As Filed: July 23, 1998 SEC File No.
SECURITIES AND EXCHANGE COMMISSION
Form S-1
Registration Statement Under the Securities Act of 1933
EUROGAS, INC.
(Exact name of registrant as specified in its charter)
Utah
(State or other jurisdiction of incorporation or organization)
1311
(Primary Standard Industrial Classification Code Number)
87-0427676
(I.R.S. Employer Identification No.)
942 East 7145 South, #101A, Midvale, Utah 84047 (801) 255-0862
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Hank Blankenstein, 942 East 7145 South, #101A, Midvale, Utah 84047
(801) 255-0862
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Keith L. Pope, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101-2006
Telephone: (801) 531-7090
Telecopy: (801) 531-7091
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box.[ ]
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Unit(2) Price Registration Fee
- --------------------------------- ------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock 10,000,000 $3.6875 $36,875,000 $10,879
</TABLE>
[FN]
(1) There are also registered pursuant to Rule 416 such additional number of
securities as may be issuable under the antidilution provisions of the
Company's Warrants and Options to purchase Common Stock.
(2) Estimated solely for purposes of calculating the registration fee. The
last price of the Common Stock was $3.6875 as reported by the Bulletin
Board on July 17, 1998.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Preliminary Prospectus
10,000,000 Shares
EUROGAS, INC.
Common Stock
This Prospectus relates to a public offering by certain shareholders (the
"Selling Shareholders") of (i) up to 10,000,000 shares of common stock, par
value $0.001 per share (the "Common Stock"), of EuroGas, Inc. (the "Company"),
issued or issuable on the conversion of 1998 Series B Convertible Preferred
Stock currently issued and outstanding or issuable in the future. (See "SELLING
SECURITY HOLDERS" and "PLAN OF DISTRIBUTION.") The number of shares of Common
Stock into which the 1998 Series B Convertible Preferred Stock are convertible
will vary based on the trading price for the Company's Common Stock in the over-
the-counter market at the time of conversion. (See "DESCRIPTION OF SECURITIES
TO BE REGISTERED: 1998 Series B Convertible Preferred Stock.") The Common
Stock is quoted on the Bulletin Board maintained by NASD, Inc. (the "Bulletin
Board"), under the trading symbol "EUGS." The last price for the Common Stock as
of July 17, 1998, as reported by the Bulletin Board was $3.6875.
This Offering Involves Substantial Risks. (See the discussion under the caption
"RISK FACTORS" beginning on page 6.)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
REGULATORY AUTHORITY, NOR HAS THE COMMISSION OR ANY
STATE OR OTHER REGULATORY AUTHORITY PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting Discounts Proceeds to Selling
Price to Public(1) and Commissions(2) Shareholders(3)
------------------ ---------------------- -------------------
<S> <C> <C> <C>
Per Share $ 3.6875 - $ 3.6875
Total $36,875,000 - $36,875,000
</TABLE>
[FN]
(1) The price per share for the securities offered by the Selling Shareholders
is estimated at the last price for the Common Stock of $3.6875 per share
as reported by the Bulletin Board on July 17, 1998.
(2) It is anticipated that the securities being sold by the Selling
Shareholders will be sold in privately-negotiated transactions or through
broker-dealers in individual transactions in which normal commissions and
other charges will be made by the broker-dealer. There is no agreement
between any broker-dealer and the Company with respect to such sales.
(See "PLAN OF DISTRIBUTION.")
(3) All amounts received on the sale of the Common Stock will be paid to the
Selling Shareholders, and there will be no proceeds to the Company. The
Company anticipates that it will incur costs related to this offering of
approximately $100,000. (See "USE OF PROCEEDS" and "PLAN OF
DISTRIBUTION.")
The date of this Prospectus is , 1998.
The Selling Shareholders may offer the Common Stock through or to
securities brokers or dealers designated by them in the trading market for the
Common Stock or in other transactions negotiated by the Selling Shareholders.
Any such sale of Common Stock by the Selling Shareholders must be accompanied
by, or follow the delivery of, a prospectus that is part of the current
registration statement relating to the Common Stock being offered, unless the
Selling Shareholder elects to rely on Rule 144 or another exemption from the
registration requirements in connection with a particular transaction. The
Selling Shareholders and any broker, dealer, or agent that participates with the
Selling Shareholders in the sale of the Common Stock offered hereby may be
deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions or discounts received by
them and any profit on the resale of the Common Stock purchased by them may be
deemed to be underwriting commissions under the Securities Act. (See "SELLING
SECURITY HOLDERS" and "PLAN OF DISTRIBUTION.")
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. In connection with this offering, the Company
estimates that it will incur costs of approximately $100,000 for filing and
listing fees, legal, accounting, printing, and other matters associated with the
preparation, filing, and distribution of the registration statement and
prospectus. Any separate costs of the Selling Shareholders will be borne by
them. Commissions or discounts paid in connection with the sale of securities
will be paid by the Selling Shareholders and will be determined by agreement
between the Selling Shareholders and the broker-dealer through, or to, which the
securities are to sold and may vary depending on the broker-dealer's commission
or mark-up schedule, the size of the transaction, and other factors. (See "PLAN
OF DISTRIBUTION.")
ADDITIONAL INFORMATION
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such material can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago
Illinois 60661. Copies can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at the prescribed rates. The Commission
also maintains a Web site that contains the reports and other information
regarding registrants, such as the Company, which file reports electronically
with the Commission at http://www.sec.gov.
The Company will provide, without charge, a copy of the information
incorporated in this Prospectus by reference, including copies of the periodic
reports of the Company filed with the Commission (not including the exhibits
thereto), to anyone requesting a copy. Requests should be directed to Hank
Blankenstein, EuroGas, Inc., 942 East 7145 South, #101A, Midvale, Utah 84047,
telephone (801) 255-0862.
No person is authorized to provide any information or to make any
representation not contained in this Prospectus and any such information or
representation made or given must not be relied on as having been authorized by
the Company. Neither the delivery of this Prospectus nor any sale under this
Prospectus shall, under any circumstance, create any implication that the
information in this Prospectus is current as of such date.
TABLE OF CONTENTS
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Caption Page
<S> <C>
PROSPECTUS SUMMARY.............................................. 5
THE COMPANY.................................................. 5
THE OFFERING................................................. 5
USE OF PROCEEDS.............................................. 6
RISK FACTORS................................................. 6
RISK FACTORS.................................................... 7
THE COMPANY'S ACTIVITIES..................................... 7
Need for Significant Funds ................................ 7
Lack of Revenues .......................................... 7
Exploration Risks ......................................... 7
Lack of Infrastructure .................................... 7
Location of the Company's Interests ....................... 8
Future Licenses ........................................... 8
SEC Investigation and Other Legal Matters ................. 8
Dependence on Texaco ...................................... 8
No Assurance of Commercial Production From the Company's
Projects ................................................ 9
Dependence on Officers, Key Employees, and Consultants .... 9
Risk of Impairment of Recorded Value of Unproved
Properties .............................................. 9
Risks of Adverse Weather .................................. 9
Forward Looking Information May Prove Inaccurate .......... 10
FACTORS RELATED TO THE OIL AND GAS INDUSTRY.................. 10
Volatility of Commodity Prices and Markets ................ 10
Operating Hazards and Uninsured Risks ..................... 10
Intense Competition in the Oil and Gas Industry ........... 10
Environmental Regulations ................................. 11
GENERAL RISKS RELATING TO OFFERING........................... 11
Market Impact of Offering ................................. 11
Lack of Due Diligence Review .............................. 11
Shares Eligible for Future Sale ........................... 11
Substantial and Immediate Dilution ........................ 11
Substantial Warrants and Options Outstanding .............. 12
Issuance of Additional Common Stock ....................... 12
Determination of Purchase and Exercise Price .............. 12
No Dividends .............................................. 12
USE OF PROCEEDS................................................. 12
DETERMINATION OF OFFERING PRICE................................. 13
DILUTION........................................................ 13
SELLING SECURITY HOLDERS........................................ 13
PLAN OF DISTRIBUTION............................................ 14
GENERAL...................................................... 14
RESTRICTED NATURE OF SECURITIES.............................. 14
SALE OF COMMON STOCK......................................... 15
DETERMINATION OF OFFERING PRICE.............................. 15
DESCRIPTION OF SECURITIES TO BE REGISTERED...................... 15
GENERAL...................................................... 15
COMMON STOCK................................................. 15
1998 SERIES B CONVERTIBLE PREFERRED STOCK.................... 16
1995 SERIES PREFERRED STOCK.................................. 16
OTHER PREFERRED STOCK DESIGNATIONS........................... 17
SELECTED PROVISIONS OF THE ARTICLES OF INCORPORATION......... 17
TRANSFER AGENT............................................... 17
INTERESTS OF NAMED EXPERTS AND COUNSEL.......................... 17
INFORMATION WITH RESPECT TO THE REGISTRANT...................... 18
DESCRIPTION OF BUSINESS AND PROPERTIES OF THE COMPANY........ 18
General ................................................... 18
Forward Looking Information May Prove Inaccurate .......... 19
Activities in Poland ...................................... 19
General ................................................ 19
The Pol-Tex Concession and Related Matters ............. 20
Activities in Slovakia .................................... 21
Slovakian Oil & Gas Joint Venture ...................... 22
Slovakian Talc Deposit ................................. 23
Activities in the Sakha Republic .......................... 24
Activities in Canada ...................................... 25
Activities in the Ukraine ................................. 25
Risks Associated With the Stage of Exploration and Location
of Company's Interests .................................. 26
Environmental Compliance .................................. 26
Competition ............................................... 27
Employees and Consultants ................................. 27
Operational Hazards and Insurance ......................... 27
Office Space .............................................. 27
History ................................................... 28
LEGAL PROCEEDINGS............................................ 30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 31
Market for Common Stock ................................... 31
Sale of Unregistered Securities ........................... 32
SELECTED FINANCIAL DATA...................................... 34
Certain Financial Data .................................... 34
Statement of Operations Data .............................. 34
Balance Sheet Data ........................................ 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ... 34
General ................................................... 34
Recent Developments ....................................... 35
Funding Activities ..................................... 35
Financial Position ..................................... 35
Results of Operations ..................................... 35
Capital and Liquidity ..................................... 36
Year 2000 ................................................. 37
FINANCIAL STATEMENTS......................................... 37
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 37
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.......... 37
Company Control ........................................... 38
Key Consultants and Employees ............................. 39
Section 16(a) Beneficial Ownership Reporting Compliance ... 40
EXECUTIVE COMPENSATION....................................... 41
Executive Employment and Consulting Arrangements .......... 41
Compensation of Directors ................................. 41
Board Compensation Committee Report on Executive
Compensation ............................................ 42
SECURITY ONWERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 44
Dr. Reinhard Rauball and Wolfgang Rauball ................. 44
Relationship With Oxbridge and Chemilabco ................. 44
Herbert Zimmer ............................................ 45
Loan Transactions ......................................... 44
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES.................................... 45
</TABLE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
and financial statements appearing elsewhere in this Prospectus and the periodic
reports of the Company filed with the Commission that are incorporated into this
Prospectus by reference.
The Company
The Company is engaged in the acquisition of rights to explore for and
exploit natural gas and coal bed methane gas in various parts of the world. The
Company currently has interests in several projects, including a coal bed
methane gas project in Poland that has been farmed out to a subsidiary of
Texaco, Inc. ("Texaco"), a natural gas project in Slovakia, a natural gas
project in Canada, and, as a result of a recent acquisition of a subsidiary of
OMV Aktiengesellschaft ("OMV"), an Austrian gas transmission company, a natural
gas project in the Sakha Republic, a member of the Russian Federation located in
eastern Siberia. In addition, the Company has an exclusive right to negotiate
the terms of a joint venture arrangement with the Polish Oil & Gas Company
("POGC") concerning a separate natural gas project in Poland, has recently
entered into agreements with respect to two natural gas projects in Ukraine, and
has entered into a cooperation agreement with National Power International
Limited, a United Kingdom based power company, to submit a bid on the
construction of a power plant in Poland. The Company has also recently acquired
a controlling interest in a company that is a minority partner in the proposed
development of a talc deposit in Slovakia.
The Company had historically suffered from a shortage of capital. However,
it had working capital of approximately $9,366,000 and $4,540,000 at December
31, 1997, and March 31, 1998, respectively. Since that time, it has received a
net aggregate of approximately $7,400,000 in equity financing to provide it with
the necessary funds to meets its contractual commitments at least in the short-
term. Most of the projects in which the Company is involved will require
significantly more capital than is currently available to the Company. While
the Selling Shareholders have committed to provide the Company with up to an
additional $22,000,000 in equity financing, the Company anticipates that it will
continue to seek equity and debt financing from others and participation in its
projects by industry partners in order to provide the necessary financing and
expertise for the long-term development of the various projects. (See
"INFORMATION WITH RESPECT TO THE REGISTRANT.")
The Company's principal executive offices are located at 942 East 7145
South, #101A, Midvale, Utah 84047. The Company's telephone number at that
location is (801) 255-0862.
The Offering
This offering relates to the sale by the Selling Shareholders of up to
10,000,000 shares of Common Stock, either issued or issuable on the conversion
of currently issued and outstanding 1998 Series B Convertible Preferred Stock or
issuable on the conversion of the 1998 Series B Convertible Preferred Stock to
be issued in the future. The 1998 Series B Convertible Preferred Stock was and
will be issued in private placements (the "Private Placements") to a limited
number of investors in transactions exempt from the registration requirements of
the Securities Act. As a result, the Common Stock issued on the conversion of
the 1998 Series B Convertible Preferred Stock will be restricted securities and
will not be transferable, except pursuant to a registration statement or an
available exemption from registration.
This Prospectus is part of a registration statement filed to meet the
Company's contractual obligations to permit the sale by the Selling Shareholders
of the Common Stock received by them on conversion of the 1998 Series B
Convertible Preferred Stock. (See "PLAN OF DISTRIBUTION.")
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<S> <C>
Securities offered 10,000,000 shares of Common Stock. (See "PLAN OF
DISTRIBUTION.")
Common Stock outstanding before offering 64,845,811 shares(1)
Common Stock outstanding after offering 74,746,934 shares(2)
No Net Proceeds The Company will not receive any proceeds from the
sale of the Common Stock by the Selling Shareholders.
(See "USE OF PROCEEDS.")
Trading Symbol The Common Stock of the Company is traded on the
Bulletin Board under the symbol EUGS, on the
Frankfurt Exchange under the symbol EUGS.F, the
Berlin Exchange under the symbol EUGS.BE, the
Stattgart Exchange under the symbol EUGS.S, and
the Hamburg Stock Exchange under the symbol EUGS.H.
</TABLE>
[FN]
(1) Includes 98,877 shares issued on the conversion of 300 shares of 1998
Series B Convertible Preferred Stock and accrued interest at a conversion
price of $3.06 per share. Does not include options to acquire up to
13,550,000 shares at a weighted option exercise price of $3.55 per share
or the shares of Common Stock issuable on the conversion of the 1998
Series B Convertible Preferred Stock. (See "PRINCIPAL SECURITY HOLDERS"
and "PLAN OF DISTRIBUTION.")
(2) Does not include options to acquire up to 13,550,000 shares with a
weighted option exercise price of $3.55 per share. The actual number of
shares of Common Stock into which the 1998 Series B Convertible Preferred
Stock is convertible will vary depending on the market price for the
Company's Common Stock immediately preceding the election of the Selling
Shareholders to convert. (See "DESCRIPTION OF SECURITIES TO BE
REGISTERED: 1998 Series B Convertible Preferred Stock.")
Use of Proceeds
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. If the Selling Shareholders meet their commitment to
the Company to acquire the remaining shares of the Series B Convertible
Preferred Stock, the Company would receive additional gross proceeds of
$22,000,000. (See "USE OF PROCEEDS.")
Risk Factors
The acquisition of Common Stock involves substantial risk. (See "RISK
FACTORS.")
RISK FACTORS
The acquisition of the Common Stock involves certain risks. The following
factors, in addition to the other information and financial data set forth
elsewhere in this Prospectus or incorporated herein by reference, should be
considered carefully in evaluating the Company and its business before making an
investment in the Common Stock offered hereby.
THE COMPANY'S ACTIVITIES
Need for Significant Funds
The Company has historically been undercapitalized, although it had working
capital of approximately $9,366,000 and $4,540,000 at December 31, 1997, and
March 31, 1998, respectively. Since that time, the Company has received net
proceeds from additional equity financing of approximately $7,400,000 providing
the Company with sufficient capital to meet its short-term contractual
commitments. While the extent of the Company's additional funding needs for
development of its interests cannot currently be estimated, it is likely that
the interest of the Company's shareholders will continue to be diluted as the
Company seeks funding through the sale of additional securities or through joint
venture or industry partnering arrangements. There can be no assurance that the
Company will continue to have available to it a source of equity financing or
that, if required, it will be able to borrow the funds necessary to continue its
activities. In addition, even if such funds are available, there can be no
assurance that the necessary financing can be obtained on terms acceptable or
favorable to the Company.
Lack of Revenues
The Company has not had any revenues since its incorporation, except for
$500,000 received in connection with transferring certain interests to Texaco.
The Company does not currently have a source of revenues, and does not
anticipate any revenues in the near term. Consequently, the Company is entirely
dependent on its existing working capital, obtaining financing from the sale of
securities in the future, and/or amounts made available to the projects of the
Company by industry partners in the future. The Company anticipates that it
will continue to incur significant losses. The Company anticipates significant
costs in connection with its ongoing development of the projects in which it
currently holds an interest and does not anticipate that these costs will be
able to be met from revenues for the foreseeable future.
Exploration Risks
Exploration and, if justified, development of the Company's interests
involve significant risks. There can be no assurance that the exploration of
these projects will result in the location of recoverable hydrocarbons. There
is no way to know in advance of drilling and testing whether any prospect will
encounter hydrocarbons or will yield gas in sufficient quantities to be
economically viable. Several test wells are typically required to explore each
prospect or exploration area. The Company may continue to incur significant
exploration costs in specific areas, 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. The Company has drilled a number of test
wells in Poland, none of which resulted in the establishment of commercial
production or reserves.
Lack of Infrastructure
The Company's prospects are located in areas of the world in which it
believes there is the potential for significant reserves of natural gas.
However, these areas are also in locations in which the necessary infrastructure
for transporting, delivering, and marketing any natural gas that may be
recovered are significantly underdeveloped or, in some cases, nonexistent.
Consequently, even if the Company is able to locate hydrocarbons in commercial
quantities, it may be required to invest significant amounts in developing the
infrastructure necessary to support the marketing of the gas or may be unable to
economically market such gas. The Company does not currently have a source of
funding available to meet these costs.
Location of the Company's Interests
The Company's operations in Poland, Slovakia, Ukraine, and the Sakha
Republic carry with them certain risks in addition to the risks normally
associated with the exploration for, and development of, hydrocarbons. Although
recent political and socio-economic trends in these countries toward the
development of a capitalistic economy provide opportunities for foreign
investment, the risks of political instability, a change of government,
unilateral renegotiation of concessions or contracts, nationalization, foreign
exchange restrictions, and other uncertainties must be taken into account when
operating in these areas of the world. The terms of the governing agreements
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. The Company will be required to obtain additional
licenses and permits on an ongoing basis to permit the drilling of wells, the
construction of transportation facilities and pipelines, the marketing of any
hydrocarbons that may be produced, and financial transactions necessary for all
of the foregoing. The rules, regulations, and laws governing all of these
matters are subject to change by the various governmental agencies involved.
There can be no assurance that the laws, regulations, and policies applicable to
the interests held by the Company will not be adversely changed at some future
date.
Future Licenses
In most cases, the Company has the right to conduct basic exploration on
the prospects in which it owns an interest. In order to drill for, test,
recover hydrocarbons, transport any hydrocarbons recovered, or sell such
hydrocarbons, the Company will typically be required to obtain additional
licenses and permits and to enter into agreements with various land owners.
These licenses, permits, and agreements would include the terms of a
development/exploitation fee, typically based on the market value of the
economically recoverable reserves, which will affect the commercial viability of
any hydrocarbons that may be discovered. In addition, the granting of
additional licenses and permits will require the consent of national and local
governments having jurisdiction over the production area. The Company could be
subject to significant delays in obtaining the necessary consents of local
authorities or satisfying other governmental requirements prior to obtaining any
such license.
SEC Investigation and Other Legal Matters
The Company is the subject to a formal order of investigation issued by the
United States Securities and Exchange Commission (the "Commission") on August 1,
1995, to investigate whether violations of applicable law may have occurred.
The Company has produced numerous documents pursuant to extensive subpoenas from
the Commission and the oral testimony of its officers and directors and the
Commission has obtained similar information from some of the Company's former
officers and directors and the former independent public accountants of the
Company. While the Company has not been contacted by the Commission with
respect to this matter for more than 18 months, the Company cannot currently
predict the duration or outcome of this investigation. If the Commission
concludes that there have been violations of the securities laws, it has
available a large range of civil and criminal remedies up to and including the
suspension of trading in the Company's Common Stock or the exclusion of the
current officers and directors of the Company from participating in a public
company. In addition, the Company is subject to certain other pending or
threatened legal claims. (See "INFORMATION WITH RESPECT TO THE REGISTRANT:
Legal Proceedings.") If these or other matters are resolved adversely to the
Company, the resolution could have a material negative impact on the Company and
its business and proposed business.
Dependence on Texaco
The Company has granted the exclusive license to Texaco to develop its coal
bed methane gas interests in Poland. Texaco has committed to expending certain
funds in connection with the acquisition of data and the initial exploration of
this project and will be required to pay additional amounts to the Company if it
elects to continue to proceed. However, Texaco also has the option at various
intervals to withdraw from future participation in the project. In addition,
control of the timing and breadth of any development has, in large part, been
turned over to Texaco which may make such decisions based on larger corporate
policies unrelated to the merits of the coal bed methane gas project. If Texaco
elects not to proceed at some point or elects to delay, for any reason, the
development of the coal bed methane, the Company would not recognize any return
on its significant investment in this project to date. In such event, the
Company would seek to locate an alternative strategic partner. However, there
can be no assurance that the Company would be successful in obtaining the
participation of another partner, that the terms of any such arrangement would
be favorable to the Company, or that such efforts would not significantly delay
the exploration and development of the coal bed methane project.
No Assurance of Commercial Production From the Company's Projects
Other than its interest in Canada, there has not been any commercial
production of gas from any of the areas in which the Company owns an interest,
even though various governmental agencies drilled exploratory wells in certain
of the areas located in Eastern Europe. Texaco is currently drilling test wells
in the concession in Poland which it controls and in which the Company owns an
interest, and the Company has drilled test wells on its Slovakia concessions.
However, none of these wells have been completed for production, and there can
be no assurance concerning the resources that may ultimately be recovered from
the Company's activities. Even when the Company intersects a structure that
contains hydrocarbon reservoirs, there can be no assurance that the porosity,
permeability, or other characteristics of any reservoir formation will support
the production of hydrocarbons in commercial quantities for any extended period
or at all.
Dependence on Officers, Key Employees, and Consultants
The Company is dependent on the services of Dr. Reinhard Rauball, the
chairman of the board of directors, Mr. Wolfgang Rauball, the Company's chief
consultant, Mr. Paul Hinterthur, the president of the Company, and Mr. Hank
Blankenstein, the Vice-President of the Company. The Company has also been
dependent on certain of these individuals for obtaining the necessary equity
financing received by the Company to date. In addition, the Company is
dependent on certain of its key employees, including Andrew J. Andraczke and J.
Tony Preuss, in connection with its business activities. Mr. Andraczke has been
instrumental in assisting the Company in establishing its operations in Poland.
The loss of one or more of these individuals could materially adversely impact
the Company. The Company has not entered into employment agreements with any of
the individuals and does not maintain key-man life insurance on its officers.
(See "MANAGEMENT: Executive Officers and Directors.")
Risk of Impairment of Recorded Value of Unproved Properties
The Company capitalizes costs related to unproved hydrocarbon properties
and recognizes the expenses for costs to drill exploratory wells that do not
result in proved reserves at the time the well is plugged and abandoned. The
Company reviews its unproved properties periodically to assess whether an
impairment allowance should be recorded. At March 31, 1998, the Company had
capitalized costs related to the acquisition of unproved properties in the
amount of approximately $24,105,000. Should future events such as the drilling
of dry holes evidence that an impairment of recorded value has taken place, the
adverse impact on the Company's results of operations for the relative period
could be significant. As a result of the foregoing, the results of operations
of the Company for any particular period may not be indicative of the results
that could be expected over longer periods. (See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
Risks of Adverse Weather
A significant portion of the Company's projects are subject to periodic
interruptions due to weather conditions that may be quite severe in the areas in
which such activities are conducted. Heavy precipitation may make travel to
exploration sites or drilling locations difficult or impossible. Extremely cold
temperatures may delay or interrupt drilling, well servicing, and production.
The temperatures in the Sakha Republic are especially extreme and include some
of the coldest areas of the northern hemisphere. The average temperature of the
entire region from October to April is below freezing with winter temperatures
dipping to minus 70 to 80 degrees Fahrenheit. The foregoing may reduce
production volumes or increase production costs and may make activities
impractical or impossible during certain portions of the year.
Forward Looking Information May Prove Inaccurate
This Prospectus contains certain forward looking statements and information
relating to the Company and its business that are based on the beliefs of
management of the Company and assumptions made based on information currently
available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including establishing beneficial
relationships with industry partners to provide funding and expertise to the
projects of the Company, locating commercial deposits of methane and natural gas
on the Company's concessions and licenses, the successful negotiation of
additional licenses and permits for the exploitation of any reserves located,
the successful completion of wells, the economic recoverability of in-place
reservoirs of hydrocarbons, the successful addressing of technical problems in
completing wells and producing gas, the success of the marketing efforts of the
Company, the ability of the Company to establish required facilities to gather
and transport any hydrocarbons that may be produced, and the ability of the
Company to obtain the necessary financing to successfully complete its goals.
Should one or more of these or other risks materialize or if the underlying
assumptions of management prove incorrect, actual results of the Company may
vary materially from those described. The Company does not intend to update the
forward looking statements contained in this report, except as may occur as part
of its ongoing periodic reports filed with the Commission.
FACTORS RELATED TO THE OIL AND GAS INDUSTRY
Volatility of Commodity Prices and Markets
Oil and gas prices have been, and are like to continue to be, volatile and
subject to wide fluctuations in response to any of the following factors:
relatively minor changes in the supply and demand for oil and gas; market
uncertainties; political conditions in international oil producing areas; the
extent of domestic production and importation of hydrocarbons in certain
relevant markets; the level of consumer demand; weather conditions; the
competitive position of hydrocarbons as a source of energy as compared to other
energy sources; the refining capacity of crude purchasers; and the effect of
governmental regulation on the production, transportation, and sale of
hydrocarbons. Adverse changes in the market or the regulatory environment would
likely have an adverse effect on the Company's ability to obtain capital from
lending institutions, industry participants, private or public investors, or
other sources. In addition, such adverse changes would have a negative impact
on the business activities of the Company.
Operating Hazards and Uninsured Risks
The exploration for hydrocarbons, drilling of wells, and production of
hydrocarbons involve hazards such as 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
gases, any one of which may result in environmental damage, personal injury, and
other harm that could result in substantial liabilities to third-parties and
losses to the Company. The Company does not maintain insurance against these
risks. Even if it obtained insurance, the Company may not be insured against
all losses or liabilities which may arise from such hazards because such
insurance may be unavailable at economic rates, because of limitations in the
insurance policies, or because of other factors. Any uninsured loss could have
a material adverse impact on the Company.
Intense Competition in the Oil and Gas Industry
The oil and gas industry is highly competitive. Most of the Company's
current and potential competitors have far greater financial resources and a
greater number of experienced and trained managerial and technical personnel
than the Company. There can be no assurance that the Company will be able to
compete effectively with such firms.
Environmental Regulations
The Company's operations are subject to environmental laws and regulations
in the various countries in which they are conducted. These environmental laws
and regulations may provide for restrictions and prohibitions on spills,
releases, or emissions of various substances produced in association with
hydrocarbon exploration and development. Certain aspects of the Company's
proposed operations may require the submission and approval of environmental
impact assessments to governmental authorities prior to commencing operations.
The Company has only recently commenced field activities and has not incurred
material environmental remediation costs to date. Management believes the
Company is currently in material compliance with applicable laws and
regulations. However, there can be no assurance of such compliance or that
applicable regulations or administrative policies or practices will not be
changed by the various governments. The cost of compliance with current
regulations or any changes in environmental regulations could require
significant expenditures and breaches of such regulations may result in the
imposition of funds and penalties, any of which may be material. There can be
no assurance that these environmental costs will not have a material adverse
impact on the Company's financial condition or results of operations in the
future.
GENERAL RISKS RELATING TO OFFERING
Market Impact of Offering
This Prospectus relates to the sale of up to 10,000,000 shares of Common
Stock by the Selling Shareholders. While the Company will receive gross
proceeds of $30,000,000 in the event that all of the shares of the 1998 Series B
Convertible Preferred Stock are sold, the Company will not receive any proceeds
from the sale of the Common Stock issuable on conversion and has prepared this
Prospectus in order to meet its contractual obligations to the Selling
Shareholders. The shares that can be sold by the Selling Shareholders under
this Prospectus represent approximately 16% of the currently issued and
outstanding Common Stock. The sale of such a significant block of stock, or
even the possibility of its sale, may adversely affect the trading market for
the Common Stock and reduce the prices available in the market.
Lack of Due Diligence Review
The Selling Shareholders reviewed certain information concerning the
Company, its business, and its proposed activities in connection with their
execution of the Subscription Agreement and the initial acquisition of shares of
1998 Series B Convertible Preferred Stock. However, no securities broker-dealer
or any other person has been engaged to perform any due diligence or a similar
review of this offering or of the Company on behalf of the Selling Shareholders,
persons who may purchase Common Stock in this offering, or any other person.
Shares Eligible for Future Sale
Substantially all of the approximately 64,845,811 shares of the Common
Stock currently issued and outstanding: (i) are free-trading; (ii) have been
held for in excess of one year and are eligible for resale under Rule 144
promulgated under the Securities Act; or (iii) will be registered for resale in
a registration statement that the Company is contractually obligated to file.
Although the resale of certain of these shares are subject to the volume
limitations and other restrictions under Rule 144, the possible resale of the
remaining shares may have a depressive affect on the public trading market for
the Common Stock.
Substantial and Immediate Dilution
Persons purchasing the Common Stock will suffer a substantial and immediate
dilution based on the net tangible book value of their shares. (See
"DILUTION.")
Substantial Warrants and Options Outstanding
The Company has issued and outstanding Warrants and Options to purchase up
to 13,550,000 shares of Common Stock at exercise prices ranging from $1.50 to
$11.79 with a weighted average exercise price of $3.55 per share. The existence
of such Warrants and Options may hinder future financings by the Company and the
exercise of such Warrants and Options may further dilute the interests of all
stockholders. Possible future resale of Common Stock issuable on the exercise
of such Warrants and Options could adversely affect the prevailing market price
of the Common Stock. Further, the holders of Warrants and Options may exercise
them at a time when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company.
Issuance of Additional Common Stock
The Company has authorized capital of 325,000,000 shares of Common Stock,
par value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share. As of July 21, 1998, 64,845,811 shares of Common Stock and
2,400,228 shares of preferred stock were issued and outstanding, with an
additional 13,550,000 shares of Common Stock reserved for issuance on the
exercise or conversion of the Warrants, Options, and other outstanding rights to
acquire Common Stock. The Company's board of directors has authority, without
action or vote of the shareholders, to issue all or part of the authorized but
unissued shares. Any such issuance will dilute the percentage ownership of
shareholders and may dilute the book value of the Company's Common Stock.
Determination of Purchase and Exercise Price
The terms of the 1998 Series B Convertible Preferred Stock were determined
by negotiations between the Company and the Selling Shareholders holding such
Preferred Stock. These negotiations took into account the history of, and
recent prices for, the Common Stock as quoted on the Bulletin Board, the
business history and prospects of the Company, an assessment of the Company's
management, the Company's need for capital, the number of securities to be
offered, and the general condition of the securities market. The prices at
which the Selling Shareholders may sell shares of Common Stock in this offering
will be individually negotiated or based on the market price for the Common
Stock at the time of the transactions. Such prices do not necessarily bear a
relationship to the assets, earnings, or book value of the Company or any other
traditional criteria of value.
No Dividends
The Company has not paid, and does not plan to pay, dividends on its Common
Stock in the foreseeable future, even if it were profitable. Earnings, if any,
are expected to be used to advance the Company's activities and for general
corporate purposes, rather than to make distributions to shareholders.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common Stock
by the Selling Shareholders. The Company anticipates that it will incur costs
of approximately $100,000 in connection with the transactions described in this
Prospectus, including filing fees, transfer agent costs, printing costs, listing
fees, and legal and accounting fees. If the remaining shares of authorized
Series B Convertible Preferred Stock are subsequently acquired by the Selling
Shareholders in order to permit the sale of all of the Common Stock subject to
this Prospectus, the Company would receive additional gross proceeds of
approximately $22,000,000. To the extent that net proceeds from the issuance of
additional shares of 1998 Series B Convertible Preferred Stock are received by
the Company, such proceeds will be used to fund the expansion of the business of
the Company, to provide funding for the existing projects of the Company, and
general and administrative expenses.
DETERMINATION OF OFFERING PRICE
With respect to the shares of Common Stock offered for sale by the Selling
Shareholders, such shares shall be sold from time to time at such prices as the
Selling Shareholders shall determine may be in their best interests and at which
a willing buyer can be found. Such prices may not be related to the assets,
earnings, or book value of the Company or any other recognized criteria of
value. There can be no assurance that the Selling Shareholders will sell any or
all of the Common Stock subject to this Prospectus.
DILUTION
As of March 31, 1998, the Company had stockholders' equity of $35,161,034
resulting in a book value of the Company of approximately $0.54 per share of
Common Stock. The sale of Common Stock by the Selling Shareholders pursuant to
this Prospectus will be at negotiated prices for individual transactions or at
the trading price for the Common Stock at the time of the sale, which will vary.
Any purchaser of the Common Stock will be buying such stock at a value
substantially in excess of the per share book value. In the event that the
Company is unable to continue as an operating business for any reason, it is
unlikely that there will be significant assets available for distribution to the
holders of Common Stock in connection with any liquidation.
SELLING SECURITY HOLDERS
The following table sets forth certain information concerning the
registered holder of the issued and outstanding 1998 Series B Convertible
Preferred Stock. This stock is held for the benefit of three beneficial
investors as set forth in footnote 1.
<TABLE>
<CAPTION>
Securities
-----------------------------------------------------------------
Now Owned After Offering
------------------------ ---------------------
Shareholders Number Percent To Be Sold Number Percent
- ----------------------------- ------------- ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Thomson Kernaghan & Co., Ltd. 10,000,000(2) 15.4% 10,000,000 0 0%
365 Bay Street, 10th Floor
Toronto Ontario MSH2V2(1)
</TABLE>
[FN]
(1) Thomson Kernaghan & Co., Ltd. is the registered owner of the issued and
outstanding 1998 Series B Convertible Preferred Stock and serves as agent
for the beneficial owners, Canadian Advantage LP, Dominion Capital Fund
Limited, and Sovereign Partners LP. These three entities have committed,
through Thomson Kernaghan & Co., Ltd., to acquire all of the 30,000
shares of Series B Convertible Preferred Stock authorized by the Company
for an aggregate gross purchase price of $30,000,000. To date, the
entities have acquired 8,000 shares for $8,000,000 with Canadian
Advantage LP acquiring 500 shares, Dominion Capital Fund Limited
acquiring 4,500 shares, and Sovereign Partners LP acquiring 3,000 shares.
The Company has the right to require additional funding in tranches of
$4,000,000 during each 30 day period following the effectiveness of this
Registration Statement.
(2) This is the number of shares of Common Stock the Company is contractually
obligated to register. The number of shares of Common Stock issuable on
conversion of the 1998 Series B Convertible Preferred Stock is based on
the trading price for the Company's Common Stock immediately prior to
conversion, and will vary from time to time. The Selling Shareholders
have converted 300 shares of 1998 Series B Convertible Preferred Stock
to date at a conversion price of $3.06 per share (80% of the average
closing price for the five days preceding the conversion), resulting in
the issuance of 98,877 shares of Common Stock. The election to convert
is at the discretion of the Selling Shareholders, except in limited
circumstances. The total number of shares of Common Stock issued on
conversion of the 1998 Series B Convertible Preferred Stock could be
greater or less than 10,000,000 shares. If greater, the Company would
be obligated to file an additional registration statement for the
excess shares. If less, the Company will deregister the shares included
in this registration statement that are not issued. (See "DESCRIPTION OF
SECURITIES TO BE REIGSTERED: 1998 Series B Convertible Preferred Stock.")
PLAN OF DISTRIBUTION
GENERAL
The shares of Common Stock being offered by the Selling Shareholders may be
acquired from time to time on conversion of the 1998 Series B Convertible
Preferred Stock held by the Selling Shareholders. The Selling Shareholders,
through their agent, Thomson Kernaghan & Co., Ltd., have entered into a
Subscription Agreement pursuant to which they have agreed to purchase up to
30,000 shares of the Company's 1998 Series B Convertible Preferred Stock at a
purchase price of $1,000 per share. The Selling Shareholders have already
acquired 8,000 shares for an aggregate gross purchase price of $8,000,000. The
Company may request additional funding tranches in the amount of not more than
$4,000,000 for every 30 day period subsequent to the effectiveness of the
Registration Statement of which this Prospectus forms a part so long as (i) the
closing bid price for the Company's Common Stock is at or above $3.00; and (ii)
the trading volume for the Company's Common Stock on the Bulletin Board or a
stock exchange on which the Common Stock is then traded is at or above 75,000
shares during any five-day trading period in the preceding 30 days; and (iii)
there is no materially adverse change in the business of the Company. The
Company may request additional tranches of $4,000,000 during each 30 day period
until the entire $30,000,000 financing commitment is satisfied.
The Selling Shareholders have represented to the Company that they have
acquired the shares of 1998 Series B Convertible Preferred Stock without any
present intention of effecting a distribution of those shares or the shares of
Common Stock issuable on conversion. However, in accordance with the
Subscription Agreement and Registration Rights Agreement, the Company agreed to
register the resale of the shares of Common Stock by the Selling Shareholders to
permit such resales from time to time in the market or in privately-negotiated
transactions. The Company is committed, and will prepare and file, such
amendments and supplements to the Registration Statement as may be necessary in
accordance with the rules and regulations of the Securities Act to keep the
Registration Statement effective until the shares of Common Stock have all been
sold or are available for sale without registration. The Company will bear all
expenses (other than broker discounts and commissions, if any) in connection
with filing the Registration Statement, obtaining its effectiveness, and filing
any necessary amendments or supplements to keep it effective. The Company
agreed to pay a financing fee in connection with the sale of the 1998 Series B
Convertible Preferred Stock equal to 7-1/2% of the gross sales price and to
issue 50,000 shares of restricted Common Stock to a third party which assisted
in facilitating the financing.
Only 300 shares of 1998 Series B Convertible Preferred Stock have been
converted to date. These shares were converted into 98,877 shares of Common
Stock, based on a conversion factor of $3.06 per share, 80% of the average
closing bid price of the Common Stock for the five days preceding the election
to convert of $3.825. The actual number of shares of Common Stock issuable on
conversion of the remaining shares of the 1998 Series B Convertible Preferred
Stock is indeterminate, since it is in part based on the future market price of
the Common Stock. The actual number of shares of Common Stock offered hereby
and included in the Registration Statement of which this Prospectus forms a
part, includes such additional number of shares of Common Stock as may be issued
or issuable on conversion of the 1998 Series B Convertible Preferred Stock by
reason of the floating rate conversion price mechanism, assuming a lower
conversion price than would occur than if the 1998 Series B Convertible
Preferred Stock were all converted at the closing price of $3.6875 on July 17,
1998. In addition, the conversion ratio is subject to adjustment by reason of
any stock split, stock dividend, or similar transaction with respect to the
Common Stock, in order to prevent dilution to the Selling Shareholders. In
accordance with Rule 416 under the Securities Act, such additional shares are
included in this Registration Statement.
RESTRICTED NATURE OF SECURITIES
The shares of 1998 Series B Convertible Preferred Stock and the Common
Stock issuable on conversion were and will be issued in private placements and
are restricted securities as that term is defined in the rules and regulations
adopted under the Securities Act. These securities may not be transferred in
the absence of registration under the Securities Act or the availability of an
applicable exemption from the registration requirements of the Securities Act
and applicable state securities laws. The registration statement of which this
Prospectus forms a part is filed to register the sale by the Selling
Shareholders of the Common Stock to be issued on the conversion of the 1998
Series B Convertible Preferred Stock.
SALE OF COMMON STOCK
The Common Stock may be sold from time to time by the Selling Shareholders
or by pledgees, transferees, or other successors in interest, on the Bulletin
Board or such other exchange on which the Common Stock is listed at the time of
sale, at prices and on terms then prevailing or related to the then current
market price, or directly to purchasers in privately negotiated transactions.
The Common Stock may be sold by various methods, including, but not limited to,
(a) directly to a purchaser in a privately negotiated transaction; (b) to
securities brokers or dealers as principals; (c) in market transactions through
broker-dealers that may receive compensation in the form of discounts,
concessions, or commissions from the Selling Shareholders and/or the purchasers
of the Common Stock for whom they may act as agents; (d) on the closing of a put
position held by the Selling Shareholder or a call position granted by the
Selling Shareholders; (e) in block transactions in which a broker or dealer may
act as an agent of the Selling Shareholder or may position and resale all or a
portion of the block as a principal in order to facilitate the transaction; (f)
in connection with a foreclosure or other transaction by the holder of a
security interest in the stock; or (g) in transactions exempt from the
registration requirements of the Securities Act, including transactions made in
reliance on Rule 144. The Selling Shareholders, and any dealers or brokers that
participate in the distribution of the Common Stock, may be deemed to be
"underwriters" as that term is defined in the Securities Act, and any profit on
the sale of the Common Stock by them and any discounts, commissions, or
concessions received by any such dealers or brokers, may be deemed to be
underwriting discounts and commissions under the Securities Act. The Company
has no understandings or arrangements with broker-dealers in connection with
such sales.
The Common Stock may be sold by the Selling Shareholders from time to time
in one or more transactions at a fixed price, which may be changed, or at
varying prices determined at the time of sale, or at negotiated prices. The
Company will pay the expenses of this offering incident to the registration of
the offer and sale of the Common Stock to the public, other than commissions and
discounts of broker-dealers through which such Common Stock may be sold. The
Company does not intend to enter into any agreement with any securities dealer
concerning solicitation of offers to purchase the Common Stock.
DETERMINATION OF OFFERING PRICE
With respect to the shares of Common Stock offered for sale by the Selling
Shareholders, such shares shall be sold from time to time at such prices as the
Selling Shareholders shall determine may be in their best interests and at which
a willing buyer can be found. Such prices may not be related to the assets,
earnings, or book value of the Company or any other recognized criteria of
value. There can be no assurance that the Selling Shareholders will sell any or
all of the Common Stock subject to this Prospectus.
DESCRIPTION OF SECURITIES TO BE REGISTERED
GENERAL
The Company is authorized to issue 325,000,000 shares of Common Stock,
$0.001 per share par value, and 5,000,000 shares of preferred stock, $0.001 per
share par value. The Company's Common Stock is currently listed on the Bulletin
Board. The board of directors of the Company can authorize the issuance of
additional shares, up to the amount of the authorized capital set forth in the
articles of incorporation, without further action by or approval of the
shareholders.
COMMON STOCK
As of July 21, 1998, the Company had 64,845,811 shares of Common Stock
issued and outstanding. The holders of Common Stock are entitled to one vote
per share on each matter submitted to a vote at any meeting of stockholders.
Holders of Common Stock do not have cumulative voting rights and, therefore, a
majority of the shares represented, in person or by proxy, at a meeting of
stockholders at which a quorum is present are able to elect all members of the
board of directors then standing for election, and if they do so, minority
stockholders would not be able to elect any members to the board of directors.
The Company's bylaws provide that a majority of the issued and outstanding
shares of the Company constitutes a quorum for stockholders' meetings, except to
the extent that a greater percentage quorum is required by statute.
Holders of the Common Stock have no preemptive rights to acquire additional
shares of Common Stock or other securities. The Common Stock is not subject to
redemption and carries no subscription or conversion rights. In the event of
liquidation of the Company, the shares of Common Stock are entitled to share
equally in corporate assets after satisfaction of all liabilities of the Company
and the payment of any liquidation preferences.
The Common Stock is subject to any voting, dividend, or liquidation
preferences that may be established by the board of directors of the Company in
designating a class of preferred stock. The Company currently has outstanding
shares of preferred stock with rights, privileges, and preferences superior to
those of the Common Stock.
Holders of Common Stock are entitled to receive such dividends as the board
of directors may from time to time declare out of funds legally available for
the payment of dividends, subject to the preferential rights of holders of
outstanding preferred stock. The Company has not paid dividends with respect to
its Common Stock. Management anticipates retaining any potential earnings for
working capital and investment in growth and expansion of the business of the
Company and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
1998 SERIES B CONVERTIBLE PREFERRED STOCK
The Company has designated 30,000 shares of Preferred Stock as its 1998
Series B Convertible Preferred Stock. The shares have a par value of $0.001 per
share and a liquidation preference of $1,000 per share, plus all accrued but
unpaid dividends. The shares of 1998 Series B Convertible Preferred Stock bear
a dividend of 6% per annum, pro rated to the date of conversion. The Company
has the option to pay such dividend in cash or by delivery of shares of Common
Stock at the time of conversion. The Company is prohibited from paying
dividends or making other distributions on any stock ranking, as to dividends or
liquidation, junior to the 1998 Series B Convertible Preferred Stock.
Each share of 1998 Series B Convertible Preferred Stock currently
outstanding is convertible into that number of shares of Common Stock determined
by taking the sum of $1,000 plus, at the election of the Company to pay
dividends by the issuance of Common Stock, the amount of any accrued but unpaid
dividends through the conversion date and dividing it by the lesser of (i) 125%
of the average closing bid price of the Common Stock, as reported by Bloomberg,
for the five trading days preceding the issuance of the shares of 1998 Series B
Preferred Stock then being converted; or (ii) 80% of the average closing bid
price, as reported by Bloomberg, for the five trading days preceding the
conversion date. After the initial 8,000 shares are converted, the remaining
22,000 shares of 1998 Series B Convertible Preferred Stock shall, if and when
issued and converted, be converted into that number of shares of Common Stock
determined by taking the sum of $1,000 plus any accrued but unpaid dividends to
be paid in Common Stock and dividing it by the lesser of (i) 125% of the average
closing bid price of the Common Stock, as reported by Bloomberg, for the five
trading days preceding the issuance of each respective block of 1998 Series B
Convertible Preferred Stock; or (ii) 85% of the average closing bid price of the
Common Stock, as reported by Bloomberg, for the five trading days preceding the
conversion date.
The 1998 Series B Convertible Preferred Stock does not have voting rights,
except to the extent that the consent of the holders is specifically required by
the governing provisions of the corporate law of the state of Utah as now
existing or as they may hereafter be amended.
1995 SERIES PREFERRED STOCK
The Company designated 2,391,968 shares as its 1995 Series Preferred Stock.
The shares have a par value of $0.001 per share and a liquidation preference of
$0.10 per share plus all accrued but unpaid dividends. The shares of 1995
Series Preferred Stock bear a dividend of $0.05 per share per annum, payable 30
days after the end of each calendar year, with the first payment to be made on
January 31, 1996. The Company is prohibited from paying dividends or making
other distributions on any stock ranking, as to dividends or liquidations,
junior to the 1995 Series Preferred Stock. The 1995 Series Preferred Stock is
convertible into Common Stock at the rate of two shares of Common Stock for each
share of 1995 Series Preferred Stock. The 1995 Series Preferred Stock does not
have voting rights, except to the extent that the consent of the holders is
specifically required by the provisions of the corporate laws of the state of
Utah as now existing or as they may hereafter be amended. The Company has the
right to redeem the 1995 Preferred Stock on not less than 30 days written notice
at a price of $36.84 per share, plus any accrued but unpaid dividends.
OTHER PREFERRED STOCK DESIGNATIONS
In connection with the acquisition of Danube, the Company authorized the
1996 Series Preferred Stock consisting of 1,250, 000 shares, all of which were
converted to 2,500,000 shares of common stock in 1997.
On May 29, 1997, the Company authorized the 1997 Series A Convertible
Preferred Stock. This series of preferred stock is nonvoting and accrues
dividends at 6% annually. The preferred stock has a liquidation of preference
of $1,000 per share plus unpaid dividends before liquidation payments applicable
to common shares but after liquidation payments to other previously issued and
outstanding preferred stock series. The 1997 Series Preferred Stock along with
unpaid dividends thereon is convertible into common stock at the rate of $1,000
dividend by the lessor of 125% of the average closing bid price for five trading
days prior to issuance or 82% of the average closing bid price for five trading
days prior to conversion. At December 31, 1997, 14,740 of the 15,000 shares of
1997 Preferred Stock, together with accrued dividends, had been converted into
2,763,165 shares of common stock.
During 1997 and 1996, the Company accrued dividends of $423,153 and
$150,592, respectively, with respect to the Preferred Stock outstanding. Of
this amount, $305,325 was paid in 1997 by the issuance of common stock and
$120,000 was paid in 1996 in cash. The cash payment may have been inappropriate
under Utah law due to the existence of a stockholders' deficit, which could
create a right to recover the payment. The Company has not yet paid all of the
accrued dividends with respect to the preferred stock and, until it does so, is
prohibited from paying dividends on any other class of security.
SELECTED PROVISIONS OF THE ARTICLES OF INCORPORATION
Under the Company's Articles of Incorporation, the Company's board of
directors is authorized, without shareholder action, to issue shares of Common
stock and the designated shares of preferred stock into one or more series and
to fix the number of shares and rights, preferences and limitations of each
series. Among the specific matters that may be determined by the board of
directors are the dividend rate, the redemption price and terms of a sinking
fund, if any, conversion rights, if any, the amount payable in the event of any
voluntary or involuntary liquidation or dissolution of the Company, and voting
rights, if any.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Interwest Transfer
Company, 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, telephone
(801) 277-1400.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity of the issuance of the Common Stock offered hereby will be
passed on for the Company by Kruse, Landa & Maycock, L.L.C.
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997, included in this Prospectus, have been audited by Hansen, Barnett &
Maxwell, independent certified public accountants, as indicated in their report
with respect thereto, and are included herein in reliance on the authority of
such firm as experts in accounting and auditing.
Certain information concerning proved reserves with respect to the
Company's Slovakian interests has been included based on a report from Ryder
Scott Company, Petroleum Engineers, and is included in reliance on their report
and the authority of such firm as experts in petroleum reserves.
INFORMATION WITH RESPECT TO THE REGISTRANT
DESCRIPTION OF BUSINESS AND PROPERTIES OF THE COMPANY
General
EuroGas, Inc. (the "Company"), is primarily engaged in the acquisition of
rights to explore for and exploit natural gas, coal bed methane gas, and other
hydrocarbons. The Company has acquired interests in several large concessions
and is in various stages of identifying industry partners, farming out
exploration rights, undertaking exploration drilling, and seeking to develop
production. One of the Company's early projects was a coal bed methane gas
concession in Poland that was sold, with a retained interest, to a subsidiary of
Texaco, Inc. ("Texaco"). In connection with this transaction, the Company gave
Texaco a right of first refusal to acquire a controlling interest in two other
coal bed methane concessions the Company holds in Poland. The Company has
subsequently been granted another concession in Poland and has entered into an
agreement with Polish Oil and Gas Company ("POGC") to jointly explore 1.9
million acres in which POGC holds, or has the right to acquire, interests. The
Company has also recently entered into an agreement with Zahidukrgeologia, an
Ukrainian state geological enterprise, and a joint venture agreement with
Makyivs'ke Girs'ke Tovarystvo ("MGT"), both to expand the Company's potential
exploration into Ukraine.
The Company also holds an interest in a potential natural gas field located
in Slovakia (the "Trebisov Area"). It is a joint venture partner there with
NAFTA Gbely a.s. ("NAFTA"), an energy concern that was formerly part of the
national oil and gas company. The Company has drilled five wells on this
location and is currently drilling a sixth. On completion of all six wells, the
installation of a production gathering system, and the construction of a
pipeline to an existing transmission facility, the Company anticipates
commencing natural gas production from this area.
The Company recently acquired EuroGas Jakutien Exploration GmbH ("EJ"),
formerly known as OMV (Jakutien) Exploration GmbH, from OMV Group ("OMV").
EJ holds a 50% interest in a joint venture established to explore for oil and
gas in the Sakha Republic in northeastern Siberia. The Company also holds an
interest in an oil and gas project in Canada and, in March 1998, purchased an
interest in a talc deposit located in Slovakia. During 1997, the Company
terminated an earlier interest it held in the Czech Republic. Finally, the
Company has entered into a letter of intent to acquire an interest in a
concession located close to the Trebisov Area.
The Company is in the early stages with respect to its exploration
interests and has not yet established production or a source of revenues. The
Company has been dependent to date on equity financings to meet its funding
needs and anticipates that it will continue to be so for the foreseeable future.
As a result of amounts spent in obtaining its concessions and its interests
in the joint ventures, negotiating and completing the acquisition of businesses
and exploration interests, completing exploration work to date, and funding the
ongoing activities of the Company, the Company had an accumulated deficit of
$33,996,397 at March 31, 1998. The Company did have working capital of
approximately $4.5 million at March 31, 1998, and has received net proceeds of
approximately $7.4 million for the issuance of 8,000 shares of 1998 Series B
Convertible Preferred Stock since that date. Due to the substantial drilling
and exploration commitments of the Company and its current lack of production,
the Company expects that it will continue to incur losses and that its
accumulated deficit will increase. The Company has not had recurring revenues
and does not currently have established production or any other source of
operational revenues. The Company has funded its cash flow requirements to date
through a series of equity and debt transactions. There can be no assurance
that this source of funding will continue to remain available to the Company.
If available, there is no assurance that it will provide the level of financing
necessary for the Company to meet its business objectives or even the Company's
existing obligations. (See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.")
When used herein, the "Company" includes EuroGas, Inc., and its wholly-
owned subsidiaries, Danube International Petroleum Company ("Danube"), EuroGas
Europe B.V. ("EuroGas Europe"), EuroGas Jakutien Exploration GmbH ("EJ,"
previously OMVJ), EuroGas Polska Sp. zo.o., Beaver River Resources, Ltd.
("BRRL"), and Energy Global A.G. ("Energy Global"), and the subsidiaries of each
of these subsidiaries, including GlobeGas B.V. ("GlobeGas"), Pol-Tex Methane, Sp
zo.o. ("Pol-Tex"), McKenzie Methane Ribnik Sp. zo.o. ("MMR"), McKenzie Methane
Jastrebie Sp. zo.o. ("MMJ"), Danube International Petroleum Holding B.V.
("Danube Netherlands"), Central European Petroleum N.V. ("Central European"),
the TAKT Joint Venture ("TAKT"), and the NAFTA Danube Association ("Danube
Slovakia"). The Company also holds a 55% interest in RimaMuran s.r.o.
("RimaMuran"), and a minority interest in United Gunn Resources, Ltd. (See the
discussion under "History" below.)
Forward Looking Information May Prove Inaccurate
This Prospectus contains certain forward looking statements and information
relating to the Company and its business that are based on the beliefs of
management of the Company and assumptions made based on information currently
available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including establishing beneficial
relationships with industry partners to provide funding and expertise to the
projects of the Company, locating commercial deposits of methane and natural gas
on the Company's concessions and licenses, the successful negotiation of
additional licenses and permits for the exploitation of any reserves located,
the successful completion of wells, the economic recoverability of in place
reservoirs of hydrocarbons, the successful addressing of technical problems in
competing wells and producing gas, the success of the marketing efforts of the
Company, the ability of the Company to establish required facilities to gather
and transport hydrocarbons that may be produced, and the ability of the Company
to obtain the necessary financing to successfully complete its goals. Should
one or more of these or other risks materialize or if the underlying assumptions
of management prove incorrect, actual results of the Company may vary materially
from those described. The Company does not intend to update the forward looking
statements contained in this report, except as may occur as part of its ongoing
periodic reports filed with the Securities and Exchange Commission.
Activities in Poland
General
The Company believes that Poland offers an attractive environment in which
to explore for and develop methane gas. The Republic of Poland is bordered on
the north by the Baltic Sea and Russia, on the west by Germany, on the south by
the Czech Republic and the Slovak Republic, and on the east by Lithuania,
Belarus, and Ukraine. Poland is comprised of approximately 120,000 square
miles, with a population of approximately 40 million people. Between 1945 and
1989, Poland's communist political and economic systems were directly influenced
by the former Soviet Union. In 1989, Poland peacefully asserted its
independence, adopted a new constitution which established a parliamentary
democracy, and began its transition to a market based economy.
In August 1991, the United States Environmental Protection Agency (the
"EPA") and the United States Agency for International Development ("AID")
published a joint study on the possibility of economic recovery of methane gas
associated with Poland's extensive hard coal reserves. The joint study
concluded that coal bed methane was an abundant underdeveloped natural gas
resource in Poland and that the development and exploitation of this resource
would provide a source of energy for Poland that was much less environmental
harmful than its extensive reliance on coal. The joint study stated that the
potential methane reserves were significant, estimating a total methane resource
associated with all coal mine concessions in Poland (both active and inactive
mines) of in excess of 1.3 trillion cubic meters. Shortly thereafter, Poland
began to solicit bids for concessions to explore for coal bed methane gas.
Coal bed methane gas production has been occurring for some time in the
United States and has drawn attention recently in Poland due in part to the
joint EPA/AID study. The Polish Concessions were originally pursued by
management of GlobeGas as they realized that there was a growing demand in
Europe for this type of fuel that is a cleaner and more efficient source of
energy than coal. The Polish government adopted the position that production of
the potential methane reserves would not only benefit the country economically
but could also significantly reduce air pollution and acid rain in the country.
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.
Poland has an extensive collection pipeline network readily accessible to
it that should facilitate the transmission and sale of any gas discovered on the
concessions in which the Company holds an interest.
The Pol-Tex Concession and Related Matters
In January 1993, the Company's wholly-owned subsidiary, Pol-Tex, was
awarded exploration rights for coal bed methane gas in a concession located in
the Upper Silesian Coal Basin in Poland (the "Pol-Tex Concession"). In
September 1993, the Company's wholly owned subsidiary, GlobeGas, entered into a
joint venture agreement with Rybnicka Spolka Weglowa SA to form McKenzie Methane
Ribnik Sp. zo.o. ("MMR") to exploit a second concession located in the Upper
Silesian Coal Basin. The interest of Rybnicka Spolka Weglowa SA was
subsequently purchased by Pol-Tex and the concession held by MMR was
relinquished to Pol-Tex and is now included in the new concession held by Pol-
Tex (see discussion below). In March 1996, the Company's 85%-owned subsidiary,
McKenzie Methane Jastrzebie Sp. zo.o. ("MMJ"), entered into a joint venture
agreement with Jastrzebska Spalka Weglowa with respect to a third concession in
the same area. These concessions are located in south central Poland.
In August of 1997, the Company completed an agreement with a subsidiary of
Texaco Incorporated ("Texaco") to sell the Pol-Tex Concession, the largest of
the coal bed methane gas concessions in Poland then held by the Company, to
Texaco in exchange for an initial payment $500,000. The agreement granted
Texaco the right to commence an initial drilling program to appraise the
concession and then to proceed to develop the concession, if warranted. The
agreement also grants a first right of refusal to Texaco to obtain a controlling
interest in two other Polish concessions (the MMR and MMJ concessions) upon
which EuroGas intends to conduct development activities. The transaction
included the sale of approximately $200,000 in fair market value of assets and
equipment.
Since August of 1997, Texaco has drilled five exploratory wells and a
disposal well on the Pol-Tex Concession. Texaco is seeking approval to install
gas and water separators in order to begin test production on these wells.
At the end of an 18-month period (approximately February of 1999), Texaco
can elect to continue to work on the Pol-Tex Concession in exchange for a
$2,500,000 payment to the Company. If Texaco elects to proceed, it has up to 30
months to undertake development work on the Pol-Tex Concession and then Texaco
must elect whether or not to complete the acquisition of the Concession. If
Texaco then elects to proceed, it must pay the Company an additional $2,500,000
and 14% of the net profit from the sale of the first 500 billion cubic feet of
methane gas; 16% of the net profit from the sale of the next 500 billion cubic
feet; 18% of the net profits of the next 1 trillion cubic feet sold; and 20% of
the net profits thereafter. If Texaco elects not to proceed after the initial
18 months, the Company would receive the Concession back, with any improvements,
subject to the approval of the Polish Ministry. If Texaco elects not to proceed
after the development phase, the Company can reacquire the Concession at a price
to be determined by the parties or a third party appraiser, again subject to
approval by the Polish Ministry.
In addition, the Company also granted Texaco the first right of refusal to
acquire control of its coal bed methane concessions in Poland known as the MMR
and MMJ concessions, at a price to be determined either by the parties or a
third party appraiser. For now, the Company will continue to operate the MMR
and MMJ concessions.
On October 13, 1997, the Company received an additional concession from the
Polish Ministry of Environmental Protection of Natural Resources and Forestry to
explore and potentially develop 110 square kilometer coal bed methane
concession. At the same time, MMR relinquished its concession and this is now
included in the larger concession held by Pol-Tex. The Company plans to conduct
a feasibility study to explore the possibilities of drilling gas wells for a
combined heat and power plant project or other uses. The terms of the
concession only requires the expenditure of $40,000 per year pending completion
of a feasibility study and negotiations with third parties for the eventual
purchase of natural gas if found.
On October 23,1997, the Company completed an agreement with Polish Oil &
Gas ("POGC") to undertake additional appraisal and development activities for a
large area located in the Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total expenditure by the Company of $15
million (US) over a three-year period. The parties established a joint team
whose initial work is the interpretation of the data generated by a $1.5 million
(US) wide-line seismic work program which was conducted in the Rymanow-Leske
area of the Carpathian Mountains in southeastern Poland. The technical team
expects to use the interpreted data to select the site for drilling a deep well
(5,000 to 5,500 meters) later in 1998.
Since the Company does not currently have the funds necessary to meet the
proposed development budget, it may seek to obtain an established industry
partner to participate in the proposed joint venture. There can be no assurance
that the Company will be able to do so or that such participation would be on
terms favorable to the Company.
The Company has also been investigating the formation of a consortium of
power companies to purchase methane gas that may be produced from the Polish
concessions in which it holds an interest (excluding the concession sold to
Texaco) and to fund the construction of a proposed power plant. In June 1998,
the Company entered into a co-operation agreement with National Power
International Limited, a United Kingdom based power company, to investigate the
commercial viability of submitting an offer to Elektrocieplowna Zieona Gora
S.A., a state-owned entity in Poland that owns and operates energy plants
("ECZG"), to jointly develop and build a gas-steam energy plant that would
produce both electricity and thermal heat. The Company and National Power have
committed, under the terms of the co-operation agreement, to make the decision
whether to submit a bid to ECZG by August 31, 1998. If the parties decide to
proceed, they will be equal partners in a new joint venture formed for
submitting the bid, although National Power will retain control of the entity
and the project, subject to National Power carrying a portion of the Company's
costs equal to 5% of the project.
Activities in Slovakia
As part of its intent to diversify and expand its interests in Europe, in
July 1996, the Company acquired Danube International Petroleum Company
("Danube") which held rights to participate in the exploration for natural gas
in the Slovak Republic and the Czech Republic. (See discussion under "History"
below.) The Company has focused on the development of the Slovakian project,
and abandoned its interest in the Czech Republic during 1997. Danube is a
partner in a joint venture agreement (the "Slovakian Oil & Gas Joint Venture")
with NAFTA Gbely A.S. ("NAFTA") organized for natural gas exploration and
development under a license covering 128,000 acres located in the East Slovakian
Basin, a northeastern extension of the Pannonian Basin which covers large parts
of Hungary and the southeastern part of Slovakia. The joint venture now
operates pursuant to an exploration permit that expires April 24, 1999. The
Slovakian Oil & Gas Joint Venture recently drilled five exploration wells and
has commenced a sixth well. In late 1996, NAFTA and the Company agreed to add
an additional area of mutual interest to their joint activities (sometimes
referred to as the Lipany area).
In March 1998, the Company acquired a 55% interest in RimaMuran s.r.o.
("RimaMuran"), a closely-held entity whose principal asset is a 43% interest in
Rozmin s.r.o., a joint venture which holds the Gemerska Talc Deposit located
near Roznava, Slovakia.
Slovakia was until recently part of Czechoslovakia. On January 1, 1993,
the Czech Republic and the Slovak Republic emerged as separate independent
nations. Slovakia is bounded on the north by Poland, on the east by Ukraine, on
the south by Hungary, and on the west by Austria and the Czech Republic.
Slovakia has an area of approximately 19,000 square miles and a population of
approximately 5.5 million people. Slovakia has not been as quick to adopt free
market reforms as Poland and the Czech Republic and the former communist party,
Party of the Democratic Left, remains a major political force. The Slovak
Republic is a member of the International Monetary Fund and the European Bank
for reconstruction and development and an associate member of the European
Union. Bratislava is the capital of Slovakia and its largest city.
The main economic segments of Slovakia are agricultural and manufacturing.
Various foreign companies have located manufacturing plants in Slovakia, taking
advantage of skilled, cheap professionals and other labor, as well as the close
proximity to "Western" Europe. A prime example of this is Volkswagen A.G.,
which has located manufacturing facilities in Slovakia. Energy in Slovakia is
primarily provided by massive gas and oil imports from countries formerly a part
of the Soviet Union. Domestic production of oil and gas cover only a small
percentage of Slovakia's energy needs.
Slovakian Oil & Gas Joint Venture
The activities of the Slovakian Oil & Gas Joint Venture with NAFTA are
conducted pursuant to a three-year exploration permit granted on April 24, 1996
(the "License"). As it continues its exploration and development on the area
subject to the License, the Joint Venture will seek to acquire additional
permits that have not yet been granted. Recently, an area known as Lipany was
added to the Slovakian Joint Venture. Prior to the Company acquiring its
interest in the Slovakia Oil & Gas Joint Venture 11 wells were drilled in the
area covered by the License between 1960 and 1982. All of these wells had gas
shows, though none were completed for commercial production. The Company
believes that new wells can be drilled offsetting the old wells that, if they
have similar gas shows, can be completed with routine techniques that now exist
for the recovery of gas from these types of formations.
The Slovakian Oil & Gas Joint Venture drilled its initial well, Trebisov 5R
in what is known as the South Cluster, which encountered a 980 meter thick gas
column subdivided into an upper interval (appearing at 1575 mete-s - 2100 meters
below ground level) and a lower interval (2100 mete-s - 2555 meters deep). In
December of 1996, after hydrological fracturing, the upper interval tested 1
million cubic feet of gas ("MMcf") per day through a 10 millimeter choke with a
flowing pressure of 450 pounds per square inch ("psi") and the lower interval
tested 0.4 MMcf per day through a 8 millimeter choke, with a flowing pressure of
275 psi. The tests were preliminary and were conducted prior to the cleaning up
of the well and removing water from the well.
Subsequently, the Joint Venture has completed the drilling of four
additional wells and is currently drilling a sixth well. In consultation with
its technical consultant, Schlumberger, the joint venture has decided to
complete all the wells drilled, construct a processing plant and tie production
to a nearby gas pipeline by the end of the 1998 year or in the first quarter of
1999. This schedule is dependent, among other things, on being able to obtain
the necessary construction permits. The Company recently engaged Ryder Scott
Company, a petroleum engineering firm, to prepare a reserve analysis on the
Trebisov reservoir. The reserve report concluded that the Company had total
proved reserves of 94,880 barrels of oil/condensate and 5,487 million cubic feet
of natural gas. Of this amount, 15,824 barrels of oil/condensate and 868
million cubic feet of natural gas are undeveloped proved reserves. Based on the
report, the proved reserves have a net present value, holding costs steady and
using a net present value discount factor of 10%, of approximately $7.3 million.
The joint venture is also completing 3D seismic surveys in the northern
Trebisov area and if the results warrant, if plans to drill an exploration well
in that area. The Company has recently reduced its projected budget for this
area and currently expects to spend approximately $5 million during the
remainder of 1998 for its share of the costs in Slovakia. These expenditures
should permit the Company to meet all its contractual commitments outlined
below.
Under the terms of the agreement, the Company was obligated to provide 75%
($4.98 million) of the projected initial test phase 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. In addition to the wells, the Company is
obligated to complete a seismic program to collect additional geophysical data.
All funds required for the initial test phase have been expended and the
drilling is now being paid 60% by the Company and 40% by NAFTA. When the cost
of development and production exceeds $6.8 million, additional funds will be
paid 50% by the Company and 50% by NAFTA. The current projections indicate that
this limit will be exceeded later this year. (See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
In late 1996, the Company and NAFTA agreed to add an additional area in the
Lipany region of Slovakia as part of the joint venture. This area consists of
approximately 26,000 acres located in the northeastern part of Slovakia and lies
within a geological structure known as the Central Carpathian Paleogene Basin.
Six wells were drilled by the Communist regime in Lipany and tested with either
gas and/or oil showings. Those wells have not been plugged and the joint
venture may investigate re-entering those wells. The Company had originally
intended to farm out this additional area to a third party, but has determined
not to complete the farm out as previously contemplated.
During March of 1998, the Company was informed by NAFTA that there may be
certain title problems related to areas of mutual interest proposed to be
explored and developed by the Slovakian Oil & Gas Joint Venture outside of the
Trebisov area. All of the wells drilled by the Company to date are located in
the Trebisov area and the Company is not aware of any title problems with these
wells. The disputed area is located in the southern portion of the property
covered by the joint venture agreement and is subject to a competing claim of
ownership by a private Slovakian company. The Company has notified the former
shareholders of Danube of a claim against them by reason of this recent problem.
(See "LEGAL PROCEEDINGS.") The Company has entered into an agreement to acquire
the rights to the disputed area. The closing of the transaction is subject to
the meeting of certain conditions but provides for the acquisition of the rights
in exchange for the issuance of 2,500,000 shares of restricted common stock and
a warrant to acquire up to an additional 2,500,000 shares of restricted Common
Stock at an exercise price of $5.00 per share. The Company would acquire a
67.5% working interest in the area and agree to pay the costs of the 22.5%
working interest holder for the initial two wells drilled.
The Slovakian Oil & Gas Joint Venture is managed by a joint management
committee consisting of four appointees of each of the joint venture
participants. Major decisions with respect to the development and operation of
the Slovakian Concession require the approval of the joint management committee.
Action taken by the joint management committee is required to be unanimous. The
Company, through its subsidiary, Danube, acts as the operator of the Slovakian
Concession during the initial test phase and for all subsequent drilling and
testing operations. NAFTA acts as the operator for production operations. All
of the assets acquired by the joint venture are owned 50% by each of the
participants. If one of the participants wishes to undertake any drilling,
testing, production, or exploration work on the Slovakian Concession and is
unable to obtain the approval of the joint management committee, it can proceed
with the work at its own expense and risk. Any party drilling a successful well
under such conditions is entitled to recover 200% of the direct investment in
the well if it is drilled in an existing field or 400% of the direct investment
if the well is a wildcat well.
The Slovakian Oil & Gas Joint Venture has not entered into any contracts
for the sale or transportation of any gas that might be recovered. If the Joint
Venture is unable to obtain the necessary permits or if it is unable to
establish ongoing production and sell the gas at a sufficiently high price to
pay the associated production costs, provide a return on the capital
expenditures made, provide funds for ongoing activities, and provide a profit,
it may be unable to continue its exploration and development activities or
successfully produce any natural gas that may exist on the concessions.
Slovakian Talc Deposit
In March 1998, the Company acquired a 55% interest in RimaMuran s.r.o.
("RimaMuran"), a closely-held entity whose sole asset is a minority interest in
a talc deposit (the "Gemerska Poloma-Talc Deposit") located approximately 50
kilometers west of Kosice in eastern Slovakia. The majority interests are held
by Thyssen Schachtbau GmbH, a leading international mining engineering company,
and Dorfner AG, a leading German processing and refining company for industrial
minerals. Exploratory holes drilled between 1987 and 1994 confirmed the
existence of a large talc deposit located approximately 350 meters, or 1150
feet, below the surface and a feasibility study has been completed. The parties
to the venture have received an indication that the project may be financed in
part by a German development bank, in exchange for the grant of an equity
interest to the bank, but no final agreement for such financing has been
reached.
RimaMuran currently has the obligation to fund 43% of the projected $12
million of capital costs over the next two and one-half years. RimaMuran does
not have the assets necessary to meet this obligation, and it is anticipated
that the necessary funding will be provided by a third-party financing source or
by the Company. While initial exploration activities have indicated the
existence of a large talc deposit, the commercial recovery of the talc has not
been established.
Activities in the Sakha Republic
On June 11, 1997, the Company acquired all of the issued and outstanding
stock of OMV (Jakutien) Exploration GmbH from OMV A.G., Austria's largest
industrial concern, in exchange for $6,252,754 (US), an option to acquire up to
2,000,000 shares of the Company's common stock, a 5% interest in the acquired
company's net profits from identified preliminary oil and gas licenses, and 1%
of gross production of the TAKT Joint Venture outside such licenses.
Subsequently, the subsidiary's name was changed to EuroGas Jakutien Exploration
GmbH ("EJ").
EJ's primary asset is a 50% interest in the joint venture (known as "TAKT")
with Sakhaneftegas, the national oil and gas company of the Sakha Republic. The
conversion of TAKT to a joint stock company with limited liability was approved
by the Company and Sakhaneftegas on December 1, 1997. TAKT was formed to
appraise, explore, and develop, and, when appropriate, exploit oil and gas
reserves, in two large areas of interest located in Yakutia (officially known as
the Sakha Republic and often referred to as "Jakutien" in German and "Yakutia"
or "Yakut" in English). Yakutia has the largest land area of the members of the
Russian Federation and is located in the far eastern portion of what was
formerly the Soviet Union. TAKT has negotiated a detailed agreement with the
Sakha Republic and the Russian Federation for the exploration, production, and
development of hydrocarbons located in the areas of interest. This agreement is
subject to execution and approval by the legislative bodies of the Sakha
Republic and the Russian Federation, which approval is currently being sought.
One of the concessions held by TAKT encompasses approximately 14,400 square
kilometers and is located approximately 325 kilometers to the northeast of
Lensk. The other smaller block which covers approximately 6,900 square
kilometers is located approximately 75 kilometers north of Lensk.
Yakutia is thinly populated (just over 1,000,000 people) and covers
approximately 3,100,000 square kilometers that the United States Geological
Service has rated as extremely rich in natural resources. There has been
limited commercial exploitation of hydrocarbons in Yakutia. Current production
is generally limited to providing fuel for heat and energy to local urban and
industrial complexes, partly because of the general remoteness of the area and
the poor transportation network currently in existence. Since 1991, the
Yakutian government has put in place an economic and legal system that is
designed to encourage foreign investment and the export of hydrocarbons. The
Company's interest in acquiring EJ was based in large part on the Company's
belief that TAKT is well-positioned to participate in the perceived
international gas export project which has been envisioned pursuant to
feasibility studies conducted by Korean, Chinese, and Japanese consortiums.
TAKT currently holds two exploration blocks located north of the city
Lensk, which cover approximately 23,300 square kilometers (approximately 8,225
square miles) located in the southeast of the East Siberian platform or East
Siberian Basin. An application to extend the two exploration licenses for an
additional 20 years was submitted to the Sakha Ministry of Justice in January
1998. TAKT also holds first right refusal on adjoining exploration blocks.
TAKT has been conducting activities within the two blocks for the past six
years, employing modern seismic and exploration techniques with encouraging
results. The exploration for and, if justified, the production of,
hydrocarbons, in Yakutia is made more difficult by the climatic conditions, the
general remoteness of the area, and the lack of infrastructure. The area is
subject to extreme arctic conditions and does not have any facilities for
transporting hydrocarbons to existing markets. The Company's ability to exploit
any potential benefit from this project will rely in part on the activities of
other independent entities in constructing the necessary infrastructure and
establishing markets for hydrocarbons.
Under the terms of the proposed Exploration and Production Sharing
Contract, the exploration phase, which is expected to last for another three to
five years, is estimated to cost in its entirety approximately $28 million (US)
of which EJ's share would be $14 million (US). At the time of the acquisition
of EJ, OMV informed the Company that approximately $6,000,000 had previously
been spent by EJ. Under the proposed agreement, TAKT has also agreed with the
Yakutian government to spend 2.5% of its budget in the exploration phase for
environmental and social concern obligations and another 2.0% of the development
stage expenditures, but in no event will these collective commitments exceed $30
million (US). Such expenses are recoverable against royalties and profits
payable. The production carries with it an 8% royalty and a 40% net profit
interest payable to the Yakutian and Russian Federation governments.
Principal work which should be undertaken during 1998 will be to reprocess
17 kilometers of seismic information. The reprocessing work will be done by
Yakutskgeofisika, the geophysical arm of Sakhaneftegas. The parties are now
discussing whether or not a second well could be spudded prior to year-end.
EJ and Sakhaneftegas each appoint two members to the board of directors of
TAKT with EJ having the right to nominate the chairman who holds the tie-
breaking vote. Unanimous votes are required for any amendments of the joint
venture itself, the admission of new partners, any buying or selling of shares,
reappointment or dismissal of the director general, and certain other specified
actions.
EuroGas has selected Wolfgang Rauball and J. Toni Preuss as its
representatives, with Wolfgang Rauball to serve as the chairman.
Activities in Canada
The Company has acquired an interest in the Beaver River natural gas field
located in northeastern British Columbia. The gas field was originally
developed by Amoco Canada in the 1960s and was one of the largest producing gas
fields in British Columbia. Technical problems led to excess water production
and Amoco shut-in the field in 1978. However, a subsidiary of Canadian
Occidental Petroleum has entered into an agreement and is working on the field
in an attempt to reestablish commercial natural gas production in the project
using up-to-date technology. It will, if warranted, spend up to $13 million
(US) on the project before requiring any participation from the other working
interests. The contracting parties amended the terms and structure of the
transaction to some degree so that the Company has exercised a portion of its
option by first purchasing 993,333 units of United Gunn Resources, Ltd. (one
share of common and one warrant), for a total of $950,000 (US). United Gunn
Resources, Ltd. holds an approximately 12% working interest in the project. The
Company completed the exercise of its option by acquiring an entity with a
direct 16% working interest in the project in exchange for $300,000 and the
issuance of 2,400,000 shares of restricted common stock. The Company will
retain the right to purchase back 1,900,000 of the 2,400,000 shares of
restricted common stock, for return of the interest, any time prior to April 15,
1999 if the Company determines that the results produced do not warrant the
continued holding of the 16% interest.
Activities in the Ukraine
The Company has entered into an Agreement on Joint Investment and
Production Activities with an Ukrainian state-owned company, Zahidukrgeologia,
to explore and, if justified, develop a license area currently held by
Zahidukrgeologia. The agreement also provides for the potential expansion of
its scope to cover an additional nine prospects on the joint agreement of the
parties and the approval of the State Committee of Geology. Zahidukrgeologia
contributed its existing license, existing geological data, and its experience
in facilitating the approval of the proposed projects. The Company will be
responsible for all of the future costs associated with exploration, drilling,
completing, and equipping wells. Any profits of the joint venture will be split
70% to the Company and 30% to Zahidukrgeologia until the Company has received an
amount equal to the amount it has spent and 50% to each of the parties
thereafter. The Company is looking for an industry partner to participate in
the exploration activities and has recently signed a Confidentiality Agreement
with a major European energy concern concerning its possible participation in
this and other Ukrainian projects.
The Company has also entered into a Statutory Agreement of Association of
Limited Liability Company with Foreign Investments with MGT to form a limited
liability company under the name "Eurodongas." The limited liability company
will be formed for the purpose of exploring for and, if justified, developing
three methane gas prospects. The Company will hold a 50% interest in this
limited liability company with administrative control and will be obligated to
fund the operations. The Company is entitled to receive 70% of the
distributions until its contributions have been returned and then profits will
be split 50% to each participant.
Finally, the Company has an agreement with Ukrnafta, a joint stock company,
to explore and, if justified, develop a concession located in the Ukraine which
is, in part, a continuation of the geological formation underlying the Company's
interests in Poland. This concession is in the very early stages of
exploration.
The Company has very recently entered into a joint venture with RWE-DEA
Altiengesellschaft for Mineraloel and Chemie AG ("RWE-DEA") that gives RWE-DEA
the right to select the Ukrainian properties that the joint venture will explore
and, if justified, develop. Under the terms of the joint venture, the Company
and RWE-DEA will be equal owners, although RWE-DEA will maintain administrative
control and will be the operator of any proposed activities.
Risks Associated With the Stage of Exploration and Location of Company's
Interests
The Company has acquired interests in potential oil and gas projects that
are in the very early stages of exploration based on management's belief that
these projects have sufficient potential for reserves to justify the acquisition
and exploration costs. However, none of these projects, other than the Trebisov
Area in the Slovak Republic, have been sufficiently developed to establish the
existence of recoverable hydrocarbons, and the Company does not currently have
production or established revenues. The value of the interests held by the
Company is entirely dependent on the successful completion of its exploratory
activities, of which no assurance can be given.
The Company's activities carry with them certain risks in addition to the
risks normally associated with the exploration and development of hydrocarbons.
Each of the eastern European former Soviet Union countries in which the Company
has obtained or is obtaining concessions (Poland, Slovakia, Yakutia, and the
Ukraine) are in the process of developing capitalistic economies. Many of their
laws, regulations, and practices with respect to the exploration and development
of hydrocarbons have not been time tested or may not yet be complete or fully
adopted. Each of the governments have announced attempts to provide
opportunities for foreign investment which has been one of the factors
encouraging the Company's attention to oil and gas development in eastern
Europe. Additionally, each of the governments, state agencies, and national
companies with which the Company now deals have demonstrated a significant
degree of stability and reliability. Nonetheless, there remains a risk that any
change in the government itself, government personnel, or the development of new
policies and practices may adversely effect the Company's holdings at some
future date.
Furthermore, the Company's concessions and licenses are often subject,
either explicitly or implicitly, to ongoing review by governmental ministries.
In the event that any of the countries elect to change the governing laws and
regulations, it is possible that the government might seek to annul or amend the
governing agreements in a manner unfavorable to the Company or impose additional
taxes or other duties on the activities of the Company. As a result of the
potential for political risks in these countries, it remains possible that the
governments might seek to nationalize or otherwise cause the interest of the
Company in the various concessions and licenses to be forfeited.
Environmental Compliance
Each of the countries in which the Company holds interests has, and
continues to adopt, laws governing environmental concerns and the Company's
drilling and exploration activities are required to be conducted in accordance
with these laws. While these laws are not usually as fully developed and
detailed as similar laws that exist in the United States, the Company is
required to conduct its operations in compliance with such laws and must prepare
and submit to the appropriate agency various operational plans, including a
discussion of environmental matters, which must be approved before the Company
can proceed. The Company may incur significant liabilities in connection with
its operations in the event that it does not fully comply with the environmental
regulations.
Competition
In seeking to explore for, develop, and produce oil and gas, the Company
competes with some of the largest corporations in the world, in addition to many
smaller entities involved in this area. Many of the entities that the Company
competes with have access to far greater financial and managerial resources than
the Company. As a result of the exclusive nature of the concessions held by the
Company, to the extent that it is able to successfully explore for, develop, and
produce hydrocarbon resources, the Company will be able to exclude any
competitor from production of the resources located on the concessions, but it
cannot exclude competitors from providing natural gas or other energy sources at
prices or on terms that purchasers deem more beneficial.
Employees and Consultants
The Company has two administrative employees located in Salt Lake City,
Utah; six technical and field workers in Poland; one project manager in
Slovakia, and an engineer located in Vienna, Austria. The Company's four
principal consultants are located in Europe. None of the Company's employees is
represented by a collective bargaining organization, and the Company considers
its relationship with its employees to be satisfactory. In addition to its
employees, the Company regularly engages technical and other consultants to
provide specific geological, geophysical, and other professional services.
Because the Company has concentrated primarily on acquiring concessions for
later exploitation rather than operating them during 1997, the Company has
relied principally on consultants who are paid one-time fees for their work and
assistance. The Company expects to rely substantially on consultants for 1998,
but expects thereafter to rely more on employees and permanent operating
personnel.
Operational Hazards and Insurance
The Company is engaged in the exploration for methane and natural gas and
the drilling of wells and, as such, its operations are subject to the usual
hazards incident to the industry. These hazards include blowouts, cratering,
explosions, uncontrollable flows of gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
activities. The Company has not as yet obtained any hazard insurance although
it has applications pending. The occurrence of a significant adverse event
that is not covered by insurance would have a material adverse effect on the
Company.
Office Space
The Company leases the 35th floor and penthouse of the building located at
80 Broad Street, New York, New York, consisting of approximately 8,800 square
feet, under the terms of a sublease ending on August 31, 2000. The rent under
this lease is $11,025 per month and required an initial prepaid rent of $481,100
on execution. The Company received a rent allowance equal to the first four
months of the lease term commencing on September 1, 1996. The monthly lease
payments are subject to annual escalation, based on the operating expenses of
the building. The offices are currently occupied by the Company's public and
shareholder relations firm that currently provides services to the Company in
lieu of rent. The Company expects to use more of the space itself as its
operations expand.
The New York office maintains the Company's Website at http://www.eugs.com
and also has available, for interested stockholders, maps and other material
concerning the Company's activities.
On September 3, 1996, the Company entered into a three-year lease for
property located at 942 East 7145 South, #101A, Midvale, Utah, that provides for
monthly payments of $1,631.40. The lease provides for annual increases in the
lease payment in an amount equal to the increase in Consumer Price Index;
provided that, such annual increase shall be not less than 6% or greater than
10%.
The Company maintains an office (approximately 600 square feet) at Parkring
10 A-1010 Vienna, Austria, that has a monthly rental of approximately $3,240
(US). The Company also has an office located at Chilehaus A Fischertwiete 2,
20095, Hamburg, Germany, with a monthly rent of approximately $2,603 (US) that
the Company anticipates it will terminate later in 1998. The Company also rents
105 square meters of space located in Dusseldorf, Germany, under the terms of a
six-year lease expiring March 31, 2004. The monthly rent is approximately
$2,180, subject to cost of living adjustments. Finally, the Company owns
an office with approximately 2,230 square feet in Warsaw, Poland.
History
The Company was incorporated in the state of Utah under the name
Northampton, Inc. ("Northampton"), on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with Energy Global, the
initial step in the Company becoming an oil and gas development stage entity,
which turned control of the Company over to the former owners of Energy Global.
Energy Global had been formed as a holding company for GlobeGas, an operating
entity in which it held a minority interest. The minority interest in GlobeGas
was initially reported on the equity method on Northampton's financial
statements.
The agreement with Energy Global required that Northampton complete a stock
consolidation of one share for each twenty-four shares previously issued and
outstanding and deliver a sufficient number of post-consolidation shares of
common stock to the former owners of Energy Global to reduce the prior
shareholders' interest to approximately 10%. (See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.") Thus the former shareholders of Energy Global became
the controlling shareholders of the Company, which changed its name to EuroGas,
Inc. Merlin V. Fish and Mark Burdge of the United States, officers and
directors of Northampton, continued to act as officers and directors until
December of 1995. (See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.")
The original asset of Energy Global was a 16% minority interest in
GlobeGas, a Netherlands corporation that held, through a joint venture,
concessions in Poland. (GlobeGas was an 85% partner with a formerly state owned
Polish coal company and held three different concessions for the exploration and
exploitation of methane coal bed gas reserves in the Upper Silesian region of
Poland.) From September of 1994 through May of 1995, the Company delivered
$3,380,963.00 in cash in exchange for additional interests in GlobeGas, which
raised the Company's participation in GlobeGas to 19.13%. In May 1995, the
Company acquired the remaining 80.87% interest in GlobeGas in exchange for
$1,150,000 in cash, the issuance of 2,256,560 shares of restricted common stock,
and the issuance of 2,391,968 shares of newly created preferred stock (the "1995
Preferred Stock"), convertible at the rate of two shares of common stock for
each share of 1995 Preferred Stock. The Company originally booked its interest
in GlobeGas as an interest in a minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas has restated its financial
presentation to reflect the historical cost basis of the assets held by GlobeGas
rather than the Company's purchase price, substantially reducing the carrying
value of these assets on the Company's balance sheets. Since the operations of
Energy Global and Northampton prior to the reorganization were immaterial, the
transaction has been accounted for as if GlobeGas were the acquiring entity and
the historical financial statements included in this report are those of
GlobeGas.
In May of 1996, the Company acquired the 15% interest in the Pol-Tex
Concession held by the Polish state coal company in exchange for a cash payment
of $25,000 and the release of the obligation of the Polish state coal company to
reimburse GlobeGas, the Company's then wholly-owned subsidiary, approximately
$1,200,000 for drilling and related costs.
In August of 1997, the Company completed an agreement with a subsidiary of
Texaco Incorporated ("Texaco") to sell the Pol-Tex concession, the largest of
the coal bed methane gas concessions held by the Company, to Texaco in exchange
for a payment $500,000 which granted Texaco the right to commence an initial
drilling program to appraise the concession and then to proceed to develop the
concession, if warranted. The agreement also grants a first right of refusal to
Texaco to obtain a controlling interest in two other Polish Concessions (the MMR
and MMJ concessions). The transaction included the sale of approximately
$200,000 in assets and equipment.
At the end of the 18-month period (approximately February of 1999), Texaco
can elect to continue to work on the Concession in exchange for a $2,500,000
payment to the Company. If Texaco elects to proceed, it has up to 30 months to
undertake development work on the Concession and then Texaco must elect whether
or not to complete the acquisition of the Concession. If Texaco then elects to
proceed, it must pay the Company an additional $2,500,000 and 14% of the net
profit from the sale of the first 500 billion cubic feet of methane gas; 16% of
the net profit from the sale of the next 500 billion cubic feet; 18% of the net
profits of the next 1 trillion cubic feet sold; and 20% of the net profits
thereafter. If Texaco elects not to proceed after the initial 18 months, the
Company would receive the Concession back, with any improvements, subject to the
approval of the Polish Ministry. If Texaco elects not to proceed after the
development phase, the Company can reacquire the Concession at a price to be
determined by the parties or a third party appraiser, again subject to approval
by the Polish Ministry.
In addition, the Company also granted Texaco the first right of refusal to
acquire control of its other coal bed methane concessions in Poland known as the
MMR and MMJ concessions, at a price to be determined either by the parties or a
third party appraiser. For now, the Company will continue to operate the MMR
and MMJ concessions.
In July 1996, the Company continued in its quest to acquire additional gas
interests in Eastern Europe by acquiring Danube. Danube was a participant in
joint ventures for the exploration and production of natural gas in Slovakia and
the Czech Republic. Danube was acquired for $3,000,000 in cash ($500,000 paid
at closing and $2,500,000 which was eventually converted into 383,790 shares of
common stock, the issuance of 2,500,000 shares of the Company's restricted
common stock, the issuance of 1,250,000 shares of a newly created preferred
stock (the "1996 Preferred Stock"), which was converted into an aggregate of
2,500,000 additional shares of the Company's common stock, and the issuance of
warrants to purchase up to 5,000,000 shares of common stock at $3.00 per share
during the five years subsequent to the closing. The Company has recently
lodged an indemnity claim against the former Danube shareholders. (See "LEGAL
PROCEEDINGS.")
In connection with the transaction, the Company also issued 12,500,000
shares of common stock to Chemilabco, which held an interest in the operating
subsidiaries of Danube and options to participate in the Czech and Slovakian
operations of Danube. An outside investment group held a 5% interest in the gas
projects of Danube that it received in exchange for a $1,000,000 investment and
which was granted prior to the acquisition of Danube by the Company. The 5%
minority interest was recently acquired for 250,000 shares of restricted common
stock. As part of the acquisition, Danube agreed to pay advisory fees to SBC
Warburg, a United Kingdom investment bank, and Moyes Newby & Company.
In July of 1996, the Company added Dr. Martin A. Schuepbach, the President
of Danube, as a director of the Company and appointed him as the Company's
president and chief executive officer. Mr. Schuepbach subsequently resigned as
a director and officer of the Company.
On June 11, 1997, the Company acquired all of the issued and outstanding
stock of EJ from OMV Inc., Austria's largest industrial concern, in exchange for
$6,252,754 (US), an option to acquire up to 2,000,000 shares of the Company's
common stock, a 5% interest in EJ's net profits from identified preliminary oil
and gas licenses, and 1% of gross production of the TAKT Joint Venture outside
such licenses.
EJ's primary asset is a 50% interest in the joint venture (known as "TAKT")
with Sakhaneftegas, the national oil and gas company of the Sakha Republic.
On October 13, 1997, the Company received an additional concession from the
Polish Ministry of Environmental Protection of Natural Resources and Forestry to
explore and potentially develop a 110 square kilometer coal bed methane
concession located near the MMR and MMJ concessions. The Company plans to
conduct a feasibility study to explore the possibilities of drilling gas wells
for a combined heat and power plant project or other uses. The agreement
requires expenditure of only $40,000 per year pending completion of feasibility
study and negotiations with third parties for the eventual purchase of natural
gas if found.
On October 23 ,1997, Pol-Tex completed an agreement with Polish Oil & Gas
("POGC") to undertake additional appraisal and development activities for a
large area located in the Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total expenditure by the Company of $15
million over a three-year period. The parties established a joint team whose
initial work is the interpreting of the data generated by a $1.5 million (US)
wide-line seismic work program which was conducted in the Rymanow-Leske area of
the Carpathian Mountains in southeastern Poland. The technical team expects to
use the interpreted data to select the site for drilling a deep well (5,000 to
5,500 meters) later this year.
In late 1997, the Company entered into an option agreement to acquire an
interest in the Beaver River natural gas field located in northeastern British
Columbia. The gas field was originally developed by Amoco Canada in the 1960s
and was one of the largest producing gas field in British Columbia. Technical
problems led to excess water production and Amoco shut-in the field in 1978.
However, a subsidiary of Canadian Occidental Petroleum has entered into an
agreement and is working to establish commercial natural gas production in the
project using up-to-date technology and may, if warranted, spend up to $13
million (US) on the project before requiring any participation from the other
working interests. The Company has proceeded to exercise its options by first
purchasing 993,333 units of United Gunn Resources, Ltd. (one share of common and
one warrant), for a total of $950,000 (US). United Gunn Resources, Ltd. holds
approximately a 12% working interest in the project. The Company completed the
exercise of its option by exchanging $300,000 and 2,400,000 shares of restricted
common stock for 16% direct working interest from a third party. EuroGas did
retain the right to purchase back, in exchange for return of the working
interest, 1,900,000 of the 2,400,000 shares of restricted common any time prior
to April 15, 1999 if EuroGas determines that the results produced do not warrant
the continued holding of the direct interest.
In March 1998, the Company acquired a 55% interest in RimaMuran s.r.o.
("RimaMuran"), a closely-held entity whose principal asset is a 43% interest in
Rozmin s.r.o., a joint venture which holds the Gemerska Talc Deposit located in
Roznava, Slovakia. Thyssen Schachtbau GmbH, a leading international mining
engineering company, and Dorfner AG, a leading German processing and refining
company for industrial minerals, hold the majority interest in the Gemerska Talc
Deposit. The Company purchased its interest for a nominal cash payment and will
assume 43% of the development budget which is expected to be approximately $12
million over the next two and one-half years. (The Company's obligation will be
approximately $5 million.)
LEGAL PROCEEDINGS
On August 1, 1995, the United States Securities and Exchange Commission
(the "SEC") issued a formal order In the Matter of EuroGas, Inc., to investigate
whether violations of applicable law may have occurred. The Company has
produced numerous documents pursuant to extensive subpoenas from the SEC and the
oral testimony of its officers and directors. The SEC has obtained similar
information from the Company's former independent public accountants. The
Company has not been contacted by the SEC in connection with this matter for
more than eighteen (18) months. However, the SEC has given no formal indication
that it has completed its investigation and, the Company cannot predict the
duration or outcome of this investigation.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of the
Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie Methane
Corporation (McKenzie Methane Corporation was an affiliate of the former owner
of Pol-Tex), asserted certain claims against Pol-Tex and GlobeGas in connection
with lending activities between McKenzie Methane Corporation and the management
of GlobeGas prior to its acquisition by the Company. The claim asserted that
funds that were loaned to prior management may have been invested in GlobeGas
and, therefore, McKenzie Methane Corporation might have had an interest in
GlobeGas at the time of the acquisition of GlobeGas by the Company. These
claims were resolved pursuant to a settlement agreement entered into in November
1996. Under the terms of the settlement agreement, the Company issued 100,000
shares of restricted Common Stock and an option to purchase up to 2,000,000
shares of Common Stock at any time prior to December 31, 1998, to the Bishop's
Estate (KUKUI's parent). The option exercise price was $3.50 per share if
exercised within 90 days of the execution of the agreement with Texaco; $4.50
per share if exercised prior to December 31, 1997; and $6.00 per share if
exercised prior to December 31, 1998. The Company also granted registration
rights with respect to the securities.
In March of 1997, a trustee over certain of the individual McKenzies and
other related entities asserted a claim to the proceeds that the Company would
receive from the Texaco agreement and exploitation of the Pol-Tex Concession in
an action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie,
debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case
no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7,
respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co.,
Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane, Sp.
zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court for
the Southern District of Texas Houston Division). The trustee's claim is
apparently based upon the theory that the Company may have paid inadequate
consideration for its acquisition of GlobeGas (which indirectly controlled the
Pol-Tex Concession in Poland) from persons who were acting as nominees for the
McKenzies or in fact may be operating as a nominee 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. (KUKUI is also the
principal creditor of the McKenzies in these other cases.) The Company plans to
vigorously defend against such claims. The Company believes that the litigation
is without merit based on its belief that the prior settlement with KUKUI bars
any such claim, the trustee over the McKenzies has no jurisdiction to bring such
claim against a Polish corporation (Pol-Tex) and the ownership of Polish mining
rights, that the Company paid substantial consideration for GlobeGas, and that
there is no evidence that the creditors of the McKenzies invested any money in
the Pol-Tex Concession. The Company also believes that continued pursuit of
the claim may give rise to a separate cause of action against third parties that
the Company will pursue if necessary.
On August 21, 1997, KUKUI, Inc. asserted a claim against EuroGas, Inc. in
an action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United States
District for the Southern District of Texas, Houston Division. KUKUI's claim is
based upon an alleged breach of the settlement agreement between the Company and
KUKUI as a result of the Company's failure to file and obtain the effectiveness
of a registration statement for the resale by KUKUI of 100,000 shares delivered
to KUKUI in connection with the settlement. In addition, KUKUI has informed the
Company and the court that Bishop's Estate, its parent, would be entering a
claim for failure to register the resale of the shares subject to its option to
purchase up to 2,000,000 shares in the Company's common stock. The Company has
denied any liability, intends to vigorously defend the claim and recently filed
a counterclaim against KUKUI and Bishop's Estate for breach of contract, in
particular concerning its joint activities with the Trustee over the McKenzies.
The Kingdom of the Netherlands had assessed a tax against the Company's
operating subsidiary, GlobeGas in the amount of $911,051 even though it had
significant operating losses. During 1997, the income tax liability was reduced
on the financial statements of the Company to $753,306 due to different exchange
ratios. The Company has appealed the assessment and has proposed a settlement
with the Netherlands which would reflect a reduction in the tax to $42,000.
Pending final resolution, a liability for the total amount assessed will
continue to be reflected in the Company's financial statement.
The holder of certain registration rights, Finance Credit & Development
Corporation, Ltd., has requested that the Company provide it with information
concerning the delay in filing a required registration statement. While Finance
Credit & Development Corporation, Ltd., has not asserted a specific legal claim
against the Company to date, it may elect to do so if the Company is unable to
resolve this matter with it.
As set forth in "BUSINESS: Slovakian Oil & Gas Joint Venture," the Company
has been notified of a potential title problem with certain areas which the
Company intended to explore and develop with NAFTA in the future. The area of
concern relates to rights acquired through the acquisition of Danube. The
Company believes that the owners of Danube knew or should have known about the
problem prior to the acquisition of Danube and that no disclosure concerning the
problem was made at the time. The Company has initiated a further investigation
concerning the matter and has notified the former Danube shareholders of a claim
for indemnity to the extent that the Company suffers any damage by reason of the
potential title problem. As the matter is in its initial stages, the Company
cannot predict whether it will be ultimately damaged by the title problem or, if
damaged, will be able to recover from the former Danube shareholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
The common stock of the Company is traded on the Bulletin Board under the
symbol "EUGS" under the symbol "EUGSF" on the Frankfurt Stock Exchange, the
symbol "EUGSBE" on the Berlin Stock Exchange, EUGSS on the Stuttgart Exchange
and EUGSH on the Hamburg Stock Exchange. As of July 17, 1998, there were
64,845,811 shares of the Company's common stock issued and outstanding.
The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated based on
information concerning the trading of the common stock on the Bulletin Board.
All prices reflected herein have been adjusted retroactively to reflect the 24-
for-1 reverse stock split recently approved by the Company. The quotations
presented reflect interdealer prices, without retail markup, markdown,
commissions, or other adjustments and may not necessarily represent actual
transactions in the common stock.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------------ -------- -------
<S> <C> <C>
March 31, 1996 $ 3.25 $ 1.125
June 30, 1996 $ 7.875 $ 1.75
September 30 1996 $ 5.75 $ 2.875
December 31, 1996 $ 5.00 $ 2.875
March 31, 1997 $ 6.75 $ 3.4375
June 30, 1997 $ 12.50 $ 4.375
September 30, 1997 $ 10.6875 $ 4.9375
December 31, 1997 $ 7.625 $ 3.75
March 31, 1998 $ 6.8125 $ 3.9375
June 30, 1998 $ 5.75 $ 3.625
</TABLE>
The liquidity of the common stock may be limited, and the reported price
quotes may not be indicative of prices that could be obtained in actual
transactions. On July 17, 1998, the closing quotation for the Company's common
stock in the over-the-counter market was 3.6875.
No dividends have been paid on the Company's common stock, and the Company
does not have retained earnings from which to pay dividends. The Company
accrued cumulative preferred dividends of $423,530 and $150,592 in 1997 and
1996, respectively. Of this amount, $305,325 was paid in 1997 by the issuance
of common stock in connection with the conversion of a portion of the preferred
stock. In 1996, the Company paid dividends on the preferred stock of $120,000
in cash at a time the Company had a stockholders' deficit. All cumulative
dividends with respect to the Company's preferred stock would be required to be
paid prior to the Company declaring or paying any dividend on its common stock.
(See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.") Even if
the Company was 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.
Sale of Unregistered Securities
In May 1998, the Company entered into a Subscription Agreement pursuant to
which it agreed to sell up to 30,000 shares of its 1998 Series B Convertible
Preferred Stock for an aggregate of $30,000,000 gross proceeds. At the time of
the execution of the agreement, 8,000 shares were sold by the Company for gross
proceeds of $8,000,000 to three sophisticated investors. The Company obtained
representations that the purchasers were acquiring the securities for their own
investment and without the intent to make a distribution of such securities,
placed a restrictive legend on the certificates representing the securities, and
relied on the non-public offering exemption to the registration requirements of
the Securities Act in making this sale. The Common Stock issuable on conversion
of the 1998 Series B Convertible Preferred Stock is also restricted, but the
resale of such securities by the Selling Shareholders is covered by this
Prospectus.
During 1997, the Company sold or delivered 10,544,030 shares of common
stock and 4,450,000 options in transactions that were not registered under the
Securities Act as described in more detail below. Unless otherwise noted, the
sales were made without the participation of underwriters and without the
payment of any commission. The Company relied upon the exemptions from
registration provided in Section 4(2) of the Securities Act and Regulation D.
No placement of securities involved a public offering. The two offerings
for cash proceeds were to sophisticated institutions. The balance of shares and
options were delivered in connection with either a conversion of outstanding
indebtedness or the acquisition of property or mineral interests. In each
instance, the Company used the proceeds for general working capital.
The following summary does not include two sales previously reported in
which the Company relied principally on Regulation S as an exemption from
registration. The reports considering those sales were on the Company's Form
8-K dated March 24, 1997, covering the sale of 500,000 shares for gross
proceeds of $2.5 million and Form 8-K dated May 30, 1997, covering the
issuance of a newly created preferred stock for gross proceeds of $15 million.
On June 11, 1997, the Company delivered an option to OMV A.G. in connection
with its purchase of a subsidiary of OMV A.G. whose principal asset was a joint
venture in the Sakha Republic as described under "BUSINESS & PROPERTIES:
Activities in the Sakha Republic." The terms of the option provide for an
exercise price of $4.00 per share until April 1, 1998, $5.00 per share until
March 31, 1999, and $6.00 per share until March 31, 2000, at which time the
unexercised portion expires.
On June 30, 1997, the Company sold 1,430,000 shares of its restricted
stock, at $7.00 per share, for a gross purchase price of $10 million (US) to
Chemilabco B.V., a principal shareholder of the Company. (See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Also on June 30, 1997, the Company sold to Finance Credit & Development
Corporation, Ltd., in a transaction that amended a prior financing agreement, a
total of 2,999,999 shares of restricted common stock for $7.5 million and
converted a $1 million outstanding debenture to 333,334 shares of restricted
common stock. In connection therewith, the Company also granted a warrant for
the acquisition of 2,200,000 shares of the Company's common stock at $3.00 per
share. The option expires December 31, 1998.
During the 1997 fiscal year, holders of convertible debenture notes
(proceeds of which were received prior to 1997), converted a total of
$10,947,991 of principal and accrued interest into 2,646,907 shares of the
Company stock pursuant to the terms of the various debentures.
On July 3, 1997, 1,250,000 shares of the 1996 Preferred Stock were
automatically converted into 2,500,000 shares of common stock. The shares were
held by the former shareholders of Danube that the Company acquired during
fiscal 1996.
On August 9, 1997, the Company sold an option to purchase 250,000 shares to
CIBC Oppenheimer in connection with the entering into of a financial advisory
agreement. The option provides for an exercise price $11.79, expires August 9,
2002, and provides CIBC Oppenheimer with registration and cashless exercise
rights.
On August 30, 1997, the Company converted a promissory note held by the
former Danube shareholders in the amount of $2,846,590 of principal and accrued
interest into 383,790 shares of the Company's common stock.
On November 11, 1997, the Company delivered 250,000 shares of restricted
common stock for the acquisition of the 5% interest in the Danube subsidiary
which had been held by two foreign individuals which had invested $1 million
with the Danube project prior to its acquisition by the Company in 1996.
SELECTED FINANCIAL DATA
Certain Financial Data
The following statement of operations and balance sheet data are not
audited and are derived from the consolidated financial statements of the
Company. The consolidated financial statements of the Company for the years
ended December 31, 1993 through 1997, have been audited by the Company's
independent certified public accountants. The selected financial data below
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included with this filing and "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
<TABLE>
<CAPTION>
Statement of Operations Data
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 500,000 $ 0 $ 0 $ 0 $ 0
Loss Applicable to
Common Shares $(11,925,429) $(6,413,183) $(4,327,581) $(3,699,439) $(3,363,296)
Basic and Diluted Loss
per Common Share $ (0.22) $ (0.16) $ (0.13) $ (0.15) $ (0.18)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 0.00 $ 0.00
Loss Applicable to Common Shares $ (1,799,091) $ (1,282,625)
Basic and Diluted Loss per Common Share $ (0.03) $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
At March 31,
1998 1997 1996 1995 1994
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $ 44,097,104 $ 40,754,543 $ 15,902,139 $ 7,680,367 $ 7,599,962
Long-Term Obligations $ 2,510,908 $ 3,157,789 $ 10,631,547 $ 4,011,750 $ 3,011,750
Cash Dividends
per Common Share $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company is primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, and other hydrocarbons in
various parts of the world. The Company currently has several projects in
various stages of development, including a coal bed methane gas project in
Poland which has been sold to a subsidiary of Texaco, Inc. ("Texaco"), a natural
gas project in Slovakia, a natural gas project in the Sakha Republic, a member
of the Russian Federation located in eastern Siberia, a natural gas interest in
Canada, and an interest in a Talc deposit in Slovakia.
In addition, the Company has recently entered into a joint venture
agreement with Polish Oil & Gas Company ("POGC") concerning a separate project
in the Carpathian Flysch and Tectonic Foredeep formation located principally in
southeastern Poland. The Company has also entered into agreements to explore
and develop projects in the Ukraine.
Recent Developments
Funding Activities
Prior to the second quarter of 1997, the Company suffered from a lack of
capital. The Company's activities to date have not generated revenue, except
for the gross revenue of $500,000 recognized in connection with the sale of a
single interest in property, so it is not able to meet any of its funding needs
from operations. During the 1997 fiscal year, the Company completed a number of
equity financings with cash proceeds to the Company of in excess of $31 million.
In addition, the Company converted approximately $11 million of debt to equity.
These transactions significantly improved the Company's working capital position
and provided it with funds to complete its recent acquisitions and to meet its
contractual obligations in the near term. At December 31, 1997, the Company had
$17,247,667 in cash and cash equivalents and $9,365,940 in working capital
available. At March 31, 1998, the Company had $10,809,855 in cash and cash
equivalents and $4,539,795 in working capital available. Since March 31, 1998,
the Company has received net proceeds of approximately $7.4 million in
connection with the issuance of 8,000 shares of 1998 Series B Convertible
Preferred Stock.
Financial Position
The Company had an accumulated deficit of $33,996,397 at March 31, 1998,
most of which has been funded out of proceeds received from the issuance of
stock or debt instruments (substantial portions of which were issued to related
parties), loan proceeds, and incurring payables. The Company's financing
activities provided net cash of approximately $31 million, $8.2 million, and
$2.9 million during the years ended 1997, 1996, and 1995, respectively, and used
net cash of approximately $1.4 million for the three months ended March 31,
1998, for the repayment of long-term debt. During this same period, operating
activities used net cash of $3.2 million, $4.0 million, and $2.4 million for the
years ended December 31, 1997, 1996, and 1995, respectively, and $2.5 million
for the three months ended March 31, 1998. The Company has also used cash to
acquire mineral interests, property and equipment, either directly or indirectly
through the acquisition of subsidiaries, with $11.2 million, $3.7 million, and
$1.3 million used in investing activities for the years ended December 31, 1997,
1996, and 1995, respectively, and $2.3 million for the three months ended March
31, 1998.
The Company's principal assets consist of unproved and undeveloped gas
properties. All costs incidental to the acquisition, exploration, and
development of such properties are capitalized, including costs of drilling and
equipping wells and directly related overhead costs which include the costs of
Company owned equipment. Since the Company has not established production,
these properties have not been amortized. In the event that the Company is
ultimately unable to establish production or sufficient reserves on these
properties to justify the carrying costs, the value of the assets will need to
be written down and the related costs charged to operations, resulting in
additional losses. The Company periodically evaluates its properties for
impairment and if a property is determined to be impaired, the carrying value of
the property is reduced to its net realizable amount.
Results of Operations
The Company has not received any revenues since inception, except for the
$500,000 received from Texaco during the year ended December 31, 1997. These
revenues were offset against $500,000 of the cost of the property sold, and no
gain or loss was recognized on the sale. The Company does not currently have a
source of ongoing revenues.
The Company had a net loss applicable to common shares of approximately
$11,925,429 and $6,413,000, respectively, for the years ended December 31, 1997,
and 1996, and $1,799,092 and $1,282,625 for the three months ended March 31,
1997, and 1996. The difference between the years ended December 31, 1997 and
1996, was due in large part to the expansion of the Company's activities,
primarily as a result of acquisitions, the growth of the Company's
administrative expenses, the Company's decision to write off the carrying value
associated with its interests in the Czech Republic in the amount of $1,972,612,
and additional interest expenses in 1997. The 1997 interest expense includes a
reserve of $1 million, which is management's estimate of the amount due to a
lender who provided funding from 1995 to 1997. This amount has not yet been
finally determined. (See the Notes to the Financial Statements.) A substantial
portion of the general and administrative expenses consist of payments to a
limited number of officers, directors, and consultants.
Due to the highly inflationary economies of the Eastern European countries
in which the Company operates, the Company is subject to extreme fluctuations in
currency exchange rates that can result in the recognition of significant gains
or losses during any period. Approximately $332,000, ($401,000), and ($131,000)
in gains (losses) were recognized as a result of currency transactions in the
years ended December 31, 1997, 1996, and 1995, respectively, and a loss of
approximately $58,000 was recognized during the three months ended March 31,
1998. The Company had a cumulative foreign currency translation adjustment of
($14,749) at December 31, 1997, and ($145,590) at March 31, 1998. The Company
does not currently employ any hedging techniques to protect against the risk of
currency fluctuations.
Under the full cost method by which the Company accounts for its mineral
interests in properties, costs of unproved properties are assessed periodically
and any resulting provision for impairment would normally be charged to the
proved property base. The impairment for unproved properties is charged to
operations. The impact of such reassessment and resulting impairment charge
could be significant during any particular period and resulted in a write down
of $1,972,612 in the carrying value of the assets associated with the Company's
interests in the Czech Republic during the year ended December 31, 1997.
As of March 31, 1998, the Company's balance sheets reflected $24,105,418 in
interests in unproved mineral properties and $7,295,012 in oil and gas
properties subject to amortization. These properties are held under licenses or
concessions that contain specific drilling or other exploration commitments and
that expire within one to three years, unless the concession or license
authority grants an extension or a new concession license, of which there can be
no assurance. If the Company is unable to establish productions or resources on
these properties, is unable to obtain any necessary future licenses or
extensions, or is unable to meet its financial commitments with respect to these
properties, it could be forced to write off the carrying value of the related
property.
Capital and Liquidity
Throughout its existence, the Company has relied on cash from financing
activities to provide the funds required for acquisitions and operating
activities. Such net cash has been used principally to fund cumulative net
losses of approximately $34 million.
During the years ending December 31, 1997 and 1996, operations required
cash of approximately $3,245,000 and $3,985,000, respectively. Operations used
net cash of $2,546,477 and $740,598 for the three months ended March 31, 1997
and 1996. Investing activities used net cash of approximately $11,205,000 for
the year ended December 31, 1997, the largest component of which was the
approximately $6,315,000 booked in connection with the acquisition of EJ, and
$3,727,000 in 1996. Investing activities used net cash of $2,287,535 and
$387,958 for the three months ended March 31, 1998 and 1997, respectively.
Financing activities provided net cash of approximately $31,286,000 during
the year ended December 31, 1997, as compared to $8,194,000 in the prior year
and used net cash of $1,419,012 for the three months ended March 31, 1998, as
compared to providing net cash of $1,129,597 for the three months ended March
31, 1997.
At March 31, 1998, the Company had total current assets of approximately
$10,965,000 and total current liabilities of approximately $6,946,000, resulting
in working capital of approximately $4,540,000 or a working capital ratio of
2.4-to-1.
While the Company had cash of approximately $10.8 million at March 31,
1998, and has received additional amounts since then, it has substantial
financial commitments with respect to exploration and drilling obligations
related to the mineral properties in which it has an interest. Many of the
Company's projects are long-term and will require to expenditure of substantial
amounts over a number of years before the establishment, if ever, of production
and ongoing revenues. As noted above, the Company has relied principally on
cash provided from equity and debt transactions to meet its cash requirements.
While the Company currently has sufficient cash to meet its short-term needs, it
will be required to obtain additional cash either from financing transactions or
operating activities to meet its longer-term needs. Obtaining additional equity
financing or structuring strategic relationships will continue to result in
dilution of the percentage ownership of the Company by the current shareholders.
If the Company is unable to establish production or reserves sufficient to
justify the carrying value of its assets or to obtain the necessary funding to
meet its short and long-term obligations or to fund its exploration and
development program, all or a portion of the mineral interests in unproved
properties will be charged to operations, leading to significant additional
losses.
Year 2000
The Company uses computers principally for processing and analyzing
geophysical and geological data, and administrative functions such as word
processing, accounting and management, and financial reporting. The Company's
principal computer systems have been purchased since December 31, 1995. The
software utilized by the Company is standard "off-the-shelf" software, typically
available from a number of vendors. While the Company believes it is taking all
appropriate steps to assure year 2000 compliance, it is dependent substantially
on vendor compliance. The Company intends to modify or replace those systems
that are not year 2000 compliant. The Company is requiring its systems and
software vendors to represent that the services and products provided are, or
will be, year 2000 compliant. The Company estimates that the cost to redevelop,
replace, or repair its technology will not be material. In addition to its own
computer systems, in connection with its business activities, the Company
interacts with suppliers, customers, creditors, and financial service
organizations domestically and globally who use computer systems. It is
impossible for the Company to monitor all such systems, and there can be no
assurance that the failure of such systems would not have material adverse
impacts on the Company's business and operations.
FINANCIAL STATEMENTS
The financial statements and supplementary data are set forth immediately
following the signature page.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is the name and age of each executive officer and director
of the Company, 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:
<TABLE>
<CAPTION>
Name Age Positions With the Company Director Since
- ----------------------- ---- ------------------------------ ---------------
<S> <C> <C> <C>
Dr. Reinhard Rauball 52 Director 1994 - August
Paul Hinterthur 60 President and Director 1995 - December
Hank Blankenstein 56 Vice-President and Director 1995 - December
Dr. Gregory P. Fontana 38 Director 1996 - January
Dr. Hans Fischer 52 Director 1996 - January
J. Toni Preuss 50 Managing Director of GlobeGas N/A
</TABLE>
The current board of directors was elected at the December 12, 1997,
shareholders' meeting. A director's regular term continues until the next
annual meeting of shareholders and thereafter until his successor is duly
elected and qualified. Officers serve at the pleasure of the board of
directors. There is no family relationship among the current directors and
executive officers.
The Company's executive committee consist of three members, Paul
Hinterthur, Hank Blankenstein, and J. Toni Preuss, an officer and director of
the Company's subsidiary, GlobeGas. The executive committee is charged with
overseeing the day-to-day management of the Company and with making all
significant contractual and financial decisions.
Company Control
Dr. Reinhard Rauball, the chairman of the board of directors, and Wolfgang
Rauball, the Company's chief consultant, are brothers. Both gentlemen have been
key figures in arranging the original transaction with Energy Global, the
acquisition of the concessions in Poland, the later acquisition of Danube, which
holds concessions in Slovakia, the acquisition of EJ and the Yakutia Concession,
and the participation in the British Columbia project. From time to time, the
Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt
financing for the Company through parties with whom they have previous business
and personal relationships and have directly loaned some of their own funds to
the Company. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
While there is no formal agreement among the Rauballs and other debt and
equity holders of Company, the practical result of the relationships is to vest
control of the Company in the Rauballs.
The following sets forth brief biographical information for each of the
foregoing individuals.
Dr. Reinhard Rauball is a director of the Company. He has been an attorney
in Dortmund, Germany, since 1974, as well as a government appointed Notary since
1991. He was a law instructor at Bochum University from 1977 to 1979 and is the
author of numerous legal publications and books on constitutional law in
Germany. Dr. Rauball currently represents a number of prominent German
industrial companies and acts as counsel to the German government on special
projects. From 1983 to 1990, he was the chairman of the Supervisory Board of
Etienne Aigner, AG, a publicly-held company in Munich, Germany, which is a
leading international fashion concern with franchise shops in over 50 countries
around the world. He was the president of Borussia Dortmund, a leading German
soccer club, from 1979 to 1982 and 1984 to 1986.
Wolfgang Rauball has acted as an independent consultant to the European
subsidiaries of the Company since August 1994. He is president of Pol-Tex
Methane Sp. zo.o. in Poland and also acts as a director of GlobeGas B.V.
Amsterdam. Mr. Rauball attended Darmstadt Technical University in Germany from
1967 through 1971 but did not receive a degree. Thereafter, Mr. Rauball worked
as a mining geologist in Canada from 1972 to the present date. During the
period 1976 through 1986, his consulting activities were primarily for companies
conducting exploration for gold ore bodies in Canada, the United States, and
South America. Wolfgang Rauball arranges for financing for business
enterprises, primarily public companies engaged in the mineral industry. In
1993, Wolfgang Rauball was convicted by a German court of negligently causing
the bankruptcy of a German subsidiary of a Canadian company. Mr. Rauball was a
managing director of the Canadian company. Beginning in 1987, he was involved
in a contest for control of the Canadian company. During the contest, the
German subsidiary used some of its capital to purchase restricted securities of
an unrelated company, which purchase caused the German subsidiary to become
insolvent from a balance sheet point of view. Prior to being able to solve the
problem, Mr. Rauball was deprived of his ability to participate in management of
the Canadian company (his right to participate in management was subsequently
restored by the British Columbia Securities Commission in Canada). German law
is very strict in this regard and generally holds managing directors of parent
companies responsible for either infusing additional funds to make the
subsidiary solvent or making the appropriate bankruptcy filings on behalf of the
subsidiary, neither of which was done in this case. The German court held that
Mr. Rauball was negligent in participating in the original stock purchase by the
German subsidiary. Mr. Rauball received a suspended sentence and a monetary
fine of approximately $70,000. This type of activity is not a crime in either
the United States or Canada, where Mr. Rauball then resided, and therefore, the
board of directors of the Company does not feel that this matter compromises in
any way the value of Mr. Rauball's services.
Paul Hinterthur is a director and president of the Company. He has held
executive positions with the Company since 1995. After completing studies in
Economics in Frankfurt, London and Paris, he served in executive positions for
Dresdner Bank, one of the leading banks in the world from 1965 to 1984. During
his tenure with Dresdner Bank, he served in the financial centers of Frankfurt,
London, Tokyo, and Hong Kong. After retiring from the banking business, he has
been an independent international business and finance consultant for many
years. Mr. Hinterthur speaks five languages.
Hank Blankenstein is a director and vice-president of the Company. He has
had over 30 years experience in various levels of management positions. He
served as an administrative financial officer for a large semiconductor facility
from 1973 to 1985. Prior to that, he served in a number of operational
positions for high tech industry companies, having engineering production
supervising responsibilities, in charge of a 400-person division. He has been
involved in several high tech start-up situations serving in senior management
positions. He holds a bachelor of science degree in finance and banking from
Brigham Young University that was awarded in 1966.
Dr. Gregory P. Fontana is a director of the Company. He is currently an
attending cardiothoracic surgeon at Brotman Medical Center and 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 and
University of California at Los Angeles. Some of his academic appointments
include Clinical Fellow in Pediatric Cardiac Surgery at Harvard Medical School
and Clinical Assistant Professor of Surgery at UCLA School of Medicine and he
has received several research grants, including a National Research Service
Award and Minimally-Invasive Cardiac Surgery Grant. He belongs to several
professional organizations, including the American Heart Association, and has
authored numerous scientific presentations and bibliographies. He is currently
a consultant to Heartport, Inc., Redwood City, California.
Dr. Hans Fischer is a director of the Company. He is currently Professor
of Radiology at the University of California, Los Angeles, Harbor-UCLA Medical
Center where he has been on the faculty since 1992. He has been a chair,
member, and designated alternate on Research, Clinical Radiology, Quality
Assurance and Ambulatory Care Committees for Harbor-UCLA Medical Center since
1990. He trained at Leibniz-Gymnasium, Dortmund West Germany, School of
Medicine, University of Muenster West Germany and School of Sociology,
University of Muenster West Germany. He received his M.D. in 1971 and Ph.D. in
1985 from University of Muenster.
J. Toni Preuss serves on the executive committee of the Company and has
been the managing director of GlobeGas, a Company subsidiary, since November
1995. Since 1970, he has been a representative of Idua Nova Insurance Company
in Hamburg, Germany, specializing in investment strategies. In 1980, he
established his own Sports Marketing Agency and Services Company which has an
international reputation and operations in Russia, Czech Republic, Holland,
Switzerland, and Turkey. He is the personal financial advisor for several
international soccer players and coaches.
Key Consultants and Employees
The following sets forth biographical information for certain of the
Company's key employees and consultants.
Andrew K. Andraczke, vice-president and secretary, and a member of the
management committee of Pol-Tex Methane, is responsible for business development
and coordination of administrative, legal, and political aspects of the venture
in Poland. He also directs computer operations and system support for
exploration and production.
Mr. Andraczke holds B.Sc., M.Sc., and Ph.D degrees in computer science and
application from Computer Science Institute of Polytechnical University in
Warsaw where he also taught as 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.
In 1976, he moved from Poland to accept consulting contracts in France and
the United States. From 1976 to 1982, he worked for several oil and gas and
mining firms, including OTC Oklahoma Production in Tulsa, Kansas Oil
Consolidated in Tulsa, John W. Mecom Company in Houston, InteResources Group,
Inc. in Houston, and British Sulphur Corporation in London, 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.
He joined Oil Exploration and Production Company in Houston in 1982 and
served as an internal consultant and management advisor on computer applications
and emerging technologies. He provided technical support for large projects
including integrated exploration systems, reservoir simulation, enhanced oil
recovery, and evaluation of production. He developed and supported reservoir
models for some of Tenneco's largest oil and gas fields and authored numerous
proprietary exploration and drilling systems for Tenneco.
Dr. F. Horvath is currently Professor at the Eotvos University in Budapest.
Dr. Horvath now acts as the Company's chief geological advisor. He is
particularly familiar with many of the formations in which the Company has or is
planning to obtain concessions. At Eotvos University, he specializes in
instructing students in geophysics and geology for general and applied
geophysics, basin research, petroleum exploration, and seismic interpretation.
His primary field of research has always been the tectonic interpretation of
geological and geophysical data, particularly in the evolution of sedimentary
basins and the exploration for hydrocarbon resources. He is the principal
investigator of eight major research projects and has worked with leading
academic and industrial experts in Europe and the Americas. His contribution to
earth sciences has been acknowledged by a number of awards, including an
honorary fellowship in the European Union of Geosciences, Academia Europaea, and
the Geological Society of America.
Anka Ltd. The Company has retained Anka Ltd. to provide it with managerial
and strategic assistance with respect to its European properties, particularly
those located in the Republic of Slovakia. The Managing Director of Anka Ltd.,
Mr. Louis D. Good, has in excess of 35 years in the oil and gas industry
advising clients since 1980 on all aspects of the development, construction, and
financing of oil and gas projects.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's stock is not registered under Section 12 of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and, as a
consequence, its officers, directors, and principal shareholders are not subject
to the reporting obligations of Section 16 of the Exchange Act.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1997, 1996, and 1995, to
the chief executive officer of the Company and the other executive officers of
the Company who received compensation in excess of $100,000. The Company also
paid significant consulting fees as set forth below under "Executive Employment
and Consulting Arrangements."
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-------------------------------
Annual Compensation Awards Payoffs
------------------------------- --------------------- -------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($) Awards($) SARs(#) ($) ($)
- --------------------------- ---- --------- -------- -------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
President
Paul Hinterthur 1997 $294,100 0 0 0 0 0 0
CEO and director 1996 $ 27,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
Merlin V. Fish 1997 $ 0 0 0 0 0 0 0
Former CEO 1996 $ 0 0 0 0 0 0 0
1995 $115,693 0 0 0 0 0 0
Dr. Reinhard Rauball 1997 $874,120(1) 0 0 0 0 0 0
1996 $ 33,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
Hank Blankenstein 1997 $300,000 0 0 0 0 0 0
1996 $ 84,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
J. Toni Preuss 1997 $203,902 0 0 0 0 0 0
1996 $ 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0
</TABLE>
[FN]
(1) Dr. Rauball was paid fees for services rendered to the Company in
connection with its acquisitions during 1997, particularly the
negotiation of the business transaction in which the Company acquired
EJ as a wholly-owned subsidiary.
Executive Employment and Consulting Arrangements
The Company has relied heavily on consultants to identify potential
projects, to negotiate the terms of acquisitions, to develop relationships with
governmental regulators and industry partners, and to complete business and
financing transactions. As a result of services in these areas, the Company
paid $1,260,253 in 1997 and $479,166 in 1996 to Wolfgang Rauball, the brother of
Reinhard Rauball, the Chairman of the Board of the Company. The Company did not
make any payments to Wolfgang Rauball in 1995. The Company also paid $509,467
in 1997, $449,600 in 1996, and $69,447 in 1995 to Armando Ulrich. The Company
also paid $273,113 during 1997 to Andrew K. Andraczke, a key employee in Poland
who does not perform executive level functions. If the Company does not
continue to make significant acquisitions and as revenues are developed, the
Company anticipates that it will rely more on the services of employees and the
amounts paid to consultants will be reduced.
Compensation of Directors
The Company compensated its outside directors for service on the board of
directors by payment of a monthly fee of $5,000 and reimbursement of expenses
incurred in attending board meetings. The Company does not separately
compensate its board members who are also employees of the Company for their
service on the board.
Board Compensation Committee Report on Executive Compensation
Management compensation is overseen by the board of directors of the
Company. The board has not appointed a compensation committee. The board of
directors consists of three members of executive management, Dr. Reinhard
Rauball, Paul Hinterthur, and Hank Blankenstein, and two outside directors who
are not employees of the Company.
The Company has to date been involved in the acquisition of interests in
potential hydrocarbon resources and in obtaining the necessary governmental
approvals, industry partners, and financing for the exploration of such
resources. The Company has compensated senior management based on the perceived
contribution of each to the potential growth of the Company. The Company
anticipates that it will continue to rely on both executive management and
outside consultants in connection with the acquisition of additional projects
and the initial development of existing projects. However, the Company
anticipates that if it is able to establish ongoing revenues from production, it
will retain management personnel as employees of the Company and compensate them
on a salary basis, based on comparable compensation packages offered by
employers within the Company's general industry and geographical area.
The Company approved a stock option plan in 1996 pursuant to which options
to acquire 2,000,000 shares at $1.50 per share were issued to senior management
and consultants of the Company. The Company did not issue any stock bonuses or
grant stock options during 1997 and does not have a plan in effect currently
that would permit it to do so in 1998. However, the Company may at some point
propose and adopt such a plan.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 21, 1998, the number of shares
of the Company's common stock, par value $0.001, held of record or beneficially
by each person who held of record or was known by the Company to own
beneficially, more than 5% of the Company's common stock, and the name and
shareholdings of each officer and director and of all officers and directors as
a group.
<TABLE>
<CAPTION>
Name of Person or Group(1) Common Stock Options(2) Percent(3)
- ------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Principal Shareholders:
Chemilabco, B.V.(4) 10,540,000 0 16.2%
World Trade Center
Amsterdam Netherlands
Finance Credit & Development 2,688,333 2,200,000 7.5%
Corporation, Ltd.
"Chateau Amiral"
Bloc B-42, Boulevard
d'Italic
MC 9800 Monaco
Thomson Kernaghan & Co., Ltd. 10,000,000 0 15.4%
365 Bay Street, 10th Floor
Toronto Ontario MSH2V2(5)
Officers, Directors, and
Controlling Persons:
Dr. Reinhard Rauball(6) 579,000 250,000 1.3%
Wolfgang Rauball(7) 1,100,000 50,000 1.8%
Paul Hinterthur(8) 100,000 200,000 0.5%
Dr. Gregory P. Fontana 0 100,000 0.2%
Dr. Hans Fischer 0 100,000 0.2%
Hank Blankenstein 0 200,000 0.3%
J. Toni Preuss 0 0 0.0%
--------- --------- -----
All Officers, Directors, and 1,779,000 900,000 4.1%
Controlling Persons
as a Group (7 Persons)
</TABLE>
[FN]
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record by the listed shareholder, and
each shareholder has sole voting and investment power.
(2) Represents options to acquire shares of Common Stock at an exercise price
of $1.50 per share except for the option held by Finance Credit &
Development Corporation, Ltd., which is exercisable at $3.00 per share.
All options are currently exercisable.
(3) The percentage indicated represents the number of shares of Common Stock
held by the indicated shareholder divided by the 64,845,811 shares of
Common Stock issued and outstanding as of July 21, 1998.
(4) Includes shares held by Chemilabco's parent, Oxbridge, Ltd.
(5) The 10,000,000 shares reflects the number of shares of Common Stock
issuable on conversion of the 1998 Series B Convertible Preferred Stock
the Company is contractually obligated to register. The actual number
of shares issuable on conversion will vary depending on the trading price
of the Company's Common Stock immediately prior to conversion. Under the
terms of the Subscription Agreement, Thomson, Kernaghan & Co., Ltd. has
the right to acquire all 30,000 shares of the 1998 Series B Convertible
Preferred Stock. To date, only 8,000 shares have been issued of which
300 shares have been converted into 98,877 shares of Common Stock. If
the remaining currently issued and outstanding 7,700 shares of 1998
Series B Convertible Preferred Stock were converted based on the trading
price for the Common Stock of $3.6875 as of July 17, 1998, Thomson
Kernaghan & Co., Ltd. would be entitled to receive approximately
2,630,000 shares of Common Stock.
(6) Dr. Rauball is the record owner, as trustee, of an additional 50,000
shares, although he relinquished his trusteeship effective
August 26, 1996, and consequently, these shares are not reflected on
the foregoing table.
(7) These shares are held in the name of the spouse and children of Wolfgang
Rauball. Wolfgang Rauball disclaims a direct economic interest in these
shares, but may be deemed to beneficially own such shares under the
guidelines of the Exchange Act.
(8) These shares are held in the name of the spouse of Mr. Hinterthur. Mr.
Hinterthur disclaims a direct economic interest in these shares, but
may be deemed to beneficially own them under the guidelines of the
Exchange Act.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to January 1, 1997, the Company had a number of related party
transactions, descriptions of which are set forth in the Company's reports filed
with the Commission.
Unless otherwise indicated, the terms of any of the following transactions
were not the result of an arms-length negotiations because such transactions
were between parties that were related or had other business, professional or
personal relationships that may have affected the terms of such transaction.
Dr. Reinhard Rauball and Wolfgang Rauball
Dr. Reinhard Rauball, the chairman of the board of directors, and Wolfgang
Rauball, the Company's chief consultant, are brothers. Both gentlemen have been
key figures in arranging the original transaction with Energy Global, the
acquisition of the concessions in Poland, the later acquisition of Danube, which
holds concessions in the Slovak Republic, the acquisition of EJ and the Yakutia
Concession, and the participation in the British Columbia project. From time to
time, the Rauballs, principally Wolfgang Rauball, have also arranged for equity
and debt financing for the Company through parties with whom they have previous
business and personal relationships and have directly loaned some of their own
funds to the Company. (See Note 5 to the Financial Statements.)
While there is no formal agreement among the Rauballs and other debt and
equity holders of Company, the practical result of the relationships is to vest
control of the Company in the Rauballs.
Relationship With Oxbridge and Chemilabco
Chemilabco and its parent, Oxbridge, Ltd., constitute the largest single
shareholder of the Company. (See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.")
In 1997, Chemilabco and Oxbridge purchased 1,430,000 shares of the
Company's restricted stock for a cash purchase price of $10 million.
On December 31, 1997, the Company still owed Oxbridge an aggregate of
$1,230,235. Oxbridge holds (with others) the shares of Pol-Tex Methane Sp.
zo.o. as security for the debt.
Herbert Zimmer
Herbert Zimmer, a certified accountant, holds 700,000 shares of common
stock and represents some of the Company's shareholders and debenture holders.
Mr. Zimmer has from time to time assisted the Company in completing its internal
accounting. During 1997, Mr. Zimmer advanced $2,023,306 as a short-term loan.
In connection with this loan, Mr. Zimmer deposited proceeds from the issuance of
common stock by the Company and paid Company obligations from those proceeds for
approximately 90 days. Thereafter, Mr. Zimmer returned control over any funds
to the Company. In 1997, Mr. Zimmer received $104,493 for management services
from these funds. Mr. Zimmer received compensation of $26,000 and $70,000
during 1996, and 1995, respectively, for accounting services.
Loan Transactions
The Company has also funded part of its on-going operations requirements in
funds advanced from related parties, including certain advances in 1997.
At December 31, 1997, the Company owed $2,181,563 to related parties other
than Chemilabco. Approximately $1,772,000 of this amount was owed to Wolfgang
Rauball or his affiliates. These advances are evidenced by promissory notes
that bear interest at the rate of 10% per annum and are due December 31, 1999.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The articles of incorporation of the Company provide for the
indemnification of the officers and directors to the full extent permitted by
Utah corporate law. Such indemnification includes the advancement of costs and
expenses and extends to all matters, except those in which there has been
intentional misconduct, fraud, a knowing violation of law, or the payment of
dividends in violation of the Utah Revised Business Corporation Act and could
include indemnification for liabilities under the provisions of the Securities
Act. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer, or controlling person of the Company in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities subject to this
offering, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
EUROGAS, INC.
10,000,000 Shares of Common Stock
($0.001 Par Value)
PROSPECTUS
No dealer, salesman, or other person has been
authorized in connection with this offering
to give any information or to make any
representation other than as contained in
this Prospectus and, if made, such
information or representation must not be
relied on as having been authorized by the , 1998
Company. This Prospectus does not -------------
constitute an offer to sell or the
solicitation of an offer to buy any securities
covered by this Prospectus in any state or
other jurisdiction to any person to whom it
is unlawful to make such offer or solicitation
in such state or jurisdiction.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the
distribution of the securities being registered:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $ 10,879
Legal fees 58,000
State "blue sky" fees and expenses (including attorneys' fees) 5,000
Accounting fees and expenses 25,000
Printing expenses 1,121
Listing fees 0
---------
Total $ 100,000
</TABLE>
All expenses, except the SEC fees, are estimates.
The Selling Shareholders will not bear any portion of the foregoing
expenses, but will pay fees in connection with the sale of the Common Stock
offered hereby in those transactions completed to or through securities broker
and/or dealers in the form of markups, markdowns, or commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 16-10a-901 et seq. of the Utah Revised Business Corporation Act
and "ARTICLE VII. INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS" of the
Registrant's articles of incorporation provide for indemnification of the
Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933, as amended.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is contrary to
public policy as expressed in the Securities Act and, therefore, is
unenforceable. (See "ITEM 17. UNDERTAKINGS.")
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In May 1998, the Company entered into a Subscription Agreement pursuant to
which it agreed to sell up to 30,000 shares of its 1998 Series B Convertible
Preferred Stock for an aggregate of $30,000,000 gross proceeds. At the time of
the execution of the agreement, 8,000 shares were sold by the Company for gross
proceeds of $8,000,000 to three sophisticated investors. The Company obtained
representations that the purchasers were acquiring the securities for their own
investment and without the intent to make a distribution of such securities,
placed a restrictive legend on the certificates representing the securities, and
relied on the non-public offering exemption to the registration requirements of
the Securities Act in making this sale. The Common Stock issuable on conversion
of the 1998 Series B Convertible Preferred Stock is also restricted, but the
resale of such securities by the Selling Shareholders is covered by this
Prospectus.
During 1997, the Company sold or delivered 10,544,030 shares of common
stock and 4,450,000 options in transactions that were not registered under the
Securities Act as described in more detail below. Unless otherwise noted, the
sales were made without the participation of underwriters and without the
payment of any commission. The Company relied upon the exemptions from
registration provided in Section 4(2) of the Securities Act and Regulation D.
No placement of securities involved a public offering. The two offerings
for cash proceeds were to sophisticated institutions. The balance of shares and
options were delivered in connection with either a conversion of outstanding
indebtedness or the acquisition of property or mineral interests. In each
instance, the Company used the proceeds for general working capital.
The following summary does not include two sales previously reported in
which the Company relied principally on Regulation S as an exemption from
registration. The reports considering those sales were on the Company's Form
8-K dated March 24, 1997, covering the sale of 500,000 shares for gross
proceeds of $2.5 million and Form 8-K dated May 30, 1997, covering the
issuance of a newly created preferred stock for gross proceeds of $15 million.
On June 11, 1997, the Company delivered an option to OMV A.G. in connection
with its purchase of a subsidiary of OMV A.G. whose principal asset was a joint
venture in the Sakha Republic as described under "BUSINESS & PROPERTIES:
Activities in the Sakha Republic." The terms of the option provide for an
exercise price of $4.00 per share until April 1, 1998, $5.00 per share until
March 31, 1999, and $6.00 per share until March 31, 2000, at which time the
unexercised portion expires.
On June 30, 1997, the Company sold 1,430,000 shares of its restricted
stock, at $7.00 per share, for a gross purchase price of $10 million (US) to
Chemilabco B.V., a principal shareholder of the Company. (See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Also on June 30, 1997, the Company sold to Finance Credit & Development
Corporation, Ltd., in a transaction that amended a prior financing agreement, a
total of 2,999,999 shares of restricted common stock for $7.5 million and
converted a $1 million outstanding debenture to 333,334 shares of restricted
common stock. In connection therewith, the Company also granted a warrant for
the acquisition of 2,200,000 shares of the Company's common stock at $3.00 per
share. The option expires December 31, 1998.
During the 1997 fiscal year, holders of convertible debenture notes
(proceeds of which were received prior to 1997), converted a total of
$10,947,991 of principal and accrued interest into 2,646,907 shares of the
Company stock pursuant to the terms of the various debentures.
On July 3, 1997, 1,250,000 shares of the 1996 Preferred Stock were
automatically converted into 2,500,000 shares of common stock. The shares were
held by the former shareholders of Danube that the Company acquired during
fiscal 1996.
On August 9, 1997, the Company sold an option to purchase 250,000 shares to
CIBC Oppenheimer in connection with the entering into of a financial advisory
agreement. The option provides for an exercise price $11.79, expires August 9,
2002, and provides CIBC Oppenheimer with registration and cashless exercise
rights.
On August 30, 1997, the Company converted a promissory note held by the
former Danube shareholders in the amount of $2,846,590 of principal and accrued
interest into 383,790 shares of the Company's common stock.
On November 11, 1997, the Company delivered 250,000 shares of restricted
common stock for the acquisition of the 5% interest in the Danube subsidiary
which had been held by two foreign individuals which had invested $1 million
with the Danube project prior to its acquisition by the Company in 1996.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Copies of the following documents are included as exhibits to this
Registration Statement, pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibits
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- -------------------------------------------------------- --------------------
<S> <C> <C> <C>
Item 2.
- -----------------------------------------------------------------------------------
2.01 (2) Agreement and Plan of Merger between EuroGas, Inc., and Report on Form 8-K
Danube International Petroleum Company, Inc., dated July dated July 12, 1996,
3, 1996, as amended Exhibit No. 5*
2.02 (2) English translation of Transfer Agreement between Report on Form 8-K
EuroGas, Inc., and OMV, Inc. for the Acquisition of OMV dated June 11, 1997
(Yakut) Exploration GmbH dated June 11, 1997 Exhibit No. 1*
2.03 (2) Asset Exchange Agreement between EuroGas, Inc., and This Filing
Beaver River Resources, Ltd., dated April 1, 1998
Item 3. Articles of Incorporation and Bylaws
- -----------------------------------------------------------------------------------
3.01 (3) Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
3.02 (3) Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
3.03 (3) Designation of Rights, Privileges, and Preferences of Quarterly Report on
1995 Series Preferred Stock Form 10-QSB dated
March 31, 1995,
Exhibit No. 1*
3.04 (3) Designation of Rights, Privileges, and Preferences of Report on Form 8-K
1996 Series Preferred Stock dated July 12, 1996,
Exhibit No. 1*
3.05 (3) Designation of Rights, Privileges, and Preferences of Report on Form 8-K
1997 Series A Convertible Preferred Stock dated May 30, 1997
Exhibit No. 1*
3.06 (3) Designation of Rights, Privileges, and Preferences of This Filing
1998 Series B Convertible Preferred Stock
3.07 (3) Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
Item 4. Instruments Defining the Rights of Security Holders
- -----------------------------------------------------------------------------------
4.01 (4) Subscription Agreement between EuroGas, Inc., and Thomson This Filing
Kernaghan & Co., Ltd., dated May 29, 1998
4.02 (4) Registration Rights Agreement between EuroGas, Inc., and This Filing
Thomson Kernaghan & Co., Ltd., dated May 29, 1998
4.03 (4) Warrant Agreement between EuroGas, Inc., and Oppenheimer This Filing
& Co., Inc.
4.04 (4) Warrant Agreement dated July 12, 1996, with Danube Report on Form 8-K
shareholders dated July 12, 1996,
Exhibit No. 2*
4.05 (4) Registration Rights Agreement dated July 12, 1996, with Report on Form 8-K
Danube shareholders dated July 12, 1996
Exhibit No. 3*
4.06 (4) Registration Rights Agreement by and among EuroGas, Inc., This Filing
and Finance Credit & Development Corporation, Ltd., dated
June 30, 1997
4.07 (4) Option granted to the Trustees of the Estate of Bernice Annual Report on
Pauahi Bishop Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*
4.08 (4) Registration Rights Agreement by and among EuroGas, Inc.,
and Kukui, Inc., and the Trustees of the Estate of Annual0Reportoonthe
Bernice Pauahi Bishop fiscal year ended
December 31, 1995,
Exhibit No. 11*
4.09 (4) Convertible Debenture issued to Lux Immobilien for Annual Report on
$2,200,000 Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 12*
4.10 (4) Option issued to OMV Aktiengesellschaft to acquire up to Annual Report on
2,000,000 shares of restricted common stock Form 10-KSB for the
fiscal year ended
December 31, 1996,
Exhibit No. 13*
Item 5. Opinion Regarding Legality
- -----------------------------------------------------------------------------------
5.01 (5) & (23) Opinion of Kruse, Landa & Maycock, L.L.C. This Filing
Item 10. Material Contracts
- -----------------------------------------------------------------------------------
10.01 (10) Agreement in Principle between EuroGas, Inc., and Annual Report on
Chemilabco B.V., dated June 1996, as amended November Form 10-KSB for the
1996 fiscal year ended
December 31, 1995,
Exhibit No. 13*
10.02 (10) 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.03 (10) Settlement Agreement by and among Kukui, Inc., and Pol- Annual Report on
Tex Methane, Sp. zo.o., McKenzie Methane Rybik, McKenzie Form 10-KSB for the
Methane Jastrzebie, GlobeGas, B.V. (formerly known as fiscal year ended
McKenzie Methane Poland, B.V.), and the Unsecured December 31, 1995,
Creditors' Trust of the Bankruptcy Estate of McKenzie Exhibit No. 15*
Methane Corporation
10.04 (10) Employment Agreement with Martin A. Schuepbach dated July Report on Form 8-K
12, 1996 dated July 12, 1996,
Exhibit No. 6*
10.05 (10) English translation of General Agreement governing the Report on Form 8-K
operation of McKenzie Methane Poland, B.V. dated August 3, 1994,
Exhibit No. 2*
10.06 (10) English translation of Concession Agreement between Annual Report on
Ministry of Environmental Protection, Natural Resources, Form 10-KSB for the
and Forestry of Poland and Pol-Tex Methane Ltd. fiscal year ended
December 31, 1995,
Exhibit No. 18*
10.07 (10) Association Agreement between NAFTA a.s. Gbely and Danube Annual Report on
International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 19*
10.08 (10) Agreement between Moravske' Naftove' Doly a.s. and Danube Annual Report on
International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 20*
10.09 (10) Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*
10.10 (10) Form of Promissory Note, as amended, with attached list Annual Report on
of holders Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*
10.11 (10) Amendment #1 to the Association Agreement Entered on 13th Annual Report on
July 1995, between NAFTA a.s. Gbely and Danube Form 10-KSB for the
International Petroleum Company fiscal year ended
December 31, 1996,
Exhibit No. 25*
10.13 (10) Purchase and Sale Agreement between Texaco Slask Sp. Report on Form 8-K
zo.o., Pol-Tex Methane Sp. zo.o. and GlobeGas B.V. dated March 24, 1997
Exhibit No. 1*
10.14 (10) English translation of Articles of Association of the Report on Form 8-K/A
TAKT Joint Venture dated June 7, 1991, as amended April dated June 11, 1997
4, 1993 Exhibit No. 3*
10.15 (10) English translation of Proposed Exploration and Report on Form 8-K/A
Production Sharing Contract for Hydrocarbons between the dated June 11, 1997
Republic of Sakha (Yakutia) and the Russian Federation Exhibit No. 4*
and the TAKT Joint Venture
10.16 (10) English translation of Mining Usufruct Contract between Quarterly Report on
The Minister of Environmental Protection, Natural Form 10-Q dated
Resources and Forestry of the Republic of Poland and Pol- September 30, 1997
Tex Methane, dated October 3, 1997 Exhibit No. 1*
10.17 (10) Agreement between Polish Oil and Gas Mining Joint Stock Quarterly Report on
Company and EuroGas, Inc., dated October 23, 1997 Form 10-Q dated
September 30, 1997
Exhibit No. 2*
10.18 (10) Agreement for Acquisition of 5% Interest in a Subsidiary Quarterly Report on
by and between EuroGas, Inc., B. Grohe, and T. Koerfer, Form 10-Q dated
dated November 11, 1997 September 30, 1997
Exhibit No. 3*
10.19 (10) Option Agreement by and between EuroGas, Inc., and Beaver Quarterly Report on
River Resources, Ltd., dated October 31, 1997 Form 10-Q dated
September 30, 1997
Exhibit No. 4*
10.20 (10) Acquisition Agreement between EuroGas, Inc., and Belmont This Filing
Resources, Inc., dated July 22, 1998
10.21 (10) English translation of Agreement on Joint Investment and This Filing
Production Activities between EuroGas, Inc., and
Zahidukrgeologia, dated May 14, 1998
10.22 (10) English translation of Statutory Agreement of Association This Filing
of Limited Liability Company With Foreign Investments
between EuroGas, Inc., and Makyivs'ke Girs'ke Tovarystvo,
dated June 17, 1998
10.23 (10) Agreement between EuroGas, Inc., and RWE-DEA To be Provided by
Altiengesellschaft for Mineraloel and Chemie AG, dated Amendment
July 22, 1998
Item 21. Subsidiaries of the Registrant
- -----------------------------------------------------------------------------------
21.01 (21) Schedule of Subsidiaries Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 24*
Item 23. Consents of Experts and Counsel
- -----------------------------------------------------------------------------------
23.01 (23) Consent of Hansen, Barnett & Maxwell, auditors of the This Filing
Registrant
23.02 (23) Consent of Ryder Scott Company, Petroleum Engineers This Filing
23.03 (23) Consent of Kruse, Landa & Maycock, L.L.C., counsel to the This Filing (See Item 5)
Registrant
Item 24. Power of Attorney
- -----------------------------------------------------------------------------------
24.01 (24) Power of Attorney This Filing (See
Signature Page)
</TABLE>
[FN]
*Incorporated by reference
ITEM 17. UNDERTAKINGS
Post-Effective Amendments. [Regulation S-K, Item 512(a)]
The undersigned Registrant will:
(1) File, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Indemnification. [Regulation S-K, Item 512(h)]
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer, or controlling person of the small business issuer
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Rule 430. [Regulation S-K, Item 512(i)]
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this preliminary prospectus in reliance on rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
preliminary prospectus of the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Hamburg, Germany, on the 21st day of July, 1998.
EUROGAS, INC.
By /s/ Paul Hinterthur
Paul Hinterthur, President
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul Hinterthur and Hank Blankenstein, and each
of them, with the power of substitution, as his attorney-in-fact for him, in all
capacities, to sign any amendments to this Registration Statement and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on this 21st day of July, 1998.
/s/ Paul Hinterthur
Paul Hinterthur, Director
/s/ Dr. Reinhard Rauball
Dr. Reinhard Rauball, Director
/s/ Hank Blankenstein
Hank Blankenstein, Director
(Principal Financial and Accounting Officer)
/s/ Dr. Gregory P. Fontana
Dr. Gregory P. Fontana, Director
/s/ Dr. Hans Fischer
Dr. Hans Fischer, Director
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets--March 31, 1998 (Unaudited)
and December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited), and for the
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Three Months Ended March 31, 1998 (Unaudited),
and for the Years Ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited), and for the
Years Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-8
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Eurogas, Inc.
We have audited the accompanying consolidated balance sheets of
Eurogas, Inc. (a Utah corporation) and Subsidiaries (referred to herein
as "the Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Eurogas, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/S/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 1998
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996 1995
--------- --------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $10,809,855 $17,247,667 $ 642,605
Other receivables 155,102 173,691 122,047
Other current assets -- 29,370 4,942
---------- ----------- -----------
Total Current Assets 10,964,957 17,450,728 769,594
----------- ----------- -----------
Investment in securities
available-for-sale 962,398 -- --
Property and Equipment
Oil and gas properties
subject to amortization 7,295,012 -- --
Oil and gas properties not
subject to amortization 24,105,418 22,723,660 14,252,754
Other property and
equipment 1,014,139 1,010,772 2,423,039
----------- ----------- -----------
32,414,569 23,734,432 16,675,793
Less: accumulated
depreciation (770,100) (767,177) (2,144,113)
----------- ----------- -----------
Net Property and Equipment 31,644,469 22,967,255 14,531,680
----------- ------------ -----------
Other Assets 525,280 336,560 600,865
----------- ------------ -----------
Total Assets $44,097,104 $ 40,754,543 $15,902,139
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 696,598 $ 1,532,949 $ 1,389,859
Accrued liabilities 3,407,398 3,420,042 2,659,721
Accrued income taxes 738,450 753,306 911,051
Notes payable - current
portion 967,772 1,107,944 3,688,788
Notes payable to related
parties - current portion 614,944 1,270,547 1,062,091
----------- ----------- -----------
Total Current Liabilities 6,425,162 8,084,788 9,711,510
----------- ----------- -----------
Long-Term Debt
Notes payable 1,542,554 2,246,773 5,733,702
Notes payable to related
parties 968,354 911,016 4,897,845
----------- ----------- -----------
Total Long-Term Debt 2,510,908 3,157,789 10,631,547
----------- ----------- -----------
Minority Interest -- -- 950,000
----------- ----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, $.001
par value; 3,661,968 shares
authorized; 2,392,228 and
3,641,968 shares issued
and outstanding; $499,197
liquidation preference 2,392 2,392 3,642
Common stock, $.001 par
value; 325,000,000 shares
authorized; 64,683,934
shares, 62,283,934 shares
and 49,143,862 shares
issued and outstanding 64,684 62,284 49,144
Additional paid-in capital 69,235,945 61,659,345 14,842,922
Other comprehensive income (145,590) (14,749) (14,749)
Accumulated deficit (33,996,397) (32,197,306) (20,271,877)
------------ ------------ -----------
Total Stockholders'
Equity (Deficit) 35,161,034 29,511,966 (5,390,918)
------------ ------------ -----------
Total Liabilities and
Stockholders' Equity
(Deficit) $ 44,097,104 $ 40,754,543 $15,902,139
============ ============ ===========
The accompanying notes are an integral part of these financial
statements.
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Sale of Mineral Interests
and Equipment $ -- $ -- $ 500,000 $ -- $ --
----------- ----------- ------------ ----------- -----------
Operating Expenses
Cost of mineral interests
and equipment sold -- -- 500,000 -- --
Impairment of mineral
interests and equipment -- -- 1,972,612 -- --
Depreciation and
amortization 4,770 7,178 25,637 132,459 480,999
General and admin.-
strative 1,728,791 897,159 6,716,365 4,739,380 3,528,114
----------- ----------- ------------ ----------- -----------
Total Operating
Expenses 1,733,561 904,337 9,214,614 4,871,839 4,009,113
----------- ----------- ------------ ----------- -----------
Other Income (Expenses)
Interest income 170,556 -- 517,845 18,588 9,580
Interest expense (135,963) (242,148) (3,680,090) (1,057,039) (644,991)
Foreign currency
exchange gains
(losses), net (57,661) (76,323) 331,837 (401,141) (81,213)
Other income -- -- 43,123 48,840 16,184
----------- ----------- ------------ ----------- -----------
Other Expenses, Net (23,068) (318,471) (2,787,285) (1,390,752) (700,440)
----------- ----------- ------------ ----------- -----------
Loss Before Income
Taxes (1,756,629) (1,222,808) (11,501,899) (6,262,591) (4,709,553)
Benefit from Income
Taxes -- 122,281 -- -- 468,148
----------- ----------- ------------ ----------- ------------
Net Loss (1,756,629) (1,100,527) (11,501,899) (6,262,591) (4,241,405)
Preferred Dividends 42,462 182,098 423,530 150,592 86,176
----------- ----------- ------------ ----------- ------------
Loss Applicable to
Common Shares $(1,799,091) $(1,282,625) $(11,925,429) $(6,413,183) $(4,327,581)
=========== =========== ============ =========== ===========
Basic and Diluted Loss
Per Common Share $ (0.03) $ (0.03) $ (0.22) $ (0.16) $ (0.13)
=========== =========== ============ =========== ===========
Weighted Average Number
of Common Shares Used In
Per Share Calculation 63,483,934 49,354,271 54,705,726 41,059,000 32,459,436
=========== =========== ============ =========== ===========
Net Loss Applicable to
Common Shares (1,799,091) (1,282,625) (11,925,429) (6,413,183) (4,327,581)
Other Comprehensive
Income Cumulative
Translation adjustment (145,590) -- -- -- --
----------- ----------- ------------ ----------- -----------
Comprehensive Loss $(1,944,681) $(1,282,271) $(11,925,429) $(6,413,183) $(4,327,581)
=========== =========== ============ =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
EUROGAS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION> Deficit
Accumulated Other Total
Additional During the Compre- Stockholders'
Preferred Stock Common Stock Paid-In Development hensive Equity
Shares Amount Shares Amount Capital Stage Income (Deficit)
--------- ------- ---------- ------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -
December
31, 1994 2,391,968 $ 2,392 31,932,314 $31,932 $ 9,369,945 $ (9,531,113) $ (14,749) $ (141,593)
Issuance of
common stock
upon exercise
of stock
options for
cash -- -- 157,793 158 38,648 -- -- 38,806
Issuance of
common stock
for compensation
to officer upon
exercise of
stock option -- -- 41,667 42 9,958 -- -- 10,000
Distribution to
two share
-holders -- -- -- -- (1,150,000) -- -- (1,150,000)
Issuance of
common stock
for cash and
conversion of
a $1,671,567
debenture,
$3.12 per share,
net of $75,546
offering costs -- -- 842,259 842 2,626,520 -- -- 2,627,362
Dividends on
preferred
shares -- -- -- -- -- (86,176) -- (86,176)
Net loss -- -- -- -- -- (4,241,405) -- (4,241,405)
--------- ------- ---------- ------- ----------- ------------ --------- -----------
Balance -
December 31,
1995 2,391,968 2,392 32,974,033 32,974 10,895,071 (13,858,694) (14,749) (2,943,006)
Issuance of
common stock
for cash -- -- 18,912 19 6,789 -- -- 6,808
Issuance of
common stock
upon conver
-sion of
debentures -- -- 1,128,917 1,129 3,340,621 -- -- 3,341,750
Issuance of
common stock
as settlement
costs -- -- 22,000 22 100,678 -- -- 100,700
Issuance of
preferred and
common stock
for purchase
of subsid-
iary 1,250,000 1,250 15,000,000 15,000 499,763 -- -- 516,013
Dividends on
preferred
shares -- -- -- -- -- (150,592) -- (150,592)
Net loss -- -- -- -- -- (6,262,591) -- (6,262,591)
--------- ------- ---------- ------- ----------- ------------ --------- -----------
Balance -
December 31,
1996 3,641,968 3,642 49,143,862 49,144 14,842,922 (20,271,877) (14,749) (5,390,918)
Issuance of
common stock
and 2,200,000
options for
cash, net of
$75,000 offer-
ing costs -- -- 4,929,999 4,930 20,170,070 -- -- 20,175,000
Conversion of
notes payable
and related
interest -- -- 2,646,907 2,647 10,945,344 -- -- 10,947,991
Issuance for
cash, net of
$1,750,000
offering
costs 15,000 15 50,000 50 13,249,935 -- -- 13,250,000
Options granted
in connection
with acquisi-
tion of OMV
(Jakutien)
Exploration
GmbH -- -- -- -- 1,150,000 -- -- 1,150,000
Conversion of
1996 Series
Preferred shares
and related
accrued
dividends (1,250,000) (1,250) 2,500,001 2,500 71,524 -- -- 72,774
Conversion
of 1997
Series Preferred
shares and
related accrued
dividends (14,790) (15) 2,763,165 2,763 229,800 -- -- 232,548
Issuance to
acquire minority
interest in
subsidiary -- -- 250,000 250 999,750 -- -- 1,000,000
Dividends on
preferred
shares -- -- -- -- -- (423,530) -- (423,530)
Net loss -- -- -- -- -- (11,501,899) -- (11,501,899)
--------- ------- ---------- ------- ----------- ------------ --------- -----------
Balance -
December
31, 1997 2,392,228 2,392 62,283,934 62,284 61,659,345 (32,197,306) (14,749) 29,511,966
Issuance of
common stock
to acquire
a 16% interest
in Beaver
River project
(Unaudited) -- -- 2,400,000 2,400 7,572,600 -- -- 7,575,000
Other compre-
hensive income
(Unaudited) -- -- -- -- 4,000 -- (130,841) (126,841)
Net loss
(Unaudited) -- -- -- -- -- (1,799,091) -- (1,799,091)
--------- ------- ---------- ------- ----------- ------------ --------- -----------
Balance -
March 31, 1998
(Unaudited) 2,392,228 $ 2,392 64,683,934 $64,684 $69,235,945 $(33,996,397) $(145,590) $35,161,034
========= ======= ========== ======= =========== ============ ========= ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended
Ended March 31, December 31,
1998 1997 1997 1996 1995
------------ ----------- ------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net loss $ (1,756,629) $(1,100,527) $(11,501,899) $ (6,262,591) $ (4,241,405)
Adjustments to reconcile
net loss to cash provided
by operating activities:
Impairment of mineral
interests and equipment -- -- 1,972,612 -- --
Depreciation and
amortization 4,770 147,337 25,637 132,458 480,999
Expenses paid by issuance
of notes payable -- -- 1,321,295 -- --
Compensation paid by
issuance of common stock -- -- -- 351,808 10,000
Exchange (gain) loss -- 76,323 (331,837) 401,141 81,213
Changes in assets and
liabilities, net of
acquisitions:
Receivables 18,589 39,142 26,510 (97,595) 11,155
Accounts payable (836,351) 131,907 1,814,545 (210,990) 177,508
Accrued liabilities (55,106) 76,004 3,271,804 1,666,394 1,584,520
Accrued income taxes 14,856 (122,281) -- -- (468,938)
Other 62,812 11,497 156,451 33,903 9,200
------------ ----------- ------------ ----------- ------------
Net Cash Used in Operating
Activities (2,547,059) (740,598) (3,244,882) (3,985,472) (2,355,748)
Cash Flows From Investing
Activities
Purchases of mineral
interests, property
and equipment (1,105,137) (412,788) (5,391,568) (3,368,342) (1,294,324)
Proceeds from sale of
property and equipment -- -- 501,646 -- --
Acquisition of subsidiaries,
net of cash acquired -- -- (6,314,287) 181,743 --
Increase in deposits and
prepayments (220,000) 24,830 -- (540,000) --
Investment in securities
available-for-sale (962,398) -- -- -- --
------------ ----------- ------------ ------------ ------------
Net Cash Used In
Investing Activities (2,287,535) (387,958) (11,204,208) (3,726,599) (1,294,324)
------------ ----------- ------------ ----------- ------------
Cash Flows From Financing
Activities
Proceeds from issuance of
notes payable - related
parties -- -- 339,191 4,542,487 3,398,854
Repayment of notes payable
- related parties (227,021) -- (905,866) (1,002,026) (2,293,898)
Proceeds from issuance
of notes payable -- -- 1,135,729 4,846,995 1,245,196
Principal payments on
notes payable (1,215,635) (1,802,500) (2,707,551) (80,123) (397,500)
Proceeds from issuance
of common stock -- 2,932,097 20,175,000 6,808 974,060
Proceeds from issuance of
preferred stock -- -- 13,250,000 -- --
Dividends paid on preferred
stock -- -- -- (120,000) --
------------ ----------- ------------ ------------ ------------
Net Cash Provided By
Financing Activities (1,442,656) 1,129,597 31,286,503 8,194,141 2,926,712
------------ ----------- ------------ ------------ ------------
Effect of Exchange
Rate Changes on Cash
and Cash Equivalents (160,562) -- (232,351) 88,323 (2,253)
------------ ----------- ------------ ------------ ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents (6,437,812) 1,041 16,605,062 570,393 (725,613)
Cash and Equivalents
at Beginning of Period 17,247,667 642,605 642,605 72,212 797,825
------------ ----------- ------------ ----------- ------------
Cash and Equivalents at End
of Period $ 10,809,855 $ 643,646 $ 17,247,667 $ 642,605 $ 72,212
============ =========== ============ =========== ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months For the Years Ended
Ended March 31, December 31,
1998 1997 1997 1996 1995
-------- -------- -------- ------- ------
(Unaudited) (Unaudited)
Supplemental Disclosure of
Cash Flow Information
Cash paid for interest $226,429 $242,148 $362,622 $97,162 $8,025
Cash paid for income
taxes -- -- -- -- --
Supplemental Schedule of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
For the Three Months For the Years Ended
Ended March 31, December 31,
1998 1997 1997 1996 1995
----- ------ ----------- ---------- ---------
(Unaudited (Unaudited)
<S> <C> <C> <C> <C> <C>
Common stock issued
upon conversion of
notes payable and
accrued interest $ -- $ -- $10,947,991 $4,091,750 $1,692,108
During 1997 and 1996, Eurogas made business acquisitions resulting in
the following:
Fair value of
assets acquired $ -- $ -- $ 7,506,621 $4,999,405
Liabilities assumed -- -- (28,317) (433,392)
Obligation to sellers -- -- -- (2,500,000)
Minority interest
recognized -- -- -- (950,000)
Preferred and
common stock
issued -- -- -- (516,013)
Stock options
granted -- -- (1,150,000) --
----- ------- ----------- ----------
Cash Paid -- -- 6,328,304 600,000
Less cash acquired -- -- (14,017) (781,743)
----- ------- ----------- ----------
Net Cash Paid
(Received) $ -- $ -- $ 6,314,287 $ (181,743)
===== ======= =========== ==========
</TABLE>
In 1997, Eurogas issued common stock worth $305,322 as payment of
preferred dividends. In May 1995, Eurogas delivered and paid promissory
notes to two Globegas stockholders totaling $1,150,000. these notes
were issued and paid in connection with the acquisition of Energy
Global in 1994 and have been accounted for as distributions to those
shareholders.
During November 1997, Eurogas acquired a remaining minority interest in
the Danube project by issuing 250,000 shares of common stock valued at
$1,000,000, which was equal to the carrying value of the minority
interest after reclassification of related liabilities.
In March 1998, Eurogas exercised its option to acquire a 16-percent
carried interest in the Beaver River Project in British Columbia,
Canada in exchange for $300,000 and 2,400,000 shares of common stock.
The acquisition has been preliminarily valued at $7,875,000
(Unaudited).
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to March 31, 1998 and For The Three
Months Ended March 31, 1998 and 1997 is Unaudited)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION--Eurogas, Inc. and Subsidiaries (the Company) have
acquired oil and gas properties through investments in joint
ventures in Poland, Slovakia and Yukutia, Russia. The Company's
operations to date have consisted of evaluation, acquisition,
exploration and disposition of interests in oil and gas
properties.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated
financial statements include the accounts of all majority-owned
subsidiaries and joint ventures from the date of acquisition.
All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions which
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could
differ from those estimates.
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. These costs include
costs of drilling and equipping wells and directly related
overhead costs. Capitalized costs are categorized either as
being subject to amortization (proved properties) or not
subject to amortization (unproved properties). The cost of
unproved properties are not subject to amortization but instead
are assessed periodically and any resulting provision for
impairment which is required is charged to operations. The
assessment for impairment is based upon estimated fair value of
the unproved properties. All capitalized costs of properties
subject to amortization, including the estimated future costs
to develop proved reserves, as found, will be amortized on the
unit-of-production method using estimates of proved reserves.
Amortization will begin when and if production begins on a
well-by-well basis.
Sales of unproved properties are accounted for as adjustments
of capitalized costs by recognizing cost of properties sold
equal to the sales proceeds which results in no recognition of
gain or loss.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment are
stated at cost. Minor repairs, enhancements and maintenance
costs are expensed when incurred; major improvements are
capitalized. Depreciation of property is provided on a
straight-line basis over the estimated useful lives, as
follows: buildings-- 40 years; equipment--3 to 5 years. Upon
retirement, sale, or other disposition of other property and
equipment, the cost and accumulated depreciation are eliminated
from the accounts, and gain or loss is included in operations.
Depreciation expense for the years ended December 31, 1997,
1996 and 1995 was $83,885, $196,232 and $480,999, respectively,
of which $65,639 and $63,773 were capitalized in mineral
interests and equipment in 1997 and 1996, respectively.
Depreciation expense for the three months ended March 31, 1998
and 1997 were $4,770 and $147,337, respectively.
FINANCIAL INSTRUMENTS--The Company considers all highly-liquid
debt instruments purchased with maturities of three months or
less to be cash equivalents. The amounts reported as cash and
cash equivalents, 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 Company had cash in Polish banks in the amount of $532,627
and $63,385 at December 31, 1997 and 1996 for which the Company
would incur certain taxes if the cash were transferred out of
Poland.
LOSS PER SHARE--In the fourth quarter of 1997 the Company
adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Prior periods have been restated to
conform to the requirements of SFAS No. 128. Basic loss per
common share is computed by dividing net loss available to
common stockholders by thee weighted average number of common
shares outstanding during the period. Diluted loss per share
reflects potential dilution which could occur if all
potentially issuable common shares from stock purchase warrants
and options or convertible notes payable resulted in the
issuance of common stock. In the Company's present position,
diluted loss per share is the same as basic loss per share
because potentially issuable common shares would decrease the
loss per share and have been excluded from the calculation.
FOREIGN CURRENCY TRANSLATION--Effective January 1, 1998, the
Company changed the functional currencies of the subsidiaries
operating in Poland and Slovakia from the U.S. dollar to the
local currencies. The U.S. dollar is considered the functional
currency of all other foreign subsidiaries. Net exchange gains
or losses resulting from the translation of foreign
subsidiaries' financial statements where local currencies are
considered the functional currencies, are accumulated in a
separate section of stockholders' equity. Where the functional
currencies of foreign subsidiaries are considered to be the
U.S. dollar, financial statements are translated into U.S.
dollars using historical exchange rates and net foreign
exchange gains and losses have been reflected in the results of
operations.
INCOME TAXES--Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences in the balances of existing assets and liabilities
on the Company's financial statements and their respective tax
bases and attributable to operating loss carry forwards,
computed at enacted tax rates when such amounts are expected to
be realized or settled.
STOCK BASED COMPENSATION--The Company accounts for stock-based
compensation from stock options granted to employees and
consultants based on the intrinsic value of the options on the
date granted.
NEW ACCOUNTING STANDARDS--The Financial Accounting Standards
Board issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information in 1997. These statements, which are
effective for fiscal years beginning after December 15, 1997,
expand or modify disclosures and will have no impact on the
Company's consolidated financial position, results of
operations or cash flows.
The Company adopted SFAS No. 128, Earnings per Share, and SFAS
No. 129, Disclosures of Information about Capital Structure, in
1997. In accordance with SFAS Nos. 128 and 129, both basic net
loss per share and diluted net loss per share as well as rights
and liquidation preferences of debt and equity securities and
have been presented in the accompanying consolidated financial
statements.
INTERIM FINANCIAL STATEMENTS--The accompanying consolidated
financial statements at March 31, 1998 and for the three months
ended March 31, 1998 and 1997 are unaudited. In the opinion of
management, all necessary adjustments (which include only
normal recurring adjustments) have been made to present fairly
the financial position, results of operations and cash flows
for the periods presented. The results of operations for the
three month period ended March 31, 1998 and are not necessarily
indicative of the operating results to be expected for the full
year.
NOTE 2--BUSINESS ACQUISITIONS
ACQUISITION OF DANUBE INTERNATIONAL PETROLEUM COMPANY, INC.--
On July 12, 1996, the Company completed an acquisition of
Danube International Petroleum Company, Inc. and Subsidiaries
(Danube). Danube is a joint venture partner in agreements for
the exploration and production of natural gas in Slovakia and
the Czech Republic. All of the issued and outstanding common
stock of Danube was acquired for $500,000 paid at closing, an
obligation to pay $2,500,000 on or before December 31, 1996,
15,000,000 shares of the Company's common stock, 1,250,000
shares of 1996 Series preferred stock (which is convertible
into an aggregate of 2,500,000 shares of common stock), and
warrants to purchase up to 5,000,000 shares of common stock at
$3.00 per share during the five years subsequent to the date of
the acquisition. In addition, a $100,000 finder's fee was paid
to a third party. The acquisition of Danube was accomplished by
Eurogas forming a wholly-owned Texas subsidiary into which
Danube was merged.
The acquisition was accounted for under the purchase method of
accounting, with the total purchase price being $3,616,013,
determined primarily based upon the fair value of the mineral
interests acquired. Accordingly, the preferred stock and common
stock issued were assigned values of $73,716 and $442,297,
respectively, which was equal to the par value of these shares.
Goodwill was not recognized from the acquisition but the
portion of the purchase price in excess of historical cost was
allocated to the mineral interests in unproved properties. The
operations of Danube have been included in the consolidated
results of operations of the Company from July 1, 1996.
ACQUISITION OF REMAINING INTEREST IN POL-TEX METHANE AND DANUBE
-- On May 17, 1996 the Company acquired the remaining 15%
interest in the Company's subsidiary, Pol-Tex Methane Sp.Zo.o.
from the Polish Government for a cash payment of $5,225 and the
release of the obligation of the Polish Government to fund
development costs of the concession. The Company's operations
are unchanged on a proforma basis from this acquisition. On
November 11, 1997, the Company acquired a remaining minority
interest in the Danube project by issuing 250,000 shares of
common stock valued at $1,000,000, which was equal to the
carrying value of the minority interest after reclassification
of related liabilities.
ACQUISITION OF OMV (JAKUTIEN) EXPLORATION GASELLSCHAFT M.B.H. -
- On June 11, 1997 the Company acquired all the issued and
outstanding stock of OMV (Jakutien) Exploration Gasellschaft
m.b.H. (OMVJ), in exchange for $6,252,724 in cash, options to
purchase 2,000,000 shares of common stock valued at $1,150,000,
and a 5% interest in OMVJ's net profits. OMVJ's primary asset
is a 50% interest in a joint venture in the Republic of Sakha
(commonly known as Yakutia) of the Russian Federation. Expenses
relating to the purchase were $75,580.
The acquisition was accounted for under the purchase method of
accounting with the total purchase price of $7,478,304
determined based upon the consideration paid and the fair value
of the options granted. The purchase price was allocated to
the acquired assets and liabilities of OMVJ based upon their
fair values on the date of the acquisition. The operations of
OMVJ have been included in the consolidated results of
operations of the Company since the acquisition date.
Summary unaudited pro forma results of operations for the years
ended December 31, 1997, 1996 and 1995, assuming the
acquisition of Danube occurred on January 1, 1995 and the
acquisition of OMVJ occurred on January 1, 1996 are as follows:
1997 1996 1995
------------ ----------- ----------
Revenues $ 500,000 $ -- $ --
Net loss (11,589,555) (7,233,786) (4,443,798)
Net loss applicable to
common shares (12,913,085) (8,346,878) (4,592,474)
Net loss per common
share (0.23) (0.20) (0.10)
In March 1998, the Company exercised its option to acquire a
16-percent carried interest in the Beaver River Project in
British Columbia, Canada in exchange for $300,000 and 2,400,000
shares of common stock. The Company will retain the right to
purchase back 1,900,000 of the 2,400,000 common shares any time
prior to April 15, 1999 if the Company determines that the
results produced do not warrant the continued holding of the
carried interest. The acquisition has been preliminarily
valued at $7,875,000.
The Company acquired 993,333 units of United Gunn Resources,
Ltd. (each unit consisting of one share of common stock and one
warrant) for $962,398 during the quarter ended March 31, 1998.
United Gunn Resources, Ltd. holds a working interest of
approximately 12% in the Beaver River Project. The investment
in United Gunn Resources, Ltd. has been accounted for as a
noncurrent investment in securities available-for-sale and is
carried at market value which approximated cost at March 31,
1998.
NOTE 3--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
The Company has interests in oil and gas properties located in
Poland, Slovakia and Yakutia, Russia. At December 31, 1997, a
determination had not been made regarding the extent of any
potential oil and gas reserves relating to the Company's
interests in properties. Subsequently, an oil and gas reserve
report was prepared for the Company's interests in the Trebisov
oil and gas properties in Slovakia, dated May 1, 1998, which
determined that provided reserves of oil and gas exist. Costs
incurred with respect to that project have been reclassified as
oil and gas properties subject to amortization during the
quarter ended March 31, 1998. Amortization will begin when and
if production begins from wells on that property.
Oil and gas properties are periodically assessed for
impairment. During 1997, the investment in oil and gas
interests in the Czech Republic were determined to be impaired
and an impairment loss of $1,972,612 was recognized and charged
to operations. The capitalized costs of the other unproved
properties were also evaluated. The evaluation resulted in a
determination that further recognition of impairment of those
properties was not necessary. All oil and gas property
interests are presently in the exploration stage and no
production has been obtained. Accordingly, amortization of the
cost of the properties has not begun.
Capitalized costs relating to oil and gas acquisition and
exploration activities and the related valuation allowance for
impairment are as follows:
March 31, December 31,
1998 1997 1996
------------ ----------- -----------
Proved Properties $ 7,925,012 $ -- $ --
Unproved properties 26,417,131 25,665,373 15,221,855
Less: Accumulated
valuation allowance (2,941,713) (2,941,713) (969,101)
------------ ----------- -----------
Net Capitalized
Costs $ 31,400,430 $22,723,660 $14,252,754
============ =========== ===========
Costs incurred in oil and gas acquisition and exploration
activities during the three years ended December 31, and the
three months ended March 31, 1998, are set forth below.
Property acquisition costs represent costs incurred to purchase
or lease oil and gas properties. Exploration costs include
costs of geological and geophysical activity and drilling
exploratory wells.
For The
Three
Months For the Years Ended
Ended December 31,
1998 1997 1996 1995
----------- ----------- ----------- -----------
Unproved property
acquisition
costs $ 7,875,000 $ 7,574,601 $ 4,217,069 $ --
Exploration
costs 801,770 3,370,563 2,998,441 1,261,295
----------- ----------- ----------- -----------
Total Expend-
itures $ 8,676,770 $10,945,164 $ 7,215,510 $ 1,261,295
=========== =========== =========== ===========
Eurogas's share of
equity method
investee's costs
of property
acquisition $ 962,398 $ -- $ -- $ --
=========== =========== =========== ===========
In August 1997, the Company closed a transaction with a
subsidiary of Texaco for the exploration and potential
development of the Company's coal bed methane gas interests
held by a concession in Poland. The Company retained a 14-
percent to 20-percent carried interest in the net profits from
the property, computed after deducting capital and operating
costs incurred by the Texaco subsidiary, and transferred the
remaining interest in the property to Texaco in exchange for an
initial payment of $500,000 and payments of $2,500,000 due in
December 1998 and June 2000 if Texaco elects at those dates to
continue with the project. The agreement also granted first
right of refusal to Texaco to obtain a controlling interest in
two other property interests in Poland held by the Company. The
payment received during 1997 was recognized as a sale of the
mineral interest with costs of the property interest sold also
recognized for the same amount.
NOTE 4--OTHER PROPERTY AND EQUIPMENT
Other property and equipment consist of the following:
March 31, December 31,
1998 1997 1996
------------ ----------- ----------
Land $ 22,156 $ 22,156 $ 17,725
Buildings 92,914 92,914 92,914
Drilling rigs and
related equipment 899,069 895,702 2,312,400
------------ ----------- ----------
1,014,139 1,010,772 2,423,039
Less: Accumulated
depreciation (770,100) (767,177) (2,144,113)
------------ ----------- ----------
Net Other Property
and Equipment $ 244,039 $ 243,595 $ 278,926
============ =========== ==========
NOTE 5--GEOGRAPHIC SEGMENT INFORMATION
The Company has proved and unproved oil and gas property as
well as other long-lived property in the following countries:
March 31 December 31,
1998 1997 1996
------------ ----------- ----------
Canada $ 7,875,000 $ -- $ --
Czech Republic -- -- 1,972,612
Poland 8,244,641 8,039,847 8,045,890
Russian Federation 7,566,669 7,515,285 4,934,892
Slovakia 7,482,382 7,278,612 4,934,892
Other foreign
countries 1,001,057 470,071 179,151
------------ ----------- -----------
Total $ 32,169,749 $23,303,815 $15,132,545
============ =========== ===========
NOTE 6--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties were as follows:
March 31, December 31,
1998 1997 1996
----------- ----------- -----------
Loan from a former officer,
director and employee,
due on demand with
interest at 10%,
unsecured $ 290,206 $ 290,206 $ 290,206
Amount due to a former
officer -- -- 652,601
Loan from a company
associated with an
officer and director,
due in 1999 with
interest at 7.5%,
unsecured 169,191 362,477 269,643
Loan from an officer
and director, due in
1999, interest of 7.5%
to 10%, unsecured 1,004,617 1,409,596 1,142,047
Loans from an officer
and director who is
acting as trustee on
behalf of others,
interest at 7.5% to10%,
due on demand and in
1999, unsecured 119,284 119,284 1,405,439
7.5% convertible debenture,
payable to a consultant,
converted during 1997
to 852,630 shares of
common stock -- -- 2,200,000
----------- ----------- -----------
Total Notes Payable to
Related Parties 1,583,298 2,181,563 5,959,936
Less: Current Portion (614,944) (1,270,547) (1,062,091)
----------- ----------- -----------
Notes Payable to Related
Parties - Long-Term $ 968,354 $ 911,016 $ 4,897,845
=========== =========== ===========
NOTE 7--NOTES PAYABLE
Other loans and notes payable at December 31, 1997 and 1996
were as follows:
March 31, December 31,
1998 1997 1996
----------- ----------- -----------
Loans due 1999, interest
at 10%, unsecured $ 2,510,326 $ 3,354,717 $ 4,022,591
Amount due to the
former owners of Danube -- -- 1,847,399
7% note paid in February
1997 -- -- 1,802,500
7.5% convertible debentures -- -- 1,750,000
----------- ----------- -----------
Total Notes Payable 2,510,326 3,354,717 9,422,490
Less: Current Portion (967,772) (1,107,944) (3,688,788)
----------- ----------- -----------
Note Payable - Long-Term $ 1,542,554 $ 2,246,773 $ 5,733,702
=========== =========== ===========
Annual maturities of notes payable to related parties and
others are as follows:
March 31, December 31,
Years Ending December 31 1998 1997
----------- -----------
1998 $ 1,582,716 $ 2,378,491
1999 2,510,908 3,157,789
----------- -----------
$ 4,093,624 $ 5,536,280
=========== ===========
NOTE 8--INCOME TAXES
March 31 For the Years Ended December 31,
1998 1997 1996 1995
----------- ----------- ----------- -----------
Current foreign income
tax benefit $ -- $ -- $ -- $ 468,148
=========== =========== =========== ===========
Foreign currency exchange gains of $157,745 reduced accrued income
taxes by that amount during 1997 and were included in foreign
currency exchange gain during 1997. The related income tax
liability, which is payable in a foreign currency, did not change
during 1997.
Deferred tax assets are comprised of the following:
March 31, December 31,
1998 1997 1996
----------- ----------- -----------
Tax loss carry forwards $ 3,540,382 $ 2,885,384 $ 1,001,917
Reserves for contingencies 414,727 396,863 -
Less: Valuation allowance (3,955,109) (3,282,247) (1,001,917)
----------- ----------- -----------
Net Deferred Tax Asset $ -- $ -- $ --
=========== =========== ===========
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 for:
March 31, December 31,
1998 1997 1996 1995
---------- ----------- ----------- -----------
Tax at statutory
rate (34%) $ (597,254) $(3,910,646) $(2,129,281) $(1,601,248)
Non-deductible expenses -- -- -- 763
State taxes, net of
federal benefit (65,522) (154,969) -- --
Deferred tax asset
valuation change 672,862 2,280,330 295,877 220,563
Effect of lower tax
rates and foreign losses
with no federal benefit 10,086 1,785,285 1,833,404 911,774
---------- ------------ ----------- -----------
Total Income Tax Benefit $ -- $ -- $ -- $ (468,148)
========== ============ =========== ===========
The Company has operating loss carry forwards of approximately
$9,624,145 in various countries which expire from 1998 through 2012.
The Company's subsidiary, Globegas BV, has applied for a reduction in
an income tax liability of $738,450 in the Netherlands. The tax arose
from the sale of equipment at a profit by the former owner of
Globegas to the Company's Poland subsidiary. The Company's position
is that the gain on the sale should not have been taxable to
Globegas. The liability will continue to be reflected in the
Company's financial statements until the proposed reduction is
accepted by the Netherlands' tax authorities.
NOTE 9--RELATED PARTY TRANSACTIONS
Loans from related parties are described in Note 6.
During 1996, a shareholder of the Company, through his employer,
raised $1,992,000 in convertible debentures for the Company and was
paid a fee for the related services of $208,000. During 1997, the
shareholder advanced $2,023,306 as a short-term loan. In connection
with this loan, the shareholder retained control of the proceeds from
the issuance of common stock by the Company and paid Company
obligations from those proceeds. The shareholder received $104,493
for management services from these funds. The shareholder received
compensation of $26,000 and $70,000 during 1996 and 1995,
respectively, for accounting services.
NOTE 10--OPERATING LEASES
The Company leases office space in New York, New York under the terms
of a sublease ending on August 31, 2000. The rent under this lease is
amortized at $11,025 per month from a required initial prepayment of
$481,100 upon execution. The monthly lease payments are subject to
annual escalation, based on the operating expenses of the building.
On September 3, 1996, the Company entered into a three-year lease for
an office in Midvale, Utah, that requires monthly payments of
$1,631.40. The lease provides for annual increases in the lease
payment in an amount equal to the increase in the Consumer Price
Index, provided that such and increase shall not be less than 6% nor
greater than 10%.
The Company also leases offices in Vienna, Austria and in Hamburg,
Germany under one-year contracts for $3,240 and $2,603 per month,
respectively.
The five year annual lease payments are as follows:
Years Ending
December 31, Total
------------ --------
1998 $ 91,178
1999 86,613
2000 70,116
2001 70,116
2002 70,116
----------
$ 388,139
==========
NOTE 11--COMMITMENTS AND CONTINGENCIES
In 1995, the Company was issued a formal order that it was the
subject of an investigation by the United States Securities and
Exchange Commission (SEC), involving the financial and other
information set forth in the Company's periodic filings and press
releases. The Company has produced numerous documents and the oral
testimony of its officers and directors pursuant to extensive
subpoenas from the SEC. The SEC has obtained similar information from
the Company's prior independent public accountants. The SEC has given
no formal indication that it has completed its investigation and, the
Company cannot currently predict the duration or outcome of this
investigation.
Employment contracts with certain former officers of a subsidiary of
the Company were terminated during 1997 with no further liability
associated with those contracts.
A financial consulting firm retained by Danube prior to its
acquisition by the Company asserted a claim in 1996 that it was
entitled to commissions on financing raised for Danube. The claim was
settled in 1997 by the Company paying $310,000. The settlement covers
all commissions due from funds raised or invested to date as well as
funds which may be raised in the future from parties which were
introduced directly or indirectly by the consulting firm.
As discussed further in Note 7, the Company recently proposed a
settlement of its tax liability in the Kingdom of the Netherlands.
A bankruptcy trustee appointed for certain former shareholders of
Globegas has asserted a claim to the proceeds that the Company has
and may receive from the Texaco agreement discussed in Note 3. The
Trustee's claim is apparently based upon the theory that the Company
may have paid inadequate consideration for its acquisition of
Globegas (which indirectly controlled the Pol-Tex Methane concession
in Poland) from former shareholders and therefore they are the true
owners of the proceeds received from the development of the Pol-Tex
Concession in Poland. The Company is vigorously defending against the
claim. The Company believes that the claim is totally without merit
based on the fact that a condition of a prior settlement with the
principal creditor of the estate bars any such claim, that the court
has no jurisdiction over Pol-Tex Methane or its interests held in
Poland, and that the Company paid substantial consideration for
Globegas.
During 1997, a shareholder asserted a claim against the Company based
upon an alleged breach of the settlement agreement between the
shareholder and the Company as a result of the Company's failure to
file and obtain the effectiveness of a registration statement for the
resale by the shareholder of 100,000 shares delivered to the
shareholder in connection with the settlement. In addition, the
shareholder has informed the Company and the court that it would be
entering a claim for failure to register the resale of the shares
subject to its option to purchase up to 2,000,000 shares of the
Company's common stock. The Company had denied any liability and
intends to vigorously defend the claims. The Company has filed a
counterclaim against the shareholder for breach of contract
concerning its joint activities with the bankruptcy trustee appointed
for certain former shareholders of Globegas.
As a result of the Company's analysis of the Czech properties, the
Company's pursuit of those properties was terminated in 1997 and the
property was returned to the Czech partner. The Company has accrued
$328,000 for any continuing liability, although none has been
specifically identified, with respect to the Czech properties.
The Company paid $120,000 of dividends on its 1995 Series preferred
stock during 1996. The dividends may have been inappropriately paid
under Utah law due to the existence of a stockholders' deficit
throughout the year ended December 31, 1996. As a result, the Company
may have a claim against the preferred shareholders who received the
dividends for their repayment.
On August 30, 1997 the Company settled an obligation payable to the
former shareholders of Danube. In satisfaction of the $2,500,000
obligation and $346,590 of accrued interest, the Company issued
383,790 shares of common stock valued at $2,846,590. All claims
related to employment contracts with the former owners were released
in connection with the settlement.
During March of 1998 the Company was notified there may be certain
title problems related to an area of mutual interest to be explored
and developed by the Slovakian joint venture. The problem area is
outside of the Trebisov area where the Company has drilled six wells
and which are unaffected by the claim. The disputed area is located
in the southern portion of the property covered by the designations
contained in the Slovakian joint venture agreements and is subject to
a competing claim of ownership by a private Slovakian company. To the
extent the Slovakian joint venture may not have exploration rights as
previously contemplated, the Company's expansion beyond the Trebisov
area may be limited. Subsequent to March 31, 1998, the Company
entered into a letter of intent to acquire a controlling interest in
the disputed area which is located to the south of Trebisov. The
terms of the letter of intent provide for the acquisition of the
competing interest in exchange for 2,500,000 shares of restricted
common stock and two year warrants providing for the purchase of
2,500,000 shares for $5.00 per share. The division of the working
interest for this territory will then be 75% for the Company (rather
than the 50% split which governs the Trebisov area) provided that the
Company carries the cost of drilling the first two wells in the
disputed area. The Company has notified the former shareholders of
Danube of a claim against them by reason of this recent problem. The
cost of the acquisition of the property will be based on the fair
value of the common stock and warrants on the date the transaction is
completed less any amounts recovered or recoverable from the former
shareholders of Danube.
The Company believes the owners of Danube knew or should have known
about the problem prior to the acquisition of Danube and made no
disclosure concerning the problem. The Company has made a claim
against the former Danube shareholders for indemnity to the extent
the Company suffers any damage by reason of the potential title
claim. As the matter is in its initial stages, the Company cannot
predict whether impairment of the Slovakian mineral interests will be
warranted, or if impaired, whether the Company will be able to
recover from the former Danube shareholders.
The Company has determined that it has an obligation to a lender in
connection with loans made principally to a subsidiary from 1995
through 1997. Management is in the process of negotiating a final
agreement with the lender to settle and determine all amounts owing,
but no agreement has yet been reached. Management has estimated that
the obligation will not exceed $1 million which amount has been
included in accrued liabilities at December 31, 1997 and charged to
interest expense during the year then ended. Because the amount of
the actual obligation has not been finally established with the
lender, it could ultimately be determined to be in excess of the
amount accrued.
In March 1998, the Company acquired a 55% controlling interest in
RimaMuran S.r.o. whose principal asset is a minority interest in a
talc deposit in eastern Slovakia. RimaMuran has the obligation to
fund 43% of the projected $12,000,000 of capital costs over the next
two and one-half years. RimaMuran does not have the assets necessary
to meet this obligation, and it is anticipated that the necessary
funding will need to be provided by the Company.
In March 1998, the Company acquired an indirect, minority interest in
a talc deposit located in Slovakia for $90,000 in cash and the
requirement to spend approximately $5,000,000 in development of the
talc deposit over the next two and one-half years.
On January 28, 1998, the Company entered into an agreement with a
public relations firm in Europe. The firm agreed to provide for
dissemination of information regarding the Company in Germany and
other European countries for a period of one year. The Company is
obligated to pay the firm $9,315 per month and granted the firm an
option to purchase up to 100,000 restricted shares of common stock at
$6.50 per share through January 28, 2000.
The holders of certain registration rights have requested the Company
provide it with information concerning the delay in filing a required
registration statement. While the shareholders have not asserted a
specific legal claim against the Company to date, it may elect to do
so if the Company is unable to resolve this matter.
Eurogas has engaged technical and business consultants for its
various projects under terms which will require minimum payments of
$1,632,000 and $1,200,000 during the years ending December 31,1998
and 1998, respectively.
NOTE 12--STOCKHOLDERS' EQUITY
PREFERRED STOCK--The 1995 Series Preferred Stock (the 1995 Series),
issued on April 12, 1995, is non-voting, non-participating , and has
a liquidation preference of $0.10 per share plus unpaid dividends.
The 1995 Series stockholders are entitled to an annual dividend of
$0.05 per share. Each share of the 1995 Series shall be converted
into two shares of the Company's common stock upon lawful
presentation and shall pay dividends until converted. The Company has
the right to redeem the 1995 Series, on not less than 30 days written
notice, at a price of $36.84 per share, plus any accrued but unpaid
dividends. Annual dividend requirements of the 1995 Series are
$119,598.
The 1996 Series Preferred Stock was issued on July 12, 1996. All of
the shares of 1996 Series Preferred Stock were converted into
2,500,001 shares of common stock (at the rate of two common shares
per 1996 Series Preferred share) on July 3, 1997, along with accrued
but unpaid dividends.
On May 29, 1997, the Company authorized the 1997 Series A Convertible
Preferred Stock (the 1997 Series). This series of preferred stock is
non-voting and accrues dividends at $60.00 per share, or six percent
annually. The 1997 Series has a liquidation preference of $1,000 per
share, plus unpaid dividends before liquidation payments applicable
to common shares but after liquidation payments to other previously
issued and outstanding preferred stock series. The 1997 Series along
with unpaid dividends thereon is convertible into common stock at the
rate of $1,000 divided by the lessor of 125 percent of the average
closing bid price for five trading days prior to issuance or 82
percent of the average closing bid price for five trading days prior
to conversion. At December 31, 1997, 14,740 of the 15,000 shares of
1997 Series preferred stock along with related accrued dividends had
been converted into 2,763,165 shares of common stock.
NOTE 13--STOCK OPTIONS AND WARRANTS
The Company granted stock options and warrants during 1996 in
connection with the acquisition of Danube and the settlement of
claims relating to the Globegas reorganization in prior years.
During 1997, options to purchase 2,000,000 common shares were issued
in connection with the acquisition of OMVJ. The options are
exercisable at $4.00 per share until April 1, 1998, then at $5.00 per
share until March 31, 1999 and then at $6.00 per share until March
31, 2000 at which time they expire if not exercised. Options to
purchase 2,200,000 shares of common stock were granted in conjunction
with the issuance of 2,999,999 shares of common stock for $7,500,000
(less $75,000 in offering costs). The options are exercisable at
$3.00 per share through December 31, 1998. Options to purchase
250,000 were granted in connection with an investment firm contract.
The options are exercisable at $11.79 per share through August 9,
2002.
The Company granted options to its employees and consultants during
1996 under the Stock Option and Award Plan which was adopted in
January 1996. Options for 2,000,000 shares of common stock were
authorized and granted in January 1996. The options granted to
employees and consultants are exercisable at $1.50 over a period of
five years beginning July 18, 1996 and expire January 18, 2001. The
market value of the underlying common stock was equal to the exercise
price on the date granted and, therefore, no compensation relating to
the options was recognized during 1996 or 1997.
The Company has accounted for stock-based compensation from stock
options granted to employees and consultants based on the intrinsic
value of the options on the date granted. Had compensation cost for
the Company's Stock Option and Award Plan been determined based on
the fair value at the grant dates for options under that plan
consistent with the alternative method of SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's loss applicable to
common shares and loss per common share for the years ended December
31, would have been increased to the pro forma amounts shown below.
1997 1996 1995
------------ ----------- -----------
Net loss applicable to
common shares:
As reported $(11,925,429) $(6,413,183) $(4,327,581)
Pro forma 11,925,429 (8,492,547) (4,327,581)
Basic and diluted net loss
per common share:
As reported $ (0.22) $ (0.16) $ (0.13)
Pro forma (0.22) (0.21) (0.13)
The fair value of each option was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions for 1997 and 1996, respectively: average risk-free
interest rate - 5.7% and 5.7%; expected volatility - 95.5% and 82.6%;
expected life - 1.4 years and 5.0 years.
A summary of the status of stock options as of December 31, 1997 and
1996 and changes during the years ended December 31, are presented
below:
1997 1996
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning
of year 9,000,000 $ 2.78 -- $ --
Granted 4,450,000 3.94 9,000,000 2.78
----------- ----------- ----------- -----------
Outstanding at end of year 13,450,000 3.54 9,000,000 2.78
=========== ===========
Exercisable at end of year 13,300,000 3.56 8,800,000 2.81
Weighted-average fair value
of options granted during
the year $2.07 $1.04
Options and warrants outstanding at December 31, 1997 were exercisable
at prices ranging from $1.50 to $11.75 with remaining contractual lives
from 1.0 to 4.6 years.
NOTE 14--SUBSEQUENT EVENTS (UNAUDITED)
ISSUANCE OF 1998 SERIES B CONVERTIBLE PREFERRED STOCK -- During May,
1998 the Company issued 8,000 shares of a newly created 1998 Series B
Convertible Preferred Stock (Series B) in a private placement. The
Company has designated 30,000 shares of the Series B shares with a par
value of $0.001 per share and a liquidation preference of $1,000 per
share, plus all accrued but unpaid dividends. The Series B shares are
non-voting and bear a dividend rate of 6% per annum, which dividend may
be paid in shares of the Company's common stock at its option.
The Series B shares issued to date were issued for proceeds of
$7,400,000 net of finders fees of $600,000 and the issuance of 50,000
common shares, valued at $262,500. Each of the currently issued Series
B shares are convertible into that number of shares of Common Stock
determined by taking the sum of $1,000, plus any accrued but unpaid
dividends through the conversion date, and dividing it by the lesser of
125% of the average closing price five trading days prior to issuance of
the Series B shares, or 80% of the average closing price five trading
days prior to conversion. New issuances of Series B shares are
similarly convertible into that number of shares of Common Stock
determined by taking the sum of $1,000, plus any accrued but unpaid
dividends through the conversion date, and dividing it by the lesser of
125% of the average closing price five trading days prior to issuance of
the Series B shares, or 85% of the average closing price five trading
days prior to conversion.
The current Series B shareholders have committed to purchase the
remaining 22,000 Series B shares in additional traunches of 4,000 shares
with gross proceeds of $1,000 per share and commissions of 7 1/2 %,
following the effectiveness of a current registration statement filed
with the U.S. Securities and Exchange Commission, and provided certain
other restrictions are met.
ISSUANCE OF COMMON SHARES - As disclosed above, 50,000 common shares
were issued as finders fees for the Series B private placement.
JOINT VENTURE AGREEMENTS - During July, 1998 the Company entered into
agreements which grant right to explore prospects within the Ukraine
with two Ukraine companies. The agreements require the Company to fund
the exploration using the licenses of the joint venture partners for a
net 70% interest in the profits until costs are recovered, then a 50%
profits interest in the projects.
COMMITMENTS - During July 1998, the Company acquired directors and
officers liability insurance for a term of one year with a commitment of
$67,500 per year.
In connection with the private placement of the newly created B Series
shares the Company is committed to proceed with a registration statement
to be filed with the U.S. Securities and Exchange Commission covering
the shares the B Series will be converted to. The Company is also
committed to maintain its effective status for the period the B Series
shares remain outstanding. The private placement agreements executed
require the Company to bear the costs of the filing of the registration
and the amendments required to maintain its effective status.
ASSET EXCHANGE AGREEMENT
THIS ASSET EXCHANGE AGREEMENT (the "Agreement"), dated as of the 1st day of
April, 1998 by and among EUROGAS, INC., a Utah corporation ("EuroGas"), BEAVER
RIVER RESOURCES, LTD., a British Columbia corporation ("BRRL"), and TERRELL W.
SMITH (the "Escrow Agent").
RECITALS
A. BRRL is the owner of an interest under Petroleum Natural Gas Lease
#15661 (the "Lease") issued by the authorities of British Columbia as held
under an agreement for a Farm Out Participation, Equalization and Royalty dated
October 15, 1997 by and between Wascana Energy Partnership, United Gunn
Resources, Ltd., Mayan Limited Partnership and Wade Oil & Gas Incorporated. A
copy of the Wascana Agreement is attached hereto as Exhibit A and by reference
incorporated herein.
B. This Agreement shall provide the means by which EuroGas may acquire
ownership of all of BRRL's outstanding capital stock.
C. An Escrow is to be established hereby to complete the terms and
conditions of the Agreement.
ARTICLE 1
DEFINITIONS
1.1 Definitions. In this Agreement, the following terms have the meanings
specified or referred to in this Section 1.1 and shall be equally applicable to
both the singular and plural forms. Any agreement referred to below shall mean
such agreement as amended, supplemented and modified from time to time to the
extent permitted by the applicable provisions thereof and by this Agreement.
"BRRL" shall mean Beaver River Resources, Ltd., a closely held Canadian
corporation organized under the laws of the Province of British Columbia.
"Closing" shall mean the closing of the transfer of the Exchanged Assets
and Exchange Price to the Escrow Agent.
"Closing Date" shall mean the date on which the Closing actually takes
place, as described in Section 4.1.
"Court Order" shall mean any judgment, order, aware or decree of any
foreign, federal, state, local or other court or tribunal and any award in any
arbitration proceeding.
"Escrow Agent" shall mean TERRELL W. SMITH.
"Escrowed Amount" shall mean cash, shares of stock and other property
deposited with the Escrow Agent.
"Encumbrance" shall mean any lien, claim, charge, security interest,
mortgage, pledge, easement, conditional sale or other title retention agreement,
defect in title, covenant or other restrictions of any kind.
"EuroGas" shall mean EuroGas, Inc. a corporation duly organized and in good
standing under the laws of the State of Utah, United States.
"EuroGas Option" shall mean the right for EuroGas to reacquire 1,900,000
EuroGas Shares of common stock delivered hereunder as set forth in Article 4 of
this Agreement.
"EuroGas Shares" shall mean the restricted common stock of EuroGas, Inc.
par value $.001 which shall bear a restricted legend as set forth herein. The
shares of EuroGas shall be automatically adjusted to take into account any stock
split, stock or monetary dividend, consolidation, reorganization or other like
or similar event.
"Exchange Consideration" shall mean the aggregate consideration to be paid
by EuroGas for the Exchanged Assets, more particularly set forth in Section 3 1.
"Exchanged Assets" shall mean all of BRRL's issued and outstanding capital
stock.
"Governmental Body" shall mean any foreign, federal, state, local or other
governmental authority or regulatory body.
"Governmental Permits" shall mean all licenses, franchises, permits,
privileges, immunities, approvals and other authorizations from a Governmental
Body which are necessary to entitle BRRL to own or lease operate and use the
Lease.
"Person" shall mean any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or Governmental Body.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the United States Securities Act of 1933 or any
successor law and the rules and regulations issued pursuant to that Act or any
successor law.
"Stockholders" shall mean the stockholders of BRRL.
"Tax" shall mean any federal, state, county, local or foreign income, gross
receipts, property, sales, use, transfer, gains, license, excise, import,
franchise, ad valorem, employment, payroll, withholding or minimum tax, or any
other tax custom, duty, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or any penalty, deficiency,
addition to tax or additional amount imposed by any Governmental Body.
"Wascana" shall mean Wascana Energy Partnership and shall mean the operator
under the Wascana Agreement.
"Wascana Agreement" shall mean the agreement for a Farmout Participation,
Equalization and Royalty dated October 15, 1997 by and between Wascana Energy
Partnership, BRRL, United Gunn Resources, Ltd., Mayan Limited Partnership and
Wade Oil & Gas Incorporated.
ARTICLE 2
EXCHANGE AND SALE
2.1 Exchanged Assets. Upon the terms and subject to the conditions of
this Agreement the Stockholders will exchange all of the issued and outstanding
shares of the capital stock of BRRL for shares of the capital stock of EuroGas,
as herein provided. At the time such exchange is effected, the only asset of
BRRL shall be its leasehold interest in the Lease.
2.2 Excluded Liability. EuroGas shall not assume or be obligated to pay,
perform or otherwise discharge any liability or obligation of BRRL, direct or
indirect, known or unknown, absolute or contingent, not expressly assumed by
EuroGas pursuant to this Agreement.
2.3 Permitted Encumbrances. The only Encumbrance to be permitted
hereunder is obligations imposed by the terms of the Wascana Agreement and
Governmental Bodies on the Lease.
ARTICLE 3
EXCHANGE PRICE
3.1 Exchange Price. EuroGas shall deposit with the Escrow Agent, as the
Exchange price, US$300,000 and 2,400,000 EuroGas Shares.
ARTICLE 4
EUROGAS OPTION
4.1 EuroGas Option. At any time before April 15, 1999, EuroGas can elect
to acquire 1,900,000 EuroGas Shares by delivering a notice of the exercise of
such option and a reassignment in the form set forth in Exhibit B hereunder to
the Escrow Agent.
ARTICLE 5
ESTABLISHMENT OF ESCROW
5.1 Appointment of Escrow Agent. In order to implement the terms and
conditions of this Agreement, the parties hereby agree to establish an escrow
with Terrell W. Smith as Escrow Agent and close this transaction in accordance
with Article 6 set forth below.
5.2 Duties of Escrow Agent. It is understood and agreed by the parties to
this Agreement as follows:
(a) Escrow Agent is not and shall not be deemed to be an agent for
any party for any purposes and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed.
(b) Escrow Agent does not have and shall not be deemed to have any
responsibility in respect of any instructions, certificate, or notice
delivered to him other than to faithfully carry out the obligations
undertaken in this Agreement and to follow the directions in such
instructions or notice in accordance with the terms hereof.
(c) Escrow Agent is not and shall not be deemed to be liable for any
action taken or omitted by him in good faith and may rely on, and act in
accordance with, the advice of his counsel without liability on his part
for any action taken or omitted in accordance with such advice. In any
event, his liability hereunder shall be limited to liability for gross
negligence, willful misconduct, or bad faith on his part.
(d) Escrow Agent may conclusively rely on and act in accordance with
any certificate, instruction, notice, letter, telegram, cablegram or other
written instrument believed by him to be genuine and to have been signed by
the proper party or parties.
(e) Escrow Agent may apply for advice of counsel of his choice and
may rely upon such advice or may act or refrain from acting in accordance
with such advice.
(f) Escrow Agent shall be entitled to reimbursement from the parties
of (i) Escrow Agent's reasonable fees and reimbursement of his reasonable
expenses, including attorneys' fees in connection with duties hereunder and
(ii) the cost to save harmless, indemnify and defend Escrow Agent for,
from, and against any loss, damages, liability, judgment, costs and
expenses whatsoever, including counsel fees, suffered or incurred by him by
reason of, or on account of, any misrepresentations made to him or his
status or activities as Escrow Agent under this Agreement, except for any
loss, damages, liability, judgment, costs, or expenses resulting from gross
negligence, willful misconduct, or bad faith on the part of Escrow Agent.
(g) If any legal proceeding is instituted against him, Escrow Agent
agrees promptly to give notice of such proceeding to EuroGas and BRRL.
Escrow Agent shall not be required to institute legal proceedings of any
kind.
(h) Escrow Agent shall not, by act, delay, omission, or otherwise, be
deemed to have waived any right or remedy he may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by Escrow Agent, and then
only to the extent expressly therein set forth. A waiver by Escrow Agent
under the terms of this Agreement shall not be construed as a bar to, or
waiver of, the same or any other such right or remedy which he would
otherwise have on any other occasion.
(i) Escrow Agent may resign as such hereunder by giving 30 days
written notice thereof to EuroGas and BRRL. Within 20 days after receipt
of such notice, EuroGas and BRRL shall furnish to Escrow Agent written
instructions regarding the release of the remaining Escrowed Amount to a
substitute escrow agent designated by written instructions from EuroGas and
BRRL jointly, or, in the absence thereof, by instructions from a court of
competent jurisdiction to Escrow Agent. Such substitute Escrow Agent shall
be a title company, bank, or trust company organized and doing business
under the laws of the state of Utah and shall thereafter hold the Escrowed
Amount received by it pursuant to the terms of this Agreement and otherwise
act hereunder as if it were the Escrow Agent originally named herein.
Escrow Agent's duties and responsibilities hereunder shall terminate upon
the release of all property then held in escrow according to such written
instruction or upon such delivery as herein provided. This Agreement shall
not otherwise be assignable by Escrow Agent without the prior written
consent of EuroGas and RRRT.
(j) EuroGas and BRRL shall each pay one-half of the Escrow Agent fees
and other charges.
ARTICLE 6
CLOSING BY DELIVERY TO AND DISBURSEMENT BY ESCROW AGENT
6.1 Closing. Upon the terms and conditions set forth herein, the Closing
shall be effectuated on or before April 15, 1998 by the parties delivering to
the Escrow Agent the items set forth in Section 6.2 and Section 6.3, except such
delay as provided in Section 6.3 below with respect to the deposit of shares of
BRRL capital stock.
6.2 Delivery by EuroGas. EuroGas shall deposit with the Escrow Agent:
(a) US$300,000 cash
(b) Two certificates of EuroGas shares; one in the amount of 500,000
EuroGas shares and the other in the amount of 1,900,000 EuroGas Shares.
(c) A legal opinion from its counsel in the form set forth in
Exhibit C.
6.3 Delivery by Stockholders and BRRL.
(a) Within sixty (60) days after execution of the Agreement,
Stockholders of BRRL shall deposit with the Escrow Agent certificates
representing all of the issued and outstanding capital stock of BRRL,
separate stock powers executed in blank by Stockholders with signature
guarantees and limited powers of attorney authorizing the Escrow Agent to
deliver such shares to EuroGas within five (5) days after April 15, 1999 if
EuroGas has not exercised its option to acquire the 1,900,000 shares of
EuroGas stock from the Escrow Agent.
(b) A legal opinion from BRRL's counsel in the form attached as
Exhibit D.
6.4 Disbursement by Escrow Agent. Upon execution of the Agreement and the
establishment of the Escrow, the Escrow Agent shall hold and disburse the items
deposited as follows:
(a) Escrow Agent shall, within ten (10) days after establishment of
the Escrow, disburse the US$300,000 to BRRL; provided, however, such
disbursement of funds shall not be made to BRRL until ninety percent (90%)
of the issued and outstanding shares of capital stock of BRRL has been
deposited by the Stockholders with the Escrow Agent.
(b) Within five (5) days after December 1, 1998 or at the specific
co-signed instructions of BRRL and EuroGas prior thereto, Escrow Agent
shall deliver to BRRL 500,000 shares of EuroGas Shares.
(c) Within five (5) days after April 15, 1999, the balance of the
EuroGas Shares to Stockholders and delivery of the BRRL shares deposited by
the stockholders to EuroGas.
(d) If the Escrow Agent receives a notice of exercise of the EuroGas
Option any time prior to April 15, 1999 together with the appropriate
reassignment as set forth in Article 4, Escrow Agent shall deliver the
1,900,000 EuroGas Shares to EuroGas and he shall deliver to BRRL any
remaining EuroGas Shares or cash left in Escrow and the shares of BRRL
capital stock to the Stockholders who have deposited the shares.
6.5 Benefits and Burdens. During the Escrow EuroGas shall be entitled to
all the benefits of the BRRL's interest in the Lease. EuroGas shall comply with
the terms of the Wascana Agreement and be responsible for all of the related
costs, expenses, damages and liabilities whatsoever of carrying such interest in
the Lease to the same extent as if EuroGas were the owner of such interest.
ARTICLE 7
REPRESENTATIONS, COVENANTS AND WARRANTIES OF BRRL
As an inducement to EuroGas to enter into this Agreement and to consummate
the transactions contemplated hereby, BRRL hereby represents, covenants and
warrants to EuroGas and agrees as follows:
7.1 Organization of BRRL. BRRL is a corporation duly organized and validly
existing under the laws of the Province of British Columbia and it will be in
good standing after its Stockholders' meeting is held to authorize the execution
of this Agreement.
7.2 Authority of BRRL.
(a) The execution, delivery, and performance by BRRL of the Agreement
by BRRL of the Agreement and all agreements, documents, obligations, and
transactions contemplated by the Agreement have been duly authorized by all
necessary action on the part of the board of directors of BRRL and are not
inconsistent with BRRL's articles of incorporation or any resolution of the
directors of BRRL, and do not and will not contravene any provision of, or
constitute a default under any indenture, mortgage, contract, or other
instrument known to it to which BRRL is a party or by which it is bound.
Upon the execution and delivery of the Agreement, they will, subject to
approval of the Stockholders, constitute legal, valid, and binding
agreements and obligations of BRRL enforceable in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application affecting the enforcement of creditors' rights,
including, without limitation, the effect of statutory or other laws
regarding fraudulent conveyance or preferential transfers, and by the
availability of equitable remedies.
(b) Subject to approval of this Agreement by the Stockholders, BRRL
and the officer signing on its behalf, have the power and legal capacity to
enter into the Agreement and to execute the Agreement and any other
documents required by the Agreement.
(c) Upon the execution of this Agreement BRRL will promptly call a
meeting of its Stockholders for the purpose of having the Stockholders
approve this Agreement and the agreeing to the deposit of the Stockholders'
BRRL stock certificates in escrow in accordance herewith.
7.3 Status of Exchanged Assets. If the stock of BRRL is delivered to
EuroGas in accordance with this Agreement, the assets of BRRL at the time of
such delivery (which shall consist only of BRRL's leasehold interest in the
Lease) shall be unencumbered except for the Permitted Encumbrance described in
Article 2.3 hereof.
7.4 Independent Investigation Access. BRRL acknowledges that BRRL has
carefully reviewed EuroGas's SEC reports and press releases furnished by EuroGas
to BRRL, including but not limited to the press release dated March 19, 1998.
BRRL further acknowledges that BRRL in making its decision to acquire EuroGas
Shares has relied upon independent investigations made by it and by BRRL's
representatives and has had an opportunity to ask questions of and to receive
answers from EuroGas and its authorized representatives concerning the business
of EuroGas.
7.5 Restriction Acknowledgment. BRRL acknowledges that the completion of
the Agreement and the issuance of the consideration constitute the offer and
sale of securities as those terms are defined under the Securities Act, as
amended, and applicable state statutes. The delivery of EuroGas Shares shall be
consummated in reliance on certain exemptions from the registration requirements
of federal and state securities laws on which BRRL shall be entitled to rely as
a basis for its determination that the issuance of the EuroGas Shares is exempt
from the registration requirements of the Securities Act and similar state laws.
Until such time as such securities shall have been registered under the
Securities Act as contemplated by this Agreement, each of the certificates
representing the EuroGas Shares shall bear a legend in substantially the
following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS
OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE TRANSFERRED OR SOLD IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION OR OTHER COMPLIANCE UNDER THE SECURITIES ACT OR THE LAWS
OF THE APPLICABLE STATE OR A "NO ACTION" OR INTERPRETIVE LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER AND ITS COUNSEL TO THE EFFECT
THAT THE SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT AND SUCH STATE STATUTES.
ARTICLE 8
REPRESENTATIONS, COVENANTS AND WARRANTIES OF EUROGAS
As an inducement to BRRL to enter into this Agreement and to consummate the
transactions contemplated hereby, EuroGas hereby represents, covenants and
warrants to BRRL and agrees as follows:
8.1 Organization of EuroGas. EuroGas is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Utah, with
full corporate power and authority to own its properties and engage in its
business as contemplated.
8.2 Legality of EuroGas Shares. The EuroGas Shares are legally issued,
fully paid and non-assessable
8.3 Authority of EuroGas.
(a) The execution, delivery and performance by EuroGas of the
Agreement and all agreements, documents, obligations, and transactions
contemplated by the Agreement have been duly authorized by all necessary
action on the part of EuroGas and are not inconsistent with EuroGas's
articles of incorporation or any resolution of the directors of EuroGas,
and do not and will not contravene any provision of, or constitute a
default under any indenture, mortgage, contract or other instrument known
to it to which EuroGas is a party or by which EuroGas is a party or by
which it is bound. Upon the execution and delivery of the Agreement, it
will constitute a legal, valid and binding agreement and obligation of
EuroGas, enforceable in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or other laws of general application affecting the enforcement
of creditors' rights, including, without limitation, the effect of
statutory or other laws regarding fraudulent conveyance or preferential
transfers, and by the availability of equitable remedies.
(b) EuroGas and the officers signing on its behalf, have the power
and legal capacity to enter into the Agreement and to execute the Agreement
and any other documents required by the Agreement.
8.4 Registration of EuroGas Shares. Commencing April 15, 1998 and
continuing thereafter, EuroGas shall use all commercially reasonable efforts to
file and pursue to effectiveness a registration statement with the Securities
and Exchange Commission covering the 2,400,000 shares of EuroGas common stock,
except to the extent that EuroGas Shares may be publicly sold pursuant to an
exemption to registration, including but not limited to Rule 144 adopted under
the Securities Act or as it may be amended or succeeded to from time to time.
ARTICLE 9
GENERAL PROVISIONS
9.1 Survival of Obligations. All representations, warranties, covenants
and obligations contained in this Agreement shall survive the consummation of
the transactions contemplated by this Agreement.
9.2 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed given or delivered when
delivered personally or when sent by registered or certified mail or by private
courier addressed as follows:
If to EuroGas, to: Hank Blankenstein
EuroGas, Inc.
942 East 7145 South, #101A
Midvale, Utah 84057
Telephone: 801/255-0862
Facsimile: 801/255-2005
With a copy to: Howard S. Landa, Esq.
Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway (300 South)
Salt Lake City, Utah 84101
Telephone: 801/531-7090
Facsimile: 801/531-7091
If to BRRL, to: Fred Oliver
Beaver River Resources, Ltd.
4625 Greenville Avenue, Suite 205
Dallas, Texas 75206
Telephone: 214/739-2895
Facsimile: 214/987-3776
With a copy to: Lionel E. Gilly, Esq.
5646 Milton Street, Suite 309
Dallas, Texas 75206-3986
Telephone: 214/691-1541
Facsimile: 214/691-1573
If to Escrow Agent, to: Terrell W. Smith
Fairbanks Capital
P.O. Box 65250
Salt Lake City, Utah 84165-0250
Telephone: 801/293-1883
Facsimile: 801/293-1297
or such other address as such party may indicate by a notice delivered to the
other parties hereto.
9.3 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and permitted
assigns.
9.4 Access to Records after Closing. For a period of two (2) years after
the Closing Date, EuroGas and its representatives shall have reasonable access
to all of the books and records of the Exchanged Assets transferred to EuroGas
hereunder to the extent that such access may reasonably be required by EuroGas
to meet its reporting obligations under the Securities Laws. BRRL shall afford
such access upon receipt of reasonable advance notice and during normal business
hours. EuroGas shall be solely responsible for any costs or expenses incurred by
it pursuant to this Section 9.4.
9.5 Entire Agreement; Amendments. This Agreement and the Exhibits
referred to herein and the documents delivered pursuant hereto contain the
entire understanding the parties hereto with regard to the subject matter
contained herein or therein, and supersede all prior agreements and
understandings between or among any of the parties hereto. This Agreement shall
not be amended, modified or supplemented except by a written instrument signed
by an authorized representative of each of the parties hereto.
9.6 Interpretation. Article titles and headings to sections herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of the Agreement. The Exhibits
referred to herein shall be construed with and as an integral part of this
Agreement to the same extent as if they were set forth verbatim herein.
9.7 Waivers. Any term or provision of this Agreement may be waived, or
the time for its performance may be extended, by the party or parties entitled
to the benefit thereof. Any such waiver shall be validly and sufficiently
authorized for the purposes of this Agreement if, as to any party, it is
authorized in writing by an authorized representative of such party. The failure
of any party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
9.8 Partial Invalidity. Whenever possible, each provision hereof shall be
interpreted in such manner as to be effective and valid under applicable law,
but in case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
provision shall be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder of
such invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
9.9 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be considered an original instrument, but
all of which shall be considered one and the same agreement, and shall become
binding when one or more counterparts have been signed by each of the parties
hereto and delivered to BRRL and EuroGas.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
EUROGAS:
EuroGas, Inc.
By /s/ Hank Blankenstein
BRRL:
Beaver River Resources, Ltd.
By /s/ Fred Oliver
Vice President
ESCROW AGENT
/s/ Terrell W. Smith
Terrel1 W. Smith
ARTICLES OF AMENDMENT
EUROGAS, INC.
DESIGNATION OF RIGHTS, PRIVILEGES, AND PREFERENCES OF
1998 SERIES B CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of the Utah Revised Business Corporation Act,
section 16-10a-602, of the laws of the state of Utah, the undersigned
corporation hereby adopts the following Designation of Rights, Privileges, and
Preferences of 1998 Series B Convertible Preferred Stock (the "Designation"):
FIRST: The name of the Corporation is EuroGas, Inc.
SECOND: The following resolution establishing a series of preferred stock
designated as the "1998 Series B Convertible Preferred Stock" consisting of
30,000 shares, par value $0.001, was duly adopted by the board of directors of
the Corporation on May 27, 1998, in accordance with the articles of
incorporation of the Corporation and the corporation laws of the state of Utah.
RESOLVED, there is hereby created a series of preferred stock of the
Corporation to be designated as the "1998 Series B Convertible Preferred Stock"
consisting of 30,000 shares, par value $0.001, with the following powers,
preferences, rights, qualifications, limitations, and restrictions:
1. Liquidation.
1.01 Subject to the preferential rights of the holders of any issued
and outstanding shares of preferred stock previously or subsequently issued
under the provisions of an appropriate designation or amendment to the
articles of incorporation of the Corporation effective prior to the date
of this Designation, in the event of any voluntary or involuntary
liquidation (whether complete or partial), dissolution, or winding up of
the Corporation, the holders of the 1998 Series B Convertible Preferred
Stock shall be entitled to be paid out of the assets of the Corporation
available for distribution to its shareholders, whether from capital,
surplus, or earnings, an amount in cash equal to One Thousand Dollars
($1,000) per share plus all unpaid dividends, whether or not previously
declared, accrued thereon to the date of final distribution subject to the
priority distribution required respecting any issued and outstanding shares
of any series of preferred stock authorized prior to the date hereof. No
distribution shall be made on any common stock or other subsequently
authorized series of preferred of the Corporation by reason of any
voluntary or involuntary liquidation (whether complete or partial),
dissolution, or winding up of the Corporation unless each holder of any
1998 Series B Convertible Preferred Stock shall have received all amounts
to which such holder shall be entitled under this subsection 1.01.
1.02 If on an liquidation (whether complete or partial), dissolution,
or winding up of the Corporation, the assets of the Corporation available
for distribution to holders of 1998 Series B Convertible Preferred Stock
shall be insufficient to pay the holders of outstanding 1998 Series B
Convertible Preferred Stock the full amounts to which they otherwise would
be entitled under subsection 1.01, the assets of the Corporation available
for distribution to holders of 1998 Series B Convertible Preferred Stock
shall be distributed to them pro rata on the basis of the number of shares
of 1998 Series B Convertible Preferred Stock held by each such holder.
2. Voting Rights. The 1998 Series B Convertible Preferred Stock shall
not have voting rights, except to the extent that the consent of the holders of
the 1998 Series B Convertible Preferred Stock is specifically required by the
provisions of the corporation laws of the state of Utah, as now existing or as
hereafter amended.
3. Dividends.
3.01 The Corporation shall pay dividends to the holders of the 1998
Series B Convertible Preferred Stock at the times and in the amounts
provided for in this section 3.
3.02 The Corporation shall pay to the holders of the 1998 Series B
Convertible Preferred Stock, out of the assets of the Corporation available
therefor under the applicable laws, dividends in the amount of six percent
(6%) per annum, pro rated to the date of conversion. The 1998 Series B
Convertible Preferred Stock shall not be entitled to participate in other
dividends declared by the Corporation, and holders thereof shall not be
entitled to receive any dividends thereon other than the dividends referred
to in this section 3.
3.03 No dividend or other distribution shall be declared or paid or
set apart for payment on any stock ranking, as to dividends or liquidation,
junior to the 1998 Series B Convertible Preferred Stock, including, without
limitation, the shares of the Corporation's common stock, par value $0.001
(the "Common Stock"), for any period unless the holders of the 1998 Series
B Convertible Preferred Stock shall have then been or are contemporaneously
paid (or declared and a sum sufficient for the payment thereof set apart
for such payment) all dividends for all dividend payment periods
terminating on or prior to the date of payment of the distribution on such
junior stock. If the Corporation is in default with respect to any
dividends payable on, or any obligation to redeem shares of, the 1998
Series B Convertible Preferred Stock, the Corporation shall not declare or
pay (or set apart a sum for such payment) any dividends or make any
distribution in cash or other property on, or redeem, purchase, or
otherwise acquire, any other class or series of stock ranking junior to the
1998 Series B Convertible Preferred Stock, either as to dividends
or upon liquidation. Except as set forth in this section 3, the 1998
Series B Convertible Preferred Stock shall not have any preferences as to
dividends.
3.04 Any payment of dividends declared and due under this section 3
with respect to any shares of 1998 Series B Convertible Preferred Stock
may, at the Corporation's discretion, be made by means of delivery of
Common Stock as calculated in section 4.
3.05 Registration of transfer of any shares of 1998 Series B
Convertible Preferred Stock on the stock records maintained by or for the
Corporation shall constitute a transfer of any right which the transferor
may have had to receive any accrued but unpaid dividends as of the date of
transfer, whether declared or undeclared, and the Corporation shall have no
further obligation to the transferor with respect to such accrued and
unpaid dividends. Any shares of 1998 Series B Convertible Preferred Stock
represented by a new certificate issued to a new holder shall continue to
accrue dividends as provided in this section 3.
4. Conversion.
4.01 Each share of 1998 Series B Convertible Preferred Stock is
convertible into shares of Common Stock of the Corporation at the times, in
the manner, and subject to the conditions provided in this section 4.
4.02 The holder is entitled, at its option, to convert the shares of
1998 Series B Convertible Preferred Stock into shares of Common Stock at
any time after the issuance of the shares of 1998 Series B Convertible
Preferred Stock. Each share of the 1998 Series B Convertible Preferred
Stock shall automatically be converted into shares of Common Stock on the
date that is two (2) years from the date of issuance.
4.03 The number of shares of the Corporation's Common Stock issuable
upon conversion of the initial 8,000 shares of 1998 Series B Convertible
Preferred Stock issued shall equal the One Thousand Dollars ($1,000) plus,
at the election of the Company to pay dividends by the issuance of Common
Stock, the amount of any accrued but unpaid dividends through the
"Conversion Date" as defined below, divided by the lesser of (i) one
hundred twenty-five percent (125%) of the average closing bid price of the
Common Stock, as reported by Bloomberg, for the five (5) trading days
preceding the issuance of such shares of the 1998 Series B Convertible
Preferred Stock; or (ii) eighty percent (80%) of the average closing bid
price, as reported by Bloomberg, for the five (5) trading days preceding
the Conversion Date. The number of shares of the Corporation's Common
Stock issuable on conversion of the remaining 22,000 shares of 1998 Series
B Convertible Preferred Stock shall equal One Thousand Dollars ($1,000)
plus, at the election of the Corporation to pay dividends by the issuance
of Common Stock, the amount of accrued, but unpaid dividends through the
Conversion Date divided by the lesser of (i) one hundred twenty-five
percent (125%) of the average closing bid price of the Common Stock, as
reported by Bloomberg, for the five (5) trading days preceding the issuance
of the respective shares of the 1998 Series B Convertible Preferred Stock;
or (ii) eighty-five percent (85%) of the average closing bid price of the
Common Stock, as reported by Bloomberg for the five (5) days preceding the
Conversion Date.
4.04 Such conversion shall be effectuated by sending to the
Corporation, or its attorney, the certificate representing the shares of
1998 Series B Convertible Preferred Stock to be converted and a facsimile
or original of the signed Notice of Conversion, which evidences the
holder's intention to convert the shares or a specified portion thereof,
accompanied by a proper assignment, if the Common Stock is to be issued in
a different name. No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable
shall be rounded down or up, as the case may be, to the nearest whole
share. The date on which Notice of Conversion is effective ("Conversion
Date") shall be deemed to be the date on which the holder has delivered to
the Corporation the original shares and a facsimile or original of the
signed Notice of Conversion.
4.05 Within seven (7) business days after receipt of the documentation
referred to above, the Corporation shall deliver a certificate, bearing a
144 restrictive legend, for the number of shares of Common Stock issuable
upon the conversion. It shall be the Corporation's responsibility to take
all necessary actions and to bear all such costs to issue the Common Stock
as provided herein, including the delivery of an opinion letter to the
transfer agent, if so required. The person in whose name the certificate
of Common Stock is to be registered shall be treated as a shareholder or
record on and after the Conversion Date. No payment or adjustment shall be
made for accrued and unpaid dividends until the earlier of the Conversion
Date or the mandatory conversion date. Upon surrender of certificates
representing shares of 1998 Series B Convertible Preferred Stock of which
only part are to be converted, the Corporation shall issue certificates
representing the number of unconverted shares in the name of the original
holder. In the event the Corporation does not make delivery of the Common
Stock, as instructed by the holder, within seven (7) business days after
the Conversion Date, then in such event the Corporation shall pay to holder
an amount in cash equal to one percent (1%) per day of the principal amount
being converted.
To the extent that the failure of the Corporation to issue the Common
Stock pursuant to this section is due to the unavailability of authorized
but unissued shares of Common Stock, the provisions of section 4.07 shall
apply.
4.06 If, at any time holder submits a Notice of Conversion and the
Corporation does not have sufficient authorized but unissued shares of
Common Stock available to effect, in full, a conversion of the shares (a
"Conversion Default", the date of such default being referred to herein as
the "Conversion Default Date"), the Corporation shall issue to the holder
all of the shares of Common Stock which are available, and the Notice of
Conversion as to any shares requested to be converted but not converted
(the "Unconverted Shares") shall become null and void. The Corporation
shall provide notice of such Conversion Default ("Notice of Conversion
Default") to all existing holders of outstanding shares, by facsimile,
within one (1) business day of such default (with the original delivered by
overnight or two day courier). No holder may submit a Notice of Conversion
after receipt of a Notice of Conversion Default until the date additional
shares of Common Stock are authorized by the Corporation. The Corporation
agrees to pay to all holders of outstanding shares payments for a
Conversion Default ("Conversion Default Payments") in the amount of (N/365)
x (.24) x the initial issuance price of the outstanding shares held by each
holder where N = the number of days from the Conversion Default Date to the
date (the "Authorization Date") that the Corporation authorizes a
sufficient number of shares of Common Stock to effect conversion of all
remaining shares. The Corporation shall send notice ("Authorization
Notice") to each holder of outstanding shares that additional shares of
Common Stock have been authorized, the Authorization Date and the amount of
holder's accrued Conversion Default Payments. The accrued Conversion
Default shall be paid in cash or shall be convertible into shares of Common
Stock at the Conversion Rate, at the holder's option, payable as follows:
(i) in the event holder elects to take such payment in cash, cash payments
shall be made to such holder by the fifth day of the following calendar
month, or (ii) in the event holder elects to take such payment in stock,
the holder may convert such payment amount into shares of Common Stock at
the Conversion Rate any time after the fifth day of the calendar month
following the month in which the Authorization Notice was received, until
the expiration of the mandatory two (2) year conversion period.
4.07 In order to prevent dilution of the rights granted hereunder, the
Conversion Rate shall be subject to adjustment from time to time in
accordance with this subsection.
(a) In the event the Corporation shall declare a dividend or
make any other distribution on any capital stock of the Corporation
payable in Common Stock, options to purchase Common Stock, or
securities convertible into Common Stock, or the Corporation shall at
any time subdivide (other than by means of a dividend payable in
Common Stock) its outstanding shares of Common Stock into a greater
number of shares or combine such outstanding shares into a smaller
number of shares, then in each such event, the Conversion Rate in
effect immediately prior to such combination shall be adjusted so that
the holders of the 1998 Series B Convertible Preferred Stock shall be
entitled to receive the kind and number of shares of Common Stock or
other securities of the Corporation which they would have owned or
have been entitled to receive after the happening of any of the events
described above, had such shares of 1998 Series B Convertible
Preferred Stock been converted immediately prior to the happening of
such event or any record date with respect thereto; an adjustment made
pursuant to this paragraph (a) shall become effective immediately
after the effective date of such event retroactive to the record date
for such event.
(b) If any capital reorganization or reclassification of the
capital stock of the Corporation, consolidation or merger of the
Corporation with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be
effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities, or assets with respect to or in exchange
for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger, or sale, lawful adequate
provisions shall be made whereby the holders of the 1998 Series B
Convertible Preferred Stock shall thereafter have the right to acquire
and receive on conversion of the 1998 Series B Convertible Preferred
Stock such share of stock, securities, or assets as would have been
issuable or payable (as part of the reorganization, reclassification,
consolidation, merger, or sale) with respect to or in exchange for
such number of outstanding shares of the Corporation's Common Stock as
would have been received on conversion of the 1998 Series B
Convertible Preferred Stock immediately before such reorganization,
reclassification, consolidation, merger, or sale. In any such case,
appropriate provision shall be made with respect to the rights and
interests of the holders of the 1998 Series B Convertible Preferred
Stock to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Conversion Rate and for
the number of shares issuable on conversion of the 1998 Series B
Convertible Preferred Stock) shall thereafter be applicable in
relation to any shares of stock, securities, or assets thereafter
deliverable on the conversion of the 1998 Series B Convertible
Preferred Stock. In the event of a merger or consolidation or the
conversion of the Corporation with or into another corporation or the
sale of all or substantially all of its assets as a result of which a
number of shares of Common Stock of the surviving or purchasing
corporation is greater or lesser than the number of shares of Common
Stock of the Corporation outstanding immediately prior to such merger,
consolidation, or purchase are issuable to holders of Common Stock of
the Corporation, then the Conversion Rate in effect immediately prior
to such merger, consolidation, or purchase shall be adjusted in the
same manner as though there was a subdivision of combination of the
outstanding shares of Common Stock of the Corporation. The
Corporation will not effect any such consolidation, merger, or sale
unless prior to the consummation thereof the successor corporation
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument mailed or
delivered to the holders of the 1998 Series B Convertible Preferred
Stock at the last address of such holder appearing on the books of the
Corporation, the obligation to deliver to each such holder such shares
of stock, securities, or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire on conversion of
1998 Series B Convertible Preferred Stock.
(c) No adjustment shall be made in the Conversion Rate for the
number of shares of Common Stock issuable on conversion of 1998 Series
B Convertible Preferred Stock:
(i) In connection with the offer and sale of any shares of
1998 Series B Convertible Preferred Stock;
(ii) In connection with the issuance of any Common Stock,
securities, or assets on conversion of debentures, preferred
stock, or other securities convertible to Common Stock, including
the conversion of shares of 1998 Series B Convertible Preferred
Stock;
(iii)In connection with the issuance of any shares of
Common Stock, securities, or assets on account of the
antidilution provisions set forth in this subsection or similar
rights with respect to other securities of the Corporation;
(iv) In connection with the purchase or other acquisition by
the Corporation of any capital stock, evidence of its
indebtedness, or other securities of the Corporation;
(v) In connection with the sale or exchange by the
Corporation of any Common Stock, evidence of its indebtedness, or
other securities of the Corporation, including securities
containing the right to subscribe for or purchase Common Stock or
Preferred Stock of the Corporation.
4.08 The Corporation covenants and agrees that:
(a) The shares of Common Stock, securities, or assets issuable
on any conversion of any shares of 1998 Series B Convertible Preferred
Stock shall have been deemed to have been issued to the person on the
Conversion Date, and on the Conversion Date, such person shall be
deemed for all purposes to have become the record holder of such
Common Stock.
(b) All shares of Common Stock or other securities which may be
issued on any conversion of the 1998 Series B Convertible Preferred
Stock will, on issuance, be fully paid and nonassessable and free from
all taxes, liens, and charges with respect to the issue thereof.
Without limiting the generality of the foregoing, the Corporation will
from time to time take all such action as may be requisite to assure
that the par value of the unissued Common Stock or other securities
acquirable on any conversion of the 1998 Series B Convertible
Preferred Stock is at all times sufficient to render the Common Stock
issued upon conversion fully paid and non-assessable.
(c) The issuance of certificates for Common Stock or other
securities on conversion of the 1998 Series B Convertible Preferred
Stock shall be made without charge to the registered holder thereof,
including any issuance tax in respect thereof or other costs incurred
by the Corporation in connection with the conversion of the 1998
Series B Convertible Preferred Stock and the related issuance of
Common Stock or other securities.
5. Additional Provisions.
5.01 A share of 1998 Series B Convertible Preferred Stock shall be
transferable only on the books of the Corporation maintained at its
principal office, on delivery thereof duly endorsed by the holder by his
duly authorized attorney or representative or accompanied by proper
evidence of succession, assignment, or authority to transfer. In all cases
of transfer by an attorney, the original power of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited and remain
with the Corporation. In case of transfer by executors, administrators,
guardians, or other legal representatives, duly authenticated evidence of
their authority shall be produced and may be required to be deposited and
remain with the Corporation in its discretion. On any registration or
transfer, the Corporation shall deliver a new certificate representing the
shares of 1998 Series B Convertible Preferred Stock so transferred to the
person entitled thereto.
5.02 Any notice required or permitted to be given to the holders of
the 1998 Series B Convertible Preferred Stock under this Designation shall
be deemed to have been duly given if mailed by first class mail, postage
prepaid, to such holders at their respective addresses appearing on the
stock records maintained by or for the Corporation and shall be deemed to
have been given as of the date deposited in the United States mail.
IN WITNESS WHEREOF, the foregoing Designation of Rights, Privileges, and
Preferences of 1998 Series B Convertible Preferred Stock of the Corporation has
been executed this 27th day of May, 1998.
ATTEST: EUROGAS, INC.
By /s/ Lynne Martin By /s/ Hank Blankenstein
Lynne Martin, Assistant Secretary Hank Blankenstein, Vice-President
EUROGAS, INC.
Maximum Offering: $30,000,000
This offering consists of 30,000 shares of the Company's Series B Convertible
Preferred Stock, $1,000 per share convertible into the
Company's Common Stock.
SUBSCRIPTION AGREEMENT
SUBSCRIPTION PROCEDURES
The Series B Convertible Preferred Stock of EuroGas, Inc. (the "Company" or
"Seller") is being offered for $1,000 per share (the "Shares"). The Shares will
be transferable to the extent that any such transfer is permitted by law. This
offering is being made in accordance with the exemptions from registration
provided for under Section 4(2) of the Securities Act of 1933, as amended (the
"Act") and Rule 506 of Regulation D promulgated under the Act (the "Regulation D
Offering").
In order to purchase Shares, each subscriber (the "Investor") must complete
and execute a questionnaire (the "Investor Questionnaire"), a subscription
agreement (the "Subscription Agreement"), and an Internal Revenue Service Form
W-9 or other appropriate form as may be applicable. In addition, the Investor
must make a payment to an escrow fund of $1,000 per share of Series B
Convertible Preferred Stock subscribed for. All subscriptions are subject to
acceptance by the Company, which shall not occur until the Company has returned
the Company Signature Page and the stock certificate representing the Shares
purchased to the Investor.
The Investor Questionnaire is designed to enable the Investor to
demonstrate the minimum legal requirements under federal and state securities
laws to purchase the Shares. The Signature Page for the Investor Questionnaire
and the Subscription Agreement contain representations relating to the
subscription and should be reviewed carefully by each Investor.
Also included is an Internal Revenue Service Form W-9: "Request for
Taxpayer Identification Number and Certification" for U.S. citizens or residents
of the U.S. for U.S. federal income tax purposes only. (Foreign investors
should consult their tax advisors regarding the need to complete Internal
Revenue Service Form W-9 and any other forms that may be required).
If you are a foreign person or foreign entity, you may be subject to a
withholding tax equal to 30% of any dividends paid by the Company. In order to
eliminate or reduce such withholding tax you must submit a properly executed
I.R.S. Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or
I.R.S. Form 1001 (Ownership Exemption or Reduced Trade Certificate), claiming
exemption from withholding or eligibility for treaty benefits in the form of a
lower rate of withholding tax on interest or dividends.
Payment must be made by wire transfer as provided below:
Immediately available funds should be sent via wire transfer to the escrow
account stated below and the completed Investor Questionnaire, Subscription
Agreement, and a Form W-9 or other appropriate form should be forwarded to the
Escrow Agent. Your subscription funds will be deposited into a non-interest
bearing escrow account of Joseph B. LaRocco, Esq., Escrow Agent, at First Union
Bank of Connecticut, Stamford, Connecticut. In the event of a termination of
the Offering or the rejection of a subscription, subscription funds will be
returned without interest or charges. The wire instructions are as follows:
First Union Bank of Connecticut
Executive Office
300 Main Street, P. O. Box 700
Stamford, CT 06904-0700
ABA #: 021101108
Swift #: FUNBUS33
Account #: 20000-2072298-4
Acct.Name: Joseph B. LaRocco, Esq. Trustee Account
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
SUBSCRIPTION AGREEMENT
To: EUROGAS, INC.
This Subscription Agreement is made between EUROGAS, INC., a Utah
corporation, (the "Company" or "Seller"), and the undersigned prospective
purchaser ("Purchaser") who is subscribing hereby for the Company's Series B
Convertible Preferred Stock (the "Shares"), at a purchase price of $1,000 per
share. The Shares being offered will be separately transferable, to the extent
that any such transfer is permitted by law. The conversion terms of the Shares
are set forth in Section 4 and the form of Notice of Conversion is attached
hereto as Exhibit A. This subscription is submitted to you in accordance with
and subject to the terms and conditions described in this Subscription Agreement
dated May , 1998, together with any Exhibits thereto, relating to an offering
(the "Offering") of 30,000 Shares. The offering (the "Regulation D Offering") is
limited to accredited investors and is made in accordance with the exemptions
from registration provided for under Section 4(2) of the Securities Act of 1933,
as amended (the "Act"), and Rule 506 of Regulation D promulgated under the Act
("Regulation D").
1. SUBSCRIPTION.
(a) The undersigned hereby irrevocably subscribes for and agrees to
purchase up to 30,000 Shares at a purchase price of $1,000.00 per Share, upon
the terms set forth in this Subscription Agreement. The funding shall be
provided as follows: $8,000,000, less placement fees, shall be paid over to the
Company upon closing on or before May 28, 1998; the Company may request a second
funding tranche in the amount of not more than $4,000,000, less placement fees,
within the thirty day period after the registration statement covering the
resale of the Shares is declared effective and every thirty day period
thereafter, as long as at the time of each request, (a) the closing bid price
for the Company's common stock is at or above $3.00, (b) the daily trading
volume for the Company's common stock on the NASDAQ Electronic Bulletin
Board or a U.S. stock exchange is at or above 75,000 shares during any five
trading day period in the preceding 30 days and (c) there is no materially
adverse change in the business of the Company. The Shares shall pay a 6%
cumulative dividend, payable in arrears at the time of each conversion, in cash
or in common stock of the Company, $.001 par value ("Common Stock"), at the
Company's option. If paid in Common Stock, the number of shares of the
Company's Common Stock to be received shall be determined pursuant to Section
4(d) hereof. If the dividend is to be paid in cash, the Company shall make such
payment within 5 business days of the conversion payment date. If the dividend
is to be paid in Common Stock, said Common Stock shall be delivered to the
Purchaser, or per Purchaser's instructions, within 10 business days of the
conversion date. The Shares are subject to automatic conversion at the end of
two years from the date of issuance at which time all Shares outstanding will be
automatically converted based upon the formula set forth in this Section 4(d).
The closing for the initial tranche of $8,000,000 shall be deemed to have
occurred on the date all $8,000,000 of the funds, less placement fees, are
received by the Company (the "Closing Date"). Each subsequent tranche will
require the execution of another Subscription Agreement and the issuance of the
requisite number of Shares by the Company to the Purchaser.
(b) Upon receipt by the Company of the requisite payment for the Shares
being purchased, the Shares so purchased will be forwarded by the Escrow Agent,
Joseph B. LaRocco, to the Purchaser and the name of such Purchaser will be
registered on the Preferred Stock transfer books of the Company as the record
owner of such Shares. The Escrow Agent shall not be liable for any action taken
or omitted by him in good faith and in no event shall the Escrow Agent be liable
or responsible except for the Escrow Agent's own gross negligence or willful
misconduct. The Escrow Agent has made no representations or warranties in
connection with this transaction and has not been involved in the negotiation of
the terms of this Agreement or any matters relative thereto. Seller and
Purchaser each agree to indemnify and hold harmless the Escrow Agent from and
with respect to any suits, claims, actions or liabilities arising in any way out
of this transaction including the obligation to defend any legal action brought
which in any way arises out of or is related to this Agreement, except that
Seller and Purchaser will not indemnify the Escrow Agent for his gross
negligence or willful misconduct. The Escrow Agent is not rendering securities
advice to anyone with respect to this proposed transaction; nor is the Escrow
Agent opining on the compliance of the proposed transaction under applicable
securities law.
2. REPRESENTATIONS AND WARRANTIES.
The undersigned hereby represents and warrants to, and agrees with, the
Company as follows:
(a) The undersigned has been furnished with, and has carefully read
the applicable form of Registration Rights Agreement annexed hereto as
Exhibit B (the "Registration Rights Agreement"), and the Designation of
the Rights, Privileges and Preferences of the Series B Convertible
Preferred stock annexed hereto as Exhibit F (the "Series B Convertible
Preferred Stock Designation") and is familiar with and understands the
terms of the Offering. With respect to tax and other economic
considerations involved in his investment, the undersigned is not relying
on the Company. The undersigned has carefully considered and has, to the
extent the undersigned believes such discussion necessary, discussed with
the undersigned's professional legal, tax, accounting and financial
advisors the suitability of an investment in the Company, by purchasing the
Shares, for the undersigned's particular tax and financial situation and
has determined that the investment being made by the undersigned is a
suitable investment for the undersigned.
(b) The undersigned acknowledges that all documents, records, and
books pertaining to this investment which the undersigned has requested
have been made available for inspection by the undersigned.
(c) The undersigned has had a reasonable opportunity to ask questions
of and receive answers from a person or persons acting on behalf of the
Company concerning the Offering and all such questions have been answered
to the full satisfaction of the undersigned.
(d) The undersigned will not sell or otherwise transfer the Shares or
the shares issued upon conversion of the Shares without registration under
the Act or applicable state securities laws or compliance with an exemption
therefrom. The Shares have not been registered under the Act or under the
securities laws of any state. Resales of the Common Stock underlying the
Shares or issued in payment of dividends on the Shares are to be registered
by the Company pursuant to the terms of the Registration Rights Agreement
attached hereto as Exhibit B and incorporated herein and made a part
hereof. The undersigned represents that the undersigned is purchasing the
Shares for the undersigned's own account, for investment and not with a
view to resale or distribution except in compliance with the Act. The
undersigned has not offered or sold any portion of the Shares being
acquired nor does the undersigned have any present intention of dividing
the Shares with others or of selling, distributing or otherwise
disposing of any portion of the Shares either currently or after the
passage of a fixed or determinable period of time or upon the occurrence or
non-occurrence of any predetermined event or circumstance in violation of
the Act. Except as provided in the Registration Rights Agreement, the
Company has no obligation to register the Shares.
(e) The undersigned recognizes that an investment in the Shares
involves substantial risks, including loss of the entire amount of such
investment. Further, the undersigned has carefully read and considered the
schedule entitled Pending Litigation matters attached hereto as Exhibit C.
(f) The undersigned acknowledges that each certificate representing
the Shares (and the shares of Common Stock issued upon conversion of the
Shares) or in payment of dividends on the Shares shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED
OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED
OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT
APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
NOTWITHSTANDING THE FOREGOING, THE COMMON STOCK INTO WHICH THE
SECURITIES EVIDENCED BY THIS CERTIFICATE ARE CONVERTIBLE ARE ALSO
SUBJECT TO THE REGISTRATION RIGHTS SET FORTH IN EACH OF THAT
CERTAIN SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
BY AND BETWEEN THE HOLDER HEREOF AND THE COMPANY, A COPY OF EACH
IS ON FILE AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE.
If Purchaser sends a Notice of Conversion and indicates on said notice
that the conversion is for an immediate sale, then in such event the
Company shall have its transfer agent send Purchaser the appropriate number
of shares of Common Stock without restrictive legends and not subject to
stop transfer instructions.
(g) The undersigned acknowledges and agrees that it shall not be
entitled to seek any remedies with respect to the Offering from any party
other than the Company.
(h) This Subscription Agreement is executed and delivered on behalf
of a corporation, and: (i) such corporation has the full legal right and
power and all authority and approval required (a) to execute and deliver,
or authorize execution and delivery of, this Subscription Agreement and all
other instruments (including, without limitation, the Registration Rights
Agreement) executed and delivered by or on behalf of such corporation in
connection with the purchase of the Shares and (b) to purchase and hold the
Shares: (ii) the signature of the party signing on behalf of such
corporation is binding upon such corporation; and (iii) such corporation
has not been formed for the specific purpose of acquiring the Shares,
unless each beneficial owner of such entity is qualified as an accredited
investor within the meaning of Rule 501(a) of Regulation D and has
submitted information substantiating such individual qualification.
(i) The undersigned shall indemnify and hold harmless the Company and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Company, who is or may be a party or is
or may be threatened to be made a party to any threatened, pending or
contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of or arising from any actual or
alleged misrepresentation or misstatement of facts or omission to represent
or state facts made or alleged to have been made by the undersigned to the
Company or omitted or alleged to have been omitted by the undersigned,
concerning the undersigned or the undersigned's subscription for and
purchase of the Shares or the undersigned's authority to invest or
financial position in connection with the Offering, including, without
limitation, any such misrepresentation, misstatement or omission contained
in this Subscription Agreement, the Questionnaire or any other document
submitted by the undersigned, against losses, liabilities and expenses for
which the Company, or any stockholder, executive, employee, representative,
affiliate, officer, director or control person of the Company has not
otherwise been reimbursed (including attorneys' fees and disbursements,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred by the Company, or such officer, director stockholder, executive,
employee, representative, affiliate or control person in connection with
such action, suit or proceeding.
(j) The undersigned is not subscribing for the Shares as a result of,
or pursuant to, any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or meeting.
(k) The undersigned or the undersigned's representatives, as the case
may be, has such knowledge and experience in financial, tax and business
matters so as to enable the undersigned to utilize the information made
available to the undersigned in connection with the Offering to evaluate
the merits and risks of an investment in the Shares and to make an informed
investment decision with respect thereto.
(l) The Purchaser is purchasing the Shares for its own account for
investment, and not with a view toward the resale or distribution thereof.
Purchaser is neither an underwriter of, nor a dealer in, the Shares or the
Common Stock issuable upon conversion thereof or upon the payment of
dividends thereon and is not participating in the distribution or resale of
the Shares or the Common Stock issuable upon conversion or exercise
thereof.
3. SELLER REPRESENTATIONS.
(a) Concerning the Securities. The issuance, sale and delivery of
the Shares have been duly authorized by all required corporate action on the
part of Seller, and when issued, sold and delivered in accordance with the terms
hereof and thereof for the consideration expressed herein and therein, will be
duly and validly issued and enforceable in accordance with their terms, subject
to the laws of bankruptcy and creditors' rights generally. At least 10,000,000
shares of Common Stock issuable upon conversion of the Shares have been duly and
validly reserved for issuance and, upon issuance shall be duly and validly
issued, fully paid, and non-assessable (the "Reserved Shares").
Prior to conversion of all the Shares, if at anytime the conversion of all
the Shares outstanding results in an insufficient number of Reserved Shares
being available to cover all the conversions and exercises, or requires
shareholder approval pursuant to a rule of a stock exchange on which the common
stock is traded, then in such event, the Company will move to call and hold a
shareholder's meeting within 60 days of such event for the sole purpose of
authorizing additional Common Stock to facilitate the conversions or meeting the
requirements of such rule. In such an event the Company shall: (1) recommend
to its current or future officers, directors and other control people to vote
their shares in favor of increasing the authorized number of shares of Common
Stock and (2) recommend to all shareholders to vote their shares in favor of
increasing the authorized number of shares of Common Stock or approve the
transaction as appropriate. Seller represents and warrants that under no
circumstances will it deny or prevent Purchaser's right to convert the Shares as
permitted under the terms of this Subscription Agreement or the Registration
Rights Agreement.
(b) Authority to Enter Agreement. This Agreement has been duly
authorized, validly executed and delivered on behalf of Seller and is a valid
and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
(c) Non-contravention. The execution and delivery of this Agreement
and the consummation of the issuance of the Shares, and the transactions
contemplated by this Agreement do not and will not conflict with or result in a
breach by Seller of any of the terms or provisions of, or constitute a default
under, the articles of incorporation or by-laws of Seller, or any indenture,
mortgage, deed of trust, or other material agreement or instrument to which
Seller is a party or by which it or any of its properties or assets are bound,
or any existing applicable law, rule, or regulation of the United States or any
State thereof or any applicable decree, judgment, or order of any Federal or
State court, Federal or State regulatory body, administrative agency or other
United States governmental body having jurisdiction over Seller or any of its
properties or assets which conflict, breach, or default would have a material
adverse effect on the Company's financial position.
(d) Company Compliance. The Company represents and warrants that the
Company and its subsidiaries are: (i) in substantial compliance, to the extent
applicable, with all reporting obligations under either Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; (ii) not in violation of any term or
provision of its Certificate of Incorporation or by-laws; (iii) not in default
in the performance or observance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any mortgage, deed of trust, indenture or other instrument or agreement to
which they are a party, either singly or jointly, by which it or any of their
property is bound or subject which would have a material adverse effect on the
Company's financial condition, except at set forth in Exhibit C.
(e) Pending Litigation. Except as otherwise disclosed in Exhibit C,
there is (i) no action, suit or proceeding before or by any court, arbitrator or
governmental body now pending or, to the knowledge of the Company, threatened or
contemplated to which the Company or any of its subsidiaries is or may be a
party or to which the business or property of the Company or any of its
subsidiaries is or may be bound or subject, (ii) no law, statute, rule,
regulation, order or ordinance that has been enacted, adopted or issued by any
Governmental Body or that, to the knowledge of the Company, has been proposed by
any Governmental Body materially and adversely affecting the Company or any of
its subsidiaries, (iii) no injunction, restraining order or order of any nature
by a federal, state or foreign court or Governmental Body of competent
jurisdiction to which the Company or any of its subsidiaries is subject issued
that, in the case of clauses (i), (ii) and (iii) above, (x) is reasonably likely
to, singly or in the aggregate, result in a material adverse effect on the
business, condition, (financial or otherwise), operations, earnings,
performance, properties or prospects of the Company effect, and its subsidiaries
taken as a whole or (y) would interfere with or adversely affect the issuance of
the Shares reasonably likely to render this Subscription Agreement or the
Shares, or any portion thereof, invalid or unenforceable.
(f) Issuance of the Shares. No action has been taken and no law,
statute, rule, regulation, order or ordinance has been enacted, adopted or
issued by any Governmental Body that prevents the issuance of the Shares or the
Common Stock issuable upon conversion thereof; no injunction, restraining order
or order of any nature by a federal or state court of competent jurisdiction has
been issued that prevents the issuance of the Shares or the Common Stock
issuable upon thereof or suspends the sale of the Shares or the Common Stock
issuable upon conversion thereof in any jurisdiction; and no action, suit or
proceeding is pending against or, to the best knowledge of the Company,
threatened against or affecting, the Company, any of its subsidiaries or, to the
best knowledge of the Company, before any court or arbitrator or any
Governmental Body that, if adversely determined, would prohibit, interfere with
or adversely affect the issuance or marketability of the Shares or the Common
Stock issuable upon conversion thereof or render the Subscription Agreement or
the Shares, or any portion thereof, invalid or unenforceable.
(g) The Company shall indemnify and hold harmless the Purchaser and
each stockholder, executive, employee, representative, affiliate, officer,
director or control person of the Purchaser, who is or may be a party or is or
may be threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of or arising from any breach of the representations
and warranties made by the Company in this Subscription Agreement, the
Questionnaire or any other document submitted by the Company, against losses,
liabilities and expenses for which the Purchaser, or any stockholder, executive,
employee, representative, affiliate, officer, director or control person of the
Purchaser has not otherwise been reimbursed (including attorneys' fees and
disbursements, judgments, fines and amounts paid in settlement) actually and
reasonably incurred by the Purchaser, or such officer, director stockholder,
executive, employee, representative, affiliate or control person in connection
with such action, suit or proceeding.
(h) No Change. Other than filings required by the Blue Sky or
federal securities law, no consent, approval or authorization of or
designation, declaration or filing with any governmental or other regulatory
authority on the part of the Company is required in connection with the valid
execution, delivery and performance of this Agreement. Any required
qualification or notification under applicable federal securities laws and
state Blue Sky laws of the offer, sale and issuance of the Shares, has been
obtained on or before the date hereof or will have been obtained within the
allowable period thereafter, and a copy thereof will be forwarded to counsel
for the Purchaser.
(i) True Statements. Neither this Agreement nor any of the
"Disclosure Documents", as hereinafter defined, contains any untrue statement
of a material fact or omits to state any material fact necessary in order to
make the statements contained herein or therein not misleading in the light
of the circumstances under which such statements are made.
(j) The Purchaser has been advised that the Company has not
retained any independent professionals to review or comment on this Offering
or otherwise protect the interests of the Purchaser. Although the Company
has retained its own counsel, neither such counsel nor any other firm,
including Joseph B. LaRocco, Esq., has acted on behalf of the Purchaser,
and the Purchaser should not rely on the Company's legal counsel or
Joseph B. LaRocco, Esq. with respect to any matters herein described.
(k) There has never been represented, guaranteed, or warranted
to the undersigned by any broker, the Company, its officers, directors or
agents, or employees or any other person, expressly or by implication
(i) the percentage of profits and/or amount of or type of consideration,
profit or loss to be realized, if any, as a result of the Company's
operations; and (ii) that the past performance or experience on the part
of the management of the Company, or of any other person, will in any way
result in the overall profitable operations of the Company.
(l) Prior Financing Under Regulation S or Regulation D No other
financings other than as disclosed in the Company's Form 10-K for December 31,
1997, have been conducted by the Company since January 1, 1997.
(m) Current Authorized Shares. As of March 18, 1998, there were
325,000,000 authorized shares of Common Stock of which approximately 78,133,934
shares of Common Stock were deemed issued and outstanding on a fully diluted
basis.
(n) Disclosure Documents. The Disclosure Documents are all the
documents (other than preliminary materials) that the Company has been
required to file with the SEC from December 31, 1997, to the date hereof.
As of their respective dates, except as set forth on Exhibit C hereto, none
of the Disclosure Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, and no material event has occurred
since the Company's filing on Form 10-Q for the three months ended
March 31, 1998, which could make any of the disclosures contained therein
misleading. The financial statements of the Company included in the
Disclosure Documents have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited financial statements, only to normal recurring year-end
audit adjustments), and accurately reflect in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the consolidated results of their operations and
changes in financial position for the periods then ended.
(o) Information Supplied. The information supplied by the Company
to Purchaser in connection with the offering of the Shares does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in the light of the circumstances in which they were
made, not misleading. There exists no fact or circumstances which, to the
knowledge of the Company, materially and adversely affects the business,
properties, assets, or conditions, financial or otherwise, of the Company,
which has not been set forth in this Agreement or disclosed in such documents.
(p) Delivery Instructions. On the Closing Date the Shares being
purchased hereunder shall be delivered to Joseph B. LaRocco, Esq. as Escrow
Agent, who will simultaneously wire to the Company the funds being held in
escrow, less placement fees of 7.5%, at which time the Escrow Agent shall then
have the Shares delivered to the Purchaser, per the Purchaser's instructions.
The placement agent shall also receive 50,000 shares of the Company's restricted
Common Stock with piggyback registration rights in any other registration
statement to be filed by the Company.
(q) Non-contravention. The execution and delivery of this Agreement
by the Company, the issuance of the Shares, and the consummation by the Company
of the other transactions contemplated by this Agreement, do not and will not
conflict with or result in a breach by the Company of any of the terms or
provisions of, or constitute a default under, the (i) certificate of
incorporation or by-laws of the Company, (ii) any indenture, mortgage, deed of
trust, or other material agreement or instrument to which the Company is a party
or by which it or any of its properties or assets are bound, (iii) any material
existing applicable law, rule, or regulation or any applicable decree, judgment,
or (iv) order of any court, United States federal or state regulatory body,
administrative agency, or other governmental body having jurisdiction over the
Company or any of its properties or assets, except such conflict, breach or
default which would not have a material adverse effect on the transactions
contemplated herein and such agreements as are already the subject of litigation
as identified on Exhibit C.
(r) No Default. Except as set forth in the Company's reports on
form 10-K for the twelve months ending December 31, 1997 and Form 10Q for the
quarter ended March 31, 1998, the Company is not in default in the performance
or observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it or its property is bound, and
neither the execution of, nor the delivery by the Company of, nor the
performance by the Company of its obligations under, this Agreement or
the issuance of the Shares, will conflict with or result in the breach or
violation of any of the terms or provisions of, or constitute a default or
result in the creation or imposition of any lien or charge on any assets or
properties of the Company under, (i) any material indenture, mortgage, deed of
trust or other material agreement applicable to the Company or instrument to
which the Company is a party or by which it is bound, (ii) any statute
applicable to the Company or its property, (iii) the Certificate of
Incorporation or By-Laws of the Company, (iv) any decree , judgment, order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company regulation of any court or governmental agency or body having
jurisdiction over the Company or its properties, or (v) the Company's listing
agreement for its Common Stock.
(s) Use of Proceeds. The Company represents that the net proceeds
of this Offering will be used for working capital.
4. TERMS OF CONVERSION.
(a) Shares. Upon the Company's receipt of a facsimile or original of
Purchaser's signed Notice of Conversion, the Company shall instruct its
transfer agent to issue one or more Certificates representing that number of
shares of Common Stock into which the Shares are convertible in accordance with
the provisions regarding conversion set forth in Exhibit A hereto. The Seller's
transfer agent or attorney shall act as Registrar and shall maintain an
appropriate ledger containing the necessary information with respect to each
Share.
(b) Conversion Date. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Shares to be converted
together with a facsimile or original of the signed Notice of Conversion which
evidences Purchaser's intention to convert those Shares indicated. The date on
which the Notice of Conversion is effective ("Conversion Date") shall be deemed
to be the date on which the Purchaser has delivered to the Company a facsimile
or original of the signed Notice of Conversion, as long as the original Shares
to be converted are received by the Company or its designated attorney within 3
business days thereafter. As long as the Shares to be converted are received by
the Company within 3 business days after it receives a facsimile or original of
the signed Notice of Conversion, the Company shall deliver to the Purchaser, or
per the Purchaser's instructions, the shares of Common Stock, with restrictive
legends as set forth in this Agreement, within 5 business days of receipt of the
Shares to be converted.
(c) Common Stock to be Issued. Upon the conversion of any Shares
and upon receipt by the Company or its attorney of a facsimile or original of
Purchaser's signed Notice of Conversion (See Exhibit A), Seller shall instruct
Seller's transfer agent to issue Stock Certificates with restrictive legends as
set forth in this Agreement in the name of Purchaser (or its nominee) and in
such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Seller.
(d) Conversion Rate. At anytime after the Closing Date the Purchaser
will have the right to convert the Shares, representing the initial funding
tranche of $8,000,000 into Common Stock of the Company at the lesser of (a) 80%
of the five day average closing bid price, as reported by Bloomberg, LP, for the
Company's Common Stock for the five trading days immediately preceding the
Conversion Date or (b) 125% of the five day average closing bid price, as
reported by Bloomberg, LP, for the Company's Common Stock for the five trading
day period preceding the Closing Date. Anytime after the Closing Date of a
subsequent funding tranche the Purchaser will have the right to convert the
Shares, representing that subsequent funding tranche, into Common Stock of
the Company at the lesser of (a) 85% of the five day average closing bid price,
as reported by Bloomberg, LP, for the Company's Common Stock for the five
trading days immediately preceding the Conversion Date or (b) 125% of the five
day average closing bid price, as reported by Bloomberg, LP, for the Company's
Common Stock for the five trading day period preceding the Closing Date of that
subsequent funding tranche. No fractional shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded up or down, as the case may be, to the nearest whole
share.
The Shares are subject to mandatory conversion twenty-four (24) months
after issuance, at which time all Shares outstanding will be automatically
converted, upon the terms set forth in this section ("Mandatory Conversion
Date").
(e) Nothing contained in this Subscription Agreement shall be deemed
to establish or require the payment of interest to the Purchaser at a rate in
excess of the maximum rate permitted by governing law. In the event that the
rate of interest required to be paid exceeds the maximum rate permitted by
governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing law and
such excess shall be returned with reasonable promptness by the Purchaser to the
Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue certificates for the Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Shares that are to be converted in part, the Company shall issue to the
Purchaser new certificates representing Shares equal to the unconverted amount,
if so requested by Purchaser.
(g) In the event the Common Stock is not delivered per the written
instructions of the Purchaser, within 7 (seven) business days after the
Conversion Date and delivery of the certificate representing the Shares to be
converted then in such event the Company shall pay to Purchaser one percent (1%)
in cash, of the dollar value of the Shares being converted per each day after
the fifth business day following the Conversion Date that the Common Stock is
not delivered.
The Company acknowledges that its failure to deliver the Common Stock
within 10 business days after the Conversion Date will cause the Purchaser to
suffer damages in an amount that will be difficult to ascertain. Accordingly,
the parties agree that it is appropriate to include in this Agreement a
provision for liquidated damages. The parties acknowledge and agree that the
liquidated damages provision set forth in this section represents the parties'
good faith effort to qualify such damages and, as such, agree that the form and
amount of such liquidated damages are reasonable and will not constitute a
penalty. The payment of liquidated damages shall not relieve the Company from
its obligations to deliver the Common Stock pursuant to the terms of this
Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 4 is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 4(g) shall not
apply but instead the provisions of Section 4(h) shall apply.
The Company shall make any payments incurred under this Section 4(g) in
immediately available funds within ten (10) business days from the date of
issuance of the applicable Common Stock. Nothing herein shall limit a
Purchaser's right to pursue actual damages or cancel the conversion for the
Company's failure to issue and deliver Common Stock to the Purchaser within
ten (10) business days after the Conversion Date.
(h) The Company shall at all times reserve and have available all
Common Stock necessary to meet conversion of the Shares by all Purchasers of the
entire amount of Shares then outstanding. If, at any time Purchaser submits a
Notice of Conversion and the Company does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the Shares (a "Conversion Default", the date of such default being referred to
herein as the "Conversion Default Date"), the Company shall issue to the
Purchaser all of the shares of Common Stock which are available, and the Notice
of Conversion as to any Shares requested to be converted but not converted (the
"Unconverted Shares"), upon Purchaser's sole option, may be deemed null and
void. The Company shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Purchasers of outstanding Shares, by
facsimile, within five (5) business days of such default (with the original
delivered by overnight or two day courier), and the Purchaser shall give notice
to the Company by facsimile within five business days of receipt of the original
Notice of Conversion Default (with the original delivered by overnight or two
day courier) of its election to either nullify or confirm the Notice of
Conversion.
The Company agrees to pay to all Purchasers of outstanding Shares payments
for a Conversion Default ("Conversion Default Payments") in the amount of
(N/365) x (.24) x the initial issuance price of the outstanding and/or tendered
but not converted Shares held by each Purchaser where N = the number of days
from the Conversion Default Date to the date (the "Authorization Date") that the
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of all remaining Shares. The Company shall send notice
("Authorization Notice") to each Purchaser of outstanding Shares that additional
shares of Common Stock have been authorized, the Authorization Date and the
amount of Purchaser's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Purchaser's option, payable as follows:
(i) in the event Purchaser elects to take such payment in cash, cash payments
shall be made to such Purchaser of outstanding Shares by the fifth day of the
following calendar month, or (ii) in the event Purchaser elects to take such
payment in stock, the Purchaser may convert such payment amount into Common
Stock at the conversion rate set forth in section 4(d) at anytime after
the 5th day of the calendar month following the month in which the Authorization
Notice was received, until the expiration of the mandatory 24 month conversion
period.
The Company acknowledges that its failure to maintain a sufficient number
of authorized but unissued shares of Common Stock to effect in full a conversion
of the Shares will cause the Purchaser to suffer damages in an amount that will
be difficult to ascertain. Accordingly, the parties agree that it is
appropriate to include in this Agreement a provision for liquidated damages.
The parties acknowledge and agree that the liquidated damages provision set
forth in this section represents the parties' good faith effort to quantify such
damages and, as such, agree that the form and amount of such liquidated damages
are reasonable and will not constitute a penalty. The payment of liquidated
damages shall not relieve the Company from its obligations to deliver the Common
Stock pursuant to the terms of this Agreement.
Nothing herein shall limit the Purchaser's right to pursue actual damages
or cancel the conversion for the Company's failure to maintain a sufficient
number of authorized shares of Common Stock.
(i) The Company shall furnish to Purchaser such number of
prospectuses and other documents incidental to the registration of the shares of
Common Stock underlying the Shares and the shares of Common Stock issuable in
payment of dividends on the Shares, including any amendment of or supplements
thereto.
5. OPINION LETTER/BOARD RESOLUTION
Prior to or on the Closing Date the Company shall deliver to the Escrow
Agent an opinion letter signed by counsel for the Company in the form attached
hereto as Exhibit D. Also, prior to or on the Closing Date the Company shall
deliver to the Escrow Agent a signed Board Resolution authorizing this offering,
which shall be attached hereto as Exhibit E.
6. DELIVERY INSTRUCTIONS.
The Shares being purchased hereunder shall be delivered to Joseph B.
LaRocco, Esq. as Escrow Agent, who will hold them in escrow until funds have
been wired to the Company at which time the Escrow Agent shall then have the
Shares delivered to the Purchaser, per the Purchaser's instructions.
7. UNDERSTANDINGS.
The undersigned understands, acknowledges and agrees with the Company as
follows:
FOR ALL SUBSCRIBERS:
(a) This Subscription may be rejected, in whole or in part, by the Company
in its sole and absolute discretion at any time before the date set for closing
unless the Company has given notice of acceptance of the undersigned's
subscription by signing this Subscription Agreement and delivering it to
Purchaser or the Escrow Agent.
(b) No U.S. federal or state agency or any agency of any other
jurisdiction has made any finding or determination as to the fairness of the
terms of the Offering for investment nor any recommendation or endorsement of
the Shares or the Company.
(c) The representations, warranties and agreements of the undersigned and
the Company contained herein shall be true and correct in all material respects
on and as of the date of the sale of the Shares as if made on and as of such
date and shall survive the execution and delivery of this Subscription Agreement
and the purchase of the Shares.
(d) IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(e) The Offering is intended to be exempt from registration under the
Securities Act by virtue of Section 4(2) of the Securities Act and the
provisions of Regulation D thereunder, which is in part dependent upon the
truth, completeness and accuracy of the statements made by the undersigned
herein and in the Questionnaire.
(f) It is understood that in order not to jeopardize the Offering's exempt
status under Section 4(2) of the Securities Act and Regulation D, any transferee
may, at a minimum, be required to fulfill the investor suitability requirements
thereunder.
(g) THE SHARES MAY NOT BE TRANSFERRED, RESOLD OR OTHERWISE DISPOSED OF
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
8. SUBMISSION TO JURISDICTION
(a) Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this Agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Purchaser shall be brought and maintained exclusively
in the courts of the state of New York. The Company hereby expressly and
irrevocably submits to the jurisdiction of the state and federal Courts of the
state of New York for the purpose of any such litigation as set forth above and
irrevocably agrees to be bound by any final judgment rendered thereby in
connection with such litigation. The Company further irrevocably consents to
the service of process by registered mail, postage prepaid, or by personal
service within or without the State of New York. The Company hereby expressly
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may have or hereafter may have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that any
such litigation has been brought in any inconvenient forum. To the extent that
the Company has or hereafter may acquire any immunity from jurisdiction of any
court or from any legal process (whether through service or notice, attachment
prior to judgment, attachment in aid of execution or otherwise) with respect to
itself or its property. The Company hereby irrevocably waives such immunity in
respect of its obligations under this agreement and the other loan documents.
(b) Waiver of Jury Trial. The Purchaser and the Company hereby
knowingly, voluntarily and intentionally waive any rights they may have to a
trial by jury in respect of any litigation based hereon, or arising out of,
under, or in connection with, this agreement, or any course of conduct, course
of dealing, statements (whether oral or written) or actions of the Purchaser or
the Company. The Company acknowledges and agrees that it has received full and
sufficient consideration for this provision and that this provision is a
material inducement for the Purchaser entering into this agreement.
(c) Submission To Jurisdiction. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought in the
state and federal courts located in New York, and the parties hereby irrevocably
submit to the non-exclusive jurisdiction of such courts for the purpose of any
such action or proceeding.
9. MISCELLANEOUS.
(a) All pronouns and any variations thereof used herein shall be deemed to
refer to the masculine, feminine, impersonal, singular or plural, as the
identity of the person or persons may require.
(b) Neither this Subscription Agreement nor any provision hereof shall be
waived, modified, changed, discharged, terminated, revoked or canceled, except
by an instrument in writing signed by the party effecting the same against whom
any change, discharge or termination is sought.
(c) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
or sent by facsimile transmission: (i) if to the Company, at it's executive
offices or (ii) if to the undersigned, at the address for correspondence set
forth in the Questionnaire, or at such other address as may have been specified
by written notice given in accordance with this paragraph 9(c).
(d) This Subscription Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of Utah, as such laws
are applied by Utah courts to agreements entered into, and to be performed in,
Utah by and between residents of Utah, and shall be binding upon the
undersigned, the undersigned's heirs, estate, legal representatives, successors
and assigns and shall inure to the benefit of the Company, its successors and
assigns. If any provision of this Subscription Agreement is invalid or
unenforceable under any applicable statue or rule of law, then such provisions
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any
provision hereof that may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision hereof.
(e) This Subscription Agreement, together with Exhibits A, B, C, D, E and
F attached hereto and made a part hereof, constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by both parties hereto.
(f) This Agreement may be executed in counterparts, and the facsimile
transmission of an executed counterpart to this Agreement shall be effective as
an original.
10. SIGNATURE.
The signature of this Subscription Agreement is contained as part of the
applicable Subscription Package, entitled "Signature Page."
EUROGAS, INC.
CORPORATION QUESTIONNAIRE
Investor Name: Thomson Kernaghan & Co., Ltd.
The information contained in this Questionnaire is being furnished in order
to determine whether the undersigned CORPORATION'S Subscription to purchase the
Shares described in the Subscription Agreement may be accepted.
ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED
CONFIDENTIALLY. The undersigned CORPORATION understands, however, that the
Company may present this Questionnaire to such parties as it deems appropriate
if called upon to establish that the proposed offer and sale of the Shares is
exempt from registration under the Securities Act of 1933, as amended. Further,
the undersigned CORPORATION understands that the Offering is required to be
reported to the Securities and Exchange Commission and to various state
securities and "blue sky" regulators.
IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED CORPORATION MUST
COMPLETE FORM W-9 ATTACHED HERETO.
I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES TO THE CORPORATION.
1. The undersigned CORPORATION: (a) has total assets in excess of
$5,000,000; (b) was not formed for the specific purpose of acquiring
the Shares and (c) has its principal place of business in Canada.
2. Each of the shareholders of the undersigned CORPORATION is able
to certify that such shareholder meets at least one of the
following three conditions:
(a) the shareholder is a natural person whose individual net
worth* or joint net worth with his or her spouse exceeds
$1,000,000; or
(b) the shareholder is a natural person who had an individual
income* in excess of $200,000 in each of 1996 and 1997 and who
reasonably expects an individual income in excess of $200,000 in
1998; or
(c) Each of the shareholders of the undersigned CORPORATION is
able to certify that such shareholder is a natural person who,
together with his or her spouse, has had a joint income in excess
of $300,000 in each of 1996 and 1997 and who reasonably expects a
joint income in excess of $300,000 during 1998; and the
undersigned CORPORATION has its principal place of business in
------------------------------.
* For purposes of this Questionnaire, the term "net worth" means the excess
of total assets over total liabilities. In determining income, an investor
should add to his or her adjusted gross income any amounts attributable to tax-
exempt income received, losses claimed as a limited partner in any limited
partnership, deductions claimed for depletion, contributions to IRA or Keogh
retirement plan, alimony payments and any amount by which income from long-term
capital gains has been reduced in arriving at adjusted gross income.
3. The undersigned CORPORATION is:
(a) a bank as defined in Section 3(a)(2) of the Securities Act;
or
(b) a savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the Securities Act whether
acting in its individual or fiduciary capacity; or
(c) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; or
(d) an insurance company as defined in Section 2(13) of the
Securities Act; or
(e) An investment company registered under the Investment
Company Act of 1940 or a business development company as defined
in Section 2(a)(48) of the Investment Company Act of 1940; or
(f) a small business investment company licensed by the U.S.
Small Business Administration under Section 301 (c) or (d) of the
Small Business Investment Act of 1958; or
(g) a private business development company as defined in Section
202(a) (22) of the Investment Advisors Act of 1940.
II. OTHER CERTIFICATIONS.
By signing the Signature Page, the undersigned certifies the following:
(a) That the CORPORATION'S purchase of the Shares will be solely for the
CORPORATION'S own account and not for the account of any other person or
entity; and
(b) that the CORPORATION'S name, address of principal place of business,
place of incorporation and taxpayer identification number as set
forth in this Questionnaire are true, correct and complete.
III. GENERAL INFORMATION
(a) PROSPECTIVE PURCHASER (THE CORPORATION)
Name: Thomson Kernaghan & Co., Ltd.
Principal Place of Business: Canada
Address for Correspondence (if different): 365 Bay Street, 10th Floor
(Number and Street)
Toronto Ontario MSH 2V2
(City) (State) (Zip Code)
Telephone Number: (416) 860-6130
(Area Code) (Number)
Jurisdiction of Incorporation: Canada
Date of Formation:
Taypayer Identification Number: N/A
Number of Shareholders:
(b) INDIVIDUAL WHO IS EXECUTING THIS QUESTIONNAIRE ON BEHALF OF THE
CORPORATION.
Name: Mark Valentine
Position or Title: VP & Director
EUROGAS, INC.
CORPORATION SIGNATURE PAGE
Your signature on this Corporation Signature Page evidences the agreement
by the Purchaser to be bound by the Questionnaire and the Subscription
Agreement.
1. The undersigned hereby represents that (a) the information contained
in the Questionnaire is complete and accurate and (b) the Purchaser will notify
EuroGas, Inc. immediately if any material change in any of the information
occurs prior to the acceptance of the undersigned Purchaser's subscription and
will promptly send EuroGas, Inc. written confirmation of such change.
2. The undersigned officer of the Purchaser hereby certifies that he has
read and understands this Subscription Agreement.
3. The undersigned officer of the Purchaser hereby represents and
warrants that he has been duly authorized by all requisite action on the part of
the Corporation to acquire the Shares and sign this Subscription Agreement on
behalf of Thomson Kernaghan and, further, that Mark Valentine has all
requisite authority to purchase the Shares and enter into this Subscription
Agreement.
8,000 May 29, 1998
Number of Shares subscribed for Date
THOMSON KERNAGHAN & CO., LTD.
(Purchaser)
By /s/ Mark Valentine
(Signature)
Name: Mark Valentine Title: VP & Director
(Please Type or Print) (Please Type or Print)
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.
COMPANY ACCEPTANCE PAGE
This Subscription Agreement accepted and agreed to this day of
May, 1998.
EUROGAS, INC.
By
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of May 29,
1998, by and among EUROGAS, INC., a Utah corporation (the "Company"), and
THOMSON KERNAGHAN & CO., LTD on behalf of Dominion Capital Fund, Ltd, Sovereign
Partners Limited Partnership and Canadian Advantage Limited Partnership (the
"Subscriber").
W I T N E S S E T H
WHEREAS, pursuant to the Subscription Agreement (the "Subscription
Agreement"), by and among the Company and the Subscriber, the Company has agreed
to sell and the Subscriber has agreed to purchase an aggregate of 30,000 Series
B, Convertible Preferred Shares (the "Shares"), at $1,000 per Share, of the
Company convertible into shares of the Company's Common Stock, $.0001 par value
per share (the "Common Stock"); and
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Subscriber's entering into the Subscription Agreement, the Company has agreed to
provide the Subscriber with certain registration rights with respect to the
Common Stock;
NOW THEREFORE, in consideration of the mutual promises, representation,
warranties, covenants and conditions set forth in the Subscription Agreement and
this Registration Rights Agreement, the Company and the Subscriber agree as
follows:
1. Certain Definitions. As used in this Agreement the following terms
shall have the following respective meanings:
"Closing Date" shall mean the date the funds necessary to purchase the
Shares were received by the Company.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Common Stock, $.0001 par value per
share.
"Registrable Shares" shall mean any Common Stock of the Company issued or
issuable in respect of the Shares whether on conversion of the Shares or as
payment of a dividend, including Common Stock issued on a stock split, stock
dividend, recapitalization or similar event; provided, however, that shares of
Common Stock or other securities shall no longer be treated as Registrable
Shares if (a) they have been sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, (b)
they have been sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 so that all transfer
restrictions and restrictive legends with respect thereto are removed upon
consummation of such sale or (c) they are available for sale under Rule 144 or
otherwise, in the opinion of counsel to the Company, without compliance with the
registration and prospectus delivery requirements of the Securities Act of 1933
so that no transfer restrictions or restrictive legends will appear upon the
Common Stock certificates following the consummation of such sale.
The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933 and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement. Said registration shall include all amendments, post-
effective amendments and supplements to any such registration statement as may
be necessary under the Act and the regulations of the Commission to keep such
registration effective with respect to the Registrable Shares until Subscriber
has converted all the Shares or until May , 2000, whichever shall occur first.
"Registration Expenses" shall mean all expenses incurred by the Company in
compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, 2(b) and the reasonable
expenses of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company).
"Reserved Shares" shall mean the shares of Common Stock issuable upon
conversion of the Shares that have been duly and validly reserved for issuance,
and upon issuance which shall be duly and validly issued, fully paid, and non-
assessable.
"Act" shall mean the Securities Act of 1933, as amended, or any similar
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Shares.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with the
SEC, no later than thirty (30) days after the Closing Date, a Registration
Statement on Form S-1 (or any other available form), covering a sufficient
number of shares of Common Stock for the Subscriber but in no event less than
10,000,000 shares of Common Stock into which the $30,000,000 of Shares in the
total offering would be convertible. Such Registration Statement shall state
that, in accordance with the Act, it also covers such indeterminate number of
additional shares of Common Stock as may become issuable to prevent dilution
resulting from Stock splits, or stock dividends. If at any time the number of
shares of Common Stock into which the Shares may be converted exceeds the
aggregate number of shares of Common Stock then registered, the Company shall,
within ten (10) business days after receipt of written notice from any
Subscriber, either (i) amend the Registration Statement filed by the Company
pursuant to the preceding sentence, if such Registration Statement has not been
declared effective by the SEC at that time, to register all shares of Common
Stock into which the Shares may be converted, or (ii) if such Registration
Statement has been declared effective by the Commission at that time, file with
the SEC an additional Registration Statement on Form S-1 (or any other available
form), to register the shares of Common Stock into which the Shares may be
converted that exceed the aggregate number of shares of Common Stock already
registered. The Company shall notify the Subscriber by facsimile transmission,
within five (5) business days of notification from the Commission, that the
Registration Statement has been declared effective. In addition to the
Registrable Shares, the Registration Statement may also include up to 400,000
Shares of Common Stock to be sold by others and, subject to a limitation that no
more than 150,000 of such shares can be sold in any month, any shares of common
stock issued or issuable on the exercise of outstanding warrants, options, or
similar rights.
(b) Underwritten Offering. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Subscribers acting by majority in interest of the Registrable Shares subject to
such underwritten offering shall have the right to select one legal counsel to
represent their interests, and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. The
Subscriber(s) who hold the Registrable Shares to be included in such
underwriting shall pay all underwriting discounts and commissions and other fees
and expenses of such investment banker or bankers and manager or managers so
selected in accordance with this Section 2(b) (other than fees and expenses
relating to registration of Registrable Shares under federal or state securities
laws, which are payable by the Company pursuant to Section 5 hereof) with
respect to their Registrable Shares and the fees and expenses of such legal
counsel so selected by the Subscriber.
(c) Certain Fees. The Company shall pay cash liquidated damages of 1.0%
of the principal amount of the Shares for the initial 30 day period and 2.0% of
the principal amount of the Shares for each subsequent 30 day period or portion
thereof after which the following obligations of the Company remain unsatisfied:
(i) if the registration ceases to remain effective during the
"Registration Period" as defined in Section 3(a);
(ii) if the registration is not declared effective within ninety (90)
days after the Closing Date; and
(iii) if the Registration Statement is not filed within thirty (30) days
following the Closing Date.
The above damages shall continue until the obligation is fulfilled, subject to a
maximum of 12 months and shall be paid within 5 business days after each 30 day
period. Failure of the Company to make payment within said 5 business days
shall be considered a default. The Company acknowledges that its failure to meet
any of its obligations under either Section 2(c) (i) or (ii) of this Agreement
will cause the Subscriber to suffer damages in an amount that will be difficult
to ascertain. Accordingly, the parties agree that it is appropriate to include
in this Agreement a provision for liquidated damages. The parties acknowledge
and agree that the liquidated damages provision set forth in this section
represents the parties' good faith effort to qualify such damages and, as such,
agree that the form and amount of such liquidated damages are reasonable and
will not constitute a penalty. The payment of liquidated damages shall not
relieve the Company from its obligations to deliver the Common Stock pursuant to
the terms of this Agreement and the Subscription Agreement.
3. Obligation of the Company. In connection with the registration of
the Registrable Shares, the Company shall do each of the following:
(a) Prepare promptly, and file with the SEC within thirty (30) days of the
Closing Date, a Registration Statement with respect to not less than the number
of Registrable Shares provided in Section 2(a), above, and thereafter use its
best efforts to cause each Registration Statement relating to Registrable Shares
to become effective the earlier of (i) five business days after notice from the
Securities and Exchange Commission that the Registration Statement may be
declared effective, or (b) ninety (90) days after the Closing Date, and keep the
Registration Statement effective at all times until the earliest of (i) May ,
2000 or (ii) the date the Subscriber no longer owns any of the Registrable
Shares (items (i) and (ii) cumulatively being referred to as the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Act with respect to the disposition of all Registrable Shares
of the Company covered by the Registration Statement until such time as all of
such Registrable Shares have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(c) Furnish to each Subscriber whose Registrable Shares are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each prospectus, and each amendment or supplement thereto, and (ii) such number
of copies of a prospectus and all amendments and supplements thereto and such
other documents, as the Subscriber may reasonably request in order to facilitate
the disposition of the Registrable Shares owned by such Subscriber;
(d) Use reasonable efforts to (i) register and qualify the Registrable
Shares covered by the Registration Statement under such other securities or blue
sky laws of such jurisdictions as the Subscriber(s) who hold a majority in
interest of the Registrable Shares being offered reasonably request and in which
significant volumes of shares of Common Stock are traded, (ii) prepare and file
in those jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof at all times during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualification in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Shares for sale in such jurisdictions: provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to (A) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(d), (B) subject itself to general
taxation in any such jurisdiction, (C) file a general consent to service of
process in any such jurisdiction, (D) provide any undertakings that cause more
than nominal expense or burden to the Company or (E) make any change in its
articles of incorporation or by-laws or any then existing contracts, which in
each case the Board of Directors of the Company determines to be contrary to the
best interests of the Company and its stockholders;
(e) As promptly as practicable after becoming aware of such event, notify
each Subscriber of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and uses its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Subscriber as such Subscriber may
reasonably request;
(f) As promptly as practicable after becoming aware of such event, notify
each Subscriber who holds Registrable Shares being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance by the SEC of
any notice of effectiveness or any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time;
(g) Use its commercially reasonable efforts, if eligible, either to (i)
cause all the Registrable Shares covered by the Registration Statement to be
listed on a national securities exchange and on each additional national
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable Shares
is then permitted under the rules of such exchange, or (ii) secure designation
of all the Registrable Shares covered by the Registration Statement on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Shares on the NASDAQ National Market System; or if, despite the
Company's commercially reasonable efforts to satisfy the preceding clause (i) or
(ii), the Company is unsuccessful in doing so, to secure NASD authorization and
quotation for such Registrable Shares on either the SmallCap Market or the over-
the-counter bulletin board and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register with the
National Association of Securities Dealers, Inc. ("NASD") as such with respect
to such Registrable Shares;
(h) Provide a transfer agent for the Registrable Shares not later than the
effective date of the Registration Statement;
(i) Cooperate with the Subscribers who hold Registrable Shares being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Shares to be offered pursuant to the Registration Statement and
enable such certificates for the Registrable Shares to be in such denominations
or amounts as the Subscribers may reasonably request and registrated in such
names as the Subscribers may request; and, within five (5) business days after a
Registration Statement which includes Registrable Shares is ordered effective by
the SEC, the Company shall deliver, and shall cause legal counsel selected by
the Company to deliver, to the transfer agent for the Registrable Shares (with
copies to the Subscribers whose Registrable Shares are included in such
Registration Statement) an appropriate instruction and opinion of such counsel,
if required; and
(j) Take all other reasonable actions necessary to expedite and facilitate
the sale by the Subscriber of the Registrable Shares pursuant to the
Registration Statement.
The Company shall use its best efforts to effect such registration (including,
without limitation, the execution of an undertaking to file amendments, post-
effective amendments, and supplements, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Act and the Regulations of the
Commission) as may be so requested and as would permit or facilitate the sale
and distribution of all or such Registrable Shares as are specified in such
request.
4. Expenses of Registration. The Company shall bear all Registration
Expenses incurred in connection with any registration, qualification or
compliance of the Registrable Shares pursuant to this Agreement. All Selling
Expenses shall be born by the Subscriber.
5. Registration Procedures. The Company shall advise the Subscriber of
the initiation of a registration under the Agreement and as to the completion
thereof. At its expense the Company will prepare and file with the Commission
such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act and the Regulations of the
Commission with respect to the disposition of securities covered by such
registration statement.
6. Indemnification.
(a) The Company will indemnify and hold harmless the Subscriber, each
of its stockholders, executives, employees, representatives, affiliates,
officers, directors and partners, and each person controlling the Subscriber,
with respect to which registration has been effected pursuant to this Agreement
against all claims, losses, damages and liabilities (or actions, proceedings or
settlements in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus or
other document incident to any such registration, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Act or any rule or regulation thereunder applicable to the
Company and will reimburse the Subscriber, each of its stockholders, executives,
employees, representatives, affiliates, officers, directors and partners, and
each person controlling the Subscriber for any legal and any other expenses as
they are reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, provided, however, that the
indemnity contained in this Section 6(a) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if such
Settlement is effected without the consent of the Company, and provided further
that the Company shall not be liable in any such case to the extent that any
such claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by the Subscriber and stated to be specifically for use in the
registration statement filed pursuant to this Agreement. The foregoing
indemnity agreement is further subject to the condition that insofar as it
relates to any untrue prospectus, such indemnity agreement shall not inure to
the benefit of the foregoing indemnified parties if copies of a final prospectus
correcting the misstatement, or alleged misstatement, omission or alleged
omission upon which such loss, liability, claim or damage is based is timely
delivered to such indemnified party and a copy thereof was not furnished to the
person asserting the loss, liability, claim or damage.
(b) The Subscriber will indemnify the Company, each of its
stockholders, executives, employers, representatives, affiliates, directors,
officers and each person who controls the Company within the meaning of the Act
and the rules and regulations thereunder against all claims, losses, damages and
liabilities (or actions, proceedings, or settlements in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or other document incident to any such
registration or based upon any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation of the Act or any rule of regulation
thereunder applicable to the Company and will reimburse the Company, and its
stockholders, executives, employers, representatives, affiliates, directors,
officers, partners, persons, underwriters or control persons for any legal or
any other expense reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, and only to the extent, that such untrue statement (or alleged untrue
statement) or omission or alleged omission) relating to such holder is made in
such registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by the Subscriber and stated to be specifically for use therein;
provided, however, that the obligations of the Subscriber shall be limited to an
amount equal to the proceeds to the Subscriber
(c) Each party entitled to indemnification under this Section 6 (an
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party, (whose approval shall not
unreasonably be withheld or delayed), and the Indemnified Party may participate
in such defense at such indemnified party's expense, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement unless,
and only to the extent that such failure adversely affects the rights or
obligations of the Indemnifying party. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
7. Information by Holder of Registrable Shares. The Subscriber shall at
all times cooperate with the Company including furnishing to the Company such
information regarding the Subscriber and the distribution proposed by such
holder of Registrable Shares as the Company may reasonably request in writing
and as shall be reasonably required in connection with any registration referred
to in this Agreement. If there is a delay in the filing or effectiveness of the
Registration Statement as a result of the Subscribers' failure to cooperate with
the Company, the damages set forth in Section 2(c) shall not apply for the
period of delay caused by such failure to cooperate. The Company however, shall
give Subscriber at least 5 business days notice of its request for cooperation.
8. Transfers or Assignments of Registration Rights. The Subscriber's
rights under this Agreement to cause the Company to register the Registrable
Shares may be transferred or assigned by the Subscriber only to affiliates of
the Subscriber or to a purchaser of the Shares, or any portion of the Shares, in
the principal amount of at least $50,000 or at least 50 Shares and such
assignment shall only be effective upon delivery of written notice of such
assignment to the Company within thirty (30) days of the assignment. Upon such
assignment the assignee shall have all the rights and obligations of the
Subscriber hereunder.
9. Miscellaneous.
9.1 Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Utah without giving effect to conflict
of laws principles.
9.2 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.3 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
9.4 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, or delivered by hand or by messenger or courier delivery
service, addressed (a) if to the Subscriber, at the address listed in the
Subscription Agreement or at such other address as the Subscriber shall have
furnished to the Company in writing, or (b) if to the Company, at its executive
offices, or at such other address as the Company shall have furnished to the
Subscriber in writing.
9.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Registrable Shares, upon any
breach or default of the Company under this Agreement, shall impair any such
right, power, or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiesce therein, or of or in any similar
breach or default thereunder occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
9.6 Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument. An executed facsimile counterpart of this Agreement shall be
effective as an original.
9.7 Severability. In the case any provision of this agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
9.8 Amendments. This provision of this Agreement may be amended at any
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the owners of all of the Registrable Shares as of the date of
such amendment or waiver.
9.9 Termination or Registration Rights. This Agreement shall terminate
at the earlier of May , 2000, or such time as there ceases to be any
outstanding Registrable Shares as defined herein.
The foregoing Registration Rights Agreement is hereby executed as of the
date first above written.
EUROGAS, INC.
By:
ATTEST:
Secretary
SUBSCRIBER
/s/ Mark Valentine
THOMSON KERNAGHAN & CO., LTD.
By: Mark Valentine
Title: VP & Director
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF IN THE UNITED STATES OR TO UNITED STATES PERSONS EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON AUGUST 9, 2002, OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT BUSINESS DAY.
WARRANT TO PURCHASE
250,000 COMMON SHARES
WARRANT TO PURCHASE
COMMON SHARES OF
EUROGAS, INC.
TRANSFER RESTRICTED -- SEE SECTION 5.02
This certifies that, for $2,500.00 and other good and valuable consideration,
OPPENHEIMER & CO., INC. and its registered, permitted assigns (collectively, the
"Warrantholder"), is entitled to purchase from EUROGAS, INC., a corporation
incorporated under the laws of the state of Utah (the "Company"), subject to the
terms and conditions hereof, at any time after 9:00 A.M., New York time, on
August 9, 1998, and before 5:00 P.M., New York time, on August 9, 2002 (or, if
such day is not a Business Day, at or before 5:00 P.M., New York time, on the
next following Business Day), the number of fully paid and non-assessable Common
Shares stated above at the Exercise Price. The Exercise Price and the number of
shares purchasable hereunder are subject to adjustment from time to time as
provided in Article III hereof.
ARTICLE I
Section 1.01: Definition of Terms. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) 50% Holders: At any time as to which a Demand Registration is
requested, the holders of any Warrants and the holders of Warrant Shares
who have the right to acquire or hold, as the case may be, not less than
50% of the combined total of Warrant Shares issuable and Warrant Shares
outstanding at the time such Demand Registration is requested.
(b) Business Day: A day other than a Saturday, Sunday or other day
on which banks in the State of New York are authorized by law to remain
closed.
(c) Common Stock: Common Stock, par value of $.001 per share, of the
Company.
(d) Common Stock Equivalents: Securities that are convertible into
or exercisable for shares of Common Stock.
(e) Demand Registration: See Section 6.02.
(f) Exchange Act: The Securities Exchange Act of 1934, as amended.
(g) Exercise Price: $11.79 per Warrant Share, as such price may be
adjusted from time to time pursuant to Article III hereof.
(h) Expiration Date: 5:00 P.M., New York time, on August 7, 2001 or
if such day is not a Business Day, the next succeeding day which is a
Business Day.
(i) Holder: A Holder of Registrable Securities.
(j) NASD: National Association of Securities Dealers, Inc., and
NASDAQ: NASD Automatic Quotation System.
(k) Person: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or
agency thereof.
(l) Participatory Registration: See Section 6.01.
(m) Prospectus: Any prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other
amendments and supplements to the prospectus, including post-effective
amendments and all material incorporated by reference in such prospectus.
(n) Public Offering: A public offering of any of the Company's
equity securities pursuant to a registration statement under the Securities
Act.
(o) Registrable Securities: Any securities that may be or are issued
by the Company upon exercise of this Warrant, or other Warrants which may
be issued to Oppenheimer & Co., Inc. including those which may thereafter
be issued by the Company in respect of any such securities by means of any
stock splits, stock dividends, recapitalizations, reclassifications or the
like, and as adjusted pursuant to Article III hereof.
(p) Registration Expenses: Any and all expenses incurred in
connection with any registration or action incident to performance of or
compliance by the Company with Article VI, including, without limitation,
(i) all SEC, national securities exchange and NASD registration and filing
fees; all listing fees and all transfer agent fees; (ii) all fees and
expenses of complying with state securities or blue sky laws (including the
fees and disbursements of counsel for the underwriters in connection with
blue sky qualifications of the Registrable Securities); (iii) all printing,
mailing, messenger and delivery expenses and (iv) all fees and
disbursements of counsel for the Company and of its accountants, including
the expenses of any special audits and/or "cold comfort" letters required
by or incident to such performance and compliance, but excluding
underwriting discounts and commissions, brokerage fees and transfer taxes,
if any, and fees of counsel or accountants retained by the holders of
Registrable Securities to advise them in their capacity as Holders of
Registrable Securities.
(q) Registration Statement: Any registration statement of the
Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Agreement,
including all amendments (including post-effective amendments) and
supplements thereto, all exhibits thereto and all material incorporated
therein by reference.
(r) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
(s) Securities Act: The Securities Act of 1933 as amended.
(t) Transfers: See Section 5.02.
(u) Warrants: This Warrant, and all other similar warrants issued on
the date hereof, and all other warrants that may be issued in its place
(together evidencing the right to purchase an aggregate of 250,000 shares
of Common Stock), originally issued as set forth in the definition of
Registrable Securities.
(v) Warrantholder: The person(s) or entity(ies) to whom this Warrant
is originally issued, or any successor in interest thereto, or any assignee
or transferee thereof, in whose name this Warrant is registered upon the
books to be maintained by the Company for that purpose.
(w) Warrant Shares: Common Stock, Common Stock Equivalents and other
securities purchased or purchasable upon exercise of the Warrants.
(x) $ or Dollars: United States dollars.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
Section 2.01: Duration of Warrant. The Warrantholder may exercise this Warrant
at any time and from time to time after 9:00 A.M., New York time on August 9,
1998, and before 5:00 P.M., New York time, on the Expiration Date. If this
Warrant is not exercised on the Expiration Date, it shall become void, and all
rights hereunder shall thereupon cease.
Section 2.02: Exercise of Warrant.
(a) The Warrantholder may exercise this Warrant, in whole or in part,
as follows:
(i) by presentation and surrender of this warrant to the Company
at its corporate office at 942 East 7145 South, #101A, Midvale, Utah
84047 or at the office of its stock transfer agent, if any, with the
Subscription Form annexed hereto duly executed and accompanied by
payment of the full Exercise Price for each Warrant Share to be
purchased by means of a cashiers or certified check; or
(ii) By presentation and surrender of this Warrant to the Company
at its principal executive offices with a Cashless Exercise Form
annexed hereto duly executed (a "Cashless Exercise"). In the event of
a Cashless Exercise, the Warrantholder shall exchange its Warrant for
that number of shares of Common Stock determined by multiplying the
number of Warrant Shares by a fraction, the numerator of which shall
be the amount by which the then current market price per share of
Common Stock exceeds the Exercise Price, and the denominator of which
shall be the then current market price per share of Common Stock. For
purposes of any computation under this Section 2.02(a)(ii), the then
current market price per share of Common Stock at any date shall be
deemed to be the last sale price of the Common Stock on the business
day prior to the date of the Cashless Exercise (which shall be defined
as the average closing price on NASDAQ OTC or National Exchange and
the DAX market in Germany) or, in case no such reported sales take
place on such day, the average of the last reported bid and asked
prices of the Common Stock on such day, in either case on the
principal national securities exchange on which the Common Stock is
admitted to trading or listed, or if not listed or admitted to trading
on any such exchange, the representative closing bid price of the
Common Stock as reported by NASDAQ, or other similar organization if
NASDAQ is no longer reporting such information, or if not so
available, the fair market price of the Common Stock as determined
by the Board of Directors in good faith.
(b) Upon receipt of this Warrant with the Subscription Form fully
executed and accompanied by payment of the aggregate Exercise Price for the
Warrant Shares for which this Warrant is then being exercised, or, in the
case of Section 2.02(a)(ii), with the Cashless Exercise Form duly executed,
the Company shall cause to be issued certificates for the total number of
whole shares of Common Stock for which this Warrant is being exercised
(adjusted to reflect the effect of the anti-dilution provisions contained
in Article III hereof, if any, and as provided in Section 2.04 hereof) in
such denominations as are requested for delivery to the Warrantholder, and
the Company shall thereupon deliver such certificates to the Warrantholder.
The Warrantholder shall be deemed to be the holder of record of the shares
of Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock may not then be actually delivered
to the Warrantholder. If at the time this Warrant is exercised, a
Registration Statement is not in effect to register under the Securities
Act the Warrant Shares issuable upon exercise of this Warrant, the Company
may require the Warrantholder to make such representations, and may place
such legends on certificates representing the Warrant Shares, as may be
reasonably required in the opinion of counsel to the Company to permit the
Warrant Shares to be issued without such registration.
(c) In case the Warrantholder shall exercise this Warrant with
respect to less than all of the Warrant Shares that may be purchased under
this Warrant, the Company shall execute a new warrant in the form of this
Warrant for the balance of such Warrant Shares and deliver such new warrant
to the Warrantholder.
(d) The Company shall pay any and all stock transfer and similar
taxes which may be payable in respect of the issue of this Warrant or in
respect of the issue of any Warrant Shares.
Section 2.03: Reservation of Shares. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of
this Warrant such number of shares of Common Stock or other shares of capital
stock of the Company from time to time issuable upon exercise of this Warrant.
All such shares shall be duly authorized, and when issued upon such exercise,
shall be validly issued, fully paid and non-assessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale and free and clear of all preemptive rights.
Section 2.04: Fractional Shares. The Company shall not be required to issue
any fraction of a share of its capital stock in connection with the exercise of
this Warrant, and in any case where the Warrantholder would, except for the
provisions of this Section 2.04, be entitled under the terms of this Warrant to
receive a fraction of a share upon the exercise of this Warrant, the Company
shall, upon the exercise of this Warrant and receipt of the Exercise Price,
issue the greatest number of whole shares purchasable upon exercise of this
Warrant for which payment in full of the Exercise Price has been received. The
Company shall not be required to make any cash or other adjustment in respect of
such fraction of a share to which the Warrantholder would otherwise be entitled.
Section 2.05: Listing. Prior to the issuance of any shares of Common Stock
upon exercise of this Warrant, the Company shall secure the listing of such
shares of Common Stock upon each national securities exchange or automated
quotation systems, if any, upon which shares of Common Stock are then listed
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation System, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of the same class shall be
listed on such national securities exchange or automated quotation system.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be subject to
adjustment from time to time upon the happening of certain events as provided in
this Article III.
Section 3.01: Mechanical Adjustments
(a) If at any time prior to the exercise of this Warrant in full, the
Company shall (i) declare a dividend or make a distribution on the Common
Stock payable in shares of its Common Stock; (ii) subdivide, reclassify or
recapitalize the outstanding Common Stock into a greater number of shares
of Common Stock; (iii) combine, reclassify or recapitalize its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or
(iv) issue any shares of its capital stock by reclassification of its
Common Stock (including any such reclassification in connection with a
consolidation or a merger in which the Company is the continuing
corporation), the Exercise Price in effect at the time of the record date
of such dividend, distribution, subdivision, combination, reclassification
or recapitalization shall be adjusted so that the Warrantholder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised in full immediately prior to such event, he
would have owned upon such exercise and been entitled to receive by virtue
of such dividend, distribution, subdivision, combination, reclassification
or recapitalization. Any adjustment required by this paragraph 3.01(a)
shall be made successively and become effective immediately after the
record date, in the case of a dividend or distribution, or the effective
date, in the case of a subdivision, combination, reclassification or
recapitalization, to allow the purchase of such aggregate number and kind
of shares.
(b) If at any time prior to the exercise of this Warrant in full, the
Company shall (i) issue or sell any Common Stock or Common Stock
Equivalents without consideration or for consideration per share of Common
Stock less than the current market price per share of Common Stock on the
date of such issuance or sale as defined in Section 3.01(f) (other than
pursuant to employee benefit or compensation arrangements and other
than pursuant to subscription rights, options or warrants which had a
subscription, exercise, purchase or conversion price equal to or greater
than the current market price per share on the effective date of issuance
or grant of such rights, options or warrants) or (ii) fix a record date for
the issuance of subscription rights, options or warrants to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or Common Stock Equivalents) at a price (or having an exercise or
conversion price per share) less than the current market price of the
Common Stock (as determined pursuant to Section 3.01(e)) on the record date
described below, the Exercise Price shall be adjusted so that the Exercise
Price shall equal the price determined by multiplying the Exercise Price in
effect immediately prior to the date of such sale or issuance (which date
in the event of distribution to shareholders shall be deemed to be the
record date set by the Company to determine shareholders entitled to
participate in such distribution) by a fraction, the numerator of which
shall be (i) the number of shares of Common Stock outstanding on the date
of such sale or issuance, plus (ii) the number of additional shares of
Common Stock which the aggregate consideration received by the Company upon
such issuance or sale (plus the aggregate of any additional amount to be
received by the Company upon the exercise of such subscription rights,
options or Warrants) would purchase at such current market price per share
of the Common Stock immediately prior to the date of such issuance or sale;
and the denominator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such issuance or sale, plus (ii) the
number of additional shares of Common Stock offered for subscription or
purchase (or into which the Common Stock equivalents so offered are
exercisable or convertible). Any adjustments required by this paragraph
3.01(b) shall be made immediately after such issuance or sale or record
date, as the case may be unless the offering period of such Common Stock or
Common Stock Equivalents, or the period in which such rights, options or
warrants may be exercised or converted, shall expire in 90 days or less, in
which case such event shall be given effect immediately after the
expiration of such period based upon the number of shares of Common Stock
(or Common Stock Equivalents) actually delivered; provided that should any
Warrant be exercised during such period, the number of shares of Common
Stock issuable upon such exercise shall be recalculated giving effect to
any adjustment made at the end of such period in respect of such event and
an appropriate number of additional shares of Common Stock shall be issued
in respect of such exercise. Such adjustments shall be made successively
whenever such event shall occur. In the event that such period shall be
greater than 90 days, then to the extent that shares of Common Stock (or
Common Stock Equivalents) are not delivered after the expiration of such
subscription rights, options or warrants, the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options or warrants been
made upon the basis of delivery of only the number of shares of Common
Stock (or Common Stock Equivalents) actually delivered.
(c) If at any time prior to the exercise of this Warrant in full, the
Company shall fix a record date for the issuance or making a distribution
to all holders of the Common Shock (including any such distribution to be
made in connection with a consolidation or merger in which the Company is
to be the continuing corporation) of evidences of its indebtedness, any
other securities of the Company or any cash, property or other assets or
securities, including without limitation shares of a subsidiary's capital
stock (excluding a common stock dividend, combination, reclassification,
recapitalization or issuance referred to in Section 3.01(a)), regular cash
dividends or cash distributions in the ordinary course of business or
subscription rights, options or warrants for Common Stock or Common Stock
Equivalents (excluding those referred to in Section 3.01(b)) (any such
nonexcluded event being herein called a "Special Dividend"), the Exercise
Price shall be decreased immediately after the record date for such Special
Dividend to a price determined by multiplying the Exercise Price then in
effect by a fraction, the numerator of which shall be the then current
market price of the Common Stock (as defined in Section 3.01(e)) on such
record date less the fair market value (as determined by the Company's
Board of Directors) of the evidences of indebtedness, securities or
property, or other assets issued or distributed in such Special Dividend
applicable to one share of Common Stock or of such subscription rights or
warrants applicable to one share of Common Stock, and the denominator of
which shall be such then current market price per share of Common Stock (as
so determined) and the number of shares of Common Stock subject to purchase
upon exercise of this Warrant shall be increased to a number determined by
multiplying the number of shares of Common Stock subject to purchase
immediately before such Special Dividend by a fraction, the numerator of
which shall be the Exercise Price in effect immediately before such Special
Dividend and the denominator of which shall be the Exercise Price in effect
immediately after such Special Dividend. Any adjustment required by this
paragraph 3.01(c) shall be made successively effective on the record date
for the Special Dividend and in the event that such distribution is not so
made, the Exercise Price shall again be adjusted to be the Exercise Price
that was in effect immediately prior to such record date.
(d) If at any time prior to the exercise of this Warrant in full, the
Company shall make a distribution to all holders of the Common Stock of
stock of a subsidiary or securities convertible into or exercisable for
such stock, then in lieu of an adjustment in the Exercise Price or the
number of Warrant Shares purchasable upon the exercise of this warrant,
each Warrantholder, upon the exercise hereof at any time after such
distribution, shall be entitled to receive from the Company, such
subsidiary or both, as the Company shall determine, the stock or other
securities to which such Warrantholder would have been entitled if such
Warrantholder had exercised this Warrant immediately prior thereto, all
subject to further adjustment as provided in this Article III, and the
Company shall reserve, for the life of the Warrant, such securities of such
subsidiary or other corporation; provided, however, that no adjustment in
respect of dividends or interest of such stock or other securities shall be
made during the term of this Warrant or upon its exercise.
(e) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to one or more of paragraphs (a), (b) and (c) of this
Section 3.01, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable upon exercise
of each Warrant by the Exercise Price in effect on the date thereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(f) For the purpose of any computation under this Section 3.01, the
current market price per share of Common Stock at any date shall be deemed
to be the average of the daily closing prices for 20 consecutive trading
days commencing 30 trading days before such date. The closing price for
each day shall be the last sale price regular way or, in case no such
reported sales take place on such day, the average of the last reported bid
and asked prices regular way, in either case on the principal national
securities exchange on which the Common Stock is admitted to trading or
listed, or if not listed or admitted to trading on such exchange, the
representative closing bid price as reported by NASDAQ, or other similar
organization if NASDAQ is no longer reporting such information, or if not
so available, the fair market price as determined in good faith by the
Board of Directors of the Company.
(g) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($.05) in such price; provided, however, that any adjustments which by
reason of this paragraph (f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section 3.01 shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be.
Notwithstanding anything in this Section 3.01 to the contrary, the Exercise
Price shall not be reduced to less than the then existing par value, if
any, of the Common Stock as a result of any adjustment made hereunder.
(h) In the event that at any time, as a result of any adjustment made
pursuant to Section 3.01(a), the Warrantholder thereafter shall become
entitled to receive any shares of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Section 3.01(a).
(i) In the case of an issue of additional Common Stock or Common
Stock Equivalents for cash, the consideration received by the Company
therefor, without deducting therefrom any discount or commission or other
expenses paid by the Company for any underwriting of, or otherwise in
connection with, the issuance thereof, shall be deemed to be the amount
received by the Company therefor. To the extent that such issuance shall
be for a consideration other than cash, then, except as herein otherwise
expressly provided, the amounts of such consideration shall be deemed to be
the fair value of such consideration at the time of such issuance as
reasonably determined in good faith by the Board of Directors of the
Company (but without deduction of any compensation, discounts or expenses
paid or incurred by the Company for, and in the underwriting of, or
otherwise in connection with, the issuance thereof). The term issue shall
include the sale or other disposition of shares held by or on account of
the Company or in the treasury of the Company but until so sold or
otherwise disposed of such shares shall not be deemed outstanding.
Section 3.02: Notices of Adjustment. Whenever the number of Warrant Shares or
the Exercise Price is adjusted as herein provided, the Company shall prepare and
deliver forthwith to the Warrantholder a certificate signed by its President,
and by any Vice President, Treasurer or Secretary, setting forth the adjusted
number of shares purchasable upon the exercise of this Warrant and the Exercise
Price of such shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
adjustment was made. The certificate of any independent firm of public
accountants of recognized standing selected by the Board of Directors of the
Company shall be conclusive evidence of the arithmetic correctness of any
computation made under this Section 3.
Section 3.03: No Adjustment for Dividends. Except as provided in Section 3.01
of this Agreement, no adjustment in respect of any cash dividends shall be made
during the term of this Warrant or upon the exercise of this Warrant.
Section 3.04: Preservation of Purchase Rights in Certain Transactions. In case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a subsidiary in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock) or in case
of any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as an
entirety, the Company shall, as a condition to such transaction cause such
successor or purchasing corporation, as the case may be, to execute with the
Warrantholder an agreement granting the Warrantholder the right thereafter, upon
payment of the Exercise Price in effect immediately prior to such transaction,
to receive upon exercise of this Warrant the kind and amount of shares and other
securities and property which he would have owned or have been entitled to
receive as a result of such transaction had this Warrant been exercised
immediately prior to such action. Such agreement shall provide for adjustments
in respect of such shares of stock and other securities and property, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Article III and shall provide that such rights may be exercised at
any time prior to the Expiration Date. In the event that in connection with any
such transaction, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for, or of, a security
of the Company other than Common Stock, any such issue shall be treated as an
issue of Common Stock covered by the provisions of Article III. The provisions
of this Section 3.04 shall similarly apply to successive reclassifications,
capital reorganizations, consolidations, mergers, sales or conveyance.
Section 3.05: Form of Warrant After Adjustments. The form of this Warrant need
not be changed because of any adjustments in the Exercise Price or the number or
kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in the Warrant, as initially issued.
Section 3.06: Treatment of Warrantholder. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
ARTICLE IV
OTHER PROVISIONS RELATING TO
RIGHTS OF WARRANTHOLDER
Section 4.01: No Rights as Shareholders: Notice to Warrantholders. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent or to receive notice as a shareholder in respect of any
meeting of shareholders for the election of directors of the Company or of any
other matter, or any rights whatsoever as shareholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any dividend to all
holders of Common Stock;
(b) the Company shall authorize the issuance to all holders of Common
Stock of any additional shares of Common Stock or Common Stock equivalents
or of rights, options or warrants to subscribe for or purchase Common Stock
or Common Stock Equivalents or of any other subscription rights, options or
warrant;
(c) a dissolution, liquidation or winding up of the Company; or
(d) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock)
or any consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is
the continuing corporation and that does not result in any reclassification
or change of Common Stock outstanding) or in the case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety.
Such giving of notice shall be completed at least 10 Business Days prior to the
date fixed as a record date or effective date or the date of closing of the
Company's stock transfer books for the determination of the shareholders
entitled to such dividend, distribution, or subscription rights, or for the
determination of the shareholders entitled to vote on such proposed merger,
consolidation, sale, conveyance dissolution, liquidation or winding up. Such
notice shall specify such record date or the date of closing the stock transfer
books, as the case may be. Failure to provide such notice shall not affect the
validity of any action taken in connection with such dividend, distribution or
subscription rights, or proposed merger, consolidation, sale, conveyance,
dissolution, liquidation or winding up.
Section 4.02: Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant
is lost, stolen, mutilated or destroyed, the Company may, upon receipt by the
Company of evidence of ownership reasonably satisfactory to it and on such terms
as to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as, and in substitution for, this
Warrant.
ARTICLE V
SPLIT-UP, COMBINATION, EXCHANGE
AND TRANSFER OF WARRANTS
Section 5.01: Split-Up, Combination, Exchange and Transfer of Warrants.
Subject to the provisions of Section 5.02 hereof, this Warrant may be split up,
combined or exchanged for another Warrant or Warrants containing the same terms
to purchase a like aggregate number of Warrant Shares. If the Warrantholder
desires to split up, combine or exchange this Warrant, he or it shall make such
request in writing delivered to the Company and shall surrender to the Company
this Warrant and any other Warrants to be so split-up, combined or exchanged.
Upon any such surrender for a split-up, combination or exchange, the Company
shall execute and deliver to the person entitled thereto a Warrant or Warrants,
as the case may be, as so requested. The Company shall not be required to
effect any split-up, combination or exchange which will result in the issuance
of a Warrant entitling the Warrantholder to purchase upon exercise a fraction of
a share of Common Stock or a fractional Warrant.
Section 5.02: Restrictions on Transfer. Neither this Warrant nor the Warrant
Shares may be disposed of or encumbered (any such action, a "Transfer"), except
(i) to OPPENHEIMER & CO., INC. any successor to the business of such company, or
any officer or partner of such company, or (ii) to any underwriter in connection
with a registered Public Offering of the Warrant Shares, provided (as to (ii))
that this Warrant is exercised upon such Transfer and the Warrant Shares issued
upon such exercise are sold by such underwriter as part of such registered
Public Offering and, as to both (i) and (ii), only in accordance with and
subject to the provisions of the Securities Act and the rules and regulations
promulgated hereunder. If at the time of a Transfer, a Registration Statement
is not in effect to register this Warrant or the Warrant Shares, the Company may
require the Warrantholder to make such representations, and may place such
legends on certificates representing this Warrant, as may be reasonably required
in the opinion of counsel to the Company to permit a Transfer without such
registration.
ARTICLE VI
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 6.01: Participatory Registration.
(a) Right to Include Registrable Securities. If at any time or from
time to time after August 9, 1998, and prior to the Expiration Date, the
Company proposes to register any Common Stock (or any other securities for
which this Warrant may then be exercised) under the Securities Act on any
form for the registration of securities under such Act, whether or not for
its own account (other than by a registration statement on forms S-4, S-8
(or any successor forms) or other form which does not include
substantially the same information as would be required in a form for the
general registration of securities or would not be available for the
Registrable Securities) (a "Participatory Registration"), it shall, as
expeditiously as possible, give written notice to all Holders of its
intention to do so and of such Holders' rights under this Section 6.01.
Such rights are referred to hereinafter as "Participatory Registration
Rights." Upon the written request of any such Holder made within 20 days
after receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended manner of distribution of such securities), the Company shall use
its best efforts to include in the Registration Statement the Registrable
Securities which the Company has been so requested to register by the
Holders thereof (subject to paragraph (e) below) and the Company shall keep
such registration statement in effect and maintain compliance with each
Federal and state law or regulation for the period necessary for such
Holder to effect the proposed sale or other disposition (but in no event
for a period greater than 120 days).
(b) Withdrawal of Participatory Registration by Company. If, at any
time after giving written notice of its intention to register any
securities in a Participatory Registration but prior to the effective date
of the related Registration Statement, the Company shall determine for any
reason not to register such securities, the Company shall give written
notice of such determination to each Holder and, thereupon, shall be
relieved of its obligation to register any Registrable Securities in
connection with such Participatory Registration. All best efforts
obligations of the Company pursuant to Section 6.04 shall cease if the
Company determines to terminate prior to such effective date any
registration where Registrable Securities are being registered pursuant to
this Section 6.01.
(c) Participatory Registration of Underwritten Public Offerings. If
a Participatory Registration involves an offering by or through
underwriters, then, (i) all Holders requesting to have their Registrable
Securities included in the Company's Registration Statement must sell their
Registrable Securities to the underwriters selected by the Company on the
same terms and conditions as apply to other selling shareholders and (ii)
any Holder requesting to have his or its Registrable Securities included in
such registration Statement may elect in writing, not later than three
Business Days prior to the Company's request for effectiveness of the
Registration Statement filed in connection with such registration, not to
have his or its Registrable Securities so included in connection with such
registration.
(d) Payment of Registration Expenses for Participatory Registration.
The Company shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to a
Participatory Registration Right contained in this Section 6.01.
(e) Priority in Participatory Registration. If a Participatory
Registration involves an offering by or through underwriters, the Company
shall not be required to include Registrable Securities therein if and to
the extent the underwriter managing the offering reasonably believes in
good faith and advises each Holder requesting to have Registrable
Securities included in the Company's Registration Statement that such
inclusion would materially adversely affect such offering; provided that:
(i) if other selling shareholders who are employees, officers, directors,
or other affiliates of the Company have requested registration of
securities in the proposed offering, the Company will reduce or eliminate
such other selling shareholders' securities before any reduction or
elimination of Registrable Securities; (ii) any such reduction of
elimination (after taking into account the effect of clause (i) shall be
pro rata to all other holders of the securities of the Company exercising
"participatory registration rights" similar to those set forth herein in
proportion to the respective number of shares they have requested to be
registered; and (iii) in such event, such Holders may delay any offering by
them of all Registrable Securities requested to be included (or that
portion of such Registrable Securities eliminated for such period, not to
exceed 60 days, as the managing underwriter shall request) and the Company
shall file such supplements and post-effective amendments and take such
other action necessary under federal and state law or regulation as may be
necessary to permit such Holders to make their proposed offering for a
period of 90 days following such period of delay.
Section 6.02: Demand Registration.
(a) Request for Registration. If, at any time subsequent to August
9, 1998 and prior to the Expiration Date, any 50% Holders make a written
request that the Company file a registration statement under the Securities
Act, the Company as soon as practicable shall use its best efforts to file
a registration statement with respect to all Warrant Shares that it has
been so requested to include and obtain the effectiveness thereof, and to
take all other action necessary under any Federal or state law or
regulation to permit the Warrant Shares that are then held and/or that may
be acquired upon the exercise of the Warrants specified in the notices of
the Holders or Holders thereof to be sold or otherwise disposed of, and the
Company shall maintain such compliance with each such Federal and state law
and regulation for the period necessary for such Holder or Holders to
effect the proposed sale or other disposition (but in no event for more
than 120 days) (the "Demand Registration"); provided, however, the Company
shall be entitled to defer such Demand Registration for a period of up to
60 days if and to the extent that its Board of Directors shall determine in
good faith that such registration would interfere with a pending corporate
transaction. The Company shall also promptly give written notice to the
Holder and the Holders of any other Warrants and/or the Holders of any
Warrant Shares who or that have not made a request to the Company pursuant
to the provisions of this subsection (a) of its intention to effect any
required registration or qualification, and shall use its best efforts to
effect as expeditiously as possible such registration or qualification of
all other such Warrant Shares that are then held or that may be acquired
upon the exercise of the Warrants, the Holder or Holders of which have made
a written request for such registration or qualification, within 15 days
after such notice has been given by the Company, as provided in the
preceding sentence. The Company shall be required to effect a registration
or qualification pursuant to this subsection (a) on one occasion only.
Each written request of the Holders shall specify the names of the Holders
making such request and the number of Warrant Shares to be sold by each
Holder.
(b) Payment of Registration Expenses for Demand Registration. The
Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) Selection of Underwriters. If any Demand Registration is
requested to be in the form of an underwritten offering, the managing
underwriter shall be Oppenheimer & Co., Inc., the co-manager, if any, shall
be selected by the Company and Oppenheimer & Co., Inc. and the independent
pricer required under the rules of the NASD (if any) shall be selected and
obtained by the Holders of a majority of the Warrant Shares to be
registered. Such selection shall be subject to the Company's consent,
which consent shall not be unreasonably withheld. All fees and expenses
(other than Registration Expenses otherwise required to be paid) of any
managing underwriter, any co-manager or any independent underwriter or
other independent pricer required under the rules of the NASD shall be paid
for by such underwriters or by the Holder or Holders whose shares are being
registered. If Oppenheimer & Co., Inc. should decline to serve as managing
underwriter, the Holders of a majority of the Warrant Shares to be
registered may select and obtain one or more managing underwriters. Such
selection shall be subject to the Company's consent, which shall not be
unreasonably withheld.
Section 6.03: Buy-outs of Registration Demand. Upon receipt of any request
pursuant to Section 6.01 or a demand pursuant to Section 6.02 that Registrable
Securities be included in a registration statement, and in lieu of any
obligation under such Sections to effect either a Participatory or a Demand
Registration with respect to such Registrable Securities, the Company may,
within five business days of receipt of such request, purchase all, but not less
than all, such Registrable Securities at an amount in cash equal to with respect
to Warrants not yet exercised the difference between (a) the then current market
value (as determined in Section 3.01(e)) of the Common Stock on the day of such
repurchase, and (b) the Exercise Price in effect on such day and with respect to
issued Warrant Shares, the then current market value (as determined in Section
3.01(e)) of the Common Stock on the day of such repurchase.
Section 6.04: Registration Procedures. If and whenever the Company is required
to use its best efforts to take action pursuant to any Federal or state law or
regulation to permit the sale or other disposition of any Warrant Shares that
are then held or that may be acquired upon exercise of the Warrants in order to
effect or cause the registration of any Registrable Securities under the
Securities Act as provided in this Article VI, the Company shall, as
expeditiously as practicable;
(a) furnish to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Registration
Statement, the Prospectus or the Prospectuses (including each preliminary
prospectus) and any amendment or supplement thereto as they may reasonably
request;
(b) enter into such agreements (including an underwriting agreement)
and take all such other actions reasonably required in connection therewith
in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection
with an underwritten offering (i) make such representations and warranties
to the underwriters in such form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm the
same if and when requested; (ii) obtain opinions of counsel to the Company
and updates thereof (which counsel and opinions in form, scope and
substance shall be reasonably satisfactory to the underwriters and their
counsel) addressed to the underwriters covering the matters customarily
covered in opinions requested in underwritten offerings and such other
matters as may be reasonably requested by such underwriters; (iii) obtain
"cold comfort" letters and updates thereof from the Company's accounts
addressed to the underwriters, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters
to underwriters in connection with underwritten offerings; (iv) set forth
in any underwriting agreement entered into the indemnification provisions
and procedures of Section 6.05 hereof with respect to all parties to be
indemnified pursuant to said Section or such other alternative
indemnification language reasonably satisfactory to such persons; and
(v) deliver such documents and certificates as may be reasonably requested
by the underwriters and their counsel to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company; the above shall
be done at each closing under such underwriting or similar agreement or as
and to the extent required thereunder;
(c) make available for inspection by one or more representatives of
the Holders of Registrable Securities being sold, any underwriter
participating in any disposition pursuant to such registration, and any
attorney or accountant retained by such Holders or underwriter, all
financial and other records, pertinent corporate documents and properties
of the Company, and cause the Company's officers, directors and employees
to supply all information reasonably requested by any such representatives;
and
(d) otherwise use its best efforts to comply with all applicable
Federal and state regulations and take such other action as may be
reasonably necessary to or advisable to enable each such Holder and each
such underwriter to consummate the sale or disposition in such jurisdiction
or jurisdictions in which any such Holder or underwriter shall have
requested that the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders; provided, however, with respect to the
Demand Registration that additional shares of Common Stock may be included only
if the managing underwriter determines in its judgment that the inclusion of
such additional shares will not adversely affect such offering.
Each seller of Registrable Securities as to which any registration is being
effected shall furnish to the Company such information regarding the
distribution of such securities and such other information as may otherwise be
required by the Securities Act to be included in such Registration Statement.
Section 6.05: Indemnification.
(a) Indemnification by Company. In connection with each Registration
Statement relating to disposition of Registrable Securities, the Company
shall indemnify and hold harmless each Holder and each Person, if any, who
controls such Holder (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) against any and all losses, claims,
damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and
any amount paid in settlement of any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under
the Securities Act, the Exchange Act or other Federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, or arise out of or are based upon
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein in light
of the circumstances in which they are made not misleading; provided,
however, that such indemnity shall not inure to the benefit of any Holder
(or any Person controlling such Holder within the meaning of Section l5 of
the Securities Act or Section 20 of the Exchange Act) on account of any
losses, claims, damages or liabilities arising from the sale of the
Registrable Securities if such untrue statement or omission or alleged
untrue statement or omission was made in such Registration Statement,
Prospectus or preliminary prospectus, or such amendment or supplement, in
reliance upon and in conformity with information furnished in writing to
the Company by such Holder specifically for use therein. The Company shall
also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers and directors and each Person who controls such Persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act) to the same extent as provided above with respect to the
indemnification of the Holders of Registrable Securities, if requested.
This indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
(b) Indemnification by Holder. In connection with each Registration
Statement, each selling Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.05(a), the Company,
its directors, officers, employees, agents and counsel and each Person who
controls the Company (within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act) but only insofar as such losses,
claims, damages and liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which was
made in the Registration Statement, the Prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, in reliance upon
and in conformity with information furnished in writing by such Holder to
the Company specifically for use therein. In no event shall the liability
of any selling Holder of Registrable Securities hereunder be
greater in amount than the dollar amount of the net proceeds received by
such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Procedure. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim is to be made against an indemnifying
party or parties under this section, notify each such indemnifying party of
the commencement of such action, suit or proceeding, enclosing a copy of
all papers served. No indemnification provided for in Section 6.05(a) or
6.05(b) shall be available to any party who shall fail to give notice as
provided in this Section 6.05(c) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice, but the omission so to
notify such indemnifying party of any such action, suit or proceeding shall
not relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified party,
and the indemnified party notifies the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party of
such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided below
and except for the reasonable costs of investigation subsequently incurred
by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ separate counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying
parties; (ii) the indemnified party shall have been reasonably advised by
counsel that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party); or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of
separate counsel for the indemnified party shall be at the expense of the
indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its
written consent.
(d) Contribution. In connection with each Registration Statement
relating to the disposition of Registrable Securities, if the
indemnification provided for in subsection (a) or (b) hereof is unavailable
to an indemnified party thereunder in respect of any losses, claims,
damages or liabilities referred to therein, then the indemnifying party
shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities. The amount to be contributed by
the indemnifying party hereunder shall be an amount which is in the same
proportionate relationship to the total amount of such losses, claims,
damages or liabilities as the total net proceeds from the offering (before
deducting expenses) of the Registrable Securities sold by such party bears
to the total price to the public (including underwriters' discounts) for
the offering of the securities covered by such registration.
(e) Specific Performance. The Company and the Holder acknowledge
that remedies at law for the enforcement of this Section 6.05 may be
inadequate and intend that this Section 6.05 shall be specifically
enforceable.
ARTICLE VII
OTHER MATTERS
Section 7.01: Amendments and Waivers. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waiver or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority of the outstanding Registrable Securities. Holders shall
be bound by any consent authorized by this Section whether or not Certificates
representing such Registrable Securities have been marked to indicate such
consent.
Section 7.02: Counterparts. This Warrant may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
Section 7.03: Governing Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of New York, U.S.A.
Section 7.04: Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
Section 7.05: Attorneys' Fees. In any action or proceeding brought to enforce
any provisions of this Warrant, or where any provisions hereof or thereof are
validly asserted as a defense, the successful party shall be entitled to recover
reasonable attorneys' fees and disbursements in addition to its costs and
expenses and any other available remedy.
Section 7.06: Computations of Consent. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (other
than the Warrantholder or subsequent Holders if they are deemed to be such
affiliates solely by reason of their holdings of such Registrable Securities)
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
Section 7.07: Notice. Any notices or certificates by the Company to the Holder
and by the Holder to the Company shall be deemed delivered if in writing and
delivered in person or by registered mail (return receipt requested) to the
Holder addressed to him in care of OPPENHEIMER & CO., INC., Oppenheimer Tower,
World Financial Center, New York, New York 10281 or, if the Holder has
designated, by notice in writing to the Company, any other address, to such
other address, and if to the Company, addressed to it at:
EuroGas, Inc.
942 East 7145 South, #101A
Midvale, Utah 84047
The Company may change its address by written notice to the Holder and the
Holder may change its address by written notice to the Company.
Section 7.08: Investment Representation of the Holder. By accepting delivery
of this Warrant, the Holder represents to the Company that it has acquired this
Warrant solely for its own account for investment (except as contemplated in
Section 5.02) and not with a view to distribution or sale in violation of the
Securities Act, but subject, nevertheless, to any requirement of law that the
disposition of the Holder's property be at all times within its control. The
Holder represents that it understands that this Warrant has been issued in a
transaction that is exempt from the registration requirements of the Securities
Act and that this Warrant must be held by the Holder and may not be resold
unless subsequently registered under the Securities Act or an exemption from
such registration is available.
Section 7.09: Currency. All amounts used in this Agreement are expressed in
U.S. Dollars unless otherwise specified.
Section 7.10: Parent Acknowledgment. An agreement has been entered into for
the sale of Oppenheimer's parent entity, Oppenheimer Holdings, Inc., to CIBC
Wood Gundy Securities Corp. ("CIBC"), which is anticipated to result in the
merger of Oppenheimer and CIBC. Notwithstanding the other provisions of this
Agreement, the parties acknowledge and agree that such transactions shall not
constitute an assignment or change in control for purposes of this Agreement,
which shall remain in full force and effect following such event. The parties
further agree that any such successor entity shall be obligated to perform all
of Oppenheimer's duties and responsibilities hereunder and be entitled to the
benefit of all of Oppenheimer's rights and remedies, including, without
limitation, indemnification under this Agreement.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its
corporate seal as of the 15th day of October, 1997.
EUROGAS, INC.
By: /s/ Hank Blankenstein
Title: Vice-President
Attest: /s/ Lynne Martin
Secretary
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
attorney to transfer said Warrant Certificate on the books of the
within-named Company with respect to the number of Warrants set forth below,
with full power of substitution in the premises:
Name(s) of
Assignee(s) Address No. of Warrants
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
Dated: , 19
Note: The above signature should correspond exactly
with the name on the face of this Warrant
Certificate
SUBSCRIPTION FORM
(To be executed upon exercise of Warrant)
:
The undersigned hereby irrevocably elects to exercise the right of purchaser
represented by the within Warrant Certificate for, and to purchase thereunder,
shares of Common Stock, as provided for therein, and tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check for the amount of $ .
Please issue a certificate or certificates for such Common Stock in the name of,
and pay any cash for any fractional share to:
Name
(Please print Name, Address and
Social Security No.)
Signature
Note: The above signature should correspond exactly
with the name on the first page of this Warrant
Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 2.02(a)(ii))
The undersigned hereby irrevocably elects to Exchange its Warrant for such
shares of Common Stock pursuant to the Cashless Exercise provisions of the
within Warrant Certificate, as provided for in Section 2.02(a)(ii) of such
Warrant Certificate.
Please issue a certificate or certificates for such Common Stock in the name of:
Name
(Please print Name, Address and
Social Security No.)
Signature
NOTE: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
And if said number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant Certificate, a new Warrant Certificate is
to be issued in the name of the undersigned for the balance remaining of the
shares purchasable rounded up to the next higher number of shares.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is entered into as
of June 30, 1997, by and among EUROGAS, INC., a Utah corporation ("EuroGas") on
the one hand, and on the other hand, Finance & Credit Development Corporation,
Ltd. ("F.C.D.C."), an Ireland corporation, based on the following:
Premises
EuroGas has entered into an agreement with Finance & Credit Development
Corporation, Ltd. which contemplates the issuance of shares either directly or
through convertible debentures (the "Debentures"). In addition, EuroGas has
delivered to Finance & Credit Development Corporation, Ltd. an option (the
"EuroGas Option") to acquire 2,200,000 shares (the "EuroGas Option Shares") of
the common stock of EuroGas, Inc., par value $0.001 per share (the "EuroGas
Common Shares"). As part of the agreement, the parties have agreed to enter
into this Registration Rights Agreement.
Agreement
NOW, THEREFORE, based on the foregoing premises and in consideration of the
terms and provisions set forth herein, the mutual benefits to be gained by the
performance thereof, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions.
As used herein, the terms set forth below have the following respective
meanings:
"Commission" means the United States Securities and Exchange Commission.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"F.C.D.C." means Finance & Credit Development Corporation, Ltd. or its
assigns.
"Registrable Securities" means the EuroGas Common Shares issuable through
the convertible Debentures, the EuroGas Option Shares, and any other securities
issued or issuable with respect to any such shares by way of a stock dividend or
stock split or in connection with a combination of shares, re-capitalization,
merger, consolidation or reorganization. Any Registrable Securities will cease
to be such when (i) a registration statement covering such Registrable
Securities has been declared effective by the Commission and such Registrable
Securities have been disposed of pursuant to such effective registration
statement or (ii) such Registrable Securities are distributed to the public
pursuant to Rule 144 under the Securities Act.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Selling Holder" means a Holder who is selling Registrable Securities
pursuant to a registration statement as contemplated by this Agreement.
Each of the terms set forth below has the meaning set forth in the
provision set forth opposite such term in the following table:
<TABLE>
<CAPTION>
Term Provision
- --------------------------- ------------
<S> <C>
Registration Effective Date Section 2(b)
Registration Period Section 2(b)
Registration Statement Section 2(a)
Registration Expenses Section 5
</TABLE>
SECTION 2. Registration.
(a) As soon as practicable after EuroGas receives the appropriate audited
financial statements for the recently acquired OMV (Jakutien), EuroGas shall
file a Registration Statement under the Securities Act with the Commission on
appropriate form pursuant to the Securities Act with respect to the resale of
all of the Registrable Securities.
(b) EuroGas agrees to use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
practicable after the filing thereof (the "Registration Effective Date") and to
keep the Registration Statement continuously effective for a period ending the
later of ninety (90) days after the effectiveness of the Registration Statement
or December 31, 1998 (the "Registration Period"). EuroGas further agrees to
supplement or amend the Registration Statement as promptly as practicable in
order to update from time to time any information with respect to the Holders or
their plan of distribution, if requested by the Holders or any underwriter for
the Holders, and EuroGas agrees to furnish to the Holders copies of any such
supplement or amendment promptly after it has been filed with the Commission.
EuroGas shall be permitted to register shares of EuroGas Common Stock other than
the Registrable Securities pursuant to the Registration Statement.
SECTION 3. Piggy-Back Registration.
(a) If, at any time prior to the end of the Registration Period, EuroGas
proposes to file a registration statement under the Securities Act with respect
to an offering for its own account or for the account of any other person or
entity of any class of its equity securities, including any securities
convertible into or exchangeable for any of its equity securities (other than
(i) a registration statement on Form S-4 or S-8 (or any substitute form for
comparable purposes that may be adopted by the Commission) or (ii) a
registration statement filed in connection with an exchange offer or an offering
of securities solely to EuroGas' existing security holders), then EuroGas shall
in each case give written notice of such proposed filing to the Holders of
Registrable Securities as soon as practicable, but in no event later than 30
days prior to the anticipated filing date, and such notice shall offer to such
Holders the opportunity to register the resale of such number of Registrable
Securities as each such Holder may request. Upon the written request of a
Holder made within 20 days after receipt of such notice by the Holder, EuroGas
shall include in any registration described in the first sentence of this
Section 3(a) all Registrable Securities requested by such Holder to be included
therein, subject to the provisions of Section 3(b) hereof.
(b) In the case of a proposed underwritten offering, EuroGas shall use its
best efforts to cause the managing underwriter or underwriters of such offering
to permit all Registrable Securities requested by a Holder to be included in the
registration statement for such offering to be included on the same terms and
conditions as any similar securities of EuroGas included therein. Notwith-
standing the foregoing, if the managing underwriter or underwriters of such
offering determine in writing that the success of the offering would be
materially and adversely affected by inclusion of the Registrable Securities
requested to be included, then the securities offered for the account of the
Holders in such offering shall be reduced to the extent necessary to reduce the
total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters; provided, however,
that the proportion by which the amount of Registrable Securities intended to be
offered by the Holders is reduced shall not exceed the proportion by which the
amount of securities intended to be offered by any person or entity other than
EuroGas is reduced.
(c) To the extent not inconsistent with applicable law, each Selling
Holder whose securities are included in a registration statement pursuant to
this Section 3 agrees not to effect any public sale or distribution of the
security being registered, including a sale pursuant to Rule 144 under the
Securities Act, during the 15 days prior to and during the 90-day period (or
such shorter period as may be required by the managing underwriter or
underwriters with respect to any officer or director or shareholder of EuroGas)
beginning on, the effective date of a registration statement (except, in each
case, as part of such registration), if and to the extent requested by the
managing underwriter or underwriters for an underwritten public offering.
SECTION 4. Registration Procedures.
(a) If and whenever EuroGas is required to effect the registration of any
Registrable Securities in accordance with this Agreement, EuroGas will as
expeditiously as practicable:
(i) prepare and file with the Commission such amendments and
supplements to any such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of the securities covered thereby for
(A) in the case of a registration pursuant to Section 2, the Registration
Period or (B) in the case of a registration pursuant to Section 3, a period
of at least nine months after the applicable registration statement becomes
effective (unless all of the Registrable Securities registered thereunder
have been sold or disposed of prior to the expiration of said nine-month
period);
(ii) furnish to each Selling Holder such number of copies of such
registration statement and of each amendment and supplement thereto (in
each case including all exhibits thereto) and of the prospectus included in
such registration statement (including each preliminary prospectus) and any
prospectus filed pursuant to Rule 424 under the Securities Act and of such
other documents as each Selling Holder may reasonably request in order to
facilitate the disposition of its Registrable Securities;
(iii) use commercially reasonable efforts to register or qualify
the Registrable Securities covered by such registration statement under the
securities acts or blue sky laws of such jurisdictions as the Selling
Holders shall reasonably request, keep such registration or qualification
in effect for so long as such registration statement remains in effect and
do any and all other acts and things which may be reasonably necessary or
appropriate to enable the Selling Holders to dispose of such Registrable
Securities in such jurisdictions (provided, however, that EuroGas will not
be required to (a) qualify to do business as a foreign corporation in any
jurisdiction where it would not otherwise be required to be so qualified,
(b) consent to general service of process in any jurisdiction; or (c)
subject itself to general taxation in any such jurisdiction where it would
not otherwise be subject to such taxation);
(iv) use commercially reasonable efforts to cause the Registrable
Securities to be registered with or approved by such other governmental
agencies or authorities as may be necessary to enable the Selling Holders
to dispose of such Registrable Securities;
(v) notify each Selling Holder promptly (A) when such registration
statement and any post-effective amendment thereto has become effective
under the Securities Act, (B) of any request by the Commission for an
amendment or supplement to such registration statement or the prospectus
included therein or for additional information, (C) of the issuance by the
Commission of any stop order suspending the effectiveness of such
registration statement or the initiation of any proceedings for that
purpose, (D) of the receipt of any notification with respect to the
suspension of the registration or qualification of any Registrable
Securities in any jurisdiction in which they are registered or qualified or
the initiation of any proceedings for that purpose and (E) of the
occurrence of any event as a result of which the prospectus included in
such registration statement or any document incorporated or deemed to be
incorporated by reference therein includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) use commercially reasonable efforts to obtain the withdrawal at
the earliest possible moment of any stop order suspending the effectiveness
of such registration statement and the lifting at the earliest possible
moment of any suspension of the registration or qualification of the
Registrable Securities in any jurisdiction in which they are registered or
qualified;
(vii) upon the occurrence of any event of specified in clause (E)
of subparagraph (v) above, promptly prepare and furnish to each Selling
Holder an amendment or supplement to the prospectus included in such
registration statement so that, as thereafter delivered to the purchasers
of the Registrable Securities, such prospectus and any document
incorporated or deemed to be incorporated therein by reference will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(viii) otherwise use commercially reasonable efforts to comply with
all applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months after the effective date of such
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act;
(ix) grant to the Selling Holders and their respective counsel and
accountants the opportunity to participate in the preparation of such
registration statement and any amendment thereof or supplement thereto, and
grant to a representative jointly appointed by all Selling Holders and
their counsel such access to EuroGas' books and records and such
opportunities to discuss the business of EuroGas with its officers and
independent public accountants as shall be necessary, in the judgment of
the Selling Holders based upon the advice of their counsel, to conduct a
reasonable investigation within the meaning of the Securities Act; and
(x) use its best efforts to cause all Registrable Securities covered
by such registration statement to be listed on any securities exchange on
which any securities of such class are then listed.
(b) If and whenever EuroGas is required to effect the registration of any
Registrable Securities in accordance with this Agreement, each Holder agrees as
follows:
(i) to cooperate with EuroGas by providing in writing such
information as EuroGas shall reasonably request in order to comply with the
applicable provisions of the Securities Act and applicable state securities
laws in connection with the disposition of Registrable Securities by such
Holder as described herein, including information regarding the identity of
the Holder effecting such disposition and the proposed method of effecting
such disposition;
(ii) in the case of an underwritten offering, enter into any agreement
(including underwriting agreements in customary form) with any underwriter
engaged to effect the distribution of the Registrable Securities; provided,
however, that the Selling Holders shall not be required to agree to any
terms or conditions more stringent than those agreed to by all other
participants in the registration;
(iii) on receipt of any notice from EuroGas of a happening of an
event described in clause (E) of subparagraph (a)(v) above, to promptly
discontinue disposition of securities pursuant to the registration
statement until such Holder is advised in writing by EuroGas that the use
of the prospectus can be resumed and has received copies of any amended or
supplemental material; provided, however, that in no event shall the
Selling Holders be required to discontinue sales pursuant to this
subparagraph (b)(iii) for a period of more than 30 consecutive days or for
more than 60 days during any calendar year;
(iv) at the end of any period during with EuroGas is required to keep
the registration statement effective, to discontinue sales of securities
pursuant to such registration statement on notice from EuroGas of its
intent to remove such securities from registration and to promptly provide
EuroGas with written confirmation of the number of securities held by the
Holder that remain unsold; and
(v) to conduct any sales pursuant to the registration statement in
accordance with the description set forth in the plan of distribution
contained in the registration statement and the limitations and conditions
imposed upon the Selling Holders by any applicable state securities laws.
SECTION 5. Registration Expenses. All expenses incident to the
performance of or compliance with this Agreement by EuroGas, including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), rating agency fees, printing expenses, messenger and delivery
expenses, internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the fees and expenses incurred in connection with the listing of the securities
to be registered on each securities exchange on which similar securities issued
by EuroGas are then listed, and fees and disbursements of counsel for EuroGas
and its independent certified public accountants (including the expenses of any
special audit or comfort letters required by or incident to such performance),
securities acts liability insurance (if EuroGas elects to obtain such
insurance), the reasonable fees and expenses of any special experts retained by
EuroGas in connection with such registration, and fees and expenses of other
persons retained by EuroGas, in connection with each registration hereunder (but
not including any underwriting discounts or commissions or brokerage fees or
transfer taxes attributable to the sale of Registrable Securities or the fees
and expenses of any counsel, accountant or other representative retained by the
Selling Holders) (collectively, "Registration Expenses") shall be borne by
EuroGas.
SECTION 6. Indemnification; Contribution.
(a) Indemnification by EuroGas. EuroGas agrees to indemnify and hold
harmless each Selling Holder, its officers, directors, partners and agents and
each person, if any, who controls a Selling Holder within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages (whether in contract, tort or otherwise),
liabilities and expenses (including reasonable costs of investigation)
whatsoever (as incurred or suffered) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities or
in any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of, or are based upon, any such untrue
statement or omission or allegation thereof based upon information furnished in
writing to EuroGas by such Selling Holder expressly for use therein. EuroGas
also agrees to indemnify any underwriters of the Registrable Securities, their
officers, partners and directors and each person who controls such underwriters,
on substantially the same basis as that of the indemnification of the Selling
Holder provided in this Section 6 or such other indemnification customarily
obtained by underwriters at the time of offering.
(b) Conduct of Indemnification Proceedings. If any action or proceeding
(including any governmental investigation) shall be brought or asserted against
a Selling Holder (or its officers, directors, partners or agents) or any person
controlling a Selling Holder in respect of which indemnity may be sought from
EuroGas, EuroGas shall assume the defense thereof, including the employment of
counsel selected by EuroGas in its reasonable discretion, and shall assume the
payment of all expenses. The Selling Holder or any controlling person of the
Selling Holder shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of the Selling Holder or such controlling
person unless (i) EuroGas has agreed in writing to pay such fees and expenses or
(ii) the named parties to any such action or proceeding (including any impleaded
parties) include both the Selling Holder or such controlling person and EuroGas,
and the Selling Holder or such controlling person shall have been advised by
counsel that there may be one or more legal defenses available to such Selling
Holder or such controlling person which are different from or additional to
those available to EuroGas (in which case, if the Selling Holder or such
controlling person notifies EuroGas in writing that it elects to employ separate
counsel at the expense of EuroGas, EuroGas shall not have the right to assume
the defense of such action or proceeding on behalf of the Selling Holder or such
controlling person). EuroGas shall not be liable for any settlement of any such
action or proceeding effected without its written consent, but if settled with
its written consent, or if there be a final judgment for the plaintiff or
claimant in any such action or proceeding, EuroGas agrees to indemnify and hold
harmless the Selling Holder and such controlling person from and against any
loss or liability (to the extent stated above) by reason of such settlement or
judgment.
(c) Indemnification by Selling Holder. Each Selling Holder agrees to
indemnify and hold harmless EuroGas, its directors and officers and each person,
if any, who controls EuroGas within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from EuroGas to the Selling Holder, but only with respect to
information furnished to EuroGas in writing by such Selling Holder expressly for
use in any registration statement or prospectus relating to the Registrable
Securities, or any amendment or supplement thereto, or any preliminary
prospectus. In case any action or proceeding shall be brought against EuroGas
or its directors or officers, or any such controlling person, in respect of
which indemnity may be sought against the Selling Holder, the Selling Holder
shall have the rights and duties given to EuroGas, and EuroGas or its directors
or officers or such controlling person shall have the rights and duties given to
the Selling Holder, by the preceding paragraph. Notwithstanding the foregoing,
the liability of the Selling Holder pursuant to this Section 6(c) shall not
exceed the amount by which the total price at which the Registrable Securities
of the Selling Holder were offered to the public exceeds the amount the Selling
Holder has otherwise been required to pay by reason of this Section 6.
(d) Contribution. If the indemnification provided for in this Section 6
is unavailable to EuroGas, the Selling Holders or the underwriters in respect of
any losses, claims, damages, liabilities or judgments referred to herein, then
each such indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) as between
EuroGas and the Selling Holders on the one hand and the underwriters on the
other, in such proportion as is appropriate to reflect the relative benefits
received by EuroGas and the Selling Holders on the one hand and the underwriters
on the other from the offering of the Registrable Securities, or if such
allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of EuroGas and the Selling Holders on the one hand and of the underwriters
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations and (ii) as between EuroGas, on the one hand,
and the Selling Holders on the other, in such proportion as is appropriate to
reflect the relative fault of EuroGas and of the Selling Holders in connection
with such statements or omissions, as well as any other relevant equitable
considerations. The relative benefits received by EuroGas and the Selling
Holders on the one hand and the underwriters on the other shall be deemed to be
in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by EuroGas and the Selling Holders bear to the total underwriting discounts and
commissions received by the underwriters, in each case as set forth in the table
on the cover page of the prospectus. The relative fault of EuroGas on the one
hand and of the Selling Holders on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The parties agree that it would not be just and equitable if contribution
pursuant to this Section 6(d) were determined by pro rata allocation (even if
the Selling Holders were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages, liabilities,
or judgments referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), the Selling Holders shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Registrable Securities of the Selling Holders were offered to the public
exceeds the amount of any damages which the Selling Holders have otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
SECTION 7. Participation in Underwritten Registrations. No person may
participate in any underwritten registration hereunder unless such person agrees
to sell its securities on the basis provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements.
SECTION 8. Rule 144 and Reports. At all times from and after the date
of the filing of the Registration Statement and prior to the expiration of the
period during which EuroGas is required to keep such registration statement
effective in accordance with Section 2(b) hereof, EuroGas covenants that it will
file any reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder
and that it will take such other action as any Holder of Registrable Securities
may reasonably request, all to the extent required from time to time to enable
such Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the Commission. Upon
request of any Holder, EuroGas will deliver to such Holder a written statement
as to whether it has complied with such requirements.
SECTION 9. Notices. All notices and other communications hereunder shall
be in writing and shall be delivered in person, by United States mail (first
class and with postage prepaid thereon) or by cable, telex or facsimile
transmission to the parties at the following addresses (or at such other address
as any party shall have furnished to the others in accordance with the terms of
this Section 9):
If to EuroGas, to: EuroGas, Inc.
Attention: Hank Blankenstein, Vice-President
942 East 7145 South, #101A
Midvale, Utah 84047
Facsimile: (801) 255-2005
Confirmation: (801) 255-0862
With a copy to: Howard S. Landa, Esq.
Kruse, Landa & Maycock, L.L.C.
50 West Broadway, Eighth Floor
Salt Lake City, Utah 84101
Facsimile Transmission: (801) 531-7091
Confirmation: (801) 531-7090
If to F.C.D.C., to: F.C.D.C.
Dr. H. M. Ilgen
"Chateau Amiral"
Bloc B - 42, Boulevard d'Italic
MC 98000 Monaco
Facsimile Transmission: 011-3-779-350-1311
Confirmation: 011-3-779-325-0084
With a copy to: K. Chris Todd, Esq.
Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C.
1301 K Street, N.W., Suite 1000 West
Washington, D.C. 20005-3317
Facsimile Transmission: 202-326 7999
Confirmation: 202-326-7900
if to any other Holder, to such address as such Holder provides to EuroGas or,
if no such address is provided, to the address of such Holder reflected in the
stock transfer records of EuroGas.
All notices and other communications hereunder that are addressed as provided in
or pursuant to this Section 9 shall be deemed duly and validly given (i) if
delivered in person, upon delivery, (ii) if delivered by United States mail
(first class and with postage paid thereon), 72 hours after being placed in a
depository of the United States mails and (iii) if delivered by cable, telex or
facsimile transmission, upon transmission thereof and receipt of the appropriate
answer back.
SECTION 10. Conflicting Agreements. EuroGas agrees that it will not
grant any rights of registration under the Securities Act relating to its
capital stock or other equity securities to any person or entity other than
pursuant to this Agreement, unless the rights so granted do not limit or
restrict in any manner the rights of the Holders granted pursuant to this
Agreement (except as expressly provided in Section 3(b) hereof).
SECTION 11. Amendment; Waivers. The provisions of this Agreement may be
amended only by a written instrument executed by each of the parties hereto, and
compliance with any provision hereof may be waived only by a written instrument
executed by each party entitled to the benefits of the same. No failure to
exercise any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege granted hereunder.
SECTION 12. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
between the parties with respect thereto.
SECTION 13. Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. The rights of a Holder under this Agreement may be
assigned without the consent of EuroGas to any person or entity who acquires any
Registrable Securities directly or indirectly (in a chain of title) from such
Holder if (i) such Holder executes a written instrument which expressly provides
that such person or entity shall succeed to all or a portion of the rights of
such Holder hereunder and (ii) such person or entity agrees to be bound by all
of the terms and conditions hereof.
SECTION 14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah (without regard to
any conflicts of law principles that would require the application of the laws
of any other jurisdiction).
SECTION 15. Rights Cumulative. The rights of the parties under this
Agreement are cumulative and shall not preclude the assertion by any party of
any rights now or hereafter available to it under any other agreement, by law or
otherwise.
SECTION 16. Severability. If any provision contained herein is held to
be invalid, illegal or unenforceable for any reason, the invalidity, illegality
or un-enforceability of such provision shall in no way affect any other
provision hereof.
SECTION 17. Specific Performance. The parties hereto recognize that the
obligations imposed on them in this Agreement are special, unique and of
extraordinary character, and that irreparable damage would occur in the event of
a breach of any of the provisions hereof. Accordingly, the parties agree that
each of them shall be entitled to seek injunctive relief to prevent breaches of
this Agreement and to obtain specific enforcement of the provisions hereof, in
addition to any other remedy now or hereafter available at law or in equity or
otherwise.
SECTION 18. Headings. The headings contained in this Agreement are for
convenience of reference only and shall in no way define, limit or extend the
scope or intent of any provisions set forth herein.
SECTION 19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
EuroGas:
EUROGAS, INC.
By /s/ Hank Blankenstein
Hank Blankenstein, Vice-President
F.C.D.C.:
FINANCE & CREDIT DEVELOPMENT
CORPORATION, LTD.
By /s/ Dr. H. M. Ilgen
KRUSE, LANDA & MAYCOCK, L.L.C.
EIGHTH FLOOR, BANK ONE TOWER
50 WEST BROADWAY (300 SOUTH)
SALT LAKE CITY, UTAH 84101-2034
JAMES R. KRUSE TELEPHONE: (801) 531-7090
HOWARD S. LANDA TELECOPY: (801) 531-7091
ELLEN MAYCOCK MAILING ADDRESS (801) 359-3954
DAVID R. KING Post Office Box 45561
KEITH L. POPE Salt Lake City, Utah 84145-0561
LYNDON L. RICKS
JODY L. WILLIAMS
STEVEN G. LOOSLE
RICHARD C. TAGGART
DAVID C. WRIGHT
PAMELA S. NIGHSWONGER
SHANE L. HANNA OF COUNSEL
WILLIAM N. WHITE ANTHONY L. RAMPTON
July 21, 1998
Board of Directors
EuroGas, Inc.
942 East 7145 South, #101A
Midvale, Utah 84047
Re: EuroGas, Inc.
Registration Statement on Form S-1
Gentlemen:
We have been engaged by EuroGas, Inc. (the "Company"), to render our
opinion respecting the legality of certain securities to be offered and sold
pursuant to the registration statement on Form S-1 being filed by the Company
with the Securities and Exchange Commission (the "Registration Statement").
Capitalized terms used but not defined herein have the same meanings as set
forth in the Registration Statement.
In connection with this engagement, we have examined the following:
1. Articles of incorporation of the Company;
2. Bylaws of the Company;
3. The Registration Statement; and
4. Unanimous consents of the Company's board of directors.
We have examined such other corporate records and documents and have made
such other examination as we deemed relevant.
Based upon the above examination, we are of the opinion that the Common
Stock to be sold pursuant to the Registration Statement will be, when sold in
accordance with the terms set forth in the Registration Statement, legally
issued, fully paid, and nonassessable under the Nevada Revised Statutes, as
amended.
This firm consents to being named in the Prospectus included in the
Registration Statement as having rendered the foregoing opinion and as having
represented the Company in connection with the Registration Statement.
Sincerely yours,
/s/ Kruse, Landa & Maycock, L.L.C.
KRUSE, LANDA & MAYCOCK, L.L.C.
KL&M/KLP:pjc
ACQUISITION AGREEMENT
THIS ACQUISITION AGREEMENT (this "Agreement") is entered into as of the
22nd day of July, 1998, by and between EUROGAS, INC., a Utah corporation
("EuroGas"), and BELMONT RESOURCES, INC., a corporation organized under the laws
of the providence of British Columbia ("Belmont"), based on the following:
Premises
A. EuroGas is a publicly-held corporation that owns an interest in
mineral deposits in Slovakia through a wholly-owned subsidiary.
B. Belmont is a publicly-held corporation traded on the Vancouver Stock
Exchange.
C. Maseva, s.r.o. ("Maseva") is a privately-held entity organized under
the laws of the Slovak Republic. Maseva was awarded the rights to the
exploration territory known as "Kralovsky Chlmec" pursuant to a decision (the
"Decision") of the Slovak Republic Ministry of Environment located in Bratislava
dated March 10, 1998, File No. 464/359/98-3.3 that gives Maseva the exclusive
right to explore in the area covered by the Decision.
D. Belmont has entered into an agreement with Maseva pursuant to which a
new company was formed in the Slovak Republic under the name of Maseva Gas,
s.r.o. ("Maseva Gas") and the exploration rights covered by the Decision have
been transferred from Maseva to Maseva Gas and Belmont now owns 90% of Maseva
Gas.
E. EuroGas wishes to acquire, and Belmont desires to sell, the right to
explore for and exploit crude oil and natural gas in the territory covered by
the Decision by the transfer of ownership of it 90% interest in Maseva Gas to
EuroGas.
Agreement
NOW, THEREFORE, based on the foregoing premises, which are incorporated
herein by this reference, and for and in consideration of the mutual covenants
and the agreements hereinafter set forth and the mutual benefit to the parties
to be derived therefrom, it is hereby agreed as follows:
Article I
Definitions
In this Agreement, the following terms shall have the meanings specified in
this Article I. Such definition shall be equally applicable to both the
singular and the plural forms. Any agreement referred to below shall mean such
agreement as amended, supplemented, or modified from time to time to the extent
permitted by the applicable provisions thereof and by this Agreement.
"Assumed Obligations" means the obligations under the contracts and
agreements which are assumed by EuroGas, all as more particularly described in
Section 2.02.
"Closing" has the meaning set forth in Section 2.04.
"Closing Date" has the meaning set forth in Section 2.04.
"Common Stock of EuroGas" means the authorized common stock of EuroGas, par
value $0.001 per share.
"Decision" means the decision of the Slovak Republic Ministry of
Environment in Bratislava dated March 10, 1998, File No. 464/359/98-3.3 granting
Maseva the exclusive right to prospect for crude oil and natural gas in the
exploration territory identified in the decision covering 849.7 square
kilometers.
"Due Diligence" means the 30 days after the date of deliver of the Belmont
Exhibits and Belmont Schedules during which time EuroGas may inspect such
Belmont Exhibits and Belmont Schedules.
"Environmental Laws" means the central government, provincial, and local
laws and regulations governing the generation, marketing, refining, recycling,
treatment, handling, use, storage, transportation, disposal, and clean up of
hazardous, radio active, reactive, flammable, infectious, toxic, or dangerous
materials, or the protection of public health or the environment, including,
without limitation, all laws and regulation governing water resources, water
management structures, and other territories protected pursuant to the Slovakian
Gazette on the Protection of Nature and the Countryside and compliance with the
regulations governing forestry land reserves, national nature reserves, and the
Ministry of Environment, including all permits and regulatory approvals required
or issued thereunder.
"Excluded Liabilities" has the meaning set forth in Section 2.03.
"Maseva" means Maseva, s.r.o., an entity organized under the laws of the
Slovak Republic located in Kosice.
"Maseva Concession" means the rights currently held by Maseva under the
Decision, including the exclusive right to prospect for crude oil and natural
gas in the territory identified in the Decision and, on the identification and
location of exploitable minerals, the pre-emptive right to determine the mining
area and exploit the minerals. The Maseva Concession will be transferred in its
entirety to Maseva Gas prior to the Closing.
"Maseva Gas" means Maseva Gas, s.r.o., an entity to be formed under the
laws of the Slovak Republic.
"Warrant" means the warrant delivered to Belmont as part of the purchase
price, which gives Belmont the right, at its election, to acquire up to
2,500,000 shares of restricted Common Stock of EuroGas, at an exercise price of
$5.00 per share, at any time prior to October 1, 2000.
"Working Interest Agreement" means the working interest agreement to be
entered into between Maseva Gas and Belmont at the time of Closing, a form of
which is attached to this Agreement as an Exhibit.
Article II
Purchase of Assets
Section 2.01 The Purchase. On the terms and conditions set forth in this
Agreement, EuroGas shall purchase from Belmont 90%of the record and equity
ownership interest in and to Maseva Gas in exchange for the delivery to Belmont
of 2,500,000 shares of restricted common stock of EuroGas and the Warrant to
purchase up to an additional 2,500,000 shares of EuroGas common stock at a
purchase price of $5.00. In addition, at the time of Closing, Belmont shall be
assigned a 22.5%working interest in the Maseva Concession; provided that,
EuroGas will bear Belmont's costs in connection with the drilling of the initial
two new wells on the Maseva Concession in accordance with the terms of the
Working Interest Agreement. Within ten (10) days of the execution of this
Agreement, EuroGas shall place the shares of restricted stock of EuroGas and the
warrant into escrow with a mutually acceptable escrow agent pending Closing.
Section 2.02 Assumed Obligations. On the Closing Date, EuroGas shall
assume and agree to discharge the obligations of Belmont under the terms of the
agreements governing Maseva Gas and the Maseva Concession that are incurred or
related to any time subsequent to the Closing Date. All costs attributable to
any period of time that encompasses the time both before and after the Closing
Date shall be pro rated between EuroGas and Belmont as of the Closing Date.
Section 2.03 Excluded Liabilities. EuroGas shall not assume, be
obligated to pay, be obligated to perform, or otherwise be required to discharge
any liability or obligation of Belmont, Maseva, or Maseva Gas, direct or
indirect, known or unknown, absolute or contingent, not expressly assumed by
EuroGas, including any liability or obligation attributable to any time prior to
the Closing Date.
Section 2.04 Closing; Closing Date. Subject to the terms and conditions
of this Agreement, the consummation of the sale and purchase of Maseva Gas as
contemplated hereby (the "Closing") shall take place at the offices of Kruse,
Landa & Maycock, L.L.C., or such other place as mutually acceptable to the
parties hereto as soon as practicable, but in any event on or before September
30, 1998. The date on which the Closing takes place shall be the "Closing
Date."
Section 2.05 Closing Events. At the Closing, Belmont shall execute,
acknowledge, and deliver (or shall cause to be executed, acknowledged, and
delivered) (i) the bills of sale, assignments, and other documents and
instruments of conveyance and transfer, all in form and substance reasonably
satisfactory to EuroGas and its counsel, necessary to vest free and clear title
in EuroGas to 90% of the equity and record ownership of Maseva Gas; (ii)
originals or copies of all of Maseva Gas' agreements, contracts, and
commitments; (iii) originals or copies of all science related to the Maseva
Concession, including surveys, reports, feasibility studies, testing reports,
seismic information, drill logs, etc.; (iv) all certificates, opinions,
schedules, agreements, resolutions, or other instruments required by this
Agreement to be so delivered prior to the Closing; (v) a representation letter
acknowledging the restricted nature of the securities delivered to Belmont as
part of the purchase price and setting forth Belmont's investment intent in form
and substance as set forth on Exhibit "C" attached hereto and incorporated
herein by this reference; and (vi) such other items as may be reasonably
requested by the parties hereto and their respective legal counsel in order to
effectuate or evidence the transactions contemplated hereby. EuroGas shall
deliver to Belmont the certificates representing 2,500,000 shares of restricted
Common Stock and the Warrant giving Belmont the right to acquire up to an
additional 2,500,000 shares of restricted common stock of EuroGas at an exercise
price of $5.00 per share at any time prior to two years subsequent to the
Closing Date.
Section 2.06 Registration of Common Stock. At the Closing, the parties
will execute and deliver a Registration Rights Agreement giving Belmont the
right to have the restricted Common Stock delivered as part of the purchase
price and the restricted Common Stock issuable on exercise of the Warrants
included in any appropriate registration statement that may be filed by EuroGas
within one year of the date of Closing.
Article III
Representations, Covenants, and Warranties of Belmont
Belmont hereby represents, covenants, and warrants to EuroGas, such
representations, covenants, and warranties to be made as of the date hereof and
at and as of the Closing Date and to survive the Closing and continue in
accordance with the terms hereof, as follows:
Section 3.01 Organization of Belmont. Belmont is a corporation duly
organized, validly existing, and in good standing under the laws of British
Columbia and has the corporate power and is duly authorized, qualified,
franchised, and licensed under all applicable laws, regulations, ordinances, and
public authorities to own its properties and assets and to carry on its business
in all material respects as it is now being conducted. There is no jurisdiction
in which it is not so qualified in which the character and location of the
assets owned by it or the nature of the business transacted by it requires
qualification, except when the failure to do so would not have a material
adverse affect on the business and properties of Belmont. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated by this Agreement in accordance with the terms hereof will not,
violate any provision of Belmont's articles of incorporation or bylaws.
Section 3.02 Organization of Maseva Gas. Maseva Gas is an entity duly
organized, validly existing, and in good standing under the laws of the Slovak
Republic, with the power and duly authorized, qualified, franchised, and
licensed under all applicable laws, regulations, ordinances, and public
authorities to own its properties and assets, including the Maseva Concession,
and to carry on its proposed business of exploring for natural gas and crude oil
on the Maseva Concession. There is no jurisdiction in which it is not so
qualified in which the character and location of the assets owned by it or the
nature of the business transaction or proposed by it, requires qualification.
The consummation of the transactions contemplated by this Agreement in
accordance with the terms hereof will not violate any provision of Maseva Gas'
governing instruments.
Section 3.03 Approval of this Agreement. The board of directors of
Belmont has authorized the execution and delivery of this Agreement and has
approved the transactions contemplated hereby. There is no requirement that the
shareholders of Belmont approve this Agreement or the transactions contemplated
hereby. This Agreement is the legal, valid, and binding agreement of Belmont
enforceable in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, or other laws effecting the enforcement of
creditor's rights generally and by general principles of equity.
Section 3.04 Capitalization of Maseva Gas. The authorized capital of
Maseva Gas is as set forth in the provided copy of the Maseva Articles of
Organization. All such issued and outstanding shares have been legally issued,
and are fully paid, and nonassessable, and not issued in violation of the rights
of any other person or entity. No shares of the authorized capital of Maseva
Gas are subject to any right held by any other person or entity to require the
issuance of additional shares or acquire the issued and outstanding shares on
the exercise or conversion of options, warrants, convertible debentures,
contract rights, or other such instruments.
Section 3.05 Ownership of Maseva Gas. Belmont hereby represents and
warrants that, as of the Closing Date, it will be the sole beneficial and record
owner of 90% of the issued and outstanding record and equity ownership of Maseva
Gas. Belmont's ownership interest in Maseva Gas will be held solely by Belmont,
free and clear of any and all liens, encumbrances, claims, or rights of any
other person or entity.
Section 3.06 Ownership of Maseva Concession. As of the Closing, Maseva
Gas will be the sole and exclusive holder of the Maseva Concession and all of
the rights granted under the Decision. No other person or entity will have any
lien, encumbrance, claim, or right with respect to the Maseva Concession.
Section 3.07 No Liabilities or Contingencies. As of the Closing, Maseva
Gas will not have and will not be liable for, any liabilities or contingencies,
whether known or unknown, except for those obligations listed on Schedule 3.06
which have accrued but which are not yet due.
Section 3.08 Material Contract Defaults. As of the Closing, Maseva Gas
will not be in default in any respect under the terms of any outstanding
contract, agreement, lease, or other commitment which is material to the
business, operations, properties, assets, or condition of Maseva Gas, and there
will be no event of default or other event which would with the notice or lapse
of time or both would constitute a default in any material respect under any
such contract, agreement, lease, or other commitment.
Section 3.09 Taxes. All tax returns, tax reports, and taxes with respect
to the formation or operation of Maseva Gas or which might be a lien or
encumbrance against Maseva Gas or its assets that is due prior to the Closing
Date will be filed on or before the Closing Date and the underlying tax
obligations paid in full.
Section 3.10 Third-Party Consents. No contract, agreement, lease, or
other commitment, written or oral, to which Belmont or Maseva Gas is, or as of
the Closing Date, will be a party, or to which any of Maseva Gas' properties or
assets are subject, require the consent of the other party in order to
consummate the transactions herein contemplated.
Section 3.11 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, or
constitute an event of default under, any material indenture, mortgage, deed of
trust, or other material contract, agreement, or instrument to which Belmont or
Maseva Gas is a party or to which any of their properties or operations are
subject.
Section 3.12 Compliance With Laws and Regulations. Belmont and Maseva
Gas have complied with all applicable statutes and regulations of any
governmental agency with respect to the Maseva Concession. The Maseva
Concession, including all of the rights under the terms of the Decision, is in
good standing and can be fully exploited by Maseva Gas. Any and all consents
required from any governmental agency to permit Maseva Gas to exploit the Maseva
Concession will have been obtained by the Closing Date.
Section 3.13 Environmental Concerns. The Maseva Concession and Maseva
Gas are in full compliance with all Environmental Laws, including the
regulations adopted under the Gazette on Geological Operations, the Slovak
Geological Bureau, the Gazette on the Protection of Nature and Countryside, the
Forestry Land Reserves, the Protection of Agricultural Land Reserves, the
Ministry of Environment, and all local rules and regulations, and are not
subject to any environmental liabilities.
Section 3.14 Brokers' Fees. Belmont has not engaged or entered into any
agreement with any broker or finder in connection with any of the transactions
contemplated by this Agreement requiring the payment of any fee or compensation.
Section 3.15 Belmont Schedules. Belmont will deliver to EuroGas within
ten (10) days of the execution of this Agreement the following disclosure
schedules that are collectively referred to as the "Belmont Schedules":
(a) A complete copy, including all exhibits, of the Decision;
(b) A complete copy, including all exhibits, of the Contract of
Mandate between Belmont and Maseva;
(c) A complete copy, including all exhibits, of the Contract to enter
into a Future Contract between Belmont and Maseva;
(d) A copy of any other agreement, contract, or commitment to which
Maseva Gas is a party or the Maseva Concession is subject to;
(e) A schedule including all geological information with respect to
the Maseva Concession, including feasibility studies, geological surveys,
reports, development plans, seismic information, analysis, test results, or
similar matters;
(f) A copy of the complete financial records of the costs associated
with obtaining the Maseva Concession, forming Maseva and Maseva Gas, and
the negotiation and execution of the agreements between Belmont and Maseva.
(g) A schedule setting forth the information required by Section
3.06.
Article IV
Representations, Covenants, and Warranties of EuroGas
Section 4.01 Organization. EuroGas is a corporation duly organized,
validly existing, and in good standing under the laws of the state of Utah and
has the corporate power and is duly authorized, qualified, franchised, and
licensed under all applicable laws, regulations, ordinances, and public
authorities to own its properties and assets and to carry on its business in all
material respects as it is now being conducted. There is no jurisdiction in
which it is not so qualified in which the character and location of the assets
owned by it or the nature of the business transacted by it requires
qualification, except when the failure to do so would not have a material
adverse affect on the business and properties of EuroGas. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated by this Agreement in accordance with the terms hereof will not,
violate any provision of EuroGas' articles of incorporation or bylaws.
Section 4.02 Approval of this Agreement. The board of directors of
EuroGas has authorized the execution and delivery of this Agreement and has
approved the transactions contemplated hereby. There is no requirement that the
shareholders of EuroGas approve this Agreement or the transactions contemplated
hereby. This Agreement is the legal, valid, and binding agreement of EuroGas
enforceable in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, or other laws effecting the enforcement of
creditor's rights generally and by general principles of equity.
Section 4.03 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, or
constitute an event of default under, any material indenture, mortgage, deed of
trust, or other material contract, agreement, or instrument to which EuroGas is
a party or to which any of their properties or operations are subject.
Section 4.04 EuroGas Disclosure. The information concerning EuroGas and
its business and operations set forth in its reports on Form 10-K for the year
ended December 31, 1997, and Form 10-Q for the quarter ended March 31, 1998,
does not contain any untrue statement of a material fact or omit a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading.
Section 4.05 Brokers' Fees. EuroGas has not engaged or entered into any
agreement with any broker or finder in connection with any of the transactions
contemplated by this Agreement requiring the payment of any fee or compensation.
Section 4.06 EuroGas Schedules. EuroGas will deliver to Belmont within
ten (10) days of the execution of the Agreement the following disclosure
schedules which are collectively referred to as the "EuroGas Schedules":
(a) Annual report on Form 10-K for the year ended December 31, 1997;
and
(b) Quarterly report on Form 10-Q for the quarter ended March 31,
1998.
Article V
Conditions Precedent to the Obligations of EuroGas
The obligations of EuroGas to purchase the equity ownership of Maseva Gas
is subject to the satisfaction, at or before the Closing, of each of the
conditions set forth below.
Section 5.01 Performance by Belmont. Belmont shall have substantially
performed all conditions of this Agreement unless the requirement has been
waived in writing by EuroGas.
Section 5.02 Formation of Maseva Gas. Maseva Gas shall be duly and
lawfully formed and in existence as a legally recognized entity in the Slovak
Republic.
Section 5.03 Transfer of Decision. The Maseva Concession, including all
rights under the Decision, shall have been transferred to Maseva Gas and Maseva
and Maseva Gas shall have obtained any necessary consent of the Slovak Republic
Ministry of Environment as to such transfer and its ownership by EuroGas.
Section 5.04 Payment of Existing Obligations. Belmont shall have
provided the necessary funding to Maseva or Maseva Gas to permit the payment of
all obligations which are due prior to the Closing Date, including the
obligation of Belmont to reimburse Maseva for the initial work and
organizational costs in investigating and obtaining the Maseva Concession.
Section 5.05 Due Diligence Review. EuroGas shall have favorably
completed its due diligence of the Maseva Concession and the ownership of all
rights with respect thereto by Maseva Gas.
Section 5.06 No Material Adverse Change. There shall not have been any
material change to Maseva Gas or the Maseva Concession prior to the Closing
Date.
Section 5.07 Absence of Litigation. No action, suit, or proceeding
before any court or any governmental body or authority pertaining to the
consummation of the transactions contemplated by this Agreement shall have been
instituted or threatened on or before the Closing Date.
Section 5.08 Closing Date Pro Rations. EuroGas and Belmont shall pro
rate as of the Closing Date, all charges and items of expense with respect to
the Maseva Concession with Belmont bearing the proportionate expense
attributable to the period prior to the Closing Date in accordance
with the terms of this Agreement and EuroGas bearing the proportion expense
attributable to the period subsequent to the Closing Date.
Section 5.09 Third-Party Consents. Belmont shall have obtained the
consents of all third-parties whose consent is required to consummate the
transactions contemplated by this Agreement, including any consents reasonably
requested by EuroGas.
Section 5.10 Other Agreements. The execution of a Registration Rights
Agreement, Working Interest Agreement, and Warrant in the form substantially
similar to the drafts attached to this Agreement.
Section 5.11 Agreement with Maseva. The obtaining of any agreements with
Maseva (the owner of the other 10% of Maseva Gas) as Belmont and EuroGas deem
mutually advisable.
Article VI
Conditions Precedent to the Obligations of Belmont
The obligation of Belmont to sell its interest in Maseva Gas is subject to
EuroGas' satisfaction, at the time of Closing, of the conditions set out below,
except for any condition which has been waived in writing by Belmont at or prior
to the Closing.
Section 6.01 Performance by EuroGas. EuroGas shall have substantially
performed all the conditions of this Agreement, unless the requirement has been
waived in writing by Belmont.
Section 6.02 Corporate Approval. The board of directors of EuroGas shall
have approved the transactions described in this Agreement and resolutions
setting forth those approvals shall have been certified to Belmont by an officer
of EuroGas.
Section 6.03 Other Agreements. The execution of a Registration Rights
Agreement, Working Interest Agreement, and Warrant in the form substantially
similar to the drafts attached to this Agreement.
Section 6.04 Agreement with Maseva. The obtaining of any agreements with
Maseva (the owner of the other 10% of Maseva Gas) as Belmont and EuroGas deem
mutually advisable.
Article VII
Survival of Representations and Warranties
All representations and warranties made in Articles IV and V shall be
continuing and shall survive the Closing, but shall expire 24 months after the
Closing Date; provided, however, that if a claim for indemnification has been
asserted pursuant to Article VII prior to or as of the expiration date of such
24-month period, such representations and warranties shall remain in full force
and effect until full and complete resolution of such claim. Notwithstanding
the foregoing, however, the time for making a claim based upon such
representation or warranty shall expire 24 months after the Closing Date.
Article VIII
Indemnification
Section 8.01 By EuroGas and Belmont. EuroGas, on the one hand, and
Belmont on the other hand, each hereby agrees to indemnify and hold harmless the
other party against all claims, damages, losses, liabilities, costs, and
expenses (including settlement costs and any legal, accounting, or other
expenses for investigating or defending any actions or threatened actions)
reasonably incurred by the indemnified party in connection with each and all of
the following:
(a) any breach by the indemnifying party of any representation or
warranty in this Agreement;
(b) any breach of any covenant, agreement, or obligation of the
indemnifying party contained in this Agreement or any other agreement,
instrument, or document contemplated by this Agreement; and
(c) any misrepresentation contained in any statement, exhibit,
certificate, or schedule furnished by the indemnifying party pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement.
Section 8.02 By Belmont. Belmont agrees to indemnify and hold harmless
EuroGas from any and all claims, damages, liabilities, costs, and expenses
(including settlement costs and any legal, accounting, or other expenses for
investigating or defending any actions or threatened actions) reasonably
incurred by the indemnified party in connection with each and all of the
following:
(a) any claims against, or liabilities or obligations of, Maseva Gas,
the Maseva concession, or the business or assets of Maseva Gas related to
any period of time prior to the Closing Date.
(b) any and all claims, damages, losses, liabilities, costs, and
expenses including settlement costs and any legal, accounting, or other
expenses for investigating or defending any actions or threatened actions
reasonably incurred by EuroGas in connection with any claim relating to
Maseva Gas' business or operations prior to the Closing Date.
Section 8.03 Claims for Indemnification. Whenever any claim shall arise
for indemnification hereunder, the party seeking indemnification (the
"Indemnified Party"), shall promptly notify, in writing, the party from whom
indemnification is sought (the "Indemnifying Party") of the claim and, when
known, the facts constituting the basis for such claim. In the event of any
such claim for indemnification hereunder resulting from or in connection with
any claim or legal proceedings by any party, the notice to the Indemnifying
Party shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. The Indemnified Party shall not settle or
compromise any claim by a third party for which it is entitled to
indemnification hereunder without the prior written consent of the Indemnifying
Party, which shall not be unreasonably withheld, unless suit shall have been
instituted against it and the Indemnifying Party shall not have taken control of
such suit after notification thereof as provided in section 8.04 hereof.
Section 8.04 Defense by Indemnifying Party. In connection with any claim
giving rise to indemnity hereunder resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Party, at its sole cost and expense may, upon written notice to the
Indemnified Party, assume the defense of any such claim or legal proceeding if
it acknowledges to the Indemnified Party in writing its obligations to indemnify
the Indemnified Party with respect to all elements of such claim. The
Indemnified Party shall be entitled to participate (but not control) the defense
of any such action, with its counsel and at its own expense. If the
Indemnifying Party does not assume the defense of any such claim or litigation
resulting therefrom within 30 days after the date such claim is made:
(a) the Indemnified Party may defend against such claim or litigation
in such manner as it may deem appropriate, including, but not limited to,
settling such claim or litigation, after giving notice of the same to the
Indemnifying Party, on such terms as the Indemnified Party may deem
appropriate; and
(b) the Indemnifying Party shall be entitled to participate in (but
not control) the defense of such action, with its counsel and at its own
expense. If the Indemnifying Party thereafter seeks to question the manner
in which the Indemnified Party defended such third party claim or the
amount or nature of any such settlement, the Indemnifying Party shall have
the burden to prove by a preponderance of the evidence that the
Indemnified Party did not defend or settle such third party claim in a
reasonably prudent manner.
Article IX
Specific Performance
The parties hereto agree the failure of any party to perform any obligation
or duty which each has agreed to perform shall cause irreparable harm to the
parties willing to perform the obligations and duties herein, which harm cannot
be adequately compensated for by money damages. It is further agreed by the
parties hereto an order of specific performance against a party in default under
the terms of this Agreement would be equitable and would not work a hardship on
the defaulting party. Accordingly, in the event of default by any party hereto,
the non-defaulting party, in addition to whatever other remedies are available
at law or in equity, shall have the right to compel specific performance by the
defaulting party of any obligation or duty herein.
Article X
Miscellaneous Provisions
Section 10.01 Costs. EuroGas and Belmont shall each pay all of their own
costs and expenses incurred or to be incurred by each in negotiating and
preparing this Agreement and in closing and carrying out the transactions
contemplated by this Agreement.
Section 10.02 Notices. Any notice, demand, request, or other
communication under this Agreement shall be in writing and shall be deemed to
have been given on the date of service if personally served or by facsimile
transmission (if receipt is confirmed by the facsimile operator of the
recipient), or delivered by overnight courier service or on the third day after
mailing if mailed by certified mail, return receipt requested, addressed as
follows:
If to EuroGas, to: Hank Blankenstein, Vice-President
EuroGas, Inc.
942 East 7145 South, #101A
Midvale, Utah 84047
Fax: (801) 255-2005
Confirmation: (801) 255-0862
With copies to: Howard S. Landa, Esq.
Kruse, Landa & Maycock, L.L.C.
50 West Broadway, Eighth Floor
Salt Lake City, Utah 84101
Fax: (801) 531-7091
Confirmation: (801) 531-7090
If to Belmont, to: Vojtech Agyagos
Belmont Resources, Inc.
Suite 1180 - 666 Burrard St.
Vancouver, British Columbia
Canada V6C 2X8
Fax: (604) 683-1350
Confirmation: (604) 683-6648
With copies to: David Anfield, Esq.
Anfield, Sujir, Kennedy & Durno
16th Floor - Stock Exchange Tower
609 Granville Street
P.O. Box 10068 - Pacific Centre
Vancouver, British Columbia
Canada V7Y 1C3
Fax: (604) 669-3877
Confirmation: (604) 669-1322
or such other addresses and facsimile numbers as shall be furnished in writing
by any party in the manner for giving notices hereunder, and any such notice,
demand, request, or other communication shall be deemed to have been given as of
the date so delivered or sent by facsimile transmission (if receipt is confirmed
by the facsimile operator of the recipient), three days after the date so
mailed, or one day after the date so sent by overnight delivery.
Section 10.03 Governing Law. This Agreement shall be governed by,
enforced and construed under and in accordance with the laws of the United
States of America and, with respect to matters of state law, with the laws of
the state of Utah. Venue for all actions regarding this Agreement shall be in
Salt Lake County, Utah. The parties hereby submit to the personal jurisdiction
of such court for the purpose of resolving any dispute arising under this
Agreement.
Section 10.04 Attorneys' Fees. In the event that any party institutes any
action or suit to enforce this Agreement or to secure relief from any default
hereunder or breach hereof, the breaching party or parties shall reimburse the
nonbreaching party or parties for all costs, including reasonable attorneys'
fees, incurred in connection therewith and in enforcing or collecting any
judgment rendered therein.
Section 10.05 Schedules and Exhibits; Knowledge. Whenever in any section
of this Agreement reference is made to information set forth in the exhibits or
the Belmont Schedules, such reference is to information specifically set forth
in such exhibits or schedules and clearly marked to identify the section of this
Agreement to which the information relates. Whenever any representation is made
to the "knowledge" of any party, it shall be deemed to be a representation that
no officer or director of such party, after reasonable investigation, has any
knowledge of such matters.
Section 10.06 Entire Agreement. This Agreement, together with the
documents to be delivered pursuant hereto, represent the entire agreement
between the parties relating to the subject matter hereof. There are no other
courses of dealing, understanding, agreements, representations, or warranties,
written or oral, except as set forth herein.
Section 10.07 Survival; Termination. The representations, warranties, and
covenants of the respective parties shall survive the Closing.
Section 10.08 Form of Execution; Counterparts. A valid and binding
signature hereto or any notice or demand hereunder may be in the form of a
manual execution or a true copy made by photographic, xerographic, or other
electronic process that provides similar copy accuracy of a document that has
been executed. This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original and all of which taken together shall be but a
single instrument.
Section 10.09 Amendment or Waiver. Every right and remedy provided herein
shall be cumulative with every other right and remedy, whether conferred herein,
at law, or in equity, and may be enforced concurrently herewith, and no waiver
by any party of the performance of any obligation by the other shall be
construed as a waiver of the same or any other default then, theretofore, or
thereafter occurring or existing. At any time prior to the Closing Date, this
Agreement may be amended by a writing signed by all parties hereto, with respect
to any of the terms contained herein, and any term or condition of this
Agreement may be waived or the time for performance thereof may be extended by a
writing signed by the party or parties for whose benefit the provision is
intended.
Section 10.10 Waiver of Jury Trial. Each party hereby (a) knowingly,
voluntarily, intentionally, and irrevocably waives, to the maximum extent not
prohibited by law, any right it may have to a trial by jury in respect of any
litigation based hereon, or directly or indirectly at any time arising out of,
under, or in connection with this Agreement or any transaction contemplated
hereby or associated herewith; and (b) acknowledges that it has been induced to
enter into this Agreement and the transactions contemplated hereby by, among
other things, the mutual waivers and certifications contained in this section.
DATED as of the date first above written.
EuroGas:
EUROGAS, INC.
By /s/ Hank Blankenstein
Belmont:
BELMONT RESOURCES, INC.
By /s/ Vojtech Agyagos
CONFIRMED:
Chairman of the State Committee of Geology
S.V. Hoshovskyj
"16" 06 1998
AGREEMENT ON JOINT INVESTMENT AND
PRODUCTION ACTIVITIES
From May 14, 1998 Lviv (Ukraine)
State Geological Enterprise "ZAHIDUKRGEOLOGIA"
hereinafter "ZAHIDUKRGEOLOGIA"
290601, Lviv. Mitskiewich Sq., 8, Ukraine
in person of
General Director of the SGE "ZAHIDUKRGEOLOGIA"
Volodymyr Poberezhskyj,
acting on the basis of the Statute
and
Company EUROGAS Inc.
hereinafter EUROGAS,
80 Broad Street Penthouse New York, 1004
in person of
EUROGAS Managing Director
Wolfgang Rauball,
acting on the basis of the Statute
have concluded this Agreement about the following:
GENERAL PROVISIONS
The Parties of the Agreement (ZAHIDUKRGEOLOGIA and EUROGAS) guarantee the
liability of their entering the membership of the Parties of the Agreement.
The Parties of the Agreement will preserve their juridical independence.
The present Agreement cannot be the impediment for the Parties of the Agreement
to perform their duties to the third parties.
In the process of the joint activity the Parties of the Agreement are guided by
the valid legislation of Ukraine.
The introduction of any changes into the Agreement will be performed due to the
common consent of the Parties of the Agreement and will be submitted in the
written form.
ARTICLE 1
SUBJECT AND OBJECTIVE OF THE AGREEMENT
1.1 The subject of the Present Agreement is to perform the joint investment
activity with the view to create the necessary productive conditions for
conducting the prospecting-exploration, investigation-industrial works for
oil, gas and coalbed methane.
1.2 The provisions of the present Agreement cover the South-Western
coal-bearing area which has been jointly chosen by the Parties of the
Agreement and for the exploration of which ZAHIDUKRGEOLOGIA possesses
licence #770 dated 18.09.1996 (hereinafter - the Area of Works)
1.3 The provisions of the present Agreement may be expanded onto the following
prospects: Hrushivska, Kamenska, Luchkivska in the Transcarpathian
Foredeep and Ortynyiska, Dovholutska, Mizhrichenska, Stajkivska,
Chukvinska, Pivnichno-Blazhivska in the Precarpathian Foredeep, if the
Parties come to such a consent and the State Committee of Geology does not
object.
1.4 In the established order EUROGAS will purchase from the State Committee of
Geology the package of the geological-geophysical information on the
following prospects: Dovholutska, Ortynytska, Mizhrichenska, in the
Precarpathian Foredeep and Hrushivska, Kamenska, Luchkivska in the
Transcarpathian Foredeep and having obtained the packages of information
during three months will make a decision about the prospects for investing
the works on. The agreements of purchase of the packages of the
geological-geophysical information on the prospects Ortynytska,
Mizhrichenska and Kamenska have been signed by the State Committee of
Geology and EUROGAS.
l.5 The present Agreement is concluded with the view to:
- provide investing into the prospecting, exploration,
investigation-industrial works and exploitation of the discovered
prospects in the limits of the Area of Works;
- obtain profit by the Parties of the Agreement;
- provide organisational-economic conditions for the joint investments
into prospecting, exploration and investigation works on the prospects
in the limits of the Area of Works, use of advance domestic and
foreign technical equipment, achievement of high economic efficiency
of investigation-industrial works on the Area of Works provided labour
protection and safety, protection of mineral resources and environment
are ensured in compliance with the requirements of the valid
legislation.
ARTICLE 2
PRECONDITIONS TO BEGIN CONDUCTING
THE JOINT ACTIVITIES
2.1 After signing the Agreement ZAHIDUKRGEOLOGIA according to the valid
legislation will re-register the special permit (licence) #770 dated
18.09.1998 to the new one with the notes in the special provisions of the
licence that the works on the licensed area will be performed in compliance
with the provisions of the present Agreement.
2.2 All the geological, technical and organisational problems concerning the
works according to the above mentioned licence are stipulated in the
Working Programme stated in the Addendum to the Agreement which is the
integral part of the Agreement.
2.3 In the process of carrying out the licensed activity according to the
Working Programme the Parties of the Agreement will handle the questions on
the foundation of the Joint Venture the founders of which will be
ZAHIDUKRGEOLOGIA and EUROGAS.
ARTICLE 3
CONTRIBUTIONS OF THE PARTIES
3.1. When performing the works in compliance with the provisions of the present
Agreement its Parties overtake the following obligations:
3.2. ZAHIDUKRGEOLOGIA
performs the activity on the preparation of the project works for drilling
the prospecting, exploration and production wells, makes the contributions
into the joint activity in the form of the actually performed work
contents, advanced Ukrainian experience and achievements in know-how,
technical equipment,, buildings.
Bears the responsibility for the qualitative and complete development,
co-ordinations and confirmations of all the project documentation for
geological-exploration works, required for acting under the present
Agreement, with the co-ordination with EUROGAS.
Facilitates organising the conditions for the accommodation of the
operating staff of the foreign Party of the Agreement on the working sites
on the same level as that of the workers of the Ukrainian Party of the
Agreement.
Facilitates, in the limits of its abilities and competence, when necessary
providing the medical aid to the operating staff of the foreign Party of
the Agreement;
Facilitates, in the limits of its abilities and competence, the efficient
customs services and means of conveyance for the transportation of the
technical equipment including the gadgets for the whole period of the
Agreement liability.
3.3. EUROGAS Inc. New York
Overtakes 100% of expenditures for performing the stipulated prospecting
and exploration drilling, equipping and investigation-industrial
exploitation of the fields according to the Working Programme stated in the
Addendum, after the agreement and co-ordination of the Parties of the
Agreement. Contributes into the joint investment activity the advanced
international experience of work and know-how, and also provides the highly
effective drilling equipment, drilling technologies and apparatuses for
performing and preparation of the analyses, which would correspond to the
highest world standards (after the co-ordination with ZAHIDUKRGEOLOGIA).
Organises at its own expense the exchange of experience and training of the
Ukrainian specialists to work on the imported drilling equipment and use
the modern technologies.
3.4. Investment contributions of the Parties are evaluated in the Ukrainian
currency and in the US dollars. The exchange of the contribution in the
foreign currency into the Ukrainian currency and vice versa is performed at
the official rate of the National Ukrainian Bank valid at the moment of the
investment.
ARTICLE 4
LICENCES
Licence #770 for the geological investigation including the commercial
development of the South-Western coal-bearing area has been obtained by the
enterprise ZAHIDUK1RGEOLOGIA on 18.09.1996.
After signing the Agreement ZAHIDUKRGEOLOGIA due to the valid legislation will
re-register the above mentioned licence to the new one with the 5 years validity
with the notes in the special provisions of the licence that the works on the
licensed area will be performed in compliance with the provisions of the present
Agreement.
On condition the results of the exploration and the fulfillment of the Working
Programme are successful, ZAHIDUKRGEOLOGIA or the Joint Venture founded by the
Parties of the Agreement will obtain in the established order the licence with
the 20 years validity for the exploitation of the fields, if they are discovered
on the Area of Works.
ARTICLE 5
RIGHTS AND OBLIGATIONS OF THE PARTIES
TO THE AGREEMENT
5.1 The Parties have the following rights:
- to participate in resolving the issues concerning ensuring the joint
investment activity according to the Agreement;
- to obtain the respective portion of the profit from the joint
investment activity or the portion of the product according to the
Agreement;
- to obtain, free of charge, and verify the information concerning the
joint investment activity, have an access to the Area of Works and
accounting documents, reports, initial financial documentation
concerning this Area;
- to present the suggestions to the Council of Management concerning the
improvement of the joint business activity on the Area of Works.
5.2 The Parties overtake the following obligations:
- not to disclose confidential information on the joint investment
activity;
- to fulfil the Working Programme of the joint investment activity;
- to exchange the available information on the joint activity according
to the Agreement.
ARTICLE 6
CONDUCTING THE JOINT INVESTMENT ACTIVITIES
6.1 To make the decisions on conducting the joint investment activity according
to the Agreement the Council on Management (hereinafter the Council) is
established. The Council consists of 4 people, two representatives from
each Party. The Council is run by the Chairman, who is appointed for one
year in turn from each Party after the consent of the Parties. In the
first year of the joint activity, the representative of EUROGAS is
appointed the Chairman of the Council. In case of the equality of votes
during resolving the problems concerning the joint activity on exploration
and development of the hydrocarbons prospects in the Area of Works
according to the Working Programme, the Chairman will have a casting voice
except the changes of the costs stipulated in this Programme. Sessions of
the Council will be held once a quarter and are considered lawful when all
members of the Council are present.
To the competence of the Council belong:
- confirmation of the programme of the joint investment activity;
- confirmation of the budget of the joint investment activity;
- development of the perspectives and execution of the provisions of the
present Agreement;
- consideration and confirmation of the additional contributions of the
Parties;
- confirmation of the accounting balance for conducting the joint
investment activity;
- confirmation of the profit distribution procedure and covering of
losses procedure under the present Agreement;
- making decisions on terminating the Agreement.
The decisions of the Council are adopted by simple majority of votes through
open ballot.
The decisions of the Council are registered in the protocol which is signed by
all the Members or the authorised representatives of the Members acting on their
behalf.
6.2 Under the guidance and control of the Council ZAHIDUKRGEOLOGIA on behalf of
EUROGAS performs the direct activity on conducting the geological survey
and investigation-industrial development of the fields according to the
Working Programme, budget of the joint activity and Council's decision.
EUROGAS provides the objective and stepwise financing of the joint business
activity through the separate settlement account in the amount and terms
stipulated in the Working Programme.
The financing of each next stage is conducted after the confirmation of the
performed works of the previous stage by the Council.
ZAHIDUKRGEOLOGIA guarantees the reasonable and objective use of the costs
transferred by EUROGAS.
The above mentioned does not effect the EUROGAS rights directly to pay the
services of the other organisations, purchase of the materials, equipment, etc.
concerning the Agreement fulfillment, that would also be its contribution to the
joint activity if such cannot be provided by ZAHDUKRGEOLOGIA for the competitive
prices.
ARTICLE 7
PROGRAM OF THE JOINT INVESTMENT ACTIVITY
The Initial Working Programme of the joint investment activity co-ordinated by
the Parties of the Agreement stated in the Addendum.
ARTICLE 8
PROFIT SPLITTING
The profit is distributed between the Parties quarterly or otherwise in
accordance with the Council's decision at the following rate:
- till the complete payback of EUROGAS investments stipulated in the
Addendum:
70% (EUROGAS): 30% (ZAHIDUKRGEOLOGIA)
- after the complete payback of EUROGAS investments:
50% (EUROGAS): 50% (ZAHIDUKRGEOLOGIA)
ARTICLE 9
REALISATION OF THE PRODUCT
Realisation of the product obtained in the result of the joint activity under
the Agreement can be performed by each Party independently. If the purchaser in
Ukraine does not offer EUROGAS the price competitive with that of the
international level, EUROGAS preserves the right to sell the obtained product
abroad.
ARTICLE 10
CONFIDENTIAL INFORMATION
10.1 Any information, transmitted by one of the Parties to the other during the
period of the Agreement validity, containing the data about the conducted
works, production, prices, negotiations and offers, including the
provisions of the Agreement is confidential. This information cannot be
revealed without the previous written consent of the other Party.
10.2 Irrespective of the above mentioned, having learned the confidential
information each of the Parties has the right to disclose it without the
previous written consent in the following cases:
- to the members of the Council on Management of the joint investment
activity;
- to any central administrative institution authorised to obtain such
information, as well as to any court or other office according to the
valid legislation of Ukraine;
- within the scope the information is commonly known or the Party has
acquired it due to the provision of law, independently from the
present Agreement.
10.3 The present Article 10 is valid during the period of the Agreement
validity.
ARTICLE 11
THE JOINT DATA BASE
While the present Agreement is binding, all the technical data and information
concerning the joint activity Agreement, known to the Parties shall be
exchanged. In compliance with the situation the Council will use this
information to create the Joint Data Base accessible to both the Parties of the
Agreement.
ARTICLE 12
CESSION AND SUCCESSORSHIP
12.l The Participant may transfer its rights and obligations under the Agreement
to the third parties, having previously informed the other Participant,
after the confirmation of the State Committee of Geology in the written
form.
12.2 In case one of the Parties ceases to exist, due to liquidation or
re-organisation, its rights and obligations under the Agreement will be
transferred to its successor.
ARTICLE 13
RESPONSIBILITY OF THE PARTIES
FORCE MAJEURE
13.1 Each Participant bears the responsibility to the other Participant for
inappropriate performance or non-performance of the provisions of the
Agreement or the Working Programme. In case of their violation the
responsible Party must compensate the direct damages, which arose through
its fault, to the other Party. The degree of the responsibility is
estimated by the Council.
13.2 The present Agreement execution infringements will be justified by the
Parties in case of Force Majeure being the reason of delay or preclusion of
the Agreement execution.
This provision of the Agreement may be used by the Parties, provided that
they acted with due diligence to overcome the impediment and return to the
Agreement execution without an unjustified delay.
Force Majeure defined in clause 13.2 of this Agreement will mean natural
disasters, fires, floods, storms, typhoons, earthquakes, epidemics,
accidents, military actions, wars (declared and undeclared), blockades and
unforeseen embargoes or other hostile acts, strikes and other labour
disorders, rebellions.
The Party whose ability to fulfil obligations under the Agreement is
affected for the above mentioned reasons, must immediately inform the other
Party in writing, so that they together could do everything possible to
eliminate the influence of such conditions. The beginning of the Force
Majeure effect is confirmed by the Trade-Industrial Chamber of Ukraine.
13.3 If the joint activity is delayed, limited or made impossible by the Force
Majeure circumstances, the time to comply with such affected conditions,
the time the present Agreement is binding and all the initial rights and
obligations will be prolonged for the time period equal with that of delay,
with regard to the necessary time period to recommence the activity.
ARTICLE 14
SETTLING THE DISPUTES
All the disputes arising between the Parties of the Agreement concerning the
provisions, subjective interpretation or application of this Agreement or its
any separate provisions should be resolved through negotiations between the
Parties of the Agreement. In case any dispute is not resolved by means of the
negotiations between the Parties within 90 days, the Parties should submit a
dispute for the consideration and resolving by arbitration in the International
Commercial Arbitration Court in Trade-Industrial Chamber of Ukraine according to
the UNCITRAL Rules. All the submissions and decisions concerning the
arbitration will be made in the Ukrainian and English languages.
ARTICLE 15
TERM OF THE AGREEMENT VALIDITY
AND ITS DISSOLUTION
15.1 The Agreement comes into force since the moment of its confirmation by the
Ukrainian State Committee of Geology for the 5(five)-year term.
15.2 The present Agreement loses its validity in case of the expiration of its
term. Each of the Parties may refuse from its rights and obligations under
the present Agreement, having informed the other Participant about it
within six months.
15.3 The Party, which decided to dissolve the Agreement, will not demand to
return the expenditures sustained till the moment of the Agreement
dissolution.
15.4 The present Agreement may be extended by the mutual consent and
confirmation of the State Committee of Geology.
ARTICLE 16
CONDITIONS OF COORDINATING THE COMMUNICATION
BETWEEN THE PARTIES
16.1 Any notifications or other ways of communication which will be fulfilled
under this Agreement must be sent to the juridical addresses of the
Parties.
16.2 Any correspondence or other ways of communication with the state and other
bodies for the execution of the present Agreement will be conducted under
the following addresses:
for SGE "ZAHIDUKRGEOLOGIA"
290601, Lviv,
Mitskiewich Sq., 8, Ukraine
Tel. (0322) 72-05-25, fax 72-28-82
for EUROGAS Inc.
80 Broad Street Penthouse
New York, NY #1004, U.S.A.
Tel. 212 785 2626, fax 212 509 2755
Herengracht 466
1017 CA Amsterdam
The Netherlands
Tel. 31 20 521 6696, fax 31 20 521 6695
ARTICLE 17
FINAL PROVISIONS
17.1 After signing the Agreement, all the previous negotiations, correspondence,
agreements and protocols of intention about the issues concerning the
present Agreement lose their juridical power.
17.2 If for any reason one or some of the provisions of the present Agreement
are considered null, illegal or in any way non-performable, the invalidity,
illegality or non-performance will not influence the other provisions of
the Agreement, and the Agreement will be approached as if those null,
illegal or non-performable provisions did not exist.
17.3 The present Agreement is signed in two copies in Ukrainian and in two
copies in English. In case of the dubious interpretation of the Agreement
items the preference is given to the copy in the Ukrainian language.
JURIDICAL ADRESSES, BANK REQUISITES
AND SIGNATURES OF THE PARTIES:
State geological enterprise "ZAHIDUKRGEOLOGIA":
290601, Ukraine, Lviv, Mitskiewich Sq., 8,
Tel. (0322) 72-05-25, fax 72-28-82,
Number of bank account: 26005301410830
in Lviv Regional Dpt. Prominvestbank,
MIO 325633
General Director
/s/ V.O. Poberezhskyj
V.O. Poberezhskyj
Company EUROGAS Inc.
80 Broad Street Penthouse Herengracht 466
New York, N.Y. 1004, U.S.A. 1017 CA Amsterdam
tel. 212 785 2626 the Netherlands
fax 212 509 2755 tel. 31 20 521 6696
fax 31 20 521 6695
Acc. # 40.43.93.470 555591 in ABN AMRO Bank N.V., Amsterdam
Managing Director
/s/ W. Rauball
W. Rauball
Town Council
State Administration
of
No.
of " " , 1998
Deputy Head
-------------------------
STATUTARY AGREEMENT OF ASSOCIATION
OF LIMITED LIABILITY COMPANY
WITH FOREIGN INVESTMENTS
"EURODONGAS"
Makyivka 1998
The present Statutory Agreement of Association whose purpose is creation of the
Limited Liability Company with Foreign Investments "EURODONGAS" is concluded on
"17" June 1998 between
(1) "Eurogas Inc." Company, registered on "1" August 1985 under No. CO117160,
in the commercial register, in Salt Lace City, Utah, USA located at
address: 80 Broad Street Penthouse New York 1004 USA, represented by
President Wolfgang Rauball.
and
(2) Limited Liability Company "Makyivs'ke Girs'ke Tovarystvo" (MGT),
identification Code 21952070, registered by Girnyts'ki District Executive
Committee, Makyivka, on January 22, 1992, located at address: Panchenko
Str. 11, Makyivka, Donetski Region, 339004 Ukraine, represented by Director
General Ivan Nikonorovich Averkin.
Each of the Parties is referred to in the texts of the present Statutory
Agreement of Association and the Articles of Association separately as Founder
or Participant and together as Founders or Participants. The Founders of the
Company are its primary Participants.
Since the Participants wish to conclude the Statutory Agreement of Association
with the purpose of the creation of the Limited Liability Company with Foreign
Investments "EURODONGAS",
now they agreed as follows:
ARTICLE 1
DEFINITIONS
The following terms used in the present Statutory Agreement of Association have
the following meanings:
1.1. the term "Company" means the Limited Liability Company with Foreign
Investments "EURODONGAS";
1.2. the term "Articles of Association" means the Articles of Association of the
Limited Liability Company with Foreign Investments "EURODONGAS";
1.3. the term "date of registration" means the date of registration of the
Company as a legal entity by competent state agencies of Ukraine;
1.4. the term "Statutory Agreement" means the Statutory Agreement of Association
concluded between the Founders of the Company.
ARTICLE 2
NAME AND LOCATION OF THE COMPANY
2.1. The Company has:
2.1.1. Full name:
- in Ukrainian: TOBapHCTBO 3 OOMeKeHoIo BiJIIoBiJibHiCTIo 3
iHo3Emhhmmh iHBeCTHUiRMH "CBpOJOHra3",
- in English: Limited Liability Company with Foreign Investments
"EURODONGAS".
2. 1.2. Short name:
- in Ukrainian: TOB "CbpoJoHra3",
- in English: LLC "EURODONGAS".
2.2. Location of the Company:
Panchenko Str. 11, Makyivka, Donetski Region, 339004 Ukraine.
ARTICLE 3
LEGAL STATUS, SUBJECT AND
OBJECTIVES OF THE COMPANY
REGULATORY DEEDS
3.1. The Company is a legal entity established for an indefinite period from the
moment of its registration by state agencies for business activity in
Ukraine and abroad.
3.2. The Company has own balance, settlement accounts in foreign and national
currency and other necessary bank accounts, official seal, other seals and
stamps which bear its name, trade marks and other requisites (if exist)
that are approved by the Director General.
3.3. The Company disposes its property, may accrue proprietary and
non-proprietary interests, bear responsibility, be a plaintiff or a
defendant in a court, arbitration court in own name.
3.4. The Founders hereby agreed that the Company has subject and objectives of
activity stated in the Article 4 of the Articles of Association.
3.5. The activity of the Company is regulated by the present Statutory Agreement
of Association, the Articles of Association and the Laws of Ukraine "On
Business Companies", "On Enterprises", other acting laws of Ukraine.
3.6. The Company is entitled to create in Ukraine and abroad subsidiaries,
affiliates and branch offices in accordance with laws of Ukraine
3.7. The Company is entitled without restrictions to take decisions relating to
its activity.
3.8. The Company bears responsibility on own debts and obligations by own
property to which fine may be imposed in accordance with laws of Ukraine.
Responsibility of the Participants is limited by their shares in the
Authorized Fund.
ARTICLE 4
RIGHTS AND OBLIGATIONS OF THE PARTICIPANTS
4.1. The Participants of the Company have right:
4.1.1. to participate personally or through representatives in the Meeting of
Participants and in making decisions according to an order of the day;
4.1.2. to participate in the management of the Company in accordance with the
Articles of Association;
4.1.3. to obtain dividends declared by the Meeting of Participants for
distribution among the Participants in the amount of 70 % (Eurogas)
and 30% ( M G T) to the complete compensation of Eurogas investments
and in the future in the proportion to the amount of the full paid
shares in the Authorized Fund.
4.1.4. to obtain any information as for activity of the Company, in
particular from the Board of Directors;
4.1.5. to obtain any information relating to activity of the Company? in
particular from the Board of Directors;
4.1.6. to participate in distribution of property of the Company in the case
of its liquidation;
4.1.7. to exercise other rights given to them by the present Articles of
Association, the Statutory Agreement of Association or acting laws of
Ukraine.
4.2. The Participants are obliged:
4.2.1. to fulfill obligations against the Company;
4.2.2. to refrain from disclosure of confidential information and commercial
secrets relating to activity of the Company;
4.2.3. to pay shares obtained in accordance with the Articles of Association
and the Statutory Agreement of Association;
4.2.4. to promote activity of the Company.
ARTICLE 5
THE AUTHORIZED FUND,
SHARES OF THE PARTICIPANTS
5.1. The Parties agreed to create the Authorized Fund through making
contributions by each Participant. The Authorized Fund in amount 30000
(thirty thousand) grivnas that amounts to US dollars at
the rate of the National Bank of Ukraine (hereinafter referred to as NBU)
per 100 US dollars on " " 199 is
created for support of activity of the Company.
5.2. The contribution to the Authorized Fund may be done by the Participants in
the form of buildings, constructions, equipment, materials and other
tangible assets (or interests in them), securities, other proprietary
interests, know-how, foreign and/or national currency investments.
5.3. Shares of the Participants in the Authorized Fund are:
"Eurogas" possesses 50% (fifty per cent) of the Authorized Fund of the
Company that amounts to 15000 (fifteen thousand) grivnas or
US dollars at the rate of the NBU
per 100 US dollars on " " 199 ;
LLC "MGT" possesses 50% (fifty per cent) of the Authorized Fund of the
Company that amounts to 15000 (fifteen thousand) grivnas or
US dollars at the rate of the NBU
per 100 US dollars on " " 199 .
5.4. Each Participant has to make at least 30% (thirty per cent) of contribution
at the moment of registration of the Company. The payments are to be
confirmed by the bank.
5.5. The Participants are to make their contribution not later than 1 (one) year
after the moment of registration of the Company.
5.6. Should any Participant not make his contribution for the period determined
in article 5.3. of the present Statutory Agreement of Association, a fine
in amount of 10% (ten per cent) of annual indebtedness is imposed to such
Participant.
5.7. The Board of Directors issues to every Participant a Certificate verifying
that he made his contribution to the Authorized Fund completely. Such
Certificate is not a security. Such Certificate verifies membership of a
Participant in the Company and his right to participate in management of
the Company and his right for obtaining a relevant part of profits in the
form of dividends and for participation in distribution of property and
proprietary interests in the case of liquidation of the Company.
5.8. During 2 years after registration of the Company none Participant may sell,
transfer, cede, dispose in another way or stop holding any shares of the
Company at any time which are held by Participant at present or in future,
except for cases when consent of other Participants of the Company was
obtained.
5.9. In 2 years after registration of the Company every Participant may sell its
share to third person at market price provided that such Participant
proposed to another Participant the right of prior purchase of the share at
market price. In the case of withdrawal of any Participant from the
Company a part of the Company's assets is paid to such Participant in
proportion to his share. Payment is made after approval of annual account
for the year when such withdrawal took place. On demand of Participant and
on consent of the Company the contribution may be returned partially or
completely in natural form. Assets transferred by Participant to the
Company for use are to be returned in the form of property without
compensation.
5.10. None Participant may mortgage, debit or pawn in another way share in
the Company which he possesses at present or in future without written
consent of another Participant of the Company.
5.11. The Company may increase or decrease the Authorized Fund by means of
approval of the Meeting of Participants in accordance with acting laws
of Ukraine.
5.12. The Authorized Fund may be increased after making contributions
completely by all Participants according to their shares. Decision of
the Company on increasing the Authorized Fund is valid from the date of
making changes thereto in the state register according to laws of
Ukraine.
5.13. The Authorized Fund may be decreased provided absence of objections
from creditors of the Company. Decision for decreasing the Authorized
Fund is valid not earlier than 3 months after the appropriate state
registration.
5.14. A relevant part of profits obtained by the Company in current year
before withdrawal of Participant from the Company should be paid to the
said Participant.
ARTICLE 6
MANAGING BODIES OF THE COMPANY
6.1. The highest body of the Company is the Meeting of Participants.
6.2. The executive body of the Company is the Board of Directors which consists
of 4 persons and headed by the Director General.
6.3. The Auditing Commission controls the financial and commercial activity of
the Company as well as activity of the Board of Directors.
6.4. The order of creation, competence and activity of the managing bodies are
determined by the Articles of Association.
ARTICLE 7
THE FIRST MEETING
7.1. The First Meeting of the Company is called by the Founders and valid only
if Participants are present who own more than 60% (sixty per cent) of the
Authorized Fund of the Company.
7.2. The First Meeting takes decision on the following matters:
7.2.1. approval of establishment of the Company;
7.2.2. approval of the Articles of Association of the Company;
7.2.3. approval of appointment of the first managing bodies of the Company;
7.2.4. approval if necessary of agreements concluded by the Founders before
the establishment of the Company;
7.2.5. determination of privileges granted to the Founders;
7.2.6 other matters.
ARTICLE 8
ALTERATIONS AND ADDITIONS
8.1. The Participants may make alterations to the present Statutory Agreement of
Association and/or Articles of Association in accordance with acting laws
of Ukraine. None addition, denial or alteration of any provision of the
present Articles of Association is valid unless it made in writing and
signed by both Participants of their representatives.
8.2. After signing the present Statutory Agreement of Association all preceding
correspondence or arrangements connected with this Statutory Agreement of
Association become invalid.
8.3. In the case when any Participant changes his address, he has to notify
another Participant thereto in writing for 7 (seven) days.
8.4. Expenses of the Participants for registration of EURODONGAS Company are to
be compensated by the Company during 1 (one) month from the moment of
registration of the Company.
ARTICLE 9
CONFIDENTIAL INFORMATION
9.1. The Parties of the present Statutory Agreement of Association, for time
being the Participants of the Company and for 5 (five) years after being
so, have to keep in secret the information about the Company as well as all
confidential information, trade secrets and know-how (both in written and
non-written form) given to or taken from another party, its affiliates or
by the Company, whose confidential information, trade secrets and know-how
may be used only for benefit of the Company, for purposes of the present
Articles of Association. Obligation of confidentiality is not spread to
information which became available to public or information whose
disclosure is required by law or by any provision about exchange of
contributions.
9.2. Participants may disclose the information to third parties in the case when
they carry out such activity which requires such information and in such
amount which is necessary to reach objectives of the Company.
ARTICLE 10
FORCE MAJEURE CIRCUMSTANCES
10.1. The Participants may completely or partially be free from fulfillment
of provisions of the present Statutory Agreement of Association if such
non-fulfillment is caused by force majeure circumstances which are beyond
control of the Participants. Such circumstances include: war, revolt,
earthquake, flood, acts of God and the similar phenomena.
10.2. Every Participant which refers to the force majeure circumstances is
to send without delay a written notification to another Participant.
In this case, this Participant may demand for a certificate issued by
appropriate agency of the country that confirms the said circumstances.
10.3. The Participant who is unable to fulfill his obligations in connection
with arising force majeure circumstances has to take all possible
measures for the fastest compensation of such non-fulfillment.
10.4. After stopping the said circumstances the Participant has to notify
another Participant in writing about such stopping subject to such
Participant will be responsible for further non-fulfillment of his
obligations after stopping force majeure circumstances.
10.5. In the case of arising force majeure circumstances period of
fulfillment of obligations is delayed for the time of the said
circumstances or their consequences being in force.
10.6. Starting the force majeure circumstances is to be confirmed by the
Chamber of Trade and Industry of Ukraine.
ARTICLE 11
SETTLLEMENT OF DISPUTES
11.1. The Participants have to take all possible measures to settle disputes
arising from the present Statutory Agreement of Association by means of
negotiations.
11.2. Should the Participants not reach consent for 30 (thirty) days from
the day of their arising, the disputes are to be transferred for
consideration to the International Commercial Arbitration Court at the
Chamber of Trade and Industry of Ukraine. The Parties agreed that under
consideration and settlement of the disputes Rules of International
Commercial Arbitration Court at the Chamber of Trade and Industry of
Ukraine will be applied.
11.3. The arbitration court should consist of three arbiters.
11.4. The place of holding the arbitrage is Kiev, Ukraine.
11.5. The official language of arbitration proceedings is Ukrainian.
11.6. The present Statutory Agreement of Association is guided and
interpreted in accordance with acting laws of Ukraine. Legal
regulations of Ukraine are applicable to all legal relations which
arise from the present Statutory Agreement of Association.
ARTICLE 12
DURATION AND TERMINATION
OF THE STATUTARY AGREEMENT OF ASSOCIATION
12.1. The present Statutory Agreement of Association is valid from the date
of its signing by the Participants.
12.2. The present Statutory Agreement of Association is concluded for an
indefinite period.
12.3. The present Statutory Agreement of Association may be terminated:
12.3.1. in the case of reaching objective of the Company;
12.3.2. in the case of liquidation, reorganization or bankruptcy of the
Company;
12.3.3. on written consent of the Participants;
12.3.4. by written notification sent by any Participant to another Party about
termination of the Statutory Agreement of Association not later than 6
months before such termination;
12.3.5. by court decision.
ARTICLE 13
LICENSES
13.1. According to Deposits Code, MGT has a license for mining methane from
coalbed deposits at sites Butovs'ka Glyboka No.2, Oktiabrs'ka Glyboka
No.3, Chaikino Glyboka No.2.
After Company registration and approval of Investments Commitment Protocol MGT
submit to State Geology Committee the documents needed for reregistration of the
above mentioned licenses of the Company. After the approval Investments
Commitment Protocol becomes the integral part of the Statutory Agreement.
ARTICLE 14
OTHER PROVISIONS
14.1. Any additions to the present Statutory Agreement of Association are
its integral part.
14.2. Any notification which is required or allowed by the present Statutory
Agreement of Association is to be made in writing. Such notifications
are considered as made (i) if they were handed personally; (ii) in
twenty four hours after sending by fax; (iii) after seven days after
sending by messenger mail.
14.3. The present Statutory Agreement of Association is concluded in 6 copies,
3 copies in English and 3 copies in Ukrainian which are of equal
legal force.
ARTICLE 15
SIGNATURES OF THE FOUNDERS
"Eurogas Inc." Company, registered on "1" August 1985 under No. CO117160, in the
commercial register, in Salt Lake City, Utah, USA located at address: 80 Broad
Street Penthouse New York 1004 USA, represented by President Wolfgang Rauball.
President /s/ W. Rauball
W. Rauball
Limited Liability Company "Makyivs'ke Girs'ke Tovarystvo" (MGT), identification
Code 21952070 registered by Girnyts'ki District Executive Committee, Makyivka,
on January 22, 1992, located at address: Panchenko Str. 11, Makyivka, Donetski
Region, 339004 Ukraine.
Director General /s/ I.N. Averkin
I.N. Averkin
under letter of attorney
of " " 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Interests of
Experts and Counsel" in the Registration Statement on Form S-1 and related
Prospectus of Eurogas, Inc. for the registration of 10,000,000 shares of
common stock and to the use therein of our report dated March 31, 1998,
with respect to the consolidated financial statements of Eurogas, Inc.
and Subsidiaries.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
July 21, 1998
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS FAX: (303) 623-4258
600 SEVENTEENTH STREET SUITE 900N DENVER, COLORADO 80202
TELEPHONE (303) 623-9147
CONSENT OF RYDER SCOTT COMPANY
We consent to the use of our report dated April 20, 1998, in the
registration statement on Form S-1 filed by EuroGas, Inc., including the
discussion of such report in the registration statement and any references made
to us as a result of such use.
Very truly yours,
/s/ Ryder Scott Company
Petroleum Engineers
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Denver, Colorado
July 20, 1998
CALGARY OFFICE: 1850, 355-8TH AVENUE, S.W.CALGARY, ALBERTA T2P 1C9
TELEPHONE (403) 262-2799 FAX (403) 262-2790
HEADQUARTERS: 1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002
TELEPHONE (713) 651-9191
