As Filed: August 3, 1998 SEC File No. 333-59715
SECURITIES AND EXCHANGE COMMISSION
Amendment No. 1
to
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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<CAPTION>
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.
<TABLE>
<CAPTION>
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
<TABLE>
<CAPTION>
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.")
<TABLE>
<CAPTION>
<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 Initial 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 Initial 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 Initial Filing
Kernaghan & Co., Ltd., dated May 29, 1998
4.02 (4) Registration Rights Agreement between EuroGas, Inc., and Initial Filing
Thomson Kernaghan & Co., Ltd., dated May 29, 1998
4.03 (4) Warrant Agreement between EuroGas, Inc., and Oppenheimer Initial 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., Initial 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. Initial 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 Initial Filing
Resources, Inc., dated July 22, 1998
10.21 (10) English translation of Agreement on Joint Investment and Initial Filing
Production Activities between EuroGas, Inc., and
Zahidukrgeologia, dated May 14, 1998
10.22 (10) English translation of Statutory Agreement of Association Initial 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 This Filing
Altiengesellschaft for Mineraloel and Chemie AG, dated
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 Initial Filing
Registrant
23.02 (23) Consent of Ryder Scott Company, Petroleum Engineers Initial Filing
23.03 (23) Consent of Kruse, Landa & Maycock, L.L.C., counsel to the Initial Filing
Registrant (See Item 5)
Item 24. Power of Attorney
- -----------------------------------------------------------------------------------
24.01 (24) Power of Attorney Initial 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 Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hamburg, Germany, on the 3rd day of August, 1998.
EUROGAS, INC.
By /s/ Paul Hinterthur
Paul Hinterthur, President
(Principal Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on this 3rd day of August, 1998.
/s/ Paul Hinterthur
Paul Hinterthur, Director
/s/ Dr. Reinhard Rauball
Dr. Reinhard Rauball, Director By /s/ Hank Blankenstein
Hank Blankenstein, Attorney-in-fact
/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.
PARTNERSHIP AGREEMENT
between
1. EuroGas, Inc., 942 East 7145 South, Suite A-101, Midvale, Utah 84047, USA,
hereinafter EuroGas,
and
2. RWE-DEA Aktiengesellschaft for Mineraloel und Chemie [Mineral Oil and
Chemical Corporation], Uberseering 40, 22297 Hamburg, Germany, hereinafter RWE-
DEA.
Preamble
In connection with exploration, development and production of hydrocarbons
off- and on-shore within the territory of Ukraine, EuroGas and RWE-DEA intend to
act jointly as a consortium in the pursuit of projects, acquisition of
prospecting and extraction rights, and prospecting for and extraction of
hydrocarbons. EuroGas and RWE-DEA believe they will strengthen their position
by a joint venture in Ukrainian territory.
On this basis, EuroGas and RWE-DEA agree to structure their cooperation in
the form of a civil law partnership. For this purpose, EuroGas and RWE-DEA
hereby agree as follows:
Section 1
Establishment, Purpose
(1) EuroGas and RWE-DEA shall combine to form a civil law partnership.
(2) This combination shall have as its purpose a joint venture in the
exploration, development and production of hydrocarbons off- and on-shore within
the territory of Ukraine. Activity shall also include treatment, storage and
transportation of hydrocarbons. The partnership shall act as the business
manager of projects in Ukraine. In addition, activity shall include all actions
and legal steps necessary therefor.
Section 2
Term, Cancellation
The partnership shall commence on August 1, 1998 for an indefinite term.
Each partner shall have the right to cancel participation in the partnership at
the end of each semiannual calendar period with three months' notice by means of
a registered letter to the other partner, the first effective date being
December 31, 1999.
Section 3
Name, Domicile
(1) The partnership shall be named
"RWE-DEA EuroGas E & D (Ukraine)."
(2) The partnership shall be domiciled in Hamburg.
Section 4
Fiscal Year
The fiscal year of the partnership shall be from July 1 to June 30 of each
year. The period from August 1, 1998 to June 30, 1999 shall be a short fiscal
year.
Section 5
Transfer of Shares
Shares in the partnership shall not be transferred or encumbered by third
parties without prior consent of all partners.
Section 6
Management, Representation
RWE-DEA shall be entitled to manage and represent the partnership alone,
while EuroGas shall have these rights only jointly with RWE-DEA. Each one of
the managing partners shall have the right of protest under Section 711 BGB
[Civil Code]. The partners shall decide under Section 7 of the present
Agreement as to the admissibility of a management decision which is being
protested.
Section 7
Partners' Resolutions
(1) All decisions placed within the competency of the partners by law or by
this Agreement shall be made through partners' resolutions. The resolutions
shall require approval by all partners. In particular, approval by all partners
shall be required for:
a) Initiation of projects through acquisition of prospecting and exploitation
rights in the Ukraine as well as acquisition or creation of companies and
participation in companies related thereto or necessary therefor;
Determination of project budgets, manner of financing and goals and
concepts of any given project;
Declaration of economic finds and decision regarding the development of a
found field, together with the definition of a development concept, a
development budget and the manner of financing;
b) Decision regarding substantial changes, sale or abandonment of prospecting
and development rights (except obligatory returns), sale, dissolution or
abandonment of companies or of participation in companies related thereto.
(2) Partners' meeting shall be called in writing with 14 days notice. Any
partner may call a meeting. The partners' meeting shall have a quorum if each
partner is represented. Should the partners' assembly lack a quorum, a new
meeting shall be called in writing within seven days. That meeting shall have a
quorum even if only one partner is represented. This fact shall be noted in the
invitation.
(3) Should a resolution regarding an item of the agenda fail to pass
unanimously during a partners' meeting, a new vote shall be taken, in which case
RWE-DEA shall have a double vote.
Section 8
Implementation of Individual Projects
For each individual project EuroGas and RWE-DEA shall conclude an
individual consortium agreement in accordance with the attached sample.
Section 9
Compensation
Compensation of the partner acting as business manager, lead manager and
manager of exploration, drilling or recovery operations shall be established in
each individual case in the consortium agreement or other agreements related to
the respective project.
Section 10
Non-Competition
No partner shall be permitted to compete directly or indirectly, on his own
behalf or on behalf of third parties, within the territory of Ukraine without
prior written approval.
Section 11
Preservation Clause
Should a stipulation of this agreement be or become invalid or should the
agreement contain an omission, the legal validity of the remaining stipulations
shall remain unaffected thereby. In place of the invalid stipulation, a valid
stipulation closest to the economic intent of the partners shall be considered
as having been agreed to; the same shall apply to an omission.
Section 12
Written Form Clause
There are no collateral contracts in addition to this agreement. Changes
and/or amendments shall be in writing. The same applies to a waiver of the
written form clause itself.
Hamburg New York
RWE-DEA Aktiengesellschaft EuroGas, Inc.
for Mineraloel und Chemie
/s/ Duly Authorized Officers /s/ Dr. Reinhard Rauball
Chairman of the Board
Dortmund, July 22, 1998
