Back to GetFilings.com
______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 000-24781 87-0427676
---- ----------- ------------
(State or other (Commission File (IRS Employer
jurisdiction No.) Identification No.)
of incorporation or
organization)
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
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant based upon the last sale price of the common
stock as of the last business day of the registrant's most recently completed
second quarter was approximately $13,500,000, or $0.115 per share.
As of April 30, 2003, the registrant had 168,212,635 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
i
TABLE OF CONTENTS TO FORM 10-K
PAGE
PART I
Item 1. Business 1
Item 2. Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 25
Item 13. Certain Relationships and Related Transactions 26
Item 14. Controls and Procedures 27
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 27
Documents Filed
1. Financial Statements
2. Financial Statement Schedule
3. Exhibit List
Reports on Form 8-K
Exhibits
Financial Statement Schedules
SIGNATURES 34
CERTIFICATIONS. 35
i
PART I
This Annual Report on Form 10-K for the year ended December 31, 2002 contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve
risks and uncertainties. The reader is cautioned that the actual results of
EuroGas, Inc. and its consolidated subsidiaries will differ (and may differ
materially) from the results discussed in these forward-looking statements.
Statements considered to be forward-looking by the Company include statements in
which the Company discloses its beliefs, expectations or anticipations, and
statements using the words "may," "should," "might," "could," "might," "would,"
"expect," "believe" and "anticipate." Factors that could cause or contribute to
such differences include those factors discussed herein under "Factors That May
Affect Future Results" and elsewhere in this Form 10-K generally. The reader is
also encouraged to review other filings made by the Company with the Securities
and Exchange Commission (the "SEC") describing other factors that may affect
future results of the Company.
Item 1. Business
General
We are primarily engaged in the acquisition of rights to explore for and
exploit natural gas, coal bed methane gas, crude oil, talc and other minerals.
We have acquired interests in several large exploration concessions and are in
various stages of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop production. Unless
otherwise indicated, all dollar amounts in this Form 10-K are reflected in
United States dollars.
When used herein, "we", the "Company" and "EuroGas" includes EuroGas, Inc.,
and its wholly owned subsidiaries, EuroGas (UK) Limited, Danube International
Petroleum Company, EuroGas GmbH Austria, EuroGas Polska Sp. zo.o., and Energy
Global A.G., and the subsidiaries of each of these subsidiaries, including
GlobeGas B.V., Pol-Tex Methane, Sp. zo.o., McKenzie Methane Jastrzebie Sp.
zo.o., Energetyka Lubuska and Danube International Petroleum Holding B.V.
Activities in Slovakia
On January 1, 1993, the Czech Republic and Slovakia emerged as separate
independent nations. Slovakia is bordered on the north by Poland, on the east
by Ukraine, on the south by Hungary, and on the west by Austria and the Czech
Republic. Slovakia has an area of approximately 19,000 square miles and a
population of approximately 5.5 million people. Slovakia has not been as quick
to adopt free market reforms as Poland and the Czech Republic and the former
communist party remains a major political force. Slovakia is a member of the
International Monetary Fund, the European Bank for reconstruction and
development, and an associate member of the European Union. Bratislava is the
capital of Slovakia and its largest city.
Gemerska Talc Deposit. During 1998, we acquired a 24% interest in an
undeveloped talc deposit located near Roznava in Eastern Slovakia through an
indirect investment in Rozmin s.r.o. Oxbridge Ltd., a related party, paid
$879,000 on behalf of the Company in 1998 as part of the purchase of the 24%
interest in the talc deposit. On March 19, 1998, we reimbursed Oxbridge Ltd. for
its payment and accounted for the payment to Oxbridge Ltd. as a reduction of a
separate promissory note payable to Oxbridge Ltd. In 2000, Oxbridge Ltd. made a
demand for payment of the promissory note. EuroGas reclassified the payment to
Oxbridge Ltd. as an increase in the cost of the 24% interest in the talc deposit
and recorded the principal and $272,490 of accrued interest due under the
promissory note payable to Oxbridge Ltd. In November 2000, EuroGas issued
2,391,162 shares of common stock, valued at $1,151,490, or $0.48 per share, to
Oxbridge Ltd. in satisfaction of the principal and accrued interest due on the
promissory note. Through December 31, 2000 and 1999, EuroGas had invested
$2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and $915,913
(excluding the payment to Oxbridge Ltd.), respectively, in the acquisition and
development of the talc deposit and related equipment.
On 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
1
price of the Company's common shares below $0.30 per share through April 17,
2002. During April 2002, EuroGas was obligated to issue 3,830,000 common shares
to Belmont under the terms of the agreement. 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 December 31, 2002 EuroGas has accrued $85,000 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.
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.
The Gemerska Talc Deposit is considered to be one of the richest and
largest talc deposits in the world. The deposit, according to the Ministry of
Environment of the Slovak Republic, contains 146.6 million tons of high-purity
talc reserves. Mine construction, which began in August 2000, is scheduled for
completion in 2003, at which time talc production is scheduled to commence.
Production is expected to reach 130,000 tons of talc annually. This would
represent approximately 12% of the annual European talc consumption. We believe
the exploitation of the Gemerska Talc Deposit will be particularly favorable due
to strong global demand for talc.
Envigeo-Carpathian Flysch Concession. In September 1998, we acquired a 51%
interest in Evigeo s.r.o., a Slovakian private company that owns a 2,300 square
kilometer appraisal and survey concession, known as the Medzilaborce concession,
in the northeast corner of Slovakia, referred to as the Carpathian Flysch
region, is in good standing.Subsequently the Company sold some of its interest
and now EuroGas presently holds a 45% interest in Envigeo, McCallan owns 45% and
the Envigeio s.r.o. owns the other 10% There are three concessions, all held by
Envigeo. This region extends into Poland and Ukraine and is geologically on
trend with extensive major discoveries of oil and gas found in the neighboring
countries. Since 1998 we have undertaken geological reconnaissance work on the
Medzilaborce concession to meet the concession requirements. As we have
evaluated the investment we have determined that there is no potential for
returns in the near future. Therefore we have decided to impair this project.
Accordingly, the Company recognized a $1,703,000 charge for impairment, which
was the carrying value of the Company's investment in the project, during the
fourth quarter of 2002.
2
Slovakian Oil & Gas Joint Venture. In July 1996, as part of our effort to
diversify and expand our interests in Europe, we acquired Danube International
Petroleum Company ("Danube"), which held participation rights for natural gas
exploration in Slovakia and the Czech Republic. Since the acquisition, we have
focused our efforts on the development of the Slovakian project and abandoned
our interest in the Czech Republic. Danube was a partner in a joint venture
agreement (the "Slovakian Oil & Gas Joint Venture") with NAFTA Gbely A.S.
("NAFTA"). The principal focus of the Slovakian Oil & Gas Joint Venture is
natural gas exploration and development under a license covering 128,000 acres
located in the East Slovakian Basin, a northeastern extension of the Pannonian
Basin that covers large parts of Hungary and the southeastern part of Slovakia.
Under the terms of the joint venture agreement, EuroGas was obligated to
provide 75% ($4.98 million) of the projected initial test phase (including
seismic testing) funding of $6.64 million and 60% ($4.08 million) of the
projected capital investment cost for the initial production phase of $6.8
million. All funds required for the initial test phase were expended. However,
the Company has decided to withdraw from the NAFTA-Danube association and
discontinue our involvement in any further exploration in the Trebisov gas field
in eastern Slovakia. In exchange for the Company's withdrawal, Nafta Gbely
a.s. agreed to pay all outstanding obligations and liabilities totaling
approximately $750,000 owing to Geophysical Services Ltd. of Hungary.
Activities in Poland
EuroGas Polska has several oil and gas concessions and projects in Poland,
including:
. a 112 sq. kilometer coal bed methane concession located in the Upper
Silesian Coal Basin,
. a project with Polish Oil and Gas to undertake appraisal and development
activities for a large area located in the Carpathian Flysch and Tectonic
ForeDeep areas of Poland,
. exclusive rights to explore for and develop hydrocarbons in an area of over
1,100,000 acres in Southeastern Poland, and
. a concession to explore and develop oil and gas on over 1,000,000 acres in
the Carpathian oil fairway.
Polish Methane Gas Concessions. Coal bed methane gas production has taken
place in the United States for some time, and has drawn attention in Poland due
to a study funded by the United States Government. Methane is a component of
natural gas that is used as a fuel in various industries and as a source of
residential heating. Before natural gas is used as a fuel, heavy hydrocarbons
such as butane, propane, and natural gasoline are separated to meet pipeline
specifications. The heavy hydrocarbons are typically sold separately. The
remaining gas constitutes dry gas, composed of methane and ethane. Once
produced and separated, there is no substantial difference between natural gas
and methane. The demand in Europe for both natural and methane gas has been
traditionally high and the price generally runs significantly higher than prices
in the United States, although the price for natural gas in Poland is generally
lower than in the rest of the European market. Gas production typically
competes with coal and oil but is generally considered to be a preferred product
because of recent environmental concerns expressed by governments in Europe.
On October 13, 1997, EuroGas received a concession from the Polish Ministry
of Environmental Protection of Natural Resources and Forestry to explore and
potentially develop a 112 square kilometer coal bed methane concession located
in the Upper Silesian Coal Basin. We conducted a feasibility study to explore
the possibilities of drilling gas wells for a combined heat and power plant
project or other uses. The results of the study suggest that the volume of gas
in place can exceed 30 billion cubic meters. Additional work connected with
evaluation of the productivity of the wells is under way. Although the property
is carried in the books at zero value there is a possibility for success if a
proper funding of the project can be obtained.
3
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields. On October 23,
1997, EuroGas Polska completed an agreement with Polish Oil to undertake
appraisal and development activities for a large area located in the Carpathian
Flysch and Tectonic ForeDeep areas of Poland. The agreement contemplates total
expenditures by EuroGas of $15 million. To date, EuroGas Polska and Polish Oil
have conducted and interpreted a $1.5 million, wide-line seismic work and
geological exploration program in the Rymanow-Lesko area of the Carpathian
Mountains in southeastern Poland. Polish Oil has produced a report based on
this program, which suggests the potential for substantial oil and gas reserves
in the Rymanow-Lesko area. If subsequent feasibility studies indicate that oil
or gas can economically be recovered from this concession, of which there is no
assurance, further testing, regulatory approvals and construction will be
required before commercial production can commence, which would take at least
two years, and cost at least $2,000,000. We do not currently have the funds
necessary to complete a feasibility study, drill test wells, or develop this
concession and will need to bring in a joint venture partner or raise additional
capital before such process can commence.
Carpathian New Concession. On December 20, 1999, we executed a usufruct
agreement with the Ministry of Environmental Protection, Natural Resources and
Forestry of the Republic of Poland. This agreement tentatively secured for
EuroGas the exclusive rights to explore for and develop hydrocarbons in an area
of over 1,100,000 acres in Southeastern Poland.
On September 7, 2000, the Ministry of Environmental Protection, Natural
Resources and Forestry of the Republic of Poland granted EuroGas Polska a
concession to explore and develop oil and gas on more than one million acres in
the Carpathian oil fairway. In May 2000, a report conducted by independent
Polish oil and gas experts indicated potentially producing deposits in 12
exploration leads within this area, with the largest one potentially containing
300 million barrels of oil equivalent. On October 27, 2000, EuroGas Polska
entered into a Joint Operation Agreement with Polish Oil. The agreement calls
for Polish Oil to become the operator in the Carpathian Project. Separately,
Polish Oil and the Company have entered into a tentative agreement whereby
Polish Oil will acquire 30% of EuroGas Polska.
Our work on the Carpathian Project is at an early exploratory stage. If
subsequent exploration and testing indicates that oil or gas can economically be
recovered from this concession, of which there is no assurance, an estimated two
years of further testing, obtaining regulatory approvals and construction will
be required before commercial production could commence, at an estimated minimum
cost of $3,000,000. We are currently negotiating the possibility of forming
partnerships with a few major international oil and gas companies.
Activities in Kazakhstan
By an amended agreement dated November 22, 2001, EuroGas agreed to acquire
all of the issued and outstanding shares of Falcon Energy Overseas Inc., a
subsidiary of Falcon Energy Holding Corp. ("Falcon The venture holds the
license to explore and develop proven shallow oil fields in Kazakhstan on an
area of approximately 3.2 million acres known as the Sagiski Block. Falcon also
holds other oil and gas interests in Kazakhstan outside the joint venture with
FIOC. Under the agreement EuroGas was to issue 30,000,000 shares of EuroGas
common stock and pay staged cash commitments of $10,000,000. The Company issued
10,000,000 shares and the parties terminated the relationship as the acquisition
was unwound.
EuroGas expected to obtain funding for this project through Oxbridge Ltd.,
but terms of that funding were never finalized due to the Company's delisting
from the NASD OTC Bulletin Board on December 28, 2001 and Falcon's inability to
provide financial statements to the Company. On February 12, 2002, Falcon
notified EuroGas that all agreements between Falcon and EuroGas, both written or
verbal were null and void as of February 6, 2002. The Company and Falcon are
currently in discussions to negotiate a new agreement; however, any new
agreement will contemplate potential properties other than the Sagiski Block.
Activities in Canada
Beaver River Natural Gas Field. EuroGas owns a 7.5% interest in the Beaver
River natural gas project. The objective of this project is to reestablish
commercial production in an abandoned natural gas field in the northeast corner
of British Columbia, Canada. Beaver River is the largest existing gas pool in
British Columbia. The prior owners shut down the project because of heavy water
4
influx. Before shutting down the project, the prior owner produced substantial
amounts of natural gas and reported that peak production reached 350 million
cubic feet per day from five wells. Independent reservoir studies and government
reports show substantial natural gas reserves at Beaver River, ranging between
1.5 and 3 trillion cubic feet.
EuroGas originally held a 15% interest in the Beaver River natural gas
project, through a wholly owned subsidiary, Beaver River Resources Ltd.
("BRRL"). This interest was reduced to 7.5% in the settlement of a lawsuit with
the former owners. In the settlement, the former owners returned 1,200,000
shares of EuroGas common stock to EuroGas in exchange for one-half of BRRL's
interest in the Bear River project.
According to the current operator of the Beaver River project, Questerre
Energy ("Questerre"), the A5 re-entry well was reaching gas production levels as
high as 17 million cubic feet per day in March of 2001. The well was in
production from March through April 2001, when it was shut in. Due to drilling
of a new well and lower pressure in the field pipeline, enhancement of the
field pipeline pressure through installation of additional compressor pumping
and gas lift systems was necessary.
The compressor pumping and gas lift systems were installed and
operational in early 2002 after which extensive testing of the experimental
process upon which the recovery effort is based.
Since mid-March of 2001, BRRL received one-sixth of a 4% overriding royalty
from gas production, under its agreement with Questerre. The property owners
including BRRL are receiving an overriding royalty of 4% until Questerre has
recovered its investment. The total royalties received are expected to
substantially increase until Questerre has received up to 600% of its
investment. Thereafter the ownership interest will change to a 6.7% working
interest.
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 to the low production from the Beaver River Project and gas prices
currently being paid for the production, management has determined that it is
unlikely that the Company will receive any cash flows from the project, except
for nominal overriding royalty payments. Accordingly, the Company recognized a
$3,937,500 charge for impairment, which was equal to the carrying value of the
Company's investment in the project.
Disclosure of Oil and Gas Operations
Reserves Reported to Other Agencies. No reserves were reported to any
other federal agency or authority for the years ended December 31, 2002 or
December 31, 2001.
Oil and Gas Production and Production Costs. Effective with the sale of
our interest in Big Horn Resources, Ltd. in January 2001, we have no proven oil
and gas reserves. Accordingly, we are not required to present disclosure of oil
and gas operations.
Competition
In the business of exploration, development, and production of oil and gas
resources, we compete with some of the largest corporations in the world, in
addition to many smaller entities. Many of the entities that we compete with
have access to far greater financial and managerial resources than those
available to EuroGas. As a result of the exclusive nature of certain
concessions that we hold, to the extent that we are able to successfully find,
develop, and produce hydrocarbon resources, we will be able to exclude any
competitor from production of the resources located on the concessions, but we
cannot exclude competitors from providing natural gas or other energy sources at
prices or on terms that purchasers deem more beneficial.
Employees
As of December 31, 2002, we had four administrative employees. In
addition, we use the services of consultants to the Company, who also serve as
officers of the Company and its subsidiaries. These consultants include
Wolfgang Rauball, Hank Blankenstein, Michael J. Slater, and Mr. Andrew
Andraczke. Messrs. Rauball, Slater and Andraczke work out of Europe, and Mr.
5
Blankenstein works out of the United States. None of our employees are
represented by a collective bargaining organization, and we consider our
relationship with our employees to be satisfactory. In addition to our
employees, we regularly engage technical and other consultants to provide
specific geological, geophysical, and other professional services on an as-
needed basis.
Operational Hazards and Insurance
We are engaged in the exploration for methane and natural gas and the
drilling of wells and, as such, our operations are subject to the usual hazards
incident to the industry. These hazards include blowouts, cratering,
explosions, uncontrollable flows of gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
activities. We do not have any hazard insurance. The occurrence of a
significant adverse event that is not covered by insurance would have a material
adverse effect on EuroGas.
Financial Information About Foreign and Domestic Operations
The information set forth as "Note 8 - Geographic Information" of our
consolidated financial statements included in this Form 10-K contains
information regarding financial information about foreign and domestic
operations of the Company and its subsidiaries.
Factors That May Affect Future Results
This report on Form 10-K contains forward-looking statements. You can
identify forward-looking statements by their use of the forward-looking words
"anticipate," "estimate," "project," "likely," "believe," "intend," "expect," or
similar words. These statements discuss future expectations, contain
projections regarding future developments, operations, or financial conditions,
or state other forward-looking information. When considering the forward-
looking statements made in this report, you should keep in mind the risks noted
in "Factors That May Affect Future Results" below and other cautionary
statements throughout this report. You should also keep in mind that all
forward-looking statements are based on management's existing beliefs about
present and future events outside of management's control and on assumptions
that may prove to be incorrect. If one or more risks identified in this report
or other filing materializes, or any other underlying assumptions prove
incorrect, our actual results may vary materially from those anticipated,
estimated, projected, or intended.
Our consolidated financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business.
We have incurred significant losses since inception, which have resulted in
an accumulated deficit of $153,346,645 at December 31, 2002. These losses and
this significant deficit raise substantial doubt about our ability to continue
as a going concern. The accompanying audited consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
We are dependent upon financing activities to fund our operations and will
continue to require significant funds to meet our obligations and to pursue our
business plan.
EuroGas has historically been undercapitalized. Prior to our acquisition
of an approximately 50% interest in a Canadian gas production entity (Big Horn)
in 1998 (which was fully divested in 2002), we had not earned any significant
cash revenues since our incorporation. Because we divested our interest in Big
Horn, we do not currently have a source of revenues, do not anticipate any
revenues in the near term and expect to continue to incur operating losses in
the foreseeable future. As a result, we are entirely dependent on financing
from the sale of securities or loans in the future and/or amounts made available
by industry partners in the future. We expect to continue to incur significant
costs as part of our ongoing and planned projects and do not anticipate that
these costs will be offset fully, if at all, by revenues for the foreseeable
future. If we are unable to raise capital from the sale of securities, loans,
or industry partnerships in the future, we will have to scale back our
operations and may, at some point, become insolvent.
6
Our projects are highly speculative and generally only at the exploration
stage.
Our assets and interests are primarily in methane gas, natural gas, and
crude oil exploration and development projects. These projects are highly
speculative, whether we are still at the exploratory stage or have commenced
development. We can provide no assurance that any drilling, testing, or other
exploration project will locate recoverable gases or other fuels in sufficient
quantities to be economically extracted. Several test wells are typically
required to explore each concession or field. We may continue to incur
significant exploration costs in specific fields, even if initial test wells are
plugged and abandoned or, if completed for production, do not result in
production of commercial quantities of natural gas or other fuel.
Many of our projects are in locations where the infrastructure is
inadequate to support our needs.
Many of the projects in which we have invested are located in areas of the
world, primarily Eastern Europe. In most of these areas the necessary
infrastructure for transporting, delivering, and marketing any natural gas,
methane gas or other fuels that may be recovered is significantly underdeveloped
or, in some cases, nonexistent. Even if we are able to locate natural gas,
methane gas, or other valuable fuels in commercial quantities, we may be
required to invest significant amounts in developing the infrastructure
necessary to support the transportation and delivery of such fuels. We do not
currently have a source of funding available to meet these costs.
Many of our projects are in countries that have fragile and unpredictable
political and socio-economic systems.
Our operations in Poland, Slovakia, and other parts of Eastern Europe carry
with them certain risks in addition to the risks normally associated with the
exploration for, and development of, natural gas and other fuels. Although
recent political and socio-economic trends in these countries have been toward
the development of market economies that encourage foreign investment, these
countries continue to be subject to the risks of political instability, a change
of government, unilateral renegotiation of concessions or contracts,
nationalization, foreign exchange restrictions, and other uncertainties. The
terms of the agreements governing our projects are subject to administration by
the various governments and are, therefore, subject to changes in the government
itself, changes in government personnel, the development of new administrative
policies or practices, the adoption of new laws, and many other factors.
Moreover, we may be required to obtain and renew licenses and permits on an
ongoing basis in connection with further exploration, the drilling of wells, the
construction of transportation facilities and pipelines, the marketing of any
fuel that may be produced, and financial transactions necessary for all of the
foregoing. The rules, regulations, and laws governing all such matters are
subject to change by the various governmental agencies involved. We can provide
no assurance that the laws, regulations, and policies applicable to our
interests in various countries in which our projects are located will not be
radically and adversely altered at some future date.
The continuance, completion or renewal of many of our licenses may be
subject to the discretion of government authorities and we cannot therefore
predict with certainty whether they will be continued or renewed or whether we
will be successful in obtaining all permits and licenses required to fully
exploit our interests in those countries.
In general, we have the right to conduct basic exploration on all
concessions or fields in which we have an interest. However, in order to drill
for, recover, transport or sell any gas or other hydrocarbons, we will generally
be required to obtain additional licenses and permits and enter into agreements
with various landowners and/or government authorities. The issuance of most such
permits and licenses will be contingent upon the consent of national and local
governments having jurisdiction over the production area, which entities have
broad discretion in determining whether or not to grant permits and licenses.
Moreover, even if obtained, such licenses, permits, and agreements will
generally contain numerous restrictions and require payment by us of a
development/exploration fee, typically based on the market value of the
economically recoverable reserves. The amount of a fee and other terms of any
such license, permit, or agreement will affect the commercial viability of any
extraction project. We can provide no assurance that we will be able to obtain
the necessary licenses, permits, and agreements. Even if we do obtain such
items, the associated costs, delays and restrictions may significantly affect
our ability to develop the affected project.
7
EuroGas has been the subject of an inactive SEC investigation, which could
cause the Company to incur significant expense and expose it to the risks
associated with an adverse judgment.
We are presently subject to a formal order of investigation issued by the
SEC on August 1, 1995, to investigate whether violations of securities laws may
have occurred. In connection with that investigation, EuroGas produced numerous
documents for the SEC, and the SEC has questioned current and past officers,
directors, former accountants, and other agents. We have not been contacted by
the SEC with respect to this matter for several years; however, we cannot
currently predict the duration or outcome of this investigation.
If the SEC concludes that we, or our representatives, have violated the
securities laws, it has available a large range of civil, administrative, and
criminal remedies. Those remedies could include the suspension of trading in
the common stock, the levying of substantial fines, and the exclusion of our
current officers and directors from participating in a public company. In
addition, we are subject to certain other pending or threatened legal claims.
The adverse resolution of the SEC investigation or any pending litigation would
have a material adverse effect on our operations and proposed business.
Our projects may never begin producing valuable hydrocarbons.
None of the projects in which we own an interest is presently producing gas
or other hydrocarbons. Texaco drilled and abandoned test wells on the
concession in Poland in which we own an interest, and we have drilled test wells
on our Slovakia concessions. None of these wells has been developed or
commenced production, and we can provide no assurance that any of our projects
will at any time commence production of any valuable resource.
We are dependent upon certain officers, key employees, and consultants, the
loss of which would adversely affect our ability to continue in business.
We are dependent on the services of Wolfgang Rauball (Chairman and Chief
Executive Officer), Hank Blankenstein (Chief Financial Officer), Michael Slater
(President), and Andrew K. Andraczke (Vice President and Treasurer of EuroGas
Polska). We are also dependent on certain key employees in connection with our
business activities. The loss of one or more of these individuals could
materially and adversely impact our operations. We have not entered into
employment agreements with any of these individuals, and do not maintain key-man
life insurance on any EuroGas officers or employees.
We are thinly staffed.
We have numerous projects throughout the world, which we attempt to direct
and manage with only a few employees. Unless and until additional employees are
hired, our attempt to manage our numerous projects and obligations with such a
limited staff could have serious adverse consequences, including without
limitation, a possible failure to meet a material contractual, court, or SEC
deadline, or a possible failure to consummate investment or acquisition
opportunities.
Subsequent evaluation may reveal that our unproved properties are not
valuable, and we may need to record an impairment of the value of those
properties, which would adversely affect our financial condition.
We capitalize costs related to unproved gas properties under the full cost
method. We review our unproved properties periodically to assess whether an
impairment allowance should be recorded. On December 31, 2002, we had
capitalized costs related to the acquisition of oil and gas properties not
subject to amortization in the amount of approximately $841,000. Should future
events, such as the drilling of dry holes, evidence that an impairment of
recorded value has taken place, we will be obligated to proportionally reduce
the recorded value of the respective asset on our balance sheet.
Severe weather will interrupt, and may adversely affect, our activities in
various parts of the world.
Severe weather conditions frequently interrupt much of our exploratory and
testing work. Heavy precipitation sometimes makes travel to exploration sites
or drilling locations difficult or impossible. Extremely cold temperatures may
delay or interrupt drilling, well servicing, and production (if commenced, of
which we can give no assurance). The temperatures in all of the regions in
which we have exploratory or other operations are extremely cold. Even if
recoverable reserves are discovered in regions prone to severe weather, the
above-described adverse weather conditions may limit production volumes,
increase production costs, or otherwise prohibit production during extended
portions of the year.
8
The prices of the various hydrocarbons we produce or may produce are
volatile and unstable.
The prices of oil, natural gas, methane gas and other fuels have been, and
are likely to continue to be, volatile and subject to wide fluctuations in
response to numerous factors, including the following:
. changes in the supply and demand for such fuels;
. political conditions in oil, natural gas, and other fuel-producing and fuel-
consuming areas;
. the extent of domestic production and importation of such fuels and
substitute fuels in relevant markets;
. weather conditions;
. the competitive position of each such fuel as a source of energy as
compared to other energy sources;
. the refining capacity of crude purchasers;
. the effect of governmental regulation on the production, transportation,
and sale of oil, natural gas, and other fuels.
Low prices or highly volatile prices for any fuel being explored or
produced at one of our projects will adversely affect our ability to secure
financing or enter into suitable joint ventures or other arrangements with
industry participants. In addition, if we commence recovery of fuel at any of
our projects, a low or volatile price for the fuel being recovered will
adversely affect revenue and other operations.
Our operations involve numerous hazards, and we maintain no insurance
against such risks.
Exploring for fuel, drilling wells, and producing fuel involves numerous
hazards, including the following:
. fire,
. explosions,
. blowouts,
. pipe failures,
. casing collapses,
. unusual or unexpected formations and pressures, and
. environmental hazards such as spills, leaks, ruptures, and discharges of
toxic substances.
If any of these events were to occur we might be forced to cease any or all
of our exploration, drilling, or production activities on a temporary or
permanent basis. In addition, these events might lead to environmental damage,
personal injury, and other harm resulting in substantial liabilities to third
parties. We do not maintain insurance against these risks. Even if we were to
obtain insurance, we might not be insured against all losses or liabilities that
might arise from these hazards because the insurance may be unavailable at
economic rates, due to limitations in the insurance policies, or other factors.
Any uninsured loss would likely have a material adverse impact on our business
and operations.
Our operations are subject to numerous environmental laws, compliance with
which may be extremely costly.
Our operations are subject to environmental laws and regulations in the
various countries in which they are conducted. These laws and regulations
frequently require completion of a costly environmental impact assessment and
government review process prior to commencing exploratory and/or development
9
activities. In addition, environmental laws and regulations may restrict,
prohibit, or impose significant liability in connection with spills, releases,
or emissions of various substances produced in association with fuel exploration
and development.
We can provide no assurance that we will be able to comply with applicable
environmental laws and regulations or that those laws, regulations or
administrative policies or practices will not be changed by the various
governmental entities. The cost of compliance with current laws and regulations
or changes in environmental laws and regulations could require significant
expenditures. Moreover, if we violate any governing laws or regulations, we
may be compelled to pay significant fines, penalties, or other payments. Costs
associated with environmental compliance or noncompliance may have a material
adverse impact on our financial condition or results of operations in the
future.
Most of our outstanding shares are free trading and, if sold in large
quantities, may adversely affect the market price for our common stock.
Most of the approximately 168,212,635 shares of common stock issued and
outstanding as of April 30, 2003 are free trading or are eligible for resale
under Rule 144 under the Securities Act. In addition, we have agreed to file a
registration statement to register a significant number of shares for resale.
Although the resale of certain of these shares may be subject to the volume
limitations and other restrictions under Rule 144, the possible resale of the
remaining shares may have an adverse effect on the market price for our common
stock.
We have a substantial number of warrants, options and debentures
outstanding, the exercise of which would result in substantial dilution to
existing shareholders and the existence of which adversely affects the public
market price of our common stock.
As of December 31, 2002, there are outstanding warrants and options to
purchase up to 39,342,858 shares of common stock at exercise prices ranging from
$0.15 to $0.55 per share. The existence of these outstanding warrants and
options may hinder our future equity offerings, and the exercise of these
warrants and options would further dilute the interests of all of our
shareholders. Future resale of the shares of common stock issuable on the
exercise of warrants and options may have an adverse effect on the prevailing
market price of our common stock. Furthermore, the holders of warrants and
options may exercise them at a time when we would otherwise be able to obtain
additional equity capital on terms more favorable to us.
We have the right to, and expect to, issue additional shares of common
stock without shareholder approval.
EuroGas has authorized capital of 325,000,000 shares of common stock, par
value $0.001 per share, and 3,661,968 shares of preferred stock, par value
$0.001 per share. As of December 31, 2002, there were 168,212,635 shares of
common stock and 2,392,228 shares of preferred stock issued and outstanding.
Also at December 31, 2002, there were 39,342,858 shares of common stock reserved
for issuance upon the exercise or conversion of outstanding warrants, options,
and similar rights to acquire common stock. The timing of the exercise of
conversion rights or the purchase rights under options, warrants or similar
agreements is outside the control of the Company. Our board of directors has
authority, without action or vote of our shareholders, to issue all or part of
the authorized but unissued shares. Any issuance of shares described in this
paragraph will dilute the percentage ownership of our existing shareholders and
may dilute the book value of the common stock.
We have not paid any dividends on our common stock and do not expect to pay
dividends with respect to the common stock in the near future.
We have not paid, and do not plan to pay, dividends on our common stock in
the foreseeable future, even if we become profitable. Earnings, if any, are
expected to be used to advance our activities and for general corporate
purposes, rather than to make distributions to shareholders.
You should consider this cautionary warning concerning forward-looking
statements in this report
Certain statements in this report constitute "forward-looking statements"
within the meaning of the rules and regulations promulgated by the SEC. Those
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those discussed above, that may cause our actual
results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or
10
implied by the forward-looking statements. These risks, uncertainties and other
factors include, among other things, our lack of revenue and our substantial net
losses and accumulated deficit, as well as the continuing uncertainty of
profitability, the highly competitive industry in which we operate, changes in
or failure to comply with governmental regulation, the uncertainty of third
party reimbursement for our products, general economic and business conditions
and other factors referenced above.
Item 2. Properties
The Company has a month-to-month lease for approximately 2,230 square feet
of office space in Warsaw and Prszczyna, Poland. The rental amount is
approximately $800 per month. We sublease office space in Vienna, Austria and
West Vancouver, Canada, for use by our administrative officers. Our subsidiary,
GlobeGas, maintains office space under an agreement with First Alliance Trust,
at Herengracht 466, Amsterdam, The Netherlands. Under this agreement, First
Alliance provides office space, accounting and legal functions for GlobeGas. The
agreement calls for payment for these services on an as-needed basis.
Item 3. 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.
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' 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,
11
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 (Adv. 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, which motion is currently pending before the
court. 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 sought court approval to file a Third Amended Complaint. On March
13, 2003 the Court entered and Order Granting Trustee's Motion for Leave to
Amend. On March 13, 2003 the Trustee filed his Third Amended Complaint, which
is now styled Steve Smith, Turstee v. Harven Michael McKenzie, McKenzie Methane
Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Rienhard Rauball, MCK
Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114
and 97-4115). As to EuroGas, the Third Amended Copmplain asserts claims for
breach of contract, fraud in the inducement, conspiracy, aiding and abetting
civil conspiracy, fraudulent transfer and punitive dmanges. As to Wolfgang and
Rienhard Rauball, the Complaint asserts claims for turnover under Section 542
and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post-
petition avoidable transfers, civil conspiracy, aiding and abetting civil
conspiracy and punitive damages. The Company has recently filed a Motion to
Dismiss the third Amended Complaint. At present, no trial date has been set.
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.
12
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 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 affirming
the Bankruptcy Court's orders. On October 25, 2002 Eurogas filed a notice of
appeal of the District Court's order to the Fifth Circuit Court of Appeals. The
appeal is currently pending before this Court. EuroGas cannot predict the
outcome of these appeals, but intends to vigorously pursue the appeals to
completion.
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 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.
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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of the Company
during the forth quarter of 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
Market Information and Holders
Our common stock is quoted on the OTC Bulletin Board market maintained by
the National Association of Securities Dealers under the symbol "EUGS" and is
traded on the Frankfurt and Berlin stock exchanges under the symbols EUG.F and
EUG.B respectively. As of April 30, 2003, there were 168,212,635 shares of
common stock issued and outstanding, held by approximately 317 holders of record
and an estimated 2,100 beneficial owners, including shares of common stock held
in street name.
13
The following table sets forth the approximate range of high and low bids
for the common stock during the periods indicated. These quotations reflect
interdealer prices, without retail markup, markdown, commissions, or other
adjustments and may not necessarily represent actual transactions in the common
stock.
High Bid Low Bid
Year Ended December 31, 2001
----------------------------
Quarter ended March 31, 2001 $0.48 $0.27
Quarter ended June 30, 2001 0.33 0.22
Quarter ended September 30, 2001 0.23 0.11
Quarter ended December 31, 2001 0.29 0.14
Year Ended December 31, 2002
----------------------------
Quarter Ended March 31, 2002 0.26 0.03
Quarter Ended June 30, 2002 0.20 0.10
Quarter Ended September 30, 2002 0.19 0.07
Quarter Ended December 31, 2002 0.10 0.06
The liquidity of our common stock may be limited, and the reported price
quotes may not be indicative of prices that could be obtained in actual
transactions. On April 30, 2003, the high and low bids for our common stock on
the OTC Bulletin Board were $0.12 and $0.12 respectively.
Dividends
We have not paid dividends on our common stock, and we do not have retained
earnings from which to pay dividends. We have accrued cumulative preferred
dividends of $135,198, $135,199 and $139,932 in 2002, 2001 and 2000,
respectively. Of this amount, zero was paid in 2002, zero was paid in 2001,
$21,599 was paid in 2000, by the issuance of shares of common stock in
connection with the conversion of a portion of the preferred stock. We must pay
cumulative dividends with respect to our preferred stock before we can declare
or pay any dividend on our common stock. Even if we were able to generate the
necessary earnings, it is not anticipated that dividends will be paid in the
foreseeable future, except to the extent required by the terms of the cumulative
preferred stock currently issued and outstanding.
Recent Sales of Unregistered Securities
During the year ended December 31, 2002, the Company issued the following
securities without registration under the Securities Act of 1933, as amended,
not previously reported on the quarterly reports on Form 10-Q filed by the
Company during 2002. During July 2002 EuroGas reached a verbal settlement with a
group of stockholders and agreed to issue 1,417,847 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 two 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.
These private issuances of securities were affected in reliance upon the
exemption for sales of securities not involving a public offering, under Section
4(2) of the Securities Act of 1933, as amended. In each transaction, the
Company observed the following practice:
. the investors confirmed that they were "accredited investors," as defined
in Rule 501 of Regulation D under the Securities Act,
. each investor had the background, education, and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in the securities,
14
. there was no public offering or general solicitation with respect to the
offering,
. the investors were provided with any and all other information requested by
them with respect to the Company,
. the investors acknowledged that all securities being purchased were
"restricted securities" for purposes of the Securities Act, and the investors
also agreed to transfer the securities only in a transaction registered with
the SEC under the Securities Act or exempt from registration under the
Securities Act, and
. a legend was placed on the certificates and other documents representing
each security stating that it was restricted and could only be transferred
if subsequently registered under the Securities Act or transferred in a
transaction exempt from registration under the Securities Act.
Item 6. Selected Financial Data
The following statement of operations and balance sheet data were derived
from our audited consolidated financial statements. Our consolidated financial
statements have been audited by our independent certified public accountants.
The selected financial data below should be read in conjunction with our
consolidated financial statements and the notes thereto included with this
report and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Statement of Operations Data
Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ----------- ------------ ------------ ------------
M
Net Sales $ 5,074 $ 88,937 $ 6,395,037 $ 4,973,508 $ 879,404
Loss from $ 18,551,994 $ 5,475,654 $ 52,436,869 $ 28,946,667 $ 11,024,180
Operations
Loss per $ 0.12 $ 0.04 $ 0.50 $ 0.36 $ 0.22
Common Share
Balance Sheet Data
Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ----------- ------------ ------------ ------------
Total Assets $ 9,417,748 $16,110,130 $ 30,337,006 $ 53,968,578 $ 65,334,387
Long-Term $ 0 $ 0 $ 0 $ 0 $ 1,788,294
Obligations
Cash Dividends
per Common $ 0 $ 0 $ 0 $ 0 $ 0
Share
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
We are engaged primarily in the acquisition of rights to explore for and
exploit oil, natural gas, coal bed methane gas, and mineral mining. We have
also extended our business into co-generation (power and heat) projects. We have
acquired interests in a number of large exploration concessions, for oil,
natural gas, and coal bed methane gas, and talc, and are in various stages of
identifying industry partners, farming out exploration rights, undertaking
exploration drilling, and seeking to develop production. We currently have
several projects in various stages of development, including a coal bed methane
gas project in Poland, a natural gas project and several additional undeveloped
concession areas in Slovakia, and an interest in a talc deposit in Slovakia. We
also have holdings in oil and natural gas projects in Canada.
15
Our principal assets consist both of proven and developed properties, as
well as unproven and undeveloped properties. All costs incidental to the
acquisition, exploration, and development of such properties are capitalized,
including costs of drilling and equipping wells and directly-related overhead
costs, which include the costs of equipment we own. Because we have limited
proven reserves and established production, most of our holdings have not been
amortized. If we are ultimately unable to establish production or sufficient
reserves on some of these properties to justify the carrying costs, the value of
the assets will need to be written down and the related costs charged to
operations, resulting in additional losses. We periodically evaluate our
properties for impairment and if a property is determined to be impaired, the
carrying value of the property is reduced to its net realizable amount.
Recent Developments
Outlook
In the past, we have focused our resources on pre-exploration or early-
exploration stage natural gas, coal bed methane gas, and other hydrocarbon
projects with little short-term revenue potential. We believe that our
investment in these early-stage projects will prove profitable in the long run,
and we may invest in additional early-stage projects from time to time in the
future. Nonetheless, management believes that, in order to balance our
holdings, the focus of our acquisition, investment and development strategy
should be on hydrocarbon projects that have the potential to generate revenues
within one to five years of the date of investment. We are actively seeking
investments of that type. Specifically, we intend to take the following actions
over the coming months:
. Focus our efforts on projects in Central Europe and Canada. We will
concentrate our financial and management resources on Central Europe (Poland
and Slovakia), as well as Canada, where the Company has a carried interest
in the Beaver River gas project;
. Bring the Gemerska Poloma Talc Deposit into production.
. Begin an exploration program on our oil and gas concessions covering
approximately 4,300 km2 in southeast Poland; POGC is the operator of this
venture. EuroGas, in conjunction with POGC, is currently in discussions with
a number of international oil and gas companies who are interested in a
possible participation in this project.
. Enter into a joint venture with large international oil and gas companies
on our oil and gas concession in Slovakia.
. Continue our efforts to reduce corporate overhead. We will continue to
manage the Company from our West Vancouver, North American Headquarter and
our Vienna Central European Headquarters.
In summary, the outlook, based on our strategic approach, is simple. We
intend to use the proceeds from the Teton and Westlinks divestiture and possibly
the sale of other non-core assets to fund development of the Gemerska Poloma
Talc project and oil and gas projects in Central and Eastern Europe. Further,
we will closely monitor the Beaver River gas project in British Columbia. The
ultimate goal is to transform the company from an asset-rich exploration concern
to a significant cash flow-producing resource company.
Results of Operations-Fiscal Years 2002, 2001 and 2000
The following table sets forth consolidated income statement data and other
selected operating data for the years ended December 31, 2002, 2001 and 2000.
For the Years Ended December 31,
------------------------------------------
2002 2001 2000
------------ ----------- -----------
Oil and Gas Sales $ 5,074 $ 88,937 $ 6,395,037
Oil and gas production - - 1,521,471
Impairment of mineral
interests and equipment 5,999,357 794,444 26,783,790
Depreciation, depletion
and amortization 11,896 25,511 2,023,425
Settlement costs 10,219,117 1,690,947 7,200,205
General and
administrative 2,536,843 1,675,746 8,801,706
------------ ----------- -----------
Total Costs and Operating
Expenses 18,767,213 4,186,648 46,330,597
------------ ----------- -----------
16
Other Income (Expenses)
Interest Income 103,729 59,961 89,698
Other Income 72,816 272,324 455,938
Interest expense (12,191) (240,115) (8,122,205)
Net Gain (loss) on sale
and impairment of 132,153 (1,409,729) (2,029,916)
securities and equipment
Foreign exchange net
gains (losses) (86,362) (402,227) (263,523)
Equity income - 341,843 -
Minority interest in
income of subsidiary - - (103,022)
------------ ----------- ------------
Total Other Income
(Expense) 210,145 (1,377,943) (9,973,030)
-
Provision for Income
Taxes - - (2,528,279)
------------ ----------- ------------
Net Loss $(18,551,994) $(5,475,654) $(52,436,869)
============ =========== =============
Basic and Diluted Loss $ (0.12) $ (0.04) $ (0.50)
Per Common Share ============ =========== ============
Weighted Average Number
of Common Shares Used in
Per Share Calculation 154,419,143 134,732,687 106,145,361
============ =========== ===========
Revenues. Prior to 1998, we had not generated any revenues from oil and
gas sales. As a result of our acquisition of the controlling interest in Big
Horn, our results of operations for 2001 and 2000 reflect oil and gas sales of
approximately $88,937 and $6,395,037, respectively. As a result of the
Company's sale of its controlling interest in Big Horn and the non-consolidation
of Big Horn thereafter, the Company had no oil and gas sales in 2002.
Operating Expenses. Operating expenses include general and administrative
expenses, depreciation, depletion and amortization, settlement costs, cost of
mineral interests and equipment and impairment of mineral interests and
equipment. Oil and gas production expenses were $0 in 2001, and $1,521,471 in
2000. All of our oil and gas production expenses are from our Big Horn
subsidiary. In 2002, we had no oil and gas operating expenses.
General and administrative expenses were $2,536,843 for 2002, compared with
$1,675,746 for 2001 and $8,801,706 in 2000. The increase of 51% in 2002 from
the level of expense in 2001 was due primarily to the addition of several new
employees and additional expenses related to those employees. Depreciation,
depletion and amortization expenses were $11,896 for 2002, compared to $25,511
for 2001 and $2,023,425 during 2000. The decline in depreciation, depletion and
amortization expense is attributable to limited assets subject to depreciation,
depletion and amortization.
Impairment of mineral interests and expenses totaled $5,999,357 for 2002,
$794,444 in 2001, and $26,783,790 in 2000. The principal factor that
contributed to the increase in impairment expenses from 2001 through 2002 was
the impairment during the year of the Beaver River Project and the Envigeo
Project.
Settlement costs for financial statement purposes decreased from $7,200,205
in 2000 and $1,690,947 in 2001 to $10,219,117 in 2002. The settlement costs in
2002 resulted from a change in estimate.
Income Taxes. Historically, we have not been required to pay income taxes,
due to our absence of net profits. For future years, we anticipate being able
to utilize a substantial portion of our accumulated deficit, which was
approximately $153,346,645 at December 31, 2002, to offset profits, if and when
achieved, resulting in a reduction in income taxes payable at such time.
Net Loss. We incurred net losses from operations of approximately $18.5
million, $5.5 million, and $52.4 million for the years ended December 31, 2002,
2001 and 2000, respectively. After preferred dividends, the loss applicable to
common shares was approximately $18.7 million, $5.6 million and $52.6 million
for the years ended December 31, 2002, 2001 and 2000, respectively. These
losses were due in part to the absence of revenues, combined with continued
expansion of our activities, primarily as a result of acquisition and the growth
of our administrative expenses. In addition, a portion of the recognized net
losses in 2000 resulted from the $7,701,362 impairment of mineral interests
recognized against the TAKT joint venture and the default judgment entered
against us on March 16, 2000.
17
Due to the highly inflationary economies of the Eastern European countries
in which we operate, we are subject to extreme fluctuations in currency exchange
rates that can result in the recognition of significant gains or losses during
any period. In 2002 we recognized a loss of $86,362 because of currency
transactions. In 2001, the loss was $402,227. In 2000, we had a loss of
$263,523 as a result of currency transactions. We had a cumulative foreign
currency translation adjustment of $1,341,529 as of December 31, 2002. We do
not currently employ any hedging techniques to protect against the risk of
currency fluctuations.
Capital and Liquidity
We had an accumulated deficit of $153,346,645 as of December 31, 2002,
substantially all of which has been funded out of proceeds received from the
issuance of stock and the incurrence of payables. As of December 31, 2002, we
had total current assets of approximately $1.8 million and total current
liabilities of approximately $19.4 million resulting in negative working capital
of approximately $17.6 million. As of December 31, 2002, our balance sheet
reflected approximately $800,000 in mineral interests in properties not subject
to amortization, net of valuation allowance. These properties are held under
licenses or concessions that contain specific drilling or other exploration
commitments and that expire within one to three years, unless the concession or
license authority grants an extension or a new concession license, of which
there can be no assurance. If we are unable to establish production or
resources on these properties, obtain any necessary future licenses or
extensions, or meet our financial commitments with respect to these properties,
we could be forced to write off the carrying value of the applicable property.
Throughout our existence, we have relied on cash from financing activities
to provide the funds required for acquisitions and operating activities. Our
financing activities used net cash of approximately $100,000 and $80,000, during
the years ended December 31, 2002 and 2001, respectively, and provided $5.7
million during the year ended December 31, 2000. This net cash has been used
principally to fund net operating losses of approximately $18.5 million, $5.5
million and $52.4 million during those three years. Our operating activities
used $1.5 million of net cash during the year ended December 31, 2002 and $3.4
million in the year ended December 31, 2001, and provided net cash of
approximately $0.6 million during the year ended December 31, 2000. A portion of
our cash was used in acquiring mineral interests, property and equipment, either
directly or indirectly through the acquisition of subsidiaries, with
approximately, $1.6 million, $3.7 million, and ($7.3) million provided by (used)
in investing activities for the years ended December 31, 2002, 2001 and 2000,
respectively, of which approximately $0.5 million, $0.1 million and $8.5
million, respectively, was used in acquiring mineral interests.
While we had cash on hand of as of December 31, 2002, we have short-term
and long-term financial commitments with respect to exploration and drilling
obligations related to our interests in mineral properties and potential
litigation liabilities. Many of our projects are long-term and will require the
expenditure of substantial amounts over a number of years before the
establishment, if ever, of production and ongoing revenues. As noted above, we
have relied principally on cash provided from equity and debt transactions to
meet our cash requirements. We do not have sufficient cash to meet our short-
term or long-term needs and we will require additional cash, either from
financing transactions or operating activities, to meet our immediate and long-
term obligations. There can be no assurance that we will be able to obtain
additional financing, either in the form of debt or equity, or that, if such
financing is obtained, it will be available to us on reasonable terms. If we
are able to obtain additional financing or structure strategic relationships in
order to fund existing or future projects, existing shareholders will likely
experience further dilution of their percentage ownership of the Company.
If we are unable to establish production or reserves sufficient to justify
the carrying value of our assets or to obtain the necessary funding to meet our
short and long-term obligations or to fund our exploration and development
program, all or a portion of the mineral interests in unproven properties will
be charged to operations, leading to significant additional losses.
Inflation
The amounts presented in our consolidated financial statements do not
provide for the effect of inflation on our operations or our financial position.
Amounts shown for property, plant and equipment and for costs and expenses
reflect historical costs and do not necessarily represent replacement costs or
18
charges to operations based on replacement costs. Our operations, together with
other sources, are intended to provide funds to replace property, plant and
equipment as necessary. Net income would be lower than reported if the effects
of inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation adjustments. Due to
inflationary problems in Eastern Europe reflected in currency exchange losses,
we have experienced losses on the values of our assets in those countries in
prior periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We conduct business in many foreign currencies. As a result, we are
subject to foreign currency exchange rate risk due to effects that foreign
exchange rate movements of those currencies have on our costs and on the cash
flows that we receive from foreign operations. We believe that we currently
have no other material market risk exposure. To date, we have addressed our
foreign currency exchange rate risks principally by maintaining our liquid
assets in interest-bearing accounts in U.S. dollars, until payments in foreign
currency are required, but we do not reduce this risk by hedging. For further
discussion of our policies regarding derivative financial instruments and
foreign currency translation, see Note 1 to our Consolidated Financial
Statements contained in "Item 8. Financial Statements and Supplementary Data."
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and its subsidiaries,
together with note and supplementary data related thereto, are set forth
following pages F-1 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain Information Regarding Executive Officers, Directors and Control Persons
The following table contains information about each individual who was a
director or executive officer of EuroGas as of December 31, 2002, together with
all positions and offices of the Company held by each and the term of office and
the period during which each has served.
Name Age Positions with the Company Term of Office
Dr. Gregory P. 43 Director January 1996 - Present
Fontana
Wolfgang Rauball 57 Director, Chief Executive November 2000 - Present
Officer
Vojtech Agyagos 59 Director May 2001 - Present
Hank Blankenstein 61 Director, Chief Financial May 2002 - Present
officer
Michael Slater 50 President February 2002 - Present
Biographical Information
The following paragraphs set forth brief biographical information for each
of the aforementioned directors and executive officers:
Dr. Gregory P. Fontana. Dr. Fontana has been a director of EuroGas since
January 1996. He is an attending cardio thoracic surgeon at Cedars-Sinai
Medical Center in California. He received his M.D. in 1984 at the University of
California, followed by ten years of postgraduate training at Duke University,
Harvard University and UCLA. Some of his academic appointments include Clinical
Fellow in Pediatric Cardiac Surgery at Harvard Medical School and Clinical
Assistant Professor of Surgery at UCLA School of Medicine. Dr. Fontana has
received several research grants, including a National Research Service Award
and Minimally-Invasive Cardiac Surgery Grant. He belongs to several
professional organizations, including the American Heart Association, and has
authored numerous scientific presentations and papers. Dr. Fontana is also a
consultant to Edwards Life Science and Venpro Inc. and a member of the
Scientific Advisory Board for Genzyme Biosurgery and BioHeart, Inc.
Wolfgang Rauball. Mr. Rauball was appointed director of the Company in
November 2000 and President/Chairman in July 2001. He is also Managing Director
of EuroGas Austria GesmbH and Globegas BV. Mr. Rauball has worked for the
Company in various functions since 1994. Mr. Rauball attended Darmstadt
Technical University in Germany from 1967 through 1971. During the period 1976
through 1986, his consulting activities were primarily for companies conducting
exploration for gold ore bodies in Canada, the United States and South America.
Wolfgang Rauball arranges financing for business enterprises, primarily public
companies engaged in the resource industry.
Vojtech Agyagos. Mr. Agyagos was appointed director of the Company in May
2001 as the nominee of Belmont. Vojtech Agyagos has served as the President and
a director of Belmont since December 1996, and is also a Managing Director of
Rozmin s.r.o. Mr. Agyagos has been self-employed as a consultant and manager to
companies involved in the acquisition and development of resource properties
since July 1991. From 1982 to 1985 and from 1985 to 1991 he served as the
President and a Director of Inter-Globe Resources and Stanholm Resources
respectively. From May 1993 to January 1995, Mr. Agyagos served as President
and a director of Stina Resources Ltd.
Hank Blankenstein. Mr. Blankenstein was appointed a director and chief
financial officer of the Company in May of 2002. Mr. Blankenstein, age 60,
served as a director and financial vice president of the Company from 1995 until
2000. Mr. Blankenstein has more than 30 years experience at various levels of
management. From April 2000 until his appointment to the board and CFO, Mr.
Blankenstein was involved in several real estate development projects. Mr.
Blankenstein holds a Bachelor of Science degree in Finance and Banking from
Brigham Young University.
Michael J. Slater. Mr. Slater was appointed as president of the Company in
February of 2002. Mr. Slater has spent the last 25 years working for Texaco in
various technical positions. His most recent responsibility was as Vice-
President, Negotiations, Texaco Exploration. He worked on and developed
exploration projects in Europe, the former Soviet Union ("FSU"), the North Sea
and Africa with emphasis on Eastern Europe and the FSU. He held that position
from October 1995 until joining the Company. Mr. Slater holds a BS in Geology
from Kings College, London and a PhD in geology from Cambridge University.
20
Key Employees
Andrew K. Andraczke. Mr. Andraczke has been Vice President, Secretary, and
a member of the management committee of Pol-Tex since 1992, and is responsible
for business development and coordination of administrative, legal, and
political aspects of the Pol-Tex venture. Mr. Andraczke also directs computer
operations and system support for the venture's exploration and production
activities. Mr. Andraczke holds B.Sc., M.Sc., and Ph.D. degrees in computer
science and applications from the Computer Science Institute of Polytechnical
University in Warsaw where he also was an Associate Professor. He served as the
General Manager of the Computing Center of the Center for Geological Research in
the Central Office of Geology (Ministry of Geology) from 1972 to 1976, where he
developed and implemented Poland's first general database of geological and
mineral resources of Poland. He also implemented computer mapping systems, oil
and gas reservoir simulations, and production control for mining operations.
From 1976 to 1982, he worked for several oil and gas and mining firms, including
OTC Oklahoma Production in Tulsa, Oklahoma, Kansas Oil Consolidated in Tulsa,
Oklahoma, John W. Mecom Company in Houston, Texas, InteResources Group, Inc. in
Houston, Texas, and British Sulphur Corporation in London, U.K., performing
reservoir modeling of secondary and tertiary oil reservoirs, inorganic polymer
floods, and underground coal gasification projects. During this time, he also
developed data acquisition and reserve balance systems for mines in the U.S.,
Mexico, and Egypt. Mr. Andraczke joined Tenneco Oil Exploration and Production
Company in Houston in 1982 and served as an internal consultant and management
advisor on computer applications and emerging technologies until 1987.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors and
certain shareholders to file reports concerning their ownership of our common
stock with the SEC and to furnish to us copies of such reports. Based solely
upon our review of the reports required by Section 16 and amendments thereto
furnished to us, we believe that all reports required to be filed pursuant to
Section 16(a) of the Exchange Act were filed with the SEC on a timely basis.
Audit Committee and Code of Ethics Disclosure
The Company's Board of Directors has not yet appointed an audit committee.
The Company expects to form an audit committee and to establish a written code
of ethics for its executive officers and directors during 2003.
Item 11. Executive Compensation
The following table sets forth information relating to the compensation of
all persons who served as the Chief Executive Officer of EuroGas during the year
ended December 31, 2002, and other persons serving as executive officers of
EuroGas as of December 31, 2002, whose total cash compensation for the 2002
fiscal year exceeded $100,000 (collectively, the "Named Officers").
Summary Compensation Table
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- -------
Securities
Other Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Salary Bonus Compensation Awards SARs Payouts Compensation
Principal Year ($) ($) ($) ($) (#) ($) ($)
Position
- ---------------------------------------------------------------------------------------------
Wolfgang 2002 $300,000 Nil Nil -
Rauball 2001 $120,000 50,000
President, 2000 $120,000
CEO (1)
Michael 2002 $400,000 Nil Nil
Slater
President
(2)
Hank 2002 $180,000 Nil Nil
Blankenstein
Chief
Financial
Officer (3)
21
(1) Mr. Rauball was appointed as President and CEO and interim CFO on July
6, 2001. He also serves as Managing Director of EuroGas Austria GmbH.
(2) Mr. Slater became an officer of the Company in February 2002.
(3) Mr. Blankenstein became an officer of the Company in May 2002.
Option Grants in Last Fiscal Year
No options were granted to the Named Officers during 2002.
Executive Employment and Consulting Arrangements
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 winding-up or merger transaction. The
agreement may be terminated if either party fails to meet its obligations under
the terms of the agreement.
Option Exercises and Fiscal Year-End Option Value
The following table sets forth information with respect to the aggregate
number and value of unexercised options held by all Named Officers at December
28, 2002. No options were exercised by the Named Officers during the year ended
December 31, 2002. In accordance with SEC rules, the value of unexercised
options is calculated by subtracting the exercise price from $0.73, the closing
price of the common stock on the last business day of the year ended December
31, 2002. The closing sale price of the Company's stock on April 30, 2003, was
$0.115.
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values
Name Shares Value Number of Securities Value of Unexercised
Acquired Realized Underlying Unexercised In-the-
on Options at 12/28/2002 Money Options at
Exercise Exercisable / 12/28/2002
Unexercisable Exercisable/Unexercisable
Andrew Andraczke 350,000 - 350,000 -
Greg Fontana 250,000 - 250,000 -
22
Compensation Plans
The following table sets forth information as of December 31, 2002 with
respect to shares of common stock to be issued upon the exercise, and the
weighted-average exercise price, of all outstanding options and rights granted
under our equity compensation plans, as well as the number of shares available
for future issuance under those plans.
Plan category Number of Weighted Number of
securities to average securities
be issued exercise remaining
upon exercise price of available for
of outstanding future
outstanding options, issuance
options, warrants and
warrants and rights
rights
(a) (b) (c)
Equity compensation 600,000 $0.73 1,400,000
plans approved by
security holders
Equity compensation 0 N/A N/A
plans not approved by
security holders
Total 600,000 N/A 1,400,000
Compensation of Directors
We compensate our outside directors for their services with a monthly fee
of $5,000 and reimbursement of expenses incurred in attending board meetings.
We do not separately compensate our board members who are also our employees for
their service on the board.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
As of December 31, 2002, the Compensation Committee consisted of the Board
of Directors. The Board of Directors as of December 31, 2002, included:
. Gregory Fontana, who is not an employee of the Company;
. Wolfgang Rauball, who since July 2001 has served as President and CEO and
interim CFO of EuroGas, and who also serves as Managing Director of EuroGas
Austria GesmbH since 1998 and as Managing Director of GlobeGas B.V.
Amsterdam since 1996; and
. Vojtech Agyagos who has served as a Director since May 2001.
Compensation Committee Report
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act or the Exchange Act that incorporates
by reference, in whole or in part, subsequent filings, including, without
limitation, this Annual Report on Form 10-K, the Compensation Committee Report
and the Performance Graph set forth below shall not be deemed to be incorporated
by reference in any such filings.
As required by rules promulgated by the SEC, this Compensation Committee
Report describes the overall compensation goal and policies applicable to our
executive officers, including the basis for determining the compensation of
executive officers for the 2002 fiscal year.
General. Management compensation is overseen by the Board of Directors.
In July 1999, the Board established a Compensation Committee comprised of Dr.
Gregory P. Fontana, Dr. Hans Fischer and Rudolph Heinz, who also constituted the
Compensation Committee on December 31, 1999. However, Mr. Fischer and Mr. Heinz
23
have subsequently resigned, and the Compensation Committee has been dissolved.
Accordingly, the following compensation report was prepared by Board members
serving as of December 31, 2002.
Compensation Objectives. In determining the amount of compensation for our
executive officers, the Board is guided by several factors. Because we have
very few employees, compensation practices are flexible in response to the needs
and talents of the individual officer and are geared toward rewarding
contributions that enhance stockholder value. Historically, we have compensated
senior management based on the perceived contribution to the development of our
operations, consisting principally of salaries believed to reflect their
contributions. In addition, because we have only recently begun to generate
revenues from operations and have attempted to preserve capital for development
of our business and operations, we have used stock options as a form of
compensation for executive officers. The use of stock options is designed to
align the interests of the executive officers with the long-term interests of
EuroGas and to attract and retain talented employees who can enhance our value.
Although certain members of the Board are also executive officers, none
participates in the determination of his own compensation.
Compensation Components. The compensation of our executive officers
consists of three components: base salary, bonuses and long-term incentive
awards in the form of stock options. The Board establishes base salaries based
primarily on its objective judgment, taking into consideration both qualitative
and quantitative factors. Among the factors considered by the Board are:
(i) the qualifications and performance of each executive officer;
(ii) the performance of EuroGas as measured by such factors as development
activities and increased shareholder value;
(iii) salaries provided by other companies inside and outside the industry
that are of comparable size and at a similar stage of development,
to the extent known; and
(iv) our capital position and needs. The Board does not assign any specific
weight to these factors in determining salaries.
From time to time, we also compensate our executive officers in the form of
bonuses. Because we are presently in an early stage of development and do not
have a history of earnings per share, net income, or other conventional data to
use as a benchmark for determining the amount or existence of bonus awards, any
bonuses granted by the Board in the near term will be based upon its subjective
evaluation of each individual's contribution to EuroGas. In some cases,
however, bonuses payable to executive officers may be tied to specific criteria
identified at the time of engagement. For the years ended December 31, 2000,
2001 and 2002, the Board did not pay bonuses to any executive officers. The
Board's action was based on its conclusion that, despite the superior personal
performance of the executive officers, no cash incentive bonuses should be
awarded, due to the Board's desire to preserve capital for future growth and
development.
The third component of our compensation structure consists of the grant of
stock options to compensate executive officers and other key employees. Having
granted all options available under the 1996 Stock Option and Award Plan, on
November 20, 1999, the Board determined to grant options outside of any option
plan (but on terms and conditions identical to those contained in our 1996 Stock
Option and Award Plan), to certain officers, directors and outside consultants.
The purpose of such options is to give each option recipient an interest in
preserving and maximizing shareholder value in the long term, to reward option
recipients for past performance and to give option recipients the incentive to
remain with EuroGas over an extended period. The right to determine the amount
of such grants was delegated to the Compensation Committee based on its
assessment of the proposed recipients' current and expected future performance,
level of responsibilities, and the importance of his or her position with, and
contribution to, EuroGas.
Chief Executive Compensation. Mr. Rauball had a salary of $300,000 as a
director and CEO. Consistent with the Board's desire to preserve capital for
future growth and development, the Board elected not to pay a bonus to any
executive officer for the 2001 and 2002 fiscal years.
Use of Consultants. We anticipate continuing to rely on executive
management and outside consultants in connection with the acquisition of
additional projects and the initial development of existing projects. However,
we anticipate that, if able to establish ongoing revenues from production, we
will retain management personnel as employees of EuroGas and compensate them on
24
a salary basis, based on comparable compensation packages offered by employers
within our general industry and geographical area.
Respectfully submitted,
Gregory Fontana
Wolfgang Rauball
Vojtech Agyagos
Performance Graph
The following graph shows a comparison of cumulative shareholder return for
our common stock for the period beginning December 31, 1997 (the date the
common stock was first quoted in the over-the-counter market) and ending
December 31, 2002, as well as the cumulative total return for the NASDAQ
Composite Index and the Howard Weil, Bloomberg Oilfield Service and
Manufacturing Index. The Peer Group Index is a price-weighted composite index
comprised of the cumulative shareholder return for forty-seven companies
involved in oilfield services.
The performance graph assumes that $100 was invested at the market close on
December 31, 1997 and that dividends, if any, were reinvested for all companies,
including those on the NASDAQ Composite Index and the Peer Group Index.
[Graph]
Total Return
Analysis
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
EuroGas $ 100.00 $ 89.29 $ 29.46 $ 14.29 $ 12.28 $ 7.00
Dow Jones US $ 100.00 $ 75.24 $ 77.46 $121.92 $ 92.03 $ 129.20
Oil Companies
Secondary Index
(symbol: OIS)
NASDAQ $ 100.00 $ 208.40 $ 386.77 $ 234.81 $ 78.33 $134.00
Composite
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following beneficial ownership table sets forth information regarding
beneficial ownership of our common stock as of April 30, 2003 by:
. each person or entity that is known by us to own beneficially 5% or more of
the outstanding shares of our common stock;
. each of our directors;
. each of the Named Executive Officers; and
. all of our executive officers and directors as a group.
Under relevant provisions of the Exchange Act, a person is deemed to be a
"beneficial owner" of a security if he or she has or shares the power to vote or
direct the voting of the security or the power to dispose or direct the
disposition of the security. A person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership in 60 days. More than one person may be deemed to be a beneficial
owner of the same securities. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of our common stock
as of April 30, 2003, plus those shares of our common stock that the stockholder
has the right to acquire within 60 days. Consequently, the denominator for
calculating the percentage ownership may be different for each stockholder.
Unless otherwise indicated, the address of these individuals is the same as the
Company's principal executive offices.
25
The table is based upon information provided by our directors and executive
officers.
Amount and Nature of Beneficial
Ownership as of April 30, 2003(1)
Name and Address of Common Exercisable Total
Beneficial Owner Shares (1) Options & Ownership Percent(3)
Warrants(2)
Wolfgang Rauball 19,671,429 21,428,572 41,100,001 26%
(4)
CEO, Chairman &
Director
Dr. Gregory P. Nil 250,000 250,000 *
Fontana, Director
2269 Worthing Lane
Los Angeles,
California 90077
Andrew Andraczke, Nil 350,000 350,000 *
Vice President,
EuroGas Polska
Warsaw str.
Lektykarska 18
01-687 Warszawa,
Poland
Vojtech Agyagos, Nil Nil Nil *
Director
1365 Dempsey Road
North Vancouver,
B.C. V7K 1S7
Hank Blankenstein, Nil Nil Nil 0
Director
3477 Melody Creek
Circle
Riverton, Ut, 84065
Michael J. Slater Nil Nil Nil 0
2 Manor Park
Tunbridge Wells,
Kent
U.K. TN4 8XP
All officers and 19,671,429 22,028,572 41,700,001 26%
directors
as a group (6
persons)
* Less than one percent.
_________________________
(1) Unless otherwise indicated, to our best knowledge, all stock is owned
beneficially by the listed shareholder, and each shareholder has sole
voting and investment power with respect to our common stock
beneficially owned by such person.
(2) Represents options or warrants exercisable within 60 days of April 30,
2003, held by the individual or entity.
(3) The percentage indicated represents the number of shares of our common
stock, warrants and options exercisable within 60 days held by the
indicated stockholder divided by the sum of (a) the number of shares
subject to options exercisable by this shareholder within 60 days and
(b) which is the number of shares of our common stock issued and
outstanding as of December 31, 2002.
(4) Includes shares in which Mr. Rauball disclaims beneficial ownership
and which he temporarily holds as a nominee for other persons.
26
Item 13. Certain Relationships and Related Transactions
Wolfgang Rauball currently serves as our CEO and is a director and a
significant shareholder of the Company. Over the past three years, we have
entered into several transactions with Mr. Rauball or with entities controlled
by him, as outlined in this Item 13.
During June of 2002 the Company issued Mr. Rauball 10,000,000 shares of its
common stock and warrants for an additional 10,000,000 shares in a subscription
on a private placement. The 10,000,000 shares of common stock were issued at a
price of $0.10 per share, the warrants were issued at an exercise price of
$0.125 per share if converted before June 10, 2003 and an exercise price of
$0.15 after that but before June 10, 2004. 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 $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.
During June 2002, EuroGas entered into a compensation agreement with Mr.
Rauball that provides the officer with $300,000 of compensation for his prior
services. The compensation was charged to operations during June 2002. The
resulting $381,284 payable to the officer was converted into common stock as
further described above.
Additionally, Hank Blankenstein, our 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.
Item 14. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
(a) Evaluation of Disclosure Controls and Procedures. Within 90 days
prior to the date of this report, our Chief Executive Officer and Chief
Financial Officer conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended). Based on the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective.
(b) Changes in Internal Controls. There were no significant changes in
our internal controls or in other factors that could significantly affect those
internal controls subsequent to the date of the evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls. As a
result, no corrective actions were required or undertaken.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial Statements
of the Company and report of independent accountants are included immediately
following the signature page of this Report.
A. Report of Hansen, Barnett & Maxwell, independent certified public
accountants, for the years ended December 31, 2002, 2001, and
2000
27
B. Consolidated Balance Sheets at December 31, 2002 and 2001
C. Consolidated Statements of Income for the years ended December
31, 2002, 2001, and 2000
D. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2002, 2001and 2000
E. Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
F. Notes to Consolidated Financial Statements
2. Exhibits.
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 Petroleum Exhibit No. 5*
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 between Report on Form S-1
EuroGas, Inc., dated July, 23, 1998
and 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, Privileges, Quarterly Report on
and Preferences Form 10-QSB dated
of 1995 Series Preferred Stock March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights, Privileges, Report on Form 8-K
and Preferences dated July 12, 1996,
of 1996 Series Preferred Stock Exhibit No. 1*
3.5 Designation of Rights, Privileges, Report on Form 8-K
and Preferences dated May 30, 1997
1997 Series A Convertible Preferred Exhibit No. 1*
Stock
3.6 Designation of Rights, Privileges, Report on Form S-1
and Preferences Dated July 23, 1998
of 1998 Series B Convertible Exhibit No. 3.06*
Preferred Stock
28
Exhibit
Number Title of Document Location
- --------------------------------------------------------------------------
3.7 Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
3.8 Designation of Rights, Privileges, Registration Statement on Form S-1, File No.
and Preferences of 1999 Series C 6% 333-92009, filed on December 2, 1999
Convertible Preferred Stock
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 12, Report on Form 8-K
1996, with dated July 12, 1996,
Danube Shareholder Exhibit No. 2*
4.3 Registration Rights Agreement Report on Form S-1 dated July 23, 1998 Exhibit
Between EuroGas, Inc., No. 4.02*
and Thomson Kernaghan & Co., Ltd.,
dated May 29, 1998
4.4 Registration Rights Agreement dated Report on Form 8-K
July 12, 1996, dated July 12, 1996
with Danube Shareholder Exhibit No. 3*
4.5 Registration Rights Agreement by Report on Form S-1
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 of Annual Report on
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 by Annual Report on
and among Form 10-KSB for the
EuroGas, Inc., and Kukui, Inc., and fiscal year ended
the Trustees of December 31, 1995,
the Estate of Bernice Pauahi Bishop Exhibit No. 11*
4.8 Option issued to OMV Annual Report on
Aktiengesellschaft to acquire up Form 10-KSB for the
to 2,000,000 shares of restricted fiscal year ended
common stock December 31, 1996,
Exhibit No. 13*
4.9 Form of Convertible Debenture Quarterly report on Form 10-Q dated March 31,
issued on January 12, 2000. 2000.
10.1 English translation of Mining Quarterly Report on Form 10-Q dated September
Usufruct Contract between The 30, 1997 Exhibit No. 1*
Minister of Environmental
Protection, Natural Resources and
Forestry of the Republic of Poland
and Pol-Tex Methane, dated October
3, 1997
10.2 Agreement between Polish Oil and Quarterly Report on Form 10-Q dated September
Gas Mining Joint Stock Company and 30, 1997 Exhibit No. 2*
EuroGas, Inc., dated October 23,
1997
29
Exhibit
Number Title of Document Location
- --------------------------------------------------------------------------
10.3 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.4 Settlement Agreement by and among Annual Report on
Kukui, Inc., and 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
10.5 Acquisition Agreement between Report on Form S-1 dated July 23, 1998
EuroGas, Inc., and Belmont Exhibit No. 10.20*
Resources, Inc., dated July 22,
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, Natural fiscal year ended
Resources, and December 31, 1995,
Forestry and Pol-Tex Methane Ltd. Exhibit No. 18*
10.8 Association Agreement between NAFTA Annual Report on
a.s. Gbely Form 10-KSB for the
and Danube International Petroleum fiscal year ended
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 Petroleum Fiscal year Ended December 31, 1995,
Company 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 NAFTA Fiscal year ended
a.s. Gbely and December 31, 1996,
Danube International Petroleum Exhibit No. 25*
Company
30
Exhibit
Number Title of Document Location
- --------------------------------------------------------------------------
10.13 Acquisition Agreement by and among Form 10-Q
Belmont Resources, Inc., EuroGas Dated September 30, 1998
Incorporated, dated 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, dated Fiscal year ended
April 28, 1997 December 31, 1996,
Exhibit No. 27*
10.15 Purchase and Sale Agreement between Report on Form 8-K
Texaco Slask Dated March 24, 1997
Sp. zo.o., Pol-Tex Methane Sp. Exhibit No. 1*
zo.o. and
GlobeGas B.V.
10.16 English translation of Articles of Report on Form 8-K/A
Association of the Dated June 11, 1997
TAKT Joint Venture dated June 7, Exhibit No. 3*
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 Agreement on Registration Statement on Form S-1 dated July
Joint Investment and Production 23, 1998 Exhibit No. 10.21*
Activities between EuroGas, Inc.,
and Zahidukrgeologia, dated May 14,
1998
10.19 English translation of Statutory Registration Statement on Form S-1 dated July
Agreement of Association of Limited 23, 1998 Exhibit No. 10.22*
Liability Company with Foreign
Investments between EuroGas, Inc.,
and Makyivs'ke Girs'ke Tovarystvo,
dated June 17, 1998
10.20 Partnership Agreement between Amendment No. 1 to Registration Statement on
EuroGas, Inc., and RWE-DEA Form S-1 dated August 3, 1998 Exhibit No.
Aktiengesellschaft for Mineraloel 10.23
and Chemie AG, date July 22, 1998
10.21 Mining Usufruct Contract between Quarterly Report on
The Minister of Form 10-Q dated
Environmental Protection, Natural September 30, 1997
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 and Quarterly Report on
Gas Mining Joint Form 10-Q dated
Stock Company and EuroGas, Inc., September 30, 1997
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 EuroGas, September 30, 1997
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, Ltd., September 30, 1997
dated Exhibit No. 4*
October 31, 1997
31
Exhibit
Number Title of Document Location
- --------------------------------------------------------------------------
10.25 Lease Agreement dated September 3, Registration Statement
1996, between Potomac Corporation on Form S-1, File No.
and the Company; Letter of 333-92009, filed on
Amendment dated September 30, 1999. December 2, 1999
10.26 Sublease dated November 2, 1999, Registration Statement on Form S-1, File No.
between Scotdean Limited and the 333-92009, filed on December 2, 1999
Company
10.27 Securities Purchase Agreement dated Registration Statement on Form S-1, File No.
November 4, 1999, between the 333-92009, filed on December 2, 1999
Company and Arkledun Drive LLC
10.28 Registration Rights Agreement dated Registration Statement on Form S-1, File No.
November 4, 1999, between the 333-92009, filed on December 2, 1999
Company and Arkledun Drive LLC
10.29 Supplemental Agreement dated Registration Statement on Form S-1, File No.
November 4, 1999, between the 333-92009, filed on December 2, 1999
Company and Arkledun Drive LLC
10.30 Executive Employment Agreement Registration Statement on Form S-1, File No.
dated April 20, 1999 between the 333-92009, filed on December 2, 1999
Company and Karl Arleth
Form 10-K for year ended December 31, 2000
10.31
Settlement Agreement dated June 16,
2000, between the Company and FCOC
Securities Purchase Agreement dated Form 10-K for year ended December 31, 2000
10.32 October 2, 2000, between the
Company and Arkledun Drive LLC
10.33 Registration Rights Agreement dated Form 10-K for year ended December 31, 2000
October 2, 2000, between the
Company and Arkledun Drive LLC
10.34 Settlement Agreement dated November Form 10-K for year ended December 31, 2000
14, 2000, between the Company and
Arkledun Drive LLC
10.35 Consulting Agreement dated Form 10-K for year ended December 31, 2000
September 18, 2000, between the
Company and Spinneret Financial
Systems, Ltd.
10.36 Securities Purchase Agreement dated Form 10-K for year ended December 31, 2000
March 27, 2001 between the Company
and Belmont Resources Inc.
10.37 Agreement dated April 9, 2001 Form 10-K for year ended December 31, 2000
between the Company and Belmont
Resources Inc.
10.38 Warrant Agreement dated September Form 10-K for year ended December 31, 2000
8, 2000 with Oxbridge Limited
10.39 Warrant Agreement dated September Form 10-K for year ended December 31, 2000
8, 2000 with Rockwell International
Ltd.
10.40 Warrant Agreement dated September Form 10-K for year ended December 31, 2000
8, 2000 with Conquest Financial
Corporation
32
Exhibit
Number Title of Document Location
- --------------------------------------------------------------------------
10.41 Termination and Transfer Agreement Form 10-K for year ended December 31, 2000
dated June 23, 2000 between the
Company and Belmont Resources, Inc.
10.42 Loan Agreement dated March 3, 1999 Form 10-K for year ended December 31, 2000
between the Company and Pan Asia
Mining Corp.
10.43 Agreement dated July 14, 2000 Form 10-K for year ended December 31, 2000
between the Company and Oxbridge
Limited
10.44 Amended Agreement dated July 25, Form 10-K for year ended December 31, 2000
2000 between the Company, Pan Asia
Mining Corp., and Oxbridge Limited
10.45 Settlement Agreement dated November Form 10-K for year ended December 31, 2000
20, 2000 between the Company and
Beaver River Resources, Ltd.
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
* Incorporated by reference
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 2001, we did
not file any reports on Form 8K.
(c) Exhibits
Exhibits to this Report are attached following Page F-1 hereof.
(d) Financial Statement Schedules
None
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EUROGAS, INC.
(Registrant)
By /s/ Wolfgang Rauball
-----------------------
Wolfgang Rauball
Chief Executive Officer
By /s/ Hank Blankenstein
------------------------
Hank Blankenstein
Principal Accounting and
Financial Officer
DATE: May 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/ Wolfgang Rauball May 15, 2003
- ---------------------------
Wolfgang Rauball, Director
/s/ Gregory P. Fontana May 15, 2003
- ---------------------------
Dr. Gregory P. Fontana, Director
/s/ Vojtech Agyagos May 15, 2003
- ---------------------------
Vojtech Agyagos, Director
/s/ Hank Blankenstein May 15, 2003
- ---------------------------
Hank Blankenstein, Director
34
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2002 and
2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31,
2002, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years
Ended December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31,
2002, 2001, and 2000 F-9
Notes to Consolidated Financial Statements F-9
Supplemental Information Regarding Oil and Gas Producing
Activities (Unaudited) F-29
F-1
HANSEN, BARNETT & MAXWELL (801) 532-2200
A Professional Corporation Fax (801) 532-7944
CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750
Salt Lake City, Utah 84180
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of EuroGas, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
each of the three years in the period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EuroGas, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 in the financial
statements, the Company has suffered recurring losses from operations and has
had negative cash flows from operating activities. At December 31, 2002, the
Company had negative working capital and a capital deficiency. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
May 14, 2003
F-2
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 2002 2001
- -----------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 187,922 $ 257,831
Investment in securities available-for-sale 1,490,058 782,908
Investment in fixed maturity securities - 1,445,501
Other receivables 98,176 586,520
Other current assets 16,416 21,050
- -----------------------------------------------------------------------------------------------
Total Current Assets 1,792,572 3,093,810
- -----------------------------------------------------------------------------------------------
Property and Equipment - full cost method
Talc mineral properties and mining equipment 6,507,736 6,300,993
Oil and gas properties not subject to amortization 841,427 6,186,606
Furniture and office equipment 371,188 353,142
- -----------------------------------------------------------------------------------------------
Total Property and Equipment 7,720,351 12,840,741
Less: Accumulated depletion, depreciation and amortization (196,259) (183,278)
- -----------------------------------------------------------------------------------------------
Net Property and Equipment 7,524,092 12,657,463
Receivable from a related party 101,084 -
Investments, at cost - 358,857
- -----------------------------------------------------------------------------------------------
Total Assets $ 9,417,748 $ 16,110,130
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accrued liabilities $ 5,150,443 $ 4,525,467
Accrued liabilities payable to related parties - 416,858
Accrued settlement obligations 13,145,766 6,345,766
Accrued income taxes 815,053 802,621
Notes payable to related parties 253,365 424,294
- -----------------------------------------------------------------------------------------------
Total Current Liabilities 19,364,627 12,515,006
- -----------------------------------------------------------------------------------------------
Stockholders' Equity (Deficiency)
Preferred stock, $0.001 par value; 3,661,968 shares authorized;
2,392,228 shares outstanding; liquidation preference: $1,150, 350,479 350,479
Common stock, $0.001 par value; 325,000,000 shares authorized;
168,212,635 shares and 144,796,460 shares issued, respectivel 168,213 144,797
Additional paid-in capital 143,595,224 139,314,283
Accumulated deficit (153,346,645) (134,659,453)
Accumulated other comprehensive loss (264,363) (1,336,314)
Receivable from shareholder (448,425) -
Treasury stock, at cost; 5,028 and 307,000 shares, respective (1,362) (218,668)
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficiency) (9,946,879) 3,595,124
- -----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 9,417,748 $ 16,110,130
===============================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Oil and Gas Sales $ 5,074 $ 88,937 $ 6,395,037
- ---------------------------------------------------------------------------------------------------
Costs and Operating Expenses
Oil and gas production - - 1,521,471
Impairment of mineral interests and other assets 5,999,357 794,444 26,783,790
Depreciation, depletion and amortization 11,896 25,511 2,023,425
Settlement expense 10,219,117 1,690,947 7,200,205
General and administrative 2,536,843 1,675,746 8,801,706
- ---------------------------------------------------------------------------------------------------
Total Costs and Operating Expenses 18,767,213 4,186,648 46,330,597
- ---------------------------------------------------------------------------------------------------
Other Income (Expenses)
Net gain (loss) on sale of investments 132,153 (1,409,729) (2,029,916)
Equity income - 341,843 -
Interest income 103,729 59,961 89,698
Interest expense (12,191) (240,115) (8,122,205)
Foreign exchange net gains (losses) (86,362) (402,227) (263,523)
Gain on sale of equipment 72,816 272,324 455,938
Minority interest in income of subsidiary - - (103,022)
- ---------------------------------------------------------------------------------------------------
Total Other Income (Expenses) 210,145 (1,377,943) (9,973,030)
- ---------------------------------------------------------------------------------------------------
Loss Before Income Taxes (18,551,994) (5,475,654) (49,908,590)
Provision for Income Taxes - - 2,528,279
- ---------------------------------------------------------------------------------------------------
Net Loss (18,551,994) (5,475,654) (52,436,869)
Preferred Dividends 135,198 135,199 139,932
- ---------------------------------------------------------------------------------------------------
Loss Applicable to Common Shares $ (18,687,192) $ (5,610,853) $(52,576,801)
===================================================================================================
Basic and Diluted Loss Per Common Share $ (0.12) $ (0.04) $ (0.50)
===================================================================================================
Basic and Diluted Weighted-Average Common
Shares Outstanding 154,419,143 134,732,687 106,145,361
===================================================================================================
The accompanying notes are an integral part of these financial statements.
F-4
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Treasury
Accumulated Stock and Total
Preferred Stock Common Stock Additional Other Receivable Stockholders'
--------------------- ------------------- Paid-In Accumulated Comprehensive from Equity
Shares Amount Shares Amount Capital Deficit Income (Loss) Shareholder (Deficiency)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 1999 2,394,028 $ 2,001,949 86,835,838 $ 86,836 $102,032,174 $ (76,471,799) $(3,865,941) $ - $ 23,783,219
-------------
Net loss - - - - - (52,436,869) - - (52,436,869)
Net change in
unrealized losses
on securities
available for sale - - - - - - (179,136) - (179,136)
Reclassification
adjustment on
unrealized loss on
securities available
for sale - - - - - - 1,248,073 - 1,248,073
Translation
adjustments - - - - - - (869,045) - (869,045)
------------
Comprehensive loss (52,236,977)
------------
Dividends on
preferred shares - - - - - (139,932) - - (139,932)
Conversion of
Series C preferred
stock and accrued
dividends (1,800) (1,651,470) 5,329,713 5,330 1,667,739 - - - 21,599
Issuance for cash,
net of $169,500
offering costs - - 9,400,000 9,400 2,195,600 - - - 2,205,000
Issuance of shares
and 3,000,000
options under
settlement agreement
with FCD - - 3,700,000 3,700 11,609,300 - - - 11,613,000
Issuance for
settlement
agreements - - 1,842,983 1,843 1,031,671 - - - 1,033,514
Issuance for
assumption of
lending
commitment - - 500,000 500 364,500 - - - 365,000
Repricing of warrants - - - - 1,246,718 - - - 1,246,718
Warrants and
beneficial conversion
option of debt, net
of $360,212
offering costs - - - - 2,669,567 - - - 2,669,567
Warrants issued in
connection with
default on notes
payable - - - - 2,639,038 - - - 2,639,038
Beneficial conversion
feature of
notes payable - - - - 918,000 - - - 918,000
Conversion of
$1,173,896 of notes
payable to related
parties and
$502,871 of accrued
interest - - 3,891,954 3,892 1,672,875 - - - 1,676,767
Conversion of notes
payable - - 14,331,540 14,331 5,001,705 - - - 5,016,036
Issuance for services - - 1,164,432 1,165 398,797 - - - 399,962
- ----------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 2000 2,392,228 $ 350,479 126,996,460 $126,997 $133,447,684 $(129,048,600) $(3,666,049) $ - $(51,026,466)
==================================================================================================================================
(CONTINUED)
The accompanying notes are an integral part of these financial statements.
F-5
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
Treasury
Accumulated Stock and Total
Preferred Stock Common Stock Additional Other Receivable Stockholders'
--------------------- ------------------- Paid-In Accumulated Comprehensive from Equity
Shares Amount Shares Amount Capital Deficit Income (Loss) Shareholder (Deficiency)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 2000 2,392,228 $ 350,479 126,996,460 $126,997 $133,447,684 $(129,048,600) $(3,666,049) $ - $(51,026,466)
------------
Net loss - - - - - (5,475,654) - - (5,475,654)
Net change in
unrealized losses
on securities
available for sale - - - - - - (26,620) - (26,620)
Translation
adjustments - - - - - - 2,356,355 - 2,356,355
------------
Comprehensive loss (3,145,919)
------------
Dividends on
preferred shares - - - - - (135,199) - - (135,199)
Modification
warrants - - - - 143,560 - - - 143,560
Issued for cash - - 100,000 100 44,210 - - - 44,310
Issuance for
services - - 100,000 100 48,300 - - - 48,400
Issuance for
additional interest
in Rozmin s.r.o. - - 12,000,000 12,000 3,588,000 - - - 3,600,000
Issuance of shares
and 5,200,000
warrants as
settlement expense - - 3,800,000 3,800 1,861,072 - - - 1,864,872
Purchase of treasury
stock - - - - - - - (218,668) (218,668)
Cancellation of shares
in settlement - - (1,200,000) (1,200) (358,800) - - - (360,000)
Issuance of shares
as contract penalty - - 3,000,000 3,000 447,000 - - - 450,000
Sale of treasury
stock - - - - 93,257 - - - 93,257
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 2001 2,392,228 350,479 144,796,460 144,797 139,314,283 (134,659,453) (1,336,314) (218,668) 3,595,124
------------
Net loss - - - - - (18,551,994) - - (18,551,994)
Net change in
unrealized losses
on securities
available for sale,
net of $401,783 tax - - - - - - 702,087 - 702,087
Translation
adjustments, net of
$401,783 tax benefit - - - - - - 369,864 - 369,864
------------
Comprehensive loss (17,480,043)
Issued for cash - - 418,328 418 33,048 - - - 33,466
Purchase of treasury
stock - - - - - - - (81,596) (81,596)
Conversion of notes
payable from related
parties and receivable
from shareh - - 10,000,000 10,000 990,000 - - (448,425) 551,575
Issued for stock
price guarantee - - 3,830,000 3,830 (3,830) - - - -
Issuance of shares
and warrants issued
for settlements - - 9,167,847 9,168 1,819,056 - - - 1,828,224
Warrants issued for
settlement - - - - 1,690,893 - - - 1,690,893
Dividends on
preferred shares - - - - - (135,198) - - (135,198)
Sale of treasury
stock - - - - (248,227) - - 298,903 50,676
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -
December 31, 2002 2,392,228 $ 350,479 168,212,635 $168,213 $143,595,223 $(153,346,645) $ (264,363) $ (449,786) $(9,946,879)
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-6
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net loss $(18,551,994) $(5,475,654) $(52,436,869)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation, depletion and amortization 11,896 25,511 2,023,425
Impairment of mineral interests and equipment,
net of gain of sale 5,929,910 794,444 26,783,790
Loss on settlement of notes receivable 144,148 - 500,000
Minority interest in income of subsidiary (equity income) - (341,842) 103,022
Interest expense related to grant or repricing of
warrants and beneficial conversion features - - 7,486,306
Expenses paid with common shares, warrants and notes payable 3,519,117 158,400 2,023,828
Net gain on sale of subsidiaries - (219,997) -
(Gain) loss on sale and impairment of securities (276,301) 109,480 2,029,916
Exchange loss 86,362 402,227 263,523
Changes in assets and liabilities, net of acquisitions:
Trade receivables - (336,462) (1,204,539)
Other receivables 499,121 - (67,505)
Accounts payable - - 4,489,571
Accrued liabilities 275,307 (171,858) 486,080
Deferred income taxes - - 2,442,081
Accrued settlement obligations 6,800,000 1,675,747 6,104,205
Other - - (452,046)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (1,562,434) (3,380,004) 574,788
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sale of investment in fixed-maturity securities 1,100,156 - -
Proceeds from sale of securities available for sale 661,912 299,489 -
Purchase of securities available for sale (5,230) - -
Purchases of mineral interests, property and equipment (518,116) (391,714) (8,848,981)
Proceeds from sale of Big Horn, net of cash disposed - 3,447,521 -
Proceeds from sale of interest in gas property and equipment 158,227 326,582 2,773,959
Collection of principal of note receivable 208,213 - -
Expenditure for other investments - - (1,200,000)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 1,605,162 3,681,878 (7,275,022)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common shares, net of offering costs 33,466 44,310 2,400,000
Proceeds from issuance of notes payable to related parties - - 3,327,892
Proceeds from issuance of notes payable - - 67,363
Change in receivable from related parties (101,084) - -
Principal payments on notes payable to related parties - - (65,974)
Proceeds from sale of treasury stock 50,676 93,257 -
Acquisition of treasury stock (81,596) (218,668) -
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (98,538) (81,101) 5,729,281
- ------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (14,099) (20,687) (18,443)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (69,909) 200,086 (989,396)
Cash at Beginning of Year 257,831 57,745 1,047,141
- ------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 187,922 $ 257,831 $ 57,745
==================================================================================================================
(CONTINUED)
F-7
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Years Ended December 31 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ - $ - $ 146,222
- ------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Investing and Financing Activities
Accrual of preferred dividends $ 135,198 $ 135,199 $ 139,932
Exchange of investment in preferred stock for note receivable 362,082 - -
Conversion of note payable to common stock 170,291 - -
Conversion of accrued liabilities to common stock 500,000 - -
Conversion of accrued receivables due from related parties
to common stock 118,716 - -
Difference between cost and proceeds on sale of treasury stock 248,226 - -
Common shares issued upon conversion of notes payable and
accrued interest - - 6,415,816
Common shares issued as payment of preferred dividends - - 21,599
Common shares and warrants issued in satisfaction of accrued
settlement obligations - - 12,451,514
Purchase of majority interest in Rozmin in exchange for:
Modification of warrants - 143,560 -
Issuance of common shares - 3,600,000 -
Accrual of royalties payable and cash paid - 100,000 -
Common stock issued in payment of accrued settlement obligation - 1,864,872 -
- ------------------------------------------------------------------------------------------------------------------
Cash Received From Sale of Subsidiaries
Assets sold $ - $ 18,356,857 $ -
Less liabilities relieved - (14,909,336) -
- ------------------------------------------------------------------------------------------------------------------
Cash Proceeds $ - $ 3,447,521 $ -
- ------------------------------------------------------------------------------------------------------------------
F-8
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - EuroGas, Inc. and its subsidiaries ("EuroGas" or the
"Company") are engaged primarily in the evaluation, acquisition, exploration and
disposition of mineral interests, and rights to exploit oil, natural gas, coal
bed methane gas, talc, and other minerals. EuroGas is in various stages of
identifying industry partners, farming out exploration rights, and seeking to
develop production. EuroGas' primary mineral property interests are an interest
in a talc mineral deposit in Slovakia, an interest in a joint venture to reclaim
a natural gas field in Western Canada, and oil and gas exploration properties in
Poland and Slovakia.
Business Condition - EuroGas has accumulated a deficit of $153,346,645 through
December 31, 2002. EuroGas has had very limited revenue, losses from operations
and negative cash flows from operating activities during the years ended
December 31, 2002 and 2001. At December 31, 2002, the Company had a working
capital deficiency of $17,572,054 and a capital deficiency of $9,946,879. 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
property and equipment is unsuccessful, all or a portion of the recorded amount
of those properties will be recognized as impairment losses. Payment of
$19,364,627 of current liabilities will require substantial additional
financing. Management plans to finance operations, development of its properties
and payment of its liabilities through borrowing, through sale of interests in
its properties 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.
From January 1, 2001 through May 29, 2001, the investment in Big Horn Resources
Ltd. was accounted for by the equity method of accounting, based upon the
weighted-average ownership percentage that was held by EuroGas during that
period.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. The
critical accounting policies that require management's most significant
estimates and judgments include the assessment of recoverability of property and
equipment. The actual results experienced by the Company may differ materially
from management's estimates.
Mineral Interests in Oil and Gas Properties - The full cost method of accounting
is used for oil and gas properties. Under this method, all costs associated with
acquisition, exploration, and development of oil and gas properties are
capitalized on a country-by-country basis. Costs capitalized include acquisition
costs, geological and geophysical expenditures, lease rentals on undeveloped
properties and costs of drilling and equipping productive and non-productive
wells. Drilling costs include directly related overhead costs. Proceeds from
disposal of properties are applied as a reduction of cost without recognition of
a gain or loss except where such disposal would result in a major change in the
depletion rate. Capitalized costs are categorized either as being subject to
amortization or not subject to amortization. The costs of properties not subject
to amortization are assessed periodically and any resulting provision for
impairment required is charged to operations. The assessment for impairment is
based upon estimated fair value of the properties. Fair value is determined
based upon estimated future discounted net cash flows.
F-9
Capitalized costs of properties subject to amortization and estimated future
costs to develop proved reserves are amortized and depreciated using the unit-
of-production method based on the estimated proven oil and natural gas reserves
as determined by independent engineers. Units of natural gas are converted into
barrels of equivalent oil based on the relative energy content basis.
Capitalized costs of properties subject to amortization, net of accumulated
amortization and depreciation, are limited to estimated future discounted net
cash flows from proven reserves, based upon year-end prices, and any resulting
impairment is charged to operations.
Talc Mineral Properties and Mining Equipment - Costs incurred to acquire and
develop talc mineral properties and to acquire related mining equipment are
capitalized. Once production begins, depreciation and depletion of total
estimated cost and estimated restoration costs will be computed using the units-
of-production method based on estimated minerals likely to be recovered.
Furniture and Office Equipment - Furniture and office equipment are stated at
cost. Minor repairs, enhancements and maintenance costs are expensed when
incurred and major improvements are capitalized. Depreciation is provided on a
straight-line basis over the estimated useful lives of the equipment of three to
five years. Upon retirement, sale, or other disposition, the cost and
accumulated depreciation are eliminated from the accounts, and gain or loss is
included in operations. Depreciation expense for each of the three years in the
period ended December 31, 2002, was $11,896, $25,511, and $117,875,
respectively.
Political Risk - EuroGas has mineral interest property and interests in Eastern
Europe, which are subject to political instability, changes in governments,
unilateral renegotiation of concessions and contracts, nationalization, foreign
exchange restrictions, or other uncertainties.
Financial Instruments - The amounts reported as cash, investment in securities
available-for-sale, trade and other receivables, accounts payable and notes
payable are considered to be reasonable approximations of their fair values. The
fair value estimates presented herein were based on estimated future cash flows.
The amounts reported as investment in securities available-for-sale are based
upon quoted market prices.
Derivative Financial Instruments - EuroGas and its international subsidiaries
occasionally incur obligations payable in currencies other than their functional
currencies. This subjects EuroGas to the risks associated with fluctuations in
foreign currency exchange rates. EuroGas does not reduce this risk by utilizing
hedging. The amount of risk is not material to EuroGas' financial position or
results of operations.
Loss Per Share - Basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share during periods of
income reflect potential dilution which could occur if all potentially issuable
common shares from stock purchase warrants and options, convertible notes
payable and preferred shares resulted in the issuance of common shares. The
weighted-average common shares outstanding was not increased from 39,342,858,
18,439,594, and 49,876,792 potentially issuable common shares at December 31,
2002, 2001, and 2000, respectively, because to do so would have decreased the
loss per share and have been excluded from the calculation.
Foreign Currency Translation - The functional currencies of the subsidiaries
operating in Poland are the local currencies. The effect of changes in exchange
rates with respect to those subsidiaries is recognized as a separate component
of accumulated other comprehensive loss. Where the functional currencies of
foreign subsidiaries is the U.S. dollar, financial statements of the foreign
subsidiaries are translated into U.S. dollars using historical exchange rates
and net foreign exchange gains and losses from those subsidiaries are reflected
in the results of operations. Exchange gains and losses from holding foreign
currencies and having liabilities payable in foreign currencies are included in
the results of operations.
F-10
Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences in the balances of existing assets
and liabilities on the Company's financial statements and their respective tax
bases and attributable to operating loss carry forwards. Deferred taxes are
computed at the enacted tax rates for the periods when such amounts are expected
to be realized or settled.
Stock-Based Compensation - EuroGas has accounted for stock-based compensation
from stock options granted to employees and consultants prior to 1998 based on
the intrinsic value of the options on the date granted. Since 1999, EuroGas has
accounted for options granted to consultants according to their fair value as
prescribed in SFAS No. 123, Accounting for Stock Based Compensation.
Had compensation cost for stock options been determined based on the fair value
at the grant dates for options under that plan consistent with the alternative
method of SFAS No. 123, EuroGas' loss applicable to common shares and loss per
common share for the year ended December 31, 2002, 2001 and 2000 would have been
increased to the pro forma amounts shown below.
December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Net loss applicable to common shares:
As reported $(18,551,994) $(5,610,853) $(52,576,801)
Add: Stock-based employer compensation
expense included in reported net loss 1,127,262 - -
Less: Total stock-based employer
compensation expense determined under
fair value based method for all
awards (1,881,710) (65,813) (99,570)
- ----------------------------------------------------------------------------------------------
Pro forma $(19,306,442 $(5,676,666) $(52,676,371)
Basic and diluted net loss per common share:
As reported $ (0.12) $ (0.04) $ (0.51)
Pro forma (0.12) (0.04) (0.50)
Long-Lived Assets - In the event that facts and circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable and estimated
future undiscounted cash flows are less than the carrying amount of the asset,
an impairment loss is recognized. The impairment is measured based on the excess
of cost over estimated future discounted cash flows.
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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes financial accounting
and reporting standards for the impairment or disposal of long-lived assets.
The adoption of this statement on January 1, 2002, did not have a material
effect on the Company's financial position or results of operations.
F-11
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, this statement modifies the criteria for classification
of gains or losses on debt extinguishment such that they are not required to be
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will be required to apply the provisions of this
standard to transactions occurring after December 31, 2002. The adoption of this
standard in 2003 is not expected to have a material effect on the Company's
financial position or results of operations.
Reclassifications - Certain reclassifications have been made in the prior-period
financial statements to conform to the 2002 presentation.
NOTE 2 - IMPAIRMENT OF MINERAL INTERESTS AND EQUIPMENT AND OTHER ASSETS
The Company periodically assesses the capitalized costs of properties for
impairment based on estimated future discounted net cash flows. 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. Through the date of
the evaluation, the operator has invested in excess of $16,000,000 in the
project. Due to the low production from the Beaver River Project and gas prices
paid for the production, management determined that it was unlikely that the
Company will receive any cash flows from the project, except for nominal
overriding royalty payments. Accordingly, the Company recognized a $3,937,500
impairment charge during 2002, which was equal to the carrying value of the
Company's investment in the project.
During 2002 the Company evaluated its investments in the Envigeo project in
Slovakia and its investment in a lube oil refinery in Slovenia. Management
determined the estimated undiscounted future cash flows were less than the
carrying value of the investments and recognized impairment charges during 2002
of $1,703,000 and $358,857, respectively.
As a result of assessments of the recovery of investments, the following losses
were recognized during 2000: Trebisov property in Slovakia of $7,306,943, Maseva
property in Slovakia of $6,558,230, Beaver River property in Canada of
$3,937,500, Ukraine properties of $1,200,310, TAKT properties in Russia of
$7,701,362, and other of $79,445. During 2001, impairment loss of $1,154,444 was
recognized from the Nafta-Danube Association in Slovakia (See Note 3) less
$360,000 of recovery from Beaver River in Canada.
F-12
NOTE 3 - SALE OF INVESTMENTS IN SUBSIDIARIES
Big Horn Resources Ltd. - Through December 31, 2000, EuroGas owned 14,100,000
common shares, or 50.1%, of Big Horn Resources Ltd. ("Big Horn"). From February
through June 2001, EuroGas sold 4,278,233 of its Big Horn shares for $2,319,081,
at an average price of $0.54 per share. In addition, on May 29, 2001, EuroGas
entered into an agreement with Enterra Energy Corp. ("Enterra") whereby EuroGas
sold Enterra 8,275,500 Big Horn shares in exchange for $1,198,936 paid in cash
and for 6,123,870 shares of Enterra's preferred stock. Under the terms of the
preferred stock designation and the agreement, Enterra agreed to redeem all of
the preferred shares by May 29, 2002 at $0.56 per share. EuroGas transferred
$2,279,579 of the cost of the Big Horn common stock to the Enterra preferred
stock but did not recognize a gain on the exchange. EuroGas recognized a
$932,248 gain from the sale of the investment in Big Horn.
As a result of the sale, EuroGas' interest in Big Horn was reduced from 50.1% to
42.5% at March 31, 2001 and to less than 5% after May 29, 2001. These decreases
in ownership resulted in the investment in Big Horn being accounted for by the
equity method from January 1, 2001 through May 29, 2001 and as an investment in
securities available for sale thereafter. EuroGas' equity in the income from
Big Horn through May 29, 2001 was $341,843.
Nafta-Danube Association - An agreement was reached to resolve the dispute with
the Slovakian joint venture partner Nafta Gbely a.s. ("Nafta") regarding the
Trebisov property. On July 4, 2001, EuroGas informed Nafta that EuroGas would
agree to withdraw from the Nafta-Danube Association, in exchange for Nafta
making full payment of all obligations to Geophysical Services Ltd., Hungary.
EuroGas will not have any further legal or financial obligations connected with
the Nafta-Danube Association. Nafta agreed to assume and pay all other
liabilities owed by the Association.
As a result of the agreement, EuroGas evaluated the carrying value of the gas
properties and equipment in the Association, determined they were impaired and
recognized an impairment loss of $1,154,444 at June 30, 2001. EuroGas recorded
the sale of the Nafta-Danube Association as of June 30, 2001 and recognized a
loss on the sale of $703,251.
NOTE 4 - SIGNIFICANT ACQUISITIONS
Falcon Energy Holding Corp. - On November 23, 2001, EuroGas entered into an
agreement with Falcon Energy Holding Corp., a Delaware corporation ("Falcon
Holding") for the acquisition of 100% of the issued and outstanding shares of
its subsidiary, Falcon Energy Overseas Inc. ("Falcon"), also a Delaware
corporation. The November agreement was an amendment to a former agreement
entered into on September 17, 2001. As the purchase price for the Falcon shares,
EuroGas agreed to issue 10,000,000 common shares to Falcon Holding and to
provide $10,000,000 of funding to Falcon by December 31, 2001. The agreement
included a penalty provision that if the Companies did not complete the
contract, EuroGas would be required to issue Falcon 3,000,000 shares of common
stock. On February 12, 2002 Falcon terminated the agreement due to EuroGas not
providing the required funding. As a result, the 3,000,000 penalty shares became
issuable to Falcon and were included as outstanding at December 31, 2001 in the
accompanying financial statements. The shares were valued at $450,000 or $0.15
per share based upon the fair value of the stock on the date of the agreement.
EuroGas and Falcon continued to negotiate a suitable replacement program for
future investment; however, none was found. Falcon continued to hold the balance
of the 7,000,000 shares as a deposit toward completion of a new acquisition
agreement. As of December 31, 2002 the Company considers the shares issued, the
deposit forfeited and recognized a charge to settlement expense during 2002. The
issuance of the 7,000,000 shares was valued at $1,050,000, or $0.15 per share
based upon the valuation of the original shares and the fair value on the date
the contingency originated.
F-13
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
common shares below $0.30 per share through April 17, 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
December 31, 2002. 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
also 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 December 31, 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 April
17, 2001.
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 owns a 100% interest in Rozmin s.r.o subject to the
contingency for issuance of the additional common shares to Belmont. 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.
F-14
NOTE 5 - 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 accumulated other comprehensive loss. The cost of
securities sold was determined by the average-cost method. The investment in
securities consisted of the following:
December 31, 2002 2001
---------------------------------------------------------------------------------------
Cost $ 412,892 $ 809,612
Gross unrealized gains 1,077,166 -
Gross unrealized losses - (26,704)
---------------------------------------------------------------------------------------
Estimated fair value $ 1,490,058 $ 782,908
======================================================================================
During 2002, the Company sold available-for-sale securities for $661,912 gross
proceeds that resulted in gross realized gains of $276,301 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.
Investment in Other Equity Securities at Cost - During 2000, EuroGas paid a
deposit of $300,000 towards a potential acquisition of an interest in a Russian
oil and gas company owned by Teton Petroleum Company ("Teton"), and made loans
to Teton in the amount of $1,000,000. During October 2000, EuroGas and Teton
terminated their merger agreement. EuroGas received 2,700,000 shares of Teton
common stock in consideration of its advances to Teton under the termination
agreement. Since there was no regular and active market for the Teton common
stock and the fair value was not readily determinable it was recorded at its
historical cost of $1,300,000 as a long-term investment. During December 2000,
management evaluated the investment and determined it to be impaired and
recorded an impairment charge of $781,843 against the Teton stock. The
investment in Teton stock was carried at $518,157 at December 31, 2000. Due to a
market becoming available for the Teton stock, the investment was transferred to
available-for-sale securities during 2001.
NOTE 6 - ACCOUNTS AND NOTES RECEIVABLE
On October 28, 1998, EuroGas received an executed promissory note in the amount
of $500,000 from an independent third party. Terms of the note dictate that
interest accrues at 7.5%. The balance was due on May 28, 1999. During the second
quarter of 2000 EuroGas determined that the note receivable was unrecoverable.
Accordingly, the Company provided an allowance against the note and recorded a
bad debt charge of $500,000 during the year ended December 31, 2000.
F-15
NOTE 7 - MINERAL INTERESTS IN PROPERTIES
Beaver River Project - In March 1998, EuroGas exercised its option to acquire a
16% carried interest in the Beaver River Project in British Columbia, Canada in
exchange for $300,000 and the issuance of 2,400,000 common shares which were
valued at $3.16 per share. The acquisition was valued at $7,875,000. The
interest in the Beaver River Project has been classified as oil and gas
properties not subject to amortization. During 2000, EuroGas received 1,200,000
shares of its common stock in return for one-half of its interest in the Beaver
River project. An impairment loss of $3,937,500 was recognized on the return.
Maseva Gas s.r.o. - During October 1998, EuroGas acquired a 90% interest in
Maseva Gas s.r.o. ("Maseva"), a Slovak company, from Belmont Resources Inc.
("Belmont"). Maseva holds an 850 square kilometer concession to explore for oil
and natural gas. EuroGas purchased Maseva by issuing 2,500,000 common shares
and warrants purchasing an additional 2,500,000 shares at $2.50 per share within
two years. The purchase price was $6,527,462 based upon the $2.00 per share
quoted market value of the EuroGas common shares issued, and the fair value of
the warrants on the acquisition date. The fair value of the options was
determined by using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0.0%, expected volatility of 63.2%, risk-free
interest rate of 5.0% and an expected life of 2 years. The unproved oil and gas
concession is the primary asset acquired. Maseva had no operations prior to the
acquisition. The acquisition was considered to be the purchase of properties and
the cost of the acquisition was allocated to oil and gas properties not subject
to amortization.
EuroGas and Belmont were related parties as a result of a common individual
serving on the board of directors and is a significant shareholder of both
companies. Although the transfer of Maseva back to Belmont was not an arms-
length transaction, it resulted in the recognition of a loss on the disposition
of $6,528,230.
On June 14, 2000, EuroGas agreed to transfer its 90% interest in Maseva back to
Belmont, a related party as explained above, and to modify the warrants to
purchase 2,500,000 common shares held by Belmont to reduce the exercise price
from $2.50 to $0.82 per share and to extend their expiration date from October
8, 2000 to June 14, 2002. In exchange, Belmont agreed to provide $1,000,000 of
debt financing to Rozmin s.r.o. and Belmont agreed to waive its right of first
refusal to acquire the shares in RimaMuran s.r.o. from EuroGas. The modification
to the options increased their fair value by $1,246,718. The fair value of the
options was determined using the Black-Scholes option pricing model with the
following weighted average assumptions: risk free interest rate of 6.5%;
expected dividend yield of 0%; volatility of 110% and an expected life of 2.0
years. The modification to the warrants was accounted for as a prepaid financing
fee. Belmont did not provide the $1,000,000 financing as required under the
related agreement. EuroGas did not pursue its rights to require Belmont to meet
its obligation and, therefore, charged the prepaid financing fee to interest
expense during 2000.
Talc Mineral Interest - During 1998, EuroGas acquired a 24% interest in an
undeveloped talc deposit in Eastern Slovakia through an indirect investment in
Rozmin s.r.o. During the third quarter of 2000, EuroGas determined that Oxbridge
Ltd., a related party, had paid $879,000 on behalf of EuroGas in 1998 as part of
the purchase of the 24% interest in the talc deposit. On March 19, 1998, EuroGas
reimbursed Oxbridge Ltd. for their payment and accounted for the payment to
Oxbridge Ltd. as a reduction of a separate promissory note payable to Oxbridge
Ltd. In light of a demand in 2000 by Oxbridge Ltd. for payment of the
promissory note, EuroGas reclassified the payment to Oxbridge Ltd. as an
increase in the cost of the 24% interest in the talc deposit and recorded the
principal and $272,490 of accrued interest due under the promissory note payable
to Oxbridge Ltd. In November 2000, EuroGas issued 2,391,162 shares of common
stock, valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in
satisfaction of the principal and accrued interest due on the promissory note.
Through December 31, 2000 and 1999, EuroGas had invested $2,376,682 (including
F-16
the $879,000 paid to Oxbridge Ltd.) and $915,913 (excluding the payment to
Oxbridge Ltd.), respectively, in the acquisition and development of the talc
deposit and related equipment. As described in Note 4, EuroGas has increased its
investment in Rozmin s.r.o. to a 100% direct interest, subject to completion of
the Belmont transaction, by exchanging interests with the former minority
interest holders.
The following is a summary of changes to properties:
2002 2001 2000
- --------------------------------------------------------------------------------------------
Talc Mineral Properties
Cost at beginning of year $ 6,300,993 $ 2,216,308 $ 755,539
Development costs 206,743 - -
Acquisition costs - 4,084,685 1,460,769
- --------------------------------------------------------------------------------------------
Net Other Mineral Interest Proper $ 6,507,736 $ 6,300,993 $ 2,216,308
- --------------------------------------------------------------------------------------------
Oil and Gas Properties Subject to
Amortization
Cost at beginning of year - 16,499,982 21,553,571
Net reclassificiation to properties not
subject to amortization - - (1,560,841)
Acquisition costs - - 154,842
Exploration and development costs - - 6,518,896
Sale of properties - - (2,357,901)
Less ceiling test and valuation a - (16,499,982) (7,306,943)
Translation adjustments - - (501,642)
- ---------------------------------------------------------------------------------------------
Cost at year end - - 16,499,982
Less depreciation, depletion and - - (3,619,329)
- --------------------------------------------------------------------------------------------
Net Properties Subject to
amortization $ - $ - $ 12,880,653
=============================================================================================
Oil and Gas Properties Not Subject
to Amortization
Cost at beginning of year $ 6,186,606 9,461,039 26,862,072
Acquisition costs - 5,773 1,593,776
Exploration costs 310,570 34,186 139,722
Net reclassificiation from
properties subject to
amortization - - 1,560,841
Disposal (17,658) (2,501,926) (303,684)
Impairment and valuation adjustme (5,711,335) (794,444) (19,476,847)
Translation adjustments 73,244 (18,022) (914,841)
- ----------------------------------------------------------------------------------------------
Net Property Not Subject to
Amortization $ 841,427 $ 6,186,606 $ 9,461,039
==============================================================================================
Furniture and Office Equipment
Equipment $ 371,188 $ 353,142 $ 1,006,517
Less: Accumulated depreication (196,259) (183,278) (359,728)
- ----------------------------------------------------------------------------------------------
Net Furniture and Equipment $ 174,929 $ 169,864 $ 646,789
===============================================================================================
F-17
NOTE 8 - GEOGRAPHIC INFORMATION
EuroGas and its subsidiaries operate primarily in the talc and the oil and gas
exploration and production industry. Accordingly, segment information is not
presented separately from the accompanying balance sheets and statements of
operations. Property and equipment were located in the following geographic
areas at December 31:
December 31, 2002 2001 2000
----------------------------------------------------------------------------------
Canada $ - $ 3,975,000 $ 18,861,163
Europe $ 7,524,092 $ 9,041,320 6,702,483
---------------------------------------------------------------------------------------
Net Loss $ 7,524,092 $ 13,016,320 $ 25,563,646
==================================================================================
Sales and net loss were in the following geographic areas during the years ended
December 31:
December 31, 2002 2001 2000
----------------------------------------------------------------------------------
Oil and Gas Sales - Canada $ 5,074 $ 88,937 $ 6,395,037
Canada $ - $ (618,949) $ (3,833,909)
Europe (18,551,994) (4,856,705) (45,711,413)
---------------------------------------------------------------------------------------
Total Property and Equipment $(18,551,994) $ (5,475,654) $(49,545,322)
==================================================================================
NOTE 9 - ACCRUED SETTLEMENT OBLIGATIONS
Oxbridge Settlement - During 1997 Oxbridge Limited attempted to convert
2,391,968 Series 1995 Preferred Stock into EuroGas common shares but was
effectively prevented in doing so by an agreed order with the Trustee in the
McKenzie bankruptcy case described below. As a result, Oxbridge was unable to
receive proceeds from the sale of the conversion shares when the average market
prices and trading volume would have resulted in substantial proceeds and has
made a claim against EuroGas for its losses. During 2002 EuroGas estimated the
cost to settle the Oxbridge claim to be approximately $6,800,000 and recognized
settlement expense and an accrued settlement obligation during 2002.
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' 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.
F-18
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 (Adv. 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, which motion is currently pending before the
court. 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 sought court approval to file a Third Amended Complaint. On March
13, 2003 the Court entered and Order Granting Trustee's Motion for Leave to
Amend. On March 13, 2003 the Trustee filed his Third Amended Complaint, which
is now styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane
Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK
Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114
and 97-4115). As to EuroGas, the Third Amended Complaint asserts claims for
breach of contract, fraud in the inducement, conspiracy, aiding and abetting
civil conspiracy, fraudulent transfer and punitive damages. As to Wolfgang and
Rienhard Rauball, the Complaint asserts claims for turnover under Section 542
and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post-
petition avoidable transfers, civil conspiracy, aiding and abetting civil
F-19
conspiracy and punitive damages. The Company has recently filed a Motion to
Dismiss the Third Amended Complaint. At present, no trial date has been set.
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
December 31, 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 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 affirming
F-20
the Bankruptcy Court's orders. On October 25, 2002 EuroGas filed a notice of
appeal of the District Court's order to the Fifth Circuit Court of Appeals. The
appeal is currently pending before this Court. EuroGas cannot predict the
outcome of these appeals, but intends to vigorously pursue the appeals to
completion.
NOTE 10 - NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of:
December 31, 2002 2001
--------------------------------------------------------------------------------------
Loans from companies associated with a director
due in 2001 and 2002 with interest at 7% to 10%
unsecured $ 247,816 $ 418,107
Loan from a director, due in 2001, and 2002,
interest:
7.5% to 10% unsecured 5,549 5,549
--------------------------------------------------------------------------------------
Total Notes Payable to Related Parties 253,365 423,656
Less: Current Portion Payable to Related Pa (253,365) (423,656)
--------------------------------------------------------------------------------------
Notes Payable to Related Parties - Long Ter $ - $ -
=======================================================================================
2000 Convertible Debentures - During the first quarter of 2000 EuroGas completed
the issuance of two-year 10.5% convertible debentures in the amount of
$3,000,000 to related parties in exchange for cash proceeds of $1,591,336, the
conversion of prior outstanding EuroGas debt into debentures in the amount of
$422,288 and proceeds in the form of payments to creditors on behalf of EuroGas
by a debenture holder in the amount of $986,376. The debentures were convertible
into common shares at $0.35 per share, which represents a discount of 20% from
quoted market values on the date of the issuance. Upon conversion in 2000, the
debenture holders also received warrants to purchase 17,142,858 common shares at
$0.35 per share. The convertibility of the debentures at a discount, and the
detachable warrants issued below market on the date of issuance, constitute a
beneficial conversion feature of the debentures. The Company recorded the three
instruments at their relative fair values on the date of issuance with
$1,898,138 allocated to warrants, $330,439 allocated to the debentures and
$771,429 allocated to the beneficial conversion feature with the remaining
$2,669,567 recorded as a debt discount. Since the debentures were immediately
convertible, the Company recognized the resulting debt discount of $2,669,567 as
interest expense. The value of the options was determined using the Black-
Scholes option- pricing model with the following assumptions: risk-free interest
rate of 6.2%, volatility of 126% and an expected life of two years. The
debentures were subsequently converted, at the election of the holders, on March
30, 2000, into 8,571,428 common shares and warrants to purchase 17,142,858
common shares at $0.35 per share.
During September and November 2000, the Company issued 3,870,960 common shares
upon conversion of notes payable to related parties in the amount of $1,345,701,
or $0.35 per share, including conversion of principal on related party notes
payable in the amount of $909,907 and related accrued and unpaid interest in
the amount of $437,794. The grant of convertibility of the notes payable and
notes payable to related parties, at a discount below market during the
September, constitutes the grant of a beneficial conversion feature of $0.31 per
share for the difference between market and the conversion price of the debt.
The Company recognized $459,242 as interest expense related to the beneficial
conversion feature. There was no beneficial conversion feature related to the
November conversion.
Apart from the first quarter debentures, during 2000 the Company issued notes
payable to shareholders totaling $448,093 for payments made to or on behalf of
the Company. Included in the payments is an advance by an officer of $100,000
F-21
to Teton Petroleum Company as a note receivable.
During October 1999, the Company reached a settlement agreement on a defaulted
loan from a former director with principal owed of $225,206 and accrued interest
of $163,071. Pursuant to the terms of the agreement, the Company paid $130,000
in cash and issued 615,000 common shares during August 2000 with a market value
of $440,000 or $0.71 per share. The excess in the value of the settlement and
the previously accrued amount was charged to operations during 2000.
NOTE 11 - NOTES PAYABLE
During September and November 2000, the Company issued 3,389,944 common shares
upon conversion of notes payable in the amount of $1,191,115, or $0.35 per
share, including principal on notes payable of $813,277 and related accrued and
unpaid interest in the amount of $377,838. The grant of convertibility of the
notes payable and notes payable to related parties, at a discount below market
during the September conversion, constitutes the grant of a beneficial
conversion feature of $0.31 per share for the difference between market and the
conversion price of the debt. The Company recognized $458,758 as interest
expense during 2000 related to the beneficial conversion feature. There was no
beneficial conversion feature related to the November conversion.
NOTE 12 - INCOME TAXES
Deferred tax assets were comprised of the following:
December 31 2002 2001 2000
----------------------------------------------------------------------------------
Tax loss carry forwards $ 6,656,461 $ 2,445,695 $ 19,884,518
Property and equipment 133,071 133,071 (2,309,010)
Impairment losses on oil and gas 8,061,266 5,823,506 5,823,506
Impairment of investment in secur 1,021,436 1,723,363 1,353,959
Accrued settlement obligations 4,903,371 4,326,876 4,326,876
Unralized gain on investment
in securities (401,783) - -
Foreign currency translation
adjustment 500,390 - -
Valuation allowance (20,874,212) (14,452,511) (31,521,930)
----------------------------------------------------------------------------------
Net Deferred Tax Liability $ - $ - $ (2,442,081)
==================================================================================
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes:
December 31 2002 2001 2000
----------------------------------------------------------------------------------
Tax at statutory rate (34%) $ (6,307,678) $ (1,861,722) $(17,675,717)
Non-deductible expenses 596,799 98,198 77,177
State taxes, net of federal benef (612,215) (180,696) -
Change in deferred tax valuation 6,323,094 1,944,220 20,126,819
----------------------------------------------------------------------------------
Total Income Tax (Benefit) $ - $ - $ 2,528,279
==================================================================================
As of December 31, 2002, EuroGas has operating loss carry forwards of
approximately $17,800,000 in various countries which expire from 2010 through
2022.
F-22
NOTE 13 - RELATED PARTY TRANSACTIONS
Receivable from a Related Party - 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 $424,294 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 2002.
The resulting $381,284 payable to the officer was converted into common stock as
further described in Note 4 to the financial statements. During the remaining
months of 2002, EuroGas paid $101,084 in additional expense on behalf of EuroGas
resulting in a receivable from the officer.
As described in Note 4, EuroGas purchased a 57% interest in Rozmin, s.r.o. from
Belmont Resources, Ltd.
Effective October 21, 1999, the Company transferred all its shares of EuroGas
Deutschland GmbH to a related party for its fair value of $0. The Company was
required to fund EuroGas Deutschland GmbH's deficit of $98,898 before the
transfer could be made.
A significant shareholder and director of EuroGas, together with various other
companies under his control, have paid miscellaneous business expenses on behalf
of EuroGas and EuroGas has paid certain business expenses on their behalf. The
resulting receivables and payables are combined and presented in the
accompanying financial statements as receivable from related party of $101,084
as of December 31, 2002, and as accrued liabilities payable to related parties
in the amount of $416,8589 as of December 31, 2001.
Related party loans are described in Note 10, Notes Payable to Related Parties.
NOTE 14 - STOCKHOLDERS' EQUITY
Preferred Stock
There are 2,391,968 shares of 1995 Series Preferred Stock (the "1995 Series
preferred stock") issued and outstanding. The 1995 Series preferred stock is
non-voting, non-participating and has a liquidation preference of $0.10 per
share plus unpaid dividends. The 1995 Series preferred shareholders are entitled
to annual dividends of $0.05 per share. Each share of the 1995 Series preferred
shares are convertible into two common shares upon lawful presentation of the
share certificates. Dividends are payable until converted. EuroGas has the
right to redeem the 1995 Series preferred stock on not less than 30 days written
notice, at a price of $36.84 per share, plus any accrued but unpaid dividends.
Annual dividend requirements of the 1995 Series preferred stock are $119,598.
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
F-23
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. Annual dividend
requirements of the 1997 Series preferred stock are $15,600.
The following is a summary of the preferred stock outstanding at December 31,
2002:
Liquidation Preference Annual Divided 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 Conve 60 1,000.00 260,000 60.00 15,600
--------------------------------------------------------------------------------------------
Total 2,392,228 $ 499,197 $ 135,198
============================================================================================
Common Stock
On October 31, 2002 the Company recognized as issued 750,000 shares to Conquest
Financial, who had held the stock in trust. The stock was originally delivered
to Conquest during 2000 as advance collateral for a proposed financing loan from
Conquest. The loan was never funded by Conquest. During 2000, EuroGas vacated
its office lease in London it shared with Conquest; as a result Conquest paid
certain exit costs on behalf of EuroGas for closing the office and continued to
hold the unissued shares as collateral for the costs advanced. The shares
issued were valued at $247,500, or $0.33 per share, based upon the fair value of
the shares on December 20, 2000, the date the collateral was originally
delivered to Conquest and the date the shares were contingently issuable. During
2001 EuroGas accrued a $100,000 liability for exit costs from the London office.
During 2002 EuroGas recognized $147,500 as settlement costs and relieved the
$100,000 liability.
On June 10, 2002 the Company issued to 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, $381,284 of accrued
liabilities to a related party and for 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 (deficiency).
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.
During October 2002 the Company issued 418,328 common shares for $33,466 cash,
or $0.08 per share.
During February 2001, the Company issued 100,000 shares of common stock for cash
in the amount of $44,310. During April 2001, EuroGas issued 100,000 shares of
stock for professional services provided to the Company. The issuance was valued
at $48,400, or $0.48 per share.
F-24
During May 2001, EuroGas issued 3,800,000 shares to Winzer-Maurer under a
settlement obligation. The shares were valued at $1,864,872 and charged to
settlement expense during 2001.
During 2000, the Company issued 3,700,000 common shares and 3,000,000 warrants
to purchase common stock to FCDC under the terms of a settlement agreement. The
Company issued 1,842,983 common shares as payment of accrued settlement
obligations. The common shares issued were valued at $1,033,514, or an average
of $0.56 per share. In November 2000, 832,760 common shares were issued to
SlovGold GmbH, a related party, for services valued at $291,466, or $0.35 per
share, based on the market value of the common shares on the date issued. The
Company issued 331,672 common shares for services valued at $108,496, or an
average of $0.33 per share, based on the market value of the common shares on
the dates issued.
During 2000, notes payable to related parties totaling $1,173,896 and $502,871
of accrued interest were converted into 3,891,954 common shares at an average of
$0.43 per share. The Company issued 8,571,428 common shares upon conversion of
debentures with a carrying value of $3,000,000, or $0.35 per share, and issued
5,760,112 common shares upon conversion of $2,016,036 of notes payable at $0.35
per share.
Oxbridge Ltd. Purchase of Note Receivable and Lending Commitment - During March
and May 1999, EuroGas loaned Pan Asia Mining Corp., a Canadian company, $600,000
under the terms of an unsecured note receivable and made a commitment to provide
Pan Asia Mining Corp. an additional $2,025,000 of financing by March 2000. The
note receivable bore interest at the prime rate of a Canadian bank plus three
percent and was due in four installments through March 2002. During 1999,
EuroGas sold the note receivable to Oxbridge Ltd., a related party, in exchange
for $600,000 of reductions in three notes payable to Oxbridge Ltd. and two other
shareholders. During July 2000, Oxbridge Ltd. assumed EuroGas' commitment to
provide the additional financing to Pan Asia Mining Corp. in exchange for
EuroGas issuing 500,000 common shares to Oxbridge Ltd. The 500,000 common
shares were valued at $365,000, or $0.73 per share based upon the market value
of EuroGas' common shares on the date issued, and recognized as a general and
administrative expense for Oxbridge Ltd. assuming the financing commitment.
Warrants
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.
At December 31, 2002 and 2001, the Company had warrants outstanding to purchase
38,142,858 and 15,750,000 common shares, respectively.
Treasury
The Company purchased 381,000 shares of treasury stock during the year ended
December 31, 2002 for $81,596, or $0.21 per share, and sold 682,972 shares for
$50,676, or $0.07 per share.
F-25
NOTE 16 - EMPLOYEE STOCK OPTIONS
On July 1, 2000, five-year options to purchase 200,000 common shares at $0.73
per share were granted in connection with an employment agreement. The options
vest on July 1, 2001. No compensation expense was recognized in connection with
the grant because the exercise price was equal to the fair value of the
underlying shares on the date of grant.
A summary of the status of stock options as of December 31, 2002, 2001 and 2000
and changes during the years then ended are presented below:
2002 2001 2000
-----------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 2,400,000 $ 1.08 4,200,000 $ 1.07 2,000,000 $ 1.50
Granted - - - 0.73 2,400,000 0.74
Expired (1,200,000) - (1,800,000) - (200,000) 1.50
-----------------------------------------------------------------------------------------------------------
Outstanding at end
of year 1,200,000 0.74 2,400,000 1.08 4,200,000 1.08
============================================================================================================
Exercisable at end of year 1,200,000 0.74 2,400,000 1.08 2,950,000 1.12
============================================================================================================
Weighted-average fair
value of options granted
during the year - - $ 0.71
The fair value of options granted during 2000 was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
average risk-free interest rate of 6.18%, expected volatility of 138.4% and
expected life of 5 years.
The following table summarizes information about stock options outstanding at
December 31, 2002:
Outstanding Exercisable
- -------------------------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------
$ 0.45-$11.79 1,200,000 1.91 years $ 0.74 1,200,000 $ 0.74
=================================================================================================
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following:
December 31, 2002 2001
- -------------------------------------------------------------------------------------
Foreign currency translation adjustments,
after tax $ (939,746) $ (1,309,610)
Unrealized gain (loss) on investments in
securities available-for-sale, after tax 675,383 (26,704)
- -------------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss $ (264,363) $ (1,336,314)
=====================================================================================
F-26
NOTE 18 - 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) and is described in Note 9.
EuroGas' subsidiary, GlobeGas BV, lost its appeal for a reduction of a 1992
income tax liability in the Netherlands of $815,053 at December 31, 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.
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 has lost its $615,904 in net assets of that subsidiary and
may be subject to additional losses in net assets of Energy Global's
subsidiaries. The subsidiaries have been recognized as owned directly by
EuroGas, Inc. subsequent to the liquidation.
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 officer resigned in January 2001. The options
vested on January 1, 2000, and were considered to have expired during 2002 due
to the termination of the officer's employment. 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.
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.
The Company leases office facilities from various lessors in Poland, Vienna, and
Vancouver. Rent expenses for the years ended December 31, 2002, 2001 and 2000
were $116,765, $64,674 and $513,690, respectively. Except for Vancouver, the
office leases are on month-to-month agreements. EuroGas entered into a lease
agreement for its Vancouver office space that requires monthly payments of
$6,851 through January 2003. Future minimum payments under the lease are
$89,063.
Winzer-Maurer Settlement - On October 27, 2000, the Company reached an
agreement in principal related to a dispute involving the issuance of common
shares upon conversion of notes payable and completed the agreement by issuance
of 3,800,000 common shares on May 15, 2001. Those shares were required to be
registered with the Securities and Exchange Commission by the submission of a
Form S-3 no later than January 15, 2001, which did not occur. The Company also
agreed to issue warrants to purchase 5,200,000 common shares at $1.00 per share.
The warrants expired on January 15, 2002. The Company recorded a litigation
settlement expense and related accrued settlement obligation in the amount of
$1,864,872 during the fourth quarter of 2000 relating to the settlement
agreement. The value of the settlement was based upon the fair value of the
F-27
financial instruments to be issued as of the settlement date. The 3,800,000
common shares issued were valued at $1,292,000, or $0.34 per share, based on the
closing market price of the common shares on October 27, 2000. The warrants to
be issued to purchase 5,200,000 common shares were valued at their fair value of
$572,872, or $0.11 per warrant, computed utilizing the Black-Scholes option
pricing model with the following assumptions: risk free interest rate of 5.84%,
expected dividend yield of 0%, expected volatility of 136%, and expected life of
1.2 years. The accrued settlement obligation was satisfied with the issuance of
shares on May 15, 2001.
As a result of the Company's failure to register 3,800,000 shares by January 15,
2001, on September 23, 2002 the Company agreed to issue an additional 1,417,847
common shares and warrants to purchase 6,000,000 additional common shares at
$0.25 per share before June 30, 2004. The aggregate value of the settlement,
reflected on the accompanying financial statements as settlement expense, was
$530,724, based upon $141,785, or $0.10 per share for the common shares and
$388,939 fair value of the warrants issued. The fair value of the warrants was
computed utilizing the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 3.5%, expected dividend yield of 0%,
expected volatility of 166%, and expected life of 2 years.
Crawford Settlement - During July 1999, an action was commenced by Crawford, a
former consultant, asserting breach of a service agreement related to consulting
and engineering services provided to the Company in a prior year. Crawford made
an assertion for $159,500 and the right to purchase 284,000 common shares at
$1.50 per share as compensation for services provided to the Company. During
2000, the Company reached a settlement agreement in satisfaction of this action.
Pursuant to the agreement, the Company received $300,000 from a former officer
of EuroGas and issued 250,000 common shares to Crawford. The Company recorded
the issuance of the common shares at the fair value of $195,000, or $0.78 per
share and settlement income in the amount of $105,000 during the year ended
December 31, 2000. The former officer also made payments to Crawford in full
satisfaction of his claims.
Jeu-Calvo Settlement - In January 1999, Stephen Jeu and Susanna Calvo initiated
an action in District Court, Harris County, Texas, 55th Judicial District,
asserting claims against EuroGas stemming from an alleged breach of contract.
On or about November 1, 1999, EuroGas entered into a settlement agreement with
Mr. Jeu and Ms. Calvo pursuant to which EuroGas was required to make specified
cash payments to Mr. Jeu and Ms. Calvo and to issue to Mr. Jeu and Ms. Calvo
common shares having a market value of $440,000 on the date of issue. During
August 2000, EuroGas issued 615,000 common shares to Mr. Jeu and Ms. Calvo in
full satisfaction and settlement of the asserted claims. The common shares
issued were valued at $440,000, or $0.72 per share, based on the market value of
the common shares on the date issued. At December 31, 1999, the Company had
recognized obligations relating to the settlement, in accrued liabilities, notes
payable and accrued interest, of $570,000. During 2000, the estimated
obligation was adjusted to $440,000 for the value of the common shares issued.
F-28
There was $841,427 of unproved oil and gas properties as of December 31,
2002. The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion,
and amortization as of December 31, 2001, and 2000 by geographic area, were
as follows:
Europe
Total Canada and Russia
------------ ------------ ------------
At December 31, 2001
Unproved oil and gas properties $ 28,006,150 $ 7,875,000 $ 20,131,150
Proved oil and gas properties - - -
------------ ------------ ------------
Gross capitalized costs 28,006,150 7,875,000 20,131,150
Less: Impairments (21,819,544) (3,937,500) (17,882,044)
Less: Accumulated depreciation,
depletion, and amortization - - -
Future abandonment and restoration - - -
------------ ------------ ------------
Net capitalized costs $ 6,186,606 $ 3,937,500 $ 2,249,106
============ ============ ============
At December 31, 2000
Unproved oil and gas properties $ 42,921,154 $ 5,738,804 $ 37,182,350
Proved oil and gas properties 16,499,982 16,499,982 -
------------ ------------ ------------
Gross capitalized costs 59,421,136 22,238,786 37,182,350
Less: Impairments (33,460,115) (3,512,792) (29,947,323)
Less: Accumulated depreciation,
depletion, and amortization (3,619,329) (3,619,329) -
Future abandonment and restoration (183,002) (183,002) -
------------ ------------ ------------
Net capitalized costs $ 22,158,690 $ 14,923,663 $ 7,235,027
============ ============ ============
F-29
There was $310,570 of exploration costs incurred during 2002 relating to
oil and gas properties in Europe. Costs incurred in oil and gas producing
activities, both capitalized and expensed, during the years ended December
31, 2001, and 2000 were as follows:
Total Canada Europe
---------- ---------- --------
For the Year Ended December 31, 2001
Property acquisition costs
Proved $ - $ - $ -
Unproved 5,773 - 5,773
Exploration costs 34,186 - 34,186
Development costs - - -
---------- ---------- --------
Total Costs Incurred $ 39,959 $ - $ 39,959
========== ========== ========
For the Year Ended December 31, 2000
Property acquisition costs
Proved $ - $ - $ -
Unproved 1,748,618 1,683,266 65,352
Exploration costs 4,582,695 4,307,116 275,579
Development costs 2,075,923 2,075,923 -
---------- ---------- --------
Total Costs Incurred $8,407,236 $8,066,305 $340,931
========== ========== ========
F-30
There were no material operations from oil and gas producing activities during
2002 except for impairment in the amount of $5,711,335 relating to properties in
Europe. The results of operations from oil and gas producing activities for the
years ended December 31, 2001, and 2000 were as follows:
Total Canada Europe
------------ ----------- ------------
For the Year Ended December 31, 2001
Oil and gas sales $ 88,937 $ 88,937 $ -
Production costs - - -
Impairment of mineral interests (794,444) 360,000 (1,154,444)
Depreciation, depletion, and amortization - - -
------------ ----------- ------------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $ (705,507) $ 448,937 $(1,154,444)
============ =========== ===========
For the Year Ended December 31, 2000
Oil and gas sales $ 6,395,037 $ 6,395,037 $ -
Production costs (1,521,471) (1,521,471) -
Impairment of mineral interests (26,783,790) (2,661,585) (24,122,205)
Depreciation, depletion, and amortization (1,885,107) (1,885,107) -
------------ ----------- ------------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $(23,795,331) $ 326,874 $(24,122,205)
============ =========== ============
F-31
Reserve Information - The following estimates of proved and unproved developed
reserve quantities, presented in barrels and thousand cubic feet (MCF), and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of EuroGas'
reserves. EuroGas emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, these estimates are expected to change as
future information becomes available. EuroGas' proved reserves are located in
Canada and the Slovak Republic. Unproved reserve properties are located in the
Slovak Republic, Sakha Republic (Russian Federation), Canada, Poland, and the
Ukraine.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.
Total Canada Slovak Republic
--------------------------- -------------------------- --------------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (MCF) (Barrels) (MCF) (Barrels) (MCF)
--------- ----------- -------- ---------- ------- ----------
Proved Developed and Undeveloped
Reserves
Balance - December 31, 1999 1,044,580 13,487,085 949,700 7,999,300 94,880 5,487,785
Purchases of minerals in place - 146,000 - 146,000 - -
Extensions and discoveries 46,134 504,080 46,134 504,080 - -
Production (113,100) (916,089) (113,100) (916,089) - -
Sales of minerals in place (52,819) (104,891) (52,819) (104,891) - -
Revision of estimates (269,995) 5,549,785 (175,115) (62,000) (94,880) (5,487,785)
--------- ----------- -------- ---------- ------- ----------
Balance - December 31, 2000 654,800 18,665,970 654,800 7,566,400 - -
Sale of minerals in place (654,800) (18,665,970) (654,800) (7,566,400) - -
--------- ----------- -------- ---------- ------- ----------
Balance - December 31, 2001 - - - - -
========= =========== ======== ========== ======= -
==========
Proved Developed Reserves -
December 31, 1999 806,400 7,566,400 806,400 7,772,800 - -
December 31, 2000 631,400 6,546,900 631,400 654,900 - -
December 31, 2001 - - - - - -
========= =========== ======== ========== ======= ==========
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less the tax basis of the properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10
percent per year to reflect the estimated timing of the future cash flows.
There were no estimated net cash flows related to proved oil and gas reserves at
December 31, 2002 or 2001. The standardized measure of discounted estimated net
cash flows related to proved oil and gas reserves at December 31, 2000 were as
follows. There were no proved oil and gas reserves at December 31, 2001:
Total Canada Europe
------------ ------------ -----------
For the Year Ended December 31, 2000
Future cash inflows $ 61,049,083 $ 61,049,083 $ -
Future production costs and development
costs (10,028,153) (10,028,153) -
Future income tax expenses (15,219,536) (15,219,536) -
------------ ------------ -----------
Future net cash flows 35,801,394 35,801,394 -
10% annual discount for estimated
timing of cash flows (12,293,103) (12,293,103) -
------------ ------------ -----------
Standardized measures of discounted future
net of cash flows relating to proved oil
and gas reserves $ 23,508,291 $ 23,508,291 $ -
============ ============ ===========
F-33
The primary changes in the standardized measure of discounted estimated future
net cash flows for the year ended December 31, 2001, and 2000 were as follows:
For the Year Ended December 31, 2001
Total Canada Europe
------------ ------------ -----------
Beginning of year $ 23,508,291 $ 23,508,291 $ -
Sale of minerals in place (36,780,948) (36,780,948) -
Accretion of discount 979,554 979,554 -
Net change in income taxes 12,293,103 12,293,103 -
------------ ------------ -----------
End of year $ - $ - $ -
============ ============ ===========
For the Year Ended December 31, 2000
Beginning of year $ 15,534,137 $ 8,271,627 $ 7,262,510
Purchase of minerals in place 473,849 473,849 -
Extensions and discoveries 2,077,190 2,077,190 -
Development 1,398,342 1,398,342 -
Production (4,927,526) (4,927,526) -
Sale of minerals in plac (682,295) (682,295) -
Revisions of estimates:
Sales prices 18,299,745 18,299,745 -
Development costs (1,024,521) (1,024,521) -
Production costs 1,160,734 1,160,734 -
Quantities (9,148,314) (1,885,804) (7,262,510)
Accretion of discount 743,112 743,112 -
Net change in income taxes (120,755) (120,755) -
Change in exchange rate (275,407) (275,407) -
------------ ------------ -----------
End of year $ 23,508,291 $ 23,508,291 $ -
============ ============ ===========
F-34
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Wolfgang Rauball, Chief Executive Officer of EuroGas, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of EuroGas,
Inc. (the "Registrant");
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other
financial information included in this Annual 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 Annual 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 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
this Annual Report is 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 Annual Report (the "Evaluation Date"); and
c) presented in this Annual 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 Registrant's
board of directors (or persons performing the equivalent
functions):
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 Annual Report whether 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.
Date: May 15, 2003 /s/ Wolfgang Rauball
-----------------------------
Wolfgang Rauball
Chief Executive Officer
(Principal Executive Officer)
35
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Hank Blankenstein, Chief Financial Officer of EuroGas, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of EuroGas,
Inc. (the "Registrant");
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other
financial information included in this Annual 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 Annual 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 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
this Annual Report is 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 Annual Report (the "Evaluation Date"); and
c) presented in this Annual 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 Registrant's
board of directors (or persons performing the equivalent
functions):
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 Annual Report whether 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.
Date: May 15, 2003 /s/Hank Blankenstein
-------------------------
Hank Blankenstein
Chief Financial Officer
(Principal Financial and
Accounting Officer)
36
EXHIBIT 99.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify that the Annual Report on Form 10-K of
EuroGas, Inc. for the year ended December 31, 2002, as filed May __, 2003 with
the Securities and Exchange Commission, to the best of our knowledge fully
complies with the requirements of Section 13(a) or 15(d) of The Securities
Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the
annual report fairly presents, in all material respects, the financial condition
and results of operations of EuroGas, Inc.
Date: May 15, 2003 /s/ Wolfgang Rauball
Wolfgang Rauball
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: May 15, 2003 /s/Hank Blankenstein
Hank Blankenstein
Chief Financial Officer
(Principal Financial and
Accounting Officer)
37