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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, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
EUROGAS, INC.
(Exact name of registrant as
specified in its charter)
Utah 33-1381-D 87-0427676
- --------------- ------------------- -------------------
(State or other (Commission File No. (IRS Employer
jurisdiction of Identification No.)
incorporation)
Kaertnerring 5-7
Top 3D
A-1015 Vienna, Austria
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 43-1-513-9404
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, 2001, based upon the
closing bid price for the common stock of $0.266 per share on
March 29, 2001, was approximately $31,545,833. Common stock
held by each officer and director and by each other person who may be
deemed to be an affiliate of the Registrant has been excluded. As of
March 31, 2001, the Registrant had 128,264,788 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
EuroGas, Inc. (the "Company") is filing its Annual Report on Form
10-K for the year ended December 31, 2000.
2
PART I
This Annual Report on Form 10-K for the year ended December 31, 2000
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 (collectively, "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 "SEC") describing other factors that may
affect future results of the Company.
Items 1 & 2. Business and Properties
General
We are primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, crude oil, talc and other
minerals. We have acquired interests in several large exploration
concessions and are in various stages of identifying industry
partners, farming out exploration rights, undertaking exploration
drilling, and seeking to develop production. We are also involved in
several planning-stage co-generation and mineral reclamation projects.
Unless otherwise indicated, all dollar amounts in this Form 10-K are
reflected in United States dollars.
When used herein, "we", the "Company" and "EuroGas" includes
EuroGas, Inc., and its wholly owned subsidiaries, EuroGas (UK)
Limited, Danube International Petroleum Company, EuroGas GmbH Austria,
EuroGas Polska Sp. zo.o., and Energy Global A.G., and the subsidiaries
of each of these subsidiaries, including GlobeGas B.V., Pol-Tex
Methane, Sp zo.o., McKenzie Methane Jastrzebie SP. zo.o., Energetyka
Lubuska, Danube International Petroleum Holding B.V., and the NAFTA
Danube Association.
Summary Description of Current Activities
ACTIVITIES IN SLOVAKIA. We are pursuing three projects in
Slovakia, including the development of the Gemerska-Poloma Talc
Deposit located near Roznava. As of December 31, 2000, we owned a 55%
interest in Rima Muran s.r.o., which in turn owned a 43% interest in
this talc deposit, with the remaining 57% interest being held by
Belmont Resources, Ltd, a Vancouver, British Columbia entity and an
affiliate of a significant shareholder of EuroGas. In February 2001,
we entered into an agreement to acquire Belmont Resources' 57%
interest, in exchange for 12 million shares of our common stock, with
registration rights, and a two percent royalty interest in the
project. The construction of the talc mine is scheduled for
completion in late 2001.
Our remaining two Slovakian projects involve the exploration for
oil or natural gas in the Trebisov gas field in eastern Slovakia and
the 2000 square kilometer Medzilaborce concession in the northeastern
corner of Slovakia. Each of the projects is at an early exploratory or
appraisal stage.
ACTIVITIES IN CANADA. We hold a 7.5% interest in the Beaver
River natural gas project, which is an attempt to reestablish
commercial production in an abandoned natural gas field in the
northeast corner of British Columbia, Canada. According to the
operator of the Beaver River project, Questerre Beaver River, Inc.
("Questerre"), the A5 re-entry well has been in production since March
20, 2001, and Questerre is planning the next re-entry well.
As of December 31, 2000, we held an equity interest of 50.1% of
the capital stock of Big Horn Resources Ltd., a Canadian full-service
oil and gas producer ("Big Horn"). Big Horn's business is conducted
primarily in western Canada, particularly in the provinces of Alberta
3
and Saskatchewan, and its stock is currently traded on the Toronto
Stock Exchange. Although we have one seat on Big Horn's board of
directors, we are not involved in the day-to-day management or
operations of Big Horn. In February 2001, we divested a portion of our
holdings in Big Horn, and we intend to sell a portion of our remaining
investment as well, in order to focus on the Gemerska Poloma Talc
Deposit, Beaver River, and our projects in Central Europe.
ACTIVITIES IN POLAND. On May 19, 1999, EuroGas Polska, our wholly
owned subsidiary entered into the Energetyka Lubuska joint venture
("Energetyka"). Energetyka executed a letter of intent with the
Polish Oil and Gas Company ("Polish Oil") to develop a new power plant
near Gorzow in northwestern Poland. The proposed project involves the
construction of a five-Megawatt power plant that uses gas produced by
a nearby oilfield to produce electricity that will be marketed to a
nearby de-sulfurisation plant owned by Polish Oil. The project is at
a conceptual stage, and we must enter into a final agreement with
Polish Oil, complete design of the plant, and obtain financing before
the 12-24 month construction process can commence. The decision to
start the project was delayed by one year due to increased gas
prices and static prices of electricity. If the ratio between the
price of gas and electricity improves, then we may enter into a final
agreement by the end of 2001.
ACTIVITIES IN SAKHA REPUBLIC. In 1997, we acquired OMV
(Jakutien) GmbH, which holds a 50% interest in the TAKT Joint Venture,
an entity based in Yakutsk, Sakha Republic, Russia. The TAKT Joint
Venture held two oil and gas exploration licenses in Yakutsk. We
participated in a program of seismic reprocessing of over 1,700 km of
data and its interpretation prior to the expiration of the licenses in
October 1998. Recently, we have entered into negotiations to renew
the licenses to allow us to drill a test well. However, the delay in
the construction of the pipeline may greatly diminish the value of the
Sakha project, and the Company may eventually be forced to abandon the
project.
ACTIVITIES IN THE UNITED KINGDOM. In 1999, we entered into an
agreement with Slovgold GesmbH, an Austrian company with headquarters
in Vienna, to conduct a six-well pilot program on a 500 sq. kilometer
(125,000 sq. acre) concession in South Wales held by UK Gas Limited,
in order to test for coal bed methane gas. In order to minimize the
amount of capital we were required to contribute to the pilot program,
we entered into discussions with UK Gas, to permit us to participate
in the pilot program by utilizing drilling equipment owned by our
Polish subsidiary. We were unable to reach a final agreement with UK
Gas, however, and the Company has halted further involvement with this
project.
ACTIVITIES IN UKRAINE. In September 2000, the Company decided to
suspend all projects in Ukraine, due to uncertain political and
economic conditions. The Company is currently in negotiations with an
established North American oil and gas company with oil and gas-
production in the Ukraine for such company to reevaluate the Company's
Ukrainian projects, and possibly operate existing and additional joint
ventures in the Ukraine for the Company.
PROPOSED MERGER WITH TETON PETROLEUM COMPANY. On April 5, 2000,
we entered into a Master Transaction Agreement with Teton Petroleum
Company, a Delaware corporation ("Teton"), and Goltech Petroleum, LLC
("Goltech"), a Texas limited liability company and wholly owned
subsidiary of Teton. The Master Transaction Agreement and
accompanying documents contemplated a merger with Teton, the purchase
by EuroGas of a 35% membership interest in Goltech, and our providing
a credit facility to Goltech. During the first half of 2000, we paid
a $300,000 deposit toward the purchase of Goltech, and loaned $500,000
to Goltech under the credit facility, which was convertible into
equity of Goltech. During the second half of 2000, we advanced Teton
$500,000 and received a convertible debenture from Teton therefor.
On December 27, 2000 we ended merger talks with Teton. Teton's
divestiture of its working interest in the Goloil project, along with
its ceding of control of its Russian operations, decreased Teton's
intrinsic value to EuroGas. These developments by Teton, along with
high oil prices, which would have increased the overall cost of the
proposed merger to EuroGas, substantially reduced the expected value
of the Teton transactions for EuroGas' shareholders. Accordingly,
after careful analysis and deliberation, we determined that it would
not be in the best long-term interests of the Company to proceed with
the merger.
Through exercise of a convertible debenture, EuroGas now holds
1.7 million Teton shares, along with 1.0 million shares previously
issued to EuroGas as a result of a August 2000, standstill agreement
with Teton. EuroGas' 2.7 million shares of Teton comprise 12.1% of
Teton's total issued and outstanding shares.
4
The following table provides a brief summary of the principal
projects in which we are presently engaged. These projects are
described in greater detail in the pages that follow the table.
Summary of Existing EuroGas Projects
Ownership
Interest
Country Nature/Name of Project (% Interest-Form) Status of Project
- --------- ---------------------- ---------------- ------------------
Canada . Big Horn Resources 50.1% interest Producing 1,000
Ltd. (reduced to barrels of oil
42.5% in equivalent per
February 2001) day; Company
plans on
divesting
investment
. Beaver River Natural 7.5%-Joint Production has
Gas Field Venture commenced in
2001 from the
A5 re-entry
well
Poland . Polish Methane Gas
Concessions
. 112 sq. km. 100%-Subsidiary Pre-exploration
Concession
. Carpathian 100%-Subsidiary Evaluating
Flysch/ForeDeep Oil seismic data
& Gas Field prior to
drilling
. Carpathian New 100%-Subsidiary Final
Concession (1,100,000 concession
acres in southeastern granted in
Poland) September 2000
. Energetyka Lubuska 100%-Subsidiary Negotiating
joint venture;
Pre-exploration; on
hold pending
improvement in
prices of
electricity
Slovakia . Slovakian Oil & Gas 50%-Joint Testing/drilling
Joint Venture-Trebisov Venture (some proven
Natural Gas Reservoir reserves; title
issues)
. Envigeo Oil and Gas 51%_Joint Pre-exploration
Venture
. Gemerska Talc Deposit 23%_2nd Tier Testing
Subsidiary complete;
seeking
financing for
development;
production
expected in
late 2001
Slovenia . Operating Lubricant Agreement to Negotiations in
Refinery Purchase From process
Government
Activities in Canada
Big Horn Resources Limited
As of December 31, 2000, we held 14,000,000 shares of Big Horn common
stock, representing a 50.1 % interest in Big Horn. Big Horn currently
produces approximately 1,000 barrels of oil equivalent per day.
5
We are not engaged in the day-to-day management of Big Horn and
its operations. As previously discussed, we have
divested a portion of our investment in Big Horn, and we intend to
divest our remaining investment.
Beaver River Natural Gas Field
We hold a 7.5% interest in the Beaver River natural gas project,
which is an attempt to reestablish commercial production in an
abandoned natural gas field in the northeast corner of British
Columbia, Canada. Beaver River is the largest existing gas pool in
British Columbia. It was shut down by its prior owner due to heavy
water influx. Its prior owner produced substantial amounts of natural
gas with peak production reaching 350 million cubic feet ("MMCF)
per day from five wells. Independent reservoir studies and government
reports show substantial natural gas reserves at Beaver River, ranging
between 1.5 and 3 Trillion Cubic feet.
The majority interest holder and operator, Questerre, has
indicated that the A5 re-entry well commenced production of 18 MMcf
of natural gas per day on March 20, 2001. Questerre is
currently conducting a technical review to plan the next re-entry
well. The Company is being carried during the reworking period, and
does not have to provide additional capital until Questerre has
recovered the total investment.
Activities in Poland
Energetyka Lubuska Power Plant
Energetyka executed a letter of intent with Polish Oil to develop
a new power plant near Gorzow in northwestern Poland. The proposed
project involves the construction of a five-Megawatt power plant that
uses gas produced by a nearby oilfield to produce electricity that
will be marketed to a nearby de-sulfurisation plant owned by Polish
Oil. The project is at a conceptual stage, and we must enter into a
final agreement with Polish Oil, complete design of the plant, and
obtain financing before the 12-24 month construction process can
commence. The decision to start the project was delayed by one year
due to a rise in gas prices, and the fact that the rise in the price
of electricity did not match the price of gas. If the ratio between
the price of gas and electricity improves, we expect to enter into a
final agreement by the end of 2001.
Polish Methane Gas Concessions
Coal bed methane gas production has taken place in the United
States for some time, and has drawn attention in Poland due to a study
funded by the United States Government. 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.
On October 13, 1997, we received a 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 gas concession located in Upper Silesian Coal Basin. We conducted
a feasibility study to explore the possibilities of drilling gas wells
for a combined heat and power plant project or other uses. The
results of the study suggest that the volume of gas in place can
exceed 30 billion cubic meters. Additional work connected with
evaluation of the productivity of the wells is under way.
6
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields
On October 23, 1997, EuroGas Polska completed an agreement with
Polish Oil to undertake appraisal and development activities for a
large area located in the Carpathian Flysch and Tectonic ForeDeep
areas of Poland. The agreement contemplates total expenditures by
EuroGas of $15 million. To date, EuroGas Polska and Polish Oil have
conducted and interpreted a $1.5 million, wide-line seismic work and
geological exploration program in the Rymanow-Leskoe area of the
Carpathian Mountains in southeastern Poland. Polish Oil has produced
a report based on such program, which suggests the potential for
substantial oil and gas reserves in the Rymanow-Leske area. If
subsequent feasibility studies indicate that oil or gas can
economically be recovered from this concession, of which there is no
assurance, further testing, regulatory approvals and construction will
be required before commercial production can commence, which would
take at least two years, and cost at least $2,000,000. We do not
currently have the funds necessary to complete a feasibility study,
drill test wells, or develop this concession and will need to bring in
a joint venture partner or raise additional capital before such
process can commence.
Carpathian New Concession
On December 20, 1999, we executed a usufruct agreement with the
Ministry of Environmental Protection, Natural Resources and Forestry
of the Republic of Poland. This agreement tentatively secured for us
the exclusive rights to explore for and develop hydrocarbons in an
area of over 1,100,000 acres in Southeastern Poland.
On September 7, 2000, the Ministry of Environmental Protection,
Natural Resources and Forestry of the Republic of Poland granted
EuroGas Polska a concession to explore and develop oil and gas on over
one million acres in the Carpathian oil fairway. In May 2000, a report
conducted by independent Polish oil and gas experts indicated
potentially producing deposits in 12 exploration leads within this
area, with the largest one potentially containing 300 millions barrels
of oil equivalent. On October 27, 2000, EuroGas Polska entered into a
Joint Operation Agreement with Polish Oil. The agreement calls for
Polish Oil to become the operator in the Carpathian Project.
Separately, Polish Oil and the Company have entered into a tentative
agreement whereby Polish Oil will acquire 30% of EuroGas Polska.
Our work on the Carpathian Project is at an early exploratory
stage. If subsequent exploration and testing indicates that oil or
gas can economically be recovered from this concession, of which there
is no assurance, an estimated two years of further testing, obtaining
regulatory approvals and construction will be required before
commercial production could commence, at an estimated minimum cost of
$3,000,000. We are currently negotiating concerning the possibility
of forming partnerships with a few major international oil- and gas
companies.
Activities in Slovakia
On January 1, 1993, the Czech Republic and Slovakia emerged as
separate independent nations. Slovakia is bordered 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 remains a major political force. Slovakia is a member
of the International Monetary Fund, 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.
Gemerska Talc Deposit
During 1998, we acquired a 24% interest in an undeveloped talc
deposit in Eastern Slovakia through an indirect investment in Rozmin
s.r.o. During the third quarter of 2000, we determined that Oxbridge
Ltd., a related party, had paid $879,000 on behalf of the Company in
1998 as part of the purchase of the 24% interest in the talc deposit.
7
On March 19, 1998, we reimbursed Oxbridge Ltd. for its payment and
accounted for the payment to Oxbridge Ltd. as a reduction of a
separate promissory note payable to Oxbridge Ltd. In light of a
demand in 2000 by Oxbridge Ltd. for payment of the promissory note, we
reclassified the payment to Oxbridge Ltd. as an increase in the cost
of the 24% interest in the talc deposit and recorded the principal and
$272,490 of accrued interest due under the promissory note payable to
Oxbridge Ltd. In November 2000, we issued 2,391,162 shares of common,
valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in
satisfaction of the principal and accrued interest due on the
promissory note. Through December 31, 2000 and 1999, we had invested
$2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and $915,913
(excluding the payment to Oxbridge Ltd.), respectively, in the
acquisition and development of the talc deposit and related equipment.
On March 27, 2001, we entered into an agreement to purchase an
additional 57% interest in Rozmin s.r.o. from Belmont Resources Inc.
("Belmont"), a related party, in exchange for issuing 12,000,000
common shares of the Company, which carry registration rights. We
have the right to repurchase up to 6,000,000 common shares at $2.00
per share for up to one year, upon thirty days written notice to
Belmont. We agreed to issue additional common shares if the ten-day
average NASD OTC quoted trading price of the Company's common shares
is less than $0.30 per share for any ten-trading-day period through
March 27, 2002. Under the terms of the guarantee, We agreed to issue
an additional 1,000,000 common shares to Belmont for each $0.05
decrease in the ten-day average quoted market price below $0.30 per
share. Additionally, if Belmont is unable to realize $1,911,700 from
the resale of the 12,000,000 common shares by March 27, 2002, we have
agreed to issue additional common shares to compensate for any
shortfall based on the ten-day average trading price on the date of
the notice of shortfall from Belmont.
We also agreed to pay Belmont a $100,000 non-refundable advanced
royalty, and Rozmin s.r.o. granted Belmont a two percent royalty on
the gross revenues from any talc sold. We agreed to arrange the
necessary financing to place the talc deposit into commercial
production by March 27, 2002, and if not in commercial production
within one year, we agreed to pay Belmont additional advanced
royalties of $10,000 per month for each month of delay in achieving
commercial production. We also granted Belmont the right to appoint
one member of our Board of Directors for not less than one year.The
purchase of the additional 57% interest in Rozmin s.r.o. will be
recorded at $3,664,000 during the first quarter 2001, based on the
market value of the common shares issued (including the guarantee of
the future stock value) and the cash to be paid. If additional common
shares are issued in the future under the guarantee of the future
market value of the Company's common shares, no additional cost will
be recognized.
We acquired the original 24% mineral interest in the Gemerska
Talc Deposit through the acquisition of a 53% interest in RimaMuran
s.r.o., whose principal asset is the 24% investment in Rozmin s.r.o.
RimaMuran s.r.o. has an obligation to fund 33% to 39% of the projected
$12,000,000 capital cost requirements over the next year. RimaMuran
s.r.o. does not have the assets necessary to meet this obligation, and
it is anticipated that the necessary funding will need to be provided
by the Company. In addition, we have the obligation to provide 57% of
the capital cost requirements as a result of the purchase of the 57%
interest from Belmont in March 2001.
The Gemerska Talc Deposit is considered to be one of the richest
and largest talc deposits in the world. The deposit, according to the
Ministry of Environment of the Slovak Republic, contains 146.6 million
tons of high-purity talc reserves. Mine construction, which began in
August 2000, is scheduled for completion in the fall 2001, at which
time talc production is scheduled to commence. Production is expected
to reach 130,000 tons of talc annually. This would represent
approximately 12% of the annual European talc consumption. We believe
the exploitation of the Gemerska Talc Deposit will be particularly
favorable due to very strong talc prices in the world.
Rozmin s.r.o. has signed a Letter of Intent with Gebruder Dorfner
GmbH & Co. ("Dorfner"), regarding the future sale and marketing of the
talc industrial mineral from the Gemerska Talc Deposit. Over the past
one hundred years, Dorfner has been engaged in the development and
production of talc, kaolin, quartz and feldspar. Dorfner now processes
and markets over 240 industrial minerals and other products throughout
38 countries.
Slovakian Oil & Gas Joint Venture
In July 1996, as part of our effort to diversify and expand our
interests in Europe, we acquired Danube International Petroleum
Company ("Danube"), which held participation rights for natural gas
exploration in Slovakia and the Czech Republic. Since the
acquisition, we have focused our efforts on the development of the
Slovakian project and abandoned our interest in the Czech Republic.
Danube is a partner in a joint venture agreement (the "Slovakian Oil &
8
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 that 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 license that was granted
on April 24, 1995, and expired in April, 1999. We are presently in
discussions with officials of NAFTA and Slovakian Governmental
officials regarding an extension or re-issue of the expired license,
which we believe we can obtain.
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, 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) was encountered.
In December 1996, after hydrological fracturing, the upper interval
tested 1 MMcf of gas 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 was conducted
by Schlumberger, a well-known oil and gas service company, prior to
the cleaning and removal of water from the well.
Based upon the initial test results, we 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. In 1998, the Slovakian Oil & Gas Joint
Venture completed the remaining three wells of the six wells planned
for initial drilling.
The Trebisov natural gas field is known for large pay zones of up
to 3,000 feet thick. NAFTA has estimated the potential natural gas
reserves in Trebisov to be in the range of one trillion cubic feet.
These reserves, however, can only be tapped by applying modern
fracturing techniques, because the natural gas is trapped in very
tight gas formations. Over the last 4 1/2 years, EuroGas and NAFTA
have drilled a total of 6 wells to a depth of up to 9,000 feet and
invested a total of approximately $22,000,000 in exploration and
development of the Trebisov gas field. The wells will have to be
fractured in order to achieve commercial production. In addition, the
joint venture conducted a comprehensive 3-D seismic program that
suggests the presence of previously undetected potential gas reserves.
If subsequent tests to indicate that oil or gas can economically be
recovered from this concession, of which there is no assurance, an
estimated two years of further testing, seeking regulatory approvals
and construction will be required before commercial production can
commence, at an estimated minimum cost of $4,000,000.
Under the terms of the joint venture agreement, we were obligated
to provide 75% ($4.98 million) of the projected initial test phase
(including seismic testing) funding of $6.64 million 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 expenses associated with drilling
are being paid 60% by us and 40% by NAFTA. When the cost of
development and production exceeds $6.8 million, we will pay 50% of
additional funds and NAFTA will pay the remaining 50%. This limit was
exceeded during 2000.
During March 1998, NAFTA informed us 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 we have drilled to
date are located in the Trebisov area, where we are not aware of any
title problems. The disputed title 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, our expansion beyond the
Trebisov area may be limited. We have notified the former
shareholders of Danube of a claim against them because of this
problem.
Envigeo-Carpathian Flysch Concession
In September 1998, we acquired a 51% interest in Envigeo s.r.o.,
a Slovakian private company which owns a 2,300 square kilometer
appraisal and survey concession, the Medzilaborce 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 and is geologically on trend with extensive major discoveries
of oil and gas found in the neighboring countries. During the year
2000 we have undertaken substantial geological reconnaissance work on
the Medzilaborce concession in order to meet the concession
requirements. We are currently negotiating for the participation of a
major international independent oil company as our partner in this
project.
9
Activities in Ukraine
In September 2000, we decided to temporarily suspend all projects
in the Ukraine, due to uncertain political and economic conditions.
Prior to such suspension of activities, we were involved in numerous
projects in Ukraine, each of which was at an early exploratory stage.
Such projects included the following:
(i) We entered into a non-binding letter of intent with a
Ukrainian state-owned company, ZahidUkrGeologyia, to acquire two
Ukrainian oil and gas concessions totaling approximately 150 sq.
kilometers (60 sq. miles). The agreement called for EuroGas to fund
the project with future revenue divided in the following proportions:
EuroGas 70% and ZahidUkrGeologyia 30%. We have no definitive plans
with respect to consummation of such acquisition or exploration of
such properties.
(ii) We signed a joint operation agreement with
ZahidUkrGeologyia, calling for study and development of Kamienska
natural gas reservoir in Western Ukraine. The agreement called for
EuroGas to fund the project with future revenue divided in the
following proportions: EuroGas 70% and ZahidUkrGeologyia 30%. We have
no definitive plans with respect to exploration of such properties.
With respect to each of these projects, our joint venture
partners or other sources have indicated that the respective
concession contains substantial potential reserves of recoverable
hydrocarbons. Neither EuroGas, nor any independent engineering firm,
has confirmed any such estimates or performed studies to evaluate
whether such hydrocarbons can be economically recovered. Our
exploratory work on each such concession is at an early exploratory
stage. If subsequent exploration and testing indicates that oil or
gas can economically be recovered, of which there is no assurance, an
extensive period of additional testing, seeking regulatory approvals,
and construction will be required before commercial production could
commence. We do not currently have the funds necessary to complete
the exploration or development of such concessions and we will need to
bring in a joint venture partner or raise additional capital before
such process can commence.
Activities in the Sakha Republic
The Republic of Sakha (often referred to as "Yakutia" in English)
has the largest land area of the members of the Russian Federation and
is located in the far eastern portion of the former Soviet Union.
Yakutia is thinly populated (just over 1,000,000 people) and covers
approximately 3,100,000 square kilometers, which 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 in and the export of
hydrocarbons. Our interest in acquiring EG (explained below) was based
in large part on our 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, we acquired all of the issued and outstanding
stock of EuroGas Austria GmbH ("EG") (formerly known as OMV (Jakutien)
Exploration GmbH). 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 EuroGas and Sakhaneftegas on
December 1, 1997. TAKT was formed to appraise, explore, develop, and
export oil and gas reserves in two large areas in Yakutia. 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. The Company
10
participated in program of seismic reprocessing of over 1,700 km of
data and its interpretation prior to the expiration of the licenses in
October 1998. Recently, the Company has been negotiating to have the
licenses renewed to allow the Company to move forward with choosing a
drilling location for a future well. The negotiations, however, have
been unsuccessful so far, and the Company is attempting to renegotiate
with Sakhaneftegas to further develop this project.
Activities in the United Kingdom
We have entered into an agreement with Slovgold GesmbH, an
Austrian company with headquarters in Vienna, to conduct a six-well
pilot program on a 500 sq. kilometer (125,000 sq. acre) concession in
South Wales held by UK Gas Limited, to test for coal bed methane gas.
In order to minimize the amount of capital we need to contribute to
conduct the pilot program, we have entered into discussions with UK
Gas in order to permit us to participate in the pilot program by
utilizing drilling equipment owned by our Polish subsidiary. We were
unable however to reach a final agreement with UK Gas, however, so we
decided to stop any further involvement in this project.
Disclosure of Oil and Gas Operations
RESERVES REPORTED TO OTHER AGENCIES. No reserves were reported
to any other federal agency or authority for the years ended December
31, 2000 or 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, which
relate solely to the Company's operations in Canada:
For the year ended For the year ended
December 31, 2000 December 31, 1999
------------------ ------------------
Average sales prices:
Liquids, per barrel $34.58 $13.56
Natural Gas per thousand
cubic feet (Mcf) $ 3.70 $ 1.55
Average production cost,
per barrel of equivalent oil(1) $ 7.43 $ 3.90
(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, we have not
produced any gas or oil in any geographic area during our history.
PRODUCTIVE WELLS. - The following table sets forth the number of
gross productive wells and net productive wells in which we have a
working interest.
Productive Oil and Gas Wells at December 31, 2000
-------------------------------------------------
Productive Oil Wells (1) Productive Gas Wells(1)
------------------------ -----------------------
Gross(2) Net(2) Gross(2) Net(2)
-------- ------ -------- ------
Canada 19 7.8 29 8.7
Eastern Europe
and Russia - - - -
Total 19 7.8 29 8.7
(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 we
have an interest. Net wells are the sum of our fractional
interest in gross wells.
11
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 we have a working interest.
Acreage (*) At December 31, 2000
Undeveloped Developed Total
Gross Net Gross Net Gross Net
--------- --------- ------ ----- --------- ---------
Canada 72,360 38,346 34,119 11,826 106,479 50,172
Eastern Europe
and Russia 6,444,506 3,586,671 - - 6,444,506 3,586,671
--------- ---------- ------ ------ --------- ---------
Total 6,516,866 3,625,017 34,119 11,826 6,550,985 3,636,843
(*) Gross acreage includes the total number of acres in all
tracts in which we have an interest. Net acreage is the sum
of our fractional interests in gross acreage.
DRILLING ACTIVITIES. The following table sets forth the net number
of development wells (productive and dry) and exploratory wells
(productive and dry) for which drilling was completed during each of
the five years ended December 31, 2000, 1999, 1998, 1997 and 1996.
Drilling Activities
-------------------------------------------------------------------------
Development Wells Drilled Exploratory Wells Drilled
---------------------------------- ----------------------------------
Productive Wells(2) Dry Wells(1) Productive Wells(2) Dry Wells(1)
------------------ ----------- ------------------ -----------
For the year ended
December 31, 2000:
Canada 2.1 1.0 6.6 3.8
Eastern Europe and
Russia - - - -
Total 2.1 1.0 6.6 3.8
For the year ended
December 31, 1999:
Canada 1.2 0.1 3.6 0.5
Eastern Europe and
Russia - - - -
Total 1.2 0.1 3.6 0.5
For the year ended
December 31, 1998:
Canada 0.4 _ 0.9 _
Eastern Europe and -
Russia -
Total 0.4 _ 0.9 _
For the year ended
December 31, 1997:
Canada _ _ _ _
Eastern Europe and
Russia - - - 12.0
Total _ _ _ 12.0
For the year ended
December 31, 1996:
Canada _ _ _ _
Eastern Europe and
Russia - - - -
Total - - - -
(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.
12
Development Wells Exploratory Wells
Drilling Drilling
Gross Net Gross Net
------------------ ---------------
As of December 31, 2000
Canada 6.0 3.1 19.0 10.4
Eastern Europe and
Russia 6.0 3.0 1.0 0.5
------- ----- ----- -----
Total 12.0 6.1 20.0 10.9
Competition
In seeking to explore for, develop, and produce oil and gas
resources, we compete with some of the largest corporations in the
world, in addition to many smaller entities involved in this area.
Many of the entities that we compete with have access to far greater
financial and managerial resources than we do. As a result of the
exclusive nature of certain concessions that we hold, to the extent
that we are able to successfully explore for, develop, and produce
hydrocarbon resources, we will be able to exclude any competitor from
production of the resources located on the concessions, but we cannot
exclude competitors from providing natural gas or other energy sources
at prices or on terms that purchasers deem more beneficial.
Employees and Consultants
As of December 31, 2000, we had two administrative employees
located in London, and six technical and field workers in Poland. Our
four principal consultants are located in Europe. None of our
employees are represented by a collective bargaining organization, and
we consider our relationship with our employees to be satisfactory.
In addition to our employees, we regularly engage technical and other
consultants to provide specific geological, geophysical, and other
professional services.
Operational Hazards and Insurance
We are engaged in the exploration for methane and natural gas and
the drilling of wells and, as such, our 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. We have not obtained any hazard insurance. The occurrence
of a significant adverse event that is not covered by insurance would
have a material adverse effect on EuroGas.
Office Facilities
We have a month-to-month lease for approximately 2,230 square
feet of office space in Warsaw, Poland. The rental amount is
approximately $800 per month.
Until March 30, 2001, we maintained an office (approximately
2,500 square feet) at 22 Upper Brook Street, Mayfair, London, UK.
We are in the process of renting an office in Vienna, Austria
Our 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
EuroGas, Inc., was incorporated in the State of Utah under the
name Northampton, Inc. 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 Northampton, and EnergyGlobal became a wholly-owned
13
subsidiary of Northampton. Energy Global had been formed as a holding
company for a 16% 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 interests in two other concessions for the
exploration and exploitation of methane coal bed gas reserves in the
Upper Silesian region of Poland. In May 1995, we acquired the
remaining 80.87% interest in GlobeGas. In 1996, we acquired the
remaining 15% interest in Pol-Tex held by the Polish state coal
company. Pol-Tex has acquired exploration or development rights in
various parts of Poland.
Beginning in 1996, we began directly or indirectly acquiring oil
exploration or development rights throughout Eastern Europe and
Canada, including the following:
(i) In 1996, we acquired Danube International Petroleum Company,
a participant in a joint venture for the exploration and production of
natural gas in Slovakia.
(ii) In 1997, we acquired all of the issued and outstanding stock
of EG, whose primary asset is the 50% interest in the TAKT joint
venture with the national oil and gas company of the Sakha Republic.
(iii) In early 1998, we acquired the 55% interest in Rima
Muran, 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 mid-1998, we 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 Flysch region.
In 2000, we entered into an agreement with Slovgold GesmbH to
conduct a six-well pilot program on a 500 sq. kilometer (125,000 sq.
acre) concession in South Wales held by UK Gas Limited, in order to
test for coal bed methane gas. This agreement was later cancelled.
On April 5, 2000, we entered into a master transaction agreement
and merger agreement with Teton and related entities pursuant to which
we agreed to fund Teton's construction of a pipeline in Russia and to
acquire Teton through a merger.
On December 27, 2000 we ended merger talks with Teton. EuroGas
has exercised early conversion of a two million share Teton
convertible debenture. As a result, EuroGas now holds 1.7 million
Teton shares from the conversion. Along with the 1.0 million Teton
shares previously issued to EuroGas pursuant to a standstill agreement
with Teton, EuroGas now holds a total of 2.7 million Teton shares, or
12.1% of the total issued and outstanding shares of Teton (22,174,851
shares).
On October 27, 2000, EuroGas Polska entered into a Joint
Operation Agreement with Polish Oil. The agreement calls for Polish
Oil to become the operator in the Carpathian project. Separately,
Polish Oil and the Company have entered into a tentative agreement
whereby Polish Oil will acquire 30% of EuroGas Polska.
Certain Developments Since December 31, 2000
In February the Company sold 2,087,000 shares of Big Horn at Cdn.
$0.80 per share. The Company also intends to sell the remaining
6,000,000 shares that it owns of Big Horn. The proceeds will be used to
finance the Company's projects in Poland, and developing the
Gemerska-Poloma Talc Deposit in Slovakia. The Company has agreed to
buy 57% of Rozmin, which owns the Gemerska-Poloma Talc Deposit. Under
the terms of the agreement, EuroGas will issue 12 million shares of
its common stock, with registration rights, and grant a 2% royalty
interest in the project. EuroGas, via its 55% interest in Rima Muran
s.r.o., controls the remaining 43% interest in Rozmin. The agreement
is subject to any necessary regulatory and shareholders' approvals.
14
Where You Can Find More Information
We file 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 we file 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 us, that
file electronically with the SEC.
In addition, we will provide, without charge, to each person to
whom this Form 10-K is delivered, upon written or oral request, 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 01-687 Warsaw, Poland ul. Lektykarska 18, Attention: Chief
Financial Officer. Telephone requests may be directed to the office
of the Company at (011) (48) 22 8330468.
We maintain an Internet Website at http://www.eugs.com and have
available, for interested shareholders, maps and other material
concerning our activities.
Financial Information About Foreign and Domestic Operations
The information set forth as "NOTE 6 - GEOGRAPHIC INFORMATION" of
our consolidated financial statements 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 various forward-looking statements. Such
statements can be identified by the use of the forward-looking words
"anticipate," "estimate," "project," "likely," "believe," "intend,"
"expect," or similar words. These statements discuss future
expectations, contain projections regarding future developments,
operations, or financial conditions, or state other forward-looking
information. When considering such forward-looking statements, you
should keep in mind the risk noted in "Factors That May Affect Future
Results" below and other cautionary statements throughout this Form 10-
K and our other periodic filings with the SEC that are incorporated
herein by reference. You should also keep in mind that 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. If one or more risks
identified in this prospectus, a prospectus supplement, or any
applicable filings materializes, or any other underlying assumptions
prove incorrect, our actual results may vary materially from those
anticipated, estimated, projected, or intended.
Risks Related To General Activities
We Have A Working Capital Deficit And Will Continue To Need
Significant Funds
EuroGas has historically been undercapitalized. We had a working
capital deficit of approximately $17,318,000 million on December 31,
2000, 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
ventures or industry partnering arrangements.
We Are Dependent Upon Financing Activities to Fund Our Operations
Prior to our acquisition of an approximately 50% interest in a
Canadian gas production entity (Big Horn) in 1998 (which we have
partially divested in 2001 and intend to fully divest), 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 Big Horn will
15
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 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.
We Have Significant Future Obligations Under a Settlement Agreement
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. We entered into a
memorandum of understanding with Finance & Credit Development
Corporation, Ltd. settling the default judgment on June 16, 2000. We
agreed, among other things, to issue to FCDC 3,700,000 shares of
common stock, to grant FCDC an option exercisable for the 30-day
period following June 30, 2001, to purchase an additional 3,000,000
shares of common stock at an exercise price of $.65, and to pay to
FCDC in cash or shares of common stock the difference between $3.00
per share and the market value of the shares of common stock received
upon exercise of the option. If the option had been exercised on
[December 31, 2001], we would have been obligated to issue [3,000,000]
shares of common stock, and to pay FCDC an aggregate of [$6,700,000]
in cash or additional shares of common stock. This settlement and the
consideration given to FCDC in the Settlement Agreement are more fully
described under ITEM 3. Legal Proceedings.
Our Projects Are Highly Speculative And Generally Only At the
Exploration Stage
Our assets and interests are primarily in talc, methane gas, natural
gas, and crude oil 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.
Many of Our Projects Are In Locations Where The Infrastructure is
Inadequate to Support Our Needs
Many of the projects in which we have invested are located in
areas of the world, primarily eastern Europe and the former Soviet
Union, 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.
Many Of Our Projects Are In Countries That Have Fragile and
Unpredictable Political and Socio-Economic Systems
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.
16
Moreover, we may be required to obtain and renew licenses and
permits on an ongoing basis in connection with further exploration,
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.
The Continuance, Completion Or Renewal of Many of Our Licenses
Are Subject to the Discretion of Government Authorities
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 landowners
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, which
entities have broad discretion in determining whether or not to grant
permits and licenses. 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.
We Are The Subject Of An Inactive SEC Investigation and A
Defendant In Various Other Lawsuits
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 several 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 our current officers and directors from participating in
a public company. In addition, we are subject to certain other
pending or threatened legal claims. The adverse resolution of the SEC
investigation or any pending litigation affecting us would have a
material adverse effect on our operations and proposed business.
Our Projects May Never Begin Producing Valuable Hydrocarbons
Other than the production of an average of approximately 560
barrels of oil equivalent per day by Big Horn net production after
royalties, in which we are planning to divest our current 42% 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.
We are Dependent Upon Certain Officers, Key Employees, and
Consultants
We are dependent on the services of Andrew K. Andraczke, the
President of EuroGas, Inc. We are also dependent on certain key
employees in connection with our business activities. 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. Dahl, our Chief Financial Officer,
and do not maintain key-man life insurance on any EuroGas officers or
employees.
17
We Are Thinly Staffed
We have numerous projects throughout the world, which we attempt
to direct and manage with only a few employees. In addition to our
President and our Chief Financial Officer we have eight full-time
equivalent employees, three significant consultants, and a contract
with a geo-engineering firm. Unless and until additional employees
are hired, our attempt to manage our numerous projects and obligations
with such a limited staff could have serious adverse consequences,
including without limitation, a possible failure to meet a material
contractual, court, or SEC deadline, or a possible failure to
consummate investment or acquisition opportunities.
Subsequent Evaluation May Reveal That Our Unproved Properties Are
Not Valuable, and We May Need to Record an Impairment of the Value of
Such 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. On December 31,
2001, we had capitalized costs related to the acquisition of oil and
gas properties not subject to amortization in the amount of
approximately $9,461,000. Should future events, such as the drilling
of dry holes, evidence that an impairment of recorded value has taken
place, we will be obligated to proportionate reduce the recorded value
of the respective asset on our balance sheet.
Severe Weather Will Interrupt, and May Adversely Affect, Our
Activities In Various Parts of the World
Severe weather conditions frequently interrupt much of our
exploratory and testing work. Heavy precipitation sometimes makes
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 all of the regions in
which we have exploratory or other operations are extremely cold, and
the temperatures in the Sakha Republic are especially extreme and
include some of the coldest areas in 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
The Price Of The Various Hydrocarbons We Produce or May Produce
Are Volatile and Unstable
The prices of oil, natural gas, methane gas and other fuels have
been, and are likely to continue to be, volatile and subject to wide
fluctuations in response to numerous factors, including the following:
(i) changes in the supply and demand for such fuels;
(ii) political conditions in oil, natural gas, and other fuel-
producing and fuel-consuming areas;
(iii) the extent of domestic production and importation of
such fuels and substitute fuels in relevant markets;
(iv) weather conditions;
(v) the competitive position of each such fuel as a source of
energy as compared to other energy sources;
(vi) the refining capacity of crude purchasers;
(vii) the effect of governmental regulation on the
production, transportation, and sale of oil, natural gas, and other
fuels.
18
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.
Our Operations Involve Numerous Hazards, and We Maintain No
Insurance Against Such Risks
Exploring for fuel, drilling wells, and producing fuel involves
numerous hazards, including the following:
(i) fire,
(ii) explosions,
(iii) blowouts,
(iv) pipe failures,
(v) casing collapses,
(vi) unusual or unexpected formations and pressures, and
(vii) 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 that may arise from such hazards
because such insurance may be unavailable at economic rates, due to
limitations in the insurance policies, or other factors. Any
uninsured loss may have a material adverse impact on our business and
operations.
The Oil and Gas Industry Is Highly Competitive, and We Are At a
Competitive Disadvantage
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.
Our Operations Are Subject to Numerous Environmental Laws,
Compliance With Which May be Extremely Costly
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 can provide no assurance that we will be able to comply with
applicable environmental laws and regulations or that those laws,
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.
19
Other Risks Relating To The Common Stock
Most of Our Outstanding Shares Are Free Trading And, If Sold In
Large Quantities, May Adversely Affect the Market Price For Our Common
Stock
Most of the approximately 138,996,460 shares of common stock
issued and outstanding as of March 31, 2001; (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 we are
contractually obligated to file. Although the resale of certain of
these shares may be 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.
We Have A Substantial Number of Warrants, Options and Debentures
Outstanding
As of December 31, 2000, there are outstanding warrants and
options to purchase up to 45,092,856 shares of common stock at
exercise prices ranging from $0.45 to $11.79. This is in addition to
the estimated 8,622,017 shares of our common stock we are obligated to
issue to certain persons pursuant to litigation settlements. The
existence of such warrants and options may hinder our future equity
offerings, and the exercise of such warrants and options may further
dilute the interests of all our 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
our common stock. Furthermore, the holders of warrants and options
may exercise them at a time when we would otherwise be able to obtain
additional equity capital on terms more favorable to us.
We Have The Right To, and Expect to, Issue Additional Shares of
Common Stock Without Shareholder Approval
EuroGas has authorized capital of 325,000,000 shares of common
stock, par value $0.001 per share, and 3,661,968 shares of preferred
stock, par value $0.001 per share. As of December 31, 2000, 126,996,460
shares of common stock and 2,394,028 shares of preferred stock were issued
and outstanding. Subsequent to December 31, 2000, EuroGas issued 12,000,000
shares of common stock for talc property interests. In addition, there are
45,092,856 shares of common stock reserved for issuance on the exercise or
conversion of outstanding warrants, options, and similar rights to
acquire common stock and 8,622,017 shares of stock issuable to certain
persons pursuant to litigation settlement agreements. We have no
means to control the timing of the conversion of convertible
securities. Our board of directors has authority, without action or
vote of our shareholders, to issue all or part of the authorized but
unissued shares. Any such issuance will dilute the percentage
ownership of our shareholders and may dilute the book value of the
common stock.
We Have Not Paid Any Dividends and Do Not Expect To Pay Dividends
In the Near Future
We have not paid, and do not plan to pay, dividends on our common
stock in the foreseeable future, even if we become profitable.
Earnings, if any, are expected to be used to advance our activities
and for general corporate purposes, rather than to make distributions
to shareholders.
ITEM 3. Legal Proceedings
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 our acquisition of GlobeGas.
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, we 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. We also granted registration rights with
respect to the securities.
20
In March 1997, a trustee over certain of the McKenzie parties and
other related entities asserted a claim to the proceeds that we 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 we paid inadequate consideration for our
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.) We believe that the litigation is
without merit based on our belief that the 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 we 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, that
motion was approved by the bankruptcy court. Currently a trial is set
on this action for July 2001. We have initiated settlement
discussions with the Trustee.
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. We
dispute the allegations and have 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, we have engaged in settlement
discussions in an attempt to reach a negotiated resolution of the
dispute.
On August 21, 1997, KUKUI asserted a claim against us 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 our 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. We have denied any liability and have filed a
counterclaim against KUKUI and Bishop's Estate for breach of contract.
In early December 1999, we signed a settlement agreement with
KUKUI, the Bishop Estate and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires us to
pay $900,000 over the 12 months beginning in January 2000 and to issue
100,000 shares of registered common stock to the Bishop Estate by June
30, 2000. Although a substantial amount of this payment was made, we
failed to pay the full amount. We are currently engaged in
negotiations to reinstate this settlement. The bankruptcy court
approved the settlement, but it is unclear whether the Trustee
considers the settlement to be enforceable. If the settlement
agreement does not resolve the foregoing litigation, we will
vigorously defend such litigation.
21
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 we breached an agreement by failing to seek registration of
certain restricted and unregistered shares issued to Plaintiffs in
connection with our acquisition of its interest in Beaver River
Resources, Ltd. The action sought rescission of the agreement, or in
the alternative, damages, and includes claims for costs, attorney's
fees and interest. We filed an answer denying the allegations
contained in the lawsuit. A settlement was reached whereby half of
our interest in the Beaver River project was returned in exchange of
half of the shares that were issued.
For the 1992 year, the Kingdom of the Netherlands assessed a tax
against GlobeGas in the amount of approximately $911,000, even though
it had significant operating losses. The amount fluctuates on our
financial statements due to adjustments in exchange ratios. As of
December 31, 2000, the income tax liability recorded in our financial
statements was $692,431. We have appealed the assessment and 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 our financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market for Common Stock
Our 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 symbol "EUGS.F" on the Frankfurt
Stock Exchange. As of March 31, 2001, there were 138,996,460 shares of
common stock issued and outstanding, held by approximately 270
holders of record (300 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.
High Bid Low Bid
-------- -------
Year Ended December 31, 1998
----------------------------
Quarter ended March 31, 1998 $ 6.81 $ 3.94
Quarter ended June 30, 1998 5.75 3.63
Quarter ended September 30, 1998 4.97 2.06
Quarter ended December 31, 1998 2.25 1.19
Year Ended December 31, 1999
----------------------------
Quarter ended March 31, 1999 $ 2.50 $ 1.03
Quarter ended June 30, 1999 1.09 0.55
Quarter ended September 30, 1999 0.94 0.55
Quarter ended December 31, 1999 0.80 0.45
Year Ending December 31, 2000
Quarter ended March 31, 2000 $ 1.88 $ 0.42
Quarter ended June 30, 2000 1.09 0.75
Quarter ended September 30, 2000 0.91 0.47
Quarter ended December 31, 2000 0.48 0.25
The liquidity of our 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 30, 2001, the high and low
bids for our common stock on the OTC Bulletin Board were $.297 and
$.266 respectively.
Dividends
No dividends have been paid on our common stock, and we do not
have retained earnings from which to pay dividends. We have accrued
cumulative preferred dividends of $139,932, $1,442,345 and
$2,861,301 in 2000, 1999 and 1998, respectively. Of this amount,
$21,599 was paid in 2000, $1,301,376 was paid in 1999 and $165,008
was paid in 1998 by the issuance of shares of our common stock in
connection with the conversion of a portion of the preferred stock.
All cumulative dividends with respect to our preferred stock would be
required to be paid prior to our declaring or paying any dividend on
our common stock. Even if we 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.
23
Recent Sales of Unregistered Securities
On or about January 12, 2000, the Company 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. As of March 31, 2000, the
holders of all four Convertible Debentures exercised their conversion
rights under the Convertible Debentures, and we issued 8,571,428
shares of common stock and warrants to purchase 17,142,858 shares of
common stock at an exercise price of $0.35 per share on or before
June 1, 2001.
During 2000, 1,800 shares of Series C Preferred Stock were
converted, according to their terms, into 5,266,452 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 Series C Preferred Stock, at a weighted
average price of $0.34 per common share.
In May 2000, the Company issued 250,000 common shares for cash in
the amount of $195,000, or $0.78 per share. During September 2000,
the Company issued 500,000 common shares to a shareholder as
compensation for services valued at $365,000, or $0.73 per share.
During July 2000, the Company issued 500,000 common shares to
Oxbridge Ltd., a related party, in exchange for the assumption by
Oxbridge Ltd. of the Company's commitment to provide additional
financing to Pan Asia Mining Corp. The 500,000 common shares were
valued at $365,000, or $0.73 per share.
During 2000, the Company issued 3,700,000 common shares and
3,700,000 options under the terms of a settlement obligation. The
Company also issued 1,842,983 common shares as payment of accrued
settlement obligations. The common shares issued were valued at
$1,033,514, or an average of $0.56 per share.
During 2000, notes payable to related parties totaling $1,173,896
and $502,871 of accrued interest were converted into 3,891,954 common
shares at an average of $0.43 per share.
During September 2000, the Company entered into an agreement
with a broker/dealer for the resale of 2,000,000 common shares that
had been registered for resale by a recent Form S-3 Registration
Statement filed with the Securities and Exchange Commission. Under
the agreement, the broker/dealer was issued 2,000,000 common shares.
As of December 31, 2000, 400,000 shares were resold for proceeds
totaling $209,500, or $0.52 per share. Total proceeds received by the
Company were $205,000, net of offering costs. The Company expects to
receive either proceeds from the sale of the remaining 1,600,000
shares or the return of those shares.
On October 2, 2000, the Company entered into a Common Stock
Purchase Agreement with Arkledun Drive LLC ("Arkledun") whereby the
Company issued 7,000,000 common shares to Arkledun for resale under a
public offering of common shares. Arkledun agreed to purchase
5,500,000 common shares for $2,165,000. If Arkledun did not realize
$2,489,750 from the resale of the 5,500,000 shares, after the
deduction of customary broker's fees, any resulting shortfall would be
made up by Arkledun selling as many of the additional 1,500,000 common
shares issued as required. If there still was a shortfall after
selling the 1,500,000 common shares, the Company agreed to issue
additional common shares or pay Arkledun the remaining shortfall.
On November 14, 2000, Arkledun notified the Company of a
remaining shortfall after the 7,000,000 shares had been sold. To
resolve the shortfall and to settle all claims and demand rights of
Arkledun under the Agreement, the Company issued an additional
2,000,000 common shares to Arkledun. The additional 2,000,000 common
shares have piggy-back registration rights to be included in any
future public offering conducted by the Company.
In November, 832,760 common shares were issued to SlovGold GmbH,
a related party, for payments made on behalf of the Company. The
common shares were recorded at $291,466, or $0.35 per share, based on
the market value of the common shares on the date issued.
The Company also issued 400,000 common shares under the
registration statement for Form S-3 that it filed with the SEC on June
28, 2000, and amended on August 17, 2000, for cash proceeds of
$208,500, or an average of $0.52 per share. The Company incurred
offering costs for the overall public offering of $168,500. The public
offering resulted in the Company issuing 9,400,000 common shares for
net proceeds of $2,205,000.
24
The private issuances of securities discussed above 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 following: (a) the investors
confirmed to us 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 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.
Item 6. Selected Financial Data
Certain Financial Data
The following statement of operations and balance sheet data were
derived from our consolidated financial statements. Our consolidated
financial statements have been audited by our independent certified
public accountants. The selected financial data below should be read
in conjunction with our consolidated financial statements 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.
Statement of Operations Data
- ----------------------------
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- ----------
Net Sales $ 6,395,037 $ 4,973,508 $ 879,404 $ 0 $ 0
Loss from $47,017,043 $28,946,667 $11,024,899 $11,501,899 $6,413,183
Operations
Loss per
Common Share $ 0.47 $ 0.36 $ 0.22 $ 0.22 $ 0.16
Balance Sheet Data
- ------------------
At December 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Total Assets $30,779,287 $53,968,578 $65,334,543 $ 40,754,139 $15,902,139
Long-Term
Obligations $ - $ - $ 1,788,294 $ 3,157,789 $10,631,547
Cash Dividends
per Common
Share $ - $ - $ - $ - $ -
25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
We are engaged primarily in the acquisition of rights to explore
for and exploit oil, natural gas, coal bed methane gas, and mineral
mining. We have also extended our business into co-generation (power
and heat) projects. We have acquired interests in a number of large
exploration concessions, for oil, natural gas, and coal bed methane
gas, and are in various stages of identifying industry partners,
farming out exploration rights, undertaking exploration drilling, and
seeking to develop production. We currently have 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, and an interest in a talc
deposit in Slovakia. We have 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 government and private companies.
We also have holdings in oil and natural gas projects in Canada.
Our principal assets consist both of 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
equipment we own. Since we have limited proven reserves and
established production, most of our holdings have not been amortized.
In the event that we are 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. We periodically evaluate our 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
In February 2001, the Company sold 2,087,000 shares of Big Horn
for Cdn. $ 0.80 per share. The Company intends to sell 6,000,000
additional shares, which would constitute the complete divestiture of
its investment in Big Horn. The proceeds shall go towards financing
projects in Poland and developing the talc mine in Slovakia, in which
the Company has increased its investment, as discussed previously. In
addition to our normal private issuances of common stock, the Company
registered 12,000,000 of its shares for sale on Form S-3 in August
2000, along with 9,000,000 shares registered on behalf of selling
shareholders, pursuant to contractual registration rights.
Outlook
In the past, we have focused our resources on pre-exploration or
early-exploration stage natural gas, coal bed methane gas, and other
hydrocarbon projects with little short-term revenue potential. We
believe that our 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 our
holdings, the focus of our 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 we
are actively seeking investments of that type. Specifically, we
intend to take the following actions over the coming months:
(i) Divest some of our shareholdings in Big Horn, in order to
raise capital to finance core projects without further diluting our
existing shareholders. Proceeds from the sales of our Big Horn shares
will be re-deployed into projects that have the potential to yield
substantial and near-term cash flow;
(ii) Determine whether to retain or divest the 12% interest that
we hold in Teton. Our management team is currently evaluating this
investment, and will make a formal recommendation to our Board of
Directors regarding its retention or divestiture;
26
(iii) Focus our efforts on projects in Central Europe and
Canada. We will concentrate our financial and management resources on
Central Europe (Poland, Slovakia, Ukraine and possibly Hungary), as
well as Canada, where the Company has a carried interest in the Beaver
River gas project;
(iv) Bring the Gemerska Poloma Talc Deposit into production;
(v) Begin an exploration program on our ten oil and gas
concessions covering approximately 4,300 km2 in southeast Poland; POGC
is the operator of this venture. EuroGas, in conjunction with POGC, is
currently in discussions with a number of international oil and gas
companies who are interested in a possible participation in this
project;
(vi) Enter into a joint venture with large international oil and
gas companies on our oil and gas concession in Slovakia;
(vii) Continue our efforts to reduce corporate overhead, as
we recently demonstrated by closing our London office, effective as of
March 31, 2001. We will continue to manage the Company from our
Warsaw and Vienna Central European headquarters.
In summary, the outlook, based on our strategic approach, is
simple--we intend to use the proceeds from the Big Horn divestiture
and possibly the sale of other non-core assets to fund production of
the Gemerska Poloma Talc project and oil and gas projects in Central
and Eastern Europe. Further, we will closely monitor the Beaver River
gas project in British Columbia. The ultimate goal is to transform
the company from an asset-rich exploration concern to a significant
cash flow-producing resource company.
27
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,
2000, 1999 and 1998.
For the Years Ended December 31,
2000 1999 1998
------------ ------------ ------------
Oil and Gas Sales $ 6,395,037 $ 4,973,508 $ 879,404
Oil and gas production 1,521,471 1,330,526 305,009
Impairment of mineral
interests and equipment 26,783,790 7,217,426 3,512,792
Depreciation, depletion
and amortization 2,023,425 1,810,176 293,955
Settlement costs 7,200,205 12,527,000 -
General and
administrative 6,854,636 8,485,939 7,804,401
------------ ------------ -------------
Total Costs and
Operating Expenses 36,735,793 31,371,067 11,916,115
Other Income (Expenses)
Interest Income 89,698 179,538 593,570
Other Income 455,938 103,878 152,776
Interest expense (7,123,750) (567,195) (465,371)
Loss on sale and
impairment of securities
and equipment (2,731,628) (1,682,045) -
Foreign exchange net
gains (losses) (263,523) 170,315 (130,419)
Minority interest in
income of subsidiary (103,022) (753,599) (137,983)
------------ ------------ -------------
Total Other Income
Expense (16,676,628) (2,549,108) 12,573
------------ ------------ -------------
Net Loss $(49,545,322) $(28,946,667) $(11,024,180)
------------ ------------ ------------
Basic and Diluted Loss
Per Common Share $ (0.47) $ (0.36) $ (0.22)
------------- ------------ ------------
Weighted Average Number
of Common Shares Used in
Per Share Calculation 106,145,361 83,368,053 64,129,062
------------- ------------ ------------
REVENUES. Prior to 1998, we had not generated any revenues from
oil and gas sales. As a result of our acquisition of the controlling
interest in Big Horn, our results of operations for 2000 and 1999
reflect oil and gas sales of approximately $6,395,037 and $4,973,508,
respectively. We intend to divest our holdings in Big Horn in 2001.
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 $1,521,471 in 2000, $1,330,526 in 1999, and $305,009 in
1998. All of our oil and gas production expenses are from our Big
Horn subsidiary. The increase in oil and gas production expenses from
1998 through 2000 reflects the acquisition of our interest in Big Horn
effective October 1998; accordingly, we only recognized a fraction for
1998, and our full 51% of such expenses for 1999 and 2000.
General and administrative expenses were $7,037,165 for 2000,
compared with $8,485,939 for 1999, representing a decrease of 22%. The
principal factors that contributed to the decrease from 1999 to 2000
were reductions in (i) legal expenses incurred in connection with
sales of registered and unregistered securities, ongoing securities
compliance, and litigation; (ii) consulting fees; (iii) payroll,
caused by a reduction in the number of staff members; and (iv) rent
and other office expenses, which we reduced by closing several
offices.
28
Depreciation, depletion and amortization expenses were
$ 2,023,425 for 2000, compared to $1,810,176 for 1999.
Impairment of mineral interests and expenses were $26,783,790 for
2000, $7,217,426 in 1999, and $3,512,792 in 1998. The principal
factor that contributed to the increase in impairment expenses from
1999 to 2000 was the recognition of a $7,672,511 impairment against
the TAKT joint venture as of December 31, 2000, based upon our
reassessment of estimated future net cash flows. Settlement costs
for financial statement purposes increased from 0 in 1998 to
$12,527,000 in 1999 and $7,200,205 in 2000. 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 our failure to comply with procedural rules, not
based on any hearing on the merits, and we have entered into a
settlement agreement concerning the suit and the default judgment.
INCOME TAXES. Historically, we have not been required to pay
income taxes, due to our absence of net profits. For future years, we
anticipate being able to utilize a substantial portion of our
accumulated deficit, which was approximately $126.4 million as of
December 31, 2000, to offset profits, if and when achieved, resulting
in a reduction in income taxes payable at such time.
NET LOSS. We incurred net losses of approximately $49.7 million,
$30.4 million, and $13.9 million for the years ended December 31,
2000, 1999, and 1998, respectively. These losses were due in part to
the absence of revenues, combined with continued expansion of our
activities, primarily as a result of acquisition and the growth of our
administrative expenses. In addition, a portion of the recognized net
losses in 2000 resulted from the $7,672,511 impairment of mineral
interests recognized against the TAKT joint venture and the default
judgment entered against us on March 16, 2000.
Due to the highly inflationary economies of the Eastern European
countries in which we operate, we are subject to extreme fluctuations
in currency exchange rates that can result in the recognition of
significant gains or losses during any period. Approximately
$(263,523) $170,315 and ($130,419) in gains (losses) were recognized
as a result of currency transactions in eacg if the three years ended
December 31, 2000, 1999 and 1998, respectively. We had a cumulative
foreign currency translation adjustment of ($3,916,641) as of
December 31, 2000. We do not currently employ any hedging techniques
to protect against the risk of currency fluctuations.
Capital and Liquidity
We had an accumulated deficit of $125,863,803 as of December 31,
2000, substantially all of which has been funded out of proceeds
received from the issuance of stock and the incurrence of payables. As
of December 31, 2000, we had total current assets of approximately
$4.8 million and total current liabilities of approximately $21.7
million (which number includes our estimated obligation with respect
to the default judgment entered against us on March 16, 2000)
resulting in negative working capital of approximately $16.9 million.
As of December 31, 2000, our balance sheet reflected approximately
$7.4 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 we are
unable to establish production or resources on these properties, are
unable to obtain any necessary future licenses or extensions, or are
unable to meet our financial commitments with respect to these
properties, we could be forced to write off the carrying value of the
applicable property.
Throughout our existence, we have relied on cash from financing
activities to provide the funds required for acquisitions and
operating activities. Our financing activities provided net cash of
approximately $4.4 million, $6.5 million and $12 million during the years
ended December 31, 2000, 1999 and 1998, respectively. Such net cash
has been used principally to fund net losses of approximately $50
million, $29 million and $11 million during the years ended December
31, 2000, 1999 and December 31, 1998, respectively. Our operating
activities provided $2.9 million of net cast during the year ended December
31, 2000 and used net cash of approximately $3.8 million and $8.3
million during the years ended December 31, 1999 and 1998, respectively.
A portion of our cash was used in acquiring mineral interests, property
and equipment, either directly or indirectly through the acquisition of
subsidiaries, with approximately, $7.7 million, $8.9 million and $13.6
million used in investing activities for the years ended December 31, 2000,
1999 and 1998, respectively, of which approximately $4.4 million, $7.0
million and $9.3 million, respectively, was used in acquiring mineral
interests.
29
While we had cash on hand of approximately $0.6 million as of
December 31, 2000, we have short-term and long-term financial
commitments with respect to exploration and drilling obligations
related to our interests in mineral properties and potential litigation
liabilities We estimate our financial commitments for the first nine
months of 2001 to be approximately $4 million. Many of our 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, we have relied
principally on cash provided from equity and debt transactions to meet
our cash requirements. We do not have sufficient cash to meet our
short-term or long-term needs and we will require additional cash,
either from financing transactions or operating activities, to meet
our immediate and long-term obligations. There can be no assurance
that we 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 us on reasonable terms. If we are able to obtain
additional financing or structure strategic relationships in order to
fund existing or future projects, existing shareholders will likely
experience further dilution of their percentage ownership of the
Company.
If we are unable to establish production or reserves sufficient
to justify the carrying value of our assets or to obtain the necessary
funding to meet our short and long-term obligations or to fund our
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 our consolidated financial statements do
not provide for the effect of inflation on our operations or our
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. Our 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, we have seen losses on the values of our
assets in those countries.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We conduct business in many foreign currencies. As a result, we
are subject to foreign currency exchange rate risk due to effects that
foreign exchange rate movements of those currencies have on our costs
and on the cash flows that we receive from foreign operations. We
believe that we currently have no other material market risk exposure.
To date, we have addressed our foreign currency exchange rate risks
principally by maintaining our liquid assets in interest-bearing
accounts in U.S. Dollars, until payments in foreign currency are
required, but we do not reduce this risk by hedging. For further
discussion of our policies regarding derivative financial instruments
and foreign currency translation, see Note 1 to our Consolidated
Financial Statements 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.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain Information Regarding Executive Officers, Directors and
Control Persons
Set forth below is the name and age of each individual who was a
director or executive officer of EuroGas as of December 31, 2000 or as
of March 31, 2001, together with all positions and offices of the
Company held by each and the term of office and the period during
which each has served:
Name Age Positions With the Company Term Of Office
----------------- --- -------------------------- -------------------------
Karl Arleth 50 President and Director April 1999 - January 2001
Dr. Gregory P. Fontana 41 Director January 1996 - Present
Andrew Andraczke 58 President and Chief Executive
Officer - Director January 2001 - Present
Hank Blankenstein 58 Vice-President, Treasurer December 1995 - March 2000
Director
Dr. Hans Fischer 54 Director January 1996 - January 2000
Borre Dahl 57 Chief Financial Officer June 2000 - Present
Rudolph Heinz 59 Director June 1999 - April 2000
Wolfgang Rauball 59 Director October 2000 - Present
Biographical Information
The following paragraphs set forth brief biographical information
for each of the aforementioned directors and executive officers:
KARL ARLETH. Prior to his resignation in January 2001 Mr. Arleth
commenced seerving as the President and a director of EuroGas in April
1999. Prior to joining EuroGas, Mr. Arleth served as a Director of
Azerbaijan International Operating Company (AIOC) from January 1998 to
April 1999. In this role, Mr. Arleth chaired the shareholder board of
AIOC, and an international consortium of 11 companies engaged in the
development and transportation of oil from Azeri-Chirag-Gunashli
offshore field complex in Azerbaijan. From January 1998 until January
1999, Mr. Arleth was also President of Amoco Caspian Sea Petroleum
Limited in Baku, Azerbaijan. From January 1997 until January 1998, he
was Director of Strategic Planning for Amoco Corporation Worldwide
Exploration and Production Sector in Chicago. From 1992 until 1997,
Mr. Arleth was President of Amoco Poland Limited in Warsaw, Poland,
where he was responsible for oil and gas exploration and production
projects as well as business development activities that focused on
natural gas transmission, distribution, storage and electric power
generation. As a result of our controlling interest acquisition in
Big Horn, Mr. Arleth has served as a director of Big Horn since July
1999.
32
DR. GREGORY P. FONTANA. Dr. Fontana is a director of EuroGas. He
is currently an attending cardio thoracic surgeon at Cedars-Sinai
Medical Center in California. He received his M.D. in 1984 at the
University of California followed by ten years of postgraduate
training at Duke University, Harvard University and University of
California at Los Angeles. Some of his academic appointments include
Clinical Fellow in Pediatric Cardiac Surgery at Harvard Medical School
and Clinical Assistant Professor of Surgery at UCLA School of Medicine
and he has received several research grants, including a National
Research Service Award and Minimally-Invasive Cardiac Surgery Grant.
He belongs to several professional organizations, including the
American Heart Association, and has authored numerous scientific
presentations and papers. He is currently a consultant to Edwards Life
Science and Venpro Inc. He is on the Scientific Advisory Board for
Genzyme Biosurgery and BioHeart, Inc.
ANDREW K. ANDRACZKE. Mr. Andraczke was appointed a director of
the Company in March 2000 and Chief executive officer in November
2000. In addition, Mr. Andraczke has been Vice President, Secretary,
and a member of the management committee of Pol-Tex since 1992, and is
responsible for business development and coordination of
administrative, legal, and political aspects of the Pol-Tex venture.
Mr. Andraczke also directs computer operations and system support for
the venture's exploration and production activities. Mr. Andraczke
holds B.Sc., M.Sc., and PhD degrees in computer science and
applications from the Computer Science Institute of Polytechnical
University in Warsaw where he also was an Associate Professor. He
served as the General Manager of the Computing Center of the Center
for Geological Research in the Central Office of Geology (Ministry of
Geology) from 1972 to 1976, where he developed and implemented
Poland's first general database of geological and mineral resources of
Poland. He also implemented computer mapping systems, oil and gas
reservoir simulations, and production control for mining operations.
From 1976 to 1982, he worked for several oil and gas and mining firms,
including OTC Oklahoma Production in Tulsa, Oklahoma, Kansas Oil
Consolidated in Tulsa, Oklahoma, John W. Mecom Company in Houston,
Texas, InteResources Group, Inc. in Houston, Texas, and British
Sulphur Corporation in London, U.K., performing reservoir modeling of
secondary and tertiary oil reservoirs, inorganic polymer floods, and
underground coal gasification projects. During this time, he also
developed data acquisition and reserve balance systems for mines in
the U.S., Mexico, and Egypt. Mr. Andraczke joined Tenneco Oil
Exploration and Production Company in Houston in 1982 and served as an
internal consultant and management advisor on computer applications
and emerging technologies until 1987.
BORRE DAHL. He became Chief Financial Officer in July 2000. From
1998 until 2000, Mr. Dahl was Finance Director, Norsk Hydro Poland,
based in Warsaw, Poland. Previously, from 1996 until 1998, Mr. Dahl
worked as an independent consultant with Gemini Consultants (formerly
Bossard) in Poland, on issues such as business plan development, new
company financing, due diligence and the restructuring of several
large companies. From 1994-96, Mr. Dahl was Customer Focus Manager for
Asea Brown Boveri, Ltd. (ABB) Poland where he was responsible for the
restructuring and recapitalization of a number of both private and
public companies, as well as the implementation of modern financial
and reporting systems. From 1989-94, Mr. Dahl was senior Management
Consultant for ABB Norway. From 1984-88, he worked with a group of
high technology companies. From 1979-84, he served as a management
consultant with Asbjorn Habberstad A/S (now A.T. Kearney, Norway).
During his work with both ABB and various high technology companies,
he held assignments in the United States and is thoroughly familiar
with US financial systems, accounting practices and standards. Between
1974-78, Mr. Dahl was Assistant Professor (I. Amanuensis) at the
Norwegian School of Management. He received a MBA in 1973 from the
IMEDE Management Development Institute, Lausanne, Switzerland.
WOLFGANG RAUBALL. He was appointed director of the Company in
November 2000. He was already managing director of EuroGas Austria
GesmbH and Globegas BV. He has worked for the Company in various
functions since 1994. Mr. Rauball attended Darmstadt Technical
University in Germany from 1967 through 1971. Thereafter, Mr. Rauball
worked as a mining geologist in Canada from 1972 to the present date.
During the period 1976 through 1986, his consulting activities were
primarily for companies conducting exploration for gold ore bodies in
Canada, the United States and South America. Wolfgang Rauball arranges
financing for business enterprises, primarily public companies engaged
in the mineral industry.
HANK BLANKENSTEIN. Prior to his resignation from all offices in
March 2000, Mr. Blankenstein was Vice President, Treasurer and a
director of EuroGas. He had served as a director since December 1995
and as Vice President and Treasurer since 1996. Mr. Blankenstein
continues to provide limited consulting services to EuroGas. Mr.
Blankenstein has had over 30 years experience in various levels of
management positions. He served as an administrative and financial
33
officer for American Micro Systems and National Semiconductor, from
1973 to 1985. Prior to that, he served in a number of operational
positions for high-tech industry companies, having engineering-
production supervising responsibilities, and was in charge of a 400-
person division. He has been involved in several high-tech start-up
situations, serving in senior management positions. He holds a
Bachelor of Science degree in Finance and Banking from Brigham Young
University that was awarded in 1966.
DR. HANS FISCHER. From January 1996 to March 2000, Mr. Fisher
served as a director of EuroGas. He is currently Professor of
Radiology at the University of California, Los Angeles, Harbor-UCLA
Medical Center where he has been on the faculty since 1992. He has
been a chair, member, and designated alternate on Research, Clinical
Radiology, Quality Assurance and Ambulatory Care Committees for Harbor-
UCLA Medical Center since 1990. He trained at Leibniz-Gymnasium,
Dortmund West Germany, School of Medicine, University of Muenster West
Germany and School of Sociology, University of Muenster West Germany.
He received his M.D. in 1971 and Ph.D. in 1985 from the University of
Muenster.
RUDOPH HEINZ. Between June 14, 1999 and March 2000, Mr. Heinz
served as a director of EuroGas. Mr. Heinz presently serves as the
General Manager of the German Federation of Money Managers, a position
he has held since May 1997. Prior to becoming an independent money
manager and Independent Financial Advisor, Mr. Heinz was manager of
the securities department for the Frankfurt based BHF Bank from April
1990 until June 1992 and was also responsible for that bank's United
States, Japan, and United Kingdom subsidiaries. From 1983 until 1990,
Mr. Heinz was the sole General Manager of DB Capital Management GmbH,
a Deutsche Bank subsidiary with operations in Germany, United States,
Japan and the United Kingdom.
Family Relationships
Dr. Reinhard Rauball, the former Chairman of the Board of
Directors, and Wolfgang Rauball, an independent consultant to EuroGas,
are brothers. Wolfgang Rauball has been instrumental in substantially
all of our acquisitions and joint ventures during the past four years.
From time to time, the Rauballs, principally Wolfgang Rauball, have
also arranged for equity and debt financing for us through parties
with whom they have previous business and personal relationships and
have made loans to us. Dr. Reinhard Rauball resigned from all of his
positions with EuroGas on February 18, 1999.
Compliance With Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our officers,
directors and certain shareholders to file reports concerning their
ownership of our common stock with the SEC and to furnish to us copies
of such reports. Based solely upon our review of the reports required
by Section 16 and amendments thereto furnished to us, we believe that
all reports required to be filed pursuant to Section 16(a) of the
Exchange Act were filed with the SEC on a timely basis.
Item 11. Executive Compensation
The compensation of our chief executive officer during 2000 and
the other executive officers of EuroGas whose total cash compensation
for the 2000 fiscal year exceeded $100,000 (the "Named Officers") is
shown on the following pages in three tables and discussed in a
compensation report of the Board of Directors.
34
Summary Compensation Table
The following table sets forth, for our three most recent fiscal
years, the compensation paid to the Named Officers.
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Salary Bonus Compensation Awards SARs Payouts Compensation
Principal Position Year $ $ $ $ # $ $
- ------------------ ---- ------ ----- ------------ -------- -------- ------- ------------
2000 $400,000 $122,200
Karl Arleth(2) 1999 $266,667 Nil $ 81,465(4) Nil 1,000,000 Nil Nil
President, CEO 1998 Nil Nil Nil Nil Nil Nil Nil
and Director Nil Nil Nil Nil Nil Nil
Andrew Andraczke 2000 $320,900 Nil Nil
President, CEO
(2) Mr. Arleth commenced serving as the President and a director
of EuroGas in April 1999, and resigned from the Company in January
2001.
(4) Represents amounts to which Mr. Arleth is entitled to
receive as a housing and service allowance; such amounts were accrued
but not paid in 1999.
Option Grants in Last Fiscal Year
The following table sets forth, for the 1999 fiscal year, certain
information regarding options grants to the Named Officers.
Potential
Realizable Value At
Individual Grants Assumed Annual
Rates of Stock
Price Appreciation
For Option Term
Percent
of
Number Total
Name of Options
Securities Granted
Underlying Employees Exercise
Options in Fiscal Price Expiration
(#) Year ($/Sh) Date 5% ($) 10% ($)
----------- --------- ------ ---------- --------- ---------
Karl Arleth(1) 1,000,000 74% $.85 05/20/2000 $597,440 $1,514,055
(1) Mr. Arleth commenced serving as the President and a director
of EuroGas on April 1999, and resigned in January 2001.
36
Aggregated Option Exercises in the Last Fiscal Year and Year End
Option Values
The following table sets forth the number of unexercised options
to acquire shares of our common stock held on December 31, 2000 and
the aggregate value of such options held by the Named Officers. The
Named Officers did not exercise any options to acquire shares of our
common stock during 2000. As of December 31, 2000, we had not granted
any stock appreciation rights to any of the Named Officers.
Number of Value of Unexercised
Unexercised Option In-the Money Options at
at December 31, 2000 at December 31, 2000(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
Karl Arleth(3) 1,000,000 0 Nil -
Hank Blankenstein(4) 200,000 0 Nil -
(1) Reflects the difference between the exercise price of the
unexercised options and the market value of shares of our common stock
as of December 31, 2000. The last transaction for our common Stock on
December 29, 2000, the last trading date of our fiscal year, was $0.25
per share.
(3) Mr. Arleth commenced serving as the President and a director
of EuroGas in April 1999, and resigned from the Company in January
2001.
(4) Mr. Blankenstein resigned as an officer and director of
EuroGas in March 2000.
Executive Employment and Consulting Arrangements
No other employee of EuroGas is employed pursuant to a written
agreement.
We have relied heavily on consultants to identify potential
projects, to negotiate the terms of acquisitions, to develop
relationships with governmental regulators and industry partners, and
to complete business and financing transactions. As a result of
services in these areas, we paid $150,000 in 2000, $200,000 in 1999,
$600,000 in 1998, and $1,260,253 in 1997 (including payments in
arrears related to services for previous years) to Wolfgang Rauball,
the brother of Reinhard Rauball, our former Chairman of the Board. We
also paid $322,900 in 2000, $320,000 in 1999, and $240,000 in 1998
(including payments in arrears related to services for previous years)
to Andrew K. Andraczke, a key employee in Poland and recently
appointed director who was appointed President and CEO of the Company
in March 2001. If we do not continue to make significant
acquisitions, and as we develop revenues, we anticipate relying more
on the services of employees and amounts paid to consultants will
decrease.
Compensation of Directors
We compensate our outside directors for their services by payment
of a monthly fee of $5,000 and reimbursement of expenses incurred in
attending board meetings. We do not separately compensate our board
members who are also our employees for their service on the board.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
As of December 31, 2000, the Compensation Committee consisted of
the Board of Directors. The Board of Directors as of December 31,2000
included Gregory Fontana, Director since 1994. Greg Fontana is not an
employee of the Company. Karl Arleth served as Director, President
and Chief Executive Officer from June 1999 until December 2000,
Andrew Andraczke has served as Director since June 2000 and became
President and Chief Executive Officer in December 2000. Garry Henry
has served as Director since December 2000 and Wolfgang Rauball has
served as Director since November 2000. Wolfgang Rauball has also
served as Managing Director of EuroGas Austria GesmbH since 1998 and
as Managing Director of GlobeGas B.V. Amsterdam since 1996.
36
Compensation Committee Report
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act or the Exchange
Act that incorporates by reference, in whole or in part, subsequent
filings, including, without limitation, this Annual Report on Form 10-
K, the Compensation Committee Report and the Performance Graph set
forth below shall not be deemed to be incorporated by reference in any
such filings.
As required by rules promulgated by the SEC, this Compensation
Committee Report describes the overall compensation goal and policies
applicable to our executive officers, including the basis for
determining the compensation of executive officers for the 2000 fiscal
year.
GENERAL. Management compensation is overseen by the Board of
Directors (the "Board"). In July 1999, the Board established a
Compensation Committee comprised of Dr. Gregory P. Fontana, Dr. Hans
Fischer and Rudolph Heinz, who also constituted the Compensation
Committee on December 31, 1999. However, Mr. Fischer and Mr. Heinz
have subsequently resigned, and the Compensation Committee has been
dissolved as a matter of law. Accordingly, the following compensation
report was prepared by Board members serving as of March 31, 2001.
COMPENSATION OBJECTIVES. In determining the amount of
compensation for our executive officers, the Board is guided by
several factors. Because we have very few employees, compensation
practices are flexible in response to the needs and talents of the
individual officer and are geared toward rewarding contributions that
enhance stockholder value. Historically, we have compensated senior
management based on the perceived contribution to the development of
our operations, consisting principally of salaries believed to reflect
their contributions. In addition, because we have only recently begun
to generate revenues from operations and have attempted to preserve
capital for development of our business and operations, we have used
stock options as a form of compensation for executive officers. The
use of stock options is designed to align the interests of the
executive officers with the long-term interests of EuroGas and to
attract and retain talented employees who can enhance our value.
Although certain members of the Board are also executive officers,
none participates in the determination of his own compensation.
COMPENSATION COMPONENTS. The compensation of our executive
officers consists of three components: base salary, bonuses and long-
term incentive awards in the form of stock options. The Board
establishes base salaries based primarily on its objective judgment,
taking into consideration both qualitative and quantitative factors.
Among the factors considered by the Board are: (i) the qualifications
and performance of each executive officer; (ii) the performance of
EuroGas as measured by such factors as development activities and
increased shareholder value; (iii) salaries provided by other
companies inside and outside the industry that are of comparable size
and at a similar stage of development, to the extent known; and (iv)
our capital position and needs. The Board does not assign any
specific weight to these factors in determining salaries.
From time to time, we also compensate our executive officers in
the form of bonuses. Because we are presently in an early stage of
development and do not have a history of earnings per share, net
income, or other conventional data to use as a benchmark for
determining the amount or existence of bonus awards, any bonuses
granted by the Board in the near term will be based upon its
subjective evaluation of each individual's contribution to EuroGas.
In some cases, however, bonuses payable to executive officers may be
tied to specific criteria identified at the time of engagement. For
the years ended December 31, 1998, 1999 and 2000, the Board did not
pay bonuses to any executive officers. The Board's action was based
on its conclusion that, despite the superior personal performance of
the executive officers, no cash incentive bonuses should be awarded,
due to the Board's desire to preserve capital for future growth and
development.
The third component of our compensation structure consists of the
grant of stock options to compensate executive officers and other key
employees. Having granted all options available under the 1996 Stock
Option and Award Plan, on November 20, 1999, the Board determined to
grant options outside of any option plan (but on terms and conditions
identical to those contained in our 1996 Stock Option and Award Plan),
to certain officers, directors and outside consultants. The purpose
37
of such options is to give each option recipient an interest in
preserving and maximizing shareholder value in the long term, to
reward option recipients for past performance and to give option
recipients the incentive to remain with EuroGas over an extended
period. The right to determine the amount of such grants was
delegated to the Compensation Committee based on its assessment of the
proposed recipients' current and expected future performance, level of
responsibilities, and the importance of his or her position with, and
contribution to, EuroGas. In the year ended December 31, 1999,
pursuant to such delegation, the Compensation Committee awarded (in
addition to the 1,000,000 options granted to Mr. Arleth pursuant to
his employment agreement) a total of 950,000 options to purchase
common stock at an exercise price of $.45 per share. Of such options,
350,000 were granted to Andrew Andraczke (key employee and director as
of March 2000), and 250,000 were granted to Greg Fontana (director),
as well as 200,000 options granted to Borre Dahl at an exercise price
of 0.73 per share.
CHIEF EXECUTIVE COMPENSATION. Mr. Karl Arleth had a base salary
of $ 400,000 per year. The salary of Andrew Adraczke has not been
changed from his $240,000 per year since he became President and CEO.
Consistent with the Board's desire to preserve capital for future
growth and development, the Board elected not to pay a bonus to any
executive officer for the 2000 fiscal year.
USE OF CONSULTANTS. We anticipate continuing to rely on both
executive management and outside consultants in connection with the
acquisition of additional projects and the initial development of
existing projects. However, we anticipate that, if able to establish
ongoing revenues from production, we will retain management personnel
as employees of EuroGas and compensate them on a salary basis, based
on comparable compensation packages offered by employers within our
general industry and geographical area.
The foregoing report is submitted by the Compensation Committee,
which consists of all Board members.
Andrew Andraczke
Borre Dahl
Gregory Fontana
Wolfgang Rauball
38
Performance Graph
The following graph shows a comparison of cumulative shareholder
return for our common stock for the period beginning August 3, 1994
(the date the common stock was first quoted in the over-the-counter
market) and ending December 31, 2000, as well as the cumulative total
return for the NASDAQ Composite Index and the Howard Weil, Bloomberg
Oilfield Service and Manufacturing Index. The Peer Group Index is a
price-weighted composite index comprised of the cumulative shareholder
return for forty-seven companies involved in oilfield services.
The performance graph assumes that $100 was invested at the
market close on August 3, 1994 and that dividends, if any, were
reinvested for all companies, including those on the NASDAQ Composite
Index and the Peer Group Index.
Total Return Analysis
12/30/94 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
EuroGas $ 100.00 $ 51.85 $ 120.37 $ 200.00 $ 46.30 $ 15.11
HW BBG Oilfield
Svc. & Manf'g $ 200.00 $ 146.32 $ 236.44 $ 359.99 $ 179.46 $ 260.02
NASDAQ Composite $ 100.00 $ 140.98 $ 173.46 $ 211.87 $ 297.02 $ 552.81
Source: Carl Thompson Associates www.ctaonline.com (800)
959-9677. Data from Bloomberg Financial Markets.
The figures for EuroGas reflect a 24-to-1 reverse stock split of
our common shares effective 9/6/94.
39
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following beneficial ownership table sets forth information
regarding beneficial ownership of our common stock as of April 15,
2000 by:
(i) each person or entity that is known by us to own
beneficially 5% or more of the outstanding shares of our common stock;
(ii) each of our directors;
(iii) our present and former chief executive officer and
former Vice President and Treasurer (our only other executive officer
during 2000); and
(iv) all of our executive officers and directors as a group.
Under relevant provisions of the Exchange Act, a person is deemed
to be a "beneficial owner" of a security if he or she has or shares
the power to vote or direct the voting of the security or the power to
dispose or direct the disposition of the security. A person is also
deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership in 60 days. More than
one person may be deemed to be a beneficial owner of the same
securities. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of our
common stock as of March 31, 2001, plus those shares of our common
stock that the stockholder has the right to acquire within 60 days.
Consequently, the denominator for calculating the percentage ownership
may be different for each stockholder.
The table is based upon information provided by our directors and
executive officers.
Amount and Nature of Beneficial
Ownership as of March 31, 2001(1)
-----------------------------------------------------
Name and Address Exercisable
of Beneficial Common Options & Total
Owner Shares Warrants(2) Ownership Percent(3)
- ----------------- --------- ----------- --------- ---------
Principal
Stockholders:
Wolfgang Rauball(4) 9,671,429 17,192,858 26,864,287 22.78%
Officers,
Directors, and
Controlling
Persons:
Dr. Gregory P.Fontana, Nil 350,000 350,000 *
Director
2269 Worthing Lane
Los Angeles,
California 90077
Andrew Andraczke, Nil 350,000 350,000 *
Director
Warsaw:str.
Lektykarska 18
01-687 Warszawa,
Poland
40
All officers and
directors
as a group (2
persons) Nil 200,000 200,000
_________________________
(1) Unless otherwise indicated, to our best knowledge, all stock
is owned beneficially and of record by the listed stockholder, and
each stockholder has sole voting and investment power with respect to
our common stock beneficially owned by such person.
(2) Represents options or warrants exercisable within 60 days of
March 31, 2001, held by such individual or entity.
(3) The percentage indicated represents the number of shares of
our common stock, warrants and options exercisable within 60 days held
by the indicated stockholder divided by the sum of (a) the number of
shares subject to options exercisable by such stockholder within 60
days and (b) 100,736,979, which is the number of shares of our common
stock issued and outstanding as of April 15, 2000.
(4) Includes shares in which Mr. Rauball disclaims beneficial
ownership and which he temporarily holds as a nominee for other
persons.
41
Item 13. Certain Relationships and Related Transactions
On or about January 12, 2000, we issued four convertible
debentures in the aggregate face amount of $3,000,000 in exchange for
$3,000,000 in cash to Wolfgang Rauball and certain affiliates of
Wolfgang Rauball, who directly or indirectly own 22.78% percent of our
outstanding common stock as of April 15, 2000, and who serves as a
consultant to us. The convertible debentures accrue interest at the
rate of prime plus two percent 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 $1,000,000 in principal amount of 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 $1,000,000
of convertible debenture), and (b) warrants to purchase one share of
our common stock at the rate of two warrants for each $0.35 in
indebtedness (for a total of 5,714,286 warrants per $1,000,000 of
convertible debenture). Each such warrant entitles the holder to
purchase one share of our common stock for an exercise price of $0.35.
As of April 15, 2000, Mr. Rauball and his affiliates have converted
all $3,000,000 in principal amount of convertible debentures in
exchange for 8,571,429 shares of our common stock and 17,142,858
warrants to purchase common stock.
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, 2000,
1999, 1998 and 1997
B. Consolidated Balance Sheets at December 31, 2000 and
1999
C. Consolidated Statements of Income for the years ended
December 31, 2000, 1999, 1998 and 1997
D. Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998, 1999 and 2000
E. Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999, 1998 and 1997
F. Notes to Consolidated Financial Statements
2. Exhibits.
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
2.1 Exchange Agreement between Report on Form
Northampton, Inc., 8-K
and Energy Global, A.G. dated August
3, 1994,
Exhibit No. 1*
42
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
2.2 Agreement and Plan of Merger Report on Form
between EuroGas, Inc., 8-K
and Danube International dated July 12,
Petroleum Company, Inc., 1996,
dated July 3, 1996, as amended Exhibit No. 5*
2.3 English translation of Transfer Report on Form
Agreement between 8-K
EuroGas and OMV, Inc. for the dated June 11,
Acquisition of 1997
OMV (Yakut) Exploration GmbH Exhibit No. 1*
dated June 11, 1997
2.4 Asset Exchange Agreement between Report on Form
EuroGas, Inc., S-1
and Beaver River Resources, Ltd., dated July,
dated April 1, 1988 23, 1998
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
Privileges, and Preferences Report on
of 1995 Series Preferred Stock Form 10-QSB
dated
March 31,
1995,
Exhibit No. 1*
3.4 Designation of Rights, Report on Form
Privileges, and Preferences 8-K
of 1996 Series Preferred Stock dated July 12,
1996,
Exhibit No. 1*
3.5 Designation of Rights, Report on Form
Privileges, and Preferences 8-K
1997 Series A Convertible dated May 30,
Preferred Stock 1997
Exhibit No. 1*
3.6 Designation of Rights, Report on Form
Privileges, and Preferences S-1
of 1998 Series B Convertible Dated July 23,
Preferred Stock 1998
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, Registration
Privileges, and Preferences of Statement on
1999 Series C 6% Convertible Form S-1, File
Preferred Stock No. 333-92009,
filed on
December 2,
1999
4.1 Subscription Agreement between Report on Form
EuroGas, Inc., and S-1
Thomson Kernaghan & Co., Ltd., dated July 23,
dated May 29, 1998 1998
Exhibit No.
4.01*
4.2 Warrant Agreement dated July 12, Report on Form
1996, with 8-K
Danube Shareholder dated July 12,
1996,
Exhibit No. 2*
43
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
4.3 Registration Rights Agreement Report on Form
Between EuroGas, Inc., S-1 dated July
and Thomson Kernaghan & Co., 23, 1998
Ltd., dated May 29, 1998 Exhibit No.
4.02*
4.4 Registration Rights Agreement Report on Form
dated July 12, 1996, 8-K
with Danube Shareholder dated July 12,
1996
Exhibit No. 3*
4.5 Registration Rights Agreement by Report on Form
and among EuroGas, Inc., and S-1
Finance Credit & Development dated July 23,
Corporation, Ltd., dated June 30, 1998
1997 Exhibit No.
4.06*
4.6 Option granted to the Trustees of Annual Report
the Estate of on
Bernice Pauahi Bishop Form 10-KSB
for the
fiscal year
ended
December 31,
1995,
Exhibit No.
10*
4.7 Registration Rights Agreement by Annual Report
and among on
EuroGas, Inc., and Kukui, Inc., Form 10-KSB
and the Trustees of for the
the Estate of Bernice Pauahi fiscal year
Bishop ended
December 31,
1995,
Exhibit No.
11*
4.8 Option issued to OMV Annual Report
Aktiengesellschaft to acquire up on
to 2,000,000 shares of restricted Form 10-KSB
common stock for the
fiscal year
ended
December 31,
1996,
Exhibit No.
13*
4.9 Form of Convertible Debenture Filed
issued on January 12, 2000. herewith.
10.1 English translation of Mining Quarterly
Usufruct Contract between The Report on Form
Minister of Environmental 10-Q dated
Protection, Natural Resources and September 30,
Forestry of the Republic of 1997 Exhibit
Poland and Pol-Tex Methane, dated No. 1*
October 3, 1997
10.2 Agreement between Polish Oil and Quarterly
Gas Mining Joint Stock Company Report on Form
and EuroGas, Inc., dated October 10-Q dated
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
Kukui, Inc., and on
Pol-Tex Methane, Sp. zo.o., Form 10-KSB
McKenzie Methane for the
Rybnik, McKenzie Methane fiscal year
Jastrzebie, GlobeGas, ended
B.V. (formerly known as McKenzie December 31,
Methane Poland, 1995,
B.V.), and the Unsecured Exhibit No.
Creditors' Trust of the 15*
Bankruptcy Estate of McKenzie
Methane Corporation
44
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
10.5 Acquisition Agreement between Report on Form
EuroGas, Inc., and Belmont S-1 dated
Resources, Inc., dated July 22, July 23, 1998
1998 Exhibit No.
10.20*
10.6 General Agreement governing the Report on Form
operation of 8-K
McKenzie Methane Poland, B.V. dated August
3, 1994,
Exhibit No. 2*
10.7 Concession Agreement between Annual Report
Ministry of on
Environmental Protection, Natural Form 10-KSB
Resources, and for the
Forestry and Pol-Tex Methane Ltd. fiscal year
ended
December 31,
1995,
Exhibit No.
18*
10.8 Association Agreement between Annual Report
NAFTA a.s. Gbely on
and Danube International Form 10-KSB
Petroleum Company for the
fiscal year
ended
December 31,
1995,
Exhibit No.
19*
10.9 Agreement between Moravske' Annual Report
Naftove' Doly a.s. on
and Danube International Form 10-KSB
Petroleum Company for the
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 Annual Report
amended, with attached on
list of shareholders Form 10-KSB
for the
fiscal year
ended
December 31,
1995,
Exhibit No.
23*
10.12 Amendment #1 to the Association Annual Report
Agreement Entered on
on 13th July 1995, between NAFTA Form 10-KSB
a.s. Gbely and for the
Danube International Petroleum Fiscal year
Company ended
December 31,
1996,
Exhibit No.
25*
10.13 Acquisition Agreement by and Form 10-Q
among Belmont Resources, Inc., Dated
EuroGas Incorporated, dated September 30,
October 9, 1998 1998
Exhibit No. 1*
10.14 Letter of Intent by and between Annual Report
Polish Oil and Gas on
Company and Pol-Tex Methane, Form 10-KSB
dated April 28, 1997 for the
Fiscal year
ended
December 31,
1996,
Exhibit No.
27*
10.15 Purchase and Sale Agreement Report on Form
between Texaco Slask 8-K
Sp. zo.o., Pol-Tex Methane Sp. Dated March
zo.o. and 24, 1997
GlobeGas B.V. Exhibit No. 1*
45
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
10.16 English translation of Articles Report on Form
of Association of the 8-K/A
TAKT Joint Venture dated June 7, Dated June 11,
1991, as amended 1997
April 4, 1993 Exhibit No. 3*
10.17 English translation of Proposed Report on Form
Exploration and 8-K/A
Production Sharing Contract for Dated June 11,
Hydrocarbons 1997
between the Republic of Sakha Exhibit No. 4*
(Yakutia) and the Russian
Federation and the TAKT Joint
Venture
10.18 English translation of Agreement Registration
on Joint Investment and Statement on
Production Activities between Form S-1 dated
EuroGas, Inc., and July 23, 1998
Zahidukrgeologia, dated May 14, Exhibit No.
1998 10.21*
10.19 English translation of Statutory Registration
Agreement of Association of Statement on
Limited Liability Company with Form S-1 dated
Foreign Investments between July 23, 1998
EuroGas, Inc., and Makyivs'ke Exhibit No.
Girs'ke Tovarystvo, dated June 10.22*
17, 1998
10.20 Partnership Agreement between Amendment No.
EuroGas, Inc., and RWE-DEA 1 to
Altiengesellschaft for Mineraloel Registration
and Chemie AG, date July 22, 1998 Statement on
Form S-1 dated
August 3, 1998
Exhibit No.
10.23
10.21 Mining Usufruct Contract between Quarterly
The Minister of Report on
Environmental Protection, Natural Form 10-Q
Resources and dated
Forestry of the Republic of September 30,
Poland and Pol-Tex 1997
Methane, dated October 3, 1997 Exhibit No. 1*
10.22 Agreement between Polish Oil and Quarterly
Gas Mining Joint Report on
Stock Company and EuroGas, Inc., Form 10-Q
dated dated
October 23, 1997 September 30,
1997
Exhibit No. 2*
10.23 Agreement for Acquisition of 5% Quarterly
Interest in a Report on
Subsidiary by and between Form 10-Q
EuroGas, Inc., B. Grohe, dated
and T. Koerfer, dated November September 30,
11, 1997 1997
Exhibit No. 3*
10.24 Option Agreement by and between Quarterly
EuroGas, Inc., Report on
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 Registration
3, 1996, between Potomac Statement
Corporation and the Company; on Form S-1,
Letter of Amendment dated File No.
September 30, 1999. 333-92009,
filed on
December 2,
1999
10.26 Sublease dated November 2, 1999, Registration
between Scotdean Limited and the Statement on
Company Form S-1, File
No. 333-92009,
filed on
December 2,
1999
46
Exhibit Title of Document Location
Number
- ------ ------------------------------ ---------------
10.27 Securities Purchase Agreement Registration
dated November 4, 1999, between Statement on
the Company and Arkledun Drive Form S-1, File
LLC No. 333-92009,
filed on
December 2,
1999
10.28 Registration Rights Agreement Registration
dated November 4, 1999, between Statement on
the Company and Arkledun Drive Form S-1, File
LLC No. 333-92009,
filed on
December 2,
1999
10.29 Supplemental Agreement dated Registration
November 4, 1999, between the Statement on
Company and Arkledun Drive LLC Form S-1, File
No. 333-92009,
filed on
December 2,
1999
10.30 Executive Employment Agreement Registration
dated April 20, 1999 between the Statement on
Company and Karl Arleth Form S-1, File
No. 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
Petroleum Engineers Statement on
Form S-1 dated
July 23,
1998.*
24 Power of Attorney Included on
the Signature
Page hereof.
*Incorporated by reference
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31,
2000, we did not file any reports on Form 8K.
(c) Exhibits
Exhibits to this Report are attached following Page F-1 hereof.
(d) Financial Statement Schedules
None
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EUROGAS, INC.
(Registrant)
By /s/ Andrew Andraczke
-------------------------
Andrew Andraczke
President and Chief Executive
Officer
DATE: April 17, 2001
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature and Title Date
/s/ Borre Dahl
______________________ April 17, 2001
Borre Dahl
Chief Financial Officer
and Chief Accounting Officer
/s/ Dr. Gregory P. Fontana
_______________________ April 17, 2001
Dr. Gregory P. Fontana, Director
/s/ Wolfgang Rauball
_______________________ April 17, 2001
Wolfgang Rauball, Director
/s/ Garry Henry
_______________________ April 17, 2001
Garry Henry, Director
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets-December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
Supplemental Information Regarding Oil and Gas Producing
Activities F-27
F-1
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 Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of
EuroGas, Inc., a Utah corporation, and Subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. 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 auditing standards
generally accepted in the United States. 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, 2000 and 1999,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming 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, 2000, the Company has negative working capital. These
factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding 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.
/s/ Hansen, Barnett & Maxwell
-----------------------------
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 23, 2001, except for Note 4 -
Acquisition of Talc Mineral Interest,
as to which the date is April 16, 2001
F-2
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December
31, 2000
Pro Forma December 31, December 31,
(Note 1) 2000 1999
------------ ------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 595,335 $ 602,448 $ 1,047,141
Investment in securities available-for-sale 137,948 137,948 317,084
Trade accounts receivable, no allowance provided - 2,715,089 907,269
Value added tax receivables 105,166 105,166 1,057,628
Receivable from joint venture partners - - 1,217,149
Other receivables 587,173 587,173 74,696
Other current assets 93,960 228,420 236,044
------------ ------------ ------------
Total Current Assets 1,519,582 4,376,244 4,857,011
------------ ------------ ------------
Drilling Advances - 321,240 -
Property and Equipment - full cost method
Oil and gas properties subject to amortization - 16,499,982 21,553,571
Oil and gas properties not subject
to amortization 7,418,029 9,461,039 26,862,072
Talc mineral properties 2,216,308 2,216,308 755,539
Furniture and office equipment 602,745 1,006,517 1,052,098
------------ ------------ ------------
Total Property and Equipment 10,237,082 29,183,846 50,223,280
Less: accumulated depletion depreciation
and amortization (224,389) (3,979,057) (2,060,386)
------------ ------------ ------------
Net Property and Equipment 10,012,693 25,204,789 48,162,894
------------ ------------ ------------
Investment in Big Horn Resources Ltd.,
equity method 4,438,297 - -
Investments, at cost 877,014 877,014 358,857
Notes Receivable - - 500,000
Other Assets - - 89,816
------------ ------------ ------------
Total Assets $ 16,847,586 $ 30,779,287 $ 53,968,578
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,888,249 $ 5,408,682 $ 4,085,777
Accrued liabilities 4,061,438 5,332,052 3,554,095
Accrued income taxes 745,905 745,905 708,931
Accrued settlement obligations 6,516,273 6,516,273 12,527,000
Notes payable 29,531 3,234,011 4,155,492
Notes payable to related parties 457,600 457,600 1,329,161
------------ ------------ ------------
Total Current Liabilities 13,698,996 21,694,523 26,360,456
------------ ------------ ------------
Deferred Income Tax Liability - 2,442,081 -
------------ ------------ ------------
Minority Interest - 3,787,343 3,824,903
------------ ------------ ------------
Stockholders' Equity
Preferred stock, $.001 par value;
3,661,968 shares authorized; issued
and outstanding: December 31, 2000 -
2,392,228 shares, December 31, 1999 -
2,394,028 shares; liquidation preference:
$879,624 350,479 350,479 2,001,949
Common stock, $.001 par value; 325,000,000
shares authorized; issued and outstanding:
December 31, 2000 - 126,996,460 shares,
December 31, 1999 - 86,835,838 shares 126,997 126,997 86,836
Additional paid-in capital 132,200,966 132,200,966 102,032,174
Accumulated deficit (125,863,803) (126,157,053) (76,471,799)
Accumulated other comprehensive loss (3,666,049) (3,666,049) (3,865,941)
------------ ------------ ------------
Total Stockholders' Equity 3,148,590 2,855,340 23,783,219
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 16,847,586 $ 30,779,287 $ 53,968,578
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Oil and Gas Sales $ 6,395,037 $ 4,973,508 $ 879,404
------------ ------------ ------------
Costs and Operating Expenses
Oil and gas production 1,521,471 1,330,526 305,009
Impairment of mineral interests
and equipment 26,783,790 7,217,426 3,512,792
Depreciation, depletion, and
amortization 2,023,425 1,810,176 293,955
Litigation settlement expense,
net of $105,000 settlement
income in 2000 7,200,205 12,527,000 -
General and administrative 6,908,264 8,485,939 7,804,401
------------ ------------ ------------
Total Costs and Operating Expenses 44,437,155 31,371,067 11,916,157
------------ ------------ ------------
Other Income (Expenses)
Interest income 89,698 179,538 593,570
Interest expense (7,124,100) (567,195) (465,371)
Loss on sale and impairment of
securities (2,029,916) (1,682,045) -
Foreign exchange net gains (losses) (263,523) 170,315 (130,419)
Other income 455,938 103,878 152,776
Minority interest in income
of subsidiary (103,022) (753,599) (137,983)
------------ ------------ ------------
Total Other Income (Expense) (8,974,925) (2,549,108) 12,573
------------ ------------ ------------
Loss Before Income Taxes (47,017,043) (28,946,667) (11,024,180)
Provision for Income Taxes 2,528,279 - -
------------ ------------ ------------
Net Loss (49,545,322) (28,946,667) (11,024,180)
Preferred Dividends 139,932 1,442,345 2,861,301
------------ ------------ ------------
Loss Applicable to Common Shares $(49,685,254) $(30,389,012) $(13,885,481)
============ ============ ============
Basic and Diluted Loss Per
Common Share $ (0.47) $ (0.36) $ (0.22)
============ ============ ============
Weighted Average Number of Common
Shares Used In Per Share
Calculation 106,145,361 83,368,053 64,129,062
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Preferred Stock Common Stock Additional Other Total
----------------------- ---------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Loss Equity
---------- ----------- ----------- --------- ------------ ------------ ---------- ------------
Balance - December 31, 1997 2,392,228 $ 350,479 62,283,934 $ 62,284 $ 61,311,258 $(32,197,306) $ (14,749) $ 29,511,966
Net loss - - - - - (11,024,180) - (11,024,180)
Net change in unrealized
losses on available for
sale securities - - - - - - (379,266) (379,266)
Translation adjustments - - - - - - (442,929) (442,929)
----------
Comprehensive loss (11,846,375)
Dividends on preferred shares - - - - - (2,861,301) - (2,861,301)
Issuance of 1998 Series
preferred stock for cash,
net of $1,275,005 offering
costs 17,000 15,668,875 50,000 50 56,070 - - 15,724,995
1998 Series preferred stock
beneficial conversion
feature - - - - 2,550,000 - - 2,550,000
Conversion of 1998 Series
preferred stock and accrued
dividends (15,500) (14,286,327) 8,860,196 8,860 14,442,474 - - 165,007
Issuance for financing and
other services - - 60,500 61 226,064 - - 226,125
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 1,733,027 76,254,630 76,255 92,833,328 (46,082,787) (836,944) 47,722,879
------------
Net loss - - - - - (28,946,667) - (28,946,667)
Net change in unrealized
losses on securities
available for sale - - - - - - (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 (31,975,664)
------------
Dividends on preferred shares - - - - - (1,442,345) - (1,442,345)
Issuance of 1998 Series
preferred stock, net of
$487,500 issuance costs 6,500 6,012,500 - - - - - 6,012,500
1998 Series preferred
shares beneficial conversion
feature - - - - 901,875 - - 901,875
Conversion of 1998 Series
preferred stock and accrued
dividends (8,000) (7,395,048) 10,576,208 10,576 7,423,973 - - 39,501
Issuance of Series C
preferred stock, net of
$148,530 issuance costs 1,800 1,651,470 - - - - - 1,651,470
Series C preferred shares
beneficial conversion
feature - - - - 360,000 - - 360,000
Compensation related to
grant of stock options - - - - 487,553 - - 487,553
Issuance as payment of
interest - - 5,000 5 25,445 - - 25,450
---------- ----------- ----------- --------- ------------ ------------ ----------- ------------
Balance - December 31, 1999 2,394,028 $ 2,001,949 86,835,838 $ 86,836 $102,032,174 $(76,471,799) $(3,865,941) $ 23,783,219
========== =========== =========== ========= ============ ============ =========== ============
(Continued)
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONTINUED)
Accumulated
Preferred Stock Common Stock Additional Other Total
----------------------- --------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Loss Equity
---------- ----------- ----------- -------- ------------ ------------- ----------- ------------
Balance - December 31, 1999 2,394,028 $ 2,001,949 86,835,838 $ 86,836 $102,032,174 $ (76,471,799) $(3,865,941) $ 23,783,219
------------
Net loss - - - - - (49,545,322) - (49,545,322)
Net change in unrealized
losses on securities
available for sale - - - - - - (179,136) (179,136)
Reclassification adjustment
on unrealized loss on
securities-available-for
-sale - - - - - - 1,248,073 1,248,073
Translation adjustments - - - - - - (869,045) (869,045)
------------
Comprehensive loss (49,345,430)
------------
Dividends on preferred shares - - - - - (139,932) - (139,932)
Conversion of Series C
preferred stock and accrued
dividends (1,800) (1,651,470) 5,329,713 5,330 1,667,739 - - 21,599
Issuance for cash, net of
$169,500 offering costs - - 9,400,000 9,400 2,195,600 - - 2,205,000
Issuance of common shares
and 3,000,000 options under
settlement agreement with
FCDC - - 3,700,000 3,700 11,609,300 - - 11,613,000
Issuance for settlement
agreements - - 1,842,983 1,843 1,031,671 - - 1,033,514
Issuance for settlement of
accrued liabilities - - 832,760 833 290,633 - - 291,466
Issuance for assumption of
lending commitment - - 500,000 500 364,500 - - 365,000
Warrants and beneficial
conversion feature issued
with notes payable, net
of $360,212 offering costs - - - - 2,669,567 - - 2,669,567
Warrants issued in
connection with default
on notes payable - - - - 2,639,038 - - 2,639,038
Beneficial conversion feature
of notes payable - - - - 918,000 - - 918,000
Conversion of $1,173,896 of
notes payable to related
parties and $502,871 of
accrued interest - - 3,891,954 3,892 1,672,875 - - 1,676,767
Conversion of notes
payable - - 14,331,540 14,331 5,001,705 - - 5,016,036
Issuance for services - - 331,672 332 108,164 - - 108,496
---------- ---------- ------------ -------- ------------ ------------- ----------- ------------
Balance - December 31, 2000 2,392,228 $ 350,479 126,996,460 $126,997 $132,200,966 $(126,157,053) $(3,666,049) $ 2,855,340
========== ========== ============ ======== ============ ============= =========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------
2000 1999 1998
------------ ------------- ------------
Cash Flows From Operating Activities
Net loss $(49,545,322) $(28,946,667) $(11,024,180)
Adjustments to reconcile net
loss to cash provided by operating
activities:
Depreciation depletion and
amortization 2,023,425 1,810,176 293,955
Impairment of mineral interests
and equipment 26,783,790 7,217,426 3,512,792
Minority interest in income
of subsidiary 103,022 753,599 137,983
Bad debt allowance provided
against note receivable 500,000 - -
Interest expense related to grant
of warrants and beneficial
conversions features 6,027,939 - -
Interest paid by issuance
of common shares 1,095,811 25,450 -
Amortization of discount on
notes payable 12,992 39,074 -
Expenses paid by issuance of
notes payable to shareholder 986,376 - -
Common shares issued for services 108,496 - 226,125
Shares issued for relief of
funding obligation 365,000 - -
Compensation paid by reduction
of note receivable - 200,000 -
Compensation from stock options - 487,553 -
Loss on sale and decline in
securities available for sale 2,029,916 1,671,393 -
Exchange (gain) loss 263,523 (170,315) 130,419
Changes in assets and liabilities,
net of acquisitions:
Trade receivables (1,807,820) (68,235) (72,121)
Other receivables (509,786) (238,945) 549,973
Other current assets (7,624) (125,475) (337,723)
Accounts payable 2,416,965 669,777 (751,640)
Accrued liabilities 3,625,045 346,193 (812,107)
Deferred income taxes 2,442,081 - -
Accrued settlement obligations 6,010,727 12,527,000 -
Other - - (115,783)
------------- ----------- -------------
Net Cash Provided by Used in
Operating Activities 2,924,556 (3,801,996) (8,262,307)
------------- ----------- -------------
Cash Flows From Investing Activities
Purchases of mineral interests,
property and equipment (8,708,816) (7,004,275) (9,291,719)
Drilling advances (324,142) - -
Proceeds from sale of interest in
gas property and equipment 2,661,707 207,509 -
Acquisition of subsidiaries, net
of cash acquired - - (2,159,363)
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 -
Expenditure for other investments (1,300,000) (358,857) -
Payments for notes receivable - (600,000) (500,000)
------------ ----------- -------------
Net Cash Used In Investing
Activities (7,671,251) (8,936,808) (13,587,411)
------------- ----------- -------------
Cash Flows From Financing Activities
Proceeds from issuance of common
shares, net of offering costs 2,400,000 - 150,000
Proceeds from issuance of notes
payable to related parties 456,749 - -
Principal payments on notes payable
to related parties (65,974) (218,355) (999,439)
Proceeds from issuance of notes
payable to related parties 1,591,336 57,506 -
Principal payments on notes payable - (981,611) (3,192,109)
Proceeds from issuance of preferred
shares, net of offering costs - 7,663,970 15,724,995
Dividends paid on preferred shares - - (260,139)
Proceeds from issuance of common
shares by subsidiary - - 592,568
------------- ----------- -------------
Net Cash Provided By
Financing Activities 4,382,111 6,521,510 12,015,876
------------- ----------- -------------
Effect of Exchange Rate Changes
on Cash (80,109) (225,075) 75,685
------------- ----------- -------------
Net Decrease in Cash (444,693) (6,442,369) (9,758,157)
Cash at Beginning of Year 1,047,141 7,489,510 17,247,667
------------- ----------- -------------
Cash at End of Year $ 602,448 $ 1,047,141 $ 7,489,510
============= =========== =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest $ 146,222 $ 376,700 $ 485,157
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Common shares and stock options
issued to acquire property $ - $ - $ 14,102,462
Common shares issued upon conversion
of notes payable, accrued liabilities
and accrued interest 4,654,522 25,450 -
Common shares issued as payment of
preferred dividends 21,599 39,502 165,008
Common shares issued in satisfaction
of accrued liabilities 391,466 - -
Common shares and warrants issued in
satisfaction of accrued settlement
obligations 12,351,514 - -
Beneficial conversion feature granted
in connection with preferred shares - 1,261,875 2,550,000
Note receivable assigned in
satisfaction of note payable - 600,000 -
Cash paid in connection with
business acquisitions:
Fair value of assets acquired $ 11,923,200
Excess property cost over fair value 3,512,792
Liabilities assumed and incurred (7,484,675)
Obligation to sellers -
Minority interest recognized (2,112,348)
Common shares issued -
Stock options granted -
-----------
Cash paid 5,838,969
Less cash acquired (3,679,606)
-----------
Net Cash Paid $ 2,159,363
===========
The accompanying notes are an integral part of these consolidated
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, talc, 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 $76,471,799 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.
Unaudited Pro Forma Balance Sheet - On February 22, 2001, EuroGas
announced its intention to sell up to 8,000,000 of its 14,100,000
common shares of Big Horn Resources Ltd. ("Big Horn"). From February
28, 2001 through March 16, 2001, EuroGas sold 2,140,500 shares of Big
Horn for $1,087,600. As a result of the sale, EuroGas' interest in
common stock of Big Horn was reduced from 50.1% to 42.5% and will
result in the investment in Big Horn being accounted for by the equity
method rather that on a consolidated basis as presented herein. The
accompanying unaudited pro forma balance sheet has been prepared to
present the financial condition of EuroGas, Inc. and subsidiaries as
though the sale of 2,140,500 Big Horn common shares had occurred on
December 31, 2000. The pro forma balance sheet has been prepared for
illustrative purposes only and does not purport to represent what the
Company's financial position actually would have been had the sale of
Big Horn common shares occurred on December 31, 2000.
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
F-9
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.
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 each of the three
years in the period ended December 31, 2000, was $117,875, $238,658
and $78,765.
Political Risk -EuroGas has mineral interest property and interests in
Eastern Europe and Eastern Russia which are subject to political
instability, changes in governments, unilateral renegotiation of
concessions and 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, 2000 in excess of
$562,282 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
F-10
shares resulted in the issuance of common shares. In the present
position, diluted loss per share is the same as basic loss per share
because 50,074,794, 19,079,713 and 17,004,647 potentially issuable
common shares at December 31, 2000, 1999 and 1998, respectively, would
have decreased the loss per share and have been excluded from the
calculation.
Foreign Currency Translation - The functional currencies of the
subsidiaries operating in Poland and Slovakia are the local
currencies. The effect of changes in exchange rates with respect to
those subsidiaries is recognized as a separate component of
comprehensive loss Where the functional currencies of foreign
subsidiaries is the U.S. dollar, financial statements of the foreign
subsidiaries 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 was
adopted on January 1, 2000 and did not had a material impact on the
financial condition or results of operations of EuroGas.
NOTE 2 - INVESTMENT IN EQUITY SECURITIES
Investment in Securities Available-for-Sale - During the first quarter
of 1998, EuroGas acquired 933,333 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.
During the year ended December 31, 2000, management determined that
there had been an other-than-temporary decline in the fair value of
the Company's investment in shares available-for-sale of United Gunn.
Accordingly, during the fourth quarter of 2000, EuroGas recognized a
$1,248,073 impairment of the investments.
During the year ended December 31, 2000, EuroGas recorded an
unrealized gain of $84 on its other securities available-for-sale.
Investment in securities available-for-sale consisted of the following
at December 31:
F-11
2000 1999 1998
-------- ---------- ----------
Cost $137,864 $1,385,937 $1,467,754
Gross unrealized gains
(losses) 84 (1,068,853) (379,266)
-------- ---------- ----------
Estimated fair value $137,948 $ 317,084 $1,088,488
======== ========== ==========
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.
Investment in Other Equity Securities at Cost - EuroGas paid a deposit
of $300,000 towards a potential acquisition of an interest in a
Russian oil and gas company owned by Teton Petroleum Company
("Teton"), made loans to Teton in the amount of $1,000,000. During
October 2000, EuroGas and Teton terminated their merger agreement
EuroGas received 2,700,000 shares of Teton common stock in
consideration of their advances to Teton under the termination
agreement. Since there is no regular and active market for the Teton
common stock and the fair value was not readily determinable it was
recorded at its historical cost of $1,300,000 as a long term
investment. During December 2000, management evaluated the investment
and determined it to be impaired and recorded an impairment charge of
$781,843 against the Teton stock. The investment in Teton stock is
carried at its new historical cost of $518,157.
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 had dropped substantially, and
management determined there had 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.
NOTE 3 - ACCOUNTS AND 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.
During the second quarter of 2000 EuroGas determined that the note
receivable was unrecoverable. Accordingly, the Company provided an
allowance against the note and recorded a bad debt charge of $500,000
to its operations for the year ended December 31, 2000.
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 - MINERAL INTERESTS IN PROPERTIES
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 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.
F-12
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 year ended
December 31, 1998, assuming the acquisition of Big Horn had occurred
on January 1, 1998, excluding non-recurring items, are as follows:
Revenues $2,138,415
Net loss (7,528,473)
Net loss applicable to common shares (10,389,774)
Net loss per common share (0.16)
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 $358,857
payment towards the purchase of a 40% interest in an operating oil
refinery in Slovenia. Upon governmental approval, EuroGas will be
obligated to make an additional investment of approximately $500,000
for the interest.
Trebisov Property - A dispute arose with the joint venture partner on
the Trebisov property in Slovalia, 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.
Acquisition and Disposition of Maseva Gas s.r.o. - During October
1998, EuroGas acquired a 90% interest in Maseva Gas s.r.o. ("Maseva"),
a Slovak company, from Belmont Resources Inc. ("Belmont"). Meseva
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
had no operations prior to the acquisition. The acquisition was
considered to be the purchase of properties and the cost of the
acquisition was allocated to oil and gas properties not subject to
amortization.
F-13
On June 14, 2000, EuroGas agreed to transfer its 90% interest in
Meseva back to Belmont as explained below. EuroGas and Belmont are
related parties as a result of a common individual serving on the
board of directors of both companies. Although the transfer of Meseva
back to Belmont was not an arms-length transaction, it resulted in the
recognition of a loss on the disposition of $6,527,462.
Acquisition of Talc Mineral Interest - During 1998, EuroGas acquired a
24% interest in an undeveloped talc deposit in Eastern Slovakia
through an indirect investment in Rozmin s.r.o. During the third
quarter of 2000, EuroGas determined that Oxbridge Ltd., a related
party, had paid $879,000 on behalf of EuroGas in 1998 as part of the
purchase of the 24% interest in the talc deposit. On March 19, 1998,
EuroGas reimbursed Oxbridge Ltd. for their payment and accounted for
the payment to Oxbridge Ltd. as a reduction of a separate promissory
note payable to Oxbridge Ltd. In light of a demand in 2000 by
Oxbridge Ltd. for payment of the promissory note, EuroGas reclassified
the payment to Oxbridge Ltd. as an increase in the cost of the 24%
interest in the talc deposit and recorded the principal and $272,490
of accrued interest due under the promissory note payable to Oxbridge
Ltd. In November 2000, EuroGas issued 2,391,162 shares of common,
valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in
satisfaction of the principal and accrued interest due on the
promissory note. Through December 31, 2000 and 1999, EuroGas had
invested $2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and
$915,913 (excluding the payment to Oxbridge Ltd.), respectively, in
the acquisition and development of the talc deposit and related
equipment.
On June 14, 2000, EuroGas agreed to transfer its 90% interest in
Meseva back to Belmont, a related party as explained above, and to
modify the warrants to purchase 2,500,000 common shares held by
Belmont to reduce the exercise price from $2.50 to $0.82 per share and
to extend their expiration date from October 8, 2000 to June 14, 2002.
In exchange, Belmont agreed to provide $1,000,000 of debt financing to
Rozmin s.r.o. and Belmont agreed to waive its right of first refusal
to acquire the shares in Rima Muran s.r.o. from EuroGas. The
modification to the options increased their fair value by $1,246,718.
The fair value of the options was determined using the Black-Scholes
option pricing model with the following weighted average assumptions:
risk free interest rate of 6.5%; expected dividend yield of 0%;
volatility of 110% and an expected life of 2.0 years. The modification
to the warrants was accounted for as a prepaid financing fee. Belmont
did not provide the $1,000,000 financing as required under the related
agreement. EuroGas did not pursue its rights to require Belmont to
meet its obligation and, therefore, charged the prepaid financing fee
to interest expense during 2000.
On March 27, 2001, EuroGas entered into an agreement to purchase an
additional 57% interest in Rozmin s.r.o. from Belmont in exchange for
EuroGas issuing 12,000,000 common shares. EuroGas agreed to register
the common shares issued. EuroGas has the right to repurchase up to
6,000,000 common shares at $2.00 per share for up to one year, upon
thirty days written notice to Belmont. EuroGas agreed to issue
additional common shares if the ten-day average NASD OTC quoted
trading price of the Company's common shares is less than $0.30 per
share for any ten-trading-day period through March 27, 2002. Under the
terms of the guarantee, EuroGas agreed to issue an additional
1,000,000 common shares to Belmont for each $0.05 decrease in the ten-
day average quoted market price below $0.30 per share. Additionally,
if Belmont is unable to realize $1,911,700 from the resale of the
12,000,000 common shares by March 27, 2002, EuroGas has agreed to
issue additional common shares to compensate for any shortfall based
on the ten-day average trading price on the date of the notice of
shortfall from Belmont.
EuroGas agreed to pay Belmont a $100,000 non-refundable advanced
royalty to Belmont. In connection with the purchase, Rozmin s.r.o.
granted a royalty to Belmont a two percent royalty on the gross
revenues from any talc sold. EuroGas agreed to arrange the necessary
financing to place the talc deposit into commercial production by
March 27, 2002, and if not in commercial production within one year,
EuroGas agreed to pay Belmont additional advanced royalties of $10,000
per month for each month of delay in achieving commercial production.
EuroGas granted Belmont the right to appoint one member of the
EuroGas, Inc. board of directors for not less than one year.
F-14
In connection with the acquisition, EuroGas further modified the
options held by Belmont for the purchase of 2,500,000 common shares at
$0.82 per share to being exercisable at $0.40 per share. The
modification to the options increased their fair value on January 4,
2001, the date modified, by $143,560. The fair value of the options
was determined using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate of
5.0%; expected dividend yield of 0%; volatility of 111% and an
expected life of 1.5 years. The purchase of the additional 57%
interest in Rozmin s.r.o. will be recorded at $3,807,560 during the
first quarter 2001, based on the market value of the common shares
issued (including the guarantee of the future stock value), the
increase in the fair value from the modification of the stock options
and the cash to be paid. If additional common shares are issued in the
future under the guarantee of the future market value of the Company's
common shares, no additional cost will be recognized.
EuroGas acquired the original 24% mineral interest through the
acquisition of a 53% interest in RimaMuran s.r.o. whose principal
asset is the 24% investment in Rozmin s.r.o. RimaMuran s.r.o. has an
obligation to fund 33% to 39% of the projected $12,000,000 capital
cost requirements over the next year. RimaMuran s.r.o. 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. In
addition, EuroGas has the obligation to provide 57% of the capital
cost requirements as a result of the purchase of the 57% interest from
Belmont in March 2001.
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.
South Wales Drilling Program - 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 coal methane gas.
Under the terms of the agreement, EuroGas agreed to pay the costs for
the pilot program and the first stage of any subsequent development
program in exchange for 40% of the cash flows from the development
until payout of the amount EuroGas invests. EuroGas' interest would
then be reduced to 25%. Slovgold GmbH is owned by a shareholder and
director of EuroGas. During December 2000, EuroGas and Slovgold GmbH
abandoned the program with no further obligation to EuroGas.
Impairment of Properties -The Company periodically assesses the
capitalized costs of properties for impairment based on estimated
future discounted net cash flows. As a result of the assessments,
impairment loss of $3,512,792 was recognized during 1998 relating to
properties held by Big Horn in Canada, $6,775,114 was recognized
during 1999 relating to properties held by Pol-Tex Methane in Poland,
and the following losses were recognized during 2000: Trebisov
property in Slovakia - $7,306,943, Mesava property in Slovakia -
$6,558,230, Beaver River property in Canada - $3,937,500, Ukraine
properties - $1,200,310, TAKT properties in Russia - $7,701,362, and
other - $79,445.
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
F-15
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.
During 2000, those properties were reclassified to properties not
subject to amortization and impaired as explained above.
The following is a summary of changes to oil and gas properties:
2000 1999 1998
------------ ------------ -----------
Properties Subject to Amortization
Cost at beginning of year $ 21,553,571 $ 18,064,186 $ -
Net reclassification from (to)
properties not subject to
amortization (1,560,841) 333,465 8,333,863
Acquisition costs 154,842 1,752,245 8,784,050
Exploration and development
costs 6,518,896 2,830,308 4,459,065
Proceeds from sale of property (2,357,901) (167,371) -
Less ceiling test and valuation
adjustments (7,306,943) - (3,512,792)
Translation adjustments (501,642) (1,259,262) -
------------- ------------ -----------
Cost at end of year 16,499,982 21,553,571 18,064,186
Less depreciation, depletion
and amortization (3,619,329) (1,817,371) (220,600)
------------- ------------ -----------
Net Properties Subject to
Amortization $ 12,880,653 $ 19,736,200 $17,843,586
============= ============ ===========
Properties Not Subject To
Amortization Cost at
beginning of year $ 26,862,072 $ 32,763,353 $ 22,723,660
Acquisition costs 1,593,776 1,259,696 17,804,072
Exploration costs 139,722 1,327,737 573,569
Net reclassification from
(to) properties subject
to amortization 1,560,841 (333,465) (8,333,863)
Proceeds from sale of property (303,684) (53,232) -
Less accumulated valuation
And adjustments (19,476,847) (6,775,114) -
Translation adjustment (914,841) (1,326,903) (4,085)
-------------- ------------ ------------
Net Property Not Subject
to Amortization $ 9,461,039 $ 26,862,072 $ 32,763,353
============== ============= ============
Talc Mineral Property
Cost at beginning of year $ 755,539 $ 709,570 $ -
Property costs - 45,969 -
Acquisition costs 1,460,769 - 709,570
-------------- ------------- ------------
Net Other Mineral Interest
Property $ 2,216,308 $ 755,539 $ 709,570
============== ============= ============
NOTE 5 - FURNITURE AND OFFICE EQUIPMENT
Other property and equipment consisted of the following at December:
2000 1999 1998
------------ ------------ -----------
Buildings $ - $ - $ 19,571
Equipment 1,006,517 1,052,098 560,446
------------ ------------ -----------
1,006,517 1,052,098 580,017
Less: Accumulated depreciation (359,728) (243,015) (86,454)
------------ ----------- -----------
Net Other Property and Equipment $ 646,789 $ 809,083 $ 493,563
============ =========== ===========
F-16
NOTE 6 - 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 at December 31:
2000 1999 1998
------------ ------------ -----------
Canada $ 18,861,163 $ 20,039,572 $ 15,995,000
Europe and Russia 6,702,483 28,571,995 36,025,164
------------- ------------ ------------
Total Property and Equipment
and Other Assets $ 25,563,646 $ 48,611,567 $ 52,020,164
============ ============ ============
Sales and net loss were in the following geographic areas during the years
ended December 31:
2000 1999 1998
------------ ------------ ------------
Oil and Gas Sales - Canada $ 6,395,037 $ 4,973,508 $ 879,404
============ ============ ============
Net Loss
United States (Corporate) $ - $(17,687,833) $ (2,625,306)
Canada (3,833,909) 757,781 (3,362,517)
Europe and Russia (45,711,413) (12,016,615) (5,036,357)
------------- ------------- ------------
Net Loss $ (49,545,322) $ (28,946,667) $(11,024,180)
============= ============= =============
NOTE 7 - ACCRUED SETTLEMENT OBLIGATIONS
FCDC Settlement Agreement and Contingently Issuable Common Shares - On
March 16, 2000, the United States District Court, District of Utah,
Central Division entered a default judgment against EuroGas, and in
favor of Finance & Credit Development Corporation, Ltd., an Ireland
Corporation ("FCDC") in the amount of $19,773,113. On June 16, 2000,
EuroGas entered into a memorandum of understanding with FCDC in
satisfaction of its default judgment. In consideration for FCDC's
stipulation to vacate its default judgment, EuroGas agreed to do the
following:
. issue to FCDC 3,700,000 common shares,
. grant FCDC options to purchase 3,000,000 common shares
at an exercise price of $0.65 per share during the 30
day period commencing June 30, 2001,
. guarantee that the market price of the common shares issuable
upon exercise of the options would be $3.00 per share on the
date of exercise by compensating FCDC in cash or common shares
in an amount equal to the difference between $3.00 and the
market price,
. guarantee that the common shares issuable upon exercise of the
options will retain a value of $3.00 per share throughout the
period during which FCDC is permitted to liquidate the shares
by compensating FCDC in cash or common shares, with respect to
the 400,000 shares FCDC is permitted to sell during every month,
in an amount equal to the difference between $3.00 per share
and 90% of the highest quoted market price per share during each
month,
. cause EuroGas GmbH, a wholly-owned, Austrian subsidiary of
EuroGas, to back up the guarantee by pledging its stock in Rima
Muran s.r.o., which indirectly held, at the time of the
agreement, a 24% interest in a talc deposit in Slovakia,
F-17
. nominate a designee of FCDC to serve on the board of directors
of EuroGas,
. register for resale all of the common shares issued to FCDC
pursuant to the settlement agreement.
Pursuant to the memorandum of understanding, the Company issued to
FCDC 3,700,000 common shares and options to purchase 3,000,000 common
shares exercisable at $0.65 per share from June 30, 2001 through July
29, 2001. The Company obtained effectiveness of a registration
statement in September 2000 relating to the resale by FCDC of the
common shares issued and the common shares underlying the options
granted.
Under the guarantee, unless the market value of the 3,000,000 shares
issuable upon exercise of the options at least equals $3.00 per share
during the period from June 30, 2001 until the common shares
underlying the option and any additional common shares issued under
the guarantee are deemed sold, the Company is required to transfer
cash or issue additional common shares sufficient to make the current
value of the total consideration FCDC receives equal to $9,000,000, or
$3.00 per share. The $9,000,000 guaranteed value less the $1,944,000
($0.65 per share) exercise price has been added to the $2,997,000
($0.81 per share) market value of the 3,700,000 common shares issued
on the date of the agreement, which totaled $10,053,000 and was the
amount recorded for the issuance of the 3,700,000 common shares. If
additional common shares are issued in the future under the guarantee,
no additional expense will be recognized.
On the date of the settlement agreement, the 3,000,000 options to be
issued were valued at $1,560,000, or $0.52 per option, utilizing the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 6.4%; expected dividend yield
of 0%; volatility of 155% and an expected life of 1.1 years. The
amount to be settled by issuance of the common shares (including the
guarantee), the options and $400,000 of settlement costs was
recognized as an accrued settlement obligation and a litigation
settlement expense of $11,527,000 related to the settlement agreement
during the year ended December 31, 1999 and an additional expense from
revision of the estimated value of the contingently issuable common
shares of $486,000 during the year ended December 31, 2000. During
2000, the $11,613,000 accrued settlement obligation was paid by
issuing 3,700,000 common shares and issuing options to purchase
3,000,000 common shares. No additional common shares have been issued
but it is likely that a substantial number of common shares will need
to be issued under the guarantee.
MeKenzie Bankruptcy Claim and Proposed Settlement - A bankruptcy
trustee appointed in the McKenzie Methane Corporation Bankruptcy (the
"McKenzie Estate") and its shareholders' bankruptcy cases (the
"Trustee") (McKenzie Methane Corporation was an affiliate of the
former owner of a EuroGas subsidiary, Pol-Tex Methane, a Polish
corporation) has asserted a claim to the proceeds that EuroGas was to
have received from an agreement with Texaco during 1997 relating to
the exploitation of the Pol-Tex Methane gas concession in Poland,
which agreement was subsequently terminated. The Trustee's claim was
apparently based upon the theory that EuroGas paid inadequate
consideration for its acquisition of Globegas (which indirectly
controlled the Pol-Tex Methane concession) from persons who were
acting as nominees for the McKenzie Estate, or in fact may be
operating as a nominee for the McKenzie Estate, and therefore, the
creditors of the McKenzie Estate are the true owners of the proceeds
received or to have been received from the exploration and
development of the Pol-Tex Methane concession. EuroGas believed that
the claim was 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 has no jurisdiction over Pol-Tex Methane
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 Methane concession.
In July 1999, the 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 disputed the allegations and
filed a motion to dismiss or alternately, to abate this suit. In
October 1999, the Trustee filed a motion 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 included claims
for damages based on fraud, conversion, breach of fiduciary duties,
F-18
concealment and perjury. In January 2000, that motion was approved by
the Bankruptcy Court. This suit was administratively consolidated with
the above claims.
During October 2000, the Company entered into a mediation settlement
agreement with the Trustee to resolve all related disputes and issues.
Under the terms of the agreement, the Company agreed to pay $1,500,000
by December 31, 2000, execute a promissory note for $1,500,000 payable
to the Trustee, bearing an interest rate of 8% per annum and maturing
on December 31, 2002, issue 2,000,000 common shares to the Trustee,
issue 2,800,000 warrants to the Trustee with an exercise price of
$0.405 per share and expiring in October 2002, and indemnify the
Trustee against any claims filed by Bertil Nordling in the McKenzie
Estate bankruptcy cases. The Company agreed to file, for the benefit
of the Trustee, a registration statement by January 15, 2001for the
registration of the common shares to be issued and the common shares
underlying the exercise of the warrants. In return, EuroGas and its
affiliates will receive a global release from the Trustee and Kukui
(and its affiliates) releasing EuroGas from all claims they could
assert against EuroGas. The parties are in the process of preparing a
final settlement agreement which will be submitted to the bankruptcy
court in the McKenzie Estate cases for approval.
In connection with the mediation settlement agreement, Mr. Wolfgang
Rauball, a shareholder and director of EuroGas, entered into a side
agreement with EuroGas under which Mr. Rauball agreed to fund the cash
payment due December 31, 2000 through the purchase of 1,875,000 common
shares from EuroGas for $750,000, or $0.40 per share, and by assuming
and paying $750,000 of the cash payment obligation to the Trustee, by
December 31, 2000. Mr. Rauball further agreed to fund each of the
payments due under the $1,500,000 promissory note 30 days prior to
their due dates through the purchase of common shares from EuroGas for
one-half of each payment at market value as of the date purchased and
by assuming and paying the remaining one-half of each payment to the
Trustee. The Company agreed to register the common shares to be issued
to Mr. Rauball in a registration statement to be filed with the
Securities and Exchange Commission. Mr. Rauball has not provided any
of the required funding to EuroGas nor has he made any of the required
payments to the Trustee. The Company has not initiated nor does it
intend to initiate any action against Mr. Rauball relating to his
default of the side agreement.
The Company has not issued the common shares, the warrants or the
promissory note to the Trustee. As a result of the failure to make the
required payment and issue the securities, the Company is in default
of the mediation settlement agreement. The Trustee also has not met
certain conditions of the agreement and, accordingly, has verbally
agreed to discuss an extension of the payment terms and the due dates
of the payments due under the promissory notes.
Under the terms of the settlement agreement, the Company agreed to
make all past due installment payments due under the Kukui settlement
agreement, as discussed below. Mr. Rauball also agreed to pay EuroGas
the installment payments. Since the date of the mitigation settlement
agreement, Mr. Rauball has not provided the required payments.
The Company recorded a litigation settlement expense and a related
accrued settlement obligation in the amount of $4,583,824 during the
fourth quarter of 2000 relating to the mitigation settlement
agreement. The value of the settlement was based upon the fair value
of the financial instruments to be issued as of the settlement date.
The 2,000,000 common shares to be issued were valued at $810,000, or
$0.405 per share, based on the closing market price of the common
shares on October 20, 2000. The warrants to be issued to purchase
2,800,000 common shares were valued at their fair value of $773,824,
or $0.277 per warrant, computed utilizing the Black-Scholes option
pricing model with the following assumptions: risk free interest rate
of 5.84%, expected dividend yield of 0%, and expected volatility of
136%, and expected life of two years. Interest has been accrued on
$1,500,000 of the accrued settlement obligation at the rate of eight
percent per annum through December 31, 2000.
F-19
Kukui Claim and Settlement - In November 1996, the Company entered
into a settlement agreement with Kukui, Inc. ("Kukui"), a principal
creditor in the McKenzie bankruptcy case, whereby the Company issued
100,000 common shares and an option to purchase 2,000,000 common
shares, which option expired on December 31, 1998. The Company
granted registration rights with respect to the 100,000 common shares
issued. On August 21, 1997, Kukui asserted a claim against EuroGas,
which was based upon an alleged breach of the 1996 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
the 100,000 shares delivered to Kukui in connection with the 1996
settlement. In addition, the Bishop Estate, Kukui's parent company,
entered a claim for failure to register the resale of common shares
subject to its option to purchase up to 2,000,000 common shares of
EuroGas. EuroGas denied any liability and filed a counterclaim against
Kukui and the Bishop Estate for breach of contract concerning their
activities with the McKenzie Bankruptcy Trustee.
In December 1999, EuroGas entered into a settlement agreement with
Kukui, the Bishop Estate and the MeKenzie Bankruptcy Trustee, which
was intended to resolve all claims made by Kukui and the Bishop Estate
against EuroGas. Under the terms of the settlement agreement, EuroGas
recorded an accrued settlement obligation and litigation settlement
expense of $1,000,000 during 1999, paid Kukui $782,232 of the
settlement obligation in 2000 and accrued an additional settlement
obligation liability and expense of $251,741 during 2000. During
2000, EuroGas issued the Bishop Estate 100,000 registered common
shares which were valued at $100,000, or 1.00 per share. The resulting
accrued settlement obligation of $369,509 at December 31, 2000 for the
estimated cost of settling the claim includes an estimated default
penalty and interest. At December 31, 2000, EuroGas was delinquent in
its payments under the settlement agreement.
Winzer-Mauer Claim and Proposed Settlement - On October 27, 2000, the
Company reached an agreement in principal related to a dispute
involving the issuance of common shares upon conversion of notes
payable. Under the terms of the agreement, the Company agreed to
issue 3,800,000 common shares, which were required to be registered
with the Securities and Exchange Commission by the submission of a
Form S-3 no later than January 15, 2001, which did not occur. The
Company also agreed to issue warrants to purchase 5,200,000 common
shares at $1.00 per share. The warrants, when issued, will expire on
January 15, 2002.
The Company recorded a litigation settlement expense and related
accrued settlement obligation in the amount of $1,864,872 during the
fourth quarter of 2000 relating to the settlement agreement. The value
of the settlement was based upon the fair value of the financial
instruments to be issued as of the settlement date. The 3,800,000
common shares to be issued were valued at $1,292,000, or $0.34 per
share, based on the closing market price of the common shares on
October 27, 2000. The warrants to be issued to purchase 5,200,000
common shares were valued at their fair value of $572,872, or $0.11
per warrant, computed utilizing the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 5.84%,
expected dividend yield of 0%, and expected volatility of 136%, and
expected life of 1.2 years. The accrued settlement obligation was
reduced upon the issuance of 877,983 of the required 3,800,000 common
shares at the date of the settlement agreement. The shares issued were
valued at $298,514, or $0.34 per share. The balance of the accrued
settlement obligation relating to the settlement with Winzer-Mauer at
December 31, 2000 was $1,566,358.
Crawford Settlement - During July 1999, an action was commenced by
Crawford, a former consultant, asserting breach of a service agreement
related to consulting and engineering services provided to the Company
in a prior year. Crawford made an assertion for $159,500 and the right
to purchase 284,000 common shares at $1.50 per share as compensation
for services provided to the Company. During the second quarter of
2000, the Company reached a settlement agreement in satisfaction of
this action. Pursuant to the agreement, the Company received $300,000
from a former officer of EuroGas and issued 250,000 common shares to
Crawford. The Company recorded the issuance of the common shares at
the fair value of $195,000, or $0.78 per share and settlement income
in the amount of $105,000 during the year ended December 31, 2000. The
former officer also made payments to Crawford in full satisfaction of
his claims.
F-20
Jeu-Calvo Settlement - In January 1999, Stephen Jeu and Sasanna Calvo
initiated and action in District Court, Harris County, Texas, 55th
Judicial District, asserting claims against EuroGas stemming from an
alleged breach of contract. On or about November 1, 1999, EuroGas
entered into a settlement agreement with Mr. Jeu and MS. Calvo
pursuant to which EuroGas was required to make specified cash payments
to Mr. Jeu and Ms. Calvo an to issue to Mr. Jeu and Ms. Calvo common
shares having a market value of $440,000 on the date of issue. During
August 2000, EuroGas issued 615,000 common shares to Mr. Jeu and Ms.
Calvo in full satisfaction and settlement of the asserted claims. The
common shares issued were valued at $440,000, or $0.72 per share,
based on the market value of the common shares on the date issued. At
December 31, 1999, the Company had recognized obligations relating to
the settlement, in accrued liabilities, notes payable and accrued
interest, of $570,000. During 2000, the estimated obligation was
adjusted to $440,000 for the value of the common shares issued.
Petroleum Ventures Settlement - On October 11, 1999, an action was
filed against EuroGas asserting that EuroGas breached an agreement by
failing to seek registration of certain restricted and unregistered
shares issued to certain investors in connection with the acquisition
of an interest in Beaver River Resources, Ltd. A settlement was
reached whereby half of the interest in the Beaver River project was
returned in exchange of half of the shares that where issued
originally.
Other - An accrued liability payable to a law firm for legal services
in the amount of $122,053 at December 31, 2000 is secured by 1,000,000
shares of Teton Petroleum Company.
NOTE 8 - NOTES PAYABLE TO RELATED PARTIES
2000 Convertible Debentures - During the first quarter of 2000 EuroGas
completed the issuance of two-year 10.5% convertible debentures in the
amount of $3,000,000 to related parties in exchange for cash proceeds
of $1,591,336, the conversion of prior outstanding EuroGas debt into
debentures in the amount of $422,288 and proceeds in the form of
payments to creditors on behalf of EuroGas by a debenture holder in
the amount of $986,376. 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
debenture holders also received 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
debentures. The Company recorded the three instruments at their
relative fair values on the date of issuance with $1,898,138 allocated
to warrants, $330,439 allocated to the debentures and $771,429
allocated to the beneficial conversion feature with the remaining
$2,669,567 recorded as a debt discount. Since the debentures were
immediately convertible, the Company recognized the resulting debt
discount of $2,669,567 as interest expense. The values of the options
was determined using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 6.2%, volatility of
126% and an expected life of two years. The debentures were
subsequently converted, at the election of the holders, on March 30,
2000, into 8,571,428 common shares and warrants to purchase 17,142,858
common shares at $0.35 were issued as units of two warrants per common
share issued concurrent with the conversion.
During September and November 2000, the Company issued 3,870,960
common shares upon conversion of notes payable to related parties in
the amount of $1,345,701, or $0.35 per share, including conversion of
principal on related party notes payable in the amount of $909,907
and related accrued and unpaid interest in the amount of $437,794.
The grant of convertibility of the notes payable and notes payable to
related parties, at a discount below market during the September,
constitutes the grant of a beneficial conversion feature of $0.31 for
the difference between market and the conversion price of the debt.
The Company recognized $459,242 as interest expense related to the
beneficial conversion feature. There was no beneficial conversion
feature related to the November conversion.
F-21
Apart from the first quarter debentures, during 2000 the Company
issued notes payable to shareholders totaling $448,093 for payments
made to or on behalf of the Company. Included in the payments an
advance by an officer of $100,000 to Teton Petroleum Company as a
note receivable.
During September 2000, the Company reached a settlement agreement
pursuant to the default on repayment of notes payable and notes
payable to related parties. Under the terms of the agreement, the
Company issued 4,999,998 warrants. The warrants vest immediately, are
exercisable at $0.55 per share and expire on December 31, 2003. The
Company recorded interest expense in the amount $2,639,038 related to
the warrants. The warrants were valued utilizing the Black-Scholes
option pricing model with the following weighted average assumptions:
risk free interest rate of 5.8 percent; volatility of 137.3 percent;
an expected life of 3.3 years.
During October 1999, the Company reached a settlement agreement on a
defaulted loan from a former director with principal owed of $225,206
and accrued interest of $163,071. Pursuant to the terms of the
agreement, the Company paid $130,000 in cash and issued 615,000 common
shares during August 2000 with a market value of $440,000 or $0.71 per
share. The excess in the value of the settlement and the previously
accrued amount was charged to operations during 2000.
Notes payable to related parties were as follows:
December 31,
------------------------------------
2000 1999 1998
--------- ---------- --------
Loan from a former director, due
on demand with interest at 10%,
unsecured $ - $ - $ 290,206
Loans from companies associated
with a director, due in
1999 and 2000 with interest
at 7.0% to 10%, unsecured 452,051 600,983 960,481
Loan from a director, due in
1999 and 2000, and 2001,
interest: 7.5% to 10%,
unsecured 5,549 613,221 606,951
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 457,600 1,329,161 1,959,612
Less: Current Portion (457,600) (1,329,161) (1,346,204)
--------- ---------- ----------
Notes Payable to Related Parties
- Long-Term $ - $ - $ 613,408
========= ========== ==========
NOTE 9 - NOTES PAYABLE
Current notes payable to sustained an increased during 2000 by $8,856
which primarily consisted of a net increase in a line of credit to a
bank in Canada.
During September and November 2000, the Company issued 3,389,944
common shares upon conversion of notes payable in the amount of
$1,191,115, or $0.35 per share, including principal on notes payable
of $813,277 and related accrued and unpaid interest in the amount of
$377,838. The grant of convertibility of the notes payable and notes
payable to related parties, at a discount below market during the
September conversion, constitutes the grant of a beneficial conversion
feature of $0.31 for the difference between market and the conversion
price of the debt. The Company recognized $458,758 as interest expense
related to the beneficial conversion feature. There was no beneficial
conversion feature related to the November conversion.
F-22
Other loans and notes payable were as follows:
December 31,
-------------------------------------
2000 1999 1998
--------- ---------- ---------
Loans due 1999 and 2000, interest at
10%, unsecured $ 29,531 $ 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
subsidiary's assets 3,204,480 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 3,234,011 4,155,492 5,237,545
Less: Current Portion (3,234,011) (4,155,492) (4,010,729)
---------- ---------- ---------
Note Payable - Long-Term $ - $ - $1,226,816
========== ========== ==========
NOTE 10 - INCOME TAXES
Deferred tax assets and liabilities are comprised of the following:
December 31,
--------------------------------------
2000 1999 1998
------------ ------------ -----------
Tax loss carry forwards $ 19,884,518 $ 7,424,514 $ 4,904,209
Property and equipment (2,309,010) (4,298,723) -
Impairment losses 5,823,506 2,997,925 -
Impairment of investment in securities 1,353,959 - -
Accrued settlement obligations 4,326,876 1,496,000 396,863
------------ ------------ -----------
Net Deferred Tax Asset $ 29,079,849 $ 7,619,716 $ 5,301,072
============ ============ ===========
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:
December 31,
----------------------------------------
2000 1999 1998
------------ ------------ -----------
Tax at statutory rate (34%) (17,675,717) $(9,788,074) $(3,748,221)
Non-deductible expenses 77,177 6,794,233 1,729,396
State taxes, net of federal
benefit - (227,710) (195,944)
Deferred tax asset valuation
change 20,126,819 2,318,643 603,635
Effect of lower tax rates and
foreign losses with no
federal benefit - 902,908 1,611,134
------------ ----------- -----------
Total Income Tax (Benefit) $ 2,528,279 $ - $ -
============ =========== ===========
As of December 31, 1999, EuroGas has operating loss carry forwards of
approximately $53,309,000 in various countries which expire from 2001
through 2020.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an
income tax liability in the Netherlands of an amount equivalent to
approximately $745,905 at December 31, 2000. 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.
F-23
NOTE 11 - RELATED PARTY TRANSACTIONS
EuroGas is entering into a purchase agreement to acquire the remaining
47% interest in Roznin, s.f.o.
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 12 - STOCKHOLDERS' EQUITY
Preferred Stock
There are 2,391,968 shares of 1995 Series Preferred Stock (the "1995
Series preferred stock") issued and outstanding. The 1995 Series
preferred stock is non-voting, non-participating and has a liquidation
preference of $0.10 per share plus unpaid dividends. The 1995 Series
preferred shareholders are entitled to annual dividends of $0.05 per
share. Each share of the 1995 Series preferred shares are convertible
into two common shares upon lawful presentation of the share
certificates. Dividends are payable until converted. EuroGas has the
right to redeem the 1995 Series preferred stock 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
preferred stock are $119,598.
On May 29, 1997, EuroGas authorized the 1997 Series A Convertible
Preferred Stock (the "1997 Series preferred stock"). The 1997 Series
preferred stock is non-voting and accrues dividends at $60.00 per
share, or six percent annually. The 1997 Series preferred stock has a
liquidation preference of $1,000 per share, plus unpaid dividends
before liquidation payments applicable to common shares but after
liquidation payments to the 1995 Series preferred stock outstanding.
The 1997 Series preferred stock, along with unpaid dividends thereon,
are 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. From December 31, 1997, there
have been 260 shares of 1997 Series preferred stock outstanding with a
liquidation preference of $260,000.
Of the total authorized preferred stock, 30,000 shares have been
designated as 1998 Series B Convertible Preferred Stock (the "1998
Series preferred stock") 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 preferred stock is non-voting and carries a
dividend rate of 6% per annum. Dividends may be paid in common shares
at the Company's option. During 1998, the Company issued 17,000 shares
of 1998 Series preferred stock in a private placement offering at
$1,000 per share for proceeds of $15,224,995, net of $1,275,005 in
commissions and $500,000 paid directly to an unrelated third-party on
behalf of EuroGas. EuroGas recognized the $500,000 as a note
receivable from the third party.
The 1998 Series preferred stock was convertible into shares of common
shares 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 1998
Series preferred stock, or 85% of the average closing price five
trading days prior to conversion. Because the 1998 Series preferred
stock was immediately convertible into common shares at a 15%
discount, EuroGas recognized the beneficial conversion feature as
preferred dividends on the dates the preferred shares were issued.
F-24
During 1998, $2,550,000 in preferred dividends were recognized
relating to the beneficial conversion feature of the 1998 Series
preferred stock.
During 1998, shareholders converted 15,500 shares of 1998 Series
preferred stock and $165,007 of accrued dividends thereon into
8,860,196 common shares. During 1999, eight thousand shares of 1998
Series preferred and $39,501 of accrued preferred dividends were
converted into 10,576,208 common shares at a weighted average price of
$0.76 per share.
During November 1999, the Company designated a Series C 6% convertible
preferred stock (the "Series C preferred stock"). The Series C
preferred stock has 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 preferred stock is non-voting and carries a 6% dividend
rate per annum, or $60.00 per share. The Series C preferred stock is
convertible into common shares of EuroGas at the rate of $1,000
divided by 85.0% of the average closing bid price for five trading
days preceding the date of issuance or the conversion date. EuroGas
issued 1,800 shares of Series C Preferred Stock for $1,800,000 or
$1,000 per share, less $148,530 of offering costs during 1999.
During the year ended December 31, 1999, EuroGas issued 6,500 shares
of 1998 Series preferred stock for $6,500,000 at $1,000 per share
before $487,500 of offering costs. The 1998 Series preferred stock
and the Series C preferred stock issued during 1999 were immediately
convertible into common shares at a 15% and 20% discount respectively.
Therefore, EuroGas recognized a beneficial conversion feature as
preferred dividends on the dates the preferred shares were issued.
During 1999, $901,875 and $360,000 in preferred dividends were
recognized relating to the beneficial conversion feature from the 1998
Series preferred stock and the Series C preferred stock, respectively.
During 2000, shareholders converted 1,800 shares of Series C preferred
stock and $21,599 of accrued dividends thereon into 5,329,713 common
shares at a weighted-average price of $0.34 per common share.
The following is a summary of the preferred stock outstanding at
December 31, 2000:
Outstanding Per Share Total Share Total
----------- --------- ----------- -------- -----------
1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598
1997 Series A
Convertible 260 1,000.00 260,000 60.00 15,600
----------- ----------- -----------
Total 2,392,228 $ 499,197 $ 135,198
=========== =========== ===========
Common Stock
2000 Common Stock Offering - On October 2, 2000, EuroGas entered into
a Common Stock Purchase Agreement (the "Agreement") with Arkledun
Drive LLC (the "Purchaser") whereby EuroGas issued 7,000,000 common
shares to the Purchaser for resale under a public offering of common
shares. The Purchaser agreed to purchase 5,500,000 common shares for
$2,165,000. If the Purchaser did not realize $2,489,750 from the
resale of the 5,500,000 shares, after the deduction of customary
broker's fees, any resulting shortfall would be made up by the
Purchaser selling as many of the additional 1,500,000 common shares
issued as required. If there still was a shortfall after selling the
1,500,000 common shares, EuroGas agreed to issue additional common
shares or pay the Purchaser the remaining shortfall.
On November 14, 2000, the Purchaser notified EuroGas of a remaining
shortfall after the 7,000,000 shares had been sold. To resolve the
shortfall and to settle all claims and demand rights of the Purchaser
under the Agreement, EuroGas issued an additional 2,000,000 common
shares to the Purchaser. The additional 2,000,000 common shares have
piggy-back registration rights to be included in any future public
offering conducted by EuroGas. The additional 3,500,000 common shares
F-25
issued over the 5,500,000 common shares the Purchaser originally
agreed to purchase were accounted for as contingently issuable shares
based on the market price of the common shares. Accordingly, the
proceeds received were allocated to all 9,000,000 common shares
issued.
The Company also issued 400,000 common shares under the public
offering for cash proceeds of $208,500, or an average of $0.52 per
share. The Company incurred offering costs for the overall public
offering of $168,500. The public offering resulted in the Company
issuing 9,400,000 common shares for net proceeds of $2,205,000.
Oxbridge Ltd. Purchase of Note Receivable and Lending Commitment -
During March and May 1999, EuroGas loaned Pan Asia Mining Corp., a
Canadian company, $600,000 under the terms of an unsecured note
receivable and made a commitment to provide Pan Asia Mining Corp. an
additional $2,025,000 of financing by March 2000. The note receivable
bore interest at the prime rate of a Canadian bank plus three percent
and was due in four installments through March 2002. During 1999,
EuroGas sold the note receivable to Oxbridge Ltd., a related party, in
exchange for $600,000 of reductions in three notes payable to Oxbridge
Ltd. two other shareholders. During July 2000, Oxbridge Ltd. assumed
EuroGas' commitment to provide the additional financing to Pan Asia
Mining Corp. in exchange for EuroGas issuing 500,000 common shares to
Oxbridge Ltd. The 500,000 common shares were valued at $365,000, or
$0.73 per share based upon the market value of EuroGas' common shares
on the date issued, and recognized as a general and administrative
expense for Oxbridge Ltd. assuming the financing commitment.
Other Common Stock Issuances - During 2000, the Company issued
3,700,000 common shares and 3,000,000 options to purchase common stock
to FCDC under the terms of a settlement agreement. The Company issued
1,842,983 common shares as payment of accrued settlement obligations.
The common shares issued were valued at $1,033,514, or an average of
$0.56 per share. In November, 832,760 common shares were issued to
SlovGold GmbH, a related party, for payments made on behalf of
EuroGas. The common shares were recorded at $291,466, or $0.35 per
share, based on the market value of the common shares on the date
issued. The Company issued 331,672 common shares for services valued
at $108,496, or an average of $0.33 per share, based on the market
value of the common shares on the dates issued.
During 2000, notes payable to related parties totaling $1,173,896 and
$502,871 of accrued interest were converted into 3,891,954 common
shares at an average of $0.43 per share. The Company issued 8,571,428
common shares upon conversion of debentures with a carrying value of
$3,000,000, or $0.35 per share, and issued 5,760,112 common shares
upon conversion of $2,016,036 of notes payable at $0.35 per share.
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 shares issued were based upon the market value of the
common shares issued as consideration.
F-26
EuroGas issued 100,000 common shares during 1998 upon the exercise of
stock options for $150,000 or $1.50 per share.
NOTE 14 - EMPLOYEE STOCK OPTIONS
On July 1, 2000, five-year options to purchase 200,000 common shares
at $0.73 per share were granted in connection with an employment
agreement. The options vest on July 1, 2001. No compensation expense
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
grant.
During October 1999, the Company granted 250,000 options related to a
settlement agreement. The options granted vest immediately and are
exercisable at $1.00 per share for a period of five years. The Company
recognized expense in the amount of $140,509 when granted.
EuroGas granted options to employees and consultants during 1999.
Options for 950,000 shares were authorized and granted on October 22,
1999. The options granted vested immediately and are exercisable at
$0.45 for a period of ten years. Compensation in the amount of
$347,044 was recognized on the when grant date.
On April 20, 1999, ten-year options to purchase 1,000,000 common
shares at $0.95 per share were issued in connection with an employment
agreement. 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.
A summary of the status of stock options as of December 31, 2000, 1999
and 1998 and changes during the years then ended are presented below:
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- -------- --------- ---------
Outstanding at beginning of year 4,000,000 $ 1.07 2,000,000 $ 1.50 2,000,000 $ 1.50
Granted 200,000 0.73 2,200,000 0.74 - -
Exercised - - - - - -
Expired - - (200,000) 1.50 - -
--------- --------- ---------- ------- --------- ---------
Outstanding at end of year 4,200,000 1.08 4,000,000 1.08 2,000,000 1.50
========= ========== =========
Exercisable at end of year 4,000,000 1.08 2,950,000 1.12 1,900,000 1.50
========= ========== =========
Weighted-average fair value of
options granted during the year $ 0.73 $ 0.71 $ -
The following table summarizes information about stock options
outstanding at December 31, 2000:
Outstanding Exercisable
---------------------------------------- ----------------------
Weighted- Weighted-
Weighted-Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ---------------- -------- ----------- --------
$ 0.45-1.00 2,400,000 5.79 years $ 0.74 2,200,000 $ 0.68
1.50 1,800,000 0.05 1.50 1,800,000 1.50
--------- ---------
$0.45-1.50 4,200,000 3.33 1.07 4,000,000 1.03
========= =========
F-27
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 to consultants according to
their fair value as prescribed in SFAS No. 123, Accounting for Stock
Based Compensation.
Had compensation cost for stock options 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 ended December
31, 2000, 1999 and 1998 would have been increased to the pro forma
amounts shown below.
December 31,
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss applicable to common shares:
As reported $(49,685,254) $(30,389,012) $ (13,885,481)
Pro forma (49,784,824) (31,447,876) (13,885,481)
Basic and diluted net loss per
common share:
As reported $ ( 0.47) $ (0.36) $ (0.22)
Pro forma ( 0.47) (0.38) (0.22)
The fair value of options granted during 2000, 1999, 1998 was
estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions for 2000, 1999 and 1998
respectively: average risk-free interest rate - 6.18%, 6.0% and 5%;
expected volatility - 138.4%, 126.2% and 63.5%; expected life - 5
years, 5 years and 2.0 years.
NOTE 15 - STOCK WARRANTS
During October 1998, the Company issued 2,500,000 warrants to purchase
common shares in connection with the acquisition of the Maseva
property. The Company was not able to meet its obligaton to develop
the Maseva property. In order to dispose of those obligations, the
Company entered into an agreement with Belmont Resources, Inc. on June
23, 2000 to return the 90% its interest in the Maseva property back to
Belmont Resources, Inc. As part of this agreement, the Company
modified the exercise price from $2.50 to $0.82 and the expiration
date from October 9, 2000 to June 14, 2002. As a result of this
repricing, the Company has recognized a charge to operations of
$1,246,718.
Subsequent to December 31, 2000, the Company further amended its
agreement with Belmont Resources, Inc. by modifying the exercise price
on the 2,500,000 warrants from $0.82 per warrant to $0.40 per warrant.
As a result of this repricing, the Company will recognize an
additional $118,089 charge to operations during the first quarter of
2001.
During the first quarter of the year ended December 31, 2000, a
warrant to purchase 3,000,000 common shares was granted pursuant to an
accrued settlement obligation to FCDC. The warrant is valued at
$1,560,000. The warrants granted vest in one year and are exercisable
at $0.65 per share for a period of thirty days.
During the first quarter of 2000, EuroGas completed the issuance of
two-year 10.5% convertible debentures in the amount of $3,000,000 in
exchange for cash proceeds of $1,591,336, the conversion of prior
outstanding EuroGas debt into debentures in the amount of $422,288 and
proceeds in the form of payments to creditors on behalf of EuroGas by
a shareholder in the amount of $986,376. 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
F-28
market on the date of issuance, constitute a beneficial conversion
feature of the offering. The Company recorded the three instruments at
their relative fair values on the date of issuance and began
amortizing the resulting debt discounts as interest expense in the
amount of $2,912,109 over the three-month life of the debentures. The
debentures were subsequently converted at the election of the holders
on March 30, 2000 into 8,571,428 common shares and warrants to
purchase 17,142,858 additional shares at $0.35 per share.
As discussed in Note 17 - Commitments and Contingencies, the Company
issued 2,800,000 warrants in connection with a legal settlement with
KUKUI. These options have an exercise price of $0.40, vest
immediately, and expire in two years. The warrants have a fair value
of $773,824, which was provided for as part of the KUKUI settlement
accrual.
On September 7, 2000, the Company issued warrants for the purchase of
1,666,666 shares of the Company's common shares to each of the following:
Rockwell International, Ltd., Oxbridge Limited and Conquest Financial
Corporation. These warrants were issued in connection with outstanding notes
payable, vest immediately, and are exercisable at $0.41 per share. These
warrants expire on December 31, 2003. The warrants had a fair value of
$2,639,038 on the grant date which was charged to operations during the third
quarter of 2000.
On October 27, 2000, the Company entered into a settlement agreement
with Mr. Winzer and Mr. Maurer, which calls for the issuance of
warrants to purchase 5,200,000 common shares at $1.00 per share. If
unexercised, the warrants will expire by January 15, 2002. The
warrants had a fair value of $572,872 on the grant date which was
charged to operations during the fourth quarter of 2000.
The fair value of options granted during 2000, 1999, 1998 was
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions for 2000, 1999
and 1998 respectively: average risk-free interest rate - 5.95%, 0.00%,
and 5.00%; expected volatility - 139.8%, 0.00% and 63.2%; expected
life - 2.0 years, 0.0 years and 2.0 years.
At December 31, 2000 and 1999, the Company had warrants outstanding to
purchase 40,892,856 and 9,750,000 common shares, respectively.
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following at
December 31, 2000 and 1999:
2000 1999
----------- -----------
Foreign currency translation adjustments $(3,666,133) $(2,797,088)
Unrealized loss on investments in
securities available-for-sale 84 (1,068,853)
----------- -----------
Accumulated Other Comprehensive Loss $(3,666,049) $(3,865,941)
=========== ===========
NOTE 17 - CONTINGENCIES AND COMMITMENTS
The Company is obligated to register common shares issued to FCDC
upon exercise of 3,000,000 options and to pay, either in cash or
additional common shares, at the Company's option, the difference
between $3.00 per share and the market value of the common shares sold
or deemed sold by FCDC.
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 is
reflected in EuroGas' financial statements.
F-29
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 common shares 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. Subsequent to December 31, 2000, the officer resigned in January
2001. EuroGas has accrued salary obligations to the officer in the
amount of $230,000, which is included in accrued liabilities.
The Company leases office facilities from various lessors in Poland
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:
Year Ending December 31:
2000 $154,452
2001 154,452
2002 104,814
--------
Total $413,718
========
NOTE 18 - SUBSEQUENT EVENTS
On January 4, 2001, the Company amended its agreement with Belmont
Resources, Inc. by reducing the exercise price on the 2,500,000
warrants from $0.82 per warrant to $0.40 per warrant. This repricing
of warrants will result in the Company recognizing an additional
$143,561 of expense during the year ending December 31, 2001.
On February 22, 2001, EuroGas announced its intention to sell up to
8,000,000 of its 14,100,000 common shares of Big Horn Resources Ltd.
From February 28, 2001 through March 16, 2001, EuroGas sold 2,140,500
shares of Big Horn Resources Ltd. for $1,087,600. The sale reduced
EuroGas' interest in Big Horn Resources Ltd. to 42.5%.
On March 27, 2001, EuroGas entered into an agreement to purchase an
additional 57% interest in a talc deposit in Slovakia in exchange for
issuing 12,000,000 common shares and paying $100,000, as further
described in Note 4 - Acquisition of Talc Mineral Interest.
F-30
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
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, 2000, 1999 and 1998, by
geographic area, were as follows:
Europe
Total Canada and Russia
----------- ------------ -----------
At December 31, 2000
Unproved oil and gas properties $42,921,154 $ 5,738,804 $37,182,350
Proved oil and gas properties 16,499,982 16,499,982 -
----------- ------------ -----------
Gross capitalized costs 59,421,136 22,238,786 37,182,350
Less: Ceiling test adjustment
and impairments (33,460,115) (3,512,792)(29,947,323)
Less: Accumulated depreciation,
Depletion, and amortization (3,619,329) (3,619,329) -
Future abandonment and restoration (183,002) (183,002) -
----------- ----------- -----------
Net capitalized costs $22,158,690 $14,923,663 $ 7,235,027
=========== =========== ===========
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, 2000, 1999 and 1998
were as follows:
Europe
Total Canada and Russia
----------- ------------ -----------
For the Year Ended December 31, 2000
Property acquisition costs
Proved $ - $ - $ -
Unproved 1,748,618 1,683,266 65,352
Exploration costs 4,582,695 4,307,116 275,579
Development costs 2,075,923 2,075,923 -
----------- ------------ ----------
Total Costs Incurred $ 8,407,236 $ 8,066,305 $ 340,931
=========== ============ ==========
F-31
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Europe
Total Canada and Russia
------------ ------------ ------------
For the Year Ended December 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
============ ============ ============
The results of operations from oil and gas producing activities for
the years ended December 31, 2000, 1999 and 1998 were as follows:
Europe
Total Canada and Russia
------------ ------------ ------------
For the Year Ended December 31, 2000
Oil and gas sales $ 6,395,037 $ 6,395,037 $ -
Production costs (1,521,471) (1,521,471) -
Impairment of mineral interests (26,783,790) (2,661,585) (24,122,205)
Depreciation, depletion, and
amortization (1,885,107) (1,885,107) -
------------ ------------ ------------
Results of operations for oil
and gas producing activities
(excluding corporate overhead
and financing costs) $(23,795,331) $ 326,874 $(24,122,205)
============ ============ ============
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) $ -
============ ============ ============
F-32
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 1, 1999 569,730 9,487,435 474,850 3,999,650 94,880 5,487,785
Purchases of minerals in place - 2,365,023 - 2,365,023 - -
Extensions and discoveries 569,149 2,683,741 569,149 2,683,741 - -
Production (94,299) (1,049,114) (94,299) (1,049,114) - -
---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 1999 1,044,580 13,487,085 949,700 7,999,300 94,880 5,487,785
Purchases of minerals in place - 146,000 - 146,000 - -
Extensions and discoveries 46,134 504,080 46,134 504,080 - -
Production (113,100) (916,089) (113,100) (916,089) - -
Sales of minerals in place (52,819) (104,891) (52,819) (104,891) - -
Revision of estimates (269,995) 5,549,785 (175,115) (62,000) (94,880) (5,487,785)
---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2000 654,800 18,665,970 654,800 7,566,400 - -
========== ========== ========== ========== ========== ==========
Proved Developed Reserves -
December 31, 1999 806,400 7,566,400 806,400 7,772,800 - -
December 31, 2000 631,400 6,546,900 631,400 654,900 - -
========== ========== ========== ========== ========== ==========
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.
F-33
The standardized measure of discounted estimated net cash flows
related to proved oil and gas reserves at December 31, 2000, 1999
and 1998 were as follows. There were no proved oil and gas
reserves at December 31, 1997:
Europe
Total Canada and Russia
------------ ------------ ------------
For the Year Ended December 31, 2000
Future cash inflows $ 61,049,083 $ 61,049,083 $ -
Future production costs and
development costs (10,028,153) (10,028,153) -
Future income tax expenses (15,219,536) (15,219,536) -
------------ ------------ ------------
Future net cash flows 35,801,394 35,801,394 -
10% annual discount for estimated
timing of cash flows (12,293,103) (12,293,103) -
------------ ------------ ------------
Standardized measures of discounted
future net of cash flows relating
to proved oil and gas reserves $ 23,508,291 $ 23,508,291 $ -
============ ============ ============
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) (1,505,495)
Future income tax expenses (3,379,138) (2,096,829) (1,282,309)
------------ ------------ ------------
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-34
The primary changes in the standardized measure of discounted
estimated future net cash flows for the year ended December 31,
1998 were as follows:
Europe
Total Canada and Russia
------------ ------------ ------------
For the Year Ended December 31, 1999
Beginning of year $ 15,534,137 $ 8,271,627 $ 7,262,510
Purchase of minerals in place 473,849 473,849 -
Extensions and discoveries 2,077,190 2,077,190 -
Development 1,398,342 1,398,342 -
Production (4,927,526) (4,927,526) -
Sale of minerals in place (682,295) (682,295) -
Revisions of estimates:
Sales prices 18,299,745 18,299,745 -
Development costs (1,024,521) (1,024,521) -
Production costs 1,160,734 1,160,734 -
Quantities (9,148,314) (1,885,804) (7,262,510)
Accretion of discount 743,112 743,112 -
Net change in income taxes (120,755) (120,755) -
Change in exchange rate (275,407) (275,407) -
------------ ------------ ------------
End of year $ 23,508,291 $ 23,508,291 $ -
============ ============ ============
For the Year Ended December 31, 1999
Beginning of year $ 13,662,990 $ 6,400,480 $ 7,262,510
Purchase of minerals in place 6,498,276 6,498,276 -
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 $ 15,534,137 $ 8,271,627 $ 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-35