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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
[ ] 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 0-24781 87-0427676
---- ------- ----------
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1006-100 Park Royal South
West Vancouver, B.C.
Canada V7T 1A2
---------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (604) 913-1462
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 the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 par value 158,626,460
- ------------------------------ -------------------------------
(Title of Class) (Number of Shares Outstanding at
November 20, 2002)
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (Unaudited) 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Nine Months Ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 30,
2002 and 2001 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 28
Certifications 29
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 265,741 $ 257,831
Investment in securities available for sale 540,428 782,908
Investment in fixed-maturity securities - 1,445,501
Receivable due from related parties 83,670 -
Other receivables 137,197 586,520
Other current assets 23,950 21,050
------------ ------------
Total Current Assets 1,050,986 3,093,810
------------ ------------
Property and Equipment - full cost accounting
Talc mineral properties and mining equipment 6,433,592 6,300,993
Oil and gas properties not subject to
amortization 2,365,198 6,186,606
Furniture and office equipment 359,051 353,142
------------ ------------
Total Property and Equipment 9,157,841 12,840,741
Less: accumulated depreciation and
amortization (184,167) (183,278)
------------ ------------
Net Property and Equipment 8,973,674 12,657,463
------------ ------------
Investments - at cost 358,857 358,857
------------ ------------
Total Assets $ 10,383,517 $ 16,110,130
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued liabilities $ 4,726,939 $ 4,525,467
Accrued liabilities payable to related parties - 416,858
Accrued settlement obligation 6,876,490 6,345,766
Accrued income taxes 802,225 802,621
Notes payable 29,531 35,718
Notes payable to related parties 223,678 388,576
------------ ------------
Total Current Liabilities 12,658,863 12,515,006
------------ ------------
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value;
3,661,968 shares authorized; 350,479 350,479
2,392,228 shares outstanding:
liquidation preference - $980,469
Common stock - $0.001 par value;
325,000,000 shares authorized; 158,627 144,797
160,044,307 shares and 144,796,460
shares issued, respectively
Additional paid-in capital 141,542,921 139,314,283
Accumulated deficit (142,926,465) (134,659,453)
Accumulated other comprehensive loss (1,102,494) (1,336,314)
Treasury stock, at cost; 1,096,327 shares
and 725,327 shares, respectively (298,414) (218,668)
------------ ------------
Total Stockholders' Equity (Deficit) (2,275,346) 3,595,124
------------ ------------
Total Liabilities and Stockholders' $ 10,383,517 $ 16,110,130
Equity (Deficit) ============ ============
The accompanying notes are an integral part of these condensed
financial statements.
3
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Oil and Gas Sales $ 2,462 $ 33,787 $ 5,074 $ 33,787
----------- ----------- ----------- -----------
Costs and Operating expenses
Impairment (recovery) of
mineral interests and
equipment - (360,000) 3,937,500 794,444
Depreciation and
amortization 5,890 7,529 28,245 16,101
Litigation settlement
expense (recovery) 530,724 (271,929) 2,221,617 1,419,018
General and administrative 509,330 74,069 2,319,415 1,883,498
----------- ----------- ----------- -----------
Total Costs and Operating
Expenses 1,045,944 (550,331) 8,506,777 4,113,061
----------- ----------- ----------- -----------
Other Income (Expense)
Interest income 74,637 83,713 95,724 131,197
Interest expense (2,168) (111,443) (90,447) (179,571)
Foreign exchange net gains
(losses) (20,150) (204,187) 195,034 (205,300)
Net gain (loss)on sale of
investments (144,148) - (26,036) 1,028,222
Gain on sale of equipment 140,282 103,389 140,282 352,777
Equity in income from
unconsolidated subsidiary - - - 341,843
Other income (expense) 54,644 - 21,254 -
----------- ----------- ----------- -----------
Total Other Income
(Expense) 103,097 (128,528) 335,811 1,469,168
----------- ----------- ----------- -----------
Net Income (Loss) (940,385) 455,590 (8,165,892) (2,610,106)
Preferred Dividends 34,076 33,984 101,120 100,845
----------- ----------- ----------- -----------
Income (Loss) Applicable
to Common Shares $ (974,461) $ 421,606 $(8,267,012) $(2,710,951)
=========== =========== =========== ===========
Basic and Diluted Income
(Loss) Per Common Share $ (0.01) $ - $ (0.06) $ (0.02)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Used In Per
Share Calculation 157,530,132 105,641,055 150,151,945 134,732,687
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed
financial statements.
4
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
2002 2001
------------ ------------
Cash Flows From Operating Activities
Net loss $ (8,165,892) $ (2,610,106)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation, depletion and amortization 21,837 16,101
Impairment of mineral interests and equipment 3,937,500 794,444
Gain on sale of property and equipment (140,282) -
Gain on sale of securities available for sale (118,112) (1,028,222)
Loss on sale of notes receivable 144,148 -
Net income of unconsolidated subsidiary - (341,843)
Amortization of discount on fixed maturity
securities - (114,896)
Expenses paid by issuance of notes payable
to related party - 110,000
Warrants issued for settlement cost 1,690,893 -
Services paid with common stock - 48,400
Foreign currency exchange (gain) loss (195,034) 205,300
Changes in assets and liabilities:
Other receivables 460,100 (377,344)
Prepaid expenses - 616,763
Receivable due from related parties (83,670) -
Accrued liabilities payable to related parties (535,574) -
Accrued liabilities and settlement
obligations 1,344,323 823,750
------------ ------------
Net Cash Used In Operating Activities (1,639,763) (1,857,653)
------------ ------------
Cash Flows From Investing Activities
Purchases of mineral interests, property
and equipment (220,172) (239,305)
Purchase of securities available for sale (5,230) -
Proceeds from sale of Big Horn Resources
Ltd. common stock - 3,467,795
Proceeds from sale of securities available
for sale 503,723 -
Proceeds from sale of note receivable 208,213 -
Proceeds from sale of property and equipment 146,726 210,881
Proceeds from sale of investment in fixed-
maturity securities 1,100,156 -
Payment to purchase Rozmin s.r.o - (100,000)
------------ ------------
Net Cash Provided By Investing Activities 1,733,416 3,339,371
------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock - 44,310
Proceeds from sale of treasury stock 1,850 -
Payment on accrued liabilities to related
party - (1,113,758)
Payment on notes payable to related party (156) -
Purchase of treasury stock (81,596) (204,793)
------------ ------------
Net Cash Used In Financing Activities (79,902) (1,274,241)
------------ ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (5,841) (772)
------------ ------------
Net Increase (Decrease) In Cash and
Cash Equivalents 7,910 206,705
Cash and Equivalents at Beginning of Period 257,831 57,745
------------ ------------
Cash and Equivalents at End of Period $ 265,741 $ 264,450
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
5
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
Supplemental Disclosure of Non cash Investing and Financing Activities
During the nine months ended September 30, 2002 and 2001, EuroGas accrued
preferred dividends of $101,121 and $108,845, respectively. During March 2002
EuroGas sold its investment in fixed-maturity securities carried at $1,445,501,
and received $1,100,156 cash and a note receivable of $345,345.
On June 10, 2002 EuroGas issued 10,000,000 common shares, valued at $1,000,000,
for a note receivable from shareholder of $448,425 and upon conversion of
$170,291 notes payable, $500,000 in accrued liabilities for salaries to
officers, and $118,716, in receivable from related parties.
The accompanying notes are an integral part of these condensed
financial statements.
6
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Interim Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of EuroGas, Inc. and its
subsidiaries ("EuroGas" or the "Company"). These financial statements are
condensed and, therefore, do not include all disclosures normally required by
accounting principles generally accepted in the United States of America. These
statements should be read in conjunction with EuroGas' most recent annual
financial statements included in the Company's report on Form 10-K for the year
ended December 31, 2001. In particular, EuroGas' significant accounting
principles were presented as Note 1 to the Consolidated Financial Statements in
that Report. In the opinion of management, all adjustments necessary for a fair
presentation have been included in the accompanying condensed consolidated
financial statements and consist of only normal recurring adjustments. The
results of operations presented in the accompanying condensed consolidated
financial statements are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2002.1
Business Condition - EuroGas has accumulated a deficit of $142,926,465 through
September 30, 2002. EuroGas has had substantially no revenue and has incurred
losses from operations and negative cash flows from operating activities during
the nine months ended September 30, 2002 and 2001 and the year ended December
31, 2001. At September 30, 2002, the Company had a working capital deficiency of
$11,607,877. These conditions raise substantial doubt regarding the Company's
ability to continue as a going concern. Realization of the investment in
properties and equipment is dependent upon management obtaining financing for
exploration, development and production of its properties. In addition, if
exploration or evaluation of oil and gas properties not subject to amortization
is unsuccessful, all or a portion of the recorded amount of those properties
will be recognized as impairment losses. Management plans to finance operations
and acquisitions through borrowing and possibly through the issuance of
additional equity securities, the realization of which is not assured.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of EuroGas, Inc., its majority-owned subsidiaries and
EuroGas' share of properties held through joint ventures. All significant
intercompany accounts and transactions have been eliminated in consolidation. 2
Reclassifications - Certain reclassifications have been made in the prior period
financial statements to conform to the current period presentation.
Recent Accounting Pronouncements- In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
NOTE 2 - SIGNIFICANT ACQUISITIONS
Rozmin s.r.o. - During 1998, EuroGas acquired a 23.65% interest in a talc
deposit in Eastern Slovakia through an indirect investment in Rozmin s.r.o. On
April 17, 2001, EuroGas entered into an agreement to purchase an additional 57%
interest in Rozmin s.r.o. from Belmont Resources, Inc. ("Belmont"), in exchange
for EuroGas issuing 12,000,000 common shares, paying Belmont $100,000 in cash,
and modifying the exercise price of existing stock options. EuroGas further
agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in
the ten-day average OTC Bulletin Board quoted trading price of the Company's
7
common shares below $0.30 per share through April 17, 2002. During April 2002,
EuroGas is obligated to issue 3,830,000 common shares to Belmont under the terms
of the agreement. The 3,830,000 common shares were included in common shares
outstanding at September 30, 2002 in the accompanying condensed financial
statements. Additionally, EuroGas agreed to issue additional common shares to
Belmont if Belmont did not realize approximately $1,218,000 from the resale of
the original 12,000,000 common shares by April 17, 2002, and provided notice of
the deficiency, to compensate Belmont for the shortfall based on the ten-day
average trading price on the date of the notice of shortfall from Belmont.
Because Belmont has not provided notice of the sale of the shares and the
resulting deficiency, EuroGas is not able to calculate the shares that may be
issuable, but estimates it may be obligated to issue approximately 12,000,000
additional common shares, based on recent market prices for the Company's common
stock, to Belmont under this provision of the agreement.
In connection with the purchase by EuroGas, Rozmin s.r.o. granted an overriding
royalty to Belmont of two percent of gross revenues from any talc sold. EuroGas
agreed to pay Belmont a $100,000 non-refundable advanced royalty payment and
agreed to arrange the necessary financing to place the talc deposit into
commercial production by April 17, 2002. If the talc deposit was not in
commercial production by then, EuroGas agreed to pay Belmont additional advanced
royalties of $10,000 per month for each month of delay in achieving commercial
production. As of September 30, 2002 EuroGas has accrued $55,000 in advance
royalty due to Belmont because the talc deposit was not in commercial
production. EuroGas granted Belmont the right to appoint one member of the
EuroGas, Inc., board of directors for not less than one year.
The purchase of the interest in Rozmin s.r.o. was recorded at $3,843,560, 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 advance royalty to be paid. The issuance of
additional common shares under the guarantee of the future market value of the
Company's common shares will not result in additional cost when issued. EuroGas
accounted for the acquisition as a purchase and allocated the purchase price to
the assets acquired, primarily the interest in talc mineral properties. No
goodwill was recognized in the purchase transaction. The operations of Rozmin
s.r.o. have been included in the consolidated results of operations from its
purchase.
EuroGas acquired the original 23.65% mineral interest through the acquisition of
a 55% interest in RimaMuran s.r.o., whose principal asset was a 43% investment
in Rozmin s.r.o. On April 2, 2002, EuroGas exchanged its 55% interest in
RimaMuran s.r.o. for the 43% investment in Rozmin s.r.o. held by RimaMuran. As
part of the exchange, EuroGas paid approximately $105,000 to the former minority
owners of RimaMuran to pay liabilities of RimaMuran and to compensate the former
minority owners. RimaMuran agreed to transfer title to two pieces of heavy
equipment, which EuroGas had previously financed, to Rozmin. As a result of the
exchange, EuroGas has a 43% ownership in Rozmin s.r.o. and will acquire
ownership of the remaining 57% interest in Rozmin if the contingency for
additional stock issuances to Belmont is resolved. By virtue of its potential
ownership of Rozmin s.r.o. and the talc deposit, EuroGas bears the full
responsibility to fund the development costs necessary to bring the talc deposit
to commercial production.
NOTE 3 - IMPAIRMENT OF MINERAL INTERESTS AND EQUIPMENT
During the second quarter of 2002, the Company evaluated its investment in the
Beaver River Gas project in British Columbia, Canada. The terms of the related
farmout agreement provide that the operator of the project will receive payout
of all of its investment prior to any payments to the other interest holders and
then the Company would receive 3.33% of the net cash flows, if any. The operator
has invested in excess of $16,000,000 in the project at September 30, 2002. Due
8
to the low production from the Beaver River Project and low gas prices currently
being paid for the production, management has determined that it is unlikely
that the Company will receive any of the cash flows from the project, except for
nominal overriding royalty payments. Accordingly, the Company recognized a
$3,937,500 charge for impairment, which was the carrying value of the Company's
investment in the project, during the second quarter of 2002.
NOTE 4 - INVESTMENT IN EQUITY SECURITIES
Investment in Securities Available-for-Sale - The Company's investment in equity
securities are accounted for as available for sale. The investments in
securities available for sale are carried at market value with unrealized gains
and losses included in other comprehensive income (loss). The cost of securities
sold was determined by the average-cost method. The investment in securities
consisted of the following at September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
--------- ---------
Cost $ 429,819 $ 809,612
Gross unrealized gains 110,638 -
Gross unrealized losses - (26,704)
--------- ---------
Estimated fair value $ 540,457 $ 782,908
========= =========
During the nine months ended September 30, 2002, the Company sold available-for-
sale securities for $503,723 gross proceeds that resulted in gross realized
gains of $118,112 and no gross realized losses.
Investment in Fixed-Maturity Securities -On March 26, 2002, the Company sold its
investment in Enterra preferred stock to Enterra for $1,445,501, of which
$1,100,156 was received on March 26, 2002 and $345,345 was due in December 2002
under the terms of a promissory note denominated in Canadian dollars. Due to the
recognition of an impairment loss during 2001, no additional gain or loss was
recognized from the sale during 2002. On August 15, 2002 EuroGas received
$208,213 in full satisfaction of the promissory note. As adjusted for changes in
foreign currency exchange rates, the carrying value of the note was $352,360
immediately prior to the settlement. The difference of $144,148 between the
carrying value and the cash received in settlement was charged to operations as
a loss on the settlement of the note.
NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE
Polish Tax Refund Receivable - During the year ended December 31, 2001, Pol-Tex
Methane Sp.zo.o., a wholly owned subsidiary, was assessed a tax obligation of
$186,031 by a Polish tax agency. The Company appealed the decision to the
Polish tax court. Subsequent to December 31, 2001 the tax court found in favor
of the Company and reversed the total obligation. During September, 2002, the
Company received $190,357, the expected refund.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Chief Executive Officer and principal shareholder of EuroGas, together with
various other companies under his control, have paid miscellaneous business
expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their
behalf. The resulting receivables and payables were combined and presented in
the accompanying financial statements as notes payable to related parties of
9
$416,858 as of December 31, 2001. During the six months ended June 30, 2002
EuroGas made additional payments of $535,574 on behalf of the officer.
Additionally, the Chief Financial Officer assigned $200,000 of accrued salary,
which accrual arose during his service to the Company during 2000, to the Chief
Executive Officer. During June 2002, EuroGas entered into a compensation
agreement with its Chief Executive Officer and principal shareholder that
provides the officer with $300,000 of compensation for his prior services. The
compensation was charged to operations during the three months ended June 30,
2002. The resulting $381,284 payable to the officer was converted into common
stock as further described in Note 7 to the financial statements. During the
three months ended September 31, 2002, EuroGas paid $83,670 in additional
expense on behalf of EuroGas resulting in a receivable from the officer.
NOTE 7 - 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 stock is 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.
There are 260 shares of 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 lesser 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. The 1997
Series preferred stock has a liquidation preference of $260,000.
The following is a summary of the preferred stock outstanding at September 30,
2002:
Annual
Liquidation Preference Dividend Requirement
Shares --------------------- ---------------------
Designation Outstanding Per Share Total Per Share Total
- ------------- ---------- --------- ---------- --------- ----------
1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598
1997 Series A
Convertible 260 1,000.00 260,000 60.00 15,600
---------- ---------- ----------
Total 2,392,228 $ 499,197 $ 135,198
========== ========== ==========
Common Stock and Warrants- On June 10, 2002 the Company to issued its Chief
Executive Officer and principal shareholder 10,000,000 common shares and
warrants to purchase 10,000,000 additional common shares at $0.125 per share
through June 9, 2003 and at $0.15 per share through June 10, 2004. The common
shares were valued at $0.10 per share based upon the quoted market price of
$0.12 per share on the date of the issuance, less a discount for restrictions on
the resale of the common stock issued. The common shares and warrants were
issued in exchange for the conversion of $170,291 of notes payable to related
parties, $371,284 of accrued liabilities to a related party and a note
receivable from its Chief Executive Officer in the amount of $448,425. The note
receivable is secured by the common shares issued and is due within one year.
The note receivable is reflected in the accompanying financial statements as an
offset to stockholders' equity (deficit).
10
The warrants had no intrinsic value on the date of the issuance; accordingly, no
compensation was recognized from the issuance of the warrants. The fair value of
the warrants granted was $754,448, estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 3.15%; expected volatility of 171%; dividend yield of 0%; and
expected life of 2 years.
On May 9, 2002 the Company issued warrants to purchase 17,142,858 common shares
at $0.15 per share, principally to the Chief Executive Officer and also to
others. The warrants were issued to holders of warrants originally issued in
January 2000 in connection with the issuance of $3,000,000 in debentures. Those
original warrants expired on March 31, 2002. The new warrants are exercisable
through March 31, 2004. The warrants granted have been recorded at their fair
value of $1,690,893 and the related settlement expense has been charged to
operations in the accompanying condensed consolidated financial statements. The
fair value of the warrants was estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions: risk-free interest
rate of 3.27%; expected volatility of 174%; dividend yield of 0%; and expected
life of 2 years.
Treasury Stock - The Company purchased 381,000 shares of treasury stock during
January 2002 for $81,596, or $0.22 per share, and sold 10,000 shares at $0.20
per share.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following at September 30,
2002 and December 31, 2001:
September 30, December 31,
2002 2001
----------- -----------
Foreign currency translation adjustments $(1,213,132) $(1,309,610)
Unrealized gain (loss) on investments
in securities available-for-sale 110,638 (26,704)
----------- -----------
Accumulated Other Comprehensive Loss $(1,102,494) $(1,336,314)
=========== ===========
NOTE 9 - CONTINGENCIES AND COMMITMENTS
The principal portion of the Company's active litigation involves matters
relating to the Company's acquisition of GlobeGas (which indirectly controlled
the Pol-Tex Concession in Poland) as follows:
McKenzie Bankruptcy Claim - This litigation is being brought by Steve Smith,
Chapter 7 Trustee (the "Trustee") for the bankruptcy estates of "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), pending in the United
States Bankruptcy Court for the Southern District of Texas, Houston Division.
In March 1997, the Trustee commenced the following cause of action: "W. Steve
Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas,
Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States
Bankruptcy Court for the Southern District of Texas, Houston Division")
(hereafter "97-4114"). The Trustee's initial claim appears to allege that the
Company may have paid inadequate consideration for its acquisition of GlobeGas
from persons or entities acting as nominees for the McKenzies, and therefore
McKenzies'
11
creditors are the true owners of the proceeds received from the development of
the Pol-Tex Concession in Poland. The Company has contested the jurisdiction of
the Court, and the Trustee's claim against a Polish corporation (Pol-Tex), and
the ownership of Polish mining rights. The Company further contends that it paid
substantial consideration for GlobeGas (Pol-Tex's parent), and that there is no
evidence that the creditors of the McKenzies invested any money in the Pol-Tex
Concession.
In March of 1997, the Trustee brought a related suit "W. Steve Smith,
Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V.,
Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie,
Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc., (Adv. No.
97-4155)" in each of the three McKenzie individual bankruptcy cases. In general,
the action asserts that the defendants, other than the Company, who acquired an
interest in the Polish Project, received a fraudulent transfer of assets
belonging to the individual McKenzie bankruptcy estates, or are alter egos or
the strawmen for the McKenzies. As a result, the Trustee asserts that any
EuroGas stock or cash received by these defendants should be accounted for and
turned over to the Trustee. As to the Company, the Trustee asserts that as
transfer agent, the Company should turn over the preferred stock presently
outstanding to the defendants or reserve such shares in the name of the Trustee
and that any special considerations afforded these defendants should be
canceled. It appears the Company was named to this litigation only because of
its relationship as transfer agent to the stock in question. This suit has been
administratively consolidated with 97-4114, and is currently pending
before the Houston bankruptcy court.
In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement
Pleadings and Join Additional Parties in the consolidated adversary proceedings,
seeking to add new parties, including Wolfgang and Reinhard Rauball and assert
additional causes of action against EuroGas and the other defendants in this
action. These new causes of action include claims for damages based on fraud,
conversion, breach of fiduciary duties, concealment and perjury. These causes
of action claim that the Company and certain of its officers, directors or
consultants cooperated or conspired with the McKenzies to secret or conceal the
proceeds from the sale of the Polish Concession from the Trustee. In January
2000, this motion was granted by the bankruptcy court. The Company is
vigorously defending this suit. On March 18, 2002, the court considered motions
to dismiss filed by EuroGas and the Rauballs (other named defendants). These
motions are currently pending before the Court. No trial date has been set.
In June 1999, the Trustee filed another suit in the same bankruptcy cases styled
"Steve Smith, Trustee, vs. Eurogas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP.
Z.O.O., et al (Ital. No. 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, vs. Eurogas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv.
No. 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.
EuroGas disputes the allegations and has filed a motion to dismiss or
alternatively, to abate this suit. On March 18, 2002, the court considered
motions to dismiss filed by EuroGas and the Rauballs (other named defendants).
On September 10, 2002, the Court entered an Order which required the Trustee to
specify the causes of action asserted against each Defendant. A few days prior
to this Order, the Trustee filed his Second Motion for Leave to Amend and
Supplement Pleadings and to Drop Certain Defendants (the "Second Motion"). On
October 21, 2002, EuroGas and other Defendants filed their Response to the
Second Motion. On November 11, 2002, the Trustee filed his Motion and Reply
to this Response under which, in part, Trustee seeks court approval to file a
Third Amended Complaint. Both the Trustee's proposed Second and Third Amended
Complaints contain new causes of action against the Defendants, including claims
under Title 18 of the United States Code. The Trustee's motions will be heard
on January 10, 2003.
12
Management's estimate of the amount due under the claims made by the Trustee has
been accrued in the accompanying consolidated financial statements as of
September 30, 2002.
Kukui, Inc. Claim - 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 additional 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 Estate of
Bernice Pauahi Bishop (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 signed a settlement agreement with the bankruptcy
Trustee, and other parties, including Kukui, Inc., and the Trustees of the
Bishop Estate , which had pursued separate claims against EuroGas (the
"Settlement Agreement"). The Settlement Agreement, in part, required EuroGas to
pay $900,000 over 12 months and issue 100,000 shares of registered common stock
to the Bishop Estate by June 30, 2000. The bankruptcy court approved the
Settlement Agreement on May 23, 2000. The claims of Kukui, Inc. and the
Trustees of the Bishop Estate have been dismissed pursuant to the terms of the
Settlement Agreement. 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 for the estimated cost of
settling the claim included an estimated default penalty and interest. The
Company contends that it has fully performed under the Settlement Agreement and
that the Settlement Agreement additionally entitles the Company to a complete
release and dismissal of all suits filed by the Bankruptcy Trustee. The
Bankruptcy Trustee contends that EuroGas defaulted under the Settlement
Agreement and is not entitled to a release or dismissal.
Holbrook Claim - On February 9, 2001, James R. Holbrook, a documents escrow
agent appointed under the Settlement Agreement, filed his Complaint of Escrow
Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee
and the other parties to the in an action settlement styled James R. Holbrook
v. W. Steve Smith, Trustee, Kukui, Inc., Eurogas, Inc. and Kruse Landa &
Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases. Under
this complaint, Holbrook sought a determination of the defendants' rights in
certain EuroGas files that he had received from Kruse Landa and Maycock, former
attorneys for EuroGas. Through this litigation, the Trustee sought turnover of
all these files pursuit to the Settlement Agreement. EuroGas has opposed
turnover of privileged materials and filed a cross-claim in the suit asking for
a declaratory judgment that the Settlement Agreement is enforceable and that the
Trustee be ordered to specifically perform his obligations under the Settlement
Agreement. The Trustee filed a counterclaim requesting specific performance by
EuroGas and other relief. At the direction of the court, both parties filed
motions for summary judgment. On December 17, 2001, the court entered an order
granting Trustee's Motion for Summary Judgment and denying a related Motion to
Strike Affidavit, which EuroGas had filed. EuroGas has appealed this order to
the United States District Court for the Southern District of Texas, which
appeals are currently pending. EuroGas cannot predict the outcome of these
appeals, but intends to vigorously pursue the appeals to completion.
13
Netherlands Tax Claim - EuroGas' subsidiary, GlobeGas BV, lost its appeal for a
reduction of a 1992 income tax liability in the Netherlands of an amount
equivalent to approximately $803,000 at September 30, 2002. The tax arose from
the sale of equipment at a profit by the former owner of GlobeGas to its Polish
subsidiary. The liability is reflected in EuroGas' financial statements.
However, GlobeGas does not have the ability to pay the assessed obligation and
as a result may face forced liquidation and dissolution by the Netherlands tax
authority.
Other Contingencies and Commitments - During July, 2002 EuroGas reached a verbal
settlement with a group of stockholders and agreed to issue 1,417,848 common
shares and warrants to purchase 6,000,000 common shares within two years at
$0.25 per share. The value of the common stock to be issued was estimated to be
$141,785, or $0.10 per share, based upon quoted market prices of the Company's
common stock on the day of the verbal agreement. The value of the warrants to be
issued were estimated to be $388,939 using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 3.5%; expected
volatility of 166%; dividend yield of 0%; and expected life of 2 years. The
value of the estimated settlement of $530,724 and was included in accrued
settlement obligations and was charged against operations during the current
quarter.
During 2002, the Company's Liechtenstein Subsidiary, Energy Global A.G., was
statutorily liquidated and dissolved by the Principality of Liechtenstein. As a
result, the Company lost $615,904 in net assets of that subsidiary and may be
subject to additional losses in net assets of Energy Global's subsidiaries.
During April 1999, EuroGas entered into a three-year employment contract with a
former chief executive officer. The contract provided for an 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 vested on January 1, 2000, and expire
in April 2009. The officer resigned in January 2001. EuroGas has accrued salary
obligations to the officer in the amount of $230,000, plus certain expenses,
which are included in accrued liabilities. EuroGas believes there may be offsets
to this amount but has not reduced the accrued amount.
In addition, other former officers have made claims for compensation and for
reimbursement of expenses against EuroGas, which amounts have been included as
accrued liabilities.
On February 5, 2002 EuroGas entered into an employment agreement with its new
President. The three-year agreement provides for annual compensation of $400,000
to be paid in monthly installments. The agreement provides for all terms of the
agreement to continue for the unexpired term of the agreement should the Company
be involved in a winding-up or merger transaction. The agreement may be
terminated if either party fails to meet its obligations under the terms of the
agreement. In June 2002, the Company agreed to compensate its Chief Executive
Officer and principal shareholder $25,000 per month.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, crude oil, talc and other
minerals. The Company has acquired interests in several large exploration
concessions and is in various stages of identifying industry partners, farming
out exploration rights, undertaking exploration drilling, and seeking to develop
production. The Company is also involved in a planning-stage co-generation and
mineral reclamation project. Unless otherwise indicated, all dollar amounts in
this Form 10-Q are reflected in United States dollars.
When used herein, the terms the "Company," and "EuroGas," include EuroGas,
Inc. and its wholly owned subsidiaries.
Recent Events - During July, 2002, 2002, the Company reached a verbal
settlement with a group of stockholders and agreed to issue 1,417,847
shares of the Company's common stock. The Company also agreed to issue
warrants to purchase up to 6,000,000 shares of the Company's common stock
at an exercise price of $0.25 per share, exercisable through June 30, 2004.
Investment in the Beaver River Project - During the second quarter of 2002,
the Company evaluated its investment in the Beaver River Gas project in British
Columbia, Canada. The terms of the related farmout agreement provide that the
operator of the project will receive payout of all of its investment prior to
any payments to the other interest holders and then the Company would receive
3.33% of the net cash flows, if any. The operator has invested in excess of
$16,000,000 in the project at June 30, 2002. Due to the low production from the
Beaver River Project and low gas prices currently being paid for the production,
management has determined that it is unlikely that the Company will receive any
of the cash flows from the project, except for nominal overriding royalty
payments. Accordingly, the Company recognized a $3,937,500 charge for
impairment, which was the carrying value of the Company's investment in the
Project, during the second quarter of 2002.
Rozmin Acquisition - During 1998, EuroGas acquired a 23.65% interest in a
talc deposit in Eastern Slovakia through an indirect investment in Rozmin s.r.o.
("Rozmin"), by purchasing a 55% interest in RimaMuran s.r.o. ("RimaMuran"),
whose principal asset was a 43% investment in Rozmin. On March 27, 2001,
EuroGas entered into an agreement to purchase an additional 57% interest in
Rozmin from Belmont Resources, Inc. ("Belmont"), in exchange for the issuance by
the Company of 12,000,000 common shares to Belmont, paying Belmont $100,000 in
cash, and modifying the exercise price of existing stock options. EuroGas also
agreed to register the resale of the common shares issued. Under the 2001
agreement, 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 further agreed to issue additional common shares if the ten-day average
OTC Bulletin Board quoted trading price of the Company's common shares was 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, EuroGas agreed
to issue additional common shares to Belmont if Belmont did not realize
$1,218,000 from the resale of the original 12,000,000 common shares by April 17,
2002, and provided notice of the deficiency, to compensate Belmont for the
shortfall based on the ten-day average trading price on the date of the notice
of shortfall from Belmont. Because Belmont has not provided notice of the sale
of the shares and the resulting deficiency, EuroGas is not able to calculate the
shares that may be issuable, but estimates it may be obligated to issue
approximately 12,000,000 additional common shares, based on recent market prices
for Company's common stock to Belmont under this provision of the agreement.
In connection with the purchase by EuroGas, Rozmin granted an overriding
royalty to Belmont of two percent of gross revenues from any talc sold. EuroGas
agreed to pay Belmont a $100,000 non-refundable advanced royalty payment and
agreed to arrange the necessary financing to place the talc deposit into
commercial production by March 27, 2002. If the talc deposit was not in
commercial production by then, EuroGas agreed to pay Belmont additional advanced
royalties of $10,000 per month for each month of delay in achieving commercial
production. The Company granted to Belmont the right to appoint one member of
the Company's board of directors for not less than one year. In connection with
the acquisition, EuroGas further modified the exercise price of options held by
Belmont for the purchase of 2,500,000 common shares from $0.82 per share to
$0.40 per share.
15
EuroGas acquired the original 23.65% mineral interest through the acquisition of
a 55% interest in Rima Muran, whose principal asset was a 43% investment in
Rozmin. On April 2, 2002, EuroGas exchanged its 55% interest in RimaMuran for
the 43% investment in Rozmin held by RimaMuran. As part of the exchange, EuroGas
paid approximately $105,000 to the former minority owners of RimaMuran to pay
liabilities of RimaMuran and to compensate the former minority owners. RimaMuran
agreed to transfer title to two pieces of heavy equipment, which EuroGas had
previously financed, to Rozmin. As a result of the exchange, EuroGas has a
direct 43% ownership in Rozmin free of encumbrances, and will acquire direct
ownership of the remaining 57% interest in Rozmin if the contingency for
additional stock issuances to Belmont is resolved. By virtue of its ownership
of Rozmin and the talc deposit, EuroGas bears the full responsibility to fund
the development costs necessary to bring the deposit to commercial production.
The Company is currently in negotiations with several interested parties to sell
a minority interest in Rozmin s.r.o to raise these development funds. In
addition the Company is also negotiating a long-term delivery contract for talc
from Rozmin. There is no assurance that these negotiations will be successful.
Results of Operations
The following table sets forth consolidated income statement data and other
selected operating data for the three-month and nine-month periods ended
September 30, 2002 and 2001, respectively.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Oil and Gas Sales $ 2,462 $ 3,787 $ 5,074 $ 33,787
Operating Expenses
Impairment (recovery)of
mineral interest and
equipment - (360,000) 3,937,500 794,444
Depreciation and amortization 5,890 7,529 28,245 16,101
Litigation settlement
expense (recovery) 530,724 (271,929) 2,221,617 1,419,018
General and administrative 509,330 74,069 2,319,415 1,883,498
---------- ---------- ---------- ----------
Total Operating Expenses 1,045,944 (550,331) 8,506,777 4,113,061
Other Income (Expense)
Interest income 74,637 83,713 95,724 131,197
Interest expense (2,168) (111,443) (90,447) (179,571)
Foreign exchange
gains (losses) (20,150) (204,187) 195,034 (205,300)
Net gain (loss) on
sale of investments (144,148) - (26,036) 1,028,222
Other income 54,644 - 21,254 -
Gain (loss) on sale
of equipment 140,282 103,389 140,282 352,777
Equity in income from
unconsolidated subsidiary - - - 341,843
---------- ---------- ---------- ----------
Net Income (Loss) (940,385) 455,590 (8,165,892) (2,610,106)
Three months ended September 30, 2002, compared with three months ended
September 30, 2001
Revenues. The Company had substantially no oil and gas sales for the
three months ended September 30, 2002 and 2001 A small amount of revenue was
generated by the Beaver River project which is currently in a testing mode on
its gas wells.
Operating Expenses. Operating expenses primarily include general and
administrative expenses, depreciation and amortization, cost of mineral
interests and equipment, and impairment of mineral interests and equipment.
General and administrative expenses were $509,330 for the three months ended
September 30, 2002, compared to $74,069 for the three months ended September
30, 2001. The increase in administrative expenses is the result of several
employees accruing salaries and increased costs from the settlement of the
Company with Winzer and Maurer. Depreciation and amortization expenses were
$5,890 for the three months ended September 30, 2002, compared to $7,529 for
the three months ended September 30, 2001.
16
Interest expense was $2,168 for the three months ended September 30, 2002.
This is compared to an interest expense of $111,443 during the three months
ended September 30, 2001. The primary reason for the decrease in interest
expense was due to debentures being converted during 2001 and not being
outstanding in 2002.
Income Taxes. Historically, the Company has not been required to pay
income taxes due to the Company's absence of net profits. For future years, the
Company anticipates that it will be able to utilize a substantial portion of its
accumulated deficit, which was approximately $142,926,465 as of September 30,
2002, to offset profits, if and when achieved, resulting in a reduction in
income taxes payable. However, to the extent accumulated deficits have not been
earned in countries where income is earned, such offsets may not be available.
Net Profit (Loss). The Company incurred a net loss of $940,385 for the
three months ended September 30, 2002, compared to a net income of $455,590 for
the three months ended September 30, 2001. The net income during 2001 was due
to reversals of an impairment change and legal expense. Losses were due to the
absence of revenues, combined with continued administrative, depreciation, and
other recurring continuing expenses. Due to the fluctuating economies of
the Eastern European countries in which the Company operates, the Company is
subject to fluctuations in currency exchange rates that can result in the
recognition of significant gains or losses during any period. The Company
recognized a loss of $20,150 in the three months ended September 30, 2002,
compared to a loss of $204,187 in the three months ended September 30, 2001,
as a result of exchange rate changes and currency transactions during these
periods. The Company does not currently employ any hedging techniques to
protect against the risk of currency fluctuations.
Nine months ended September 30, 2002, compared with nine months ended September
30, 2001
Revenues. The Company had substantially no oil and gas sales for the nine
months ended September 30, 2002 and approximately $33,787 in sales in the same
period of 2001. These revenues are attributable the Beaver River project.
Operating Expenses. General and administrative expenses were $2,319,415
for the nine months ended September 30, 2001, compared to $1,883,498 for the
nine months ended September 30, 2001, an increase of 23 percent. The increase in
administrative expenses is the result of accruing salaries for several employees
and the settlement of the Company with Winzer and Maurer. Depreciation and
amortization expenses were $28,245 for the nine months ended September 30, 2002,
compared to $16,101 for the nine months ended September 30, 2001.
Income Taxes. As indicated above, as a result of the Company's absence of
net profits, the Company has not historically been required to pay income taxes.
For future years, the Company anticipates that it will be able to utilize a
substantial portion of its accumulated deficit, which was approximately
$142,926,465 as of September 30, 2002, to offset profits, if and when achieved,
resulting in a reduction in income taxes payable. However, to the extent
accumulated deficits have not been earned in countries where income is earned,
such offsets may not be available.
Net Loss. The Company incurred a net loss of $8,165,892 for the nine
months ended September 30, 2002, compared to a net loss of $2,610,106 for the
nine months ended September 30, 2001. The losses were due to the absence of
revenues, combined with continued administrative, depreciation, other recurring
continuing expenses, the impairment of the Beaver River Gas project and the
settlement with Winzer and Maurer. As indicated above, the Company is subject
to fluctuations in currency exchange rates, which may result in recognition of
significant gains or losses during any period. The Company recognized a net
gain of $195,034 during the nine months ended September 30, 2002 and a net loss
of $205,300 during the nine months ended September 30, 2001, as a result of
exchange rate changes and currency transactions. The Company does not currently
employ any hedging techniques to protect against the risk of currency
fluctuations.
Capital and Liquidity
The Company had an accumulated deficit of $142,926,465 at September 30,
2002, substantially all of which has been funded out of proceeds received from
the issuance of stock and the incurrence of liabilities. At September 30, 2002,
the Company had total current assets of $1,050,986 and total current liabilities
of $12,658,863 resulting in negative working capital of $11,607,877. As of
September 30, 2002, the Company's balance sheet reflected $2,365,198 in mineral
interests in properties not subject to amortization, net of valuation allowance.
These properties are held under licenses or concessions that contain specific
drilling or other exploration commitments and that expire within one to three
years, unless the concession or license authority grants an extension or a new
concession license, of which there can be no assurance. If the Company is unable
17
to establish production or resources on these properties, is unable to obtain
any necessary future licenses or extensions, or is unable to meet its financial
commitments with respect to these properties, it could be forced to write off
the carrying value of the applicable property.
Throughout its existence, the Company has relied on cash from financing
activities to provide the funds required for acquisitions and operating
activities. During the nine months ended September 30, 2002, the Company
received $1,100,156 in cash from the sale of its Enterra preferred stock,
received $503,723 from the sale of securities available for sale, but expended
$220,172 in the purchase of property and equipment and development of mineral
interests, $1,639,763 in operations and $81,596 to purchase treasury stock. As a
result, the Company's financing activities used net cash of $79,902 during the
nine-month period ended September 30, 2002.
While the Company had cash of $265,741 at September 30, 2002, it has
substantial short-term and long-term financial commitments. Many of the
Company's projects are long-term and will require the expenditure of substantial
amounts over a number of years before the establishment, if ever, of production
and ongoing revenues.
As noted above, the Company has relied principally on cash provided from
equity and debt transactions to meet its cash requirements. The Company does not
have sufficient cash to meet its short-term or long-term needs, and it will
require additional cash, either from financing transactions or operating
activities, to meet its immediate and long-term obligations. There can be no
assurance that the Company will be able to obtain additional financing, either
in the form of debt or equity, or that, if such financing is obtained, it will
be available to the Company on reasonable terms. If the Company is able to
obtain additional financing or structure strategic relationships in order to
fund existing or future projects, existing shareholders will likely continue to
experience further dilution of their percentage ownership of the Company.
If the Company is unable to establish production or reserves sufficient to
justify the carrying value of its assets, to obtain the necessary funding to
meet its short and long-term obligations, or to fund its exploration and
development program, all or a portion of the mineral interests in unproven
properties will be charged to operations, leading to significant additional
losses.
Inflation
The amounts presented in the Company's consolidated financial statements do
not provide for the effect of inflation on the Company's operations or its
financial position. Amounts shown for property, plant, and equipment and for
costs and expenses reflect historical costs and do not necessarily represent
replacement costs or charges to operations based on replacement costs. The
Company's operations, together with other sources, are intended to provide funds
to replace property, plant and equipment as necessary. Net income would be lower
than reported if the effects of inflation were reflected either by charging
operations with amounts that represent replacement costs or by using other
inflation adjustments. Due to inflationary problems in Eastern Europe that are
seen in currency exchange losses, the Company has seen losses on its asset
values in those countries.
Warning Regarding Forward-looking Statements, and Factors that may affect Future
Results
This Quarterly Report on Form 10-Q contains forward-looking statements and
information relating to the Company and its business which are based on the
beliefs of management of the Company and assumptions made based on information
currently available to management. These statements can be identified by the use
of the words "will," "anticipate," "estimate," "project," "likely," "believe,"
"intend," "expect" or similar words. Forward-looking statements reflect the
current views of management of the Company and are not intended to be accurate
descriptions of the future. When considering these statements, the reader should
bear in mind the cautionary information set forth in this section and other
cautionary statements throughout this Report and the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, and in the Company's other
filings with the Securities and Exchange Commission. All forward-looking
statements are based on management's existing beliefs about present and future
events outside of management's control and on assumptions that may prove to be
incorrect. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including those identified below.
Should one or more of these or other risks materialize or if the underlying
assumptions of management prove incorrect, actual results of the Company may
vary materially from those anticipated, estimated, projected or intended. Among
the factors that may affect the Company's results are its ability to establish
beneficial relationships with industry partners to provide funding and expertise
to the Company's projects; its efforts to locate commercial deposits of
hydrocarbons on the Company's concessions and licenses; the negotiation of
additional licenses and permits for the exploitation of any reserves located;
18
the success of exploratory activities; the completion of wells drilled by the
Company, its joint venture partners and other parties allied with the Company's
efforts; the economic recoverability of in-place reservoirs of hydrocarbons;
technical problems in completing wells and producing gas; the success of
marketing efforts; the ability to obtain the necessary financing to successfully
pursue the Company's business strategy; operating hazards and uninsured risks;
the intense competition and price volatility associated with the oil and gas
industry; and international and domestic economic conditions.
The Company's activities are subject to risks in addition to the risks
normally associated with the exploration and development of hydrocarbons. Each
of the eastern European countries in which the Company has obtained or seeking
to obtain concessions is in the process of developing capitalistic economies. As
a result, many of their laws, regulations, and practices with respect to the
exploration and development of hydrocarbons have not been time tested or, in
some cases, yet adopted. The Company's operations are subject to significant
risks that any change in the government itself or in government personnel, or
the development of new policies and practices may adversely effect the Company's
operations and financial results at some future date. Furthermore, the Company's
concessions and licenses are often subject, either explicitly or implicitly, to
ongoing review by governmental ministries. In the event that any of these
countries elects to change its regulatory system, it is possible that the
government might seek to annul or amend the governing agreements in a manner
unfavorable to the Company or impose additional taxes or other duties on the
activities of the Company. As a result of the potential for political risks in
these countries, it remains possible that the governments might seek to
nationalize or otherwise cause the interest of the Company in the various
concessions and licenses to be forfeited. Many of the areas in which the
Company's prospects are located lack the necessary infrastructure for
transporting, delivering, and marketing the products which the Company seeks to
identify and exploit. Consequently, even if the Company is able to locate
hydrocarbons in commercial quantities, it may be required to invest significant
amounts in developing the infrastructure necessary to carry out its business
plan. The Company does not presently have a source of funding available to meet
these costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in many foreign currencies. As a result of
the effects that foreign exchange rate movements of those currencies have on the
Company's costs and on the cash flows, which it receives from its foreign
operations, the Company is subject to foreign exchange rate risks. The Company
believes that it currently has no other material market risk exposure. To date,
the Company has addressed its foreign currency exchange rate risks principally
by maintaining its liquid assets in US dollars, in interest-bearing accounts,
until payments in foreign currency are required, but the Company does not reduce
this risk by utilizing hedging activities.
Item 4. Controls and Procedures
Within 90 days prior to the date of filing this report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-14(c) of the Exchange Act).
Based on and as of the time of such evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted by it under the Exchange Act. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the time of such
evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The principal portion of the Company's active litigation, as described in
the following six paragraphs, involves matters relating to the Company's
acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in
Poland). This litigation is being brought by Steve Smith, Chapter 7 Trustee (the
"Trustee") for the bankruptcy estates of "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), pending in the United States Bankruptcy Court,
for the Southern District of Texas, Houston Division.
19
In March 1997, the Trustee commenced the following cause of action: "W.
Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie,
EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the
United States Bankruptcy Court for the Southern District of Texas, Houston
Division) ("97-4114"). The Trustee's initial claim appears to allege that the
Company may have paid inadequate consideration for its acquisition of GlobeGas
from persons or entities acting as nominees for the McKenzies, and therefore
McKenzies' creditors are the true owners of the proceeds received from the
development of the Pol-Tex Concession in Poland. The Company has contested the
jurisdiction of the Court, and the Trustee's claim against a Polish corporation
(Pol-Tex), and the ownership of Polish mining rights. The Company further
contends that it paid substantial consideration for GlobeGas (Pol-Tex's parent),
and that there is no evidence that the creditors of the McKenzies invested any
money in the Pol-Tex Concession.
In March of 1997, the Trustee brought a related suit styled W. Steve Smith,
Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V.,
Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie,
Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc., (Adv. No.
97-4155) in each of the three McKenzie individual bankruptcy cases. In general,
the action asserts that the defendants, other than the Company, who acquired an
interest in the Polish Project, received a fraudulent transfer of assets
belonging to the individual McKenzie bankruptcy estates, or are alter egos or
the strawmen for the McKenzies. As a result, the Trustee asserts that any
EuroGas stock or cash received by these defendants should be accounted for and
turned over to the Trustee. As to the Company, the Trustee asserts that as
transfer agent, the Company should turn over the preferred stock presently
outstanding to the defendants or reserve such shares in the name of the Trustee
and that any special considerations afforded these defendants should be
canceled. It appears the Company was named to this litigation only because of
its relationship as transfer agent to the stock in question. This suit has been
administratively consolidated with 97-4114 and is currently pending before the
Houston bankruptcy court.
In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement
Pleadings and Join Additional Parties in 97-4114, the consolidated adversary
proceedings, seeking to add new parties, including Wolfgang Rauball and Reinhard
Rauball and assert additional causes of action against EuroGas and the other
defendants in this action. These new causes of action include claims for
damages based on fraud, conversion, breach of fiduciary duties, concealment and
perjury. These causes of action allege that the Company and certain of its
officers, directors or consultants cooperated or conspired with the McKenzies to
secret or conceal the proceeds from the sale of the Polish Concession from the
Trustee. In January 2000, the Trustee's motion to amend was granted by the
bankruptcy court. The Company is vigorously defending this suit. On March 18,
2002, the court considered motions to dismiss filed by EuroGas and the Ruaballs
(other named defendants). On September 10, 2002, the Court entered an Order
which required the Trustee to specify the causes of action asserted against each
Defendant. A few days prior to this Order, the Trustee filed his Second Motion
for Leave to Amend and Supplement Pleadings and to Drop Certain Defendants (the
"Second Motion"). On October 21, 2002, EuroGas and other Defendants filed their
Response to the Second Motion. On November 11, 2002, the Trustee filed his
Motion and Reply to this Response under which, in part, Trustee seeks court
approval to file a Third Amended Complaint. Both the Trustee's proposed Second
and Third Amended Complaints contain These new causes of action against the
Defendants, including claims under Title 18 of the United States Code. The
Trustee's motions will be heard on January 10, 2003.
In June 1999, the Trustee filed another suit in the same bankruptcy cases
styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane,
SP. Z.O.O., et al (Ital. No. 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, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane,
SP. Z.O.O. (Adv. No. 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. EuroGas disputes the allegations and has filed a motion to
dismiss or alternatively, to abate this suit. The motion is currently pending
before the court.
Management's estimate of the amount due under the claims made by the
Trustee has been accrued in the accompanying consolidated financial statements
as of June 30, 2002.
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 additional 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
20
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 Estate of Bernice Pauahi
Bishop (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 signed a settlement agreement with the bankruptcy
Trustee, and other parties, including Kukui, Inc., and the Trustees of the
Bishop Estate, which had pursued separate claims against EuroGas (the
"Settlement Agreement"). The Settlement Agreement, in part, required EuroGas to
pay $900,000 over 12 months and issue 100,000 shares of registered common stock
to the Bishop Estate by June 30, 2000. The bankruptcy court approved the
Settlement Agreement on May 23, 2000. The claims of Kukui, Inc. and the
Trustees of the Bishop Estate have been dismissed pursuant to the terms of the
Settlement Agreement. 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 for the estimated cost of
settling the claim included an estimated default penalty and interest. The
Company contends that it has fully performed under the Settlement Agreement and
that the Settlement Agreement additionally entitles the Company to a complete
release and dismissal of all suits filed by the Bankruptcy Trustee. The
Bankruptcy Trustee contends that EuroGas defaulted under the Settlement
Agreement and is not entitled to a release or dismissal.
On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under
the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader
and for Declaratory Relief against EuroGas, the Trustee and the other parties to
the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee,
Kukui, Inc., EuroGas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064)
in the McKenzie bankruptcy cases. Under this complaint, Holbrook sought a
determination of the defendants' rights in certain EuroGas files that he had
received from Kruse Landa and Maycock, former attorneys for EuroGas. Through
this litigation, the Trustee sought turnover of all these files pursuit to the
Settlement Agreement. EuroGas has opposed turnover of privileged materials and
filed a cross-claim in the suit asking for a declaratory judgment that the
Settlement Agreement is enforceable and that the Trustee be ordered to
specifically perform his obligations under the Settlement Agreement. The
Trustee filed a counterclaim requesting specific performance by EuroGas and
other relief. At the direction of the court, both parties filed motions for
summary judgment. On December 17, 2001, the court entered an order granting
Trustee's Motion for Summary Judgment and denying a related Motion to Strike
Affidavit, which EuroGas had filed. EuroGas has appealed this order to the
United States District Court for the Southern District of Texas. On September
25, 2002, the District Court entered its Opinion and Order Denying Trustee's
Motion to Strike and vigorously pursue the appeals to completion affirming the
Bankruptcy Court's Order. This Order further remanded the proceeding to the
Bankruptcy Court for appropriate relief. On October 25, 2002, EuroGas filed a
notice of appeal of the District Court's Order to the Fifth Circuit Court of
Appeals.
Netherlands Tax Assessment. For the 1992 tax year, the Kingdom of the
Netherlands assessed a tax against GlobeGas in the amount of approximately
$911,000, even though Globe Gas had significant operating losses. On December
17, 2001, the Netherlands issued its final tax assessment, including interest
charged from 1998, in the amount of approximately $753,000. The Company had
until December 19, 2001 to make payment of this amount or face possible
additional proceedings against the assets of GlobeGas in satisfaction of the
assessment. The tax assessment is payable in Euro, and as a result fluctuates
on the Company's financial statements due to adjustments in exchange rates.
However, GlobeGas does not have the ability to pay the assessed obligation and
as a result may face forced liquidation and dissolution by the Netherlands tax
authority.
Dissolution of Energy Global A.G. During 200215, the Company's
Liechtenstein Subsidiary, Energy Global A.G., was statutorily liquidated and
dissolved by the Principality of Liechtenstein. As a result, the Company lost
$615,904 in net assets of that subsidiary and may be subject to additional
losses in net assets of Energy Global's subsidiaries.
21
In November 2001, Borre Dahl, a former employee of the Company, filed a
complaint against the Company and Wolfgang Rauball, the Company's Chairman and
Chief Executive Officer, claiming breach of contract, breach of employment
contract, and misrepresentation. Both Mr. Rauball and the Company have filed
answers to the complaint, and intend to defend vigorously the suit. No trial
date has been set.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report.
Exhibit
Number Title of Document Location
- ------- --------------------------- --------------------
2.1 Exchange Agreement between Report on Form 8-K
Northampton, Inc., dated August 3, 1994,
and Energy Global, A.G. Exhibit No. 1*
2.2 Agreement and Plan of Merger Report on Form 8-K
between EuroGas, Inc., dated July 12, 1996,
and Danube International Exhibit No. 5*
Petroleum Company, Inc.,
dated July 3, 1996, as amended
2.3 English translation of Transfer Report on Form 8-K
Agreement between dated June 11, 1997
EuroGas and OMV, Inc. for the Exhibit No. 1*
Acquisition of
OMV (Yakut) Exploration GmbH
dated June 11, 1997
2.4 Asset Exchange Agreement Report on Form S-1
between EuroGas, Inc., and dated July, 23, 1998
Beaver River Resources, Ltd., Exhibit No. 2.03*
dated April 1, 1988
3.1 Articles of Incorporation Registration
Statement
on Form S-18, File
No. 33-1381-D Exhibit
No. 1*
3.2 Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
3.3 Designation of Rights, Quarterly Report on
Privileges, and Preferences Form 10-QSB dated
of 1995 Series Preferred Stock March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights, Report on Form 8-K
Privileges, and Preferences dated July 12, 1996,
of 1996 Series Preferred Stock Exhibit No. 1*
3.5 Designation of Rights, Report on Form 8-K
Privileges, and Preferences dated May 30, 1997
1997 Series A Convertible Exhibit No. 1*
Preferred Stock
3.6 Designation of Rights, Report on Form S-1
Privileges, and Preferences Dated July 23, 1998
of 1998 Series B Convertible Exhibit No. 3.06*
Preferred Stock
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 Form S-
1999 Series C 6% Convertible 1, File No. 333-
Preferred Stock 92009, filed on
December 2, 1999
22
4.1 Subscription Agreement between Report on Form S-1
EuroGas, Inc., and dated July 23, 1998
Thomson Kernaghan & Co., Ltd., Exhibit No. 4.01*
dated May 29, 1998
4.2 Warrant Agreement dated July Report on Form 8-K
12, 1996, with dated July 12, 1996,
Danube Shareholder Exhibit No. 2*
4.3 Registration Rights Agreement Report on Form S-1
Between EuroGas, Inc., dated July 23, 1998
and Thomson Kernaghan & Co., Exhibit No. 4.02*
Ltd., dated May 29, 1998
4.4 Registration Rights Agreement Report on Form 8-K
dated July 12, 1996, dated July 12, 1996
with Danube Shareholder Exhibit No. 3*
4.5 Registration Rights Agreement Report on Form S-1
by and among EuroGas, Inc., and dated July 23, 1998
Finance Credit & Development Exhibit No. 4.06*
Corporation, Ltd., dated June
30, 1997
4.6 Option granted to the Trustees Annual Report on
of the Estate of Form 10-KSB for the
Bernice Pauahi Bishop fiscal year ended
December 31, 1995,
Exhibit No. 10*
4.7 Registration Rights Agreement Annual Report on
by and among Form 10-KSB for the
EuroGas, Inc., and Kukui, Inc., fiscal year ended
and the Trustees of December 31, 1995,
the Estate of Bernice Pauahi Exhibit No. 11*
Bishop
4.8 Option issued to OMV Annual Report on
Aktiengesellschaft to acquire Form 10-KSB for the
up fiscal year ended
to 2,000,000 shares of December 31, 1996,
restricted common stock Exhibit No. 13*
4.9 Form of Convertible Debenture Quarterly report on
issued on January 12, 2000. Form 10-Q dated March
31, 2000.
10.1 English translation of Mining Quarterly Report on
Usufruct Contract between The Form 10-Q dated
Minister of Environmental September 30, 1997
Protection, Natural Resources Exhibit No. 1*
and Forestry of the Republic of
Poland and Pol-Tex Methane,
dated October 3, 1997
10.2 Agreement between Polish Oil Quarterly Report on
and Gas Mining Joint Stock Form 10-Q dated
Company and EuroGas, Inc., September 30, 1997
dated October 23, 1997 Exhibit No. 2*
10.3 1996 Stock Option and Award Annual Report on
Plan Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.4 Settlement Agreement by and Annual Report on
among Kukui, Inc., and Form 10-KSB for the
Pol-Tex Methane, Sp. zo.o., fiscal year ended
McKenzie Methane December 31, 1995,
Rybnik, McKenzie Methane Exhibit No. 15*
Jastrzebie, GlobeGas,
B.V. (formerly known as
McKenzie Methane Poland,
B.V.), and the Unsecured
Creditors' Trust of the
Bankruptcy Estate of McKenzie
Methane Corporation
23
10.5 Acquisition Agreement between Report on Form S-1
EuroGas, Inc., and Belmont dated July 23, 1998
Resources, Inc., dated July 22, Exhibit No. 10.20*
1998
10.6 General Agreement governing the Report on Form 8-K
operation of dated August 3, 1994,
McKenzie Methane Poland, B.V. Exhibit No. 2*
10.7 Concession Agreement between Annual Report on
Ministry of Form 10-KSB for the
Environmental Protection, fiscal year ended
Natural Resources, and December 31, 1995,
Forestry and Pol-Tex Methane Exhibit No. 18*
Ltd.
10.8 Association Agreement between Annual Report on
NAFTA a.s. Gbely Form 10-KSB for the
and Danube International fiscal year ended
Petroleum Company December 31, 1995,
Exhibit No. 19*
10.9 Agreement between Moravske' Annual Report on
Naftove' Doly a.s. Form 10-KSB for the
and Danube International fiscal year ended
Petroleum Company 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 on
amended, with attached Form 10-KSB for the
list of shareholders fiscal year ended
December 31, 1995,
Exhibit No. 23*
10.12 Amendment #1 to the Association Annual Report on
Agreement Entered Form 10-KSB for the
on 13th July 1995, between Fiscal year ended
NAFTA a.s. Gbely and December 31, 1996,
Danube International Petroleum Exhibit No. 25*
Company
10.13 Acquisition Agreement by and Form 10-Q
among Belmont Resources, Inc., Dated September 30,
EuroGas Incorporated, dated 1998
October 9, 1998 Exhibit No. 1*
10.14 Letter of Intent by and between Annual Report on
Polish Oil and Gas Form 10-KSB for the
Company and Pol-Tex Methane, Fiscal year ended
dated April 28, 1997 December 31, 1996,
Exhibit No. 27*
10.15 Purchase and Sale Agreement Report on Form 8-K
between Texaco Slask Dated March 24, 1997
Sp. zo.o., Pol-Tex Methane Sp. Exhibit No. 1*
zo.o. and
GlobeGas B.V.
24
10.16 English translation of Articles Report on Form 8-K/A
of Association of the Dated June 11, 1997
TAKT Joint Venture dated June Exhibit No. 3*
7, 1991, as amended
April 4, 1993
10.17 English translation of Proposed Report on Form 8-K/A
Exploration and Dated June 11, 1997
Production Sharing Contract for Exhibit No. 4*
Hydrocarbons
between the Republic of Sakha
(Yakutia) and the Russian
Federation and the TAKT Joint
Venture
10.18 English translation of Registration
Agreement on Joint Investment Statement on Form S-1
and Production Activities dated July 23, 1998
between EuroGas, Inc., and Exhibit No. 10.21*
Zahidukrgeologia, dated May 14,
1998
10.19 English translation of Registration
Statutory Agreement of Statement on Form S-1
Association of Limited dated July 23, 1998
Liability Company with Foreign Exhibit No. 10.22*
Investments between EuroGas,
Inc., and Makyivs'ke Girs'ke
Tovarystvo, dated June 17, 1998
10.20 Partnership Agreement between Amendment No. 1 to
EuroGas, Inc., and RWE-DEA Registration
Aktiengesellschaft for Statement on Form S-1
Mineraloel and Chemie AG, date dated August 3, 1998
July 22, 1998 Exhibit No. 10.23
10.21 Mining Usufruct Contract Quarterly Report on
between The Minister of Form 10-Q dated
Environmental Protection, September 30, 1997
Natural Resources and Exhibit No. 1*
Forestry of the Republic of
Poland and Pol-Tex
Methane, dated October 3, 1997
10.22 Agreement between Polish Oil Quarterly Report on
and Gas Mining Joint Form 10-Q dated
Stock Company and EuroGas, September 30, 1997
Inc., dated Exhibit No. 2*
October 23, 1997
10.23 Agreement for Acquisition of 5% Quarterly Report on
Interest in a Form 10-Q dated
Subsidiary by and between September 30, 1997
EuroGas, Inc., B. Grohe, Exhibit No. 3*
and T. Koerfer, dated November
11, 1997
10.24 Option Agreement by and between Quarterly Report on
EuroGas, Inc., Form 10-Q dated
and Beaver River Resources, September 30, 1997
Ltd., dated Exhibit No. 4*
October 31, 1997
10.25 Lease Agreement dated September Registration
3, 1996, between Potomac Statement
Corporation and the Company; on Form S-1, File No.
Letter of Amendment dated 333-92009, filed on
September 30, 1999. December 2, 1999
10.26 Sublease dated November 2, Registration
1999, between Scotdean Limited Statement on Form S-
and the Company 1, File No. 333-
92009, filed on
December 2, 1999
10.27 Securities Purchase Agreement Registration
dated November 4, 1999, between Statement on Form S-
the Company and Arkledun Drive 1, File No. 333-
LLC 92009, filed on
December 2, 1999
10.28 Registration Rights Agreement Registration
dated November 4, 1999, between Statement on Form S-
the Company and Arkledun Drive 1, File No. 333-
LLC 92009, filed on
December 2, 1999
25
10.29 Supplemental Agreement dated Registration
November 4, 1999, between the Statement on Form S-
Company and Arkledun Drive LLC 1, File No. 333-
92009, filed on
December 2, 1999
10.30 Executive Employment Agreement Registration
dated April 20, 1999 between Statement on Form S-
the Company and Karl Arleth 1, File No. 333-
92009, filed on
December 2, 1999
10.31
Settlement Agreement dated June Form 10-K for year
16, 2000, between the Company ended December 31,
and FCOC 2000
Securities Purchase Agreement Form 10-K for year
10.32 dated October 2, 2000, between ended December 31,
the Company and Arkledun Drive 2000
LLC
10.33 Registration Rights Agreement Form 10-K for year
dated October 2, 2000, between ended December 31,
the Company and Arkledun Drive 2000
LLC
10.34 Settlement Agreement dated Form 10-K for year
November 14, 2000, between the ended December 31,
Company and Arkledun Drive LLC 2000
10.35 Consulting Agreement dated Form 10-K for year
September 18, 2000, between the ended December 31,
Company and Spinneret Financial 2000
Systems, Ltd.
10.36 Securities Purchase Agreement Form 10-K for year
dated March 27, 2001 between ended December 31,
the Company and Belmont 2000
Resources Inc.
10.37 Agreement dated April 9, 2001 Form 10-K for year
between the Company and Belmont ended December 31,
Resources Inc. 2000
10.38 Warrant Agreement dated Form 10-K for year
September 8, 2000 with Oxbridge ended December 31,
Limited 2000
10.39 Warrant Agreement dated Form 10-K for year
September 8, 2000 with Rockwell ended December 31,
International Ltd. 2000
10.40 Warrant Agreement dated Form 10-K for year
September 8, 2000 with Conquest ended December 31,
Financial Corporation 2000
10.41 Termination and Transfer Form 10-K for year
Agreement dated June 23, 2000 ended December 31,
between the Company and Belmont 2000
Resources, Inc.
10.42 Loan Agreement dated March 3, Form 10-K for year
1999 between the Company and ended December 31,
Pan Asia Mining Corp. 2000
10.43 Agreement dated July 14, 2000 Form 10-K for year
between the Company and ended December 31,
Oxbridge Limited 2000
10.44 Amended Agreement dated July Form 10-K for year
25, 2000 between the Company, ended December 31,
Pan Asia Mining Corp., and 2000
Oxbridge Limited
10.45 Settlement Agreement dated Form 10-K for year
November 20, 2000 between the ended December 31,
Company and Beaver River 2000
Resources, Ltd.
26
10.46 Agreement dated February 5, Attached
2002 between Hansen Energy
Limited and EuroGas, Inc.
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
99.1 Certification under Section 906 Attached
of the Sarbanes-Oxley Act (18
U.S.C. SECTION 1350)
* Incorporated by reference
(b) No current reports on Form 8-K were filed during the reporting
quarter.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
EUROGAS, INC.
Dated:
November 26, 2002 By: /s/ Wolfgang Rauball
----------------------
Wolfgang Rauball, Chief Executive Officer
(Principal Executive Officer)
November 26, 2002 By: /s/ Hank Blankenstein
----------------------
Hank Blankenstein, Chief Financial Officer
(Principal Financial and Accounting Officer)
28
CERTIFICATIONS
I, Wolfgang Rauball, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
EuroGas, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
quarterly report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others within
those entities, particularly during the period in
which the periodic reports are being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5.The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6.The registrant's other certifying officers and I
have indicated in this quarterly report whether or
not there were significant changes in internal
controls or in other factors that could significantly
affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
/s/ Wolfgang Rauball
- ----------------------
Name: Wolfgang Rauball
Date: November 26, 2002
29
I, Hank Blankenstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
EuroGas, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements
were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
report, fairly present in all material respects the
financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
quarterly report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures
to ensure that material information relating to
the registrant, including its consolidated
subsidiaries, is made known to us by others within
those entities, particularly during the period in
which the periodic reports are being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5.The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
c) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I
have indicated in this quarterly report whether or
not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to
the date of our most recent evaluation, including
any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Hank Blankenstein
- -----------------------
Name: Hank Blankenstein
Date: November 26, 2002
30