . . . . . . . . . . . (4,155,492) (4,010,729)
----------- -----------
Note Payable - Long-Term. . . . . . . . . . . . .$ - $ 1,226,816
=========== ===========
NOTE 11--INCOME TAXES
Deferred tax assets are comprised of the following:
December 31,
----------------------------
1999 1998
------------ -----------
Tax loss carry forwards . . . . . . . . . . . . $ 7,424,514 $ 4,904,209
Property and equipment. . . . . . . . . . . . . (4,298,723) -
Impairment losses . . . . . . . . . . . . . . . 2,997,925 -
Reserves for contingencies. . . . . . . . . . . 1,496,000 396,863
Less: Valuation allowance. . . . . . . . . . . (7,619,715) (5,301,072)
------------ -----------
Net Deferred Tax Asset . . . . . . . . . . . . $ - $ -
============ ===========
F-17
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes:
1999 1998 1997
------------ ----------- -----------
Tax at statutory rate (34%) $ (7,420,526) $(3,748,221) $(3,910,646)
Non-deductible expenses 4,426,685 1,729,396 -
State taxes, net of federal benefit (227,710) (195,944) (154,969)
Deferred tax asset valuation change 2,318,643 603,635 2,280,330
Effect of lower tax rates and foreign
losses with no federal benefit 902,908 1,611,134 1,785,285
------------ ----------- -----------
Total Income Tax Benefit . . . . . . . . . . . $ - $ - $ -
============ =========== ===========
As of December 31, 1999, EuroGas has operating loss carry forwards of
approximately $21,836,805 in various countries which expire from
1999 through 2013.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an income
tax liability in the Netherlands of an amount equivalent to approximately
$692,431 at December 31, 1999. The tax arose from the sale of equipment at a
profit by the former owner of Globegas to a EuroGas Polish subsidiary.
EuroGas' position is that the gain on the sale should not have been taxable
to Globegas. The liability will continue to be reflected in EuroGas'
financial statements until the proposed reduction is accepted by the
Netherlands' taxing authorities.
NOTE 12--RELATED PARTY TRANSACTIONS
Effective October 21, 1999, the Company transferred all its shares of
EuroGas Deutschland GmbH to a related party for its fair value of $0. The
Company was required to fund EuroGas Deutschland GmbH's deficit of $98,898
before the transfer could be made.
Related party loans are described in Note 9--Notes Payable To Related
Parties and loans to related parties are described in Note 3--Receivable
From Related Parties.
During 1997, a shareholder advanced $2,023,306 as a short-term loan to
EuroGas. In connection with this loan, the shareholder retained control of
the proceeds from an issuance of common shares during 1997 by EuroGas and
paid Company obligations from those proceeds. The shareholder received
$104,493 for management services from these funds.
NOTE 13--STOCKHOLDERS' EQUITY
Preferred Stock--There were 2,391,968 shares of 1995 Series Preferred Stock
(the "1995 Series") issued on April 12, 1995. The 1995 Series is
non-voting, non-participating , and has a liquidation preference of $0.10
per share plus unpaid dividends. The 1995 Series stockholders are entitled
to an annual dividend of $0.05 per share. Each share of the 1995 Series
shall be converted into two shares of EuroGas' common stock upon lawful
presentation and shall pay dividends until converted. EuroGas has the right
to redeem the 1995 Series, on not less than 30 days written notice, at a
price of $36.84 per share, plus any accrued but unpaid dividends. Annual
dividend requirements of the 1995 Series are $119,598.
EuroGas issued 1,250,000 shares of 1996 Series Preferred Stock (the "1996
Series") on July 12, 1996. All of the shares of 1996 Series Preferred Stock
were converted into 2,500,001 common shares, at the rate of two common
shares per 1996 Series Preferred share, on July 3, 1997, along with accrued
but unpaid dividends.
F-18
On May 29, 1997, EuroGas authorized the 1997 Series A Convertible Preferred
Stock (the "1997 Series"). This series of preferred stock is non-voting and
accrues dividends at $60.00 per share, or six percent annually. The 1997
Series has a liquidation preference of $1,000 per share, plus unpaid
dividends before liquidation payments applicable to common shares but after
liquidation payments to other previously issued and outstanding preferred
stock series. The 1997 Series, along with unpaid dividends thereon, is
convertible into common shares at the rate of $1,000 divided by the lessor
of 125% of the average closing bid price for five trading days prior to
issuance or 82% of the average closing bid price for five trading days prior
to conversion. By December 31, 1997, 14,740 of the 15,000 shares of 1997
Series, along with related accrued dividends, had been converted into
2,763,165 common shares.
From May through November 1998, EuroGas issued 17,000 shares of 1998 Series
B Convertible Preferred Stock (the "1998 Series") in an ongoing private
placement offering. Of the total authorized preferred shares, 30,000 shares
have been designated as the 1998 Series with a par value of $0.001 per share
and a liquidation preference of $1,000 per share plus all accrued but unpaid
dividends. The 1998 Series shares are non-voting and bear a dividend rate
of 6% per annum. Dividends may be paid in shares of EuroGas common stock at
its option. The 1998 Series stock was issued for proceeds in the amount of
$15,224,995. The proceeds were net of $1,275,005 in commissions, and
proceeds of $500,000 which the investor paid directly to an un-related third
party on behalf of EuroGas. EuroGas recognized the $500,000 as a note from
the third party.
These 1998 Series preferred shares are convertible into shares of common
stock at the rate of $1,000, plus any accrued but unpaid dividends through
the conversion date, divided by the lesser of 125% of the average closing
price five trading days prior to issuance of the Series B shares, or 85% of
the average closing price five trading days prior to conversion. Because
the 1998 Series was immediately convertible into common shares at a 15%
discount, EuroGas has recognized a favorable conversion feature as preferred
dividends on the dates the preferred stock was issued. During 1998,
$2,550,000 in preferred dividends were recognized relating to the favorable
conversion feature.
EuroGas retained the right at December 31, 1998, to issue an additional
4,000 shares of 1998 Series preferred stock at $1,000 per share less
commissions of 7.5% every 30 days beginning January 1, 1999, to a maximum
13,000 shares, if the common stock of EuroGas is trading in excess of $3.00
per share or if the subscribers otherwise consent. EuroGas filed a
registration statement with the U.S. Securities and Exchange Commission
relating to the common stock underlying the 1998 Series shares. The
registration statement became effective on August 7, 1998. EuroGas is
required to maintain the effective status of the registration statement for
the period the 1998 Series shares remain outstanding.
During November 1999, the Company designated a new Series C 6% convertible
preferred stock ("Series C"). The Series C shares have a par value of
$0.001 per share and a liquidation preference of $1,000 per share, plus all
accrued but unpaid dividends. The Series C shares are non-voting and bear a
6% dividend rate per annum, or $60.00 per share. The Series C preferred
shares are convertible into common shares of EuroGas at the rate of $1,000
divided by an applicable percentage (85.0% to 77.5% depending on the number
of days after issuance a registration statement filed with the Securities
Exchange Commission becomes effective) of the average closing bid price for
five trading days preceding the date of issuance or the conversion date.
F-19
During the year ended December 31, 1999, EuroGas issued 6,500 shares of
Series B 1998 preferred stock for $6,500,000, or $1,000 per share, less
$487,500 of offering costs and issued 1,800 shares of Series C Preferred
Stock for $1,800,000 or $1,000 per share, less $148,530 of offering costs.
In addition, 8,000 shares of Series B 1998 preferred stock and $39,501 of
accrued but unpaid preferred dividends were converted into 10,576,208 common
shares at a weighted average price of $0.76 per share. Because the 1998
Series and Series C issued during 1999 were immediately convertible into
common shares at a 15% and 20% discount respectively, EuroGas has recognized
a favorable conversion feature as preferred dividends on the dates the
preferred shares were issued. During 1999, $1,261,875 in preferred dividends
were recognized relating to the favorable conversion feature.
The following is a summary of the preferred stock outstanding at December
31, 1999:
Liquidation Preference Annual Dividend Requirement
Shares ----------------------- ---------------------------
Designation Outstanding Per Share Total Per Share Total
- - ------------------------- ----------- --------- ----------- --------- ---------
1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598
1997 Series A Convertible 260 1,000 260,000 60.00 15,600
Series C Convertible 1,800 1,000 1,800,000 60.00 108,000
---------- --------- ---------- --------- ---------
Total 2,394,028 $2,299,197 $ 243,198
========= ========== =========
Common Stock -- During 1999, 8,000 shares of 1998 Series preferred stock were
converted, according to the conversion factors mentioned, into 10,576,208
common shares at a weighted-average price of $0.79 per share. In connection
with the conversion, 49,729 common shares were issued for $39,502 in accrued
dividends on the converted 1998 Series shares at a weighted average price of
$0.79 per common share. Also during 1999, the Company issued 5,000 common
shares as payment of interest on notes payable.
During 1998, 15,500 shares of 1998 Series preferred stock were converted,
according to the conversion factors mentioned, into 8,860,196 common shares
at a weighted-average price of $1.77 per share. In connection with the
conversion, 88,914 common shares were issued for $165,007 in accrued
dividends on the converted 1998 Series shares at a weighted average price of
$1.86 per common share. The annual dividend requirements for the 1,500
shares of 1998 Series shares outstanding at December 31, 1998 was $90,000.
During February 1998 EuroGas issued 13,000 common shares valued at $61,737,
or $4.75 per share in connection with an earlier private placement. EuroGas
also issued 7,500 common shares valued at $24,375, or $3.25 per share, on
August 19, 1998, to compensate a former employee, and 40,000 shares valued
at $140,000, or $3.50 per share, were issued during August 1998 to
compensate for services relating to unsuccessful acquisitions. The services
provided were valued at the market price at which EuroGas' common shares
were trading on the date of the issuance of shares.
On April 1, 1998, EuroGas issued 2,400,000 common shares valued at
$7,575,000, or $3.16 per share, in connection with the acquisition of an
interest in the Beaver River Project. In addition, 2,500,000 shares valued
at $5,000,000, or $2.00 per share, together with warrants to purchase
2,500,000 common shares, were issued on October 9, 1998 to acquire an
interest in the Maseva property. The fair value of the warrants issued of
$1,527,462 was determined by the Black-Scholes option pricing model. The
portion of the purchase prices relating to the common stock issued was based
upon the market value of the common shares issued as consideration.
EuroGas issued 100,000 common shares during 1998 upon the exercise of stock
options for $150,000 or $1.50 per share.
F-20
NOTE 14--STOCK OPTIONS
EuroGas granted options to employees and consultants during 1999. Options
for 1,300,000 shares were authorized and granted on October 22, 1999. The
options granted vested immediately and are exercisable at $0.45 for a
period of five years. Compensation in the amount of $366,088 was recognized
when granted.
On April 20, 1999, ten-year options to purchase 1,000,000 shares of common
stock at $0.95 per share were issued in connection with an employment
agreement with EuroGas' new Chief Executive Officer. The options vest on
January 1, 2000. No compensation was recognized in connection with the grant
because the exercise price was equal to the fair value of the underlying
shares on the date of the grant.
EuroGas granted options to employees and consultants during 1996 under
the Stock Option and Award Plan which was adopted in January 1996. Options
for 2,000,000 common shares were authorized and granted in January 1996. The
options granted to employees and consultants are exercisable at $1.50 over a
period of five years beginning July 18, 1996 and expire January 18, 2001.
The market value of the underlying common shares was equal to the exercise
price on the date granted and, therefore, no compensation relating to the
options was recognized when granted.
EuroGas has accounted for stock-based compensation from stock options
granted to employees and consultants prior to 1998 based on the intrinsic
value of the options on the date granted. Since 1999, EuroGas has accounted
for options granted consultants and directors according to their fair value
as prescribed in SFAS No. 123, "Accounting for Stock Based Compensation".
Had compensation cost for EuroGas' Stock Option and Award Plan been
determined based on the fair value at the grant dates for options under that
plan consistent with the alternative method of SFAS No. 123, EuroGas'
loss applicable to common shares and loss per common share for the year
months ended December 31, 1999, 1998, and 1997 would have been increased
to the pro forma amounts shown below.
1999 1998 1997
------------ ------------ -----------
Net loss applicable to common shares:
As reported $(23,267,420) $(13,885,481) $(11,925,429)
Pro forma (24,442,504) (13,885,481) (11,925,429)
Basic and diluted net loss per common share:
As reported $ (0.28) $ (0.22) $ (0.22)
Pro forma (0.29) (0.22) (0.22)
The fair value of option granted during 1999, 1998, 1997 and 1996 were
estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions for 1999, 1998, 1997 and 1996,
respectively: average risk-free interest rate - 4.85 - 6.0%, 5%, 5.7%
and 5.7%; expected volatility - 120.0 - 126.2%, 63.5%, 95.5% and 82.6%;
expected life - 5-10 years, 2.0 years, 1.4 years and 5.0 years.
A summary of the status of stock options as of December 31, 1999, 1998 and
1997 and changes during the years then ended are presented below:
1999 1998 1997
---------------------- ---------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- -----------
Outstanding at beginning of year . . . . . 2,000,000 $ 1.50 2,000,000 $ 1.50 2,000,000 $ 1.50
Granted. . . . . . . . . . . . . . . . . . 2,300,000 0.67 - - - -
Exercised. . . . . . . . . . . . . . . . . - - - - - -
Expired. . . . . . . . . . . . . . . . . . (200,000) 1.50 - - - -
--------- ---------- --------- ---------- --------- -----------
Outstanding at end of year . . . . . . . . 4,100,000 1.03 2,000,000 1.50 2,000,000 1.50
========= ========== ========= ========== ========= ===========
Exercisable at end of year . . . . . . . . 3,050,000 1.50 1,900,000 1.50 1,850,000 1.50
========= ========== ========= ========== ========= ===========
Weighted-average fair value of
options granted during the year . . . . $ 0.67 $ - $ -
Options outstanding at December 31, 1999 were exercisable at prices ranging
from $0.95 to $1.50 with remaining contractual lives from 1.0 to 9.3 years
and an average contractual life of 0.89 years.
NOTE 15--STOCK WARRANTS
On October 9, 1998, warrants to purchase 2,500,000 common shares were issued
in connection with the acquisition of the Maseva property. The warrants are
exercisable at $2.50 per share until October 8, 2000 at which time they
expire if not exercised. The warrants were valued at $1,527,462.
During 1997, warrants to purchase 2,000,000 common shares were issued in
connection with the acquisition of OMVJ. The warrants are exercisable at
$4.00 per share until April 1, 1998, at $5.00 per share until March 31, 1999
and then at $6.00 per share until March 31, 2000 at which time they expire
if not exercised. The warrants were valued at $1,150,000. Warrants to
purchase 2,200,000 common shares were granted in conjunction with the
issuance of 2,999,999 common shares for $7,500,000 (less $75,000 in offering
costs). The warrants were exercisable at $3.00 per share through December
31, 1998 when they expired. Warrants to purchase 250,000 common shares were
granted in connection with an investment firm contract. The warrants are
exercisable at $11.79 per share through August 9, 2002.
At December 31, 1999, the Company had warrants outstanding to purchase
9,750,000 shares of common stock.
NOTE 16--COMMITMENTS AND CONTINGENCIES
An assertion has been made against EuroGas by alleged holders of registration
rights that EuroGas failed to file a registration statement for certain shares
and warrants. On March 16, 2000, a default judgement in the amount of
$19,773,113 was entered against EuroGas by the United States District Court
District of Utah, Central Division due to lack of response by EuroGas. EuroGas
has retained counsel and estimates its liability will be $3,400,000
and has recognized a charge against operations for the year ended December
31, 1999 in this amount.
As discussed further in Note 11 Income Taxes, EuroGas has proposed a
settlement of its tax liability in the Kingdom of the Netherlands.
A bankruptcy estate trustee appointed in the McKenzie Bankruptcy case has
asserted a claim to the proceeds that EuroGas would receive from an
agreement with Texaco during 1997 relating to the exploitation of the
Pol-Tex methane gas concession in Poland. The Trustee's claim is apparently
based upon the theory that EuroGas paid inadequate consideration for its
acquisition of Globegas (which indirectly controlled the Pol-Tex concession)
from persons who were acting as nominees for the McKenzie's, or in fact may
be operating as a nominee for the McKenzie's, and therefore, the creditors
of the estate are the true owners of the proceeds received or to be received
from the development of the Pol-Tex concession. EuroGas is vigorously
defending against the claim. EuroGas believes that the claim is without
merit based on the fact that a condition of a prior settlement with the
principal creditor of the estate bars any such claim, that the trustee over
the estate has no jurisdiction over Pol-Tex Methane, a Polish corporation,
or its interests held in Poland, that EuroGas paid substantial consideration
for Globegas, and that there is no evidence that the creditors invested any
money in the Pol-Tex concession.
F-22
In October 1999, the Trustee filed a Motion for Leave to Amend and
Supplement Pleadings and Join Additional Parties in this action and in
adversary proceeding 97-4155 (described below) in which he is seeking to add
new parties and assert additional causes of action against EuroGas and the
other defendants in this action. These new causes of action include claims
for damages based on fraud, conversion, breach of fiduciary duties,
concealment and perjury. In January 2000, that motion was approved by the
Bankruptcy Court.
In July 1999, the above mentioned trustee filed another suit in the same
bankruptcy cases seeking damages in excess of $170,000 for the defendants'
alleged violation of an agreement with the trustee which allowed the Texaco
agreement to proceed. EuroGas disputes the allegations and has filed a
motion to dismiss or alternately, to abate this suit which motion is
currently pending before the court.
During 1997, a shareholder, who is also the principal creditor in the above
claim, asserted a claim against EuroGas based upon an alleged breach of the
settlement agreement between the shareholder and EuroGas as a result of
EuroGas' failure to file and obtain the effectiveness of a registration
statement for the resale by the shareholder of 100,000 shares delivered to
the shareholder in connection with the settlement. In addition, the
shareholder's parent company entered a claim for failure to register the
resale of the shares subject to its option to purchase up to 2,000,000
common shares of EuroGas. EuroGas has denied any liability and has filed a
counterclaim against the shareholder and its parent company for breach of
contract concerning their activities with the bankruptcy trustee.
In early December 1999, EuroGas signed a settlement agreement with Kukui,
the Bishop Estate and the bankruptcy Trustee, which, if fully performed,
would resolve all claims made by Kukui and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires EuroGas to pay
$900,000 over the next 12 months and issue 100,000 shares of registered
common stock to the Bishop Estate by June 30, 2000. Subsequently, however,
the Trustee declared that certain conditions precedent set forth in the
settlement agreement have not been met and the Trustee does not intend to
seek bankruptcy court approval of the agreement. EuroGas is now evaluating
what effect this has on the agreement. In the event the settlement agreement
does not resolve the foregoing litigation, EuroGas intends to vigorously
defend the litigation. Pursuant to the settlement, EuroGas has made the
monthly payments to Kukui and has executed all pleadings required to be
submitted to the Federal District Court in Utah.
In October 1999, an action was filed against EuroGas which asserts that
EuroGas breached an agreement to seek registration of certain restricted and
unregistered common shares issued to the plaintiffs in connection with
EuroGas' acquisition of its interest in Beaver River Resources, Ltd. The
action seeks rescission of the agreement, or in the alternative, damages,
and includes claims for costs, attorneys' fees and interest. EuroGas has
filed an answer denying the allegations contained in the lawsuit.
During March of 1998, EuroGas was notified there may be certain title
problems related to an area of mutual interest to be explored and developed
by the Nafta/Danube joint venture in Slovakia. The problem area is outside
of the Trebisov area where EuroGas has drilled six wells and which is
unaffected by the claim. The disputed area is located in the southern
portion of the property covered by the designations contained in the
Nafta/Danube joint venture agreements and was subject to a competing claim
of ownership by a private Slovak company. EuroGas' expansion beyond the
Trebisov was limited by the extent the Nafta/Danube joint venture did not
have exploration rights as previously contemplated. During the second
quarter of 1998, EuroGas acquired a 90% interest in Maseva Gas, s.r.o.
("Maseva") which holds the rights to the exploration territory known as
"Kralovsky Chlmec"and includes the disputed area located to the south of
Trebisov. The division of the working interest for this territory is 67.5%
for EuroGas (rather than the 50% split which governs the Trebisov area),
provided that EuroGas carries the cost of drilling the first two wells in
the Maseva concession.
F-23
EuroGas has notified the former shareholders of Danube of a potential claim
against them by reason of this recent problem. EuroGas believes the owners
of Danube knew, or should have known, about the problem prior to the
acquisition of Danube and made no disclosure concerning the problem. EuroGas
has made a claim against the former Danube shareholders for indemnity to
the extent EuroGas suffers any damage by reason of the potential title
claim. It is uncertain whether EuroGas will be able to recover from the
former Danube shareholders.
As a result of the title problems with the Nafta/Danube property, a dispute
has arisen with the joint venture partner, Nafta Gbely a.s. ("Nafta").
EuroGas has asserted a claim for misrepresentation of the property asset at
the time of its acquisition and has made demand on Nafta in an amount equal
to EuroGas' investment in the property. Efforts to bring the property to
production were suspended pending resolution of the claims. EuroGas has
received indications the Slovak government may seek to resolve the dispute.
Recently, the government completed its nationalization of Nafta; although
discussions are scheduled between EuroGas and Nafta, resolution of this
matter is not assured.
During 1997, EuroGas accrued a $1,000,000 obligation to a lender. During
the fourth quarter of 1998, following resolution of the contingency,
management revised its estimate to zero and reversed the accrual. The
reversal is accounted for as change in an accounting estimate.
During October 1997 EuroGas received additional concession rights from the
Polish Ministry of Environmental Protection of Natural Resources and
Forestry to explore and potentially develop a 111 square kilometer coal bed
methane concession. The concession agreement requires expenditure of
$40,000 per year pending completion of a feasibility study and negotiations
with third parties for the eventual purchase of natural gas.
In October 1997, EuroGas completed an agreement on a 50/50 cost basis for
appraisal and development activities for an area located in the Carpathian
Flysch and tectonic Fordeep areas of Poland. The agreement
contemplates a total expenditure by EuroGas of $15 million over a three-
year period. EuroGas does not presently have the assets necessary to meet
this obligation.
In March 1998, EuroGas acquired a 53% interest in RimaMuran s.r.o. whose
principal asset is a minority interest in a talc deposit in eastern
Slovakia. RimaMuran will have an obligation to fund 33 to 39% of the
projected $12,000,000 capital cost requirements over the next two and
one-half years. RimaMuran does not have the assets necessary to meet this
obligation, and it is anticipated that the necessary funding will need to be
provided by EuroGas. To date, EuroGas has invested $1,433,651 in the
RimaMuran project.
During February 1998, EuroGas formed a consortium with a large United
Kingdom power producer and with a German Utility company to develop a power
generation project in Zielona Gora, Western Poland. EuroGas anticipates the
total investment required to develop the project will approximate $150
Million. EuroGas will hold a 12.5% share interest in the joint venture
created by the consortium and will be required to pay approximately 7.5%, or
$11,250,000 of the estimated project cost. EuroGas does not presently have
the assets necessary to meet this obligation.
During 1998, EuroGas entered into six agreements which grant rights to
jointly explore prospects within the Ukraine. The agreements commit EuroGas
to form joint ventures and joint companies and use the partners' concession
agreements in exploiting the potential standard oil and gas, as well as
coal-bed methane gas reserves. The potential reserves in the Ukraine have
not been independently verified.
During April 1999, EuroGas entered into a three-year employment contract
with its new chief executive officer. The contract provides for annual
salary of $400,000 plus living and other allowances of $28,200. In addition,
options to purchase 1,000,000 shares of EuroGas common stock at $0.95 per
share were granted in connection with the employment contract. The options
vest on January 1, 2000, and expire in April 2009.
F-24
The Company leases office facilities from various lessors in the United
States, Poland, Ukraine, the Netherlands, and the United Kingdom.
Rent expenses for the years ended December 31, 1999, 1998 and 1997 were
$517,354, $290,991, and $178,733, respectively. Annual commitments for
future minimum rental payments required under the leases as of December 31,
1999 were as follows:
Lease
Year Ending December 31: Payments
------------------------ --------
2000 $154,452
2001 154,452
2002 104,814
--------
Total $413,718
========
NOTE 17--SUBSEQUENT EVENTS
On March 16, 2000 a default judgement was entered against EuroGas of
approximately $19.8 million dollars as described in Note 16 -
Commitments and Contingencies. Management believes it has mitigated
the effect of the claim against it because of counter claims and
assignments. Accordingly, EuroGas and its legal counsel estimate
that after the counter claims and offsets the remaining amount
probable of loss resulting from the claim is approximately $3.4
million. EuroGas has accrued $3.4 million as a provision for this loss
and has charged operations for the year ended December 31, 1999.
During January 2000, all 1,800 outstanding shares of 1999 Series C
Convertible Preferred Stock were converted, according to the conversion
factors described in Note 13 Stockholders' Equity, into 5,329,713 common
shares at a weighted-average price of $0.34 per share. In connection with
the conversion, 63,261 common shares were issued for $21,599 in accrued
dividends on the converted 1999 Series shares at a weighted-average price of
$0.54 per common share.
During January 2000, EuroGas entered into an agreement with Slovgold GmbH, a
related party, to conduct a six-well pilot program in South Wales to test
for coalbed methane gas. Under the terms of the agreement, EuroGas will
cover the costs for the pilot program and the first stage of any subsequent
development program in exchange for 40% of the cash flow until payout.
EuroGas interest will be reduced to 25% after the payout point is reached.
Slovgold GmbH is affiliated with a director of EuroGas.
During the first quarter of 2000 EuroGas completed the issuance of two-year
10.5% convertible debentures in the amount of $3,000,000. The debentures are
convertible into common shares at $0.35 per share, which represents a
discount of 20% from quoted market values on the date of the issuance.
Upon conversion, the holders also receive warrants to purchase 17,142,858
common shares at $0.35 per share. The convertibility of the debentures at a
discount, and the detachable warrants issued below market on the date of
issuance, constitute a beneficial conversion feature of the offering. The
Company will record the three instruments at their relative fair values on
the date of issuance and will amortize the resulting debt discounts as
interest expense in the amount of $2,192,109 over the three-month life of
the debentures. The debentures were subsequently converted at the election
of the holders on March 30, 2000 into 8,571,429 common shares. Subsequently,
on April 14, 2000, EuroGas issued 11,428,572 common shares upon the exercise
of 11,428,572 warrants in exchange for reduction of notes payable in the
amount of $4,000,000, or $0.35 per share. (Unaudited).
F-25
Teton Petroleum Company ("Teton"), through Goltech Petroleum, LLC
("Goltech"), owns a 71% interest in Goloil, a Russian oil and gas
company. On April 5, 2000, EuroGas entered into an agreement with
Teton for the acquisition of Teton and a 35% interest in Goltech by
September 1, 2000. If the acquisition is completed under the terms
of the agreement by the required closing date, EuroGas would
purchase Teton and the interest in Goltech in exchange for
$2,300,000, the issuance of 13,621,744 shares of common stock and
the issuance of options, warrants and other rights to purchase
2,599,249 shares of common stock at $0.35 for1 year. In addition,
EuroGas would be obligated under the terms of the agreement to lend
Goltech up to $4,000,000 under a credit facility which would bear
interest at 15% per annum on the amount loaned. EuroGas will place
additional common shares with a market value of $4,000,000 into an
escrow account to ensure EuroGas' ability to provide the cash
payments and the credit facility. EuroGas has paid a deposit of
$300,000 as consideration for the agreement and has placed $500,000
and a promissory note from an individual in the amount of $500,000
and securities of the individual into an escrow account to ensure
the ability of EuroGas to provide the remaining purchase price. Until
April 21, 2000, the agreement can be terminated without payment by
either party except for the loss of the deposit paid by EuroGas. In
the event either Teton or EuroGas fails to perform under the terms
of the agreement after April 21, 2000, that party will be obligated
to pay $1,000,000 in liquidation damages. (Unaudited.)
F-26
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion, and
amortization as of December 31, 1999 and 1998, by geographic area, were as
follows:
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
Eastern Europe
Total Canada and Russia
------------ ----------- -------------
At December 31, 1999
Unproved oil and gas properties . . . . . . . . . .$ 36,583,835 $ 8,875,353 $ 27,708,482
Proved oil and gas properties . . . . . . . . . . . 25,066,363 16,198,578 8,867,785
------------ ----------- -------------
Gross capitalized costs . . . . . . . . . . . . . . 61,650,198 25,073,931 36,576,267
Less: Ceiling test adjustment and impairments . . . (13,234,555) (3,512,792) (9,721,763)
Less: Accumulated depreciation, depletion,
and amortization . . . . . . . . . . . . . . . . (1,817,371) (1,817,371) -
Future abandonment and restoration. . . . . . . . . (140,517) (140,517) -
------------ ----------- -------------
Net capitalized costs . . . . . . . . . . . . . . .$ 46,457,755 $19,603,251 $ 26,854,504
============= =========== =============
At December 31, 1998
Unproved oil and gas properties . . . . . . . . . .$ 35,709,152 $ 8,721,360 $ 26,987,792
Proved oil and gas properties . . . . . . . . . . . 21,576,978 10,968,152 10,608,826
------------- ----------- ------------
Gross capitalized costs . . . . . . . . . . . . . . 57,286,130 19,689,512 37,596,618
Less: Ceiling test adjustment and impairments . . . (6,459,442) (3,512,793) (2,946,649)
Less: Accumulated depreciation, depletion,
and amortization . . . . . . . . . . . . . . . . (220,600) (220,600) -
Future abandonment and restoration. . . . . . . . . (246,125) (246,125) -
------------- ----------- -------------
Net capitalized costs . . . . . . . . . . . . . . .$ 50,359,963 $15,709,994 $ 34,649,969
============= =========== =============
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1999 and 1998 were as follows:
Eastern Europe
Total Canada and Russia
------------ ----------- -------------
For the Year Ended Decembeer 31, 1999
Property acquisition costs
Proved . . . . . . . . . . . . . . . . . . . .$ 1,752,246 $ 1,752,246 $ -
Unproved . . . . . . . . . . . . . . . . . . . 1,259,696 469,249 790,447
Exploration costs . . . . . . . . . . . . . . . . . 1,327,737 - 1,327,737
Development costs . . . . . . . . . . . . . . . . . 2,830,308 2,705,268 125,040
------------ ----------- -----------
Total Costs Incurred. . . . . . . . . . . . . . . .$ 7,169,987 $ 4,926,763 $ 2,243,224
============ =========== ===========
For the Year Ended December 31, 1998
Property acquisition costs
Proved . . . . . . . . . . . . . . . . . . . .$ 8,784,050 $ 8,784,050 $ -
Unproved . . . . . . . . . . . . . . . . . . . 17,804,072 9,776,610 8,027,462
Exploration costs . . . . . . . . . . . . . . . . . 573,570 - 573,570
Development costs . . . . . . . . . . . . . . . . . 4,459,065 1,128,852 3,330,213
----------- ----------- -----------
Total Costs Incurred. . . . . . . . . . . . . . . . $31,620,757 $19,689,512 $11,931,245
=========== =========== ===========
F-27
The results of operations from oil and gas producing activities for the
years ended December 31, 1999 and 1998 were as follows:
Eastern Europe
Total Canada and Russia
-------------- ------------ -------------
For the Year Ended December 31, 1999
Oil and gas sales. . . . . . . . . . . . . . . . . .$ 4,973,508 $ 4,973,508 $ -
Production costs . . . . . . . . . . . . . . . . . . (1,330,526) (1,330,526) -
Impairment of mineral interests. . . . . . . . . . . (7,217,426) - (7,217,426)
Depreciation, depletion, and amortization. . . . . . (1,810,176) (1,810,176) -
-------------- ----------- -------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs) . . . . . . . . . . . . . . . . .$ (5,384,620) $ 1,832,806 $ (7,217,426)
For the Year Ended December 31, 1998
Oil and gas sales. . . . . . . . . . . . . . . . . .$ 879,404 $ 879,404 $ -
Production costs . . . . . . . . . . . . . . . . . . (305,009) (305,009) -
Impairment of mineral interests. . . . . . . . . . . (3,512,792) (3,512,792) -
Depreciation, depletion, and amortization. . . . . . (220,600) (220,600) -
-------------- ----------- -------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs) . . . . . . . . . . . . . . . . .$ (3,158,997) $(3,158,997) $ -
============== =========== =============
Reserve Information - The following estimates of proved and proved
developed reserve quantities, presented in barrels and thousand
cubic feet (MCF), and related standardized measure of discounted
net cash flow are estimates only, and do not purport to reflect
realizable values or fair market values of EuroGas' reserves.
EuroGas emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those
of producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
EuroGas' proved reserves are located in Canada and the Slovak
Republic. Unproved reserve properties are located in the Slovak
Republic, Sakha Republic (Russian Federation), Canada, Poland, and
the Ukraine.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological
and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are
those expected to be recovered through existing wells, equipment and
operating methods.
Total Canada Slovak Republic
----------------------- ------------------- -------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (MCF) (Barrels) (MCF) (Barrels) (MCF)
--------- ---------- -------- --------- ------- ---------
Proved Developed and Undeveloped Reserves
Balance - January , 1999 . . . . . . . . 905,880 12,369,485 811,000 6,881,700 94,880 5,487,785
Purchases of minerals in place . . . . . 972,054 8,686,780 972,054 8,686,780 - -
Extensions and discoveries . . . . . . . - - - - - -
Production . . . . . . . . . . . . . . . (161,054) (1,805,080) (161,054) (1,805,080) - -
--------- ---------- --------- ---------- ------ ---------
Balance - December 31, 1999. . . . . . . 1,716,880 19,251,185 1,622,000 13,763,400 94,880 5,487,785
========= ========== ========= ========== ====== =========
Proved Developed Reserves -
December 31, 1999 . . . . . . 806,400 7,772,800 806,400 7,772,800 - -
========= ========== ========= ========== ====== =========
F-28
The standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and
gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the
estimated future production of proved oil and gas
reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and
producing the proved reserves, less estimated future
income tax expenses (based on year-end statutory tax
rates, with consideration of future tax rates already
legislated) to be incurred on pretax net cash flows less
the tax basis of the properties and available credits,
and assuming continuation of existing economic
conditions. The estimated future net cash flows are
then discounted using a rate of 10 percent per year to
reflect the estimated timing of the future cash flows.
The standardized measure of discounted estimated net
cash flows related to proved oil and gas reserves at
December 31, 1999 and 1998 were as follows. There were
no proved oil and gas reserves at December 31, 1997:
Eastern Europe
Total Canada and Russia
-------------- ------------ -------------
For the Year Ended December 31, 1999
Future cash inflows . . . . . . . . . . . . . . . .$ 58,352,415 $ 42,466,594 $ 15,885,821
Future production costs and
development costs . . . . . . . . . . . . . . . (14,451,638) (12,946,144) (1,505,494)
Future income tax expenses. . . . . . . . . . . . . (10,760,417) (9,478,107) (1,282,310)
Future net cash flows . . . . . . . . . . . . . . . 33,140,360 20,042,343 13,098,017
10% annual discount for estimated
timing of cash flows . . . . . . . . . . . . . . (13,388,091) (7,552,584) (5,835,507)
------------- ------------ --------------
Standardized measures of discounted future
net of cash flows relating to proved oil
and gas reserves . . . . . . . . . . . . . . . . . $ 19,752,269 $ 12,489,759 $ 7,262,510
============== ============ =============
For the Year Ended December 31, 1998
Future cash inflows . . . . . . . . . . . . . . . . $ 36,750,126 $ 20,864,305 $ 15,885,821
.
Future production costs and
development costs . . . . . . . . . . . . . . . (9,937,200) (8,431,705) (1,505,494)
Future income tax expenses. . . . . . . . . . . . . (3,379,138) (2,096,829) (1,282,310)
-------------- ------------- --------------
Future net cash flows . . . . . . . . . . . . . . . 23,433,788 10,335,771 13,098,017
10% annual discount for estimated
timing of cash flows . . . . . . . . . . . . . . (9,770,798) (3,935,291) (5,835,507)
-------------- ------------- --------------
Standardized measures of discounted future
net of cash flows relating to proved oil
and gas reserves . . . . . . . . . . . . . . . . . $ 13,662,990 $ 6,400,480 $ 7,262,510
============== ============= ==============
F-29
The primary changes in the standardized measure of discounted estimated
future net cash flows for the year ended December 31, 1998 were as
follows:
Eastern Europe
Total Canada and Russia
-------------- ------------ -------------
For the Year Ended December 31, 1999
Beginning of year . . . . . . . . . . . . . . . . .$ 13,662,990 $ 6,400,480 $ 7,262,510
Purchase of minerals in place . . . . . . . . . . . 10,716,408 10,716,408 -
Extensions and discoveries. . . . . . . . . . . . . - - -
Development . . . . . . . . . . . . . . . . . . . . 1,120,835 1,120,835 -
Production. . . . . . . . . . . . . . . . . . . . . (598,055) (598,055) -
Revisions of estimates:
Sales prices . . . . . . . . . . . . . . . . . . . - - -
Development costs. . . . . . . . . . . . . . . . . - - -
Accretion of discount . . . . . . . . . . . . . . . 188,021 188,021 -
Net change in income taxes. . . . . . . . . . . . . (5,753,022) (5,753,022) -
Change in exchange rate . . . . . . . . . . . . . . 415,092 415,092 -
-------------- ----------- ------------
End of year . . . . . . . . . . . . . . . . . . . .$ 19,752,269 $12,489,759 $ 7,262,510
============== ============ ============
For the Year Ended December 31, 1998
Beginning of year . . . . . . . . . . . . . . . . .$ - - -
Purchase of minerals in place . . . . . . . . . . . 6,948,967 6,948,967 -
Extensions and discoveries. . . . . . . . . . . . . 6,857,937 - 6,857,937
Development . . . . . . . . . . . . . . . . . . . . 4,406,706 1,076,493 3,330,213
Production. . . . . . . . . . . . . . . . . . . . . (574,395) (574,395) -
Revisions of estimates:
Sales prices . . . . . . . . . . . . . . . . . . . (320,693) - (320,693)
Development costs. . . . . . . . . . . . . . . . . (2,580,213) - (2,580,213)
Accretion of discount . . . . . . . . . . . . . . . 866,857 180,583 686,274
Net change in income taxes. . . . . . . . . . . . . (2,004,491) (1,293,483) (711,008)
Change in exchange rate . . . . . . . . . . . . . . 62,315 62,315 -
-------------- ------------ ------------
End of year . . . . . . . . . . . . . . . . . . . .$ 13,662,990 $ 6,400,480 $ 7,262,510
============== ============ ============
F-30