As filed with the Securities and Exchange Commission December 2, 1999
SEC File No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM S-1
Registration Statement Under the Securities Act of 1933
________________
EuroGas, Inc.
(Exact name of registrant as specified in its charter)
______________________
942 East 7145 South, Suite 101-A
Midvale, Utah 84047
(801) 255-0862
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Hank Blankenstein
Chief Financial Officer
EuroGas, Inc.
942 East 7145 South, Suite 101-A
Midvale, Utah 84047
(801) 255-0862
(Name, address, including zip code, and telephone number,
Including area code, of agent for service)
______________________
Copies to:
Brian G. Lloyd, Esq.
Bryan T. Allen, Esq.
PARR WADDOUPS BROWN GEE & LOVELESS
185 South State Street, Suite 1300
Salt Lake City, Utah 84111
(801) 532-7840
______________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective
______________________
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the following box: [X]
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 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 statement for the
same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the securities
Act registration statement number of the earlier 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: [ ]
Proposed
Proposed Maximum
Maximum Aggregate
Amount to Offering Offering Amount of
Title of Each Class of be Price Per Price Per Registration
Securities to be Registered Registered(1) Share (2) Share (2) Fee
- --------------------------- ------------- --------- ---------- -------------
Common Stock 7,723,250 $.56 $4,325,020 $1,202
(1) Consists of 7,723,250 shares of Common Stock, which represents 200% of
the Registrant's estimate of a presently indeterminate number of shares
issuable upon conversion of 1,800 shares of the Registrant's 1999 Series C
6% Convertible Preferred Stock.
(2) Estimated solely for the purpose of calculating the registration fee
based upon the average of the high and low sales prices for the Common Stock
as reported on the Nasdaq Bulletin Board on November 24, 1999.
_________________________________
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 or until the Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
PROSPECTUS
7,723,250 Shares
EuroGas, Inc.
Common Stock
EuroGas, Inc. is engaged in acquiring rights to explore for and
exploit natural gas coal bed methane gas and other fuels in various
parts of the world. The selling shareholder identified in this
Prospectus is offering an indeterminate number of shares of EuroGas
Common Stock issuable upon conversion of 1,800 shares of EuroGas
1999 Series C 6% Convertible Preferred Stock issued to the selling
shareholder. For purposes of this Prospectus, EuroGas has
estimated that 3,861,625 shares of Common Stock will be issuable
upon conversion of the 1999 Series C 6% Convertible Preferred
Stock. This estimate has been computed assuming conversion of
1,800 shares of the 1999 Series C 6% Convertible Preferred Stock on
November 24, 1999 at the conversion rate of $.47 per share of
Common Stock. Because the number of shares of Common Stock to be
sold by the selling shareholder is subject to adjustment, this
Prospectus relates to a number of shares of Common Stock that is
equal to 200% of the estimated number of shares of Common Stock
issuable upon conversion of the 1999 Series C 6% Convertible
Preferred Stock.
The Common Stock is quoted on the Bulletin Board maintained by
NASD, Inc. (the "Bulletin Board") under the trading symbol "EUGS"
and is traded on various exchanges throughout Europe. The closing
sale price for the Common Stock as of November 24, 1999 was $.5625.
Per
Share Total
----- ----------
Estimated public offering price $.56 $4,325,020
Underwriting discounts and
commissions - -
Proceeds to EuroGas - -
Estimated proceeds to the selling
shareholder (1) $.56 $4,325,020
_________________________
(1) Based on 7,723,250 shares of Common Stock, which is
200% of EuroGas' estimate of a presently indeterminate number
of shares issuable upon conversion of the 1,800 shares of
outstanding 1999 Series C 6% Convertible Preferred Stock.
Consider carefully the Risk Factors beginning on page 1 of this
Prospectus before investing in the securities being sold with this
Prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
Prospectus. Any representation to the contrary is a criminal offense.
The date of this Prospectus is _________________, 1999
The information in this Prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This Prospectus is not an offer to sell these securities,
and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
<PAGE> ii
PROSPECTUS SUMMARY
This summary may not contain all of the information that you
should consider before investing in the Common Stock. You should
read the following summary together with the more detailed
information regarding EuroGas and the Common Stock being sold in
this offering, "Risk Factors," and our financial statements and
notes to those statements appearing elsewhere in this Prospectus.
THE COMPANY
We are engaged in the acquisition of rights to explore for and
exploit natural gas, coal bed methane gas, and other fuels in
various parts of the world. We currently have a partial or
complete interest in several projects, including the following:
. an exploratory-stage coal bed methane gas project
in Poland
. a majority equity interest in the capital stock
of a Canadian full-service oil and gas producer
. an exploratory-stage natural gas project in Slovakia
. an exploratory-stage natural gas project in Canada
. an exploratory-stage natural gas project in the
Sakha Republic
. an exploratory-stage talc deposit in Slovakia.
In addition, we have an exclusive right to negotiate the terms of
a joint venture arrangement with the Polish Oil & Gas Company
concerning a separate natural gas project in Poland, have recently
entered into agreements with respect to two natural gas projects
in Ukraine and have 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.
We had a working deficit of $(7,782,125) as of September 30, 1999,
and most of our partially- or wholly-owned projects require
significantly more capital than is currently available to us.
Accordingly, we expect to continue to seek equity and debt
financing from various sources and participation in our projects
by industry partners in order to obtain the necessary financial
resources and expertise for the long-term development of our
numerous projects. (See "DESCRIPTION OF BUSINESS AND PROPERTIES
OF THE COMPANY.")
Our principal executive offices are located at 942 East 7145
South, #101A, Midvale, Utah 84047. Our telephone number at that
location is (801) 255-0862. As used in this Prospectus, the terms
"we," "us," "EuroGas" and "the Company" refer to EuroGas, Inc. and
its subsidiaries.
THE OFFERING
The offering described in this Prospectus relates to the sale by
the selling shareholder of an indeterminate number of shares of
Common Stock (the "Shares"), presently estimated at 3,861,625 shares,
issuable upon the conversion (including shares of Common Stock
issuable in lieu of dividends) of 1,800 shares of our 1999 Series
C 6% Convertible Preferred Stock (the "Series C Preferred Stock")
issued to the selling shareholder.
iii
Securities Offered Indeterminate, estimated at 3,861,625
(1) (See "PLAN OF DISTRIBUTION")
Common Stock outstanding
before offering 86,830,838 shares(2)
Common Stock outstanding
after offering 94,554,078 shares(2)
Net Proceeds EuroGas will not receive any proceeds
from the sale of the Common Stock by the
Selling Shareholder. (See "USE OF PROCEEDS")
Trading Symbol The Common Stock is quoted on the Bulletin
Board (symbol EUGS)and is traded on the
Frankfurt Exchange (symbol EUGS.F),
the Berlin Exchange (symbol UGS.BE), the
Stuttgart Exchange (symbol EUGS.S), and the
Hamburg Stock Exchange (symbol EUGS.H.).
________________________
(1) This is an estimate of an indeterminate number of Shares
subject to this Prospectus. The estimate represents 200%
of the number of shares of Common Stock that would be issued
if the 1,800 shares of Series C Preferred Stock currently
outstanding were converted on November 24, 1999 at the rate
of one share of Common Stock per $.47 of liquidation preference
converted and assuming the Registration Statement of which this
Prospectus is a part (the "Registration Statement") becomes
effective after December 2, 1999 but prior to December 19,
1999. The number of Shares available for resale hereunder is
subject to adjustment and could materially differ from the
estimated amount depending upon the future market price of
the Common Stock and the occurrence of a stock split, stock
dividend, or other transaction resulting in an adjustment in
the number of Shares issuable upon conversion of the Series
C Preferred Stock. (See "DESCRIPTION OF SECURITIES TO BE
REGISTERED-- 1999 Series C 6% Convertible Preferred Stock.")
(2) This number does not include up to 14,750,000 shares of
Common Stock issuable upon the exercise of outstanding
options and warrants or the shares of Common Stock issuable
upon the conversion of currently outstanding Series C
Preferred Stock.
RISK FACTORS
You should read the "Risk Factors" beginning on page 1, as well as
other cautionary statements throughout this Prospectus, before
investing in the shares of Common Stock offered hereunder.
SELLING SHAREHOLDER
Arkledun Drive LLC (the "Selling Shareholder") is the registered
and beneficial owner of the 1,800 shares of Series C Preferred
Stock issued and outstanding. The Shares subject to this
Prospectus are the indeterminate number of shares of Common Stock
issuable upon conversion of the 1,800 shares of Series C Preferred
Stock.
PLAN OF DISTRIBUTION
The Shares may be sold by the Selling Shareholder 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. We will pay the expenses incident to the
registration of the offer and sale of the Shares to the public,
other than commissions and discounts of broker-dealers through
which such Shares may be sold. We do not intend to enter into any
agreement with any securities dealer concerning solicitation of
offers to purchase the Shares.
<PAGE> iv
RISK FACTORS
This Prospectus contains various forward-looking statements. These
statements can be identified by the use of the forward-looking
words "anticipate," "estimate," "project," "likely," "believe,"
"intend," "expect," or similar words. These statements discuss
future expectations, contain projections regarding future
developments, operations, or financial conditions, or state other
forward-looking information. When considering such
forward-looking statements, you should keep in mind the risk
factors noted in this section and other cautionary statements
throughout this Prospectus, any prospectus supplement, and our
periodic filings with the SEC. You should also keep in mind that
all forward-looking statements are based on management's existing
beliefs about present and future events outside of management's
control and on assumptions that may prove to be incorrect. If one
or more risks identified in this Prospectus, a prospectus
supplement, or any applicable filings materializes, or any other
underlying assumptions prove incorrect, our actual results may
vary materially from those anticipated, estimated, projected, or
intended.
Among the key factors that may have a direct bearing on our
operating results are risks and uncertainties described under
"Risk Factors," including those attributable to the lack of
significant operating revenues, exploration risks, the location of
many of our interests in politically unstable countries, and
uncertainties regarding our ability to obtain capital sufficient
to continue our operations and pursue proposed business strategy.
We do not intend to update any forward-looking statements, except
as may occur as part of our ongoing periodic reports filed with
the SEC.
EUROGAS ACTIVITIES
NEED FOR SIGNIFICANT FUNDS AND DILUTION
EuroGas has historically been undercapitalized. We had a working
deficit of approximately $(7,782,125) on September 30, 1999, but
most of our partially- or wholly-owned projects require
significantly more capital than is currently available to us.
Although we are unable to determine at this time the additional
amount of outside capital we will need or be able to raise in the
future, the interest of our shareholders will continue to be
diluted as we seek funding through the sale of additional
securities or through joint venture or industry partnering
arrangements. We have entered into a Subscription Agreement dated
May 29, 1998 (the "Series B Subscription Agreement") with Thomson
Kernaghan & Co., Ltd. (the "Series B Purchaser") to which it, as
agent for itself and certain beneficial holders, has agreed to
purchase an additional 6,500 shares of our 1998 Series B
Convertible Preferred Stock at the rate of $1,000 per share for a
total of $6,500,000, assuming certain market conditions are met.
One such condition precedent to the Series B Purchaser's
obligation to purchase additional shares of our 1998 Series B
Convertible Preferred Stock is that the market price of the Common
Stock be at least $3.00 per share. The closing sale price for a
share of the Common Stock on November 24, 1999 was $.5625.
Accordingly, the Series B Purchaser is presently under no
obligation to purchase any additional shares of 1998 Series B
Convertible Preferred Stock. We have not entered into other
arrangements under which any person is required, subject to
conditions precedent or otherwise, to purchase any of our securities.
Even if all conditions to the Series B Purchaser's obligations to
purchase the 1998 Series B Convertible Preferred Stock are
satisfied in the near future, and the Series B Purchaser elects to
purchase such 6,500 shares of 1998 Series B Convertible Preferred
Stock, such funding will likely be inadequate to meet our
projected needs. We can provide no assurance that we will be able
to raise through any means the funds necessary to fulfill our
current corporate plans or maintain our current operations.
<PAGE> 1
ABSENCE OF REVENUES
Prior to our acquisition of an approximately 50% interest in a
Canadian gas production entity in 1998, we had not earned any
revenues since our incorporation, other than a one-time $500,000
payment received in 1997 in connection with transferring certain
interests to Texaco. Because revenues earned by the recently
acquired Canadian entity will probably not be distributed to
EuroGas in the immediate future, we do not currently have a
source of revenues, do not anticipate any revenues in the near
term, and expect to continue to incur operating losses in the
foreseeable future. As a result, we are entirely dependent on our
existing working capital, financing from the sale of securities or
loans in the future, and/or amounts made available by industry
partners in the future. We expect to continue to incur
significant costs as part of our ongoing and planned projects and
do not anticipate that these costs will be offset fully, if at
all, by revenues for the foreseeable future. If we are unable to
raise capital from the sale of securities, loans, or industry
partnerships in the future, we will have to scale back our
operations and may, at some point, become insolvent.
EXPLORATION RISKS
Our assets and interests are primarily in methane gas, natural
gas, and fuel exploration and development projects. All such
projects are highly speculative, whether we are still at the
exploratory stage or have commenced development. We can provide
no assurance that any drilling, testing, or other exploration
project will locate recoverable gases or other fuels in sufficient
quantities to be economically extracted. Several test wells are
typically required to explore each concession or field. We may
continue to incur significant exploration costs in specific
fields, even if initial test wells are plugged and abandoned or,
if completed for production, do not result in production of
commercial quantities of natural gas or other fuel.
LACK OF INFRASTRUCTURE
The projects in which we have invested are located in areas of the
world, primarily eastern Europe and the former Soviet Union, in
which we believe there are significant reserves of natural gas,
methane gas, or other valuable hydrocarbons. These areas are
also locations in which the necessary infrastructure for
transporting, delivering, and marketing any natural gas, methane
gas or other fuels that may be recovered is significantly
underdeveloped or, in some cases, nonexistent. Even if we are able
to locate natural gas, methane gas, or other valuable fuels in
commercial quantities, we may be required to invest significant
amounts in developing the infrastructure necessary to support the
transportation and delivery of such fuels. We do not currently
have a source of funding available to meet these costs.
POLITICAL, SOCIO-ECONOMIC, AND OTHER LOCATION-RELATED RISKS
Our operations in Poland, Slovakia, Ukraine, and the Sakha
Republic carry with them certain risks in addition to the risks
normally associated with the exploration for, and development of,
natural gas and other fuels. Although recent political and
socio-economic trends in these countries have been toward the
development of market economies that encourage foreign investment,
the risks of political instability, a change of government,
unilateral renegotiation of concessions or contracts,
nationalization, foreign exchange restrictions, and other
uncertainties must be taken into account when operating in these
areas of the world. The terms of the agreements governing our
projects are subject to administration by the various governments
and are, therefore, subject to changes in the government itself,
changes in government personnel, the development of new
administrative policies or practices, the adoption of new laws,
and many other factors.
Moreover, we will be required to obtain licenses and permits on an
ongoing basis in connection with the drilling of wells, the
construction of transportation facilities and pipelines, the
marketing of any fuel that may be produced, and financial
transactions necessary for all of the foregoing. The rules,
regulations, and laws governing all such matters are subject to
change by the various governmental agencies involved. We can
provide no assurance that the laws, regulations, and policies
applicable to our interests in various countries in which our
projects are located will not be radically and adversely altered
at some future date.
<PAGE> 2
FUTURE LICENSES
In general, we have the right to conduct basic exploration on all
concessions or fields in which we have an interest. However, in
order to drill for, recover, transport or sell any gas or other
hydrocarbons, we will generally be required to obtain additional
licenses and permits and enter into agreements with various land
owners and/or government authorities. The issuance of most such
permits and licenses will be contingent upon the consent of
national and local governments having jurisdiction over the
production area. Moreover, even if obtained, such licenses,
permits, and agreements will generally contain numerous
restrictions and require payment by us of a
development/exploration fee, typically based on the market value
of the economically recoverable reserves. The amount of any such
fee and other terms of any such license, permit, or agreement will
affect the commercial viability of any extraction project. We can
provide no assurance that we will be able to obtain the necessary
licenses, permits, and agreements. Even if we do obtain such
items, the associated costs, delays and restrictions may
significantly affect our ability to develop the affected project.
SEC INVESTIGATION AND OTHER LEGAL MATTERS
We are presently subject to a formal order of investigation issued
by the SEC on August 1, 1995 to investigate whether violations of
applicable law may have occurred. In connection with such
investigation, we have produced numerous documents for the SEC,
and the SEC has questioned our current and past officers,
directors, former accountants, and other agents. We have not
been contacted by the SEC with respect to this matter for more
than two and one-half years, however, we cannot currently predict
the duration or outcome of this investigation.
If the SEC concludes that we or our representatives have violated
the securities laws, it has available a large range of civil and
criminal remedies. Such remedies include the suspension of
trading in the Common Stock, the levying of substantial fines, and
the exclusion of the current officers and directors of the Company
from participating in a public company. In addition, we are
subject to certain other pending or threatened legal claims. (See
"DESCRIPTION OF BUSINESS AND PROPERTIES OF THE COMPANY-Legal
Proceedings.") The adverse resolution of the SEC investigation or
any pending litigation affecting the Company would have a material
adverse effect on our operations and proposed business.
NO ASSURANCE OF COMMERCIAL PRODUCTION FROM THE COMPANY'S PROJECTS
Other than the production of an average of approximately 1,200
barrels of oil equivalent per day by Big Horn Resources Ltd., a
Canadian company in which we have an approximate 50% ownership
interest, none of the projects in which we own an interest is
presently producing gas or other hydrocarbons. Texaco drilled
and abandoned test wells on the concession in Poland in which we
own an interest, and we have drilled test wells on our Slovakia
concessions. None of these wells has been developed or commenced
production, and we can provide no assurance that any of our
projects will at any time commence production of any valuable
resource.
DEPENDENCE ON OFFICERS, KEY EMPLOYEES, AND CONSULTANTS
We are dependent on the services of Mr. Karl Arleth, the President
of the Company, and Mr. Hank Blankenstein, the Vice-President and
Chief Financial Officer of the Company. We are also dependent on
certain key employees, including Andrew J. Andraczke and J. Tony
Preuss, in connection with our business activities. Mr. Andraczke
has been instrumental in establishing its operations in Poland.
The loss of one or more of these individuals could materially
and adversely impact our operations. The Company has not
entered into employment agreements with any of these
individuals other than Mr. Arleth, and does not maintain key-man
life insurance on any of its officers or employees. (See
"MANAGEMENT-- Executive Officers and Directors.")
<PAGE> 3
RISK OF IMPAIRMENT OF RECORDED VALUE OF UNPROVED PROPERTIES
We capitalize costs related to unproved gas properties and
recognize the expenses for drilling and other exploration costs
that do not result in proved reserves at the time the well is
plugged and abandoned. We review our unproved properties
periodically to assess whether an impairment allowance should be
recorded. At September 30, 1999, we had capitalized costs related
to the acquisition of oil and gas properties not subject to
amortizing in the amount of approximately $33,946,386. Should
future events, such as the drilling of dry holes, evidence that an
impairment of recorded value has taken place, the adverse impact
on our results of operations for the period in which the
impairment is recognized could be significant. (See "DESCRIPTION
OF BUSINESS AND PROPERTIES OF THE COMPANY" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.")
RISKS OF ADVERSE WEATHER
Severe weather conditions frequently interrupt much of our
exploratory and testing work. Heavy precipitation sometimes make
travel to exploration sites or drilling locations difficult or
impossible. Extremely cold temperatures may delay or interrupt
drilling, well servicing, and production (if commenced, of which
we can give no assurance). The temperatures in 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. Even
if recoverable reserves are discovered in the Sakha Republic or
other regions prone to severe weather, the above-described adverse
weather conditions may limit production volumes, increase
production costs, or otherwise prohibit production during extended
portions of the year.
RISK FACTORS RELATED TO THE OIL AND GAS INDUSTRY
Volatility of Commodity Prices and Markets
The prices of oil, natural gas, methane gas and other fuels have
been, and are like to continue to be, volatile and subject to wide
fluctuations in response to numerous factors, including the
following:
. changes in the supply and demand for such fuels
. political conditions in oil, natural gas, and
other fuel-producing areas
. the extent of domestic production and
importation of such fuels and substitute fuels
in relevant markets
. weather conditions
. the competitive position of each such fuel as a
source of energy as compared to other energy
sources
. the refining capacity of crude purchasers
. the effect of governmental regulation on the
production, transportation, and sale of oil,
natural gas, and other fuels
Low and/or highly volatile prices for any fuel being
explored or produced at one of our projects will
adversely affect our ability to secure financing or enter
into suitable joint ventures or other arrangements with
industry participants. In addition, in the event we
commence recovery of fuel at any of our projects, a low
or volatile price for the fuel being recovered will
adversely affect revenue and other operations.
<PAGE> 4
OPERATING HAZARDS AND UNINSURED RISKS
Exploring for fuel, drilling wells, and producing fuel
involves numerous hazards, including the following:
. hazards such as fire, explosions, blowouts, pipe
failures, casing collapses, unusual or unexpected
formations and pressures
. environmental hazards such as spills, leaks,
ruptures, and discharges of toxic substances.
If any such event occurs, we may be forced to cease any or all of
our exploration, drilling, or production activities on a temporary
or permanent basis. In addition, such events may lead to
environmental damage, personal injury, and other harm resulting in
substantial liabilities to third-parties. We do not maintain
insurance against these risks. Even if we obtain insurance, we
may not be insured against all losses or liabilities 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 may
have a material adverse impact on our business and operations.
INTENSE COMPETITION IN THE OIL AND GAS INDUSTRY
The oil and gas industry is highly competitive. Most of our
current and potential competitors have far greater financial
resources and a greater number of experienced and trained
managerial and technical personnel than we do. We can provide no
assurance that we will be able to compete with, or enter into
cooperative relationships with, any such firms.
ENVIRONMENTAL REGULATIONS
Our operations are subject to environmental laws and regulations
in the various countries in which they are conducted. Such laws
and regulations frequently require completion of a costly
environmental impact assessment and government review process
prior to commencing exploratory and/or development activities. In
addition, such environmental laws and regulations may restrict,
prohibit, or impose significant liability in connection with
spills, releases, or emissions of various substances produced in
association with fuel exploration and development.
We believe that we are currently in material compliance with
applicable laws and regulations. However, we can provide no
assurance of such compliance or that applicable regulations or
administrative policies or practices will not be changed by the
various governmental entities. The cost of compliance with current
laws and regulations or changes in environmental laws and
regulations could require significant expenditures. Moreover, if
we breach any governing laws or regulations, we may be compelled
to pay significant fines, penalties, or other payments. Costs
associated with environmental compliance or noncompliance may have
a material adverse impact on our financial condition or results of
operations in the future.
GENERAL RISKS RELATING TO OFFERING
MARKET IMPACT OF OFFERING
This Prospectus relates to the sale of an indeterminate number of
shares of Common Stock by the Selling Shareholder. Such
indeterminate number includes the shares of Common Stock issuable
upon conversion (including shares issuable in lieu of dividends)
of 1,800 shares of Series C Preferred Stock issued to date. For
purposes of preparing this Prospectus, we have estimated
that 3,861,625 shares will be issuable upon conversion of the
Series C Preferred Stock. This estimate represents the
number of shares that would be issued if the 1,800 shares of
Series C Preferred Stock currently outstanding were converted on
November 24, 1999 at the rate of one share of Common Stock per
$.47 of liquidation preference converted and assuming the
Registration Statement becomes effective after December 2, 1999
but prior to December 19, 1999. The actual number of shares
issued to the Selling Shareholder and sold under this Prospectus
may differ materially depending upon the market price of the
Common Stock on the date of conversion and/or the occurrence of
dilutive transactions. The sale of such a significant block of
stock, or even the possibility of its sale, may adversely affect
the market price for the Common Stock.
LACK OF DUE DILIGENCE REVIEW
The Selling Shareholder reviewed certain information concerning
the Company, its business, and its proposed activities in
connection with its initial acquisition of shares of Series C
Preferred Stock. 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 any person who may
purchase the Shares from the Selling Shareholder or any other
person.
<PAGE> 5
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the approximately 86,830,838 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 an
adverse effect on the market price for the Common Stock.
SUBSTANTIAL AND IMMEDIATE DILUTIONA
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
As of the date of this Prospectus, there are outstanding warrants
and options to purchase up to 14,750,000 shares of Common Stock at
exercise prices ranging from $1.50 to $11.79 with a weighted
average exercise price of $3.43 per share. The existence of such
warrants and options may hinder future equity offerings by the
Company, and the exercise of such Warrants and Options may further
dilute the interests of all EuroGas shareholders. Future resale
of the shares of Common Stock issuable on the exercise of such
warrants and options may have an adverse effect on the prevailing
market price of the Common Stock. Furthermore, 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 (the "Preferred
Stock"). As of November 24, 1999, 86,830,838 shares of Common
Stock and 2,393,768 shares of Preferred Stock were issued and
outstanding, with an additional 14,750,000 shares of Common Stock
reserved for issuance on the exercise or conversion of the
warrants, options, and similar outstanding rights to acquire
Common Stock and 10,000,000 shares of Common Stock currently
reserved for issuance upon the exercise of Series C Preferred
Stock. In addition, the Company has no means to control the
timing of the conversion of convertible securities. The Company's
board of directors has authority, without action or vote of the
Company's shareholders, to issue all or part of the authorized but
unissued shares. Any such issuance will dilute the percentage
ownership of the Company's shareholders and may dilute the book
value of the Common Stock.
DETERMINATION OF PURCHASE AND EXERCISE PRICE
The terms of the Series C Preferred Stock were determined by
negotiations between the Company and the Selling Shareholder.
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
Shareholder may sell shares of Common Stock 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 becomes
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.
<PAGE> 7
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
Shares by the Selling Shareholder. The Company anticipates that
it will incur costs of approximately $57,000 in connection with
this Prospectus and the Registration Statement(s) of which it is a
part (the "Registration Statement"), including filing fees,
transfer agent costs, printing costs, listing fees, and legal and
accounting fees.
DETERMINATION OF OFFERING PRICE
The Shares subject to this Prospectus may be sold from time to
time at such prices as the Selling Shareholder 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 book or market value
of the Company's assets, its earnings, or any other recognized
criteria of value. We can provide no assurance that the Selling
Shareholder will sell any or all of the Common Stock subject to
this Prospectus.
DILUTION
The Shares subject to this Prospectus may be sold from time to
time at such prices as the Selling Shareholder shall determine may
be in their best interests and at which a willing buyer can be
found. The offering and/or purchase price for any of the Shares
you may purchase will be 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 SHAREHOLDER
Common Stock Beneficially Owned by Selling Shareholder
------------------------------------------------------
As of November 24, 1999 After Offering
-------------------------- ---------------
Shareholder Number Percent(1) Sold Number Percent
------------------ ------------- ---------- ----------- ------ -------
Arkledun Drive LLC 3,861,625 (2) 4.4% 3,861,625(2) 0 %
Commercial Centre
Grand Cayman
Cayman Islands, BWI
____________________
(1) Denominator includes the sum of 86,830,838 shares of
Common Stock outstanding as of November 24,1999 and 3,861,625
shares, which is EuroGas' current estimate of the number of
shares issuable to the Selling Shareholder upon conversion of
the 1,800 issued and outstanding shares of Series C Preferred
Stock.
(2) This is an estimate of the indeterminate number Shares
owned by the Selling Shareholder. Such estimate has been
computed assuming conversion of 1,800 shares of Series C
Preferred Stock on November 24, 1999 at the rate of one share of
Common Stock per $.47 of liquidation preference converted and
assuming the Registration Statement becomes effective after
December 2, 1999 but prior to December 19, 1999. The election
to convert is at the discretion of the Selling Shareholder for
the first two years following issuance, after which it is
mandatory. (See "DESCRIPTION OF SECURITIES TO BE REIGSTERED:
1999 Series C 6% Convertible Preferred Stock.").
<PAGE> 8
Arkledun Drive LLC is the registered and beneficial owner of the
1,800 issued and outstanding shares of Series C Preferred Stock.
PLAN OF DISTRIBUTION
Source Of Shares
The Shares being offered by the Selling Shareholder may be
acquired from time to time upon conversion of the 1,800 shares of
Series C Preferred Stock held by the Selling Shareholder.
The Selling Shareholder represented to the Company that it
acquired the shares of Series C Preferred Stock without any
present intention of effecting a distribution of the shares of
Common Stock issuable on conversion. However, in accordance with
the Registration Rights Agreement dated November 4, 1999, between
the Company and the Selling Shareholder (the "Registration Rights
Agreement"), the Company agreed to file this Registration
Statement registering the resale of the shares of Common Stock
issuable upon conversion of the Series C Preferred Stock by the
Selling Shareholder 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
cause the Registration Statement to cover the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock and
to keep the Registration Statement effective until all such shares
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 the filing of a
post-effective amendment to the Registration Statement, obtaining
its effectiveness, and filing any necessary amendments or
supplements to keep it effective.
The number of shares of Common Stock issuable on conversion of the
shares of the Series C Preferred Stock is indeterminate, since it
is in part based on the future market price of the Common Stock.
(See description under "DESCRIPTION OF SECURITIES TO BE
REGISTERED-- 1999 Series C 6% Convertible Preferred Stock.") 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 Shareholder.
SALE OF COMMON STOCK
The Shares may be sold from time to time by the Selling
Shareholder or by pledgees, transferees, or other successors in
interest. The Shares 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 Shareholder 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 Shareholder; (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 Shareholder, 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 Shares may be sold by the Selling Shareholder 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 Selling Shareholder has advised the
Company that it has not entered into any agreement regarding the
resale of the Shares. 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 Shares.
<PAGE> 9
DESCRIPTION OF SECURITIES TO BE REGISTERED
General
The Articles of Incorporation of the Company currently
authorize the issuance of up to 325,000,000 shares of Common Stock
and 5,000,000 shares of Preferred Stock. The Common Stock is
currently listed on the Bulletin Board. The board of directors of
the Company can authorize the issuance of additional shares of any
class of capital stock, up to the amount of the authorized capital
set forth in the articles of incorporation, without further action
by or approval of EuroGas shareholders.
This Prospectus relates solely to the sales of Common Stock
issuable to the Selling Shareholder upon conversion of the 1,800
shares of Series C Preferred Stock purchased by the Selling
Shareholder. A description of various rights of the Preferred
Stock is provided below to facilitate your understanding of the
relative rights of the Common Stock.
Common Stock
As of November 24, 1999, the Company had 86,830,838
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 shareholders. The 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 shareholders 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 shareholders
would not be able to elect any members to the board of directors.
The Company's bylaws provide that one-third of the issued and
outstanding shares of the Company constitutes a quorum for
shareholders' meetings, except to the extent that a greater
percentage quorum is required by statute.
The 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.
The 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 the holder 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.
1999 Series C 6% Convertible Preferred Stock
The Company has designated 1,800 shares of Preferred Stock as
Series C 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 Series C
Preferred Stock bear a dividend of 6% per annum of the liquidation
preference, pro rated to the date of conversion. The Company has
the option to pay such dividends in cash or 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 Series C Preferred
Stock so long as any shares of Series C Preferred Stock are
outstanding.
<PAGE> 11
Each of the 1,800 shares of Series C Preferred Stock is
convertible into a number of shares of Common Stock determined by
dividing the liquidation preference ($1,000) by the product of (i)
the average closing bid price of a share of common stock on the
five trading days preceding November 4, 1999 or the date of
conversion, whichever average is lower, multiplied by Applicable
Percentage (as defined below). (Number of shares = $1,000/(average
5 day closing bid price x Applicable Percentage)). The
"Applicable Percentage" is determined based on the schedule
provided below, with the "Effective Date" being the effective date
of the Registration Statement covering all shares of Common Stock
issuable upon conversion of the outstanding Series C Preferred
Stock and the "Closing Date" being November 4. 1999.
If the Effective Date is x days
after the Closing Date The Applicable Percentage is
not more than 15 days 85.0%
between 16 and 45 days 82.5%
between 46 and 75 days 80.0%
more than 75 days 77.5%
In addition, pursuant to a Supplemental Agreement dated November
4, 1999, between the Company and the Selling Shareholder, the
Company granted to the Selling Shareholder the right, during the
period beginning on December 19, 1999 and continuing until the
effective date of the Registration Statement covering the shares
of Common Stock issuable upon conversion of the Selling
Shareholder's Series C Preferred Stock, to exchange its shares of
Series C Preferred Stock for 8,500,000 shares of common stock of
Big Horn Resources, Ltd ("Big Horn Common Stock") held by the
Company at a rate equal to $1,000 divided by the product of the
Exchange Rate (as hereinafter defined) multiplied by the market
price of common stock of Big Horn Common Stock. The Exchange Rate
(as defined below). The "Exchange Rate" is determined based on
the schedule provided below, with the "Effective Date" being the
effective date of a post-effective amendment to the Registration
Statement covering all shares of Common Stock issuable upon
conversion of the outstanding Series C Preferred Stock and the
"Closing Date" being November 4. 1999.
If the Effective Date is x days after
the closing Date the Applicable Percentage is
between 46 and 75 days 80%
more than 75 days 77.5%
The Series C 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.
<PAGE> 11
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 dividends in cash or 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 so long as any shares of the 1998
Series B Convertible Preferred Stock are outstanding.
Each of the 8,000 shares of 1998 Series B Convertible Preferred
Stock initially issued under the Series B Subscription Agreement
was converted into that number of shares of Common Stock
determined by taking the sum of $1,000 plus the amount of any
accrued but unpaid dividends through the conversion date, and
dividing such sum by the lesser of (i) 125% of the average closing
bid price of the Common Stock, as reported by Bloomberg L.P., 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.
All other shares of Series B Convertible Preferred Stock have been
converted, or shall be converted, if and when issued and
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 the sum by the lesser of
(i) 125% of the average closing bid price of the Common Stock, as
reported by Bloomberg L.P., 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. All shares of 1998 Series B
Convertible Preferred Stock are subject to mandatory conversion,
at the respect rates set forth above, twenty-four (24) months
following the date of issuance.
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.
As of November 24, 1999, all of the 23,500 shares of 1998 Series B
Convertible Preferred Stock issued to date, together with accrued
dividends, had been converted into shares of Common Stock.
1995 Series Preferred Stock
The Company designated 2,391,968 shares of its Preferred Stock
as its 1995 Series Preferred Stock. Such 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 so long as shares of such stock remain outstanding. 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. As of November 24, 1999, there were 2,391,968 shares
of 1995 Series Preferred Stock issued and outstanding.
OTHER PREFERRED STOCK DESIGNATIONS
In 1996, the Company designated, authorized and issued 1,250,000
shares of 1996 Series Preferred Stock, all of which were converted
to an aggregate of 2,500,000 shares of Common Stock in 1997.
<PAGE> 12
On May 29, 1997, the Company designated, authorized and issued
15,000 shares of 1997 Series A Convertible Preferred Stock. This
series of preferred stock is nonvoting and accrues dividends at 6%
annually. The 1997 Series A Convertible Preferred Stock has a
liquidation of preference of $1,000 per share plus unpaid
dividends previously issued and outstanding series of Preferred
Stock. Each share of 1997 Series Preferred Stock, along with
unpaid dividends thereon, is convertible into Common Stock at the
rate of $1,000 plus accrued dividends divided by the lessor of (i)
125% of the average closing bid price for five trading days prior
to issuance or (ii) 82% of the average closing bid price for five
trading days prior to conversion. At November 24, 1999, all but
260 of the shares of 1997 Preferred Stock issued to date, together
with accrued dividends, had been converted into shares of Common
Stock.
During 1998 and 1997, the Company accrued dividends of $311,301
and $423,530, respectively, with respect to the Preferred Stock
outstanding. Of this amount, $150,163 and $301,324 was paid in
1998 and 1997 respectively by the issuance of Common Stock and
$260,130 and none was paid in 1998 and 1997 respectively in cash.
The cash payment may have been inappropriate under Utah law due to
the existence of a shareholders' 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 to designate 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
with respect to the Preferred Stock 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.
LEGAL MATTERS AND EXPERTS
Legal Matters
The validity of the issuance of the Common Stock issuable to the
Selling Shareholder upon conversion of the Series C Preferred Stock
and offered hereby is being passed upon for the Company by Parr
Waddoups Brown Gee & Loveless, P.C.
Experts
The consolidated financial statements of the Company as of
December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, 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 upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Big Horn Resources Ltd.
as of December 31, 1998 and 1997, and for the years then ended,
included in this Prospectus have been audited by KPMG LLP
independent chartered accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon 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.
<PAGE> 13
DESCRIPTION OF BUSINESS AND PROPERTIES OF THE COMPANY
GeneralEuroGas 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 exploration concessions and is in various stages of
identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop
production. The Company is also involved in co-generation and
several mineral reclamation projects. Unless otherwise indicated
in this Report, all dollar amounts are reflected in United States
dollars.
When used in this section, the "Company" includes EuroGas, Inc.,
and its wholly owned subsidiaries, Euro
Gas (UK) Limited, Danube International Petroleum Company
("Danube"), EuroGas Austria GmbH ("EG," previously OMVJ), EuroGas
Polska Sp. zo.o. ("EuroGas Polska") and EnergyGlobal A.G.
("EnergyGlobal"), and the subsidiaries of each of these
subsidiaries, including GlobeGas B.V. ("GlobeGas"), Pol-Tex
Methane, Sp zo.o. ("Pol-Tex"), McKenzie Methane Jastrebie Sp.
zo.o. ("MMJ"), Danube International Petroleum Holding B.V.
("Danube Netherlands"), EuroGas Deutschland GmbH, EuroGas Europe
BV, EuroGas Resources Limted, Central European Petroleum, NV
EuroSilesia Sp. zo.o, and Energetyka Lubuska. See "-History."
The following table provides a brief summary of the principal
projects in which EuroGas is presently engaged. These projects are
described in greater detail in the pages that follow the table.
SUMMARY OF EXISTING EUROGAS PROJECTS
Nature/Name Ownership Interest Status of
Country of Project (% Interest-Form) Project
- ------- ------------------------------- ------------------ --------------
Poland . Polish Methane Gas Concessions
. Pol-Tex Concessions (Nr. 134/93) 100%-Subsidiary Testing/Drilling
. Two Additional Concessions 50%--Joint Venture Early
Exploration
. New 111 sq. km. Concession 100%--Subsidiary Finalizing
Agreement;
Pre-Explora-
tion
. EuroSilesia Well Drilling and 51.4%--Subsidiary Actively Dril-
Servicing ling and
Servicing
. Carpathian Flysh/Foredeep Oil 50%--Joint Venture Evaluating
Seismic Data
Prior to Drill-
ing
.Energetyka Lubuska Power Plant 12.5%-Joint Venture Government
Evaluating
Proposal to
Construct.
.Zielona Gora Naatural Gas
Reservoirs and Plant 50%--Joint Venture Negotiating
Joint Venture;
Pre-Exploration
Ukraine .13 Oil and Methane Gas Properties 50%--Joint Venture Letter of
Intent to
Acquire; Pre-
exploration
.Ortinichska Oil Reserve and Operation Pre-exploration
Natural Gas Reservoir Agreement w/ Partners have
State-owned studied
Company reserves
.Three producing Oil Fields in Operation Studying
Western Ukraine and Poltava Agreement w/ Reservoir
Basin Ukranian Oil
Company
.Donetsk Coal Basin Methane Gas 50%--Joint Venture Testing/
Drilling in
late 1999
.300 sq. km. Coal-Bed Methane 50%--Joint Venture Testing/
Gas Project Drilling
Completed
est. end of
1999
Slovakia .Slovakian Oil & Gas Joint 50%--Joint Venture Testing/
Venture-Trebisov Natural Drilling
Gas Reservoir (some gas
shows; title
issues)
.Maseva Natural Gas Reservoir 67.5%-Joint Venture Pre-
Exploration
.Gemerska Talc Deposit 23%--2nd Tier Testing
Subsidiary Complete;
Seeking
Financing for
Development
Sakha
Republic TAKT Exploration Blocks Near 50%--Joint Venture Exploring
Lensk Property
Using
Seismic Tech-
niques
Canada .Big Horn Resources Ltd. 51% Subsidiary Producing
1,200 barrels
of oil equiv-
alent per day;
proven
reserves of
1.9 million
barrels of oil
equivalent at
December 31,
1998
.Beaver River Natural
Gas Field 15%-Joint Venture Drilling to
Revive
Abandoned
Natural
Gas Field
Slovenia .Operating Lubricant Refinery Agreement to Negotiations
Purchase From in Process
Government
Germany .Convertible Loan to Seiler $500,000 Loan Loan due May
Toxic Waste Company Convertible into 28, 1999
Equity Negotiation
in Process
for Repayment
ACTIVITIES IN POLAND
General. The Company believes that Poland offers an attractive
environment in which to explore for and develop oil, natural gas
and coal bed 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 Slovak Republic and on the
east by 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 and adopted a new constitution, which established
a parliamentary democracy, and began Poland's transition to a
market-based economy. In March 1999, Poland became a member of
NATO and is expected to join the European Union within the next
several years.
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
could provide a much less environmentally harmful source of energy
for Poland 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 (44 Tcf). Shortly
thereafter, Poland began to solicit bids for concessions to
explore for coal bed methane gas.
<PAGE> 17
Coal bed methane gas production has been occurring for some time
in the United States and has drawn attention in Poland due in part
to the joint EPA/AID study. 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 the
heavy hydrocarbons are removed from natural gas, 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.
The Company's Polish concessions were originally pursued by
management of GlobeGas as they realized that there was a growing
demand in Europe for this type of gas that is a cleaner and more
efficient source of energy than coal. In 1989, 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. Management believes that Poland's extensive
collection pipeline network may facilitate the transmission and
sale of any gas discovered on the Company's concessions.
The Polish Concessions and Related Matters. The Company's Polish
concessions were originally pursued by GlobeGas as management
realized that there was a growing demand in Europe for this type
of gas that is a cleaner and more efficient source of energy than
coal. In January 1993, the Company's wholly-owned subsidiary,
Pol-Tex, was awarded exploration and exploitation rights for coal
bed methane gas in a concession, Nr.134/93, granted to Pol-Tex by
the Ministry of Environmental Protection, Natural Resources and
Forestry, located in the Upper Silesian Coal Basin (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, ("Rybnicka"), a large coal mining
company owned by the Republic of Poland, to form MMR (now
Polt-Tex) to exploit a second coal bed methane concession, owned
by Rybnicka, also located in the Upper Silesian Coal Basin.
During 1999, Pol-Tex purchase the minority interest from Rybnicka
and during 1999, MMR combined with Pol-Tex. In March 1996, the
Company's subsidiary, MMJ ("MMJ") entered into a joint venture
agreement relating to a concession, owned by Kopalnia Wegla
Kamiennego SA, ("Jastrzebie"), another large coal mining company
owned by the Republic of Poland, to develop coal bed methane gas
production located in the same area. These three concession areas
(the "Polish Concessions") are located in the Upper Silesian Coal
Basin, covering approximately 92,000 acres in south central Poland.
In August 1997, the Company completed an agreement with Texaco to
transfer the Pol-Tex Concession, the largest of the coal bed
methane gas concessions held by the Company, to Texaco in exchange
for an initial payment of $500,000. The transaction included the
sale of assets and equipment having a fair market value of
approximately $200,000. Subsequent to the sale, Texaco drilled
six exploratory wells on the Pol-Tex Concession to complete its
appraisal and evaluation of the concession and spent over $12
million. However, Texaco determined not to proceed with the
project due to early gas production figures received from the
project which were considered uneconomic for Texaco and a
reduction in Texaco's world wide exploration budgets, which
included all Polish activities. Texaco has elected to curtail its
Polish coal bed methane operations.
Following a review of the information gathered by Texaco, the
Company concluded that EuroGas Polska may be able to economically
develop the concession due to its lower operating costs. EuroGas
has decided to buy back the concession rights and related maters
from Texaco. Early in 1999 Texaco made formal application to the
Ministry of Environmental Protection, Natural Resources and
Forestry to transfer the concession to EuroGas Polska. The
Ministry of Environmental Protection, Natural Resources and
Forestry has recently given verbal approval to issue a new
concession, to EuroGas Polska, to replace the one held by Texaco.
On March 19, 1999, EuroGas Polska and Texaco executed a purchase
agreement providing for Texaco's transfer of the usufruct
agreement to EuroGas Polska in exchange for a payment of $172,000.
The agreement is subject to approval by the Ministry of
Environmental Protection, Natural Resources and Forestry. In
connection with the 1997 transfer of Pol-Tex Concession, the
Company also granted Texaco a right of first refusal to acquire
control of the Company's subsidiaries Pol-Tex and MMJ. With its
planned return of the former Pol-Tex Nr. 134/93 concession, Texaco
also relinquished its option right to acquire majority interest in
<PAGE> 17
Pol-Tex and MMJ. The Company has operated these concession areas
through its subsidiaries Pol-Tex and MMJ. The Company is
presently negotiating a sale of, or joint venture or similar
arrangement with respect to, the Pol-Tex Concession. If such a
sale or joint venture is not consummated within the next few
months, the Company may be forced to recognize an impairment with
respect to the Pol-Tex Concession.
EuroGas Polska currently anticipates that it will place seven
wells in test production on the Pol-Tex Concession before the end
of the year. Because these wells were previously drilled by
Texaco and Pol-Tex, EuroGas Polska anticipates that the cost of
putting these wells into production will be approximately $800,000.
On October 13, 1997, the Company received additional concession
rights from the Polish Ministry of Environmental Protection of
Natural Resources and Forestry to explore and potentially develop
a 111 square kilometer coal bed methane concession located near
the Pol-Tex and MMJ concession areas. This concession was granted
Pol-Tex by the Ministry of Environmental Protection, Natural
Resources and Forestry in April of 1998 according to Polish
Government documents; however, the Company only recently received
the original concession paperwork. The Company plans to prepare a
feasibility study to explore the possibilities of drilling gas
wells for a combined heat and power plant project or other uses.
The concession agreement requires expenditure of $40,000 per year
pending completion of a feasibility study and negotiations with
third parties for the eventual purchase of natural gas.
During 1998, Pol-Tex acquired Katowice Drilling Enterprise,
subject to final governmental approval, through the Polish
governmental privatization program. Upon the payment of the
equity contribution described below, Pol-Tex will acquire a 51.4%
stake of EuroSilesia Sp. zo.o. ("EuroSilesia"), a new enterprise
formed by the Company and the Ministry of Treasury of the Republic
of Poland. The newly created company will drill and service wells
in Poland (Slask and Belchatow) and in the Ukraine (Western
Ukraine and Donetsk area). Pol-Tex proposes to obtain a
controlling interest in EuroSilsia by putting equity into the
newly created company of approximately $400,000. EuroSilesia,
currently employs 120 people in Poland.
On October 23, 1997, the Company completed an agreement with
Polish O&G Co. to mutually undertake, on a 50/50 cost basis,
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 interpretation
of the data generated by a $1.5 million wide-line seismic work
program which was conducted in the Rymanow-Leske area of the
Carpathian Mountains in southeastern Poland. In the framework of
the agreement, a study for the Rymanow-Lesko block (southeastern
Poland) was prepared. The results of the study, based on the
seismic exploration and geological evaluation, identified
substantial potential for oil and gas accumulations exceeding 50
billion cubic meters of gas and 60 million barrels of oil. The
potential reserve estimates are those of Polish O&G Co. and its
engineering staff and have not been independently verified by the
Company. The final report from Polish O&G Co. was to be received
during the second quarter of 1999. With positive results the
Company expects to be able to raise the funds necessary to fund
the project. The technical team expects to use the interpreted
data to select the site for drilling a deep well (5,000 to 5,500
meters).
The Company may seek to obtain an established industry partner to
participate in the proposed joint venture with Polish O&G Co.
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.
<PAGE> 18
In February 1999, the Company formed a consortium with National
Power Plc. (the largest power generation company in the UK) and
with a large German utility company, VEW Energie AG, ("VEW"), to
develop a power generation project in Zielona Gora, Western
Poland. The agreement calls for creation of a joint venture
company "Energetyka Lubuska". The venture submitted an offer to
regional Polish power company, EC Zielona Gora, ("Zielona Gora"),
to build a gas-fired combined heat and power plant. The proposed
power plant has been designed to deliver up to 180 Mwe and 80MWt.
The Company currently anticipates that the total investment
required to develop the project will be approximately $150
million. Of that amount, it is proposed that National Power Plc.
and VEW will pay approximately 55% and 37.5%, respectively, of
the total project costs. The Company will hold a 12.5% share in
"Energetyka Lubuska" and will be required to pay approximately
7.5% of the project cost. The Company presently anticipates that
the proposal will be approved by Zielona Gora within 60 days.
The Company has executed a memorandum of understanding with Erdol
und Erdgas Gommern, ("EEG"), a unit of Gaz de France, Paris, and
Bayernwerk/VIAG of Munich, Germany, to enter into negotiations to
develop several sizable proven gas reservoirs in Western Poland
and to build gas treatment facilities and gas transmission systems
to supply natural gas to the power plant in Zielona Gora. The
agreement calls for creation of a 50/50 joint venture with the
Polish partner. The Company presently anticipates that the
project will need an investment of approximately $80 million, in
addition to the $40 million already invested by Polish O&G Co.
ACTIVITIES IN UKRAINE
EuroGas has entered into a letter of intent with an Ukrainian
state-owned company, ZahidUkrgeologia, to acquire 13 Ukrainian oil
and gas properties, which include both standard oil and gas and
coal bed methane projects located in the western Ukraine. The
Company has recently entered into an agreement with RWE-DEA to
jointly establish a new company "RWE-DEA-EuroGas E+D (Ukraine)."
Under the terms and conditions of this agreement, the joint
company would give RWE-DEA the right to select those properties
that have promising oil and natural gas reserves for further
exploration and development. Under the terms of the agreement, the
Company and RWE-DEA will be equal owners, although RWE-DEA will
maintain administrative control and will be the operator with
respect to any proposed field activities. To date, the parties
have identified several potential joint ventures in the Ukraine.
The Company has also signed two joint operation agreements with
ZahidUkrGeologyia and Chernihivnaftogasgeologyia, Ukrainian
state-owned companies. The joint operation agreement with
ZahidUkrGeologyia calls for study and development of Ortinichska,
a potential oil reservoir in the western Ukraine with potential
reserves exceeding 70 million barrels of oil and the Kamienska
natural gas reservoir, with potential reserves exceeding 20
billion cubic meters. The reserves projections are those of
ZahidUkrGeologyia and its engineers and have not been
independently verified by the Company.
The project with Chernihivnaftogasgeologiya calls for evaluation
of two potentially large reservoirs, the Selukivska oil reservoir,
with potential reserves exceeding 100 million barrels, and the
Pivdinno-Berestivska oil-gas-condensate reservoir. In addition,
the Company will conduct exploration work for U-prospect in the
Donetsk-Dniepr Depression. According to Ukrainian engineering
estimates, these multiple oil and gas exploration concessions
contain potential oil reserves exceeding 1 billion barrels in
place and potential total gas reserves exceeding 500 billion cubic
meters in place. The reserves projections are those of
Chernihivnaftogasgeologiya and its engineers, and have not been
independently verified by the Company.
The Company has also executed a joint operation agreement with
Ukraine's largest oil company, Ukrnafta. The agreement calls for
creation of a joint venture to rejuvenate and increase the
production for three producing oil fields: Dolina and Kohanovka
(Western Ukraine) and Glinsk-Rozbyshewsk (Poltava Basin). The
Dolina field is the largest producing field in the Western
Ukraine, with estimates of oil in place exceeding 1 billion
barrels. The field produced over 120 million barrels of oil and,
with use of new technology, it is expected that a newly discovered
reservoir from in the field can exceed an additional 100 million
barrels. The Glinsk-Rozbyshewsk and Kohanovka fields are also
estimated to have substantial remaining reserves which could
exceed over 100 million barrels. Reservoir evaluation studies by
the Company are currently underway. The projected reserves are
those of Ukrnafta and its engineers, and have not been
independently verified by the Company.
In October 1998, the Company formed a joint venture company,
EuroDonGas, with MGO (Ukrainian Mining Company) to explore and
develop coal bed methane and natural gas reservoirs in the Donetsk
Coal Basin. MGO engineering documentation places the potential
recoverable reserves in excess of 20 billion cubic meters to a
depth of 1500 meters. The Company intends to drill its first
exploration well as soon as practicable.
The Company has also executed an agreement to create a new joint
venture with a private Ukrainian company, Vuhlegas. The project is
a coal-bed methane recovery and utilization operation. The
concession area is approximately 300 square km. It is estimated
by EuroDonGas that the area contains 6-10 trillion cubic feet
("Tcf") of natural gas. The foundation of the a joint venture
company Eurovuglegas was finalized in December 1998. EuroGas will
receive 70% of the revenues from the production until it has
recovered the full amount of its investment, following which the
revenues will be split on a 50/50 basis. The joint venture will
drill six coal bed methane/gas wells in the area of Gorska mine
(Donetsk area) as a part of a program to be financed by Global
Environmental Fund of the World Bank.
<PAGE> 19
ACTIVITIES IN SLOVAKIA
General. Slovakia was until recently part of Czechoslovakia. On
January 1, 1993, the Czech Republic and Slovak Republic
("Slovakia") 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.
Slovakia 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 agriculture 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.
As part of its effort 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
exploration for natural gas in Slovakia and the Czech Republic.
See "-History." Since the acquisition, the Company has focused
its efforts 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. The principal focus of the
Slovakian Oil & Gas Joint Venture is natural gas exploration and
development under a license covering 128,000 acres located in the
East Slovakian Basin, a northeastern extension of the Pannonian
Basin which covers large parts of Hungary and the southeastern
part of Slovakia
In March 1998, the Company acquired a 55% equity interest in
RimaMuran s.r.o. ("RimaMuran"), a closely-held entity whose
principal asset is a 43% interest in Rozmin s.r.o. ("Rozmin"), the
operating company which holds the Gemerska Talc Deposit located in
Roznava, Slovakia, approximately 50 kilometers west of Kosice in
eastern Slovakia. Thyssen Schachtbau GmbH, a leading
international mining engineering company, and Dorfner Group, a
leading German processing and refining company for industrial
minerals, hold the remaining shares in Rozmin. The Company
purchased its interest for a cash payment in the amount of $30,362
and 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).
Slovakian Oil & Gas Joint Venture. The activities of the Slovakian
Oil & Gas Joint Venture are conducted pursuant to a four-year
exploration permit granted on April 24, 1995 (the "License"). As
it continues its exploration and development on the area subject
to the License, the Slovakian Oil & Gas Joint Venture will seek to
acquire additional permits that have not yet been granted. The
Company is presently in discussions with officials of NAFTA and
the Slovakian government to discuss extension of or re-issue of
the License. Early negotiations indicate low risk potential for
the License not to be extended or re-issued. Prior to the
Company's acquisition of its interest in the Slovakia Oil & Gas
Joint Venture, eleven wells were drilled in the area covered by
the License. All of these wells had gas shows, although none were
completed for commercial production. The Company believes that
new wells can be drilled offsetting the old wells and that, if the
new wells have similar gas shows, they can be completed with
routine western completion 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. In the course
of such drilling, the Company encountered a 980 meter thick gas
column subdivided into an upper interval (appearing at 1575 meters
- 2100 meters below ground level) and a lower interval (2100
meters - 2555 meters deep). 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 preliminary
testing , conducted by Schlumberger, an internationally recognized
oil and gas service company, was conducted prior to the cleaning
up of the well and removing water from the well.
<PAGE> 21
Based upon the initial test results, the Company has engaged Ryder
Scott, a leading petroleum engineering firm, to prepare a reserve
analysis on the Trebisov reservoir. The joint venture also
completed a 148 sq. km. 3-D seismic survey covering the South
Cluster and a prospective area to the north. A survey to map
anomalous concentrations of gas in the surface soil samples was
completed in the licensed acreage to highlight areas for new
seismic surveys. In 1998, the Slovakian Oil & Gas Joint Venture
completed the remaining three wells of the six wells planned for
initial drilling. No drilling is planned in the licensed area
during 1999.
Under the terms of the joint venture agreement, the Company was
obligated to provide 75% ($4.98 million) of the projected initial
test phase funding of $6.64 million (including seismic testing)
and 60% ($4.08 million) of the projected capital investment cost
for the initial production phase of $6.8 million All funds
required for the initial test phase have been expended and 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.
During March 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 in that area.
The disputed area is located in the southern portion of the
property covered by the designations contained in the joint
venture agreement and is subject to a competing claim of ownership
by a private Slovakian company. To the extent that the Slovakian
Oil & Gas Joint Venture does not have the right to explore certain
areas as previously contemplated, the Company's expansion beyond
the Trebisov area may be limited. The Company has asserted a
claim against its joint venture partner for the misrepresentation
of the areas of mutual interest and has made a demand to be
properly compensated. There have been on going negotiations
between the Company and its joint venture partner and the Company
received indications that the issue will soon be resolved. The
Company has also notified the former Shareholder of Danube of a
claim against them by reason of this recent problem.
The Slovakian Oil & Gas Joint Venture has not established the
extent of any reservoir that may have been tapped by its
activities to date and has not entered into any contracts for the
sale or transportation of any gas that might be recovered. If the
Slovakian Oil & Gas 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 be discovered.
Other Concessions. The Company recently completed an agreement to
acquire a majority interest in Maseva, a private Slovakian company
which holds an oil and gas concession adjacent to the Trebisov
concession. This new concession, known as Maseva, has overlapping
claims with the Company's other concessions. The Company
completed exploration work consisting of a survey to map anomalous
concentrations of gas in surface soil samples to define areas for
new seismic surveys. The Company plans to conduct a three
dimensional seismic survey during the first six months of 2000.
The approximate cost will be $1.5 to $2.5 million. Based upon the
survey results, the Company intends to draft a comprehensive
development plan. No drilling is planned in the licensed area
prior to completion of the three dimensional seismic survey.
The Maseva agreement provides for the Company's acquisition of the
Maseva interest in exchange for the issuance of 2,500,000 shares
of the Company's Common Stock and the grant of two-year warrants
enabling the holder to purchase up to 2,500,000 shares of Common
Stock for $2.50 per share (adjusted from an original $5.00 per
share warrant price because of the decline of the price of the
Common Stock.) The division of the working interest for this
territory will now be 67.5% for the Company, rather than the 50%
split which governs the adjacent Trebisov joint venture, provided
that the Company carries the cost of drilling the first two wells
in the previously disputed area.
<PAGE> 21
By the purchase of the Maseva concession, the Company believes it
will solve any title problems it had with its original venture.
The Company has notified the former shareholder of Danube of a
claim against them by reason of the requirement to pay additional
consideration for concession interests originally represented as
owned by Danube.
In September of 1998, the Company acquired a 51% interest in
Envigeo Trade s.r.o.("Envigeo"), a Slovakian private company which
owns a 2,300 square kilometer appraisal and survey concession in
the northeast corner of Slovakia, referred to as the Carpathian
Flysch region, expiring in August 2001. This region extends into
Poland and Ukraine, where extensive discoveries of oil and gas
have been found. The acquisition was made from McCallan Oil and
Gas GmbH of Austria. The total price for the 51% participation
interest was $1,500,000, consisting of an initial payment of
$500,000, which was made in September 1998, and the balance of
$1,000,000, which was paid in December 1998. McCallan Oil has
spent over $300,000 in exploratory activities over the last 18
months. The Company is currently conducting a soil sampling
survey in the Envigeo concession. If the survey results are
favorable, the Company intends to pursue additional exploration
and, if justified, development and production.
Slovakian Talc Deposit. 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.
("Rozmin"), the operating entity which holds the Gemerska Talc
Deposit located in Roznava, Slovakia, approximately 50 kilometers
west of Kosice in eastern Slovakia. RimaMuran is a drilling
service company and presently employs approximately 70 people.
Thyssen Schachtbau GmbH, a leading international mining
engineering company, and Dorfner Group, a leading German
processing and refining company for industrial minerals, hold the
remaining ownership interest in Rozmin. 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. The Feasibility study was prepared by one of Germany's
leading engineering groups, Hansa GeoMin Consult, GmbH for
Deutsche Investitions- u. Entwicklungsgesellschaft mbH, ("DEG").
RimaMuran has the obligation to fund 44% 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, if
provided, would have to be provided by the Company.
The Company's majority owned subsidiary, RimaMuran, and the other
joint venture participants have continued to develop the Slovakian
talc deposit. The Company believes the exploitation of the talc
deposit will be particularly favorable due to a strong feasibility
study, the willingness of DEG, a wholly-owned financing subsidiary
of the German government, to participate, and the presence of
majority partners, Thyssen and Dorfner. The joint venture has
negotiated a non-recourse financing package which would give DEG a
10% equity participation in the project in exchange for financing
of which 9% would be contributed by RimaMuran and 1% by Thyssen
and Dorfner. The completion of the loan package is subject to the
receipt by DEG of a guarantee from Dorfner to purchase a portion
of the mined talc. Dorfner is now completing a market survey to
determine the amount of the guarantee it is willing to offer.
During the last two quarters of 1998, the Company advanced
$801,178, consisting of shareholder loans, to RimaMuran to fund
its participation in the project. In December 1998, the Company
advanced an additional payment of approximately $595,000 to Rosmin
on behalf of RimaMuran as its percentage portion of the
feasibility study and the budget.
During the fourth quarter of 1998, Rozmin entered into discussions
with Lucenac, a member of the Rio Tinto Group, which is considered
to be the largest mining company in the world. As a result of
these discussions, Lucenac has asked for drilling of two more core
holes in order to confirm previous test results and data that is
contained in the feasibility study performed by Thyssen and Dorfner.
ACTIVITIES IN THE SAKHA REPUBLIC
General. 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 (a)
the payment of $6,252,724, (b) the grant of an option to acquire
up to 2,000,000 shares of Common Stock at a per share exercise
price of $4.00 to $6.00 on yearly sliding scale, (c) a five
percent interest in the acquired company's net profits from
identified preliminary oil and gas licenses, and (d) a one percent
interest in the gross production of the TAKT Joint Venture outside
such licenses. Subsequently, the subsidiary's name was changed to
EuroGas (JAKUTIEN)Exploration GmbH ("EJ"). In January of 1999 the
name of EJ was changed to EuroGas GmbH ("EG").
<PAGE> 22
The Republic of Sakha(Yakutia)(often referred to as "Yakutia"
in English and as "Jakutien" in German) 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 and current
production is generally limited to providing fuel for heat and
energy to local urban and industrial complexes, partly because of
the general remoteness of the area and the poor transportation
network currently in existence. Since 1991, the Yakutian
government has put in place an economic and legal system that is
designed to encourage foreign investment and the export of
hydrocarbons. The Company's interest in acquiring EG was based in
large part on the Company's belief that EG's joint venture
operations are well-positioned to participate in the potential
international gas export project which has been envisioned
pursuant to feasibility studies conducted by Korean, Chinese, and
Japanese consortiums. This region is currently the subject of
multinational negotiations and discussions to build a pipe line
from the Irkutsk natural gas fields in Russia to China and Japan
with the possibility of connecting the large Sakha gas fields onto
the pipe line.
TAKT Joint Venture. EG's primary asset is a 50% interest in the
joint venture (known as "TAKT") with Sakhaneftegas, the national
oil and gas company of Yakutia. The conversion of TAKT to a joint
stock company with limited liability was approved by the Company
and Sakhaneftegas on December 1, 1997 and is expected to be
finalized in 2000. TAKT was formed to appraise, explore, develop,
and, when appropriate, export oil and gas reserves in two large
areas of interest located in Yakutia. 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 Yakutia and the
Russian Federation for the exploration, production, and
development of hydrocarbons located in the areas of interest.
TAKT currently holds two exploration blocks located near the city
of Lensk, which cover approximately 21,300 square kilometers
(approximately 8,225 square miles) located in the southeast
section 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 rights of first refusal on any
Sakha oil and gas projects offered by Sakhaneftegas to third
parties in the Sahka Republic. 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 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. The Company considers the
TAKT project as a long term investment. In a feasibility study
done by OMV, Austria's largest industrial concern, dated March 30,
1993, OMV estimated future revenues for the TAKT Joint Venture at
$26.08 billion with net profits to OMV (Jakutien) GmbH, now called
EuroGas Austria GmbH, at $2.68 billion. The projected revenues are
those of OMV and its engineers, and have not been independently
verified by the Company.
Principal work undertaken by TAKT during 1998 consisted of
reprocessing 1700 kilometers of seismic lines. The reprocessing
work was completed in January 1999 by Yakutskgeofisika, the
geophysical arm of Sakhaneftegas, in Yakutsk. TAKT has completed
a preliminary interpretation of the first 400 kilometers of
reprocessed data in the vicinity of the 314-2 well that
successfully tested gas in a large structure in 1992. A pilot
survey was conducted in the vicinity of this well to test the
applicability of a soil sampling method for detecting anomalous
concentrations of gas in surface soils. Results are expected
during the second quarter of 2000.
The Company presently anticipates that, during 1999, TAKT will
complete the interpretation and mapping of the reprocessed seismic
lines and will select a well location. The date for commencement
of this well will depend on technical discussions with local
drilling contractors and the ability of Sakhaneftegas to provide
its 50% contribution to the well cost. If the results of the
above mentioned soil survey are positive, a new survey will be
planned to cover an extensive part of the license area.
EG and Sakhaneftegas each appoint two members to the Board of
Directors of TAKT with EG 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. The Company has selected Paul
Hinterthur, the Company's Chief Executive Officer, and Dr. Mikhail
Tsikel, the former Vice President of Sakhaneftegas and an
independent industry consultant engaged by the Company, as its
representatives on TAKT's Board of Directors, with Mr. Hinterthur
serving as Chairman.
<PAGE> 23
ACTIVITIES IN CANADA
Big Horn. On October 5, 1998, EuroGas entered into a stock
purchase agreement with Oxbridge Limited, Rockwell Limited, and
Conquest Financial Corporation, three individual shareholders of
Big Horn Resources Limited ("Big Horn") and EuroGas referred to
herein collectively as "ORC." ORC had the right to purchase
10,000,000 shares of Big Horn common stock at $0.42 U.S. ($0.65
Canadian) per share. Under the terms of the stock purchase
agreement and a stock subscription agreement, EuroGas acquired the
rights of ORC to purchase 8,500,000 shares of Big Horn common
stock and paid Big Horn $4,205,500 U.S. ($6,500,000 Canadian) on
October 17, 1998. After receiving approval of the transaction
from the Toronto Stock Exchange in January 1999, Big Horn issued
8,500,000 Big Horn common shares to EuroGas and issued 1,500,000
Big Horn common shares to ORC. The 1,500,000 shares were paid for
by EuroGas but were issued directly to ORC as a finder's fee. In
addition, EuroGas paid ORC $500,000 U.S. as a finder's fee and for
an option to purchase an additional 3,000,000 Big Horn common
shares at $0.53 U.S. ($0.80 Canadian) per share from ORC and to
purchase warrants held by ORC to acquire 2,000,000 Big Horn common
shares at $0.97 U.S. ($1.50 Canadian) per share from Big Horn.
ORC verbally agreed further on October 5, 1998 to sell and EuroGas
agreed to purchase 5,600,000 common shares of Big Horn held by
ORC, including the 4,500,000 common shares described above, for
$2,940,224 U.S. ($4,480,000 Canadian) or $0.53 U.S. ($0.80
Canadian) per share. On March 31, 1999, EuroGas completed the
acquisition of the 5,600,000 shares of Big Horn common stock by
execution of promissory notes in the aggregate amount of
$1,840,224 U.S. and by the cancellation of a June 1998 note
receivable from Rockwell Limited in the amount of $1,100,000 U.S.
As a result, the Company has slightly more than a 50% interest in
Big Horn. Big Horn currently has production equivalent to
approximately 1,200 barrels of oil equivalent per day. At December
31, 1998, Big Horn had estimated proven reserves of approximated
811,000 barrels of oil and 6,881,700 mcf of natural gas. Its
estimated net future discounted cash flows at December 31, 1998
were approximately $6.4 million U.S. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
During 1999, Big Horn acquired the assets of Edinburgh Resources,
Ltd. for approximately $1,700,000 U.S. ($2,480,000 Canadian).
Edinburgh's assets include various working interests in producing
natural gas properties located north of Calgary, Alberta Canada,
and a gas processing facility.
Beaver River. In October 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 discovered and developed by Amoco Canada in the 1960s
and was one of the largest producing gas fields in British
Columbia, producing at a daily rate of approximately 250 to 300
MMcf. Technical problems, due to over production of natural gas,
led to excess water production and Amoco shut-in the field in
1978. In 1997 Wascana, a subsidiary of Canadian Occidental
Petroleum has entered into an agreement to attempt to reestablish
commercial natural gas production in the project using up-to-date
technology. 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 approximately $950,000. United Gunn
Resources, Ltd. holds an approximately 12% working interest in the
project. In April 1998, the Company entered into an Asset
Exchange Agreement with Beaver River Resources, Ltd., pursuant to
which the Company has subsequently acquired all of the issued and
outstanding shares of Beaver River Resources, Ltd. Beaver River
Resources, Ltd. currently owns a direct 16% percent working
interest in the project.
The operator of the Beaver River property, Wascana, is a
wholly-owned subsidiary of Canadian Occidental Petroleum Ltd.
Since April 1997, Wascana has re-completed one of the two
extraction wells on the field and a new salt water disposal well
next to the B-2 well. Drilling operations have moved to a second
well site to complete a work-over of that well. However, once
Wascana has spent all amounts required to earn its interest, the
parties will be bearing their relative percentages of the cost.
The Company expects that its carrying costs, directly and
indirectly, will be approximately $16,000 a month as Wascana has
notified the parties that it had spent $20,000,000 CDN through the
end of December 31, 1998. In early March of 1999, Wascana informed
the parties that it has begun test production on one of the
re-completed wells.
<PAGE> 25
ACTIVITIES IN SLOVENIA
In the Summer of 1998, the Company entered into an arrangement to
purchase and interest in an operating lubricant refinery facility
in Slovenia. At present, the company that controls the refinery,
"Mapetrol," is owned by the Slovenian government. In order to
participate, the Company was required to post a cash bond in the
amount of $337,723 (which cash bond is refundable if the
transaction is not completed). It is anticipated that the
privatization will take a number of months, after which additional
cash and stock will be required to finance the total package, all
the details of which have yet to be negotiated. The refinery is
presently producing high quality lubricating oils that have wide
distribution potential.
ACTIVITIES IN GERMANY
The Company has provided a short term loan, convertible to equity,
to Seiler Trenn-Schmelzanlagen Betriebs GmbH of Freiberg, Germany
("Seiler"). Seiler specializes in toxic waste disposal using a
proprietary methodology. Seiler presently has an operating plant
in Freiberg. The Company loaned Seiler $500,000 that is due and
payable on May 28, 1999, which has not been repaid. Seiler
Trenn-Schmelzanlagen has pledged to the Company substantially all
of the assets of the Freiberg plant as collateral for the loan.
The Company is presently evaluating the possibility of proceeding
with a possible equity investment into Seiler, which would likely
consist of conversion of the existing the loan to equity. Seiler
TSB GmbH is a subsidiary of Seiler SPCS Inc. a U.S. corporation.
During 1999, the Company made an investment of $600,000 into Hansa
GeoMin Exploration Ltd. of Duisburg, Germany. Hansa GeoMin
Exploration Ltd. is involved in numerous mineral reclamation
projects, particularly gold, on the African continent. During the
third quarter of 1999, the Company recognized an impairment of the
full value of such investment.
ACTIVITIES IN THE UNITED STATES
During the first quarter of 1999, the Company acquired shares of
the convertible preferred stock of Intergold Corporation for
$1,000,000, which has a controlling interest in several mining
claims in the central Idaho area. During the third quarter of
1999, the Company recognized an impairment of the full value of
such investment.
COMPETITION
In seeking to explore for, develop, and produce oil and gas
resources, 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
As of October 31, 1999, the Company had two administrative
employees located in Salt Lake City, Utah; one administrative
employees located in Dusseldorf, Germany; one administrative
employee and one engineer located in Berlin Germany (whose
employment is expected to be terminated on December 1, 1999); five
administrative employees located in London; and six technical and
field workers in Poland. 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 1998, 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 through 1999, but expects
thereafter to rely more on employees and permanent operating
personnel.
<PAGE> 25
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 FACILITIES
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 also currently occupied by the Company's public and
shareholder relations firm that currently provides services to the
Company in lieu of rent. The offices serve as the Company's
representative location in the Financial District of New York
City. The Company is using the New York offices periodically for
its board meetings as well as other meetings with members of the
investment community such as investment firms and banks.
The New York office maintains the Company's Website at
http://www.eugs.com and also has available, for interested
shareholders, maps and other material concerning the Company's
activities.
On October 1, 1999, the Company extended until September 30, 2002
its lease for property located at 942 East 7145 South, #101A,
Midvale, Utah. Rent for such lease is currently $1,836. 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 has an oral month-to-month lease on office with
approximately 2,230 square feet in Warsaw, Poland. The rental
amount on such lease is included in the compensation of one of the
Company's Poland-based technical employees. In February of 1999
the Company opened an office (approximately 2785 square feet) in
Berlin, Germany. The property is located at Friedrichstrasse 95
10117 Berlin, Germany. This office is leased under a 5-year
contract and has a monthly rental of approximately $9684. The
Company intends to terminate such lease on or about December 1, 1999.
The Company maintains an office (approximately 2500 square feet)
at 22 Upper Brook Street, Mayfair, London, UK. The Company has
subleased the remaining space to two other companies. In November
1998, the Company entered into a ten-year lease that provides for
a deposit of approximately $500,000 and an annual payment of
$1,740,000, of which the Company's portion is approximately
$580,000.
The Company maintains an office (approximately 400 square feet) at
Mitskiewich Sq. 8, Lviv,Ukraine. The agreement for the office was
signed in March of 1998. The terms of the lease is
month-to-month, and the monthly rent is approximately $250.
The Company's subsidiary GlobeGas maintains office space under an
agreement with First Alliance Trust, at Herengracht 466,
Amsterdam, The Netherlands. Under this agreement First Alliance
provides office space, accounting and legal functions for
GlobeGas. The agreement calls for payment for these services on
an as needed basis.
<PAGE> 26
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
EnergyGlobal, pursuant to which the former owners of EnergyGlobal
obtained voting control of Northhampton and EnergyGlobal became a
wholly-owned subsidiary of Northhampton. Energy Global had been
formed as a holding company for GlobeGas, an oil and gas operating
entity in which Energy Global held a minority interest. The
minority interest in GlobeGas was initially reported on the equity
method on Northampton's financial statements. The agreement with
EnergyGlobal 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 the Company's common stock to the
former owners of EnergyGlobal to reduce the prior Shareholder'
interest to approximately 10%. Thus, the former Shareholder of
EnergyGlobal became the controlling Shareholder of the Company,
which changed its name to EuroGas, Inc.
The original asset of EnergyGlobal was a 16% minority interest in
GlobeGas, a Netherlands corporation that held, through Pol-Tex, a
concession in Poland. (GlobeGas was an 85% partner with a
formerly state-owned Polish coal company in Pol-Tex and held
additional interest in two other 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 raised $3,380,963 in cash which was used to
acquire additional interests in GlobeGas and increased 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 Common Stock, and the issuance of 2,391,968 shares of newly
created Preferred Stock, convertible at the rate of two shares of
Common Stock for each share said series of 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 EnergyGlobal
and Northampton prior to the reorganization were immaterial, the
transaction has been accounted for as if GlobeGas were the
acquiring entity.
In 1996, the Company acquired the remaining 15% interest in the
Pol-Tex held by the Polish state coal company. In 1997, the
Company received additional concession rights in the form of a
usufruct from the Polish ministry of Environmental Protection of
Natural Resource and Forestry to explore and potentially develop a
111 square kilometer coal bed methane concession. This concession
was granted Pol-Tex by the Ministry of Environmental Protection,
Natural Resources and Forestry in April of 1998 according to
Polish Government documents. In 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. In connection with the transaction, the Company
also issued 12,500,000 shares of restricted Common Stock to
Chemilabco, which held an interest in the operating subsidiaries
of Danube and held options to participate in the Czech and
Slovakian operations of Danube. The issuance of the 12.5 million
share to Chemilabco was subject to Chemilabco providing a minimum
of $5,000,000 of financing to the Company in 1996.
In mid-1997, the Company acquired all of the issued and
outstanding stock of EG from OMV Inc., Austria's largest
industrial concern. EG's primary asset is a 50% interest in the
TAKT joint venture with Sakhaneftegas, the national oil and gas
company of the Sakha Republic. In late 1997, Pol-Tex completed an
agreement with Polish O&G Co. to undertake additional appraisal
and development activities for a large area located in the
Carpathian Flysch and tectonic Foredeep areas of Poland. 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.
In early 1998, the Company acquired a 55% interest in 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. In early 1998, the Company
entered into an arrangement to participate in a refinery facility
in Slovenia. In mid 1998, the Company completed an agreement to
acquire a majority interest in an adjacent oil and gas concession
known as Maseva which had overlapping claims with the Company's
other concessions and expects to conduct appraisal and exploration
work in that area during 1999. In mid 1998, the Company acquired
a 51% interest in Envigeo, a Slovakian private company, which owns
a 2,300 square kilometer appraisal and survey concession in the
North East corner of Slovakia, referred to as the Carpathian Flysh
region. In October 1998, the Company entered into an agreement
with Big Horn to purchase a 31% interest in Big Horn. As part of
the transaction, three parties that arranged the Company's
participation in Big Horn granted the Company a first right to
purchase all of their interest in Big Horn, at fair market prices,
with the intent of the Company to acquire a controlling interest
in Big Horn. Effective October 1998, the Company gained control
of the stock and warrants held by such third parties and now has
slightly over 50% of the total interest in Big Horn. Late in
1998, the Company provided a short term loan, convertible to
equity, to Seiler Trenn-Schmelzanlagen Betriebs GmbH of Freiberg,
Germany, a company that specializes in toxic waste disposal using
a proprietary methodology.
<PAGE> 27
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The information set forth as "NOTE 7 - SEGMENT INFORMATION" of the
consolidated financial statements of the Company included in this
Prospectus contains information regarding financial information
about foreign and domestic operations of the Company and its
subsidiaries.
LEGAL PROCEEDINGS
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of
the Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie
Methane Corporation (McKenzie Methane Corporation was an affiliate
of the former owner of Pol-Tex), asserted certain claims against
Pol-Tex and GlobeGas in connection with lending activities between
McKenzie Methane Corporation and the management of GlobeGas prior
to its acquisition by the Company. The claim asserted that funds
that were loaned to prior GlobeGas management may have been
invested in GlobeGas and, therefore, McKenzie Methane Corporation
might have had an interest in GlobeGas at the time of the
acquisition of GlobeGas by the Company. These claims were
resolved pursuant to a settlement agreement entered into in
November 1996 (the "KUKUI Settlement Agreement"). Under the terms
of the settlement agreement, the Company issued to the Bishop's
Estate (KUKUI's parent) 100,000 shares of Common Stock and an
option to purchase up to 2,000,000 shares of Common Stock at any
time prior to December 31, 1998. The option exercise price was
$3.50 per share if exercised within 90 days of the execution of
the Company's 1997 agreement with Texaco (the "Texaco Agreement");
$4.50 per share if exercised prior to December 31, 1997; and $6.00
per share if exercised prior to December 31, 1998. The Company
also granted registration rights with respect to the securities.
In March 1997, a trustee over certain of the McKenzie parties 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 alleges
that the Company paid inadequate consideration for its acquisition
of GlobeGas (which indirectly controlled the Pol-Tex Concession)
from persons who were acting as nominees for the McKenzie parties
or in fact may be operating as a nominee for the McKenzie parties
and therefore the creditors of the McKenzie parties are the true
owners of the proceeds received from the development of the
Pol-Tex Concession (KUKUI is also the principal creditor of the
McKenzie parties in these other cases.). The Company believes
that the litigation is without merit based on its belief that the
prior settlement with KUKUI bars any such claim, that the trustee
over the McKenzie parties has no jurisdiction to bring such claim
against a Polish corporation (Pol-Tex) and the ownership of Polish
mining rights, that the Company paid substantial consideration for
GlobeGas, and that there is no evidence that the creditors of the
McKenzie parties invested any money in the Pol-Tex Concession.
In June 1999, the Trustee filed another suit in the same bankruptcy
cases styled "Steve Smith, Trustee, Plaintiff vs. Eurogas, Inc.,
Globegas, B.V., Pol-Tex Methane, Sp.z.o.o., et al." Adversary
#99-3287. That suit sought sanctions against the Defendants for
actions allegedly taken by the Defendants during the bankruptcy
cases which the Trustee considered improper. The Defendants
filed a motion to dismiss the lawsuit which was granted in
August 1999. In July 1999, the Trustee also filed a suit in the
same bankruptcy cases styled "Steve Smith, Trustee, Plaintiff,
vs. Eurogas, Inc., Globegas, B.V., Pol-Tex Methane, Sp.z.o.o."
Adversary #99-3444. This suit seeks damages in excess of $170,000
for the Defendants alleged violation of an agreement with the
Trustee executed in March 1997, which agreement, in part, allowed
the Texaco Agreement to proceed. Eurogas disputes the allegations
and has filed a motion to dismiss or alternatively, to abate this
suit which motion is currently pending before the court.
Nonetheless, in order to avoid additional costs associated with
extended litigation, the Company is currently engaged in settlement
discussions with the Trustee in an attempt to reach a negotiated
resolution of the dispute.
On August 21, 1997, KUKUI asserted a claim against the Company in
an action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864
United States District for the Southern District of Texas, Houston
Division. KUKUI's claim is based upon an alleged breach of the
KUKUI Settlement Agreement as a result of the Company's failure to
file and obtain the effectiveness of a registration statement for
the resale by KUKUI of 100,000 shares of Common Stock delivered to
KUKUI in connection with the settlement. In addition, Bishop
Estate, KUKUI's parent, has entered a claim for failure to
register the resale of shares of Common Stock subject to its
option to purchase up to 2,000,000 shares of Common Stock. The
Company has denied any liability and has filed a counterclaim
against KUKUI and Bishop's Estate for breach of contract. The
parties are currently engaged in settlement discussions with
Kikui and the Bishop Estate in an attempt to reach a negotiated
resolution of the dispute.
<PAGE> 28
On October 11, 1999, an action was filed against Eurogas entitled
"Fred L. Oliver. Petroleum Ventures of Texas, Inc. R.A. Morse and
R. A. Morse, Trustee, Plaintiffs vs. Eurogas, Inc. and Beaver
River Resources, Ltd.,Defendants" in the State District Court of
Dallas County, Texas, Cause #DV99-08032-A. In this action,
Plaintiffs assert that Eurogas breached an agreement by failing
to seek registration of certain restricted and unregistered
shares issued to Plaintiffs in connection with Eurogas'
acquisition of its interest in Beaver River Resources, Ltd. The
action seeks rescission of the agreement, or in the alternative,
damages, and includes claims for costs, attorneys fees and
interest. Eurogas has filed an answer denying the allegations
contained in the lawsuit.
For the 1992 year, the Kingdom of the Netherlands assessed a tax
against the Company's operating subsidiary, GlobeGas in the amount
of approximately $911,000 even though it had significant operating
losses. The amount fluxuates on the financial statements of the
Company due to adjustments in exchange ratios. At September 30,
1999, the income tax liability recorded in the Company's financial
statements was $735,030. The Company has appealed the assessment
and has proposed a settlement which would result in a reduction in
the tax to $42,000. Pending final resolution, a liability for the
total amount assessed will continue to be reflected in the Company's
financial statements.
<PAGE> 29
Market for Common Stock
The Common Stock is quoted on the OTC Bulletin Board market
maintained by the National Association of Securities Dealers under
the symbol "EUGS" and is traded under the symbols "EUGF" on the
Frankfurt Stock Exchange, "EUGS" on the Stuttgart Exchange, "EUGM"
on the Munich Stock Exchange and EUGH on the Hamburg Stock
Exchange. As of November 24, 1999, there were 86,830,838 shares
of Common Stock issued and outstanding, held by approximately 249
holders of record (2,000 estimated beneficial owners).
The following table sets forth the approximate range of high and
low bids for the Common Stock during the periods indicated.
Such quotations reflect interdealer prices, without retail markup,
markdown, commissions, or other adjustments and may not necessarily
represent actual transactions in the Common Stock.
Quarter Ended High Bid Low Bid
-------------- -------- -------
Year Ended December 31, 1997
----------------------------
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
Year Ended December 31, 1998
----------------------------
March 31, 1998 6.8125 3.9375
June 30, 1998 5.75 3.625
September 30, 1998 4.97 2.0625
December 31, 1998 2.25 1.1875
Year Ended December 31, 1999
----------------------------
March 31, 1999 2.50 1.0312
June 30, 1999 1.0938 .5469
September 30, 1999 .9375 .5469
December 31, 1999 (through .875 .5467
November 24, 1999)
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 November 24, 1999, the high
and low bids for the Common Stock on the OTC Bulletin Board market
were $ .55 and $ .57, respectively.
DIVIDENDS
No dividends have been paid on the Common Stock, and the Company
does not have retained earnings from which to pay dividends. The
Company accrued cumulative preferred dividends of $311,304 and
$423,530 in 1998 and 1997, respectively. Of this amount, $165,007
was paid in 1998 by the issuance of shares of Common Stock in
connection with the conversion of a portion of the preferred
stock. 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 the Common Stock. Even if the
Company were able to generate the necessary earnings, it is not
anticipated that dividends will be paid in the foreseeable future,
except to the extent required by the terms of the cumulative
preferred stock currently issued and outstanding.
<PAGE> 30
Certain Financial Data
The following statement of operations and balance sheet data were
derived from the consolidated financial statements of the Company.
The selected financial data below should be read in conjunction
with the consolidated financial statements of the Company and the
notes thereto included in this Prospectus and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS" set forth in this Prospectus.
Statement of Operations Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31
-------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 3,326,629 $ - $ 879,404 $ - $ 6,262,591 $ - $ -
Net Loss $ 9,099,336 $ 5,720,220 $11,024,180 $11,501,899 $ 6,262,591 $ 4,327,581 $ 3,699,439
Loss Applicable $10,131,015 $ 5,930,569 $11,925,429 $ 6,413,183 $4,327,581 $ 3,699,439
to common
shares
Loss per $ 0.12 $ 0.09 $ 0.22 $ 0.22 $ 0.16 $ 0.013
Common Share
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
At Septmeber 30, At December 31,
------------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets $62,148,918 $52,074,750 $65,334,387 $40,754,543 $15,902,139 $ 7,680,367 $ 7,599,962
Long-Term - 349,284 1,788,294 3,157,789 10,631,547 4,011,750 3,011,750
Cash Dividends - - - - - - -
per Common
Share
Obligations
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly, and current reports, proxy
statements, and other information with the SEC. You may read and
copy any reports, statements, or other information that the
Company files at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference
Room. The SEC also maintains an Internet site
(http://www.sec.gov) that makes available to the public reports,
proxy statements, and other information regarding issuers, such as
the Company, that file electronically with the SEC.
In addition, the Company will provide, without charge, to each
person to whom this Prospectus is delivered, upon written or oral
request of any such person, a copy of any or all of the foregoing
documents (other than exhibits to such documents which are not
specifically incorporated by reference in such documents).
Please direct written requests for such copies to the Company at
942 East 7145 South, #101A, Midvale, Utah 84047, Attention: Hank
Blankenstein, Vice President. Telephone requests may be directed
to the office of the President at (801) 255-0862.
The Company also maintains an Internet Website at
http://www.eugs.com and also has available, for interested
shareholders, maps and other material concerning the Company's
activities.
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
General
The Company is engaged primarily in the acquisition of rights to
explore for and exploit oil, natural gas, coal bed methane gas and
mineral mining. The Company has also extended its business into
co-generation (power and heat) projects. The Company has acquired
interests in a number of large exploration concessions, for oil,
natural gas and coal bed methane gas, and is in various stages of
identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop
production. The Company currently has several projects in various
stages of development, including a coal bed methane gas project in
Poland, a natural gas project and several additional undeveloped
concession areas in Slovakia, a natural gas project in the Sakha
Republic (a member of the Russian Federation located in eastern
Siberia) and an interest in a talc deposit in Slovakia. The
Company has at least seven joint venture projects in the Ukraine
to explore for and exploit oil, natural gas and coal bed methane
gas with various Ukrainian State and private companies. The
Company has also created a consortium with the largest power
generation company in Great Britain, and with a large utility
company in Germany, to develop a co-generation power project in
Western Poland.
The Company has also acquired holdings in several oil and natural
gas projects in Canada. One acquisition has given the Company a
majority interest in a full-service oil and gas producing company.
The other project is a joint venture with a major oil and gas
company to reclaim one of Canada's largest natural gas fields.
The Company's principal assets consist of both proven and
developed properties, as well as unproven and undeveloped
properties. All costs incidental to the acquisition, exploration,
and development of such properties are capitalized, including
costs of drilling and equipping wells and directly-related
overhead costs, which include the costs of Company-owned
equipment. Since the Company has limited proven reserves and
established production, most of its holdings have not been
amortized. In the event that the Company is ultimately unable to
establish production or sufficient reserves on some of these
properties to justify the carrying costs, the value of the assets
will need to be written down and the related costs charged to
operations, resulting in additional losses. 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.
Recent Developments
Funding Activities. On November 4, 1999, the Company sold 1,800
shares of Series C Preferred Stock, resulting in net proceeds to
the Company of approximately $1,651,500. At September 30, 1999,
the Company had approximately $2.1 million in cash and cash
equivalents and $7.8 million in negative working capital.
Capital Expenditures. Effective during October 1998, the Company
completed its acquisition of additional shares of capital stock
of a Canadian oil and gas development and production company,
giving the Company an ownership interest in excess of 50% of the
outstanding shares of the Canadian company. In October 1998,
the Company purchased 31% of the outstanding shares of capital
stock of Big Horn Resources Ltd., of Calgary, Alberta, Canada
("Big Horn"). Also in October 1998, the Company verbally agreed
with other Big Horn shareholders to acquire additional Big Horn
shares. Effective October 1998, the Company completed its
acquisition of the additional Big Horn shares by execution of
promissory notes and the cancellation of a note receivable,
giving the Company an ownership interest in excess of 50% of
the outstanding shares of Big Horn capital stock. Big Horn is a
full-service producer of oil and natural gas, producing the
equivalent of approximately 1,200 barrels of oil a day, with
proven reserves of approximately 1.9 million barrels of equivalent
oil and with a net present value of approximately $6.4 million
as of December 31, 1998, based on a 10% valuation rate. The total
cost of the acquisition of Big Horn by the Company was $7,593,484.
Because of the temporary decline in oil prices, the acquisition
price paid by the Company reflects a premium over the Company's
proportionate share of the book value of Big Horn.
Outlook
In the past, the Company has focused its resources on pre-exploration
or early-exploration stage natural gas, coal bed methane gas, and
other hydrocarbon projects with little short-term revenue potential.
The Company believes that its investment in such early-stage projects will
prove profitable in the long-run and may continue to invest in
additional early-stage projects from time to time in the future.
Nonetheless, present management believes that, in order to balance
out its holdings, the focus of the Company's acquisition,
investment and development strategy should be on hydrocarbon
projects that have the potential to generate revenues within 1-5
years of the date of investment and is actively seeking such
investments.
Results of Operations-Nine Month Ended September 30, 1999 and 1998
The following table sets forth consolidated income statement data
and other selected operating data for the nine months ended
September 30, 1999 and 1998, respectively.
For the Nine Months Ended
September 30,
---------------------------
Revenues
1999 1998
---------- -----------
Oil and Gas Sales $ 3,326,629 -
Total Revenues 4,426,629 -
Operating Expenses
Oil and gas production 990,539 -
General and
Administrative 7,913,770 6,205,134
Depreciation, depletion
and amortization 1,428,166 19,066
Total Operating Expenses 10,332,475 6,224,200
Other Income (Expense)
Interest Income 190,051 857,615
Foreign currency
exchange gains
(losses), net 108,492 (67,507)
Realized loss on sale
and impairment of
securities (1,637,694) -
Interest Expense (405,731) (286,128)
Other Income (Expense)
Net (1,744,882) 503,980
Minority interest in
income of subsidiary (348,608) -
Net Loss (9,099,336) (5,720,220)
Loss Applicable to Common
Shares (10,131,015) (5,930,569)
<PAGE> 33
Revenues. Through September 1998, the Company had not generated
any revenues from oil and gas sales. As a result of the Company's
acquisition of the controlling interest in Big Horn, the Company's
results of operations for the nine months ended September 30, 1999
reflect oil and gas sales of approximately $3,326,629. For the
nine months ended September 30, 1998, the Company had no revenues.
Operating Expenses. General and administrative expenses were
$7,913,770 for the nine months ended September 30, 1999, compared
to $6,205,134 for the nine months ended September 30, 1998, an
increase of approximately 27%. The increase was primarily
attributable to increased personnel and administrative expenses,
additional costs associated with the closure of several offices
and significant expenses associated with the Slovakian projects.
Depreciation, depletion and amortization expenses were $1,428,166
for the nine months ended September 30, 1999, compared to $19,066
for the nine months ended September 30, 1998. The increase of
$1,409,100 was attributable to the Big Horn properties that were
amortized during the nine months ended September 30, 1999. Oil
and gas production expenses were $990,539 for the nine months
ended September 30, 1999, reflecting Big Horn production expenses.
The Company had no production expenses during the nine months
ended September 30, 1998.
Net Loss. The Company incurred a net loss of approximately
$9,099,336 for the nine months ended September 30, 1999,
compared to a net loss of $5,720,220 for the nine moths ended
September 30, 1998. The losses for both periods resulted
primarily from the absence of revenues, together with the
Company's ongoing operating expenses. The increase of $3,379,116
in net loss between the two nine-month periods was attributable
primarily to the Company realizing losses on securities in several
mineral property investments, a significant accrual for a
settlement of ongoing litigation and increased costs in the
administrative area. As indicated above, the Company is subject
to fluctuations in currency exchange rates which may result in
recognition in significant gains or losses during any period. The
Company recognized $108,492 in gains and $67,507 in losses as a
result of currency transactions during the nine months ended
September 30, 1999 and 1998, respectively. The net change in
foreign currency translation adjustment, which is a component of
accumulated other comprehensive loss, was a loss of $1,486,689 and
$160,309 for the nine months ended September 30, 1999 and 1998,
respectively.
<PAGE> 34
RESULTS OF OPERATIONS-1998, 1997, AND 1996 FISCAL YEARS
The following table sets forth consolidated income statement data
and other selected operating data for the years ended December 31,
1998, 1997 and 1996.
Revenues For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ------------ -----------
Oil and Gas $ 879,404 $ - $ -
Total Revenues 879,404 - -
Operating Expenses
Oil and gas production 305,009 - -
General and administra-
tive 7,804,401 6,716,635 4,739,380
Depreciation, depletion
and amortization 293,955 25,637 132,459
Impairment of mineral
interests & equipment 3,512,792 1,972,612 -
Total Operating
Expenses 11,916,157 8,714,614 4,871,839
Other Income (Expense)
Interest Income 593,570 517,845 18,588
Interest Expense (465,371) (3,680,090) (1,057,039)
Foreign currency exchange
gains (losses), net (130,419) 331,837 (401,141)
Other Income 152,776 43,123 48,840
Other Expense, Net 150,556 (2,787,285) (1,390,752)
Minority interest in
earnings of subsidiary 137,983 - -
Net Loss (11,024,180) (11,501,899) (6,262,591)
Revenues. Prior to 1998, the Company had not generated any
revenues from oil and gas sales. As a result of the Company's
acquisition of the controlling interest in Big Horn, the Company's
results of operations for 1998 reflect oil and gas sales of
approximately $879,404. For the 1997 and 1996 years, the only
material revenues received by the Company resulted from a one-time
sale of mineral interest and equipment in 1997, resulting in
revenues of approximately $500,000.
Operating Expenses. Operating expenses include general and
administrative expenses, depreciation and amortization, cost of
mineral interests and equipment and impairment of mineral
interests and equipment. General and administrative expenses were
$7,804,401 for 1998, compared to $6,716,365 for 1997, an increase
of 16 %. General and administrative expenses for 1997 reflected
an increase of 42 % from 1996 general and administrative expenses
of $4,739,380. The principal factors that contributed to the
increase from 1997 to 1998 were legal expenses incurred in
connection with sales of registered and unregistered securities,
ongoing securities compliance, litigation issues, additional
consulting fees, hiring of additional staff members and opening of
new offices. The increase from 1996 to 1997 was due primarily to
<PAGE> 35
payment of accrued and unpaid salaries to member of the staff and
certain consultants, hiring of new staff members and the
engagement of additional consultants. Depreciation and
amortization expenses were $293,955 for 1998, compared to $25,637
for 1997. During 1998 there was a significant increase in
properties that were amortized as compared to 1997. During 1998
the Company realized a significant impairment mainly due to the
acquisition of Big Horn. The interest was bought a fair market
value, but due to low oil prices for the last eighteen months the
actual book value of the investment was lower than fair market
value, requiring the Company to take an impairment charge. Under
the full-cost method by which the Company accounts for its mineral
interests in properties, costs of unproven properties are assessed
periodically and any resulting provision for impairment would
normally be charged to the proven property base. Because the
Company has limited proven properties, if impairment charges are
required, a portion of those charges may be charged to operations.
The impact of such reassessment and resulting impairment charges
could be significant during any particular period.
Income Taxes. Historically, the Company has not been required to
pay income taxes, due to the Company's absence of net profits.
For future years, the Company anticipates that it will be able to
utilize a substantial portion of its accumulated deficit, which
was approximately $46,082,787 as of December 31, 1998, to offset
profits, if and when achieved, resulting in a reduction in income
taxes payable.
Net Loss. The Company incurred net losses of approximately $11.0
million, $11.5 million and $6.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively. These losses were
due in large part to the absence of revenues, combined with
continued expansion of the Company's activities, primarily as a
result of acquisitions, the growth of the Company's administrative
expenses . The Company did see a limited amount of revenue from
one of its projects in 1998.
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 ($130,419), $332,000, and ($401,000) in gains
(losses) were recognized as a result of currency transactions in
the three years ended December 31, 1998, 1997, and 1996,
respectively. The Company had a cumulative foreign currency
translation adjustment of ($457,678) at December 31, 1998. The
Company does not currently employ any hedging techniques to
protect against the risk of currency fluctuations.
CAPITAL AND LIQUIDITY
The Company had an accumulated deficit of $56,213,802 at September
30, 1999, substantially all of which has been funded out of
proceeds received from the issuance of stock and the incurrence of
payables. At September 30, 1999, the Company had total current
assets of approximately $8.3 million and total current liabilities
of approximately $16.1 million, resulting in negative working
capital of approximately $7.8 million. As of September 30, 1999,
the Company's balance sheet reflected approximately $35 million in
mineral interests in unproven mineral properties, net of valuation
allowance. These properties are held under licenses or
concessions that contain specific drilling or other exploration
commitments and that expire within one to three years, unless the
concession or license authority grants an extension or a new
concession license, of which there can be no assurance. If the
Company is unable to establish production or resources on these
properties, is unable to obtain any necessary future licenses or
extensions, or is unable to meet its financial commitments with
respect to these properties, it could be forced to write off the
carrying value of the applicable property.
Throughout its existence, the Company has relied on cash from
financing activities to provide the funds required for
acquisitions and operating activities. The Company's financing
activities provided net cash of approximately $6.0 million and
$7.4 million during the nine months ended September 30, 1999 and
1998, respectively. Such net cash has been used principally to
fund cumulative net losses of approximately $9 million and $5.7
million, respectively. During the nine months ended September
30, 1999 and 1998, the Company's operating activities used net
cash of approximately $4.8 million and $6.9 million, respectively.
A portion of the Company's cash was used in acquiring mineral
interests, property and equipment, either directly or indirectly
through the acquisition of subsidiaries, with approximately $6.4
million and $5.8 million used in investing activities for the nine
months ended September 30, 1999 and 1998, respectively, of which
approximately $4.6 million and $4.1 million, respectively, was
used in acquiring mineral interests.
<PAGE> 36
While the Company had cash of approximately $2.0 million at
September 30, 1999, 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 the expenditure
of substantial amounts over a number of years before the
establishment, if ever, of production and ongoing revenues. As
noted above, the Company has relied principally on cash provided
from equity and debt transactions to meet its cash requirements.
While the Company currently has sufficient cash to meet its
short-term needs, it will require additional cash, either from
financing transactions or operating activities, to meet its
longer-term needs. There can be no assurance that the Company
will be able to obtain additional financing, either in the form of
debt or equity, or that, if such financing is obtained, it will be
available to the Company on reasonable terms. If the Company is
able to obtain additional financing or structure strategic
relationships in order to fund existing or future projects,
existing shareholders will likely continue experience further
dilution of their percentage ownership of the Company.
If the Company is unable to establish production or reserves
sufficient to justify the carrying value of its assets 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 unproven properties
will be charged to operations, leading to significant additional
losses.
Inflation
The amounts presented in the Company's consolidated financial
statements do not provide for the effect of inflation on the
Company's operations or its financial position. Amounts shown for
property, plant and equipment and for costs and expenses reflect
historical costs and do not necessarily represent replacement
costs or charges to operations based on replacement costs. The
Company's operations, together with other sources, are intended to
provide funds to replace property, plant and equipment as
necessary. Net income would be lower than reported if the effects
of inflation were reflected either by charging operations with
amounts that represent replacement costs or by using other
inflation adjustments. Due to inflationary problems in Eastern
Europe reflected in currency exchange losses, the Company has seen
losses on its assets values in those countries.
Year 2000 Issues
General. The Company is actively engaged in assessing and
correcting potential year 2000 ("Y2K") information system
problems. In short, the Y2K problem is a result of information
technology systems being designed to recognize the year portion of
a date as two rather then four digits, which means that years
coded "00" may be recognized as the year 1900, rather than the
year 2000. As a result, certain hardware and software products
may not properly function or may fail beginning in year 2000.
During 1998, the Company initiated an information system
implementation project (the "Project"), which affects nearly every
aspect of the Company's U.S. operations. In an effort to address
compliance issues, the scope of the Project was expanded to ensure
Y2K compliance for newly acquired software and hardware. The
Project has two significant phases that are designed to improve
both operating processes and information systems capabilities.
The first phase of the Project included hardware and software for
the Company's U.S. financial reporting operations. During 1998,
phase one was completed with hardware and software that has been
tested and certified as Y2K compliant. Phase two focused on the
Company's offshore financial reporting systems. In September,
1999, the Company received confirmation from its only offshore
service provider that the Company's offshore financial reporting
systems are Y2K compliant.
State of Readiness. The Company's information systems consist
principally of its financial system. The Company's financial
system includes general ledger, accounts payable, sales and use
tax calculations, payroll and human resources applications. Phase
one of the Project provided systems that are Y2K compliant for the
general ledger, accounts payable and payroll.
The Company's office support system includes network hardware and
operating systems, desktop and laptop computers and servers. The
Company is in the process of evaluating Y2K compliance for these
systems and has identified potential compliance issues primarily
related to imbedded time clocks. However, since the majority of
the Company's hardware has been replaced or upgraded over the past
two years, critical systems compliance is not expected to be a
major issue.
<PAGE> 37
Costs to Address Y2K Issues. As of September 30, 1999, the
Company had spent $50,000 on hardware and $25,000 for software in
connection with the Project.
Risks of the Company's Y2K Issues. The Company anticipates that
the risks related to its information and non-information systems
will be mitigated by current efforts being made in conjunction
with the Project, as well as ongoing assessment and correction
programs. However, the primary Y2K risk to the Company's
operations is service disruption from third-party providers that
supply telephone, electrical, banking, and financial reporting
services. Any disruption of these critical services would hinder
the Company's ability to operate. Therefore, efforts are
currently under way to obtain Y2K compliance certification from
the Company's major service providers. Most of the Company's
third-party joint venture organizations are outside of the U.S.,
particularly in eastern Europe. The Company has very little
control, other than awareness, over these organizations. Concern
about potential problems has been raised, but commitment to
compliance is beyond the Company's control.
Contingency Plans. The Company has prepared documentation that
could be used in the event of system and service disruption.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company conducts business in many foreign currencies. As
a result, it is subject to foreign currency exchange rate risk due
to effects that foreign exchange rate movements of those
currencies have on the Company's costs and on the cash flows which
it receives from its foreign operations. The Company believes that
it currently has no other material market risk exposure. To date,
the Company has addressed its foreign currency exchange rate risks
principally by maintaining its liquid assets in U.S. Dollars, in
interest-bearing accounts, until payments in foreign currency are
required, but does not reduce this risk by utilizing hedging
activities.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each director and executive
officer 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:
Name Age Positions with the Co. Director Since
---------------------- ---- ---------------------- --------------
Karl Arleth 50 President and Director April 1999
Hank Blankenstein 57 Vice-President,
Treasurer and Director December 1995
Director
Dr. Gregory P Fontanta 39 Direcvtor January 1996
Dr. Hans Fischer 53 Director January 1996
Rudolph Heinz 58 Director June 1999
BIOGRAPHICAL INFORMATION
The following paragraphs set forth brief biographical information
for each of the directors and executive officers of the Company:
<PAGE> 38
Karl Arleth is the President and a director of EuroGas. Prior to
joining EuroGas, Mr. Arleth served as a Director of Azerbaijan
International Operating Company (AIOC) shareholding for the
newly-formed BP Amoco p.l.c. from January 1998 to April 1999. In
this role, Mr. Arleth chaired the shareholder board of AIOC, and
an international consortium of 11 companies engaged in the
development and transportation of oil from Azeri-Chirag-Gunashli
offshore field complex in Azerbaijan. Previously, from January
1998 until January 1999, Mr. Arleth was President of Amoco Caspian
Se Petroleum Limited in Baku, Azerbaijan. From January 1997 until
January 1998, he was Director of Strategic Planning for Amoco
Corporation Worldwide Exploration and Production Sector in
Chicago. From 1992 until 1997, Mr. Arleth was President of Amoco
Poland Limited in Warsaw, Poland, where he was responsible for oil
and gas exploration and production projects as well as business
development activities that focused on natural gas transmission,
distribution, storage and electric power generation. As a result
of EuroGas' acquisition of a controlling interest in Big Horn, Mr.
Arleth and Mr. Blankenstein have served as directors of Big Horn
since July 1999.
Hank Blankenstein is Vice President, Treasurer and a director of
EuroGas. In addition to his service as a director since December
1995, Mr. Blankenstein has served as Vice President and Treasurer
since 1996. Mr. Blankenstein has had over 30 years experience in
various levels of management positions. He served as an
administrative and financial officer for American Micro Systems
and National Semiconductor, several large semiconductor
operations, 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.
As a result of EuroGas' acquisition of a controlling interest in
Big Horn, Mr. Arleth and Mr. Blankenstein have served as directors
of Big Horn since July 1999.
Dr. Gregory P. Fontana is a director of EuroGas. 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 has served as a director of EuroGas since
January 1996. 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.
Rudoph Heinz has served as a director of EuroGas since June 14,
1999. Mr. Heinz presently serves as the General Manager of the
German Federation of Money Managers, a position he has held since
May 1997. Prior to becoming an independent money manager and
Independent Financial Advisor, Mr. Heinz was manager of the
securities department for the Frankfurt based BHF Bank from April
1990 until June 1992 and was also responsible for that bank's
United States, Japan, and United Kingdom Subsidiaries. From 1983
until 1990, Mr. Heinz was the sole General Manager of DB Capital
Management GmbH, a Deutsche Bank subsidiary with operations in
Germany, United States, Japan and the United Kingdom.
KEY CONSULTANTS AND EMPLOYEES
The following paragraphs sets forth brief biographical information
for certain of the Company's key employees:
<PAGE> 39
Andrew K. Andraczke has been Vice President, Secretary, and a
member of the management committee of Pol-Tex since 1992, and is
responsible for business development and coordination of
administrative, legal, and political aspects of the Pol-Tex
venture. Mr. Andraczke also directs computer operations and
system support for the venture's exploration and production
activities. Mr. Andraczke holds B.Sc., M.Sc., and Ph.D degrees in
computer science and applications from the Computer Science
Institute of Polytechnical University in Warsaw where he also
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. 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. Mr. Andraczke 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 until 1987.
Dr. F. Horvath is currently a Professor at the Eotvos University
in Budapest, a position he has held for more than six years. 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 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.
FAMILY RELATIONSHIPS
Dr. Reinhard Rauball, the former Chairman of the Board of
Directors, and Wolfgang Rauball, formerly an independent
consultant to the Company, are brothers. Wolfgang Rauball was
instrumental the acquisition of the concessions in Poland, the
later acquisition of Danube, which holds concessions in Slovakia,
the acquisition of EG and the Yakutia Concession, Ukrainian joint
ventures, the acquisition of control of Big Horn Resources, the
participation in the British Columbia project, the participation
of RWE-DEA in the Ukraine, and the negotiations regarding the
participation of National Power, VEW, EEG, Polish Oil and Gas in
the matter relating to the proposed power plant in western Poland.
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 made loans to the Company. Dr. Reinhard
Rauball resigned from all of his positions with the Company on
February 18, 1999. Mr. Wolfgang Rauball resigned from all
position he has held with the Company and its subsidiaries on June
30, 1999.
EXECUTIVE COMPENSATION
The compensation of the Company's chief executive officer and the
other executive officers of the Company whose total cash
compensation for the 1998 fiscal year exceeded $100,000 (the
"Named Officers") is shown on the following pages in two tables
and discussed in a compensation report of the Board of Directors.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the three most recent fiscal
years of the Company, the compensation paid to the Named Officers.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
---------------------------- ------------- -------
Other Restri- All
Annual cted Opt- LTI Other
Compen- Stock ions/ Pay Compen-
Name and Principal Salary Bonus sation Awards SARs outs sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------- ---- -------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Hinterthur (1) 1998 $200,003 0 0 0 0 0 0
President, CEO and 1997 294,100 0 0 0 0 0 0
Director 1996 27,000 0 0 0 200,000 0 0
Reinhard Rauball, (2) 1998 $245,000 0 0 0 0 0 0
Chairman of the 1997 874,120 (3) 0 0 0 0 0 0
Board and Director 1996 33,000 0 0 0 250,000 0 0
Hank Blankenstein, 1998 $198,462 0 0 0 0 0 0
Vice President and 1997 300,000 0 0 0 0 0 0
Treasurer 1996 84,000 0 0 0 200,000 0 0
</TABLE>
(1) Paul Hinterthur died in May 1999.
(2) Dr. Rauball resigned as Chairman of the Board and as a
director effective February 18, 1999.
(3) Dr. Rauball was paid for services rendered to the
Company, that had not been reimbursed to him, beginning in
August of 1994 to the present.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant to Named Officers any options to acquire
shares of Common Stock during 1998. The Company has not granted
any stock appreciation rights to the Named Officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND YEAR END
OPTION VALUES
The following table sets forth the number of unexercised options
to acquire shares of Common Stock held on December 31, 1998 and
the aggregate value of such options held by the Named Officers.
The Named Officers did not exercise options to acquire shares of
Common Stock during 1998. As of December 31, 1998, the Company
had not granted any stock appreciation rights to any of the Named
Officers.
Unexer- Unexer-
Name Exercisable cisable Exercisable cisable
-------------------- --------------- --------- ----------- -------
Paul Hinterthur (1) 200,000 - $12,500 -
Reinhard Rauball 250,000 - 15,625 -
Hank Blankenstein 200,000 - 12,500 -
(1) Paul Hinterthur died in May 1999.
(2) Reflects the difference between the exercise price of
the unexercised options and the market value of shares of
Common Stock of December 31, 1998. The last transaction of
the Common Stock on December 31, 1998, the last trading date
of the Company's fiscal year, was $1.5469 per share.
<PAGE> 41
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 $600,000 in
1998, $1,260,253 in 1997 and $479,166 in 1996 to Wolfgang Rauball,
the brother of Reinhard Rauball, the former 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, and
$449,600 in 1996 to Armando Ulrich. The Company also paid
$240,000 in 1998, and $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.
This has been reduced to $2500 per month beginning in 1999. The
Company does not separately compensate its board members who are
also employees of the Company for their service on the board.
<PAGE> 42
COMPENSATION REPORT OF THE BOARD OF DIRECTORS
General.
Management compensation is overseen by the Board of Directors.
For the year ended December 31, 1998, the Board had not appointed
an independent compensation committee. As of December 31, 1998,
the Board of Directors consisted of two members of executive
management, Paul Hinterthur and Hank Blankenstein, and two outside
directors who are not employees of the Company. In July 1999, the
Board established a compensation committee comprised of Dr.
Gregory P. Fontana, Dr. Hans Fischer and Rudolph Heinz. The
following compensation report was prepared by the members of the
Board serving as of March 31, 1999.
Compensation Objectives.
In determining the amount of compensation for the Company's
executive officers, the Board of Directors is guided by several
factors. Because the Company has very few employees, compensation
practices are flexible in response to the needs and talents of the
individual officer and are geared toward rewarding contributions
that enhance shareholder value. Historically, the Company has
compensated senior management based on the perceived contribution
to the development of the Company's operations. This compensation
has consisted principally of salaries believed to reflect the
contributions of the respective officers. In addition, because
the Company has only recently begun to generate revenues from
operations and has attempted to preserve capital for development
of the Company's business and operations, the Company has used
stock options as a form of compensation for executive officers.
The use of stock options is designed to align the interests of the
executive officers with the long-term interests of the Company and
to attract and retain talented employees who can enhance the
Company's value. Although certain members of the Board of
Directors are also executive officers, none participates in the
determination of his own compensation.
Compensation Components.
The Company's compensation of its executive officers consists of
three components: base salary, bonuses and long-term incentive
awards in the form of stock options. The Board of Directors
establishes base salaries based primarily on its objective
judgment, taking into consideration both qualitative and
quantitative factors. Among the factors considered by the Board
are: (i) the qualifications and performance of each executive
officer; (ii) the performance of the Company as measured by such
factors as development activities and increased shareholder value;
(iii) salaries provided by other companies inside and outside the
industry that are the comparable size and at a similar stage of
development, to the extent known; and (iv) the capital position
and needs of the Company. The Board of Directors does not assign
any specific weights to these factors in determining salaries. It
does, however, attempt to maintain base salaries as low as
possible, consistent with the needs and status of the executive
officers, in order to preserve capital for future growth and
development.
From time to time, the Company may also compensate its executive
officers in the form of bonuses. Because the Company is presently
in the early stage of its development and does not have a history
of earnings per share, net income, or other conventional data to
use as a benchmark for determining the amount or existence of
bonus awards, any bonuses granted by the Board of Directors in the
near term will be based upon its subjective evaluation of each
individual's contribution to the Company. In some cases, however,
bonuses payable to executive officers may be tied to specific
criteria identified at the time of engagement. For the years
ended December 31, 1996, 1997 and 1998, the Board of Directors did
not pay bonuses to any executive officers. The Board's action was
based on its conclusion that, despite the superior personal
performance of the executive officers, no cash incentive bonuses
should be awarded due to the Board's desire to preserve capital
for future growth and development.
The third component of the Company's compensation structure
consists of the grant of stock options to compensate executive
officers and other key employees. In 1996, the Company adopted
the 1996 Stock Option and Award Plan, which is designed to give
each option holder an interest in preserving and maximizing
shareholder value in the long term, to reward option holders for
past performance and to give option holders the incentive to
remain with the Company over an extended period. Individual
grants are determined on the basis of the Board's assessment of an
individual's current and expected future performance, level of
responsibilities, and the importance of his or her position with,
and contribution to, the Company. In the year ended December 31,
1996, the Board awarded options to purchase 200,000 shares of
Common Stock, 250,000 shares of Common Stock and 200,000 shares of
Common Stock to Mr. Hinterthur, Dr. Rauball and Mr. Blankenstein,
respectively.
<PAGE> 43
Chief Executive Compensation.
Based upon the Board's subjective impression of the salaries of
presidents or chief executive officers of similarly situated
companies (both in and outside the industry), the Company's
progress in developing its interests, properties and operations
and exploiting its assets and the Board's subjective assessment of
the contributions of Mr. Hinterthur, the Board of Directors
determined to pay Mr. Hinterthur a base salary of approximately
$200,000 for the year ended December 31, 1998. Consistent with
the Board's desire to preserve capital for future growth and
development, the Board elected not to pay a bonus to Mr.
Hinterthur or any other executive officer for the 1998 fiscal
year. The Board did not grant any options under the stock option
plan during the 1998 fiscal year to Mr. Hinterthur or any other
executive officer. Mr. Hinterthur passed away in May 1999.
Use of Consultants.
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.
Respectfully submitted as of March 31, 1999,
Paul Hinterthur
Hank Blankenstein
Dr. Gregory P. Fontana
Dr. Hans Fischer
<PAGE> 44
Performance Graph
The following graph shows a comparison of cumulative shareholder
return for the Common Stock for the period beginning August 3,
1994 (the date the Common Stock was first quoted in the
over-the-counter market) and ending December 31, 1998, as well as
the cumulative total return for the NASDAQ Composite Index and the
Howard Weil, Blumberg Oilfield Service and Manufacturing Index.
The Peer Group Index is a price-weighted composite index comprised
of the cumulative shareholder return for forty-seven companies
involved in oilfield services.
The performance graph assumes that $100 was invested at the market
close on August 3, 1994 and that dividends, if any, were
reinvested for all companies, including those on the NASDAQ
Composite Index and the Peer Group Index.
[GRAPH]
<PAGE> 45
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of November 24, 1999,
information with respect to Common Stock owned beneficially by
each Director, by the Named Officers, by all Officers and
Directors as a group and by each person known by the Company to be
a beneficial owner of more than 5% of the outstanding Common
Stock. Except as otherwise indicated below, each person named has
sole voting and investment power with respect to the shares
indicated.
Name of Person or Group (1) Common Stock Options(2) Percent(3)
- --------------------------- ------------ ---------- ----------
Principal Shareholder:
Finance Credit and 2,175,833 2,220,000 4.9%
Development Corporation
"Chateau Amiral"
Bloc B-42, Boulevard
d'Italic
MC 9800 Monaco
Officers, Directors, and
Controlling Persons:
Karl Arleth - 1,000,000 1.2%
Dr Greogry P. Fontana - 100,000 *
Dr Hans Fischer - 100,000 *
Hank Blankenstein - 200,000 *
Rudolph Heinz - - -
--------- --------- ----
All Officers and Directors
as a Group (5 Persons) - 1,400,000 1.6%
_________________________
* Represents less than 1% of the issued and outstanding
Common Stock.
(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 exercisable within 60 days of
November 24, 1999 held by such individual or entity.
(3) The percentage indicated represents the number of
shares of Common Stock and options exercisable within 60
days held by the indicated shareholder divided by the sum of
(a) the number of shares subject to options exercisable by
such shareholder within 60 days and (b) 86,830,838, which
is the number of shares of Common Stock issued and
outstanding as of November 24, 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. Such
indemnification could include indemnification for liabilities
under the provisions of the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions,
the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as express in the Act and is therefore unenforceable.
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
Page
1. EuroGas, Inc. and Subsidiaries
Report of Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets-September 30, 1999
(Unaudited)
and December 31, 1998 and 1997 . . . . . . . . . . . F-3
Consolidated Statements of Operations for the
Nine Months
Ended September 30, 1999 and 1998 (Unaudited),
and for the
Years Ended December 31, 1998, 1997 and 1996 . . . . F-4
Consolidated Statements of Stockholders' Equity
(Deficit)
for the Years Ended December 31, 1996, 1997
and 1998 and
for the Nine Months Ended September 30, 1999
(Unaudited), . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the
Nine Months
Ended September 30, 1999 and 1998 (Unaudited),
and for the
Years Ended December 31, 1998, 1997 and 1996 . . . . F-7
Notes to Consolidated Financial Statements . . . . . . F-9
Supplemental Information on Oil and Gas
Producing Activities (Unaudited) . . . . . . . . . . .F-26
2. Unaudited Pro Forma Condensed Consolidated Financial
Statement
Unaudited Pro Forma Condensed Consolidated
Statement of Operations . . . . . . . . . . . . . . .F-29
Unaudited Pro Forma Condensed Consolidated
Statement of
Operations for the Year Ended December 31,
1998 . . . . . . . . . . . . . . . . . . . . . . . . .F-30
Notes to the Unaudited Pro Forma Condensed
Consolidated Statement
of Operations . . . . . . . . . . . . . . . . . . .F-31
3. Big Horn Resources Ltd.
Auditors' Report to the Directors. . . . . . . . . . .F-32
Consolidated Balance Sheets--December 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . .F-33
Consolidated Statements of Earnings and Deficit
for the Years
Ended December 31, 1998 and 1997 . . . . . . . . . .F-34
Consolidated Statements of Changes in Financial
Position
for the Years Ended December 31, 1998 an 1997 . . .F-35
Notes to Consolidated Financial Statements for
the Years
Ended December 31, 1998 and 1997 . . . . . . . . . .F-36
<PAGE> F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of EuroGas,
Inc., a Utah corporation, and Subsidiaries as of December 31, 1998 and 1997,
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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 1999
F-2
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1997
------------ ------------ ------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents . . . . . . . . .$ 2,070,092 $ 7,489,510 $ 17,247,667
Investment in securities available-for-sale 708,117 1,088,488 -
Trade accounts receivable . . . . . . . . . 1,689,146 1,107,508 -
Value added tax receivables . . . . . . . . 392,054 431,235 173,691
Receivable from joint venture partners. . . 2,455,695 2,293,048 -
Receivable from related party . . . . . . . - 200,000 -
Other receivables . . . . . . . . . . . . . 712,986 788,291 -
Other current assets. . . . . . . . . . . . 288,787 120,176 29,370
------------ ------------ ------------
Total Current Assets . . . . . . . . . . 8,316,877 13,518,256 17,450,728
------------ ------------ ------------
Property and Equipment - Full Cost Accounting
Oil and gas properties subject to
amortization . . . . . . . . . . . . . . . 18,890,849 17,008,936 -
Oil and gas properties not subject
to amortization. . . . . . . . . . . . . . 34,974,970 33,817,752 22,723,660
Other mineral interest property . . . . . . 167,814 167,814 -
Other property and equipment. . . . . . . . 849,585 580,868 1,010,772
------------ ------------ ------------
Total Property and Equipment . . . . . . 54,883,218 51,575,370 23,734,432
Less: accumulated depletion depreciation
and amortization . . . . . . . . . . . . . (1,748,830) (307,054) (767,177)
------------ ------------ ------------
Net Property and Equipment . . . . . . . 53,134,388 51,268,316 22,967,255
------------ ------------ ------------
Other Assets . . . . . . . . . . . . . . . . 697,653 547,815 336,560
------------ ------------ ------------
Total Assets . . . . . . . . . . . . . . . .$ 62,148,918 $ 65,334,387 $ 40,754,543
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable. . . . . . . . . . . . . .$ 3,769,834 $ 4,060,125 $ 1,532,949
Accrued liabilities . . . . . . . . . . . . 4,897,213 2,618,014 3,420,042
Accrued income taxes . . . . . . . . . . . 915,191 870,836 753,306
Notes payable - current portion . . . . . . 5,255,570 4,226,739 1,107,944
Notes payable to related parties. . . . . . 1,261,194 1,182,124 1,270,547
------------ ------------ ------------
Total Current Liabilities. . . . . . . . . 16,099,002 12,957,838 8,084,788
Long-Term Liabilities ------------ ------------ ------------
Notes payable . . . . . . . . . . . . . . . - 1,788,294 2,246,773
Notes payable to related parties. . . . . . - - 911,016
------------ ------------ ------------
Total Long-Term Liabilities. . . . . . . - 1,788,294 3,157,789
------------ ------------ ------------
Minority Interest. . . . . . . . . . . . . . 3,330,236 2,865,376 -
------------ ------------ ------------
Stockholders' Equity
Preferred stock - $0.001 par value;
5,000,000 shares authorized; issued
and outstanding: September 30, 1999 -
2,392,229 shares (unaudited), December
31, 1998 - 2,393,728 shares, December
31, 1997 - 2,392,228 shares;
liquidation preference: September 30,
1999 - $710,626(unaudited), December
31, 1998 - $1,999,197. . . . . . . . . . . 2,392 2,394 2,392
Common stock - $0.001 par value;
325,000,000 shares authorized; issued
and outstanding: September 30, 1999 -
86,830,838 shares (unaudited), December
31, 1998 - 76,254,630 shares, December
31, 1997- 62,283,934 shares. . . . . . . . 86,831 76,255 62,284
Additional paid-in capital. . . . . . . . . 101,507,263 94,563,961 61,659,345
Accumulated deficit . . . . . . . . . . . . (56,213,802) (46,082,787) (32,197,306)
Accumulated other comprehensive income. . . (2,663,004) (836,944) (14,749)
------------ ------------ ------------
Total Stockholders' Equity . . . . . . . . 42,719,680 47,722,879 29,511,966
------------ ------------ ------------
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . . .$ 62,148,918 $ 65,334,387 $ 40,754,543
============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-3
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and Gas Sales. . . . . . . . . .$ 3,326,629 $ - $ 879,404 $ - $ -
------------ ------------ ------------ ------------ ------------
Costs and Operating Expenses
Oil and gas production. . . . . . . 990,539 - 305,009 - -
Impairment of mineral interests
and equipment. . . . . . . . . . . - - 3,512,792 1,972,612 -
Depreciation, depletion, and
amortization . . . . . . . . . . . 1,428,166 19,066 293,955 25,637 132,459
General and administrative. . . . . 7,913,770 6,205,134 7,804,401 6,716,365 4,739,380
------------ ------------ ------------ ------------ ------------
Total Costs and Operating
Expenses . . . . . . . . . . . 10,332,475 6,224,200 11,916,157 8,714,614 4,871,839
------------ ------------ ------------ ------------ ------------
Other Income (Expenses)
Interest income . . . . . . . . . . 190,051 857,615 593,570 517,845 18,588
Foreign exchange net gains (losses) 108,492 (67,507) (130,419) 331,837 (401,141)
Interest expense. . . . . . . . . . (405,731) (286,128) (465,371) (3,680,090) (1,057,039)
Loss on sale and impairment
of securities. . . . . . . . . . . (1,637,694) - - - -
Minority interest in income
of subsidiary. . . . . . . . . . . (348,608) - (137,983) - -
Other income. . . . . . . . . . . . - - 152,776 43,123 48,840
------------ ------------ ------------ ------------ ------------
Total Other Income (Expense) . . (2,093,490) 503,980 12,573 (2,787,285) (1,390,752)
------------ ------------ ------------ ------------ ------------
Net Loss . . . . . . . . . . . . . . (9,099,336) (5,720,220) (11,024,180) (11,501,899) (6,262,591)
Preferred Dividends. . . . . . . . . (1,031,679) (210,349) (2,861,301) (423,530) (150,592)
------------ ------------ ------------ ------------ ------------
Loss Applicable to Common Shares . .$(10,131,015) $ (5,930,569) $(13,885,481) $(11,925,429) $ (6,413,183)
============ ============ ============ ============ ============
Basic and Diluted Loss Per
Common Share. . . . . . . . . . . .$ (0.12) $ (0.09) $ (0.22) $ (0.22) $ (0.16)
============ ============ ============ ============ ============
Weighted Average Number of Common
Shares Used In Per Share
Calculation . . . . . . . . . . . . 82,182,414 63,918,059 64,129,062 54,705,726 41,059,000
============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-4
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
---------------------- ----------------------- Paid-in Accumulated Comprehen- Equity
Shares Amount Shares Amount Capital Deficit sive Loss (Deficit)
---------- ---------- ----------- ---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
------------
Net loss . . . . . . . . . - - - - - (6,262,591) - (6,262,591)
Dividends on preferred
shares. . . . . . . . . . - - - - - (150,592) - (150,592)
------------
COMPREHENSIVE LOSS (6,413,183)
Issuance for cash. . . . . - - 18,912 19 6,789 - - 6,808
Issuance upon conversion
of debentures . . . . . . - - 1,128,917 1,129 3,340,621 - - 3,341,750
Issuance as settlement
costs . . . . . . . . . . - - 22,000 22 100,678 - - 100,700
Issuance of 1996 Series
preferred and common for
purchase of subsidiary. . 1,250,000 1,250 15,000,000 15,000 499,763 - - 516,013
---------- ---------- ----------- ---------- ------------ ------------ ---------- ------------
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)
------------
Net loss . . . . . . . . . - - - - - (11,501,899) - (11,501,899)
Dividends on preferred shares - - - - - (423,530) - (423,530)
------------
COMPREHENSIVE LOSS . . . .
(11,925,429)
------------
Issuance of common stock and
2,200,000 options for cash,
net of $75,000 offering
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 acquisition 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 dividends . . . . (14,740) (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
---------- ---------- ----------- ---------- ------------ ------------ ---------- ------------
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
------------
Net loss . . . . . . . . . - - - - - (11,024,180) - (11,024,180)
Dividends on preferred
shares. . . . . . . . . . - - - - - (2,861,301) - (311,301)
Net change in unrealized
losses on securities. . . - - - - - - (379,266) (379,266)
Translation adjustments. . - - - - - - (442,929) (442,929)
------------
COMPREHENSIVE LOSS . . . . (12,157,676)
Issuance of 1998 Series
preferred shares for cash,
net of $1,275,005 offering
costs . . . . . . . . . . 17,000 18 50,000 50 15,724,927 - - 15,724,995
Beneficial conversion feature
of 1998 Series preferred
shares. . . . . . . . . . - - - - 2,550,000 - - 2,550,000
Conversion of 1999 Series
preferred shares and
related dividends . . . . (15,500) (16) 8,860,196 8,860 156,163 - - 165,007
Issuance for financing and
other services. . . . . . - - 60,500 61 226,064 - - 226,125
Issuance upon exercise of
stock options for cash. . - - 100,000 100 149,900 - - 150,000
Issuance of stock and
warrants for oil and gas
property interests. . . . - - 4,900,000 4,900 14,097,562 - - 14,102,462
---------- ---------- ----------- ---------- ------------ ------------ ---------- ------------
BALANCE - December 31,
1998. . . . . . . . . . . 2,393,728 $ 2,394 76,254,630 $ 76,255 $ 94,563,961 $(46,082,787) $ (836,944) $ 47,722,879
========== ========== =========== ========== ============ ============ ========== ============
(Continued)
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-5
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
---------------------- ----------------------- Paid-in Accumulated Comprehen- Equity
Shares Amount Shares Amount Capital Deficit sive Loss (Deficit)
---------- ---------- ----------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 31,
1998. . . . . . . . . . . 2,393,728 $ 2,394 76,254,630 $ 76,255 $ 94,563,961 $(46,082,787) $ (836,944) $ 47,722,879
------------
Net loss (unaudited) . . . - - - - - (9,099,336) - (9,099,336)
Dividends on preferred shares
(unaudited) . . . . . . . - - - - - (1,031,679) - (1,031,679)
Net change in unrealized
losses on securities
(unaudited) . . . . . . . - - - - - - (1,976,514) (1,976,514)
Reclassification adjustment
for realized losses on
securities included in
net loss. . . . . . . . . - - - - - - 1,637,694 1,637,694
Translation adjustments
(unaudited) . . . . . . . - - - - - - (1,487,240) (1,487,240)
COMPREHENSIVE LOSS (unaudited) (11,957,075)
------------
Issuance of Series B 1998
preferred stock for proceeds
of $6,500,000 less $487,500
in issuance costs
(unaudited) . . . . . . . 6,500 6 - - 6,012,494 - - 6,012,500
Beneficial Conversion feature
of 1998 Series preferred
shares (unaudited). . . . - - - - 901,875 - - 901,875
Conversion of Series B
preferred stock plus accrued
dividends of 49,729 shares,
or $39,501 for the nine
months ended September 30,
1999 (unaudited). . . . . (7,910) (8) 10,576,208 10,576 28,933 - - 39,501
---------- ---------- ----------- --------- ------------- ------------ ----------- ------------
BALANCE - September 30, 1999
(Unaudited) . . . . . . . 2,392,318 $ 2,392 86,830,838 $ 86,831 $ 101,507,263 $(56,213,802) $(2,663,004) $ 42,719,680
========== ========== =========== ========= ============= ============ =========== ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-6
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss. . . . . . . . . . . . . . $ (9,099,336) $ (5,720,220) $(11,024,180) $(11,501,899) $ (6,262,591)
Adjustments to reconcile net loss
to cash provided by operating
activities:
Impairment of mineral interests
and equipment. . . . . . . . . . - - 3,512,792 1,972,612 -
Depreciation, depletion, and
amortization . . . . . . . . . . 1,397,073 19,066 293,955 25,637 132,458
Expenses paid by issuance of
notes payable. . . . . . . . . . - - - 1,321,295 -
Compensation paid by issuance of
common stock . . . . . . . . . . - - 226,125 - 351,808
Minority interest in income
of subsidiary. . . . . . . . . . 348,608 - 137,983 - -
Loss on sale of securities
available-for-sale . . . . . . . 1,637,694 - - - -
Exchange (gain) loss. . . . . . . (108,492) 67,507 113,294 (331,837) (401,141)
Changes in assets and liabilities,
net of acquisitions:
Trade receivables . . . . . . . (534,686) (365,360) (72,121) - -
Other receivables . . . . . . . (558,384) - (491,783) 26,510 (97,595)
Prepaid expenses. . . . . . . . (180,158) (118,133) - - -
Accounts payable. . . . . . . . 556,814 (621,443) (734,515) 1,814,545 (210,990)
Accrued liabilities . . . . . . 1,689,853 (202,161) (812,107) 3,271,804 2,468,676
Other . . . . . . . . . . . . . - 30,213 (115,783) 156,451 33,903
------------ ------------ ------------ ------------ -------------
Net Cash Used in Operating
Activities . . . . . . . . . . . (4,851,014) (6,910,531) (8,966,340) (3,244,882) (3,985,472)
------------ ------------ ------------ ------------ -------------
Cash Flows From Investing Activities
Purchases of mineral interests,
property and equipment . . . . . . (4,622,749) (4,130,785) (9,087,686) (5,391,567) (3,368,342)
Proceeds from sale of interest
in gas property. . . . . . . . . . - - - 501,646 -
Acquisition of subsidiaries,
net of cash acquired . . . . . . . - - (2,159,363) (6,314,287) 181,743
Increase in deposits and prepayments. (199,446) (308,290) (168,575) - (540,000)
Investment in securities
available-for-sale . . . . . . . . (1,696,700) (1,408,200) (1,467,754) - -
Proceeds from sale of securities
available-for-sale . . . . . . . . 100,557 - - - -
------------ ------------ ------------ ------------ -------------
Net Cash Used In Investing
Activities . . . . . . . . . . . (6,418,338) (5,847,275) (12,883,378) (11,204,208) (3,726,599)
------------ ------------ ------------ ------------ -------------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable to
related parties. . . . . . . . . . 429,070 - - 339,191 4,542,487
Principal payments on notes payable to
related parties. . . . . . . . . . (150,000) (2,097,556) (999,439) (905,866) (1,002,026)
Proceeds from issuance of notes
payable. . . . . . . . . . . . . . 184,742 - - 1,135,729 4,846,995
Principal payments on notes
payable. . . . . . . . . . . . . . (482,489) (2,855,384) (3,192,109) (2,707,551) (80,123)
Proceeds from issuance of common
stock, net of offering costs . . . - 12,637,500 150,000 20,175,000 6,808
Proceeds from issuance of preferred
stock, net of offering costs . . . 6,012,500 - 15,724,995 13,250,000 -
Dividends paid on preferred stock . - (260,141) (260,139) - (120,000)
Proceeds from issuance of
common stock by subsidiary . . . . - - 592,568 - -
------------ ------------ ------------ ------------ -------------
Net Cash Provided By Financing
Activities . . . . . . . . . . . 5,993,823 7,424,419 12,015,876 31,286,503 8,194,141
------------ ------------ ------------ ------------ -------------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents . . . . . (143,889) 148,202 75,685 (232,351) 88,323
------------ ------------ ------------ ------------ -------------
Net Increase (Decrease) in Cash
and Cash Equivalents. . . . . . . . (5,419,418) (5,185,185) (9,758,157) 16,605,062 570,393
Cash and Equivalents at Beginning
of Period . . . . . . . . . . . . . 7,489,510 17,247,667 17,247,667 642,605 72,212
------------ ------------ ------------ ------------ -------------
Cash and Equivalents at End of
Period. . . . . . . . . . . . . . . $ 2,070,092 $ 12,062,482 $ 7,489,510 $ 17,247,667 $ 642,605
============ ============ ============ ============ =============
(Continued)
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-7
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid for interest. . . . . . . $ 255,847 $ 300,557 $ 485,157 $ 362,622 $ 97,162
Cash paid for income taxes. . . . . - - - - -
Supplemental Schedule of Noncash
Investing and Financing Activities
Assigned notes receivable in
satisfaction of notes payable . . $ 600,000 $ - $ - $ - $ -
Common stock and stock options
issued to acquire property . . . . - 7,584,000 14,102,462 - -
Common stock issued upon conversion
of notes payable and accrued
interest . . . . . . . . . . . . . - - - 10,947,991 4,091,750
Common stock issued as payment of
preferred dividends. . . . . . . . 39,502 48,961 165,008 305,322 -
Common stock issued to acquire
minority interest in subsidiary. . - - - 1,000,000 -
Cash paid in connection with
business acquisitions:
Fair value of assets acquired. . . $ - $ - $ 11,923,200 $ 7,506,621 $ 4,999,405
Excess property cost over
fair value. . . . . . . . . . . . - - 3,512,792 - -
Liabilities assumed and incurred . - - (7,484,675) (28,317) (433,392)
Obligation to sellers. . . . . . . - - - - (2,500,000)
Minority interest recognized . . . - - (2,112,348) - (950,000)
Common stock issued. . . . . . . . - - - - (516,013)
Stock options granted. . . . . . . - - - (1,150,000) -
------------ ------------ ------------ ------------ ------------
Cash paid . . . . . . . . . . . - - 5,838,969 6,328,304 600,000
Less cash acquired. . . . . . . . . - - (3,679,606) (14,017) (781,743)
------------ ------------ ------------ ------------ ------------
Net Cash Paid (Received). . . . . $ - $ - $ 2,159,363 $ 6,314,287 $ (181,743)
============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> F-8
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information With Respect to September 30, 1999 and for the Nine Months
Ended September 30, 1999 and 1998 is Unaudited)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - EuroGas, Inc. and its subsidiaries ("EuroGas" or
the "Company") are engaged primarily in the evaluation, acquisition,
exploration and disposition of mineral interests, and rights to exploit
oil, natural gas, coal bed methane gas and other minerals. EuroGas has
also begun efforts to participate in the development of co-generation
(power and heat) projects. EuroGas is in various stages of identifying
industry partners, farming out exploration rights, undertaking exploration
drilling, and seeking to develop production. During 1998, EuroGas acquired
a controlling interest in Big Horn Resources Ltd., an exploration and
production company operating in Western Canada. EuroGas has an interest in
a joint venture to reclaim a natural gas field in Western Canada. EuroGas
holds and is developing properties in Eastern Europe including coal bed
methane gas properties in Poland, proved natural gas properties and
unproved oil and gas concessions in Slovakia, unproved natural gas
properties in Eastern Russia and an interest in a talc deposit in Slovakia.
EuroGas has entered into and is in the process of entering into joint
ventures in the Ukraine to explore for and develop oil, natural gas and
coal bed methane gas with various Ukrainian State and private companies.
BUSINESS CONDITION -Through the activities explained above, EuroGas and its
subsidiaries have accumulated deficits of $46,082,787 since their inception
in 1995 through December 31, 1998 and have accumulated deficits of
$56,215,341 through September 30, 1999. They have had losses from
operations and negative cash flows from operating activities during each of
the three years in the period ended December 31, 1998 and for the nine
months ended September 30, 1999. Although the Company had positive working
capital and stockholders' equity at December 31, 1998 and had positive
stockholders' equity at September 30, 1999, realization of the investment
in properties and equipment is dependent on EuroGas obtaining financing for
the exploration, development and production of those properties. If
exploration of unproved properties is unsuccessful, all or a portion of
recorded amount of those properties will be recognized as impairment
losses. Further, EuroGas is dependent on improvement in oil and gas prices
in order to establish profitable operations from oil and gas production. As
in the past, management plans to finance operations and acquisitions
through issuance of additional equity securities, the realization of which
is not assured.
PRINCIPLES OF CONSOLIDATION -The accompanying consolidated financial
statements include the accounts of all majority-owned subsidiaries and
EuroGas' share of properties held through joint ventures from the date of
acquisition. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES -The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of expenses during the reporting period. Actual results could
differ from those estimates.
MINERAL INTERESTS IN PROPERTIES - The full cost method of accounting is
used for oil and gas properties. Under this method, all costs associated
with acquisition, exploration, and development of oil and gas properties
are capitalized on a country by country basis. Costs capitalized include
acquisition costs, geological and geophysical expenditures, lease rentals
on undeveloped properties and costs of drilling and equipping productive
and non-productive wells. Drilling costs include directly related overhead
costs. Proceeds from disposal of properties are applied as a reduction of
cost without recognition of a gain or loss except where such disposal would
result in a major change in the depletion rate. Capitalized costs are
categorized either as being subject to amortization or not subject to
amortization. The cost of properties not subject to amortization are
assessed periodically and any resulting provision for impairment which may
be required is charged to operations. The assessment for impairment is
based upon estimated fair value of the properties. Fair value is determined
based upon estimated future discounted net cash flows.
F-9
<PAGE>
Capitalized costs of properties subject to amortization and estimated
future costs to develop proved reserves are amortized and depreciated
using the unit-of-production method based on the estimated proven oil and
natural gas reserves as determined by independent engineers. Units of
natural gas are converted into barrels of equivalent oil based on the
relative energy content basis. Capitalized costs of properties subject to
amortization, net of accumulated amortization and depreciation, are limited
to estimated future discounted net cash flows from proven reserves, based
upon year-end prices, and any resulting impairment is charged to
operations.
OTHER PROPERTY AND EQUIPMENT - Other property and equipment are stated at
cost. Minor repairs, enhancements and maintenance costs are expensed when
incurred; major improvements are capitalized. Depreciation of other
property and equipment is provided on a straight-line basis over the
estimated useful lives, as follows: buildings- 40 years and equipment-3 to
5 years. Upon retirement, sale, or other disposition of other property and
equipment, the cost and accumulated depreciation are eliminated from the
accounts, and gain or loss is included in operations. Depreciation expense
for the three years in the period ended December 31, 1998, was $78,765,
$83,885, and $196,232, respectively, of which $19,229 and $65,639 were
capitalized in mineral interests and equipment in 1998 and 1997,
respectively. Depreciation expense for the nine month period ended
September 30, 1999 and 1998 was $148,124 and $24,903, respectively.
FINANCIAL INSTRUMENTS - EuroGas considers all highly-liquid debt
instruments purchased with maturities of three months or less to be cash
equivalents. The amounts reported as cash and cash equivalents, investment
in securities available-for-sale, trade and other receivables, accounts
payable and notes payable are considered to be reasonable approximations of
their fair values. The fair value estimates presented herein were based on
estimated future cash flows. The amounts reported as investment in
securities available-for-sale are based upon quoted market prices. The cost
of securities sold is based on the average purchase price per share.
EuroGas had cash in Polish banks in the amount of approximately $1,570,000
at December 31, 1998 and $433,376 at September 30, 1999 for which EuroGas
would incur certain taxes if the cash were transferred out of Poland.
DERIVATIVE FINANCIAL INSTRUMENTS - EuroGas and its international
subsidiaries occasionally incur obligations payable in currencies other
than their functional currencies. This subjects EuroGas to the risks
associated with fluctuations in foreign currency exchange rates. EuroGas
does not reduce this risk by utilizing hedging. The amount of risk is not
material to EuroGas' financial position or results of operations.
LOSS PER SHARE - Basic loss per common share is computed by dividing net
loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
during periods of income reflect potential dilution which could occur if
all potentially issuable common shares from stock purchase warrants and
options, convertible notes payable and preferred stock resulted in the
issuance of common stock. In the present position, diluted loss per share
is the same as basic loss per share because 17,004,647 and 13,450,000
potentially issuable common shares at December 31, 1998 and 1997,
respectively, and 14,949,778 potentially issuable common shares at
September 30, 1999, would have decreased the loss per share and have been
excluded from the calculation.
F-10
<PAGE>
FOREIGN CURRENCY TRANSLATION - Effective January 1, 1998, the functional
currencies of the subsidiaries operating in Poland and Slovakia were
changed from the U.S. dollar to the local currencies due to those economies
ceasing to be considered highly inflationary. The change had no effect on
consolidated financial position at the date of the change or on the
consolidated results of operations for periods prior to the change. The
effect of changes in exchange rates during the year ended December 31,
1998, and in the future with respect to those subsidiaries, has been and
will be recognized as a separate component of comprehensive loss whereas
those changes were previously recognized in the results of operations.
Where the functional currencies of foreign subsidiaries continue 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 from
those subsidiaries are reflected in the results of operations. Exchange
gains and losses from holding foreign currencies and having liabilities
payable in foreign currencies are included in the results of operations.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences in the balances of
existing assets and liabilities on the Company's financial statements and
their respective tax bases and attributable to operating loss carry
forwards. Deferred taxes are computed at the enacted tax rates for the
periods when such amounts are expected to be realized or settled.
STOCK BASED COMPENSATION - Prior to 1999, EuroGas accounted for stock-based
compensation from stock options granted to employees and consultants based
on the intrinsic value of the options on the date granted. Since January
1, 1998, EuroGas has accounted for stock options granted to employees
based on the intrinsic value of the options on the date granted and has
accounted for options granted to consultants and other non-employees based
on the fair value of the options as determined by the Black-Scholes option
pricing model.
NEW ACCOUNTING STANDARDS - During 1998, EuroGas adopted Statements of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1997. SFAS No. 131 requires certain information
to be reported about operating segments on a basis consistent with
management's decision making process and requires the presentation of
revenue and total assets by country. These statements expanded or modified
disclosures and had no impact on consolidated financial position, results
of operations or cash flows when adopted.
In June 1999, SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No.133 was issued and establishes accounting and
reporting standards requiring that derivative instruments be recorded in
the balance sheet as either an asset or liability measured at its fair
value. SFAS No. 133 is effective for year beginning January 1, 2000 and, is
not expected to have a material impact on the financial condition or
results of operations of EuroGas.
INTERIM FINANCIAL STATEMENTS - The accompanying consolidated financial
statements at September 30, 1999 and for the nine months ended September
30, 1999 and 1998 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 nine month period ended September 30, 1999 are not
necessarily indicative of the operating results to be expected for the full
year.
PRIOR YEAR PRESENTATION - Certain September 1998 amounts have been
reclassified in order to conform with the 1999 presentation.
F-11
<PAGE>
NOTE 2--PROPERTY ACQUISITIONS
Acquisition of Big Horn Resources, Ltd. - Effective October 5, 1998,
EuroGas acquired slightly more than a 50% interest in Big Horn Resources
Ltd. ("Big Horn"), an oil and gas exploration and production company
operating in Western Canada. EuroGas acquired the majority interest by
cash payments of $4,723,498 on October 17, 1998, by executing promissory
notes effective October 1998, in the aggregate amount of $1,840,224, and
by EuroGas' cancellation of a note receivable from one of Big Horn
shareholders in the amount of $1,100,000. These payments, and the face
amount of the notes, were discounted $70,238 to October 5, 1998 using a 10%
discount rate.
The acquisition was accounted for under the purchase method of accounting;
the total purchase price of $7,593,484 was determined based upon the fair
value of the consideration paid. The purchase price was allocated to the
acquired net assets of Big Horn based upon their fair values on the
effective date of the acquisition. The fair value of the acquired
properties was based upon a reserve report prepared by independent
petroleum engineers. The purchase price exceeded the fair value of the net
assets acquired by $3,512,792 which was recognized as a non-recurring
impairment expense at the date of the acquisition. The operations of Big
Horn have been included in the consolidated results of operations of
EuroGas since acquisition.
Summary unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997, assuming the acquisition of Big Horn had
occurred on January 1, 1997, excluding non-recurring items, are as follows:
1998 1997
------------ ------------
Revenues . . . . . . . . . . . . . . . . . .$ 2,138,415 $ 1,916,000
Net loss . . . . . . . . . . . . . . . . . . (7,528,473) (14,538,000)
Net loss applicable to common shares . . . . (10,389,774) (14,962,000)
Net loss per common share. . . . . . . . . . (0.16) (0.27)
ACQUISITION OF MASEVA GAS S.R.O. - During October 1998, EuroGas acquired a
90% interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company which holds
a 850 square kilometer concession to explore for oil and natural gas. The
concession is adjacent to the southern boarder of the Trebisov concession
held by EuroGas through the Nafta/Danube joint venture in Slovakia.
EuroGas purchased Maseva by issuing 2,500,000 common shares and warrants to
purchase an additional 2,500,000 shares at $2.50 per share within two
years. The purchase price was $6,527,462 based upon the $2.00 per share
quoted market value of the EuroGas common shares issued, and the fair value
of the warrants on the acquisition date. The fair value of the options was
determined by using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0.0%, expected volatility of
63.2%, risk-free interest rate of 5.0% and an expected life of 2 years.
The unproved oil and gas concession is the primary asset acquired. Maseva
has had no operations. The acquisition is considered to be the purchase of
properties. Accordingly, pro forma amounts are not presented. The cost of
the acquisition was allocated to oil and gas properties not subject to
amortization.
ACQUISITION OF BEAVER RIVER PROJECT - In March 1998, EuroGas exercised its
option to acquire a 16% carried interest in the Beaver River Project in
British Columbia, Canada in exchange for $300,000 and the issuance of
2,400,000 common shares which were valued at $3.16 per share. The
acquisition has been valued at $7,875,000. The interest in the Beaver
River Project has been classified as oil and gas properties not subject to
amortization. EuroGas retains the right to purchase back 1,900,000 of the
2,400,000 common shares issued any time prior to April 15, 1999 by
returning the carried interest if EuroGas determines that the results
produced do not warrant the continued holding of the carried interest.
F-12
<PAGE>
ACQUISITION OF OIL REFINERY - During the third quarter of 1998, EuroGas
posted a refundable cash bond of $337,723 which will allow EuroGas to
purchase an interest in an operating oil refinery in Slovenia. If
purchased, EuroGas will be required to pay cash and issue common shares to
complete the acquisition. The refundable bond has been included as a
long-term other asset in the accompanying financial statements.
ACQUISITION OF TALC MINERAL INTEREST - During 1999, EuroGas acquired a 24%
interest in an undeveloped talc deposit in Eastern Slovakia through an
investment in a joint venture company. The investment in the talc mineral
interest and related mining equipment was $167,813 and $160,373,
respectively. At December 31, 1998 and September 30, 1999, EuroGas had a
receivable for advances to the joint venture company in the amount of
$1,059,494.
ACQUISITION OF MAJORITY INTEREST IN ENVIGEO TRADE S.R.O. - During September
1998, EuroGas acquired a 51% interest in Envigeo Trade s.r.o. ("Envigeo"),
a private Slovakian company which owns a 2,300 square kilometer oil and gas
concession in Northeast Slovakia. The concession expires in August 2001.
EuroGas paid $500,000 at the date of the acquisition, and the balance of
$1,000,000 during November 1998. The unproved oil and gas concession is the
primary asset acquired and Envigeo has had no operations of any
significance. The acquisition is considered to be the purchase of
properties. Accordingly, pro forma amounts are not presented. The cost of
the acquisition was allocated to oil and gas properties not subject to
amortization. To date, EuroGas has invested $1,620,000 in the Envigeo
properties.
ACQUISITION OF OMV (JAKUTIEN) EXPLORATION GASELLSCHAFT M.B.H. - On June 11,
1997 EuroGas 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 common shares 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
EuroGas since the acquisition date.
NOTE 3--RECEIVABLE FROM RELATED PARTY AND OTHER RECEIVABLES
On December 7, 1999, a wholly-owned subsidiary of EuroGas executed a
promissory note with an officer and member of management in the amount of
$200,000. The note, due on March 31, 1999, was repaid in full on January
7, 1999.
On October 28, 1999, EuroGas executed a promissory note in the amount of
$500,000 to an independent third party. Terms of the note dictate that
interest accrues at 5%. The balance was due on May 28, 1999 and is unpaid
at September 30, 1999.
NOTE 4--INVESTMENT IN EQUITY SECURITIES
Equity securities purchased during 1999 were recorded at cost because their
resale was restricted and their fair value was not readily determinable.
The investments consisted of $1,000,000 of 20% cumulative convertible
preferred stock of Intergold Corporation and $600,000 in share capital of
Hansageomyn GmbH, both of which are mining companies.
F-13
<PAGE>
During the third quarter of 1999, EuroGas determined not to further invest
in the two companies. The value of the underlying common shares to the
preferred stock have dropped substantially, and management has determined
there has been an other than temporary decline in the fair value of both
investments. Accordingly, during the third quarter, EuroGas recognized a
$1,600,000 impairment of the investments.
During the first quarter of 1998, EuroGas acquired 993,333 units of United
Gunn Resources, Ltd. (each unit consisting of one share of common stock and
one warrant) through a private placement subscription agreement for
$962,398. United Gunn Resources, Ltd. holds an approximate 12% working
interest in the Beaver River Project. Through December 31, 1998, EuroGas
acquired an additional 613,500 shares of United Gunn through market
purchases at a cost of $491,460. Through the purchase of equity
securities, EuroGas held approximately 9% of the outstanding United Gunn
shares at December 31, 1998. The United Gunn Resources, Ltd. shares have
been accounted for as investment in securities available-for-sale and are
carried at market value.
Investment in securities available-for-sale consisted of the following:
September 30, December 31,
1999 1998
---------- ----------
Cost . . . . . . . . . . . . . . . . . .$1,426,203 $1,467,754
Gross unrealized losses. . . . . . . . . (718,086) (379,266)
---------- ----------
Estimated fair value . . . . . . . . . .$ 708,117 $1,088,488
========== ==========
EuroGas sold 139,000 shares of United Gunn during the nine months ended
September 30, 1999, for $100,557 which resulted in a realized loss of
$37,694. The cost of securities sold was determined by the average cost
method.
NOTE 5--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
Prior to 1998, EuroGas had no property subject to amortization. Through the
acquisition of Big Horn, EuroGas acquired properties with both proved and
unproved reserves. Certain of the Big Horn reserves are in production and
are being amortized. In addition to the Canadian property, the extent of
reserves relating to Company's interests in the Slovak Trebisov oil and gas
properties was established in May 1998 when an independent reserve report
relating to those properties was obtained and which reported proved
reserves of oil and gas. Accordingly, the cost of those properties were
reclassified in 1998 as oil and gas properties subject to amortization. The
wells drilled on the property have been completed; however, a gas gathering
system is yet to be constructed. As described more fully in Note 13 -
Commitments and Contingencies, a dispute arose as a result of a conflicting
property claim, and work to bring the wells into production has been
suspended. Amortization will begin when and if production begins from wells
on that property.
In August 1997, EuroGas closed a transaction with a subsidiary of Texaco
for the exploration and potential development of EuroGas' coal bed methane
gas interests held by a concession in Poland. EuroGas retained a 14% to
20% carried interest in the net profits from the property, and transferred
the remaining interest in the property to Texaco in exchange for an initial
payment of $500,000. The payment received during 1997 was applied as a
reduction of the cost of the properties without recognition of a gain or
loss. EuroGas has since reacquired the interest for $172,000.
F-14
<PAGE>
The following is a summary of changes to oil and gas properties:
<TABLE>
<CAPTION> December 31,
September 30, _____________________________________
1999 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Properties Subject to Amortization
Cost at beginning of period. . . . $17,008,936 $ - $ - $ -
Reclassification from
properties not subject to
amortization. . . . . . . . . . . - 7,278,613 - -
Acquisition costs. . . . . . . . . 1,063,815 8,784,050 - -
Development costs. . . . . . . . . 1,488,002 4,459,065 - -
Less ceiling test and valuation
adjustments . . . . . . . . . . . - (3,512,792) - -
----------- ----------- ----------- -----------
Cost at end of period. . . . . . . 18,890,849 17,008,936 - -
Less depreciation, depletion and
amortization . . . . . . . . . . (1,456,823) (220,600) - -
Translation adjustments. . . . . . (669,904) - - -
----------- ----------- ----------- -----------
Net Properties Subject to
Amortization. . . . . . . . . . . $17,434,026 $16,788,336 $ - $ -
=========== =========== =========== ===========
Properties Not Subject To Amortization
Cost at beginning of period. . . . $33,817,752 $22,723,660 $14,252,754 $ 7,037,244
Acquisition costs. . . . . . . . . - 17,804,072 7,574,601 4,217,069
Exploration costs. . . . . . . . . 2,272,087 573,569 3,368,917 2,998,441
Reclassification to properties
subject to amortization . . . . . - (7,278,613) - -
Proceeds from sale of property . . (13,094) - (500,000) -
Less accumulated valuation and
adjustments . . . . . . . . . . - - (1,972,612) -
Translation adjustment . . . . . (1,101,775) (4,936) - -
----------- ----------- ----------- -----------
Net Property Not Subject to
Amortization at End of Period . $34,974,970 $33,817,752 $22,723,660 $14,252,754
=========== =========== =========== ===========
Other Mineral Interest Property
Cost at beginning of year. . . $ 167,814 $ - $ - $ -
Acquisition costs. . . . . . . - 167,814 - -
----------- ----------- ----------- -----------
Net Other Mineral Interest
Property. . . . . . . . . . . . $ 167,814 $ 167,814 $ - $ -
=========== =========== =========== ===========
</TABLE>
F-15
<PAGE>
NOTE 6--OTHER PROPERTY AND EQUIPMENT
Other property and equipment consisted of the following:
December 31,
September 30, ----------------------
1999 1998 1997
---------- ---------- ----------
Land. . . . . . . . . . . . . . . . . . $ - $ - $ 22,156
Buildings . . . . . . . . . . . . . . . - 19,571 92,914
Equipment . . . . . . . . . . . . . . . 849,585 561,297 895,702
---------- ---------- ----------
849,585 580,868 1,010,772
Less: Accumulated depreciation . . . . (292,007) (86,454) (767,177)
---------- ---------- ----------
Net Other Property and Equipment . . . $ 557,578 $ 494,414 $ 243,595
========== ========== ==========
NOTE 7-GEOGRAPHIC INFORMATION
EuroGas and its subsidiaries operate solely in the oil and gas exploration
and production industry. Accordingly, segment information is not presented
separately from the accompanying balance sheets and statements of
operations. Property and equipment and other non-current assets were
located in the following geographic areas:
December 31,
September 30, -----------------------
1999 1998 1997
----------- ----------- -----------
Canada. . . . . . . . . . . . . . . . $18,828,874 $15,995,000 $ -
Eastern Europe and Russia . . . . . . 35,003,167 35,821,131 23,303,815
----------- ----------- -----------
Total Property and Equipment
and Other Assets . . . . . . . . . . $53,832,041 $51,816,131 $23,303,815
=========== =========== ===========
Sales and net loss were in the following geographic areas:
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended September 30, December 31,
------------------------ ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Oil and Gas Sales - Canada. . $ 3,326,629 $ - $ 879,404 $ - $ -
=========== =========== ============ ============ ===========
Net Loss
United States (Corporate). $(5,190,123) $(1,990,154) $ (2,625,306) $ (4,915,997) $(2,175,936)
Canada . . . . . . . . . . 350,541 - (3,362,517) - -
Eastern Europe and Russia (4,259,754) (3,730,066) (5,036,357) (6,585,902) (4,086,655)
----------- ----------- ------------ ------------ -----------
Net Loss $(9,099,336) $(5,720,220) $(11,024,180) $(11,501,899) $(6,262,591)
=========== =========== ============ ============ ===========
</TABLE>
F-16
<PAGE>
NOTE 8--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties were as follows:
December 31,
September 30,----------------------
1999 1998 1997
---------- ---------- ----------
Loan from a former director, due on
demand with interest at 10%,
unsecured. . . . . . . . . . . . . . $ 290,206 $ 290,206 $ 290,206
Loan from a company associated with
a director, due in 1999 with interest
at 7.5%, unsecured . . . . . . . . . 239,694 165,683 362,477
Loan from a director, due in 1999,
interest: 7.5% to 10%, unsecured . . 612,010 606,951 1,409,596
Loans from a director and his affiliates,
interest at 7.5% to10%, due on demand
and in 1999, unsecured . . . . . . . 119,284 119,284 119,284
---------- ---------- ----------
Total Notes Payable to Related Parties 1,261,194 1,182,124 2,181,563
Less: Current Portion . . . . . . . . (1,261,194) (1,182,124) (1,270,547)
---------- ---------- ----------
Notes Payable to Related Parties -
Long-Term. . . . . . . . . . . . . . $ - $ - $ 911,016
========== ========== ==========
NOTE 9--NOTES PAYABLE
Other loans and notes payable were as follows:
December 31,
September 30,----------------------
1999 1998 1997
---------- ---------- ----------
Loans due 1999, interest at 10%,
unsecured. . . . . . . . . . . . . . $ 509,488 $ 517,749 $3,354,717
Line of credit with a bank, payable
by a subsidiary on demand with interest
at 1% above the bank's prime, and
secured by all of the subsidiaries
assets . . . . . . . . . . . . . . . 3,518,840 3,708,990 -
10% Notes due in 2000, unsecured. . . 1,240,224 1,840,224 -
Less: Discount on Note. . . . . . . . (12,982) (51,930) -
---------- ---------- ----------
Total Notes Payable . . . . . . . . . 5,255,570 6,015,033 3,354,717
Less: Current Portion . . . . . . . . (5,255,570) (4,226,739) (1,107,944)
---------- ---------- ----------
Note Payable - Long-Term. . . . . . . $ - $1,788,294 $2,246,773
========== ========== ==========
Annual maturities of notes payable to related parties and others are as
follows:
September 30, December 31,
Years ending December 31: 1999 1998
----------- -----------
1999 . . . . . . . . 5,889,522 5,408,863
2000 . . . . . . . . 627,242 1,788,294
F-17
<PAGE>
NOTE 10--INCOME TAXES
Deferred tax assets are comprised of the following:
December 31,
------------------------
1998 1997
----------- -----------
Tax loss carry forwards . . . . . . $ 4,904,209 $ 2,885,384
Reserves for contingencies. . . . . 396,863 396,863
Less: Valuation allowance. . . . . (5,301,072) (3,282,247)
----------- -----------
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:
<TABLE>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate (34%) . . . . $(3,748,221) $(3,910,646) $(2,129,281)
Non-deductible expenses . . . . . . 1,729,396 - -
State taxes, net of federal benefit (195,944) (154,969) -
Deferred tax asset valuation change 603,635 2,280,330 295,877
Effect of lower tax rates and foreign
losses with no federal benefit . . 1,611,134 1,785,285 1,833,404
----------- ----------- -----------
Total Income Tax Benefit. . . . . . $ - $ - $ -
=========== =========== ===========
</TABLE>
As of December 31, 1998, EuroGas has operating loss carry forwards of
approximately $13,760,047 in various countries which expire from 1999
through 2013.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an income
tax liability in the Netherlands of an amount equivalent to approximately
$737,000 at September 30, 1999. The tax arose from the sale of equipment at
a profit by the former owner of Globegas to a EuroGas Polish subsidiary.
EuroGas' position is that the gain on the sale should not have been taxable
to Globegas. The liability will continue to be reflected in EuroGas'
financial statements until the proposed reduction is accepted by the
Netherlands' taxing authorities.
NOTE 11--RELATED PARTY TRANSACTIONS
Related party loans are described in Note 8--Notes Payable To Related
Parties and loans to related parties are described in Note 3--Receivable
From Related Party and Other Receivables.
During 1997, a shareholder advanced $2,023,306 as a short-term loan to
EuroGas. In connection with this loan, the shareholder retained control of
the proceeds from an issuance of common shares during 1997 by EuroGas and
paid Company obligations from those proceeds. The shareholder received
$104,493 for management services from these funds.
F-18
<PAGE>
NOTE 12--STOCKHOLDERS' EQUITY
PREFERRED STOCK - There were 2,391,968 shares of 1995 Series Preferred
Stock (the "1995 Series") issued on April 12, 1995. The 1995 Series 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 EuroGas' common stock upon lawful
presentation and shall pay dividends until converted. EuroGas 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.
EuroGas issued 1,250,000 shares of 1996 Series Preferred Stock (the "1996
Series") on July 12, 1996. All of the shares of 1996 Series Preferred Stock
were converted into 2,500,001 common shares, 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, EuroGas 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 shares at the rate of $1,000 divided by the lessor
of 125% of the average closing bid price for five trading days prior to
issuance or 82% of the average closing bid price for five trading days
prior to conversion. By December 31, 1997, 14,740 of the 15,000 shares of
1997 Series, along with related accrued dividends, had been converted into
2,763,165 common shares.
From May through November 1998, EuroGas issued 17,000 shares of 1998
Series B Convertible Preferred Stock (the "1998 Series") in an ongoing
private placement offering. Of the total authorized preferred shares,
30,000 shares have been designated as the 1998 Series with a par value of
$0.001 per share and a liquidation preference of $1,000 per share plus all
accrued but unpaid dividends. The 1998 Series shares are non-voting and
bear a dividend rate of 6% per annum. Dividends may be paid in shares of
EuroGas common stock at its option. The 1998 Series stock was issued for
proceeds in the amount of $15,224,995. The proceeds were net of $1,275,005
in commissions, and proceeds of $500,000 which the investor paid directly
to an un-related third party on behalf of EuroGas. EuroGas recognized the
$500,000 as a note from the third party.
These 1998 Series preferred shares are convertible into shares of common
stock at the rate of $1,000, plus any accrued but unpaid dividends through
the conversion date, divided by the lesser of 125% of the average closing
price five trading days prior to issuance of the Series B shares, or 85% of
the average closing price five trading days prior to conversion. Because
the 1998 Series was immediately convertible into common shares at a 15%
discount, EuroGas has recognized a favorable conversion feature as
preferred dividends on the dates the preferred stock was issued. During
1998, $2,550,000 in preferred dividends were recognized relating to the
favorable conversion feature.
During 1998, 15,500 shares of 1998 Series preferred stock were converted,
according to the conversion factors mentioned, into 8,860,196 common shares
at a weighted-average price of $1.77 per share. In connection with the
conversion, 88,914 common shares were issued for $165,007 in accrued
dividends on the converted 1998 Series shares at a weighted average price
of $1.86 per common share. The annual dividend requirements for the 1,500
shares of 1998 Series shares outstanding at December 31, 1998 was $90,000.
F-19
<PAGE>
EuroGas retained the right at December 31, 1998, to issue an additional
4,000 shares of 1998 Series preferred stock at $1,000 per share less
commissions of 7.5% every 30 days beginning January 1, 1999, to a maximum
13,000 shares, if the common stock of EuroGas is trading in excess of $3.00
per share or if the subscribers otherwise consent. EuroGas filed a
registration statement with the U.S. Securities and Exchange Commission
relating to the common stock underlying the 1998 Series shares. The
registration statement became effective on August 7, 1998. EuroGas is
required to maintain the effective status of the registration statement for
the period the 1998 Series shares remain outstanding.
During the nine months ended September 30, 1999, EuroGas issued 6,500
shares of Series B 1998 preferred stock for $6,500,000, or $1,000 per
share, less $487,500 of offering costs. In addition, 8,000 shares of Series
B 1998 preferred stock and $39,501 of accrued but unpaid preferred
dividends were converted into 10,576,208 common shares at a weighted
average price of $0.76 per share. Because the 1998 Series issued during
1999 was immediately convertible into common shares at a 15% discount,
EuroGas has recognized a favorable conversion feature as preferred
dividends on the dates the preferred shares were issued. During 1999,
$901,875 in preferred dividends were recognized relating to the favorable
conversion feature.
The following is a summary of the preferred stock outstanding at September
30, 1999:
<TABLE>
<CAPTION>
Liquidation Preference Annual Dividend Requirement
Shares ---------------------- ---------------------------
Designation Outstanding Per Share Total Per Share Total
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598
1997 Series A Convertible 260 1,000 260,000 60.00 15,600
----------- ---------- ---------- ---------- ----------
Total 2,392,228 $ 499,197 $ 135,198
=========== ========== ==========
</TABLE>
As further discussed in Note 14, EuroGas issued 1,800 shares of Series C 6%
convertible preferred stock in November 1999.
COMMON STOCK - During February 1998 EuroGas issued 13,000 common shares
valued at $61,737, or $4.75 per share in connection with an earlier private
placement. EuroGas also issued 7,500 common shares valued at $24,375, or
$3.25 per share, on August 19, 1998, to compensate a former employee, and
40,000 shares valued at $140,000, or $3.50 per share, were issued during
August 1998 to compensate for services relating to unsuccessful
acquisitions. The services provided were valued at the market price at
which EuroGas' common shares were trading on the date of the issuance of
shares.
On April 1, 1998, EuroGas issued 2,400,000 common shares valued at
$7,575,000, or $3.16 per share, in connection with the acquisition of an
interest in the Beaver River Project. In addition, 2,500,000 shares valued
at $5,000,000, or $2.00 per share, together with warrants to purchase
2,500,000 common shares, were issued on October 9, 1998 to acquire an
interest in the Maseva property. The fair value of the warrants issued of
$1,527,462 was determined by the Black-Scholes option pricing model. The
portion of the purchase prices relating to the common stock issued was
based upon the market value of the common shares issued as consideration.
EuroGas issued 100,000 common shares during 1998 upon the exercise of stock
options for $150,000 or $1.50 per share.
F-20
<PAGE>
NOTE 13--STOCK OPTIONS AND WARRANTS
On April 20, 1999, ten-year options to purchase 1,000,000 shares of common
stock at $0.95 per share were issued in connection with an employment
agreement with EuroGas' new Chief Executive Officer. The options vest on
January 1, 2000. No compensation was recognized in connection with the
grant because the exercise price was equal to the fair value of the
underlying shares on the date of the grant.
On October 9, 1998, warrants to purchase 2,500,000 common shares were
issued in connection with the acquisition of the Maseva property. The
warrants are exercisable at $2.50 per share until October 8, 2000 at which
time they expire if not exercised.
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, 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 common shares were
granted in conjunction with the issuance of 2,999,999 common shares for
$7,500,000 (less $75,000 in offering costs). The options were exercisable
at $3.00 per share through December 31, 1998 when they expired. Options to
purchase 250,000 common shares were granted in connection with an
investment firm contract. The options are exercisable at $11.79 per share
through August 9, 2002.
EuroGas 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 common shares 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 shares was equal to the
exercise price on the date granted and, therefore, no compensation relating
to the options was recognized when granted.
EuroGas has accounted for stock-based compensation from stock options
granted to employees and consultants (prior to 1998) based on the
intrinsic value of the options on the date granted. Had compensation cost
for EuroGas' 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", EuroGas' loss applicable to common shares and loss per
common share for the nine months ended September 30, 1999, and for the
years ended December 31, 1998, 1997 and 1996 would have been increased to
the pro forma amounts shown below.
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares:
As reported . . . . . . . . $(10,132,554) $(13,885,481) $(11,925,429) $ (6,413,183)
Pro forma . . . . . . . . . (10,878,615) (13,885,481) (11,925,429) (8,492,547)
Basic and diluted net loss per common share:
As reported . . . . . . . . $ (0.12) $ (0.22) $ (0.22) $ (0.16)
Pro forma . . . . . . . . . (0.13) (0.22) (0.22) (0.21)
</TABLE>
The fair value of the warrants and option granted during 1999, 1998, 1997
and 1996 were estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1999, 1998 and 1996,
respectively: average risk-free interest rate - 4.85%, 5%, 5.7% and 5.7%;
expected volatility - 68.7%, 63.5%, 95.5% and 82.6%; expected life - 10
years, 2.0 years, 1.4 years and 5.0 years.
F-21
<PAGE>
A summary of the status of stock warrants and options as of September 30,
1999 and changes during the nine months then ended is presented below:
Weighted-
Average
Exercise
Shares Price
---------- ------------
Outstanding at beginning of period . . . . 13,750,000 $3.43
Granted 1,000,000 0.95
Exercised. . . . . . . . . . . . . . . . . - -
Expired. . . . . . . . . . . . . . . . . . (2,200,000) 6.00
----------
Outstanding at end of period . . . . . . . 12,550,000 2.86
==========
Exercisable at end of period . . . . . . . 11,500,000 3.03
==========
Weighted-average fair value of
options granted during the period . . . . $ 0.75
Options and warrants outstanding at September 30, 1999 were exercisable at
prices ranging from $0.95 to $11.79 with remaining contractual lives from
1.3 to 10 years and an average contractual life of 1.7 years.
A summary of the status of stock warrants and options as of December 31,
1998, 1997 and 1996 and changes during the years then ended are presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 13,450,000 $ 3.54 9,000,000 $ 2.78 - -
Granted. . . . . . . . . . . . . 2,600,000 2.46 4,450,000 3.94 9,000,000 $ 2.78
Exercised. . . . . . . . . . . . (100,000) 1.50 - - - -
Expired. . . . . . . . . . . . . (2,200,000) 3.00 - - - -
----------- ---------- -----------
Outstanding at end of year 13,750,000 3.43 13,450,000 3.54 9,000,000 2.78
=========== ========== ===========
Exercisable at end of year 13,650,000 3.45 13,300,000 3.56 8,800,000 2.81
=========== ========== ===========
Weighted-average fair value of
options granted during the year $0.61 $2.07 $1.04
</TABLE>
Options and warrants outstanding at December 31, 1998 were exercisable at
prices ranging from $1.50 to $11.79 with remaining contractual lives from
2.0 to 3.6 years and an average contractual life of 1.8 years.
NOTE 14--COMMITMENTS AND CONTINGENCIES
As discussed further in Note 9 - Income Taxes, EuroGas has proposed a
settlement of its tax liability in the Kingdom of the Netherlands.
F-22
<PAGE>
A bankruptcy estate trustee appointed for certain former shareholders of
Globegas has asserted a claim to the proceeds that EuroGas would receive
from an agreement with Texaco during 1997, relating to the exploitation of
the Pol-Tex methane gas concession in Poland. The Trustee's claim is
apparently based upon the theory that EuroGas paid inadequate consideration
for its acquisition of Globegas (which indirectly controlled the Pol-Tex
concession) from persons who were acting as nominees for the former
shareholders, or in fact may be operating as a nominee for the former
shareholder, and therefore, the creditors of the estate are the true owners
of the proceeds received or to be received from the development of the
Pol-Tex concession. EuroGas is vigorously defending against the claim.
EuroGas believes that the claim is without merit based on the fact that a
condition of a prior settlement with the principal creditor of the estate
bars any such claim, that the trustee over the estate has no jurisdiction
over Pol-Tex Methane, a Polish corporation, or its interests held in Poland,
that EuroGas paid substantial consideration for Globegas and that there is
no evidence that the creditors invested any money in the Pol-Tex concession.
In July 1999, the above mentioned trustee filed another suit in the same
bankruptcy cases that seeking damages in excess of $170,000 for the
defendants' alleged violation of an agreement with the trustee which allowed
the Texaco agreement to proceed. EuroGas disputes the allegations and has
filed a motion to dismiss or alternately, to abate this suit which motion is
currently pending before the court. Should the litigation continue, EuroGas
believes the claims might give rise to a separate cause of action against
third parties which EuroGas may pursue if necessary. In order to avoid
additional costs associated with the extended defense of the above litigation,
EuroGas is currently engaged in settlement discussions with the trustee.
During 1997, a shareholder, who is also the principal creditor in the above
claim, asserted a claim against EuroGas based upon an alleged breach of
the settlement agreement between the shareholder and EuroGas as a result
of EuroGas' 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's parent company entered a claim for failure to register the
resale of the shares subject to its option to purchase up to 2,000,000
common shares of EuroGas. EuroGas has denied any liability and has filed a
counterclaim against the shareholder and its parent company for breach of
contract concerning their activities with the bankruptcy trustee. The
parties are currently engaged in settlement discussions. The Company has
provided an accrual in the accompanying financial statements relating to the
estimated amount which the Company may be required to pay should a settlement
be reached between the parties. However, there is no assurance that a
settlement can be reached with terms acceptable to the Company.
In October 1999, an action was filed against EuroGas which asserts that
EuroGas breached an agreement to seek registration of certain restricted
and unregistered common shares issued to the plaintiffs in connection with
EuroGas' acquisition of its interest in Beaver River Resources, Ltd. The
action seeks rescission of the agreement, or in the alternative, damages,
and includes claims for costs, attorneys' fees and interest. EuroGas has
filed an answer denying the allegations contained in the lawsuit.
EuroGas has engaged officers, and technical and business consultants for
its various projects under terms which will require a minimum payment of
$1,600,000 during the year ending December 31, 1999.
F-23
<PAGE>
During March of 1998, EuroGas was notified there may be certain title
problems related to an area of mutual interest to be explored and developed
by the Nafta/Danube joint venture in Slovakia. The problem area is outside
of the Trebisov area where EuroGas has drilled six wells and which is
unaffected by the claim. The disputed area is located in the southern
portion of the property covered by the designations contained in the
Nafta/Danube joint venture agreements and was subject to a competing claim
of ownership by a private Slovak company. EuroGas' expansion beyond the
Trebisov was limited by the extent the Nafta/Danube joint venture did not
have exploration rights as previously contemplated. During the second
quarter of 1998, EuroGas acquired a 90% interest in Maseva Gas, s.r.o.
("Maseva") which holds the rights to the exploration territory known as
"Kralovsky Chlmec"and includes the disputed area located to the south of
Trebisov. The division of the working interest for this territory is 67.5%
for EuroGas (rather than the 50% split which governs the Trebisov area),
provided that EuroGas carries the cost of drilling the first two wells in
the Maseva concession.
EuroGas has notified the former shareholders of Danube of a potential
claim against them by reason of this recent problem. EuroGas 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.
EuroGas has made a claim against the former Danube shareholders for
indemnity to the extent EuroGas suffers any damage by reason of the
potential title claim. It is uncertain whether EuroGas will be able to
recover from the former Danube shareholders.
As a result of the title problems with the Nafta/Danube property, a dispute
has arisen with the joint venture partner, Nafta Gbely a.s. ("Nafta").
EuroGas has asserted a claim for misrepresentation of the property asset at
the time of its acquisition and has made demand on Nafta in an amount equal
to EuroGas' investment in the property. Efforts to bring the property to
production were suspended pending resolution of the claims. EuroGas has
received indications the Slovak government may seek to resolve the dispute.
Recently, the government completed its nationalization of Nafta; although
discussions are scheduled between EuroGas and Nafta, resolution of this
matter is not assured.
During 1997, EuroGas accrued a $1,000,000 obligation to a lender. During
1998 following resolution of the contingency, management revised its
estimate to zero and reversed the accrual. The reversal is accounted for as
change in an accounting estimate.
An assertion has been made against EuroGas by holders of registration
rights that EuroGas failed to file a Registration Statement for certain
shares and warrants held. EuroGas has not completed settlement
negotiations; no amount has been estimated or provided with respect to this
claim.
In March 1998, EuroGas acquired a 53% interest in RimaMuran s.r.o. whose
principal asset is a minority interest in a talc deposit in eastern
Slovakia. RimaMuran will have an obligation to fund 33 to 39% of the
projected $12,000,000 capital cost requirements 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 EuroGas . To date, EuroGas has invested $1,387,682 in the
RimaMuran project.
During February 1998, EuroGas formed a consortium with a large United
Kingdom power producer and with a German Utility company to develop a power
generation project in Zielona Gora, Western Poland. EuroGas anticipates
the total investment required to develop the project will approximate $150
Million. EuroGas will hold a 12.5% share interest in the joint venture
created by the consortium and will be required to pay approximately 7.5%,
or $11,250,000 of the estimated project cost. EuroGas does not presently
have the assets necessary to meet this obligation.
F-24
<PAGE>
During 1998, EuroGas entered into six agreements which grant rights to
jointly explore prospects within the Ukraine. The agreements commit EuroGas
to form joint ventures and joint companies and use the partners' concession
agreements in exploiting the potential standard oil and gas, as well as
coal-bed methane gas reserves. The potential reserves in the Ukraine have
not been independently verified.
During April 1999, EuroGas entered into a three-year employment contract
with its new chief executive officer. The contract provides for annual
salary of $400,000 plus living and other allowances of $28,200. In
addition, options to purchase, 1,000,000 shares of EuroGas common stock at
$0.95 were granted in connection with the employment contract. The options
vest on January 1, 2000, and expire in April 2009.
The Company leases office facilities from various lessors in the United
States, Poland, Germany, Ukraine, the Netherlands, and the United Kingdom.
Annual commitments for future minimum rental payments required under the
leases as of September 30, 1999 were as follows:
Lease
Payments
Year Ending December 31: ----------
1999 $ 685,976
2000 270,660
2001 270,660
2002 221,022
2003 116,208
Thereafter 9,684
----------
Total $1,574,210
==========
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
During November 1999, EuroGas paid $600,000 of principal on an 8% note
payable with a remaining principal balance of approximately $640,000.
During November 1999, the Company designated a new 1999 Series C 6%
convertible preferred stock (the "1999 Series") and completed a private
placement of 1,800 shares, resulting in proceeds to EuroGas of $1,651,500,
net of $148,500 offering costs. The 1999 Series 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 1999 Series shares are non-voting and
bear a 6% dividend rate per annum, or $60.00 per share. The 1999 Series
preferred shares are convertible into common shares of EuroGas at the rate
of $1,000 divided by an applicable percentage (85.0% to 77.5% depending on
the number of days after issuance a registration statement filed with the
Securities Exchange Commission becomes effective) of the average closing
bid price for five trading days preceding the date of issuance or the
conversion date. Alternately, the 1999 Series preferred shares are
convertible into common shares of Big Horn Resources, Ltd. held by EuroGas
at the rate of $1,000 divided by an applicable percentage (80.0% if
conversion is from 46 to 75 days after issuance or 77.5% if conversion is
more than 75 days after issuance) of the average closing bid price of the
Big Horn common stock for five trading days preceding the conversion date.
EuroGas has placed 8,500,000 shares of Big Horn common stock in escrow for
use should the 1999 Series preferred shareholders elect to convert their
shares into Big Horn common shares. EuroGas recognized $270,000 in
preferred dividends for the effects of the 15% discount beneficial
conversion feature upon the issuance of the 1999 Series preferred stock.
F-25
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion,
and amortization as of December 31, 1998 and 1997, by geographic area, were
as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------- ------------ ------------
<S> <C> <C> <C>
AT DECEMBER 31, 1998
Unproved oil and gas properties. . . . . . . . $ 36,764,402 $ 9,776,610 $ 26,987,792
Proved oil and gas properties. . . . . . . . . 20,521,728 9,912,902 10,608,826
------------- ------------ ------------
Gross capitalized costs. . . . . . . . . . . . 57,286,130 19,689,512 37,596,618
Less: Ceiling test adjustment and
impairments . . . . . . . . . . . . . . . . . (6,459,442) (3,512,793) (2,946,649)
Less: Accumulated depreciation, depletion,
and amortization. . . . . . . . . . . . . . . (220,600) (220,600) -
Future abandonment and restoration . . . . . . (246,125) (246,125) -
------------- ------------ ------------
Net capitalized costs. . . . . . . . . . . . . $ 50,359,963 $ 15,709,994 $ 34,649,969
============= ============ ============
AT DECEMBER 31, 1997
Unproved oil and gas properties. . . . . . . . $ 25,665,373 $ - $ 25,665,373
Gross capitalized costs. . . . . . . . . . . . 25,665,373 - 25,665,373
Less: Ceiling test adjustment and
impairments . . . . . . . . . . . . . . . . . (2,941,713) - (2,741,713)
------------- ------------ ------------
Net capitalized costs. . . . . . . . . . . . . $ 22,723,660 $ - $ 22,723,660
============= =========== ============
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------- ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Property acquisition costs
Proved. . . . . . . . . . . . . . . . . . $ 8,784,050 $ 8,784,050 $ -
Unproved. . . . . . . . . . . . . . . . . 17,804,072 9,776,610 8,027,462
Exploration costs. . . . . . . . . . . . . . . 573,570 - 573,570
Development costs. . . . . . . . . . . . . . . 4,459,065 1,128,852 3,330,213
------------- ------------ ------------
Total Costs Incurred . . . . . . . . . . . . . $ 31,620,757 $ 19,689,512 $ 11,931,245
============= ============ ============
FOR THE YEAR ENDED DECEMBER 31, 1997
Property acquisition costs
Unproved. . . . . . . . . . . . . . . . . $ 7,574,601 $ - $ 7,574,601
Exploration costs. . . . . . . . . . . . . . . 3,368,917 - 3,368,917
Development costs. . . . . . . . . . . . . . . - - -
------------- ------------ ------------
Total Costs Incurred . . . . . . . . . . . . . $ 10,943,518 $ - $ 10,943,518
============= ============ ============
</TABLE>
F-26
<PAGE>
The results of operations from oil and gas producing activities for the
years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------- ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Oil and gas sales. . . . . . . . . . . . . . . $ 879,404 $ 879,404 $ -
Production costs . . . . . . . . . . . . . . . (305,009) (305,009) -
Impairment of mineral interests. . . . . . . . (3,512,792) (3,512,792) -
Depreciation, depletion, and amortization. . . (220,600) (220,600) -
------------- ------------ ------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs). . . . . . . . . . . . . . . $ (3,158,997) $ (3,158,997) -
============= ============ ============
FOR THE YEAR ENDED DECEMBER 31, 1997
Impairment of mineral interests. . . . . . . . $ (2,941,713) $ - $ (2,941,713)
Depreciation, depletion, and amortization. . . - - -
------------- ------------ ------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs). . . . . . . . . . . . . . . $ (2,941,713) $ - $ (2,941,713)
============= ============ ============
</TABLE>
RESERVE INFORMATION - The following estimates of proved and proved
developed reserve quantities, presented in barrels and thousand cubic feet
(MCF), and related standardized measure of discounted net cash flow are
estimates only, and do not purport to reflect realizable values or fair
market values of EuroGas' reserves. EuroGas emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and gas properties.
Accordingly, these estimates are expected to change as future information
becomes available. EuroGas' proved reserves are located in Canada and the
Slovak Republic. Unproved reserve properties are located in the Slovak
Republic, Sakha Republic (Russian Federation), Canada, Poland, and the
Ukraine.
Proved reserves are estimated reserves of crude oil (including condensate
and natural gas liquids) and natural gas that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered
through existing wells, equipment and operating methods.
<TABLE>
<CAPTION>
Total Canada Slovak Republic
---------------------- ---------------------- ----------------------
Oil Gas Oil Gas Oil Gas
(Barrels) (MCF) (Barrels) (MCF) (Barrels) (MCF)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Proved Developed and Undeveloped Reserves
Balance - January , 1998. . . - - - - - -
Purchases of minerals in
place. . . . . . . . . . . . 847,500 7,246,700 847,500 7,246,700 - -
Extensions and discoveries. . 94,880 5,487,785 - - 94,880 5,487,785
Production. . . . . . . . . . (36,500) (365,000) (36,500) (365,000) - -
---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 1998 . 905,880 12,369,485 811,000 6,881,700 94,880 5,487,785
========== ========== ========== ========== ========== ==========
Proved Developed Reserves -
December 31, 1998 . . . . . . 764,800 3,726,300 764,800 3,726,300 - -
========== ========== ========== ========== ========== ==========
</TABLE>
F-27
<PAGE>
The standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and
gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the
estimated future production of proved oil and gas
reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing
the proved reserves, less estimated future income tax
expenses (based on year-end statutory tax rates, with
consideration of future tax rates already legislated) to
be incurred on pretax net cash flows less the tax basis of
the properties and available credits, and assuming
continuation of existing economic conditions. The
estimated future net cash flows are then discounted using
a rate of 10 percent per year to reflect the estimated
timing of the future cash flows.
The standardized measure of discounted estimated net cash
flows related to proved oil and gas reserves at December
31, 1998 were as follows. There were no proved oil and
gas reserves at December 31, 1997 or December 31, 1996:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows. . . . . . . . . . . . . . $ 36,750,126 $ 20,864,305 $ 15,885,821
Future production costs and
development costs . . . . . . . . . . . . . . (9,937,200) (8,431,705) (1,505,494)
Future income tax expenses . . . . . . . . . . (3,379,138) (2,096,829) (1,282,310)
------------ ------------ ------------
Future net cash flows. . . . . . . . . . . . . 23,433,788 10,335,771 13,098,017
10% annual discount for estimated
timing of cash flows. . . . . . . . . . . . . (9,770,798) (3,935,291) (5,835,507)
------------ ------------ ------------
Standardized measures of discounted future
net of cash flows relating to proved oil
and gas reserves. . . . . . . . . . . . . . . $ 13,662,990 $ 6,400,480 $ 7,262,510
============ ============ ============
</TABLE>
The primary changes in the standardized measure of discounted estimated
future net cash flows for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
Beginning of year. . . . . . . . . . . . . . . $ - $ - $ -
Purchase of minerals in place. . . . . . . . . 6,948,967 6,948,967 -
Extensions and discoveries . . . . . . . . . . 6,857,937 - 6,857,937
Development. . . . . . . . . . . . . . . . . . 4,406,706 1,076,493 3,330,213
Production . . . . . . . . . . . . . . . . . . (574,395) (574,395) -
Revisions of estimates:
Sales prices . . . . . . . . . . . . . . . (320,693) - (320,693)
Development costs. . . . . . . . . . . . . (2,580,213) - (2,580,213)
Accretion of discount. . . . . . . . . . . . . 866,857 180,583 686,274
Net change in income taxes . . . . . . . . . . (2,004,491) (1,293,483) (711,008)
Change in exchange rate. . . . . . . . . . . . 62,315 62,315 -
------------ ------------ ------------
End of year. . . . . . . . . . . . . . . . . . $ 13,662,990 $ 6,400,480 $ 7,262,510
============ ============ ============
</TABLE>
F-28
<PAGE>
EUROGAS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Effective October 5, 1998, EuroGas, Inc. ("EuroGas") completed
the acquisition of 14,100,000 common shares (slightly more
than a 50% interest) of Big Horn Resources Ltd. ("Big
Horn"), an oil and gas exploration and production company
operating in Western Canada. The accompanying unaudited
pro forma condensed consolidated statement of operations
has been prepared to present the results of operations of
EuroGas, Inc. and subsidiaries as if the acquisition of
Big Horn had occurred on January 1, 1998. By the date of
the closing of the acquisition on March 31, 1999, EuroGas
had made cash payments of $4,723,498 on October 17, 1998,
executed promissory notes on March 30, 1999 in the
aggregate amount of $1,840,224, and had canceled a June
1998 note receivable from one of the Big Horn shareholders
in the amount of $1,100,000. These payments and the face
amount of the notes were discounted by $70,238 using a 10%
discount rate to establish the purchase price on October
5, 1998, the date the parties agreed to the terms of these
transactions, of $7,593,484.
The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined
based upon the fair value of the consideration paid. The
purchase price was allocated to the acquired net assets of
Big Horn based upon their relative fair values on the
effective date of the acquisition. The fair value of the
acquired properties was based on a reserve report
prepared by independent petroleum engineers. The purchase
price exceeded the fair value of the net assets acquired
by $3,512,792 which was recognized by EuroGas, Inc. as a
non-recurring impairment expense at the date of the
acquisition.
The following financial information was derived from, and
should be read in conjunction with the consolidated
statements of operations of EuroGas, Inc. and subsidiaries
and of Big Horn for the year ended December 31, 1998. The
operations of Big Horn were included in the consolidated
results of operations of EuroGas, Inc. and subsidiaries
from October 5, 1998. Accordingly, adjustments have been
made to eliminate the duplication of the Big Horn
operations for the three months ended December 31, 1998.
Since the results of operations from Big Horn are included
in the consolidated results of operations of EuroGas, Inc.
and subsidiaries for the three months ended March 31,
1999, operations for Big Horn and related pro forma
amounts have not been separately presented for that
period. The unaudited condensed consolidated pro forma
statement of operations has been included herein for
comparative purposes only and does not purport to be
indicative of the results of operations which actually
would have been obtained had the agreement been completed
on January 1, 1998, or the results of operations which may
be obtained in the future. In addition, future results may
vary significantly from the results reflected in this pro
forma financial statement.
F-29
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Big Horn Pro Forma Pro Forma
EuroGas, Inc. Resources Adjustments Results
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Oil and Gas Sales $ 879,404 $ 2,711,520 (A) $ (879,404)
(C) (573,105) $ 2,138,415
----------- ----------- ----------- ------------
Costs and Operating Expenses
Oil and gas production costs 305,009 828,950 (A) (305,009) 828,950
Impairment of mineral interest
and equipment 3,512,792 1,281,221 (D) (3,512,792) -
(F) (1,281,221) -
Royalties - 573,105 (C) (573,105) -
Depreciation, depletion,
and amortization 293,955 872,579 (B) (7,114) -
(A) (246,125) 913,295
General and administrative 7,804,401 222,826 (A) (41,121) 7,986,106
----------- ----------- ----------- ------------
Total Costs and Operating
Expenses 11,916,157 3,778,681 (5,966,487) 9,728,351
----------- ----------- ----------- ------------
Other Income (Expense)
Interest income 593,570 63,443 (A) (62,521) 594,492
Foreign exchange net losses (130,419) - - (130,419)
Interest expense (465,371) (96,240) (A) 61,412 (500,199)
Income tax benefit - 14,869 - 14,869
Minority interest in income
of subsidiary (137,983) - (E) 67,927 (70,056)
Other 152,776 - - 152,776
----------- ----------- ----------- ------------
Total Other Income (Expense) 12,573 (17,928) 66,818 61,463
----------- ----------- ----------- ------------
Net Loss (11,024,180) (1,085,089) 4,580,796 (7,528,473)
Preferred Dividends (2,861,301) - - (2,861,301)
------------ ----------- ----------- ------------
Loss Applicable to Common Shares $(13,885,481) $(1,085,089) $ 4,580,796 $(10,389,774)
============ =========== =========== ============
Basic and Diluted Loss Per
Common Share $ (0.22) $ (0.16)
============ ============
Weighted Average Number of Common
Shares Used In Per Share
Calculations 64,129,062 64,129,062
============ ============
</TABLE>
Notes to the unaudited pro forma condensed consolidated statement of
operations are presented on the following page.
F-30
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
NOTE 1- Pro forma adjustments are as follows:
A - Adjustments to eliminate duplicated Big Horn operations
from October 5, 1998 through December 31, 1998. The EuroGas
condensed consolidated statement of operations for the year ended
December 31, 1998 includes the results of operations of Big Horn
from the date of its acquisition on October 5, 1998.
B - Adjustment to reflect depletion expense based upon an allocation of
EuroGas' purchase price and assuming the acquisition occurred on
January 1, 1998.
C - Adjustment to classify royalties according to U.S. generally accepted
accounting principles.
D - Adjustment to eliminate the nonrecurring impairment loss recognized
by EuroGas which was directly attributable to the acquisition.
E - Adjustment to reflect minority interest in the Big Horn income from
January 1, 1998
F - Adjustment to eliminate the impairment loss recognized by Big Horn
prior to the EuroGas acquisition.
NOTE 2- The translation to U.S. dollars and adjustments to U.S.
generally accepted accounting principles of the Big Horn financial
statements, which were prepared in Canadian dollars and using Canadian
generally accepted accounting principles, was done using the average
exchange rate for the year ended December 31, 1998, as follows:
<TABLE>
<CAPTION>
U.S.
Canadian GAAP in U.S.
Financial U.S. GAAP Canadian Exchange GAAP in
Statements Adjustments Dollars Rate U.S. Dollars
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue and Income
Oil and gas sales $ 4,021,076 $ 4,021,076 1.48 $ 2,711,520
Interest and other
income 94,084 94,084 1.48 63,443
----------- ----------- ---------- -----------
Total Revenue and
Income 4,115,160 4,115,160 1.48 2,774,963
----------- ----------- ----------
Costs and Expenses
Oil and gas production
costs 1,229,300 1,229,300 1.48 828,950
Impairment of mineral
interest and equipment - $ 1,900,000 1,900,000 1.48 1,281,221
Royalties 849,892 849,892 1.48 573,105
Depreciation, depletion,
and amortization 1,365,000 (71,000) 1,294,000 1.48 872,579
General and administrative 330,442 330,442 1.48 222,826
Interest 142,720 142,720 1.48 96,240
Income tax benefit - (22,050) (22,050) 1.48 (14,869)
----------- ----------- ----------- -----------
Total Costs and Expenses 3,917,354 1,806,950 5,724,304 1.48 3,860,052
----------- ----------- ----------- -----------
Net Income (Loss) $ 197,806 $(1,806,950) $(1,609,144) 1.48 $(1,085,089)
=========== =========== =========== ===========
</TABLE>
F-31
<PAGE>
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of Big Horn Resources Ltd.
as at December 31, 1998 and 1997 and the consolidated statements of
earnings and deficit and changes in financial position for the years then
ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at December
31, 1998 and 1997 and the results of its operations and the changes in its
financial position for the years then ended in accordance with generally
accepted accounting principles in Canada.
KPMG LLP
Chartered Accountants
Calgary, Canada
March 26, 1999
F-32
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------
DECEMBER 31 December 31
1998 1997
-------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $252,175 $76,240
Accounts receivable 1,702,025 1,851,835
Prepaid expenses and other assets 12,986 5,336
- - --------------------------------------------------------------------------
1,967,186 1,933,411
CAPITAL ASSETS (NOTE 3) 15,181,925 4,428,367
- - --------------------------------------------------------------------------
$17,149,111 $6,361,778
==========================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $1,867,680 $1,946,172
- - --------------------------------------------------------------------------
1,867,680 1,946,172
BANK INDEBTEDNESS (NOTE 4) 1,421,759 1,600,000
Provision for future abandonment and
site restoration costs 191,670 50,000
- - --------------------------------------------------------------------------
3,481,109 3,596,172
- - --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 5) 18,209,175 7,504,585
DEFICIT (4,541,173) (4,738,979)
- - --------------------------------------------------------------------------
13,668,002 2,765,606
SUBSEQUENT EVENTS (NOTE 8)
- - --------------------------------------------------------------------------
$17,149,111 $6,361,778
==========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-33
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
-------------------------------------------------------------------------
YEAR Year
ENDED Ended
DECEMBER 31 December 31
1998 1997
---------------------------------------------------------------------------
REVENUE
Oil and gas sales $3,807,620 $2,637,805
Alberta royalty tax credit 213,456 93,981
Interest and other income 94,084 4,813
-------------------------------------------------------------------------
4,115,160 2,736,599
-------------------------------------------------------------------------
EXPENSES
Operating expenses 1,229,300 858,848
Royalties 849,892 759,855
General and administrative 330,442 243,413
Interest on long-term debt 142,720 93,121
Depletion and depreciation (note 3) 1,365,000 5,118,937
-------------------------------------------------------------------------
3,917,354 7,074,174
-------------------------------------------------------------------------
NET EARNINGS (LOSS) 197,806 (4,337,575)
DEFICIT - BEGINNING OF YEAR (4,738,979) (401,404)
-------------------------------------------------------------------------
DEFICIT - END OF YEAR ($4,541,173) ($4,738,979)
=========================================================================
BASIC EARNINGS (LOSS) PER SHARE $0.01 ($0.46)
=========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-34
<PAGE>
Big Horn Resources Ltd.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
- - --------------------------------------------------------------------------
YEAR Year
ENDED Ended
DECEMBER 31 December 31
1998 1997
-------------------------------------------------------------------------
Cash provided by (used in):
Operations
Net earnings (loss) $197,806 ($4,337,575)
Add non-cash items:
Depletion and depreciation 1,365,000 5,118,937
Net change in non-cash working
capital items (644,282) (522,658)
-------------------------------------------------------------------------
918,524 258,704
-------------------------------------------------------------------------
Financing
Issue of share capital 10,704,590 3,492,035
Increase (decrease) in bank
indebtedness (178,241) 208,074
Accrued share issue costs - 150,000
-------------------------------------------------------------------------
10,526,349 3,850,109
-------------------------------------------------------------------------
Investing
Acquisition of Ironwood Petroleum
Ltd., net of cash acquired (6,548,925) -
Additions to capital assets (4,720,013) (4,032,573)
-------------------------------------------------------------------------
(11,268,938) (4,032,573)
Increase in cash 175,935 76,240
Cash, beginning of year 76,240
-------------------------------------------------------------------------
Cash, end of year $252,175 $76,240
=========================================================================
See accompanying notes to consolidated financial statements
F-35
<PAGE>
Big Horn Resources Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
__________________________________________________________________________
1. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada.
Substantially all of the exploration and production activities of the
Company are conducted jointly with others and these consolidated
financial statements reflect only the Company's proportionate
interest in such activities. These consolidated financial statements
include the accounts of Ironwood Petroleum Ltd. ("Ironwood")
effective from October 1, 1998.
(a) Petroleum and natural gas properties
The Company follows the full cost method of accounting for petroleum
and natural gas properties. All costs related to the exploration for
and the development of oil and gas reserves are capitalized on a
country by country basis. Costs capitalized include land acquisition
costs, geological and geophysical expenditures, lease rentals on
undeveloped properties and costs of drilling productive and
non-productive wells. Proceeds from the disposal of properties are
applied as a reduction of cost without recognition of a gain or loss
except where such disposals would result in a significant change in
the depletion rate.
Capitalized costs are depleted and depreciated using the unit of
production method based on the estimated gross proven oil and natural
gas reserves before royalties as determined by independent engineers.
Units of natural gas are converted into equivalent barrels of oil
based on their on their relative energy content.
Capitalized costs, net of accumulated depletion and depreciation,
are limited to estimated undiscounted future net revenues from proven
reserves, based on year-end prices, less estimated future site
restoration costs, general and administrative expenses, financing
costs and income taxes.
Estimated future abandonment and site restoration costs are
provided for over the life of proven reserves on a unit of production
basis. The annual charge is included in depletion and depreciation
expense and actual abandonment and site restoration costs are charged
to the provision as incurred.
The amounts recorded for depletion and depreciation and the
provision for future abandonment and site restoration costs are based
on estimates of proven reserves and future costs. The recoverable
value of capital assets is based on a number of factors including the
estimated proven reserves and future costs. By their nature, these
estimates are subject to measurement uncertainty and the impact on
financial statements of future periods could be material.
(b) Per share data
Per share amounts are calculated based on the weighted average
number of shares outstanding during the year. The exercise of stock
options and warrants would not have a material dilutive effect on the
per share data.
(c) Financial instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, accrued liabilities and bank
indebtedness. The fair values of all of the Company's financial
instruments approximate their carrying values.
(d) Estimates and assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
F-36
<PAGE>
2. ACQUISITION
Effective October 1, 1998 the Company acquired all of the issued
and outstanding shares of Ironwood for $7,230,361 including
acquisition costs of $143,191.
This business combination has been accounted for using the
purchase method based on the assets and liabilities of Ironwood as at
September 30, 1998. The results of operations of Ironwood have been
included in the Company's consolidated financial statements effective
from October 1, 1998.
Details of the acquisition are as follows:
Assets acquired:
Current assets, excluding cash $613,792
Capital assets 7,342,545
----------
7,956,337
Liabilities assumed:
Current liabilities 1,321,742
Provision for future abandonment
and site restoration costs 85,670
----------
1,407,412
Net non-cash assets acquired 6,548,925
Cash acquired 681,436
----------
Net assets acquired $7,230,361
==========
Consideration:
Cash $7,230,361
==========
3. CAPITAL ASSETS
------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------------
Accumulated
depletion and
Cost depreciation Net
-------------------------------------------------------------------------
Petroleum and natural
gas properties $22,716,141 $7,593,981 $15,122,160
Office furniture and
equipment 91,265 31,500 59,765
-------------------------------------------------------------------------
$22,807,406 $7,625,481 $15,181,925
=========================================================================
December 31, 1997
-------------------------------------------------------------------------
Accumulated
depletion and
Cost depreciation Net
-------------------------------------------------------------------------
Petroleum and natural
gas properties $10,672,915 $6,304,981 $4,367,934
Office furniture and
equipment 71,933 11,500 60,433
-------------------------------------------------------------------------
$10,744,848 $6,316,481 $4,428,367
=========================================================================
F-37
<PAGE>
The provision for depletion and depreciation in 1998 and 1997
includes the following components:
1998 1997
-------------------------------------------------------------------------
Amortization of capital assets $1,309,000 $ 982,800
Provision for future abandonment and
site restoration 56,000 36,000
Write-down of abandoned overseas properties - 300,137
Ceiling test adjustment - 3,800,000
-------------------------------------------------------------------------
$1,365,000 $5,118,937
=========================================================================
As at December 31, 1998 costs of undeveloped land of $3,100,00
(1997 - $824,712) have been excluded from the calculation of
depletion expense.
4. BANK INDEBTEDNESS
Bank indebtedness represents the outstanding balance under an
authorized line of credit of $7,000,000 (1997 - $2,300,000) with the
Alberta Treasury Branches. Drawings under the line of credit bear
interest at 1% above the bank's prime lending rate. Security is
provided by a first charge over all of the Company's assets. The
balance is repayable on demand.
F-38
<PAGE>
5. SHARE CAPITAL
(a) Authorized
Unlimited number of voting common shares without nominal or par value.
(b) Issued and to be issued.
-------------------------------------------------------------------------
Number of
common
shares Amount
-------------------------------------------------------------------------
Balance, December 31, 1996, shares issued and
to be issued 8,818,221 $4,012,550
Shares issued on exercise of warrants 436,250 305,377
Shares issued on exercise of warrants ( see
note 5(c) ) 500,000 115,000
Shares issued on exercise of stock options 73,500 26,460
-------------------------------------------------------------------------
Balance, December 31, 1997, shares issued 9,827,971 4,459,387
Proceeds received on issue of Special
Warrants, net of issue costs of $388,802
(see note 5(d)) - 3,045,198
-------------------------------------------------------------------------
Balance, December 31, 1997, shares issued
and to be issued 9,827,971 7,504,585
Shares issued on conversion of Special
Warrants ( see note 5(d) ) 3,434,000 -
Shares issued on exercise of stock options 564,500 172,260
Shares issued as compensation 10,220 9,198
Shares issued on private placement
(see note 5(e) ) 3,210,000 3,600,000
Shares issued on private placement
(see note 5(f) ) 1,075,500 914,175
Proceeds received from private placement
subscription ( see note 5(g) ) - 6,500,000
Share issue costs - (491,043)
-------------------------------------------------------------------------
Balance, December 31, 1998, shares issued 18,122,191 $11,709,175
Proceeds received from private placement
subscription (see note 5(g)) - 6,500,000
=========================================================================
Balance, December 31, 1998, shares issued
and to be issued 18,122,191 $18,209,175
=========================================================================
(c) On August 26, 1997, 500,000 common shares were issued to an
officer and director of the Company on the exercise of
500,000 share purchase warrants at a price of $0.23 per share
for an aggregate consideration of $115,000.
(d) On September 16, 1997, the Company issued 592,000 Special
Warrants at a price of $2.00 per Special Warrant. Each
Special Warrant entitled the holder to acquire one common
share, one flow-through common share and one share purchase
warrant at no additional cost. Each share purchase warrant
entitled the holder to purchase an additional share of the
Company at a price of $1.25 per share exercisable until
September 21, 1998. On September 17, 1997 the Company issued
2,250,000 Special Warrants, of which 1,125,000 were
flow-through Special Warrants, at a price of $1.00 per
Special Warrant. Each Special Warrant entitled the holder to
acquire one common share and one share purchase warrant at no
additional cost. Each share purchase warrant entitled the
holder to purchase an additional share of the Company at a
price of $1.25 per share exercisable until September 21,
1998. The net proceeds to the Company from both issues were
$3,045,585. These proceeds were received in 1997. All of
the common shares referred to above were issued in 1998. The
share purchase warrants expired unexercised on September 21,
1998.
F-39
<PAGE>
(e) On March 20, 1998, the Vancouver Stock Exchange approved a
non-brokered private placement of 3,000,000 common shares at a price
of $1.20 per share for proceeds of $3,600,000. The private placement
included 2,000,000 share purchase warrants exercisable up to March
22, 1999 at a price of $1.50 per common share. In addition, 210,000
common shares were issued as a finder's fee. The share purchase
warrants expired unexercised on March 22, 1999.
(f) On December 31, 1998 the Company issued 1,075,500 flow-through
common shares through a non-brokered private placement. Proceeds to
the Company from this issue were $914,175. Pursuant to the
flow-through share agreement, the Company will renounce $914,175 of
income tax deductions to the subscribers to these shares. At
December 31, 1998 $379,547 had been renounced.
(g) As described in note 2, the Company acquired, effective October
1, 1998, all of the issued and outstanding shares of Ironwood for
$7,230,361. This acquisition was partly financed by the issuance of
10,000,000 common shares at a price of $0.65 per share. This private
placement received final approval by the Toronto Stock Exchange on
January 29, 1999 and the common shares were issued from treasury on
February 4, 1999. The remaining funds held in escrow pursuant to the
private placement were released to the Company on February 5, 1999 in
the amount of $4,278,241. These funds are recorded as a reduction in
the Company's bank indebtedness at December 31, 1998.
(h) Options:
Number of options Exercise price Expiry date
----------------- -------------- -----------------
175,000 $0.69 November 25, 2001
85,000 $0.92 July 16, 2002
30,000 $1.15 March 09, 2003
85,000 $1.15 March 09, 2006
534,500 $0.98 May 26, 2008
25,000 $0.97 July 30, 2008
--------------------------------------------------
934,500
==================================================
(i) Warrants:
There are 50,000 share purchase warrants held by a company controlled
by a consultant to the Company as partial consideration for the purchase
of certain petroleum and natural gas properties. These warrants are
exercisable up to June 10, 1999 at an exercise price of $1.15.
There are 225,000 broker warrants outstanding related to the issue of
the Special Warrants referred to in note 5(d). These warrants vest as
to 1/4 on each of September 19, 1998, March 19, 1999, September 19, 1999
and March 19, 2000. These warrants are exercisable at a price of $1.00
per common share. The warrants will expire if not exercised on or
before the September 19, 2000.
F-40
<PAGE>
6. INCOME TAXES
The income tax provision is calculated by applying Canadian
federal and provincial statutory tax rates to pre-tax income with
adjustments as set out in the following table:
1998 1997
-------- -----------
Earnings (loss) before income taxes $197,806 $(4,337,575)
Combined federal and provincial income tax
rate 45% 45%
Computed income tax provision $ 89,013 $(1,951,909)
Increase (decrease) resulting from:
Non-deductible Crown royalties 330,734 315,925
Resource allowance (248,225) (143,808)
Alberta Royalty Tax Credit (96,056) -
Recognition of accounting loss
carry-forwards (361,939) -
Depletion on assets with no tax base 285,237 818,100
Accounting losses not recognized - 1,001,208
Other 1,236 2,775
--------- -----------
$ - $ -
========= ===========
At December 31, 1998 the Company had approximately $12,697,000
(1997 - $6,240,000) of tax pools available to reduce future taxable
income.
7. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use
two digits rather than four to identify a year. Date-sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using year 2000 dates is
processed. In addition, similar problems may arise in some systems
which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before,
on or after January 1, 2000 and, if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant system failure which could affect the Company's ability
to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers,
suppliers or other third parties, will be fully resolved.
8. SUBSEQUENT EVENTS
(a) On January 1, 1999 the Company amalgamated with its wholly-owned
subsidiary, Ironwood Petroleum Ltd. under the continuing name Big Horn
Resources Ltd.
(b On February 4, 1999 the Company issued 10,000,000 common shares
from treasury as described in note 5(g).
(c) On February 5, 1999 the Company received the remaining proceeds
from escrow from its private placement as described in note 5(g).
9. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN
CANADA AND THE UNITED STATES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada.
Differences in accounting principles as they pertain to the accompanying
financial statements are immaterial except as described below:
(a) Under U.S. GAAP the carrying value of petroleum and natural gas
properties and related facilities, net of deferred income taxes, is
limited to the present value of after-tax future net revenue from
proven reserves based on prices and costs at the balance sheet date
and discounted at 10%, plus the lower of cost and fair value of
unproven properties. The application of the full cost ceiling test
under U.S. GAAP resulted in a write-down of capitalized costs in 1998.
(b) Under U.S. GAAP deferred income tax assets or liabilities are
computed on the difference between financial statements and income
tax bases of assets and liabilities. Deferred income tax provisions
are based on the change during the period in the related deferred
income tax asset or liability accounts.
F-41
<PAGE>
(c) Under U.S. GAAP future income taxes are recognized on the
difference between the book value and the tax value of net assets
acquired on a purchase.
(d) Under U.S. GAAP, cash restricted for use in repayment of
bank indebtedness is shown as a current asset.
The impact of the differences between Canadian and U.S. GAAP on the
consolidated statements of earnings and deficit are as follows:
1998 1997
-------------------------
Net earnings (loss) under Canadian GAAP 197,806 $(4,337,575
Ceiling test write-down (1,900,000) -
Application of liability method for
income taxes 22,050 -
Adjustment of depletion 71,000 160,000
--------------------------------------------------------------------
Net earnings(loss)under U.S. GAAP $(1,609,144) $(4,177,575)
--------------------------------------------------------------------
Earnings per share under U.S. GAAP $(0.09) $(0.43)
The impact of the differences between Canadian and U.S. GAAP on the
consolidated balance sheets are as follows:
CANADIAN
GAAP ADJUSTMENTS US GAAP
--------------------------------------------
December 31, 1998
Restricted cash $ - $ 4,278,241 $ 4,278,241
Capital assets 15,181,925 (1,128,460) 14,053,465
Bank indebtedness (1,421,759) 4,278,241 5,700,000
Deferred income tax
liability - 1,918,490 1,918,490
Deficit (4,541,173) (3,046,950) (7,588,123)
December 31, 1997
Capital assets $ 4,428,367 $(1,240,000) $ 3,188,367
Deficit 4,738,979 (1,240,000) (5,978,979)
F-42
<PAGE>
Part II
INFORMATION NOT REQUIRED TO BE 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:
Securities and Exchange Commission registration Fee $ 1,202
Legal fees 20,000
State "blue sky" fees and expenses (including
attorney's fees) 4,798
Accounting fees and expenses 30,000
Printing expenses 1,000
Listing fees -
--------
Total $ 57,000
All expenses, except the SEC fees, are estimates.
The Selling Shareholder 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
The Company's articles of incorporation provide that officers
and directors of the Company shall be indemnified to the maximum
extent permitted by law. The provisions of the Utah Revised
Business Corporation Act (the "Revised Act") are, and provide, as
follows:
Section 16-10a-902 ("Section 902") of the Revised Act
provides that a corporation may indemnify any individual who was,
is, or is threatened to be made a named defendant or respondent (a
"Party") in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (a "Proceeding"),
because he is or was a director of the corporation or, while a
director of the corporation, is or was serving at its request as a
director, officer, partner, trustee, employee, fiduciary or agent
of another corporation or other person or of an employee benefit
plan (an "Indemnifiable Director"), against any obligation
incurred with respect to a Proceeding, including any judgment,
settlement, penalty, fine or reasonable expenses (including
attorneys' fees), incurred in the Proceeding if his conduct was in
good faith, he reasonably believed that his conduct was in, or not
opposed to, the best interests of the corporation, and, in the
case of any criminal Proceeding, he had no reasonable cause to
believe his conduct was unlawful; provided however, that, pursuant
to Subsection 902(4), (i) indemnification under Section 902 in
connection with a Proceeding by or in the right of the corporation
is limited to payment of reasonable expenses (including attorneys'
fees) incurred in connection with the Proceeding and (ii) the
corporation may not indemnify an Indemnifiable Director in
connection with a Proceeding by or in the right of the corporation
in which the Indemnifiable Director was adjudged liable to the
corporation, or in connection with any other Proceeding charging
that the Indemnifiable Director derived an improper personal
benefit, whether or not involving action in his official capacity,
in which Proceeding he was adjudged liable on the basis that he
derived an improper personal benefit.
Section 16-10a-903 ("Section 903") of the Revised Act
provides that, unless limited by its articles of incorporation, a
corporation shall indemnify an Indemnifiable Director who was
successful, on the merits or otherwise, in the defense of any
Proceeding, or in the defense of any claim, issue or matter in the
Proceeding, to which he was a Party because he is or was an
Indemnifiable Director of the corporation, against reasonable
expenses (including attorneys' fees) incurred by him in connection
with the Proceeding or claim with respect to which he has been
successful.
<PAGE> 49
In addition to the indemnification provided by Sections 902
and 903, Section 16-10a-905 ("Section 905") of the Revised Act
provides that, unless otherwise limited by a corporation's
articles of incorporation, an Indemnifiable Director may apply for
indemnification to the court conducting the Proceeding or to
another court of competent jurisdiction. On receipt of an
application and after giving any notice the court considers
necessary, (i) the court may order mandatory indemnification under
Section 903, in which case the court shall also order the
corporation to pay the director's reasonable expenses to obtain
court-ordered indemnification, or (ii) upon the court's
determination that the director is fairly and reasonably entitled
to indemnification in view of all the relevant circumstances and
regardless of whether the director met the applicable standard of
conduct set forth in Section 902 or was adjudged liable as
described in Subsection 902(4), the court may order
indemnification as the court determines to be proper, except that
indemnification with respect to certain Proceedings resulting in a
director being found liable as described in Subsection 902(4) is
limited to reasonable expenses (including attorneys' fees)
incurred by the director.
Section 16-10a-904 ("Section 904") of the Revised Act
provides that a corporation may pay for or reimburse the
reasonable expenses (including attorneys' fees) incurred by an
Indemnifiable Director who is a Party to a Proceeding in advance
of the final disposition of the Proceeding if (i) the director
furnishes the corporation a written affirmation of his good faith
belief that he has met the applicable standard of conduct
described in Section 902, (ii) the director furnishes to the
corporation a written undertaking, executed personally or in his
behalf, to repay the advance if it is ultimately determined that
he did not meet the required standard of conduct, and (iii) a
determination is made that the facts then known to those making
the determination would not preclude indemnification.
Section 16-10a-907 of the Revised Act provides that, unless a
corporation's articles of incorporation provide otherwise, (i) an
officer of the corporation is entitled to mandatory
indemnification under Section 903 and is entitled to apply for
court ordered indemnification under Section 905, in each case to
the same extent as an Indemnifiable Director, (ii) the corporation
may indemnify and advance expenses to an officer, employee,
fiduciary or agent of the corporation to the same extent as an
Indemnifiable Director, and (iii) a corporation may also indemnify
and advance expenses to an officer, employee, fiduciary or agent
who is not an Indemnifiable Director to a greater extent than the
right of indemnification granted to Indemnifiable Directors, if
not inconsistent with public policy, and if provided for by its
articles of incorporation, bylaws, general or specific action of
its board of directors or contract.
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
UNREGISTERED SALES OF SECURITIES IN 1999
On November 4, 1999, the Company completed a private
placement of 1,800 shares of Series C Preferred Stock to the
Selling Shareholder, an accredited investor, resulting in net
proceeds to the Company of approximately $1,651,500 to be used for
general working capital. The private placement of the Series C
Preferred Stock was effected in reliance upon the exemption for
sales of securities not involving a public offering, as set forth
in Section 4(2) of the Securities Act of 1933, as amended, based
upon the following based upon the following: (a) the investor
represented and warranted to the Company that it was an
"accredited investor," as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background,
education, and experience in financial and business matters as to
be able to evaluate the merits and risks of an investment in the
securities; (b) there was no public offering or general
solicitation with respect to the offering, and the investor
represented and warranted that it was acquiring the securities for
its own account and not with an intent to distribute the such
securities; (c) the investor was provided with copies of the
Company's most recent Annual Report on Form 10-KSB and any and all
other information requested by the investor with respect to the
Company, (d) the investor acknowledged that all securities being
purchased were "restricted securities" for purposes of the
Securities Act, and agreed to transfer such securities only in a
transaction registered with the SEC under the Securities Act or
exempt from registration under the Securities Act; and (e) a
legend was placed on the certificates and other documents
representing each such security stating that it was restricted and
could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from
registration under the Securities Act.
<PAGE> 50
During 1999, the Company completed two private placements of
1998 Series B Convertible Preferred Stock to an existing
shareholder of the Company pursuant to the Series B Subscription
Agreement (described in greater detail below). The company sold
an aggregate of 6,500 shares of Series B Convertible Preferred
Stock, resulting in net proceeds to the Company of approximately
$6,012,500. The private placements of the Series B Convertible
Preferred Stock were effected in reliance upon the exemption for
sales of securities not involving a public offering, as set forth
in Section 4(2) of the Securities Act of 1933, as amended, based
upon the Company's pre-existing relationship with the purchaser
and representations and warranties provided by the purchaser.
UNREGISTERED SALES OF SECURITIES IN 1998
In May 1998, the Company entered into the Series B
Subscription Agreement, pursuant to which it agreed to sell up to
30,000 shares of its 1998 Series B Convertible Preferred Stock at
the price of $1,000 per share for an aggregate of $30,000,000
gross proceeds to three accredited investors. At the time of the
execution of the Series B Subscription Agreement, 8,000 shares
were sold by the Company under the under the Series B Subscription
Agreement, resulting in net proceeds of $7,400,000; on September
12, 1998, the Company sold an additional 5,500 shares of Series B
Convertible Preferred Stock under the Series B Subscription
Agreement, resulting in net proceeds of approximately $5,100,000;
and on November 13, 1998, the Company sold another 3,500 shares of
Series B Convertible Preferred Stock under the Series B
Subscription Agreement, resulting in net proceeds of approximately
$3,200,000.
Such sales of the Series B Convertible Preferred Stock were
effected in reliance upon the exemption for sales of securities
not involving a public offering, as set forth in Section 4(2) of
the Securities Act of 1933, as amended, based upon the following
based upon the following: (a) the investor represented and
warranted to the Company that it was an "accredited investor," as
defined in Rule 501 of Regulation D promulgated under the
Securities Act and had such background, education, and experience
in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was
no public offering or general solicitation with respect to the
offering, and the investor represented and warranted that it was
acquiring the securities for its own account and not with an
intent to distribute the such securities; (c) the investor was
provided with copies of the Company's most recent Annual Report on
Form 10-KSB and any and all other information requested by the
investor with respect to the Company, (d) the investor
acknowledged that all securities being purchased were "restricted
securities" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered with the
SEC under the Securities Act or exempt from registration under
the Securities Act; and (e) a legend was placed on the
certificates and other documents representing each such security
stating that it was restricted and could only be transferred if
subsequently registered under the Securities Act or transferred in
a transaction exempt from registration under the Securities Act.
UNREGISTERED SALES OF SECURITIES IN 1997
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. Unless otherwise noted, each such sale of the Series B
<PAGE> 51
Convertible Preferred Stock was effected in reliance upon the
exemption for sales of securities not involving a public offering
set forth in Section 4(2) of the Securities Act of 1933 and/or
upon Rule 506 of Regulation D promulgated under the Securities
Act, based upon the following: (a) each investor represented and
warranted to the Company that he/she/or it was an "accredited
investor," as defined in Rule 501 of Regulation D promulgated
under the Securities Act and/or had such background, education,
and experience in financial and business matters as to be able to
evaluate the merits and risks of an investment in the securities;
(b) there was no public offering or general solicitation with
respect to the offering, and each investor represented and
warranted that he/she/it was acquiring the securities for
his/her/its own account and not with an intent to distribute the
such securities; (c) each investor was provided with copies of the
Company's most recent Annual Report on Form 10-KSB and any and all
other information requested by such investor with respect to the
Company, (d) each investor acknowledged that all securities being
purchased were "restricted securities" for purposes of the
Securities Act, and agreed to transfer such securities only in a
transaction registered with the SEC under the Securities Act or
exempt from registration under the Securities Act; and (e) a
legend was placed on the certificates and other documents
representing each such security stating that it was restricted and
could only be transferred if subsequently registered under the
Securities Act or transferred in a transaction exempt from
registration under the Securities Act. 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.
During the 1997 fiscal year, the holder 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 Shareholder 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 Shareholder 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.
<PAGE> 52
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Item 16. Exhibits and Financial Statement Schedules
(a) Financial Statements. The following Consolidated Financial
Statements of the Company and report of independent accountants,
unaudited pro forma financial statements, consolidated financial
statements of Big Horn Resources, Ltd. and report of independent
accountants are included on pages F-1 through F-42.
Page
1. EuroGas, Inc. and Subsidiaries
Report of Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets-September 30, 1999
(Unaudited)
and December 31, 1998 and 1997 . . . . . . . . . . . F-3
Consolidated Statements of Operations for the
Nine Months
Ended September 30, 1999 and 1998 (Unaudited),
and for the
Years Ended December 31, 1998, 1997 and 1996 . . . . F-4
Consolidated Statements of Stockholders' Equity
(Deficit)
for the Years Ended December 31, 1996, 1997
and 1998 and
for the Nine Months Ended September 30, 1999
(Unaudited), . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the
Nine Months
Ended September 30, 1999 and 1998 (Unaudited),
and for the
Years Ended December 31, 1998, 1997 and 1996 . . . . F-7
Notes to Consolidated Financial Statements . . . . . . F-9
Supplemental Information on Oil and Gas
Producing Activities (Unaudited) . . . . . . . . . . .F-26
2. Unaudited Pro Forma Condensed Consolidated Financial
Statement
Unaudited Pro Forma Condensed Consolidated
Statement of Operations . . . . . . . . . . . . . . .F-29
Unaudited Pro Forma Condensed Consolidated
Statement of
Operations for the Year Ended December 31,
1998 . . . . . . . . . . . . . . . . . . . . . . . . .F-30
Notes to the Unaudited Pro Forma Condensed
Consolidated Statement
of Operations . . . . . . . . . . . . . . . . . . .F-31
3. Big Horn Resources Ltd.
Auditors' Report to the Directors. . . . . . . . . . .F-32
Consolidated Balance Sheets--December 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . .F-33
Consolidated Statements of Earnings and Deficit
for the Years
Ended December 31, 1998 and 1997 . . . . . . . . . .F-34
Consolidated Statements of Changes in Financial
Position
for the Years Ended December 31, 1998 an 1997 . . .F-35
Notes to Consolidated Financial Statements for
the Years
Ended December 31, 1998 and 1997 . . . . . . . . . .F-36
<PAGE>
(b) Exhibits
<PAGE> 53
Exhibit
Number Title of Document Location
- ------ ---------------------------------------------- ------------------
2.1 Exchange Agreement between Northamption, Inc., Report on form 8-K
and Energy Global, A.G. dated August 3, 1994,
Exhibit No. 1*
2.2 Agreement and Plan of Merger between EuroGas, Report on Form 8-K
Inc., and Danube International Petroleum dated July 12, 1996
Company, Inc. dated July 3, 1996, as Exhibit No. 5*
amended.
2.3 English translation of Transfer Agreement Report on form 8-K
between EutoGas and OMV, Inc. for the dated June 11, 1997
Acquisition of OMV (Yakut) Exploration Exhibit No. 1*
GmbH dated June 1, 1997
2.4 Asset Exchange Agreement between EuroGas, Inc., Report on Form S-1
and Beaver River Resources, Ltd., dated April dated July 23, 1998
1, 1988 Exhibit No. 2.03*
3.1 Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
3.2 Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
3.3 Designation of Rights, Quarterly Report on
Privileges and Preferences Form 10-QSB dated
of 1995 Series Preferred Stock March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights Report on Form 8-K
Privileges and Preferences dated July 12, 1996
of 1996 Series Preferred Stock Exhibit No. 1*
3.5 Designation of Rights Report on form 8-K
Privileges and Preferences dated May 30 1997
1997 Series A Convertible Exhibit No. 1*
3.6 Deisgnation of Rights, Privileges Report on Form S-1
and Preferences of 1998 Series B Dated July 23, 1998
Convertible Preferred Stock Exhibit No. 3.06*
3.7 Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
3.8 Designation of Rights, Privileges, Filed herewith
and Preferences of 1999 Series C
6% Convertible Preferred Stock
4.1 Subscription Agreement between Report on Form S-1
EuroGas, In., and Thomas Kernaghan dated July 23, 1998
& Co., Ltd, dated May 292, 1998 Exhibit No. 4.01*
4.2 Warrant Agreement dated July 12, 1996, Report on Form 8-K
with Danube Shareholder dated July 12, 1996
Exhibit No. 2*
<PAGE> 54
4.3 Registration Rights Agreement Between Report on Form S-1
EuroGas, In., and Thomas Kernaghan dated July 23, 1998
& co., Ltd, dated May 29, 1998 Exhibit No. 4.02*
4.4 Registration Rights Agreement dated Report on Form 8-K
July 12, 1996, with Danube Shareholder dated July 12, 1996
Exhibit No. 3*
4.5 Registration Rights Agreement by and Report on Form S-1
among EuroGas, Inc., and Finance dated July 23, 1998
Credit & Development Corporation, Ltd. Exhibit No. 4.06*
dated June 30, 1997
4.6 Option granted to the Trustees of the Annual Report on
Estate of Bernice Pauahi Bishop Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*
4.7 Registration Rights Agreement by and Annual Report on
among EuroGas, Inc., and Kakui, Inc, and Form 10-KSB for the
the Trustees of the Estate of Bernice fiscal year ended
Pauahi Bishop December 31, 1995,
Exhibit No. 11*
4.8 Option issued to OMV Aktiengesellschaft Annual Report on
to acquire up to 2,000,000 shares of Form 10-KSB for
restricted common stock the fiscal year
ended December 31,
1996, Exhibit No.
13*
5.2 Opinion of Parr Waddoups Brown Gee & Filed herewith
Loveless
10.1 English translation of Mining Usufruct Quarterly Report on
Contract between The Minister of Form 10-Q dated
Environmental Protection, Natural September 30, 1997
Resources and Forestry of the Republic Exhibit No. 1*
of Poland and Pol-Tex Methane, dated
October 3, 1997
10.2 Agreement between Polish Oil and Gas Quarterly Report on
Mining Joint Stock Company and EuroGas, Form 10-Q dated
Inc., dated October 23, 1997 September 30, 1997
Exhibit No. 2*
10.3 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.4 Settlement Agreement by and among Annual Report on
Kukui, Inc., and Pol-tex Methane, Sp Form 10-KSB for the
zo.o., McKenzie Methane Rybnik, fiscal year ended
McKenzie Methane Jastrzebie, GlobeGas, December 31, 1995,
B.V. (formerly known as McKenzie Exhibit No. 15*
Methane Poland, B.V.), and the
Unsecured Creditors' Trust of the
Bankruptcy Estate of McKenzie Methane
Corporation
10.5 Acquisition Agreement between EuroGas, Report on Form S-1
Inc., and Belmont Resources, Inc., dated dated July 23, 1998
July 22, 1998 Exhibit No. 10.20*
<PAGE> 55
10.6 General Agreement governing the operation of Report on Form 8-K
McKenzie Methane Poland, B.V. dated August 3, 1994
Exhibit No. 2*
10.7 Concessions Agreement between Ministry of Annual Report on
Environmental Protection, Natual Resources, Form 10-KSB for the
and Forestry and Pol-tex Methane Ltd. fiscal year ended
December 31, 1995
Exhibit No. 18*
10.8 Association Agreement between NAFTA a.s. Annual Report on
Gbely and Danube International Petroleum Form 10-KSB for the
Company fiscal year ended
December 31, 1995,
Exhibit No. 19*
10.9 Agreement between Moravske' Naftove' Annual Report on
Doly a.s. and Danube International Form 10-KSB for the
Petroleum Company fiscal year ended
December 31, 1995
Exhibit No. 20*
10.10 Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*
10.11 Form of Promissory Note, as amended, Annual Report on
with attached list of shareholders Form 109-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*
10.12 Amendment #1 to the Association Annual Report on
Agreement Entered on 13th of July Form 10-KSB for the
1995, between NAFTA a.s. Gbely and Fiscal year ended
Danube International Petroleum December 31, 1996,
Company Exhibit No. 25*
10.13 Acquisition Agreement by and among Form 10-Q
Belmont Resources, In., EuroGas Dated September 30,
Incorporated, dated October 9, 1998 1998
Exhibit No. 1*
10.14 Letter of Intent by and between Annual Report on
Polish Oil and Gas Company and Form 10-KSB for the
Pol-Tex Methane, dated April 28, Fiscal year ended
1997 December 31, 1996,
Exhibit No. 27*
10.15 Purchase and Sale Agreement between Report on Form 8-K
Texaco Slaskk Sp. zo.o., Pol-Tex Dated March 24, 1997
Methane Sp. zo.o and GlobeGas Exhibit No. 1*
B.V.
10.16 English translation of Articles of Report on Form 8-K/A
Association of the TAKT Joint Venture Dated June 11, 1997
dated June 7, 1991, as amended April Exhibit No. 3*
4, 1993
10.17 English transalation of Proposed Report on Form 8-K/A
Exploration and Production Sharing Dated June 11, 1997
contract for Hydrocarbons between Exhibit No. 4*
the Republic of Sakha (Yakutia) and
the Russian Federation and the TAKT
Joint Venture
<PAGE> 56
10.18 English translation of Agreement on Registration Statement
Joint Investment and Production on Form S-1 dated July
Actuvities between EuroGas, Inc., and 23, 1998 Exhibit No.
Zahidukrgeologia, dated May 14, 1998 10.21*
10.19 English translation of Statutory Agreement Registration Statement
of Association of Limited Liability on Form S-1 dated July
Company with Foreign Investments between 23, 1998 Exhibit No.
EuroGas, Inc., and Makyivs'ke Girs'ke 10.22*
Tovarystvo, dated June 17, 1998
10.20 Partnership Agreement between EuroGas, Inc. Amendment No. 1 dated
and RWE-DEA Altiengesellschaft for August 3, 1998 Exhibit
Mineraloel and Chemie AG, dated No. 10.23
July 22, 1998
10.21 Mining Usufruct Contract between The Quarterly Report on
Minister of Environmental Protection, Form 10-Q dated
Natural Resources and Forestry of the September 30, 1997
Republic of Poland and Pol-Tex Exhibit No. 1*
Methane, dated October 3, 1997
10.22 Agreement between Polish Oil and Gas Quarterly Report on
Mining Joint Stock Companyh and EuroGas, Form 10Q dated
Inc., dted October 232, 1997 September 30, 1997
Exhibit No. 2*
10.23 Agreement for Acquisition of 5% Interest Quarterly Report on
in a Subsidiary by and between EuroGas, Form 10-Q dated
Inc., B. Grohe, and T. Koerfer, dated September 30, 1997
November 11, 1997 Exhibit No. 3*
10.24 Option Agreement by and between EuroGas, Quarterly Report on
Inc., and Beaver River Resources, Ltd., Form 10-Q dated
dated October 31, 1997 September 30, 1997
Exhibit No. 4*
10.25 Lease Agreement dated September 3, 1996, Filed herewith
between Potomac Corporation and the
Company; Letter of Amendment dated
September 30, 1999
10.26 Sublease dated November 2, 1999, between Filed herewith
Scotdean Limited and the Company
10.27 Securities Purchase Agreement dated Filed herewith
November 4, 1999, between the Company
and Arkledun Driver LLC
10.28 Registration Rights Agreement dated Filed herewith
November 4, 1999, between the Company and
Arkledun Drive LLC
10.29 Supplemental Agreement dated November 4, Filed herewith
1999, between the Company and Arkledun Drive
LLC
10.30 Executive Employment Agreement dated Filed herewith
April 20, 1999 between the Company and Karl
Arleth
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
23.2 Consent of Hansen, Barnett & Maxwell, Filed herewith
auditors of the Registrant
<PAGE> 57
23.3 Consent of KPMG LLP, auditors of Big Filed herewith
Horn Resources Ltd.
23.4 Consent of Parr Waddoups Brown Gee &
Loveless +
23.5 Consent of Ryder Scott Company, Registration Statement
Petroleum Engineers on Form S-1 dated July
23, 1998 *
24.1 Power of Attorney Report on Form S-1
dated July 23, 1998 See
Signature Page
27.1 Financial Data Schedule Filed herewith
*Incorporated by reference
+Included in Exhibit 5.2
ITEM 17. UNDERTAKINGS
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by
section 10(a)(3) of the Securities Act;
(ii) To reflect in the Prospectus any facts or
events arising after the effective date of this
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in this Registration Statement; notwithstanding
the foregoing, any increase or decrease in
volume of securities offered (if the total
dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
SEC pursuant to Rule 424(b) if, in the
aggregate, the change in volume and price
represent no more than a 20% change in the
maximum aggregate offering price set forth in
the ACalculation of Registration Fee@ table in
the effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in this Registration
Statement or any material change to such
information in this Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
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.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Company, the Company has been informed
that in the opinion of the SEC 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
being registered, 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 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.
<PAGE> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Company has duly caused this Registration Statement
on Form S-1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of
Utah, on November 24 1999.
EUROGAS, INC.
By:/s/ Hank Blankenstein
------------------------
Hank Blankenstein, Vice
President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed
by the following persons in the capacities and as of the dates
indicated.
/s/ Karl Arleth
- ----------------------
Karl Arleth Chief Executive Offider and December 1, 1999
Director (principal executive
officer)
/s/ Hank Blankenstein
--------------------- Vice President, Chief December 1, 1999
Financial Officer and
Director (principal
accounting and
financial officer)
/s/ Dr. Gregory P. Fontana
-------------------------- Director December 1, 1999
Dr. Gregory P. Fontana
/s/ Dr. Hans Fischer Director December 1, 1999
-------------------------
Dr. Hans Fischer
/s/ Rudolph Heinz
--------------------------
Rudolph Heinz Director December 1, 1999
<PAGE> 59
EXHIBIT 3-8
ARTICLES OF AMENDMENT
EUROGAS, INC.
DESIGNATION OF RIGHTS, PRIVILEGES, AND PREFERENCES OF
1999 SERIES C 6% CONVERTIBLE PREFERRED STOCK
Pursuant to the provisions of the Utah
Revised Business Corporation Act, section
16-10a-602, of the laws of the State of
Utah, the undersigned corporation hereby
adopts the following Designation of Rights,
Privileges, and Preferences of 1999 Series C
6% Convertible Preferred Stock (the
"Designation"):
FIRST: The name of the Corporation is
EuroGas, Inc.
SECOND: The following resolution
establishing a series of preferred stock
designated as the "1999 Series C 6%
Convertible Preferred Stock" was duly
adopted by the Board of Directors of the
Corporation on October 23, 1999 without
shareholder action. Shareholder action was
not required by the Articles of
Incorporation of the Corporation or the
corporation laws of the State of Utah.
RESOLVED, there is hereby created a series of preferred
stock of the Corporation to be designated as the "1999
Series C 6% Convertible Preferred Stock" consisting of
1,800 shares, par value $0.001, with the following powers,
preferences, rights, qualifications, limitations, and
restrictions:
1. Liquidation.
1.1 Subject to the preferential rights of the holders of any
issued and outstanding shares of preferred stock previously
or subsequently issued under the provisions of an appropriate
designation or amendment to the articles of incorporation of
the Corporation effective prior to the date of this
Designation, in the event of any voluntary or involuntary
liquidation (whether complete or partial), dissolution, or
winding up of the Corporation, the holders of the 1999 Series
C 6% Convertible Preferred Stock shall be entitled to be paid
out of the assets of the Corporation available for
distribution to its shareholders, whether from capital,
surplus, or earnings, an amount of cash equal to One Thousand
Dollars ($1,000) per share (the "Liquidation Preference")
plus all unpaid dividends, whether or not previously
declared, accrued thereon to the date of final distribution,
subject to the priority distribution required respecting any
issued and outstanding shares of any series of preferred
stock authorized prior to the date hereof. No distribution
shall be made on any common stock or other subsequently
authorized series of preferred stock of the Corporation by
reason of any voluntary or involuntary liquidation (whether
complete or partial), dissolution, or winding up of the
Corporation unless each holder of any 1999 Series C 6%
Convertible Preferred Stock shall have received all amounts
to which such holder shall be entitled under this subsection
1.1.
1.2 If on a liquidation (whether complete or partial),
dissolution, or winding up of the Corporation, the assets of
the Corporation available for distribution to holders of 1999
Series C 6% Convertible Preferred Stock shall be insufficient
to pay the holders of outstanding 1999 Series C 6%
Convertible Preferred Stock the full amounts to which they
otherwise would be entitled under subsection 1.1, the assets
of the Corporation available for distribution to holders of
1999 Series C 6% Convertible Preferred Stock shall be
distributed to them pro rata on the basis of the number of
shares of 1999 Series C 6% Convertible Preferred Stock held
by each such holder.
2. Voting Rights. The 1999 Series C 6% Convertible Preferred
Stock shall not have voting rights, except to the extent that the
consent of the holders of the 1999 Series C 6% Convertible
Preferred Stock is specifically required by the provisions of the
corporation laws of the State of Utah, as now existing or as
hereafter amended.
3. Dividends.
3.1 The Corporation shall pay dividends to the holders of
the 1999 Series C 6% Convertible Preferred Stock at the times
and in the amounts provided for in this section 3.
3.2 The Corporation shall pay to the holders of the 1999
Series C 6% Convertible Preferred Stock, out of the assets of
the Corporation available therefor under the applicable laws,
dividends in the amount of six percent (6%) of the
Liquidation Preference per annum, pro rated to the Conversion
Date (as hereinafter defined). Such dividends shall be due
and payable when declared by the board of directors of the
Corporation or, if not declared and paid earlier, within
seven (7) days of the Conversion Date. The 1999 Series C 6%
Convertible Preferred Stock shall not be entitled to
participate in other dividends declared by the Corporation,
and holders thereof shall not be entitled to receive any
dividends thereon other than the dividends referred to in
this section 3.
3.3 No dividend or other distribution shall be declared or
paid or set apart for payment on any stock ranking, as to
dividends or liquidation, junior to the 1999 Series C 6%
Convertible Preferred Stock, including, without limitation,
the shares of the Corporation's common stock, par value
$0.001 (the "Common Stock"), for any period unless the
holders of the 1999 Series C 6% Convertible Preferred Stock
shall have then been or are contemporaneously paid (or
declared and a sum sufficient for the payment thereof set
apart for such payment) all dividends for all dividend
payment periods terminating on or prior to the date of
payment of the distribution on such junior stock. If the
Corporation is in default with respect to any dividends
payable on, or any obligation to redeem shares of, the 1999
Series C 6% Convertible Preferred Stock, the Corporation
shall not declare or pay (or set apart a sum for such
payment) any dividends or make any distribution in cash or
other property on, or redeem, purchase, or otherwise acquire,
any other class or series of stock ranking junior to the 1999
Series C 6% Convertible Preferred Stock, either as to
dividends or upon liquidation. Except as set forth in this
section 3, the 1999 Series C 6% Convertible Preferred Stock
shall not have any preferences as to dividends.
3.4 Any payment of dividends due under this section 3 with
respect to any shares of 1999 Series C 6% Convertible
Preferred Stock may, at the Corporation's discretion, be made
by means of delivery of shares of Common Stock. The number
of shares of Common Stock to be delivered as payment of
accrued dividends shall be a number of shares of Common Stock
such that the product of the "Market Price" (as defined in
section 4.2 below) of such shares multiplied by the number of
shares share equals the amount of the accrued but unpaid
dividend.
3.5 Registration of the transfer of any shares of 1999
Series C 6% Convertible Preferred Stock on the stock records
maintained by or for the Corporation shall constitute a
transfer of any right which the transferor may have had to
receive any accrued but unpaid dividends as of the date of
transfer, whether declared or undeclared, and the Corporation
shall have no further obligation to the transferor with
respect to such accrued and unpaid dividends. Any shares of
1999 Series C 6% Convertible Preferred Stock represented by a
new certificate issued to a new holder shall continue to
accrue dividends as provided in this section 3.
4. Conversion.
4.1 Each share of 1999 Series C 6% Convertible Preferred
Stock is convertible into shares of Common Stock at the
times, in the manner, and subject to the conditions provided
in this section 4.
4.2 Capitalized terms used in this section 4 and not defined
elsewhere in this Designation shall have the following meanings:
(a) The "Applicable Percentage" shall be determined
based on the schedule provided below based on the
occurrence of the Effective Date as measured in days
after the Closing Date; provided, however, that if a
Restricted Sale Date occurs within (30) days after the
Effective Date or at any time thereafter, the term
"Effective Date" in the table below shall be deemed to
refer to the date the Holder subsequently has the right
to sell Registrable Securities pursuant to an effective
Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933,
as amended.
<TABLE>
<S> <C>
If the Effective Date is x
days after the Closing Date the Applicable Percentage is
not more than 15 days 85.0%
between 16 and 45 days 82.5%
between 46 and 75 days 80.0%
more than 75 days 77.5%
(b) "Conversion Date" means the earlier of (i) the
date on which the holder has delivered to the
Corporation the original shares of Series C 6%
Convertible Preferred Stock and a facsimile or original
of the signed Notice of Conversion (as hereinafter
defined) and (ii) the Mandatory Conversion Date (as
hereinafter defined).
(c) "Conversion Rate" means for each share of Series C
6% Convertible Preferred Stock converted, a number of
shares of Common Stock such that the product of the
Applicable Percentage multiplied by the number of
shares of Common Stock multiplied by the Market Price
of such shares of Common Stock on of the Closing Date
or the Conversion Date, whichever is lower, equals the
Liquidation Preference of such share of Series C 6%
Convertible Preferred Stock.
(d) "Effective Date" means the date the Post-Effective
Amendment is declared effective by the Securities and
Exchange Commission or automatically becomes effective
pursuant to applicable rules promulgated under the
Securities Act of 1933, as amended.
(e) "Closing Date" means the date the Corporation
receives payment in full for the respective share of
Series C 6% Convertible Preferred Stock.
(f) "Market Price" means the average closing bid price
of a share of Common Stock, as reported by Bloomberg,
L.P. for the five (5) trading days preceding the
Conversion Date,
(g) "Post-Effective Amendment" means a Post-Effective
Amendment No. 2 to the Registration Statement on Form
S-1 filed by the Corporation with the Securities and
Exchange Commission, Registration Number 333-59715.
(h) "Restricted Sale Date" shall have meaning set
forth in the Registration Rights Agreement dated
November, 1999, between the Corporation and Arkledun
Drive LLC.
(i) "Registrable Securities" means the shares of
Common Stock issuable upon conversion of the shares of
Series C 6% Convertible Preferred Stock, including any
shares of Common Stock issuable in lieu of accrued
dividends.
4.3 At any time after the issuance of shares of 1999 Series
C 6% Convertible Preferred Stock, the holder is entitled, at
its option, to convert each share of 1999 Series C 6%
Convertible Preferred Stock into shares of Common Stock at
the Conversion Rate. The minimum number of shares of 1999
Series C 6% Convertible Preferred Stock the holder may
convert is the number of shares of 1999 Series C 6%
Convertible Preferred Stock having a Liquidation Preference
of at least US $10,000 (unless if at the time of such
election to convert the aggregate Liquidation Preference of
all shares of shares of 1999 Series C 6% Convertible
Preferred Stock registered to the holder is less than US
$10,000, then the whole amount thereof).
4.4 Any accrued but unpaid dividends, whether or not
declared, as of the Conversion Date on any share of 1999
Series C 6% Convertible Preferred Stock converted pursuant to
this Section 4 shall be paid at the time of conversion, at
the option of the Corporation, (a) in cash or, (b) in the
event of a conversion pursuant to Section 4.3, in shares of
Common Stock.
4.5 Each share of the 1999 Series C 6% Convertible Preferred
Stock shall automatically be converted into shares of Common
Stock at the Conversion Rate on the date that is two (2)
years from the Closing Date (the "Mandatory Conversion
Date").
4.6 Any conversion pursuant to Section 4.3 shall be effected
by sending to the Corporation, or its attorney, the
certificate representing the shares of 1999 Series C 6%
Convertible Preferred Stock to be converted and a facsimile
or original of a signed notice of conversion which evidences
the holder's intention to convert the shares or a specified
portion thereof ("Notice of Conversion"), accompanied by a
proper assignment if the shares of Common Stock are to be
issued in a different name. No fractional shares or scrip
representing fractions of shares will be issued on
conversion, but the number of shares issuable shall be
rounded down or up, as the case may be, to the nearest whole
share. Such Notice of Conversion shall be deemed effective
on the Conversion Date. Facsimile delivery of the Notice of
Conversion shall be accepted by the Corporation at facsimile
number (801) 255-2005; ATTN: Chief Financial Officer, or at
any other facsimile number that the Corporation may provide
to the holder(s) of the 1999 Series C 6% Convertible
Preferred Stock subsequent to the Closing Date.
4.7 Within three (3) business days after receipt of the
Notice of Conversion and other documentation referred to
above, the Corporation shall deliver a certificate, bearing a
restrictive legend if required in the judgment of counsel for
the Corporation, for the number of shares of Common Stock
issuable upon the conversion. It shall be the Corporation's
responsibility to take all necessary actions and to bear all
such costs to issue the Common Stock as provided herein,
including the delivery of an opinion letter to the transfer
agent, if so required. The person in whose name the
certificate of Common Stock is to be registered shall be
treated as a shareholder of record on and after the
Conversion Date. No payment or adjustment shall be made for
accrued and unpaid dividends until the Conversion Date. Upon
surrender of certificates representing shares of 1999 Series
C 6% Convertible Preferred Stock of which only part are to be
converted, the Corporation shall issue certificates
representing the number of unconverted shares in the name of
the original holder. In the event the Corporation does not
make delivery of the Common Stock as instructed by the
holder, within three (3) business days after the Conversion
Date, the Corporation shall pay to the holder the late
payment fees in the amounts and at the times set forth in
Section 5(c) of a Securities Purchase Agreement dated as of
November ___, 1999 by and between the Corporation and
Arkledun Drive LLC.
4.8 In order to prevent dilution of the rights granted
hereunder, the Conversion Rate shall be subject to adjustment
from time to time in accordance with this subsection.
(a) If any capital reorganization or reclassification
of the capital stock of the Corporation, consolidation
or merger of the Corporation with another corporation,
or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way
that holders of Common Stock shall be entitled to
receive stock, securities, or assets with respect to or
in exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation,
merger, or sale, lawful adequate provisions shall be
made whereby the holders of the 1999 Series C 6%
Convertible Preferred Stock shall thereafter have the
right to acquire and receive on conversion of the 1999
Series C 6% Convertible Preferred Stock such shares of
stock, securities, or assets as would have been
issuable or payable (as part of the reorganization,
reclassification, consolidation, merger, or sale) with
respect to or in exchange for such number of
outstanding shares of the Corporation's Common Stock as
would have been received on conversion of the 1999
Series C 6% Convertible Preferred Stock immediately
before such reorganization, reclassification,
consolidation, merger, or sale. In any such case,
appropriate provision shall be made with respect to the
rights and interests of the holders of the 1999 Series
C 6% Convertible Preferred Stock to the end that the
provisions hereof (including, without limitation,
provisions for adjustments of the Conversion Rate and
for the number of shares issuable on conversion of the
1999 Series C 6% Convertible Preferred Stock) shall
thereafter be applicable in relation to any shares of
stock, securities, or assets thereafter deliverable on
the conversion of the 1999 Series C 6% Convertible
Preferred Stock. The Corporation will not effect any
such consolidation, merger, or sale unless prior to the
consummation thereof the successor corporation
resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by
written instrument mailed or delivered to the holders
of the 1999 Series C 6% Convertible Preferred Stock at
the last address of such holder appearing on the books
of the Corporation, the obligation to deliver to each
such holder such shares of stock, securities, or assets
as, in accordance with the foregoing provisions, such
holder may be entitled to acquire on conversion of 1999
Series C 6% Convertible Preferred Stock.
(b) No adjustment shall be made in the Conversion Rate
or any other rate of conversion for the number of
shares of Common Stock issuable on conversion of 1999
Series C 6% Convertible Preferred Stock:
(i) In connection with the offer and sale of any
shares of 1999 Series C 6% Convertible Preferred Stock;
(ii) In connection with the issuance of any Common
Stock, securities, or assets on conversion of
debentures, preferred stock, or other securities
convertible to Common Stock, including the conversion
of shares of 1999 Series C 6% Convertible Preferred Stock;
(iii) In connection with the issuance of any shares of
Common Stock, securities, or assets on account of the
antidilution provisions set forth in this subsection or
similar rights with respect to other securities of the
Corporation;
(iv) In connection with the purchase or other
acquisition by the Corporation of any capital stock,
evidence of its indebtedness, or other securities of
the Corporation;
(v) In connection with the sale or exchange by the
Corporation of any Common Stock, evidence of its
indebtedness, or other securities of the Corporation,
including securities containing the right to subscribe
for or purchase Common Stock or preferred stock of the
Corporation.
4.9 The Corporation covenants and agrees that:
(a) The shares of Common Stock, securities or assets
issuable on any conversion of any shares of 1999 Series
C 6% Convertible Preferred Stock shall have been deemed
to have been issued to the person on the Conversion
Date, and on the Conversion Date, such person shall be
deemed for all purposes to have become the record
holder of such Common Stock, securities or assets.
(b) All shares of Common Stock or other securities
which may be issued on any conversion of the 1999
Series C 6% Convertible Preferred Stock will, on
issuance, be fully paid and non-assessable and free
from all taxes, liens, and charges with respect to the
issue thereof. Without limiting the generality of the
foregoing, the Corporation will from time to time take
all such action as may be required to assure that the
par value of the unissued Common Stock or other
securities acquirable on any conversion of the 1999
Series C 6% Convertible Preferred Stock is at all times
sufficient to render the Common Stock issued upon
conversion fully paid and non-assessable.
(c) The issuance of certificates for Common Stock or
other securities on conversion of the 1999 Series C 6%
Convertible Preferred Stock shall be made without
charge to the registered holder thereof, including any
issuance tax in respect thereof or other costs incurred
by the Corporation in connection with the conversion of
the 1999 Series C 6% Convertible Preferred Stock and
the related issuance or transfer of Common Stock or
other securities.
5. Additional Provisions.
5.1 A share of 1999 Series C 6% Convertible Preferred Stock
shall be transferable only on the books of the Corporation
maintained at its principal office, on delivery thereof duly
endorsed by the holder by his duly authorized attorney or
representative or accompanied by proper evidence of
succession, assignment, or authority to transfer. In all
cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited and remain with the
Corporation. In case of transfer by executors,
administrators, guardians, or other legal representatives,
duly authenticated evidence of their authority shall be
produced and may be required to be deposited and remain with
the Corporation in its discretion. On any registration or
transfer, the Corporation shall deliver a new certificate
representing the shares of 1999 Series C 6% Convertible
Preferred Stock so transferred to the person entitled thereto.
5.2 Any notice required or permitted to be given to the
holders of the 1999 Series C 6% Convertible Preferred Stock
under this Designation shall be deemed to have been duly
given if mailed by first-class mail, postage prepaid, to such
holders at their respective addresses appearing on the stock
records maintained by or for the Corporation and shall be
deemed to have been given as of the date deposited in the
United States mail.
IN WITNESS WHEREOF, the foregoing Designation of Rights, Privileges, and
Preferences of the 1999 Series C 6% Convertible Preferred Stock of the
Corporation has been executed this ____ day of October, 1999.
ATTEST: EUROGAS, INC.
By:_________________________________
By:_____________________________________
Lynn Martin, Secretary
Hank Blankenstein,
Vice President and
Chief Financial Officer
</TABLE>
Exhibit 5.2
November 23, 1999
The Board of Directors of Eurogas, Inc.
942 East 7145 South, Suite 101-A
Midvale, Utah 84047
Re: Registration Statement on Form S-1 of Eurogas, Inc.
Gentlemen:
As counsel to Eurogas, Inc, a Utah corporation (the
"Company"), in connection with the Company's Registration Statement
on Form S-1 (the "Registration Statement") to be filed under the
Securities Act of 1933, as amended, for registration of the shares
of common stock of the Company ("Common Stock") issuable upon
conversion of the 1,800 shares of 1999 Series C 6% Convertible
Preferred Stock issued to Arkledun Drive LLC on or about November 4,
1999 (the "Series C Preferred Stock"), we have examined the
originals or certified, conformed or reproduction copies of all such
records, agreements, instruments and documents as we have deemed
necessary as the basis for the opinion expressed herein. In all
such examinations, we have assumed the genuineness of all signatures
on original or certified copies and the conformity to original or
certified copies of all copies submitted to us as conformed or
reproduction copies. As to various questions of fact relevant to
the opinion hereinafter expressed, we have relied upon certificates
of public officials and statements or certificates of officers or
representatives of the Company and others.
Based upon and subject to the foregoing, we are of the
opinion that the shares of Common Stock issuable upon conversion of
the Series C Preferred Stock, when issued in accordance with the
terms and conditions of the Series C Preferred Stock, will be
legally issued, fully paid and nonassessable.
<PAGE>
Eurogas, Inc.
November 23, 1999
Page 2
We hereby consent to the filing of the opinion as an exhibit
to the Registration Statement.
Very truly yours,
PARR WADDOUPS BROWN GEE & LOVELESS
EXHIBIT 10.25
LEASE AGREEMENT
This Lease Agreement is entered into this 3rd day of September, 1996
by and between Potomac Corporation, d/b/a Creekview Plaza (Landlord),
and EuroGas Inc. (Tenant). Landlord hereby lets to Tenant, and Tenant
hereby leases from Landlord, suite 101 (Premises), located in building A
(Building), of Creekview Plaza, 942 East 7145 South Midvale, Utah 84047
(Creekview Plaza). The Premises are outlined on the attached Floor Plan
Exhibit.
1. TERM. This lease shall become effective on the 1st day of
October, 1996 and shall remain effective for a period of Three Years (36
months). Note: See Exhibit Term and Conditions.
2. DEPOSIT. Upon the execution of this Lease, Tenant shall deposit
with Landlord the sum of $1,631.40, equaling a total of $1,631.40 as
(Deposit). Tenant agrees that if an "Event of Default" (as hereinafter
defined) occurs, at the option of Landlord, the Deposit may be declared
forfeited and applied to any damage suffered by Landlord, including
payment to past due rent, to the extent of the amount of damages
suffered. Upon any such application by Landlord, Tenant shall, upon
written notice from Landlord, forthwith remit to Landlord a sufficient
amount in cash to restore the Deposit to its original amount. Upon the
expiration of the term of this Lease, and Tenant complying with all the
terms of this Lease, the Deposit shall be returned in full, without
interest, to Tenant.
3. RENT. Tenant shall pay to Landlord at 948 East 7145 South,
Suite C-102, Midvale, Utah 84047, in advance of the first day of each
calendar month during the term of this Lease, without demand, notice,
deduction or offset, as rent for the Premises, the sum of $1,631.40,
subject to increase as provided for below (for a total reserve rent of $
N/A , plus applicable rent increases as specified below). A late
payment charge of five percent of the then current monthly rent amount
shall be due and payable with any monthly rental payment made after the
tenth day of the month. The monthly rent shall increase at the start of
the second and each succeeding year of the term of this Lease, by an
amount equal to the percentage increase in the Consumer Price Index for
the most recent published twelve month period ending prior to the
applicable rent increase, but shall not be less than six (6) percent,
not to exceed ten (10) percent.
4. INSURANCE. Tenant shall, at all times during the terms of
this Lease, at its own cost, procure and maintain comprehensive public
liability insurance with a combined single limit of not less than
$1,000,000, and fire and extended coverage insurance, including
vandalism and malicious mischief coverage, in an amount equal to the
full replacement value of all fixtures, furniture and improvements
installed in the Premises. Tenant's policies of insurance shall name
Landlord as an additional insured. Copies or certificates of Tenants
policies of insurance shall be delivered to Landlord within ten days of
the effective or renewal dates.
Tenant shall indemnify Landlord and save it harmless from and
against any and all claims, actions, damages, liabilities and expenses,
including reasonable attorneys' costs and fees, in connection with or
arising from or out of any occurrence in, upon, or at the Premises, or
the occupancy or use by Tenant of the Premises, or occasioned whole or
in part by an act or omission of Tenant, its agents, contractors,
employees, servants invitees, lessees of concessionaires, except for any
claims caused by the gross negligence or willful misconduct of Landlord.
Landlord and tenant waive any rights each may have against the
other on account of any loss or damage occasioned to Landlord of Tenant
as the case may be, when such party is covered in whole or part by
insurance with respect to such loss or damage, to the extent of any
amount recovered by reason of such insurance, provided that such release
of liability and waiver of rights shall not be operative in any case
where the effect thereof is to invalidate such insurance coverage and
the parties each, on behalf of their respective insurance companies
insuring the property of either Landlord or Tenant against any such
loss, waive any right of subrogation that it may have against the
Landlord or the Tenant, as the case may be.
-1-
<PAGE>
5. TAXES AND ASSESSMENTS. Tenant shall pay annually prior to
delinquency any taxes assessed against and levied upon fixtures,
furnishings, equipment and all other personal property of Tenant
contained in the Premises. Landlord shall pay all other real estate
taxes and assessments against Creekview Plaza.
6. UTILITIES. Landlord shall pay all applicable charges for water
and sewer. Tenant shall pay, when due, for all charges for all other
utilities which may be used or consumed in the Premises. In no event
shall Landlord be liable for any interruption or failure in the supply
of any such utilities to the Premises, unless caused by Landlord's gross
negligence or willful misconduct. Tenant shall apply for and put
utilities (Power and Gas) in their name prior to taking occupancy of
premise.
7. LANDLORD'S LIEN. The rents reserved herein shall be a first
lien upon all of Tenant's fixtures, furniture, and other personal
property located within the Premises and the same shall not be removed
from the Premises until the rent for the full term of this Lease has
been paid for in full. Upon the occurrence of an Event of Default,
Tenant consents that Landlord may secure the Premises to perfect this
lien, without terminating this Lease.
8. RULES AND REGULATION. Tenant agrees to comply with and
observe the rules and regulations adopted and promulgated by Landlord
in connection with Creekview Plaza. A copy of the current Rules and
Regulations are attached as the Rules and Regulation Exhibit and
incorporated herein by this reference.
9. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease
not sublet the Premises, or any part thereof, nor subject any part of
the Premises to pay encumbrance without first obtaining the written
consent of Landlord, which consent shall not be unreasonably withheld.
10. DAMAGE; DESTRUCTION; CONDEMNATION. Should the Premises, or
any part thereof, be destroyed or damaged by fire or other casualty or
be acquired or condemned by imminent domain so as to render the same
unusable by Tenant, then the rent shall be proportionately adjusted
according to the nature and extent of the acquisition, condemnation or
injury sustained until the Premises can be redesigned or put in proper
condition for use by the Tenant. Either Tenant or Landlord may at its
option terminate this Lease in the event such casualty, acquisition or
condemnation totally destroys the use of or removed the Premises.
11. DEFAULT; FORFEITURE; RIGHT OF RE-ENTRY. It shall be an event
of default (Event of Default) if: (a) Tenant fails to pay any rental or
other sums due hereunder within ten days after the same shall be due;
(b) Tenant fails to perform any other of the terms, conditions,
covenants of this Lease including the Rules and Regulations as set forth
as the Rules and Regulations Exhibit hereto, to be observed or performed
by Tenant for more than fifteen days after written notice thereof shall
be given to Tenant; (c) Tenant or any Guarantor of this Lease shall
become bankrupt or insolvent, or file any debtor proceedings, or have
taken against either of them a petition in bankruptcy or insolvency or
for reorganization, or for the appointment of a receiver or trustee for
the benefit of creditors, or petitions for or enters into an arrangement
for the benefit of creditors; (d) Tenant abandons the Premises, or (e)
Tenant suffers this Lease to be taken under any writ of execution.
-2-
<PAGE>
Upon the occurrence of an Event of Default, any amount due hereunder not
paid shall bear interest at the rate of eighteen percent per annum.
Additionally, Landlord, besides other rights or remedies it may have the
immediate right to re-enter and remove all persons and property from the
Premises and such property may be removed and stored in a public
warehouse of elsewhere at the cost of, and at the account of Tenant, all
without service of notice of resort to legal process and without being
deemed guilty of trespass, of becoming liable for any loss or damage
which may be occasioned thereby. Should Landlord elect to re-enter, as
herein provided or should it take possession pursuant to legal
proceedings or pursuant to any notice provided for by law, the Landlord
may at its option declare the Lease forfeited and terminated or it may
from time to time without terminating this Lease, make such alterations
and repairs as may be necessary in order to relet the Premises, and
relet the Premises or any part thereof for such term or terms (which may
be for a term extending beyond the term of this Lease) and at such
rental or rentals and upon such other terms and conditions as Landlord
in its sole discretion may deem advisable; upon each such reletting all
rentals received by Landlord for such reletting shall be applied first,
to the payment of any obligations other than rent due form Tenant to
Landlord; second, the payment of all costs and expenses of such
reletting, including brokerage fees and commissions, attorneys' fees,
and cost of such alterations and repairs; third, the payment of rent due
and unpaid hereunder, and the residue, of any, shall be held by Landlord
and applied in payment of future rent as the same may become due and
payable hereunder. If such rentals received from such reletting during
any month be less than received from such reletting during any month be
less than that to be paid during that month by Tenant hereunder, Tenant
shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such re-entry or taking possession of
the Premises by Landlord shall be construed as an election on its part
to terminate this Lease unless a written notice of such intention be
given to Tenant or unless termination thereof be decreed by a court of
competent jurisdiction.
Notwithstanding any such reletting without termination, Landlord
may at any time thereafter elect to terminate this Lease for such
previous Event of Default. Should Landlord at any time terminate the
Lease for any Event of Default, in addition to damages it may incur by
reason of such breach, Landlord shall be entitled to the cost of
recovering the Premises, reasonable attorneys' fees, and the worth at a
time of such termination of the excess, if any, of the amount of rent
and charges equivalent to the rent reserved in this Lease for the
remainder of the stated term over the then reasonable rental value of
the Premises for the remainder of the stated term. All of the foregoing
amount shall be immediately due and payable from Tenant to Landlord.
In the event of a failure by Tenant to perform any terms,
conditions and covenants of this Lease to be observed or performed by
Tenant for more than fifteen (15) days after written notice thereof
shall be given to Tenant, Landlord may at its option, perform such term,
condition, or covenant, including advancing such amounts as may be
necessary. Any amounts so advanced or any expenses incurred or sum of
money paid by Landlord by reason of the failure of Tenant to comply with
any of the terms, conditions, or covenants of this Lease or in defending
any action to which Landlord may be subjected by reason of any such
failure shall be deemed to be additional rent and shall be due and
payable to Landlord on demand.
12. ENFORCEMENT. Should Landlord or Tenant default in any of the
covenants or agreements contained herein, the defaulting party shall pay
all costs and expenses, including a reasonable attorneys' fee, which may
arise or accrue from enforcing this Lease, or from obtaining possession
of the Premises, or from pursuing any remedy provided hereunder, or by
the laws of the State of Utah, whether such remedy is pursued by filing
a suit or otherwise.
-3-
<PAGE>
13. LIABILITY. Tenant shall indemnify Landlord and save it
harmless from suits, actions, damages, liability and expense, including
Landlord's reasonable attorneys fees and court costs, in connection with
a claim for loss of life, bodily or personal injury, property damage or
any other claim arising from or out of the use or occupancy of the
Premises or any part thereof, or occasioned wholly or in part by any act
or omission of Tenant, its agents, contractors, employees, servants
invitees, licensees or concessionaires.
14. ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent herein stipulated
shall be deemed to be other than on account of the earliest stipulated
rent, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or
pursue any other remedy in this Lease provided.
15. HOLDING OVER. If, without the written consent of Landlord,
Tenant retains possession of the Premises or any part thereof after the
termination of the term by lapse of time or otherwise, then such holding
over shall constitute a month tenancy, upon the terms of this Lease,
except at double the monthly rent in effect as of the end of the term of
this Lease. Nothing in this paragraph shall in any way limit or define
the damages for which Landlord shall be entitled to compensation as a
result of tenant's unauthorized retention of possession of the Premises
following the end of the term or otherwise.
16. ATTORNMENT. Tenant shall, in the event any proceedings are
brought for the foreclosure of or in the event of exercise of the power
of sale under any mortgage or deed of trust made by Landlord covering
the Premises, attorn to the purchaser upon any such foreclosure of sale
and recognize such purchaser as the Landlord under this Lease, provided
such purchaser agrees to abide by all the terms of this Lease and to
perform all of the obligations of Landlord hereunder.
17. SUBORDINATION. Tenant agrees that this Lease shall, at the
request of the Landlord, be subordinate to the lien of any mortgage or
deed of trust that may hereafter be placed upon Creekview Plaza. Upon
the request of Landlord, Tenant will evidence the subordination of its
rights hereunder to the lien of any mortgage or deed of trust, and the
lien resulting from any other method of financing or refinancing, now or
hereafter enforce against the land and/or buildings of which the
Premises are a part, and to all advances made or hereafter to be made
upon the security thereof.
18. PARTIAL INVALIDITY. If any provision of this Lease or any
Exhibit of attachment hereto or application thereof to any person or
circumstance shall to any extent be invalid, the remainder of this Lease
or the application of such provision to persons or circumstances other
than those as to which it is held invalid shall not be affected thereby
and each remaining provision of this Lease shall be valid and enforced
to the fullest extent permitted by law.
19. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided,
all provisions herein shall be binding upon and shall inure to the
benefit of the parties, their legal representatives, successors and
assigns. Each agreement and provision to be performed by Tenant shall
be construed to be both a covenant and condition, and if there shall be
more than one Tenant, they shall all be bound jointly and severally.
-4-
<PAGE>
20. USE. Tenant shall use the Premises solely for general office
uses for conducting the business of General Business and for no other
purpose.
21. WAIVER. The waiver by Landlord of any breach of any term,
covenant or condition herein contained shall not be deemed to be a
waiver of any other term, covenant or condition or any subsequent breach
of the same or any other term, covenant or condition herein contained.
The subsequent acceptance of rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any term,
covenant or condition of this Lease other than the failure of Tenant to
pay the particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such rent.
22. NOTICES. Any notice, demand, request or other instrument which
may be or are required to be given under this Lease shall be delivered
in person or sent by United States certified mail postage prepaid and
addressed (a) if to Landlord at the address set forth in paragraph 3
hereof or at such other address Landlord may designate by written
notice, and (b) if to Tenant at the Premises or such other address as
Tenant shall designate by written notice. If notice is mailed, such
notice shall be deemed effective three days after being mailed in the
manner provided for herein.
23. BROKER'S COMMISSION. Tenant represents and warrants to Landlord
that there are no claims for brokerage commissions or finder's fees in
connection with the execution of this Lease, except as listed below, and
Tenant agrees to indemnify Landlord, and hold it harmless from, all
liabilities arising from any such claim, except as follows:
Landlord's/Tenant's Representative, M&M Management, David E. Matheson,
Broker.
24. LIMITATION ON LANDLORD'S LIABILITY. Anytime in this Lease to
the contrary notwithstanding, Tenant agrees that it shall look solely to
the estate and property of Landlord din Creekview Plaza and improvements
thereto, and subject to the prior rights of any mortgagee, for the
collection of any judgment (or other judicial process) requiring the
payment of money by Landlord or in the event of any default or breach by
Landlord with respect to any of the terms, covenants, or conditions of
this Lease to be observed or performed by Landlord, and no other assets
of Landlord shall be subject to levy, execution, or other procedures for
the satisfaction of Tenant's remedies.
25. GOVERNING LAW. The terms of this Lease shall be governed by
and construed in accordance with the laws of the State of Utah, without
giving effect to the choice of law provisions thereof.
26. ENTIRE AGREEMENT. This lease agreement constitutes the entire
agreement and understanding between the parties hereto and supersedes
all prior discussions, understandings and agreements. This lease may
not be altered or amended except by subsequent written agreement
executed by all the parties hereto.
27. MISCELLANEOUS. Time shall be of the essence of this Lease.
Tenant shall not record this Lease or any memorandum or notice
evidencing this Lease without the prior written consent of Landlord.
-5-
<PAGE>
28. OTHER. All Exhibits, Riders and Addendum referenced in this
Lease, if checked below are incorporated in and made a part of this
Lease as though fully set forth herein.
X (a) Floor Plan Exhibit
(b) Option Exhibit
X (c) Guarantee Exhibit
X (d) Rules and Regulations Exhibit
X (e) Terms and Exhibit
THIS LEASE is executed as of the day and year first set forth above.
The persons who have executed this Lease represent and warrant that
they are duly authorized to execute this Lease in their individual or
representative capacity as indicated.
LANDLORD TENANT
POTOMAC CORPORATION, EuroGas Inc.
dba Creekview Plaza
By _______________________ By _______________________
M. Jay Nilson Hank Blankenstein
Its Vice President Its: Secretary
-6-
<PAGE>
September 30, 1999
EUROGAS, INC.
Hank Blankenstein, Secretary
942 East 7145 South, Suite A-101
Midvale, Utah 84047
Re: Renewal of Lease
Dear Hank:
Your Lease dated September 23, 1996, is up for renewal and adjustment on
October 01, 1999. Your rent will be adjusted to $1,846.33 per month for
the next twelve months, with additional annual adjustments to follow as
provided for in the Lease agreement.
This letter shall serve as your notice of renewal for an additional 3
year term. All other terms and conditions of the Lease dated September
23, 1996, shall remain in force and effective, with the following
exceptions.
Landlord to change the glass in the entrance to Suite and resign the
door to Tenant's name and to building standard. Otherwise, space to be
leased in the condition it is in at the time of this renewal.
Thank you.
Potomac Corporation
dba Creekview Plaza
/s/ Terry Boffeli
----------------------------------------
Terry Boffeli, Vice President of Finance
Accepted Date: 10/18/99
-----------
EuroGas, Inc.: Tenant
/s/ Hank Blankenstein
----------------------------------------
Hank Blankenstein, Secretary
-7-
EXHIBIT 10.26
SUB-LEASE
This Sub-Lease is made the 2nd of November, 1998, between SCOTDEAN
LIMITED whose registered office is at 4 John Street London WC1N 2EH
(hereinafter called "the Landlord") of the one part and EUROGAS, (UK)
LIMITED, whose registered office is at 95 Aldwych London WC2_____,
(hereinafter called "the Tenant") of the second part;
WITNESSETH
1. The demise hereinafter contained is made in consideration of the
rents and ____________ part of the Tenant and the conditions hereinafter
contained;
2. In this Lease the following expressions have the following
meanings and the __________________ interpreted as follows:
2.1 "the Surveyor" means the surveyor for the time
being appointed or nominated by the ______________.
2.2 "the Landlord" includes the immediate reversioner
or reversioners for __________ time __________
expectant on the term hereby created.
2.3 "the Tenant" includes the person or person
deriving title from or under the Tenant __________.
2.4 "the Demised Premises" means ALL THAT piece of
land fronting Upper Brook Street in the City of
Westminster together with the message and buildings
erected thereon (and any vaults and/or cellars
ancillary thereto) and now known as 22 Upper Brook
Street (and registered at H M Land Registry with
leasehold title absolute under title number NGL
707720) and the expression "the Demised Premises"
includes:
2.4.1 The buildings now and at any time during the term
hereby granted erected on the Demised Premises.
2.4.2 All other additions alterations reinstatements
and improvements (if any) to the Demised Premises.
2.4.3 All the Landlord's fixtures and fitting and
fixtures of every kind which shall from time to time be
in or on the Demised Premises (whether originally
affixed or fastened to or upon the Demised Premises or
otherwise) except any such fixtures installed by the
Tenant that can be removed without defacing the Demised
Premises.
2.4.4 All conduits in or under or over the Demised
Premises up to the point of connection to the public
system.
2.4.5 All plant within the Demised Premises
-1-
<PAGE>
2.4.6 One half severed medially of the party walls and
other structures dividing the Demised Premises from
adjoining premises but such expression includes no air
space above or around the building erected upon the
Demised Premises from time to time and reference to
"the Demised Premises" in the absence of any provision
to the contrary includes any part of the Demised Premises.
2.5 "the Planning Acts" means the Town and Country
Planning Act 1990 and the Planning (Listed Buildings
and Conservation Areas) Act of 1990 or any statutory
modification amendment or re-enactment thereof for the
time being in force and any regulation order or
direction made or given thereunder.
2.6 "the Term" means the term of years granted by
this Lease and the expression "the Term" includes any
period of holding over or extension or continuance of
the Term whether by statute or common law and
references to "the last year of the Term" include the
last year of the Term if the Term shall determine
otherwise than by effluxion of time and references to
"the expiration of the Term" include such other
determination of the Term.
2.7 "Headlease" means a lease dated 20th May 1993 and
made between (1) Grosvenor (Mayfair) Estate and MEPC
Plc (2)
2.8 "Head Landlord" includes Grosvenor (Mayfair)
Estate or other the immediate reversioner or
reversions for the time being expectant on the term
created by the Headlease.
2.9 "Lease" means this sub-lease as varied from time
to time and includes any document entered into
pursuant to or which is supplemental to this sub-lease.
2.10 "Guarantor" means person who is a guarantor to
the Landlord of the obligations of the Tenant under
this Lease
2.11 Any reference to Value Added Tax in this Lease
shall include any tax of a similar nature that may be
substituted for or levied in addition to it.
2.12 Reference to any right exercisable by the
Landlord or any right exercisable by the Tenant in
common with the Landlord shall be construed as
including (where appropriate) the exercise of such
right by the Head Landlord and by all persons
authorised by the Landlord or the Head Landlord or
having the like right.
2.13 Reference to any consent required from the
Landlord shall be construed as also including the
consent from the Head Landlord where the Head
Landlord=s consent would be required under the terms
of the Head Lease except that nothing in this Lease
shall be construed as an acknowledgment or a warranty
by the Landlord that the Head Landlord shall not
unreasonably withhold such consent.
2.14 Any prohibition imposed on the Tenant by this
Lease shall be construed as including an obligation
against allowing or suffering the act or thing
prohibited to be done by a third party.
-2-
<PAGE>
2.15 Words importing one gender only include all other
genders.
2.16 Words importing the singular number only include
the plural number (where the context so admits) and
vice versa and where there are two or more persons
included in the expressions "the Landlord" or "the
Tenant" or "the Guarantor" covenants expressed to be
made by the Landlord and the Tenant shall be deemed to
be made by such persons jointly and severally.
3. THE Landlord HEREBY DEMISES unto the Tenant the Demised Premises
TOGETHER WITH the rights specified in the First Schedule hereto and
EXCEPT AND RESERVING unto the Landlord and all other authorized by the
Landlord and any other persons having the like rights and SUBJECT TO the
matters specified in the Second Schedule hereto TO HOLD the same unto
the Tenant from the 2nd day of November, 1998 for a term of ten years
expiring on the 1st of November 2008 YIELDING AND PAYING THEREFORE FIRST
during the first three months of the Term a peppercorn if demanded and
thereafter the yearly rent of THREE HUNDRED AND FIVE THOUSAND POUNDS
(,305,000) (or such greater rent as may from time to time become payable
under the Third Schedule hereto) such rent to be paid without any
deduction except as authorized by any provision of any Act of Parliament
or of any Statutory Order or regulation for he time being in force by
equal quarterly payments in advance on the usual quarter days in every
year AND SECONDLY by way of further or additional rent from time to time
a sum or sums of money equal to the whole of the amount or which the
Landlord shall incur or pay to be required to incur or pay by way of
annual premium or premiums for insuring the Demised Premises and loss of
rent (actual and/or estimated) in accordance with and/or complying with
the Landlord=s obligations under the provisions of Clause 5.2 hereof
and/or in accordance with the provisions of the Headlease AND THIRDLY,
by way of further or additional rent to all other amounts due from the
Tenant under this Lease. Such further or additional rents to be paid
without any deduction on demand.
4. THE Tenant HEREBY COVENANTS with the Landlord as follows:
4.1 Rent
----
4.2 To pay the respective yearly and other rents or
sums of money hereinbefore reserved at the times and
in the manner in which the same are respectively
reserved and made payable without any deduction except
as aforesaid and without exercising any counter-claim
or legal or equitable rights of set-off whatsoever.
Interest on arrears
-------------------
4.3 To pay on demand interest on the said rents first
secondly and thirdly hereinbefore reserved and any
other sums on the part of the Tenant herein covenanted
to be paid or any part or parts thereof if payment of
the same has not been made by the date upon which the
rents first hereinbefore reserved are hereinbefore
expressed to be payable (whether formally or legally
demanded or not) and within 10 days of the date upon
which the rent secondly and thirdly hereinbefore
reserved or any other sums due hereunder are demanded
such interest to be at the rate of 4 per cent per
annum above the base lending rate for the time being
of National Westminster Bank PLC and to be paid in
respect of the period from the date upon which the
payment concerned was due until and including the date
upon which the payment is made both before and after
any judgment Provided Always that in the event of
National Westminster Bank PLC ceasing for any reason
to have a base lending rte then the rate of interest
payable pursuant to the foregoing provisions shall be
such reasonable comparable rate as the Landlord or is
Surveyor may from time to time specify Provided
Further that if payment of such rents or other payment
as aforesaid shall be declined by the Landlord so as
not to waive any breach of covenant the same shall be
payable with interest thereon as aforesaid from the
date the payment became due to the date upon which
payment is accepted by the Landlord.
-3-
<PAGE>
4.4 Outgoings & VAT
---------------
4.4.1 To pay and indemnify the Landlord against all
existing and future rates taxes charge duties
assessments impositions outgoings and obligations
whatsoever payable in respect of the Demised Premises
or any part or parts thereof respectively or upon the
owner or occupier in respect thereof except only such
as the Landlord is by law bound to pay notwithstanding
any agreement to the contrary.
(i) To pay the Landlord by way of
additional rent Value Added Tax properly
chargeable in respect of any payment or other
consideration (including the rents hereby
reserved) made or given by the Tenant under
any of the terms of or in connection with
this Lease such Value Added Tax to be payable
in addition to the aforesaid payments or
other consideration.
(ii) In every case where under the terms
of this Lease the Tenant has agreed to make a
payment to the Landlord or any other person
(including without limitation by way of
indemnity or reimbursement) by reference to
any amount expended or which will be expended
by the Landlord or any other person or
otherwise to meet all or part of the
consideration for a supply for Value Added
Tax purposes made to the Landlord or any
other person to pay any Value Added Tax in
respect of such amount except to the extent
(if any) that it is recovered by the Landlord
or other person.
Gas electricity and other services
----------------------------------
4.4.2 To pay the suppliers and to indemnify the
Landlord against all charges for gas electricity and
other services consumed or used at or in connection
with the Demised Premises and all charges for meters
and telephones during the Term and to observe and
perform all regulations and requirements of the supply
authorities.
4.5 Repair
------
4.5.1 At all times during the Tem well and
substantially to repair paint paper cleanse maintain
and keep the whole of the Demised Premises in good and
substantial repair (including renewal insofar as this
amounts to repair) and condition and in proper working
order with all manner of reparations cleansing and
amendments whatsoever to the satisfaction of the
Landlord and in particular (but without prejudice to
the generality of the foregoing covenant):
-4-
<PAGE>
4.5.2 In every fifth year of the Term and also during
the last year of the Term howsoever determined to pain
enamel french polish or otherwise treat such parts of
the interior of the Demised Premises as are or should
be or require to be so treated with two coats of good
quality pain or good quality polish or other suitable
material of good quality (the colour scheme and
materials to be used in the last six months of the Term
to be such as shall first be approved by the Landlord)
in a good and workmanlike manner and to the reasonable
satisfaction of the Landlord and its Surveyor and also
to wash and paint as aforesaid or re-paper the ceilings
and walls in the usual manner and wash down all tiles
and similar washable surfaces.
4.5.3 In the year 2003 and 2006 and also in the last
year of the Term in each instance between the 1st day
of March and the 31st day of August to paint the whole
of the outside woodwork ironwork metal work cement or
stucco work (if any) and other external parts of the
Demised Premises including (without prejudice to the
generality of the foregoing) the external door or doors
fan lights and frames window sashes and frames pipework
and railings (if any) usually painted or otherwise
requiring to be painted with two good coats of good oil
pain or other type of paint approved in writing by the
Surveyor the painting of the cement or stucco work (if
any) to be finished with a colour first to be approved
by the Surveyor and the painting of the outside
woodwork ironwork and metalwork as aforesaid to be
finished with a colour first to be approved as
aforesaid. And as often as in the reasonable opinion
of the surveyor may be necessary to clean the stonework
in such manner as shall be previously approved in
writing by the surveyor and to clean and re-point the
external brickwork (if any) of the Demised Premises
such pointing to be of a type and colour first approved
in writing by the Surveyor. And to use and maintain on
the roof natural Welsh slate or such other slate or
similar appearance and commensurate quality as shall be
approved in writing by the Surveyor Provided Always
that the Tenant will not paint the whole or any part of
the external brickwork or stonework (if any) of the
Demised Premises unless such has usually been painted
prior to the date hereof. The Landlord shall be
entitled to such access as may be reasonably necessary
to the Demised Premises to effect redecoration required
by the Head Landlord but not the obligation of the Tenant.
4.5.4 within the time limited by law or by the notice
requiring the same to be done or if no such time is
limited within a reasonable time to carry out all
sanitary works and all other works whatsoever which the
Public Authorities (including a Local or Planning
Authority) may lawfully require to be carried out
thereon or in connection therewith
4.5.5 to keep all windows of the Demised Premises
properly cleaned during the Term and in particular to
cause the windows of the Demised Premises to be cleaned
internally and externally at least once in every month
4.5.6 Where the use of conduits boundary structures or
other things is common to the Demised Premises and
other property to be responsible for and to indemnify
the Landlord against all sums due from and to undertake
all work that is the responsibility of the owner lessee
or occupier of the Demised Premises in relation to
those4 conduits or other things
-5-
<PAGE>
4.5.7 At all times during the term to maintain window
boxes on the ground floor front elevation of the
Demised Premises and to keep them in good repair and
decorative condition and tidy and clean and suitably
stocked with plants and shrubs and to tend the same
properly so as to present at all times throughout the
year an attractive appearance
4.5.8 At all times during the Term to keep any paved
garden areas or other open areas comprised in the
Demised Premises in a neat and tidy condition
Delivery at the expiration of Term
----------------------------------
4.6 At the expiration of the term quietly to deliver
up to the Landlord the Demised Premises duly kept in
accordance with the covenants herein contained and in
any case where any fixtures or fittings hereby
covenanted to be yielded up shall be missing broken
damaged or destroyed to replace the same with others
of a similar quality appearance and value and to make
good any damage caused by such works or by the removal
of the Tenant's trade fixtures or fittings or
furniture or effects from the Demised Premises
Contribution to common items
----------------------------
4.7 On receipt of the Landlord's written demand
forthwith to pay and contribute a fair proportion (to
be determined by the Surveyor) with other persons
interested therein of the reasonable expenses
reasonably and properly incurred in maintaining
repairing renewing and scouring all party walls
boundaries structures foundations gutters sewers and
drains and other areas and things (whether or not of a
like nature) belonging or which shall belong to the
Demised Premises or be used jointly with the occupiers
of any adjoining or neighbouring hereditaments
4.8 Alienation
----------
4.8.1 Except in the case of a permitted dealing (as
hereinafter defined) the Lessee shall not assign or
underlet or otherwise part with possession or
occupation or permit the underletting of or parting
with possession or occupation of the Demised Premises
or any parts thereof
4.8.2 A "permitted dealing" shall mean either an
assignment of the whole (as opposed to part or parts of
the Demised Premises) or an underletting of the Demised
Premises or any part thereof which satisfies the
following criteria:
(i) any underlease of the Demised
Premises (as hereinabove defined) or any part
thereof shall reserve the full market rent
reasonably obtainable in the open market
having regard to the terms of the proposed
underlease (all fines and premiums being
prohibited) with upwards only review of rent
to full open market rental value at intervals
of not more than five years from the date of
such underlease and any underlease of part
shall contain proper provision for
contribution by the underlessee towards the
cost of insurance repair of structure and
common parts and the provision of services
-6-
<PAGE>
(ii) prior to the grant of any underlease
of the Demised Premises (whether granted by
the Tenant or by any underlessee) the
proposed term the demise and rent to be
reserved thereby and any proposed rent free
period shall first be notified in writing the
Landlord
(iii) Any underlease of the Demised
Premises may (if the Tenant so requires)
permit the underlessee such rent-free period
or reduced rent period (for fitting-out or
otherwise) or concessionairy rent or payment
made by the Tenant to the underlessee (to
cover the cost of fitting-out or otherwise)
or payment by the Tenant to a third party of
any sums due to that third party from the
underlessee or any other benefit received by
the underlessee from the Tenant as an
inducement to that underlessee to enter into
the underlease (or permit any number or
combination of such things) subject always to
the requirement in sub-clause 4.8.2 (i) that
the rent reserved shall be a full market rent
at the commencement of the term thereof as
shall be reasonable in the open market.
(iv) any underlease of the Demised
Premises may (if the Tenant so requires)
permit the underlessee to share occupation of
part of the Demised Premises to be underlet
with a company that is a member of the same
group of companies as the underlessee as
defined by s 42 of the Landlord and Tenant
Act 1954 on the basis that no landlord and
tenant relationship is created
(v) any underlease of part of the Demised
Premises shall consist of one or more whole
floors (excluding any common parts)
(vi) Not to agree the amount of any new or
increased rent under any rent review
provisions in any underlease without the
prior written consent of the Landlord which
shall not be unreasonably withheld or delayed
(vii) The Tenant shall within one month
after the agreement or the determination
thereof give notice in writing to the
Landlord of any new or increased rent payable
under the rent review provisions of any
underlease of the Demised Premises or any
part thereof and the Tenant will provide such
other information as may reasonably be
requested by the Landlord in respect of any
such rent review
(viii) Nothing herein contained shall
prevent the Tenant or any sub-tenant from
mortgaging or charging the Demised Premises
(or any part or parts thereof in the case of
a charge of a permitted underlease of part)
(ix) Nothing herein contained shall
prevent the Tenant from sharing occupation of
the Demised Premises or any part or parts
thereof with any company which is a member of
the same group of companies as the Tenant as
defined by s 42 of the Landlord and Tenant
Act 1954 or an associate of the tenant being
a legal entity having either directly or
indirectly common shareholders or directors
with the Tenant (including its facilities
management contractor) or having a
contractual relationship with the Tenant in
the context of the Tenant's usual business
activities and upon the basis that no
landlord and tenant relationship is created
Re-letting of Demised Premises
------------------------------
4.9 To permit the Landlord or its agents at any time
within six calendar months next before the expiration
of the Term to affix upon any suitable part of the
Demised Premises a notice board or notice boards (but
not so as to obscure the windows thereof or interfere
with the business of the Tenant or any of its
sub-tenants) for reletting the same and the Tenant
shall not remove or obscure the same or permit the
same to be removed or obscured and shall permit all
persons by order of the Landlord or its agents to view
the Demised Premises at reasonable hours without
interruption upon a prior appointment being made
User
----
4.10 Not to use or authorise or suffer to be used the
Demised Premises otherwise than as business or
professional (but not including governmental or
diplomatic) offices
4.11 Restrictions
------------
4.11.1 Not to hold or permit to be held any sale by
auction on the Demised Premises
4.11.2 Not to suffer or permit the Demised Premises
or any part thereof to be used for any illegal or
immoral purpose
4.11.3 Not to erect or install or permit to be
erected or installed in the Demised Premises or any
part thereof any engine or machinery of any description
(other than usual office or domestic equipment as
appropriate)
4.11.4 Not to affix or suffer or cause to be
affixed upon the exterior of the Demised Premises or
any part thereof any wireless or television mast or
aerial or satellite dish or any erection of any kind
whatsoever without the Landlord's consent which in the
case of a satellite dish shall not be unreasonably
withheld where the proposed dish cannot be seen from
the street or from the principal neons of adjoining
buildings
4.11.5 Not at any time during the Term to affix or
exhibit or permit or suffer to be affixed or exhibited
upon any part of the Demised Premises any sign of any
description or any name-plates bills notices placards
advertisements flags banners blinds signs or similar
devices of any kind whatsoever so that no show or
indication shall be made or given of the use of the
Demised Premises or any part thereof for the purposes
hereinbefore authorised except that not more than six
name-plates may be displayed either on or at the side
of the front entrance door of the Demised Premises the
size design material and position of each such
name-plate and the lettering thereon first to be
approved in writing by or on behalf of the Landlord or
the Surveyor (such approval not to be unreasonably
withheld or delayed)
-8-
<PAGE>
4.11.6 Not to allow the front entrance doors to the
Demised Premises to remain open otherwise than for the
purpose of access and egress to and from the respective
part of the Demised Premises and for the reasonable use
and enjoyment of the same
4.11.7 Not to do or bring in or upon the Demised
Premises anything which may put any weight or impose a
strain in excess of that which the Demised Premises is
designed to bear with due margin of safety
4.11.8 Not to stop up darken or obstruct any
windows in the Demised Premises nor prevent the free
and uninterrupted access of light and air thereto
4.11.9 To keep the entrance ways of and exits from
the Demised Premises clear and unobstructed at all times
4.11.10 To observe the statutory requirements of
the Local Authority for the time being relating to the
removal of refuse from the Demised Premises
4.11.11 Not to keep living poultry or animals nor
to permit to be exposed in any part of the Demised
Premises any clothes or linen or any other articles of
which such exposition is in the reasonable opinion of
the Landlord objectionable
Alterations
-----------
4.12 Not to erect or suffer to be erected any other
buildings or erections on the Demised Premises nor
make nor suffer to be made any alterations or
additions to any building or erection now or hereafter
during the Term in or upon the Demised Premises
(except for the purpose of reinstatement following
damage by a risk insured against by the Landlord and
pursuant to Clause 4.17) and in particular not to
alter the construction height elevation external or
internal architectural appearance or the chimney
stacks or chimney pots or the internal arrangements of
the Demised Premises or any part thereof nor to cut
maim alter injure or suffer to be cut maimed altered
or injured the structure of any of the main or other
walls or timbers of the Demised Premises nor to
enclose the portico Provided that with the prior
written consent of the Landlord (such consent not to
be unreasonably withheld) the Tenant may erect alter
or remove non-structural internal demountable
partitioning which does not abut or bisect any of the
windows of the Demised Premises
4.13 Nuisance
--------
4.13.1 Not to do or allow on the Demised Premises
any act or thing which may be or become or cause a
nuisance disturbance damage or inconvenience to the
Landlord or its lessees or to the owners or occupiers
of any adjoining or neighbouring premises or to the public
-9-
<PAGE>
4.13.2 To pay to the Landlord on demand all costs
charges and expenses which may be reasonably and
properly incurred by the Landlord at the request of the
Tenant in abating a nuisance or in executing such works
as may be expedient for abating a nuisance in respect
of the Demised Premises or its use whether in obedience
to a notice served by any Local or Public Authority or
otherwise
4.14 Easements
---------
4.14.1 To prevent any easement or right belonging
to or used with the Demised Premises or any part
thereof from being obstructed or lost
4.14.2 Not knowingly to allow any new encroachment
to be made or new easement acquired on or over the
Demised Premises or any part thereof and if any such
encroachment or easement shall be made or threatened to
be made or acquired to give immediate notice thereof to
the Landlord and permit the Landlord and its agents to
enter the Demised Premises to inspect the same and at
the request of the Landlord and the cost of the Tenant
to do all such things that may be proper and reasonable
for preventing the making of any such encroachment or
the acquisition of any such easement and in the event
of the Tenant failing to observe and perform the terms
of this sub-clause then to permit the Landlord and all
others authorised by it to enter upon the Demised
Premises and do all such things as may be necessary for
the purpose of preventing the making of such
encroachment or the acquisition of such easement and
the Tenant shall repay to the Landlord all monies paid
by the Landlord for that purpose on demand
4.15 Statutory Obligations and Notices
4.15.1 At all times during the Term to observe and
comply with in all respects the requirements of any
enactment (which expression shall for the purpose of
this covenant include every existing or future statute
as well as any regulation order or bye-law made under
or in pursuance of any statute) so far as the same may
relate to or affect the Demised Premises or any part
thereof or the user thereof or the use therein of any
chattel or substance machinery or equipment or
employment therein of any person and to execute all
works and provide and maintain all arrangements which
by or under any enactment or by any Government
Department or other authority or by the Court are or
may be directed or required to be executed provided or
maintained in respect of the Demised Premises or in
respect of any6 user thereof or in respect of any
chattel or substance at any time therein regardless of
whether such requirements are imposed on the lessor the
lessee or the occupier and to indemnify the Landlord
against all costs charges and expenses of or incidental
to the execution of any works or the provision or
maintenance of any arrangements so directed or required
as aforesaid.
4.15.2 Not to do or omit or suffer to be done or
omitted in or about the Demised Premises any act or
thing in respect of which the Landlord may under any
enactment have imposed upon it or become liable to pay
any penalty damages compensation costs or charges or
expenses
-10-
<PAGE>
4.15.3 As soon as the same comes to the notice of
the Tenant to give full particulars forthwith to the
Landlord of any notice order or proposal for a notice
order or requisition direction or any other thing or
proposal therefor given or served on the Tenant its
undertenants or to the owner or occupier of the Demised
Premises affecting the Demised Premises whether the
same shall be advertised or served directly on the
Tenant or the original (or a copy) thereof be received
from any other person and if so required by the
Landlord to produce the same and at the Landlord's
request and to make or join with the Landlord in making
such objections or representations in respect of any
proposal as the landlord may reasonably require.
4.16 Planning
--------
4.16.1 Not at any time during the Term to do
anything which would be in contravention of the
Planning Acts nor omit anything which would be a
contravention thereof and at all times during the Term
to comply with the same
4.16.2 not to make any application for permission
under the Planning Acts to carry out any development
without the Landlord's previous consent in writing such
consent not to be unreasonably withheld or delayed
4.16.3 At all times to indemnify and to keep
indemnified the Landlord against all actions
proceedings costs claims and demands in respect of the
Planning Acts in respect of the Tenant's use of the
Demised Premises and in relation to any works carried
out by the Tenant to the Demised Premises
4.16.4 If the Tenant shall receive any compensation
with respect to the interest of the Tenant hereunder
because of any restriction placed upon the user of the
Demised Premises under or by virtue of the Planning
Acts then if and when the Tenant's interest hereunder
shall be determined by surrender or under the power of
re-entry herein contained the Tenant shall forthwith
make such provision as is just and equitable for the
Landlord to receive its due benefit from such
compensation and in the event of there being some
disagreement as to the amount of such provision the
same shall be referred to arbitration as hereinafter
provided
4.17 Insurance
---------
4.17.1 Not to keep or permit or suffer to be kept
on the Demised Premises any material of a dangerous
combustible inflammable or explosive nature nor to do
or cause permit or suffer to be done in about or upon
the Demised Premises anything whatsoever which may
render any increased or extra premium payable for the
insurance of the Demised Premises or of any adjoining
premises or neighbouring premises
4.17.2 In the event of the Demised Premises or any
part thereof being destroyed or damaged by ay of the
perils covered by the insurance of the Demised Premises
to give notice thereof to the Landlord as soon as such
destruction or damages shall come to the notice of the
Tenant
4.17.3 Not to do or suffer or permit to be done
anything which may vitiate or jeopardise the insurance
of the Demised Premises effected by the Landlord
pursuant to the provisions of Clause 5.2 hereof
-11-
<PAGE>
4.17.4 In the event that the Demised Premises or
any part thereof or any adjoining or neighbouring
premises are destroyed or damaged by any of the risks
insured against by the Landlord hereunder and the
insurance monies being wholly or partly irrecoverable
by reason solely or in part of any act or default of
the Tenant the Tenant will make up the whole or (as the
case may require) a fair proportion of the insurance
monies rendered irrecoverable by reason of the act or
default of the Tenant and any dispute arising out of
this covenant as to the proportion to be so contributed
by the Tenant or otherwise in respect thereof shall be
referred to arbitration as hereinafter provided
4.17.5 To comply with the proper requirements and
recommendations from time to time of the insurers of
the Demised Premises
Fire Precautions
----------------
4.18 To provide and at all times hereafter to maintain
in proper and efficient working order sufficient and
effective means of extinguishing or preventing the
spread of fire in compliance with the requirements of
any appropriate legislation for the time being in
force and without prejudice to the generality of the
foregoing to provide and maintain as aforesaid all
fire fighting equipment required from time to time by
the Fire Officer
4.19 Rights of Entry
---------------
4.19.1 To permit the Landlord and the Surveyor and
their respective agents with or without workmen or
others during the Term at reasonable business hours in
the daytime by prior written appointment (except in
case of emergency) to enter the Demised Premises and
every part thereof for any lawful purpose and in
particular:
(i) to ascertain that the covenants and
conditions of this Lease have been observed
(ii) to estimate the current value of the
Demised Premises for insurance purposes
(iii) to take schedules or inventories of
fixtures and things to be yielded up at the
expiration of the Term
(iv) in connection with the sale of the
Landlord's reversion to view the Demised
Premises without interruption
(v) to prevent the forfeiture of the Head
Lease which may result from any breach by the
Tenant of any of its obligations under this
Lease
(vi) to give to the Tenant or leave on the
Demised Premises notice in writing specifying
any defects or remediable breach of covenant
then and there found and the Tenant will as
soon as reasonably practicable repair and
make good the Demised Premises as required by
such notice and the covenants in that behalf
hereinbefore contained and in the event of
the Tenant failing to commence4 and proceed
diligently with the execution of the work
referred to in the notice within one month or
such longer period as shall be reasonable in
the circumstances thereof or failing to
complete the work within three months or such
longer period as shall be reasonable in the
circumstances or if in the Surveyor's
reasonable opinion the Tenant is unlikely to
have completed the work within such period it
shall be lawful for the Landlord (but without
prejudice to the right of re-entry of the
Landlord in that behalf hereinafter
contained) to enter the Demised Premises or
any part thereof to execute such work as may
be necessary to comply with the notice and
the reasonable and proper expenses of such
including all solicitor's and surveyor's
proper charges reasonably and properly
incurred shall be repaid to the Landlord on
demand with interest thereon calculated on a
daily basis following such demand at the rate
of five per cent per annum above the base
rate for the time being of National
Westminster Bank PLC current from day to day
and the Landlord shall not be liable for any
claims by the Tenant for disturbance or any
injury to the Tenant's property
-12-
<PAGE>
4.19.2 To permit the Landlord and any lessees or
tenants or occupiers of adjoining property with or
without servants agents contractors licensees and
workmen at all reasonable times upon a prior
appointment being made (except in case of emergency) to
enter upon the Demised Premises for all reasonable
purposes in connection with the repair decoration or
alteration or other building works to any adjoining or
neighbouring property which cannot otherwise be
conveniently a\effected the person or persons
exercising such rights doing as little damage as may be
to the Demised Premises and causing as little
inconvenience as possible and making good any damage
thereby occasioned as soon as reasonably practicable at
the expense of the Landlord but without making
compensation for any temporary damage annoyance or
other disturbance to the Tenant
Landlord's costs of notice and applications
--------------------------------------------
4.20 To pay to the Landlord on demand all reasonable
and proper costs charges damages and expenses
(including bailiffs, legal, Surveyors, and other
professional costs and fees) which may be reasonably
and properly incurred by the Landlord:
4.20.1 In or in reasonable contemplation of any
proceedings under Sections 146 and 147 of the Law of
Property Act 1925 and the preparation and service of
notice thereunder (whether or not any right of re-entry
or forfeiture has been waived by the Landlord or a
notice served under the said Section 146 is complied
with by the Tenant or the Tenant has been relieved
under the provisions of the said Act and
notwithstanding forfeiture is avoided otherwise than by
relief granted by the Court) and to keep the Landlord
fully and effectively indemnified against all proper
costs expenses claims and demands whatsoever in respect
of the said proceedings unless the Court shall make an
order to the contrary or any obligations under any of
the documents and matters referred to in the Second
Schedule hereto
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<PAGE>
4.20.2 In the preparation and service of a Schedule
of Dilapidations arising out of the Tenant's obligations
hereunder at anytime during or after the Term
4.20.3 In connection with the recovery of arrears
of rend due from the Tenant hereunder
4.20.4 In respect of any application for consent
required by this Lease whether or not such consent be
granted
4.20.5 In taking such action as is necessary to
prevent a forfeiture of the Head Lease which may result
from any breach by the Tenant of its obligations under
this Lease
Head Lease & Title Paramount
----------------------------
4.21 Not to do suffer or permit in relation to the
Demised Premises by the Tenant or any undertenant or
any occupier of the Demised Premises any act or thing
or omission which would constitute a breach of the
Head Lease or any of the matters referred to in
paragraph 4 of the Second Schedule
5. THE Landlord HEREBY COVENANTS with the Tenant as follows:
5.1 That the Tenant paying the rents hereby reserved
and performing and observing the several covenants
conditions and agreements herein contained and on the
part of the Tenant to be performed and observed shall
and may peaceably and quietly hold and enjoy the
Demised Premises during the Term without any
interruption or disturbance by the Landlord or its
successors in title or any person lawfully claiming
under or in trust for it
5.2 To insure and keep insured or to procure that the
Head Landlord insures and keeps insured (unless such
insurance shall be vitiated or payment of any policy
monies refused in whole or in part by reason solely or
in part of any act neglect default or omission of the
Tenant its undertenants or anyone at the Demised
Premises or any part thereof either expressly or by
implication with their authority) in the name of the
Landlord and the Head Landlord
(i) the Demised Premises from loss or
damage by fire explosion storm lightening
aircraft and articles dropped therefrom riot
civil commotion malicious damage storm
tempest bursting or overflowing of pipes
water tanks or apparatus flood impact
landslip heave and subsidence and any other
insurable risks which the Landlord or the
Head Landlord may require with Sun Alliance
and London Insurance PLC or such other
insurers as the Landlord or Head Landlord may
determine for a sum equal to the full
reinstatement value thereof (including the
cost of debris removal demolition site
clearance any works that may be required by
statute and any incidental expenses an
allowance for extraordinary expenses
anticipated fees payable for planning
applications inflation in building costs and
including architect's surveyor's fees and
other professional fees)
-14-
<PAGE>
(ii) against loss of rent payable under
this Lease (having regard to any review of
the rent which may become due under this
Lease and in the event of such insurance
being effected prior to the agreement or
determination of the rent upon review the
amount of such rent for the purpose of
insurance shall be estimated by the Surveyor
whose decision shall be final and binding
save in case of manifest error) for three
years (subject to any reasonable exclusions
or excesses as the Landlord may negotiate
with the insurers and which the Landlord
shall notify to the Tenant) and the Landlord
will make all payments necessary for the
above purpose within one month after the same
shall become due and will whenever reasonably
required by the Tenant produce to the Tenant
a copy of the said policy or policies or of
the relevant parts thereof and evidence of
payment of the current premium PROVIDED THAT
if the Landlord or the Surveyor receives
written notification from the Tenant or the
Tenant's mortgagee sent by facsimile
transmission or recorded delivery to the
Landlord or the Surveyor that the Tenant or
the Tenant's mortgagee requires the Demised
Premises to be insured for a larger sum than
that which shall have been determined by the
Surveyor as hereinbefore mentioned the
Landlord will forthwith upon receipt of a
written notification from the Tenant or the
Tenant's mortgagee instruct (or request that
the Head Landlord forthwith instructs) the
insurers to increase the amount of the sum
insured to the level so requested and use all
reasonable endeavours to procure that within
seven days of receipt of such written
notification the amount of the insurance is
increased in accordance with such notification.
5.2.2 If the Demised Premises or any part or parts
thereof shall be destroyed or damaged by fire or any
other risk against which the Landlord has insured as
aforesaid and the insurance money under any such
insurance shall not be wholly or partly irrecoverable
by reason solely or in part of any act or default of
the Tenant its undertenants or anyone at or near the
Demised Premises or any part thereof either expressly
or by implication with their authority then to the
extent that such insurance monies are recoverable all
such insurance monies received pursuant to such
insurance shall be applied so far as the same shall
extend in reinstating restoring and rebuilding the
Demised Premises Provided Always that the Landlord
shall incur no liability in respect of any deficiency
in the said insurance monies (whether as a result of
under-insurance or any such insurance monies being
wholly or partly irrecoverable by reasons solely or in
part of any act or default of the Tenant its
undertenants or anyone at or near the Demised Premises
or any part thereof either expressly or by implication
with their authority) unless and except to the extent
of either the Landlord having failed forthwith to
instruct (or procure that its Surveyor forthwith
instruct) the Head Landlord to instruct the insurers to
increase the sum insured to the level requested or
failed to use all reasonable endeavours procure that
the sum insured is increased to the level requested
within seven days after receipt of a written
notification to that effect sent by facsimile
transmission or recorded delivery both to the Landlord
or the Surveyor from the Tenant or the Tenant's
mortgagee as hereinbefore mentioned in the proviso to
Clause 5.2.1 hereof or due to the insurance money being
wholly or partly irrecoverable by reason solely or in
part of any act or default of the Landlord or anyone at
the Demised Premises expressly or by implication with
the Landlord's authority and under the Landlord's control
-15-
<PAGE>
5.3 To pay the rent and observe and perform the
covenants agreements and conditions on the part of the
lessee under the Head Lease except insofar as
compliance is the responsibility of the Tenant under
this Lease
6. PROVIDED ALWAYS that it is hereby expressly agreed as follows:
Re-entry
---------
6.1 If and whenever during the Term:
6.1.1 the rents (or any of them or any part of them)
under this Lease are outstanding for 14 days after
becoming payable whether formally demanded or not or
6.1.2 there is a breach by the Tenant of any covenant
or other term of this Lease (other than Clause 4.21) or
any document supplemental to this Lease
6.1.3 an individual Tenant or Guarantor is adjudicated
bankrupt or an interim receiver is appointed of the
property of the Tenant or Guarantor or
6.1.4 there occurs in relation to a corporate Tenant or
Guarantor any of the following:
(I) it shall go into liquidation whether
voluntary or compulsory (except solely for
the purpose of a bona fide amalgamation or
reconstruction when solvent)
(II) it is the subject of a petition for
an administrative order in respect of the
whole or part of its business
(III) the appointment of a receiver and
manager or an administrative receiver is made
over the whole or any part or parts of its
undertaking or assets
(IV) it is unable or admitting its
inability to pay its debts when they become
due (whether within the circumstances to
which Section 123 of the Insolvency Act 1986
applies or otherwise)
(V) the directors propose a voluntary
arrangement within the meaning of Section 1
of the Insolvency Act 1986
-16-
<PAGE>
(VI) it shall be struck off the Register
of Companies or shall be dissolved or shall
cease to exist
(VII) the Tenant enters into any deed of
assignment trust or arrangement or
composition for the benefit of its creditors
(VIII) an event or proceedings occurs
analogous to any of the foregoing in relation
to a corporation or company incorporated
outside Great Britain then and in any of the
said cases it shall be lawful for the
Landlord at any time thereafter (and even if
any previous right or security has been
waived) to re-enter upon the Demised Premises
or any part thereof in the name of the whole
and then the Term will absolutely determine
but without prejudice to the right of action
of the parties hereto in respect of any
breach by the other in respect of their
respective covenants herein contained and
provided that the Landlord shall first give
to any mortgagees of the Tenant of which it
shall have received prior written notice and
at the address specified in such notice or at
the mortgagee's registered office at least
fourteen days prior written notice of such
intention to re-enter
Cesser of Rent
--------------
6.2 In case the Demised Premises or any part thereof
shall at any time during the said Term be so destroyed
or damaged by fire or by any of the other risks for
the time being insured against by the Landlord as
hereinbefore provided as to render the Demised
Premises or any part thereof unfit for occupation and
use and the policy or policies effected by the
Landlord or the Head Landlord shall not have been
vitiated or payment of the policy monies refused in
whole or in part in consequence of some act or default
of the Tenant its undertenants or anyone at the
Demised Premises expressly or by implication with
their authority as aforesaid then the rent hereby
reserved or a fair proportion thereof according to the
nature and extent of the damage sustained shall
forthwith cease until the Demised Premises shall be
again rendered fit for occupation and use or until the
expiration of three years (or such longer period in
respect of which loss of rent insurance has been
effected pursuant to Clause 5.2 hereof) from such
destruction or damage whichever shall be the sooner
(the amount of such proportion and the period during
which the rent shall cease to be payable to be
determined by the Surveyor whose decision shall be
final and binding
Rights to deal with adjoining land
----------------------------------
6.3 The Landlord shall have power at all times
without obtaining any consent from or making
compensation to the Tenant to deal with any property
for the time being belonging to the Landlord which
adjoins or is opposite or near to the Demised Premises
as it may think fit to pull down or erect or suffer to
be erected on such adjoining opposite or neighbouring
property any building whatsoever whether such building
shall or shall not affect or diminish the light or air
which may now or at any time or times during the Term
be enjoyed by the Tenant or any occupiers of the
Demised Premises or any part thereof PROVIDED THAT the
Landlord shall not materially and detrimentally
inhibit the use and occupation of the Demised Premises
by the Tenant or other the then lessee or occupier in
accordance with the terms of this Lease or the
exercise of any such other easements rights or
advantages expressly granted to the Tenant by this Lease
-17-
<PAGE>
Restrictions on adjoining property
----------------------------------
6.4 Save as expressly mentioned nothing herein
contained or implied shall impose or be deemed to
impose any restriction on the use of any land or
buildings not comprised in this Lease or give the
Tenant the benefit of or the right to enforce or to
have enforced or to prevent the release or
modification of any covenant agreement or condition
entered into by a purchaser from or any lessee tenant
or occupier of the Landlord in respect of property not
comprised in this Lease or prevent or restrict in any
way the development of any land not comprised in this
Lease
No warranty as to Planning Acts
-------------------------------
6.5 Nothing herein contained shall be deemed to
constitute any warranty by the Landlord that the
Demised Premises or any part thereof are authorised
under the Planning Acts or otherwise for any use or
any specific purpose
Notices
-------
6.6 Section 196 of the Law of Property Act 1925 as
amended by the Recorded Delivery Service Act 1962
shall apply to all notices required to be served
hereunder except that Section 196 shall be deemed to
be amended as follows:
6.6.1 the final words of Section 196(4)
" and that service . . . . . . be delivered"
shall be deleted and these shall be substituted:
". . . . and that service shall be deemed to be made on
the third Working Day after the registered letter has
been posted" "Working Day" meaning any day from Monday
to Friday (inclusive) other than Christmas Day Good
Friday and any other statutory bank holiday
6.6.2 any notice or document shall also be sufficiently
served if sent by telex or by telegraphic facsimile
transmission to the party to be served and that service
shall be deemed to be made on the day of transmission
if transmitted before 4 pm on a Working Day but
otherwise on the next following working Day
Sums due to Landlord treated as rent
------------------------------------
6.7 Any sum properly due from the Tenant under the
provisions of this Lease and not expressly reserved as
rent shall be treated as being due as rent payable in
arrear
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<PAGE>
Arbitration
-----------
6.8 If and whenever (but without prejudice to the
Landlord's rights of re-entry under clause 6.1) there
shall arise between the parties hereto or their
respective representatives or successors in title or
any of them any matter dispute difference or question
touching or concerning these presents or the
construction meaning operation or effect thereof or of
any clause herein contained or as to the rights duties
or liabilities of the parties hereto respectively or
their respective representatives or successors in
title or any of them under or by virtue of these
presents or otherwise or touching the subject matter
of these presents or arising thereout or in relation
thereto which pursuant to any provision of any Act of
Parliament or of any statutory order or regulation for
the time being in force or otherwise would but for
this present proviso fail to be determined by any
tribunal person or authority other than the High Court
of Justice or the County Court such matter dispute
difference or questions shall be referred to the
decision of a single arbitrator to be selected by the
parties And if the parties are unable to agree upon
such arbitrator the matter dispute difference or
question shall be referred to the arbitration of a
single arbitrator to be appointed by the President or
a Senior Vice President for the time being of the
Royal Institution of Chartered Surveyors And in any of
such cases such reference to arbitration shall be
deemed to be a submission to arbitration within the
Arbitration Acts 1996 or any statutory modification or
re-enactment thereof for the time being in force the
provisions whereof shall apply so far as applicable
And such reference shall be in lieu of and in
substitution for the method which but for this present
proviso would be appropriate for the determination of
such matter dispute difference or question
VAT
---
6.9 Nothing herein expressed shall be deemed to
constitute an election or an agreement by the Landlord
to elect to waive exemption for Value Added Tax
purposes in respect of the Demised Premises or to not
make such an election.
Service of Proceedings
----------------------
6.10 Service upon the Tenant of any process by which
proceedings in respect of or arising out of the
provisions of this Lease are commenced may be effected
by posting a copy of such process by recorded delivery
in a pre-paid envelope addressed to the Tenant at its
address stated on page one of this Lease or such other
address as the Tenant may from time to time notify to
the Landlord in writing as being its address for
service for the purpose of this Lease and such service
shall be deemed to be effected on the first Working
Day after posting
Further insurance provisions
----------------------------
6.11 If at the expiration of three years (or if longer
of the period for which insurance for loss of rent
against risks insured against by the Landlord has been
effected pursuant to Clause 5) after the occurrence of
damage or destruction to the demised premises as a
result of the occurrence of one of the risks against
which the Landlord has insured hereunder or the Head
Landlord has insured under the Headlease reinstatement
or rebuilding of the demised premises or any
substantial part thereof prove impossible or is
frustrated then either party may by one month's notice
in writing serve on the other at any time within six
months after the expiration of such period but before
the demised premises have been rebuilt as aforesaid
and while the demised premises are still unfit for
occupation or use terminate the term created by this
Lease (but without prejudice to any rights in respect
of any antecedent breach of the Tenant's obligations
in this Lease or any surety therefor) and in the event
of such determination the insurance monies shall
belong to the Landlord absolutely PROVIDED ALWAYS THAT
if the Head Landlord serves a notice on the Landlord
terminating the Head Lease pursuant to the clause in
the Head Lease corresponding to this clause the
Landlord shall within seven days forward a copy of
such notice to the Tenant and whereupon this Lease
shall determine on the date specified in the Head
Landlord's notice.
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<PAGE>
SEVERANCE OF INVALID PROVISIONS
-------------------------------
7. If at any time any of the provisions of this Lease is or becomes
illegal invalid or unenforceable in any respect under any law or
regulation of any jurisdiction neither the legality validity and
enforceability of the remaining provisions of this Lease nor the
legality or validity or enforceability of such provision under the law
of any jurisdiction shall be in any way effected or impaired as a result
8. LAW AND JURISDICTION
--------------------
8.1 This Lease shall be governed and construed in
accordance with English Law
8.2 The Tenant irrevocably agrees for the benefit of
the Landlord that the Courts of England shall have
jurisdiction to hear and determine any suit action or
proceeding and to settle any dispute which may arise
out of or in connection with this Lease and for such
purposes hereby irrevocably submits to the
jurisdiction of the English Courts
IN WITNESS whereof the parties hereto have duly executed this
Lease the day and year above written
-20-
<PAGE>
THE FIRST SCHEDULE
(RIGHTS)
ALL rights appurtenant to the Demised Premises referred to in or any
documents referred to in the registers of title of Title No. NGL 707720
THE SECOND SCHEDULE
(EXCEPTIONS AND RESERVATIONS AND MATTERS SUBJECT TO WHICH THE DEMISE IS
MADE)
1. (Subject to the proviso in Clause 4.19.2 of this Lease) the right to
enter upon the Demised Premises for all or any of the purposes mentioned
in this Lease or the Headlease
2. All rights easements and privileges belonging to or enjoyed by any
adjoining or neighbouring property and affecting the Demised Premises or
any part thereof
3. The right which is reserved to the Landlord and all persons claiming
through or under it at any time or times hereafter to rebuild or alter
any of the adjoining or neighbouring buildings and to build upon or
otherwise use any adjoining or neighbouring land notwithstanding any
interference with access of light or air to the Demised Premises or any
part thereof Providing that the same shall not materially and
detrimentally inhibit the Demised Premises or the Tenant's or other the
then lessee's occupier's or underlessee's use and occupation of the
Demised Premises
4. All matters specified in or in any documents specified in the
registers of title of Title No. NGL707720 (other than any mortgages
created by the Landlord)
5. The right of support and protection for the benefit of the Landlord's
adjoining premises as is now and shall from time to time be enjoyed from
the buildings from time to time comprising the Demised Premises
THIRD SCHEDULE
(PROVISIONS FOR RENT REVIEW)
1. For the purpose of this Schedule it is hereby agreed that the
following definitions and provisions shall apply namely:
(A) The expression "open market rental value" means the full
market rent at which the Demised Premises might reasonably be
expected to be let by a willing landlord to a willing tenant in
the open market without the payment of any fine or premium on a
lease of the whole of the Demised Premises for a term of 5 years
commencing on the rent Review Date (as hereinafter defined) and
after the expiry of any rent free or concessionary rent period
which would be negotiated between a willing landlord and a willing
tenant in the open market with full vacant possession at the
commencement of the term and in all respects (including provisions
for rent review at five yearly intervals but not the amount of the
rent) on the terms and conditions of this Lease on the
suppositions (if not facts) that:
(a) The Tenant has complied with all its
obligations herein imposed
(b) The Demised Premises and all other necessary
facilities shall be in good and substantial repair and
condition and fit and available for immediate
beneficial occupation and use
-21-
<PAGE>
(c) No work has been carried out or occurred on or
directly relating to the Demised Premises which has
diminished the rental value thereof
(d) In case the Demised Premises have been
destroyed or damaged they have been fully restored
(e) The Demised Premises may be used for any of the
purposes permitted by this Lease as varied or extended
by any Licence pursuant thereto
(f) The willing tenant is a taxable person for the
purposes of the Value Added Taxes Act 1994 who makes
taxable supplies only and is fully able to recover its
input tax
but disregarding (so far as may be permitted by law) all
restrictions whatsoever relating to the recovery of rent
contained in any statute or orders rules or regulations
thereunder and any directions given relating to a method of
determination of rent and also disregarding the effect (if
any) on rent of:
(a) all Tenant's fixtures and fittings in the
Demised Premises
(b) any goodwill attaching to the Demised Premises
by reason of the business of the Tenant its
undertenants or their respective predecessors in title
carried on thereat or the fact that the Demised
Premises is occupied by the Tenant or its sub-tenants
as the case may be
(c) the fact that the Demised Premises or any part
thereof are damaged or destroyed in any way by an
insured risk (save where the Demised Premises have not
been restored rebuilt or reinstated due to the Landlord
being in default of its covenants in this Lease)
(d) any improvements that shall have been carried
out to the Demised Premises with the consent of the
Landlord otherwise than in pursuance of any obligation
to the Landlord or the Landlord's predecessors in title
whether by the Tenant or his subtenants or their
respective predecessors in title during the Term
PROVIDED THAT the open market rental value for the Demised
Premises shall be ascertained without making any discount
reduction or allowance to reflect (or compensate the Tenant or the
hypothetical tenant for the absence of) any rent free period or
concessionary rent period or contribution to fitting out works or
other inducement which it might then be the practice in open
market lettings for a landlord to make so that the open market
rental value of the Demised Premises shall be that which would be
payable after the expiry of any such rent free or concessionary
rent period and after receipt of any such contribution or other
inducement
(B) the expression "Rent Review Date" means the fifth
anniversary of the commencement of the Term
2. From and after the Review Date the rent payable under this Lease
shall be whichever shall be the greater of the following amounts (that
is to say):
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(A) The amount of the rent reserved during the twelve months
immediately preceding such Review Date and
(B) The open market rental value of the Demised Premises at
such Review Date
And the rent ascertained under the foregoing provisions is payable
as from the Review Date down to the expiry of the Term is
hereafter referred to as "the New Rent"
3. The open market rental value shall be determined in manner following
that is to say it shall be such annual sum as shall at any time be
agreed in writing between the parties Provided that if no such agreement
shall have been reached by a date three months prior to the Review Date
then the same may be determined by an independent Chartered Surveyor who
shall be a Surveyor experienced in the letting of office premises in
central London appointed for that purposes by the parties jointly or if
they fail to agree then on the application of either party by the
President for the time being of the Royal Institution of Chartered
Surveyors or such other person appointed by him and such Surveyor shall
act at the option of the Landlord either as an arbitrator I manner
provided by the Arbitration Acts 1996 or any statutory modification or
re-enactment thereof for the time being in force or as an independent
expert with the further provision that if the Surveyor so agreed upon or
appointed to act (in exercise of such option by the Landlord) as
arbitrator shall die or decline to act the President for the time being
of the Royal Institution of Chartered Surveyors or the person acting on
his behalf may on the application of either the Landlord or the Tenant
by writing discharge the arbitrator and appoint another in his place
4. In the event of the New Rent not having been agreed or determined
prior to the Review Date for any reason whatever then in respect of the
period of time (hereinafter called "the said interval") beginning with
the Review Date and ending on the quarter day immediately following the
date of such agreement or determination the Tenant shall pay to the
Landlord in manner hereinbefore provided rent at the rate payable
immediately before the Review Date PROVIDED THAT at the expiration of
seven days immediately following such agreement or determination there
shall be due as a debt payable by the Tenant to the Landlord a sum of
money equal to the amount whereby the rent at the rate so agreed or
determined (duly apportioned on a daily basis) shall exceed the rent
paid in respect of the said interval together with interest thereon at
the base rate of National Westminster Bank PLC (or such other rate as
shall be substituted therefor in accordance with Clause 4.2 hereof) for
the period from the relevant Review Date to the date of payment
5. Forthwith after the determination of the New Rent as herein provided
the Landlord and the Tenant shall prepare an appropriate Memorandum
recording such determination such Memorandum to be duly signed by or on
behalf of the Landlord and the Tenant respectively at their own expense
so that at all times thereafter the said Memorandum shall be conclusive
evidence of such determination
6. It is further provided in the event of determination of the New Rent
by an expert as follows:
(A) the fees and expenses of the expert including the cost of his
nomination shall be borne as the expert shall direct and
(B) the expert shall afford the Landlord and the Tenant an
opportunity to make representations to him and to comment once on
each other's initial representation and
(C) if the expert nominated pursuant to paragraph 6 shall die
delay or become unwilling unfit or incapable of acting or if for
any reason the President or a Senior Vice-President for the time
being of the Royal Institution of Chartered Surveyors or the
person acting on his behalf shall in his absolute discretion think
fit he may on the application of either the Landlord or the Tenant
by writing discharge the expert and appoint another in his place
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<PAGE>
THE FOURTH SCHEDULE
(PROVISIONS RELATING TO ASSIGNMENT)
PART 1 - DEFINITIONS
In this Schedule the following expressions shall have the meanings
ascribed to them:
"AUTHORISED GUARANTEE AGREEMENT" means an agreement in the form of the
draft set out in Part 4 of this Fourth Schedule with such amendments or
in such other form as the Landlord reasonably requires
"RELEVANT DATE" means the date on which the Tenant applies to the
Landlord for consent to assign the Lease and any date before the
Landlord's license to assign is completed
"QUALIFYING PERSON" means an assignee who is a company or sole trader or
a partnership who together with any guarantees and other security for
the performance by the assignee of the tenant covenants under this Lease
(other than any authorised guarantee agreement as described in section
16 of the Landlord and Tenant (Covenants) Act 1995) is and after the
assignment will remain in the reasonable opinion of the Landlord no less
substantial in financial terms than the Tenant and any guarantor of the
Tenant (if any) were/was in aggregate at the date on which this Lease
was assigned or granted to the Tenant and at the Relevant Date (after
taking into account the value at that date of any other security for the
performance of the tenant covenants under this Lease by the Tenant);
"ACCEPTABLE SECURITY" means, at the Relevant Date, either:
(A) a cash deposit with or for the benefit of the Landlord of a
sum equal to the rents hereby reserved (plus VAT thereon) for the
last complete period of one year immediately preceding the
Relevant Date, and the execution by the Person providing such
deposit of a deed charging that cash deposit in favour of the
Landlord to secure the payment of the rents hereby reserved (such
deed to be in a form agreed between the Landlord and the assignee
or, in default of agreement, to be in a form to be settled by a
solicitor to be agreed between the Landlord, and the assignee or,
in default of agreement, to be nominated on the application of any
of them by the President for the time being of the City of London
Law Society or the person acting on his behalf); or
(B) a guarantee given by a Qualifying Person to the Landlord
substantially in the form of the Authorised Guarantee Agreement
with such amendments as may be necessary to adapt it to a
guarantee to the Landlord of an assignee's obligations in respect
of the tenant covenants of this Lease
PART 2
CIRCUMSTANCES WHERE ASSIGNMENT IS PROHIBITED AND LANDLORD'S CONSENT
MAY BE WITHHELD IN ACCORDANCE WITH CLAUSE 4.8.4(I)
1. Any sums due from the Tenant payable under this Lease are outstanding
2. In the Landlord's reasonable opinion there are material outstanding
breaches of any tenant covenant under this Lease or any personal
covenants undertaken by the Tenant
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<PAGE>
3. In the Landlord's reasonable opinion the assignee is not a person who
is likely to be able to comply with the tenant covenants of this Lease
and to continue to be such a person following the assignment
4. The proposed assignee is not Qualifying Person
5. In the reasonable opinion of the Landlord the proposed assignment
will have a detrimental effect on the value of diminish or otherwise
adversely effect the Landlord's reversionary interest in the Demised
Premises or the Building on the assumption (whether or not a fact) that
the Landlord wishes to sell its interest the day following the
completion of the assignment of this Lease to the proposed assignee
6. The proposed assignment would have an adverse effect on the open
market value of the reversion immediately expectant on the determination
of the Term
PART 3
CONDITIONS SUBJECT TO WHICH ANY LICENSE OR CONSENT MAY BE GRANTED
IN ACCORDANCE WITH CLAUSE 4.8.4(II)
1. On or before any assignment and before giving occupation to the
assignee the Tenant and any person who then guarantees the obligations
of the Tenant (otherwise than under an Authorised Guarantee Agreement)
shall enter into an Authorised Guarantee Agreement; and
2. If so reasonably required by the Landlord the assignee shall, upon or
before any assignment and before taking occupation provide Acceptable
Security
3. In the event of an assignment by EuroGas (UK) Limited of 95 Aldwych
London WC2B4JF only and PROVIDED THAT the proposed assignee of EuroGas
(UK) Limited provides the Landlord with a cash deposit of a sum
equivalent to one year's rent passing at the time (plus VAT thereon) and
executes a deed charging that cash deposit in favour of the Landlord to
secure payment of the rents hereby reserved (such deed to be in a form
agreed between the Landlord and the assignee or, in default of
agreement, to be in a form to be settled by a solicitor to be agreed
between the Landlord, and the assignee or, in default of agreement, to
be nominated on the application of any of them by the President for the
time being of the City of London Law Society or the person acting on his
behalf) then EuroGas (UK) Limited shall not on such assignment be
required to enter into an Authorised Guarantee Agreement.
4. The Tenant assignee and any guarantor of the assignee shall complete
a licence to assign in such form as the Landlord reasonably requires
containing (inter alia) a covenant by the assignee with the Landlord to
pay the rents reserved by and to observe and perform all the covenants
on the part of the Tenant and conditions contained in this Lease from
the date of the assignment until such time as the assignee shall be
released pursuant to section 5 of the Landlord and Tenant (Covenants)
Act 1995.
5. If the prospective assignee/guarantor is a foreign company the
Landlord has received a full legal opinion (in a form reasonably
acceptable to the Landlord) from a reputable firm of lawyers practicing
within the relevant jurisdiction confirming, among other things, that
the assignee/guarantor is properly constituted and solvent and of good
standing and that the terms of the Lease/guarantee may be fully enforced
against it
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<PAGE>
PART 4
FORM OF AUTHORISED GUARANTEE AGREEMENT
DATED: , .
BETWEEN
(1) [ ] of [ ] whose registered office is at [ ] ("the
Guarantor") and
(2) [ ] of [ ] whose registered office is at [ ] ("the
Landlord")
WHEREAS
The Guarantor has agreed to assign the Lease (as defined below) to the
Assignee and this Deed shall take effect when the Lease is assigned to
the Assignee
WITNESSES as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 LANDLORD
"Landlord" includes the person in whom the reversion immediately
expectant on the determination of the Term is for the time being
vested
1.2 ASSIGNEE
"Assignee means [ ]
1.3 TERM
"Term means the term of years granted by the Lease
1.4 LEASE
"Lease" means a lease dated 2/11/1998 between (1) Scotdean Limited
(2) EuroGas (UK) Limited pursuant to which the Premises were
demised for a term of ten years from the 24 day of November 1998
subject to the payment of the rents reserved by and the observance
and performance of the covenants on the lessee's part and
conditions contained in the Lease and "Lease" includes all or any
deeds and documents supplemental to the Lease whether or not
expressed to be so.
1.5 PREMISES
"Premises" means the premises known as 22 Upper Brook Street
London W1 as more particularly described in the Lease
1.6 GENDER
Words importing one gender import any other gender and words
importing the singular import the plural and vice versa.
2. THE GUARANTOR'S COVENANTS
The Guarantor covenants with the Landlord and without the need for any
express assignment with all the Landlord's successors in title as follows:
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<PAGE>
2.1 PAYMENT
(i) that the Assignee will as well after as before any disclaimer
of the Lease, pay the rents and other amounts from time to time
payable under the Lease and will observe and perform obligations
on the part of the Assignee under the Lease; and
(ii) in case of default or delay on the part of the Assignee in
paying the rents and other amounts from time to time payable under
the Lease or in observing and performing the Assignee's
obligations under the Lease, the Guarantor will, by way of primary
obligation and not merely as guarantor or as collateral to the
Assignee's obligation, pay to the Landlord on demand any rent or
other amounts which ought to be paid or which are due and payable
under the Lease and on demand will make good an/or indemnify the
Landlord against any breaches of the Assignee's obligation under
the Lease, including all losses, damages, costs and expenses
arising or incurred by the Landlord.
2.2 PAYMENT FOLLOWING DISCLAIMER
If the Lease shall be disclaimed or forfeited, the Guarantor
shall pay to the Landlord on demand, an amount equal to the rents
and other amounts which would have been payable to the Landlord by
the Assignee under the Lease but for the disclaimer or forfeiture
for the period commencing with the date of the disclaimer and
ending on the earlier of the date of the notice specified in
clause 2.3 or the date (if any) upon which the rent receivable for
the Premises, following a reletting, is at least equivalent to the
Yearly Rent payable under this Lease immediately before the
disclaimer or forfeiture.
2.3 (i) the term will commence on the date of such notice and
expire on the date of the expiry of the Term
(ii) so far as there are any outstanding breaches of the
Assignee's obligations under the Lease the Landlord without
prejudice to its other remedies may require that such new lease
contain a covenant that they will be remedied promptly at the cost
of the Guarantor to the reasonable satisfaction of the Landlord
(iii) the Guarantor will on completion of such new lease
indemnify the Landlord against its costs in connection with the
grant of the new lease and any costs disbursements and value added
tax payable to any reversioner or other person interested in the
Premises in connection with the obtaining of any necessary
consent, approval or licence
3. PRIORITY
3.1 RANKING OF CLAIMS
The Guarantor will only be entitled to enforce its rights in
respect of any sums it pays or liabilities it incurs under this
Deed or otherwise arising from its observance performance or
discharge of the obligations on the part of the Guarantor after
all obligations of the Assignee under the Lease have been observed
and performed and discharged in full and until then the Guarantor
shall not
(i) seek to recover whether directly or by way of set-off
lien counterclaim or otherwise or accept any money or other
property or security or exercise any rights in respect of any sum
which may be or become due to the Guarantor on account of failure
by the Assignee to observe, perform or discharge its obligations
or on account of the obligations of the Guarantor under this Deed
form the Assignee or any third party;
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<PAGE>
(ii) claim, prove or accept any payment in any composition
by or winding up or liquidation of the Assignee in competition
with the Landlord for any amount owing to the Guarantor by the
Assignee on any account;
(iii) exercise any right or remedy in respect of any amount
paid by the Guarantor under this Deed or any liability incurred by
the Guarantor in observing performing or discharging the
obligations on the part of the Assignee
3.2 WARRANTY
The Guarantor warrants that it has not taken and will not,
without the consent of the Landlord, take any security from the
Assignee in connection with the Guarantor's obligations under this
Deed and any such security so taken shall be held in trust for the
Landlord as security for the respective liabilities of the
Guarantor and the Assignee
4. SOLE OR PRINCIPAL DEBTOR
Without prejudice to the rights of the Landlord against the
Assignee as principal, the Guarantor, as a separate and
independent stipulation, agrees that any liability mentioned in
this Deed which may not be recoverable on the footing of a
guarantee whether by reason of any legal limitation, disability or
incapacity on or of the Assignee or any other fact or
circumstance, whether known to the Landlord or not, will
nevertheless be recoverable from the Guarantor as though it had
been incurred by the Guarantor and the Guarantor was the sole or
principal debtor in respect of it and will be paid by the
Guarantor on demand, together with interest at the Prescribed Rate
(as defined in the Lease) from the date of demand until payment.
5. IMMEDIATE RECOURSE
The provisions of this Deed are in addition to and not in
substitution for any other rights which the Landlord may have and
may be enforced against the Guarantor whether or not recourse has
been had to any such rights and whether or not any steps or
proceedings have been taken against the Assignee.
6. OBLIGATIONS TO SUBSIST
The rights of the Landlord and the obligations of the
Guarantor will continue to subsist notwithstanding:
(i) any neglect or forbearance by the Landlord endeavouring
to obtain payment of the rents reserved or other amounts payable
under the Lease or enforcing the observance and performance of the
Assignee's obligations or anytime which may be given to the Assignee;
(ii) any refusal by the Landlord to accept rent tendered by
or on behalf of the Assignee;
(iii) any variation in the Lease agreed between the Landlord
and the Assignee for the time being;
(iv) any disposition of the Landlord's reversion or any part
of it;
(v) the release of any one or more persons for the time
being constituting a surety or guarantor to the Landlord of the
Assignee's obligations under the Lease; or
(vi) any other act, omission, matter or thing by which (but
for this provision) the Guarantor would be exonerated, either
wholly or in part, from its obligations under this Deed, other
than a release under seal given by the Landlord.
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<PAGE>
7. STATUTORY AVOIDANCE
No assurance, security or payment which may be avoided under
any statute nor any release, settlement or discharge of the
Guarantor which may have been given or made on the faith of any
such assurance, security or payment shall prejudice or affect the
right of the Landlord to recover from the Guarantor to the full
extent of the Guarantor's obligations under this Deed as if such
release settlement or discharge had not occurred.
8. DURATION OF LIABILITY
This Deed shall cease to have effect when the Assignee is
released form its obligations under the Lease by virtue of section
5 of the Landlord and Tenant (Covenants) Act 1995
9. NOTICES
Every notice, consent, request, demand or other communication
under this Deed shall be in writing delivered personally, by first
class pre-paid post or facsimile and shall be sent to the address
or facsimile number of the person concerned set out below in
respect of the Landlord and the Guarantor or to such other address
or facsimile number as is notified to it by the other party:
(i) in respect of the Landlord, to be delivered or sent to:
Address :
Attention :
Facsimile :
(ii) in respect of the Guarantor, to be delivered or sent to:
Address :
Attention :
Facsimile :
THE COMMON SEAL OF )
SCOTDEAN LIMITED )
was hereunto affixed in )
the presence of: )
Director: ___________________________
Secretary: ___________________________
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<PAGE>
EXHIBIT 10.27
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance
set forth below, is entered into by and between EUROGAS, INC., a Utah
corporation, with headquarters located at 942 East 7145 South, #101A,
Midvale, Utah 84047 (the "Company"), and ARKLEDUN DRIVE LLC, a Cayman
Islands limited liability corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from
securities registration afforded, inter alia, by Rule 506 under
Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933
Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, shares of 1999 Series C 6% Convertible
Preferred Stock, par value $0.001 per share, of the Company (the
"Convertible Preferred Stock") which shares will (i) have a liquidation
preference of $1,000 each and (ii) be convertible into newly-issued
shares of Common Stock, $0.001 par value per share, of the Company (the
"Company Common Stock") or outstanding shares of the Common Stock of Big
Horn Resources, Ltd. (the "Big Horn Common Stock") , upon the terms and
subject to the conditions of such Convertible Preferred Stock, and
subject to acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
A. PURCHASE. The undersigned hereby agrees to purchase from the
Company 1,800 shares of the Convertible Preferred Stock having an
aggregate liquidation preference in the amount set forth on the
signature page of this Agreement (the "Preferred Stock"), out of a total
offering of shares of Convertible Preferred Stock having a liquidation
preference of $1,800,000, and having the terms and conditions set forth
in the Certificate of Designations of the Convertible Preferred Stock of
the Company attached hereto as ANNEX I (the "Certificate of
Designations"). The purchase price for the Preferred Stock (the
"Purchase Price") shall be as set forth on the signature page hereto and
shall be equal to the liquidation preference for the Preferred Stock.
B. CERTAIN DEFINITIONS. As used herein, each of the following terms
has the meaning set forth below, unless the context otherwise requires:
(i) "Closing Date" means the date of the closing of the purchase and
sale of the Preferred Stock, as provided herein.
(ii) "Common Stock" means the Company Common Stock or the Big Horn
Common Stock, as the case may be.
(iii) "Converted Shares" means the shares of the relevant Common Stock
issuable or transferable upon conversion of the Preferred Stock or in
lieu of dividends payable thereon.
(iv) "Initial Market Price" means the Market Price of the Common Stock
as of the Closing Date.
(v) "Market Price of the Common Stock" means the average closing price
of the relevant Common Stock for the five (5) trading days ending on the
trading day immediately before the relevant date indicated in the
relevant provision hereof (unless a different relevant period is
specified in the relevant provision), as reported by Bloomberg, LP or,
if not so reported, as reported on the over-the-counter market.
(vi) "Securities" means the Preferred Stock and the Converted Shares.
(vii) "Shares" means the shares of Common Stock representing any or all
of the Converted Shares or shares of Company Common Stock issued in lieu
of interest on the Preferred Stock.
(viii) "Transaction Agreements" means the Securities Purchase
Agreement, the Registration Rights Agreement (as defined below), the
terms of the Preferred Stock as reflected in the Certificate of
Designations, the Joint Escrow Instructions and the Share Escrow
Agreement (as those terms are defined below).
(viii) "Person" means any natural person or any entity, including,
but not limited to a corporation, partnership, trust or estate.
C. FORM OF PAYMENT; DELIVERY OF CERTIFICATES.
(i) The Buyer shall pay the Purchase Price for the Preferred Stock by
delivering immediately available good funds in United States Dollars to
the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as ANNEX II (the "Joint Escrow
Instructions") on the date prior to the Closing Date.
(ii) No later than the Closing Date, but in any event promptly following
payment by the Buyer to the Escrow Agent of the Purchase Price, the
Company shall deliver one or more certificates represented the Preferred
Stock to be issued hereunder (collectively, as executed, the
"Certificates"), each duly executed on behalf of the Company, to the
Escrow Agent.
(iii) By signing this Agreement, each of the Buyer and the Company,
subject to acceptance by the Escrow Agent, agrees to all of the terms
and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by
this reference as if set forth in full.
D. METHOD OF PAYMENT. Payment into escrow of the Purchase Price shall
be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No.: ______________________
Re: Eurogas 10/99 Transaction
Not later than 5:00 p.m., New York time, on the date which is two (2)
New York Stock Exchange trading days after the Company shall have
accepted this Agreement and returned a signed counterpart of this
Agreement to the Escrow Agent by facsimile, the Buyer shall deposit with
the Escrow Agent the Purchase Price for the Preferred Stock in currently
available funds. Time is of the essence with respect to such payment,
and failure by the Buyer to make such payment, shall allow the Company
to cancel this Agreement.
E. ESCROW PROPERTY. The Purchase Price and the Certificates delivered
to the Escrow Agent as contemplated by Sections 1(c) and (d) hereof are
referred to as the "Escrow Property."
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
A. Without limiting Buyer's right to sell the Common Stock pursuant to
the Registration Statement, the Buyer is purchasing the Preferred Stock
and will be acquiring the Shares for its own account for investment only
and not with a view towards the public sale or distribution thereof and
not with a view to or for sale in connection with any distribution
thereof; provided, however, that by making the representations herein,
Buyer does not agree to hold any of the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities
at any time in accordance with U.S. federal and state securities laws
applicable to such disposition and any restrictions imposed on such
transfer by this Agreement or the instruments and documents executed in
connection with this Agreement. Buyer understands that the Securities
must be held indefinitely unless the Securities are subsequently
registered under the Securities Act or an exemption from registration is
available. Buyer has been advised or is aware of the provisions of Rule
144 promulgated under the Securities Act.
B. The Buyer is (i) an "accredited investor" as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), (ii) experienced in making investments of the
kind described in this Agreement and the related documents, (iii) able,
by reason of the business and financial experience of its officers (if
an entity) and professional advisors (who are not affiliated with or
compensated in any way by the Company or any of its affiliates or
selling agents), to protect its own interests in connection with the
transactions described in this Agreement, and the related documents, and
(iv) able to afford the entire loss of its investment in the Securities.
C. All subsequent offers and sales of the Preferred Stock and the
Shares by the Buyer shall be made pursuant to registration of the Shares
under the 1933 Act or pursuant to an exemption from registration.
D. The Buyer understands that the Preferred Stock is being offered and
sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that
the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in
order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Preferred Stock.
E. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Preferred
Stock and the offer of the Shares which have been requested by the
Buyer, including ANNEX V hereto. The Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and
have received complete and satisfactory answers to any such inquiries.
Without limiting the generality of the foregoing, the Buyer has also had
the opportunity to obtain and to review the Company's (1) Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, (2) Quarterly
Reports (as amended) on Form 10-Q for the fiscal quarters ended March
31, 1999 and June 30, 1999, (3) Current Report on Form 8-K as filed on
April 16, 1999 and amended on June 15, 1999 and July 20, 1999,
respectively, and (4) Post-Effective Amendment No. 2 to Registration
Statement on Form S-1, Registration Number 333-59715 (the "Company's SEC
Documents").
F. The Buyer understands that its investment in the Securities
involves a high degree of risk.
G. The Buyer understands that no United States federal or state agency
or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities.
H. The Buyer has full power and authority to enter into this
Agreement. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement
of creditors' rights generally.
I. Buyer is a Cayman Islands limited liability corporation. The offer
and sale of the Securities complies with the laws, regulations and
statutes of the Buyer=s jurisdiction, including (i) the legal
requirements of the Buyer's jurisdiction for the purchase of the
Preferred Stock, (ii) any foreign exchange restrictions applicable to
such purchase, (iii) any governmental or other consents that may need to
be obtained, and (iv) the income tax and other tax consequences, if any,
which may be relevant to the purchase, holding, redemption, sale or
transfer of the Preferred Stock. The Buyer=s subscription and payment
for, and the Buyer=s continued beneficial ownership of, the Preferred
Stock will not violate any applicable securities or other laws of the
Buyer=s jurisdiction.
3. COMPANY REPRESENTATIONS, ETC. The Company represents and warrants
to the Buyer as of the date hereof and as of the Closing Date that,
except as otherwise provided in ANNEX V hereto:
A. CONCERNING THE PREFERRED STOCK AND THE SHARES. The Preferred
Stock has been duly authorized, and when issued and paid for in
accordance with the terms of this Agreement, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability solely by reason of acquiring the
Preferred Stock hereunder. There are no preemptive rights of any
stockholder of the Company, as such, to acquire the Preferred Stock or
the Shares.
B. REPORTING COMPANY STATUS. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Utah and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The
Company is duly qualified as a foreign corporation to do business and is
in good standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary,
other than those jurisdictions in which the failure to so qualify would
not have a material adverse effect on the business, operations or
financial condition or results of operation of the Company and its
subsidiaries taken as a whole. The Company has registered its Common
Stock pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the Common Stock is listed and traded
on The NASDAQ/Bulletin Board Market. The Company has received no
notice, either oral or written, with respect to the continued
eligibility of the Common Stock for such listing, and the Company has
maintained all requirements for the continuation of such listing.
C. AUTHORIZED SHARES. The authorized capital stock of the Company
consists of (i) 325,000,000 shares of Common Stock, $.001 par value per
share, of which as at November 4, 1999, 87,713,821 shares are
outstanding and (ii) 5,000,000 shares of preferred stock, par value
$0.001 per share, of which as at November 4, 1999, (a) 2,391,968 shares
are designated as 1995 Series Preferred Stock, and as at November 4,
1999, 2,391,968 such shares are outstanding, (b) 1,250,000 shares are
designated as 1996 Series Preferred Stock, and as at November 4, 1999,
no such shares are outstanding, (c) 20,000 shares are designated as 1997
Series A Convertible Preferred Stock, and as at November 4, 1999 no such
shares are outstanding, (d) 30,000 shares are designated as 1998 Series
B Convertible Preferred Stock and as at November 4, 1999 no such shares
are outstanding and (e) upon the filing of the certificate of
Designations with the Utah Division of Corporations and Commercial Code
(the "Division of Corporations") and the acceptance thereof by the
Division of Corporations, 1,800 shares will be designated as 1999 Series
C Convertible Preferred Stock, and as of November 4, 1999 no such shares
are outstanding. All issued and outstanding shares of Common Stock have
been duly authorized and validly issued and are fully paid and
nonassessable. The Company has sufficient authorized and unissued
shares of Common Stock as may be necessary to effect the issuance of the
Shares. The Shares have been duly authorized and, when issued upon
conversion of, or as dividends on, the Preferred Stock in accordance
with its terms, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder.
D. SECURITIES PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT AND
STOCK. This Agreement and the Registration Rights Agreement, the form
of which is attached hereto as ANNEX IV (the "Registration Rights
Agreement"), and the transactions contemplated thereby, have been duly
and validly authorized by the Company. This Agreement has been duly
executed and delivered by the Company and this Agreement is, and the
Registration Rights Agreement, when executed and delivered by the
Company, will be, valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement
of creditors' rights generally; and, when issued and paid for in
accordance with the terms of this Agreement, the Preferred Stock will be
duly and validly authorized and will be a valid and binding obligation
of the Company in accordance with its terms, subject to general
principles of equity and to bankruptcy, insolvency, moratorium, or other
similar laws affecting the enforcement of creditors= rights generally.
E. NON-CONTRAVENTION. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company, the issuance of
the Preferred Stock and the Company Common Stock comprising the Shares,
and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and
the Preferred Stock do not and will not conflict with or result in a
breach by the Company of any of the terms or provisions of, or
constitute a default under (i) the articles of incorporation or by-laws
of the Company, each as currently in effect, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to
which the Company is a party or by which it or any of its properties or
assets are bound, except as herein set forth, or (iii) to its knowledge,
any existing applicable law, rule, or regulation or any applicable
decree, judgment, or order of any court, United States federal or state
regulatory body, administrative agency, or other governmental body
having jurisdiction over the Company or any of its properties or assets,
except such conflict, breach or default which would not have a material
adverse effect on the business, operations or financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole, or on the transactions contemplated herein.
F. APPROVALS. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required
to be obtained by the Company for the issuance and sale or transfer of
the Securities to the Buyer as contemplated by this Agreement, except
such authorizations, approvals and consents that have been obtained.
G. SEC FILINGS. None of the Company=s SEC Documents contained, at the
time they were filed, any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to
make the statements made therein in light of the circumstances under
which they were made, not misleading. The Company has since September
1, 1998 timely filed all forms, reports and exhibits thereto required to
be filed with the SEC under the 1934 Act and the regulations promulgated
thereunder
H. ABSENCE OF CERTAIN CHANGES. Since December 31, 1998, there has
been no material adverse change and no material adverse development in
the business, operations or condition (financial or otherwise) or
results of operation of the Company and its subsidiaries taken as a
whole, except as disclosed in the Company=s SEC Documents. Since
December 31, 1998, except as provided in the Company=s SEC Documents,
the Company has not (i) incurred or become subject to any liabilities
(absolute or contingent) except liabilities incurred in the ordinary
course of business consistent with past practices or liabilities which
management of the Company does not anticipate will have a material
adverse effect on the Company=s business, operations, condition
(financial or otherwise) or results of operations; (ii) discharged or
satisfied any lien or encumbrance or paid any material obligation or
liability (absolute or contingent), other than current liabilities paid
in the ordinary course of business consistent with past practices; (iii)
declared or made any payment or distribution of cash or other property
to stockholders with respect to its capital stock, or purchased or
redeemed, or made any agreements to purchase or redeem, any shares of
its capital stock; (iv) sold, assigned or transferred any other tangible
assets, or canceled any debts or claims, except in the ordinary course
of business consistent with past practices; (v) suffered any substantial
losses or waived any rights of material value, whether or not in the
ordinary course of business, or suffered the loss of any material amount
of existing business; (vi) made any changes in employee compensation,
except in the ordinary course of business consistent with past
practices; or (vii) experienced any material problems with labor or
management in connection with the terms and conditions of their employment.
I. FULL DISCLOSURE. There is no fact known to the Company (other than
general economic conditions known to the public generally or as
disclosed in the Company=s SEC Documents) that has not been disclosed in
writing to the Buyer that (i) would reasonably be expected to have a
material adverse effect on the business, operations or financial
condition of the Company or results of operations of the Company and its
subsidiaries, taken as a whole, (ii) would reasonably be expected to
materially and adversely affect the ability of the Company to perform
its obligations pursuant to this Agreement or any of the other
Transaction Agreements, or (iii) would reasonably be expected to
materially and adversely affect the value of the rights granted to the
Buyer in the Transaction Agreements.
J. ABSENCE OF LITIGATION. Except as set forth in the Company=s SEC
Documents, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or,
to the knowledge of the Company, threatened against or affecting the
Company, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, operations or
financial condition, or results of operation of the Company and its
subsidiaries taken as a whole or the transactions contemplated by any of
the Transaction Agreements or which would adversely affect the validity
or enforceability of, or the authority or ability of the Company to
perform its obligations under, any of the Transaction Agreements.
K. ABSENCE OF EVENTS OF DEFAULT. The Company is not in default in the
performance or observance of any material obligation, agreement,
covenant or condition contained in any material indenture, mortgage,
deed of trust or other material instrument or agreement to which it is a
party or by which it or its property is bound. Except as set forth in
Section 3(e) hereof, no Event of Default (or its equivalent term), as
defined in the respective agreement to which the Company is a party, and
no event which, with the giving of notice or the passage of time or
both, would become an Event of Default (or its equivalent term) (as so
defined in such agreement), has occurred and is continuing, which would
have a material adverse effect on the business, operations or the
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
L. PRIOR ISSUES. Except as described in the Company=s SEC Documents,
during the twelve (12) months preceding the date hereof, the Company has
not issued any convertible securities.
M. NO UNDISCLOSED LIABILITIES OR EVENTS. The Company has no
liabilities or obligations other than those disclosed in the Company's
SEC Documents or those incurred in the ordinary course of the Company's
business since December 31, 1998, and which individually or in the
aggregate, do not or would not have a material adverse effect on the
properties, business, operations, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. No
event or circumstance has occurred or exists with respect to the Company
or its properties, business, operations, financial condition, or results
of operations, which, under applicable law, rule or regulation, requires
public disclosure or announcement prior to the date hereof by the
Company but which has not been so publicly announced or disclosed.
There are no proposals currently under consideration or currently
anticipated to be under consideration by the Board of Directors or the
executive officers of the Company which proposal would (x) change the
certificate or articles of incorporation or by-laws of the Company, each
as currently in effect, with or without shareholder approval, which
change would reduce or otherwise adversely affect the rights and powers
of the shareholders of the Company Common Stock or (y) materially or
substantially change the business, assets or capital of the Company,
including its interests in subsidiaries.
M. NO INTEGRATED OFFERING. Except as disclosed in the Company=s SEC
Documents, neither the Company nor any of its affiliates nor any person
acting on its or their behalf has, directly or indirectly, at any time
since September 1, 1998, made any offer or sales of any security or
solicited any offers to buy any security under circumstances that would
eliminate the availability of the exemption from registration under Rule
506 of Regulation D in connection with the offer and sale of the
Securities as contemplated hereby.
N. DILUTION. The number of Shares issuable upon conversion of the
Preferred Stock may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the
trading price of the Common Stock declines prior to the conversion of
the Preferred Stock. The Company's executive officers and directors
have studied and fully understand the nature of the Securities being
sold hereby and recognize that they have a potential dilutive effect.
The board of directors of the Company has concluded, in its good faith
business judgment, that such issuance is in the best interests of the
Company. The Company specifically acknowledges that its obligation to
issue the Shares upon conversion of the Preferred Stock is binding upon
the Company and enforceable regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the Company.
O. BROKERS, FINDERS. Except for payment of fees to Spinneret
Financial Systems, Ltd. (the "Placement Agent"), payment of which is
the sole responsibility of the Company, the Company has taken no action
which would give rise to any claim by any person for brokerage
commission, finder's fees or similar payments by Buyer relating to this
Agreement or the transactions contemplated hereby. Buyer shall have no
obligation with respect to such fees or with respect to any claims made
by or on behalf of other Persons for fees of a type contemplated in this
Section 3(O) that may be due in connection with the transactions
contemplated hereby. The Company shall indemnify and hold harmless each
of Buyer, its employees, officers, directors, agents, and partners, and
their respective affiliates, from and against all claims, losses,
damages, costs (including the costs of preparation and attorney's fees)
and expenses suffered in respect of any such claimed or existing fees,
as and when incurred.
P. TAX STATUS. The Company and its subsidiaries have made or filed
all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject and has
paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns,
reports, declarations, except those being contested in good faith and
has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports, or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any
such claim.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
A. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Stock has not been and is not being registered under the
provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement, the Shares have not been and are not being registered
under the 1933 Act, and may not be transferred unless (A) subsequently
registered thereunder or (B) the Buyer shall have delivered to the
Company an opinion of counsel, reasonably satisfactory in form, scope
and substance to the Company, to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption
from such registration; (2) any sale of the Securities made in reliance
on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any unregistered resale of such Securities under
circumstances in which the seller, or the person through whom the sale
is made, may be deemed to be an underwriter, as that term is used in the
1933 Act, will require compliance with some other exemption under the
1933 Act and the rules and regulations of the SEC thereunder; (3)
neither the Company nor any other person is under any obligation to
register the Securities (other than pursuant to the Registration Rights
Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder; and (4) except as provided in the Share
Escrow Agreement, the Company makes no representation or warranty with
respect to the Big Horn Common Stock, other than the Company=s ownership
of 14,100,000 shares thereof (in particular, but without limiting the
foregoing, the Company makes no representation or warranty regarding the
Buyer=s ability to sell, transfer or dispose of the shares of Big Horn
Common Stock which may be transferred to the Buyer pursuant to the terms
of this Agreement).
B. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that the
Preferred Stock and, until such time as the Company Common Stock has
been registered under the 1933 Act as contemplated by the Registration
Rights Agreement and sold in accordance with an effective Registration
Statement, certificates and other instruments representing any of the
Preferred Stock or shares of the Company Common Stock shall bear a
restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of any such Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
The legend set forth above shall be promptly removed, and the Company
shall issue a certificate without such legend to the holder of any
shares of Preferred Stock or Company Common Stock upon which such legend
is stamped, if, unless otherwise required by state securities laws, (i)
such Securities are registered for resale under the Securities Act, or
(ii) such holder provides the Company with reasonable assurances that
such Securities can be sold pursuant to Rule 144(k) promulgated under
the Securities Act. The Company shall bear the reasonable cost of the
removal of any legend as anticipated by this Section 4.
C. FILINGS. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Securities to the Buyer under
applicable provisions of the 1933 Act, the 1934 Act and the regulations
promulgated thereunder, or required by any domestic securities exchange
or trading market, and to provide a copy thereof to the Buyer promptly
after such filing.
D. REPORTING STATUS. So long as the Buyer beneficially owns any of
the Securities, (i) the Company shall file all reports required to be
filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act,
shall take all reasonable actions under its control to ensure that
adequate current public information with respect to the Company, as
required in accordance with Rule 144(c)(2) of the 1933 Act, is publicly
available, and shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination and (ii) the
Company will take all reasonable actions under its control to continue
quotation of the Company Common Stock in the over-the-counter market
maintained by the National Association of Securities Dealers, Inc.
E. USE OF PROCEEDS. The Company will use the proceeds from the sale
of the Preferred Stock (excluding amounts paid by the Company for legal
fees, finder's fees and escrow agent fees in connection with the sale
of the Preferred Stock) for general Company purposes and acquisitions,
but shall not, directly or indirectly, use such proceeds for investment
in any other affiliate or to repay debt to affiliates.
F. CERTAIN AGREEMENTS.
(i) The Company covenants and agrees that it will not, without the
prior written consent of the Buyer, enter into any subsequent or further
offer or sale of Common Stock or securities convertible into Common
Stock (collectively, "New Common Stock") with any third party on any
date which is earlier than one hundred twenty (120) days after the
Effective Date.
(ii) In the event the Company breaches the provisions of this Section
4(f), the Conversion Price (as defined in the Certificate of
Designations) shall be amended to be equal to (x) 90% of (y) the amount
determined in accordance with the provisions of the Certificate of
Designations without regard to this provision, and the Buyer may require
the Company to immediately redeem all outstanding Preferred Stock in
accordance with Section 4(i)(y) hereof.
G. FIRST RIGHT. Each time during the one year period following the
Closing Date that the Company proposes to sell securities convertible
into or exercisable for shares of Company Common Stock in a capital
raising transaction, prior to closing any such transaction, the Company
shall first notify the Buyer in writing stating (i) its bona fide intent
to sell such securities, (ii) a detailed description of the price and
terms upon which the Company intends to sell such securities, and (iii)
the number or amount of the securities proposed to be sold. The Buyer
shall have five business days to inform the Company in writing that the
Buyer wishes to purchase all, but not a part, of the securities proposed
to be sold by the Company on the terms and for the price set forth in
the Company=s notice. If the Buyer shall not exercise such right in
full, the Company may proceed to sell such securities for the price and
on the terms set forth in its notice. If such transaction is not closed
within 60 days of the Company=s notice to the Investors, the Buyer=s
right set forth in this Section 4(G) shall be deemed to be revived and
such securities shall not be sold unless reoffered to the Buyer in
accordance herewith.
H. AVAILABLE SHARES. The Company shall have at all times authorized
and reserved for issuance, free from preemptive rights, shares of
Company Common Stock sufficient to yield two hundred percent (200%) of
the number of shares of Company Common Stock issuable at conversion as
may be required to satisfy the conversion rights of the Buyer pursuant
to the terms and conditions of the Preferred Stock or represent payment
of dividends on the Preferred Stock.
I. LIMITATION ON ISSUANCE OF SHARES. The Company may be limited in the
number of shares of Company Common Stock it may issue by virtue of (i)
the number of authorized shares or (ii) the applicable rules and
regulations of the principal securities market on which the Company
Common Stock is listed or traded, including, but not necessarily limited
to, Nasdaq Rule 4310(c)(25)(H)(i)(d)(2) (collectively, the ACap
Regulations@). Without limiting the other provisions thereof, the
Certificate of Designations shall provide that (i) the Company will take
all steps reasonably necessary to be in a position to issue shares of
Company Common Stock on conversion of the Preferred Stock without
violating the Cap Regulations and (ii) if, despite taking such steps,
the Company still cannot issue such shares of Company Common Stock
without violating the Cap Regulations, the holder of shares of
Preferred Stock which cannot be converted as result of the Cap
Regulations (each such share of Preferred Stock, an "Unconverted
Preferred Share") shall have the option, exercisable in such holder=s
sole and absolute discretion, to elect either of the following remedies:
(x) if permitted by the Cap Regulations, require the
Company to issue shares of Company Common Stock in
accordance with such holder's notice of conversion at a
conversion purchase price equal to the average of the
closing price per share of Company Common Stock for any
five (5) consecutive trading days (subject to certain
equitable adjustments for certain events occurring during
such period) during the sixty (60) trading days
immediately preceding the date of notice of conversion; or
(y) require the Company to redeem each Unconverted
Preferred Share for an amount (the "Redemption Amount"),
payable in cash, equal to:
V x M
CP
where:
"V" means the liquidation value of an Unconverted
Preferred Share plus any accrued but unpaid dividends
thereon;
"CP" means the Conversion Price in effect on the date of
redemption (the ARedemption Date@) specified in the notice
from the holder of the Unconverted Preferred Share
electing this remedy; and
"M" means the highest closing ask price per share of the
Company Common Stock during the period beginning on the
Redemption Date and ending on the date of payment of the
Redemption Amount.
A holder of more than one Unconverted Preferred Share may elect one of
the above remedies with respect to some of such holder=s Unconverted
Preferred Shares and the other remedy with respect to other portions of
the Unconverted Preferred Shares. The Certificate of Designations
shall not contain any provisions inconsistent with the above terms. The
provisions of this paragraph are not intended to limit the scope of the
provisions otherwise included in the Certificate of Designations.
J. REIMBURSEMENT. If (i) the Buyer, other than by reason of its gross
negligence or willful misconduct or violation of any applicable law,
rule or regulation, becomes involved in any capacity in any action,
proceeding or investigation brought by any stockholder of the Company,
in connection with or as a result of the consummation of the
transactions contemplated by Transaction Agreements, or is impleaded in
any such action, proceeding or investigation, or (ii) the Buyer, other
than by reason of its gross negligence or willful misconduct or by
reason of its trading of the Company=s securities in a manner that is
illegal under the federal securities laws, rules or regulations or by
reason of its violation of any other law, becomes involved in any
capacity in any action, proceeding or investigation brought by the
Commission against or involving the Company or in connection with or as
a result of the consummation of the transactions contemplated by the
Transaction Agreements, or is impleaded in any such action, proceeding
or investigation by any person, then in any such case, the Company will
reimburse the Buyer for its reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other
than with respect to any matter in which the Buyer is a named party or
is impleaded, the Company will pay the Buyer the charges, as reasonably
determined by the Buyer, for the time of any officers or employees of
the Buyer devoted to appearing and preparing to appear as witnesses,
assisting in preparation for hearings, trials or pretrial matters, or
otherwise with respect to inquiries, hearing, trials, and other
proceedings relating to the subject matter of this Agreement. The
reimbursement obligations of the Company under this paragraph shall be
in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any affiliates of the Buyer
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any),
as the case may be, of the Buyer and any such affiliate, and shall be
binding upon and inure to the benefit of any successors, assigns, heirs
and personal representatives of the Company, the Buyer and any such
affiliate and any such Person. The Company also agrees that neither the
Buyer nor any such affiliate, partners, directors, agents, employees or
controlling persons shall have any D RAFT -3 10/28/99
liability to the Company or any person asserting claims on behalf of or
in right of the Company in connection with or as a result of the
consummation of the Transaction Agreements except to the extent that any
losses, claims, damages, liabilities or expenses incurred by the Company
result from (x) the gross negligence or willful misconduct or violation
of law, rule or regulation by the Buyer or (y) the Company=s use of any
information provided by the Buyer for inclusion in any registration
statement filed by the Company under the 1933 Act.
5. TRANSFER AGENT INSTRUCTIONS.
A. Promptly following the delivery by the Buyer of the Purchase Price
in accordance with Section 1(c) hereof, the Company will irrevocably
instruct its transfer agent to issue Company Common Stock from time to
time upon conversion of the Preferred Stock in such amounts as specified
from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 4(b) of this Agreement prior to
registration of the Shares under the 1933 Act, registered in the name of
the Buyer or its nominee and in such denominations to be specified by
the Buyer in connection with each conversion of the Preferred Stock.
The Company warrants that no instruction inconsistent with the
instructions referred to in this Section 5 and the stop transfer
instructions to give effect to Section 4(a) hereof prior to registration
and sale of the Shares under the 1933 Act will be given by the Company
to the transfer agent with respect to the Shares and that the Shares
shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement, the
Registration Rights Agreement, and applicable laws and regulations.
Nothing in this Section shall affect in any way the Buyer's obligations
and agreement to comply with all applicable securities laws upon resale
of the Securities. If the Buyer provides the Company with an opinion of
counsel reasonably satisfactory to the Company that registration of a
resale by the Buyer of any of the Securities in accordance with clause
(1)(B) of Section 4(a) of this Agreement is not required under the 1933
Act, the Company shall (except as provided in clause (2) of Section 4(a)
of this Agreement) permit the transfer of the Securities and, in the
case of the Converted Shares, promptly instruct the Company's transfer
agent to issue one or more certificates for Company Common Stock without
legend in such name and in such denominations as specified by the Buyer.
B. (i) The Company will permit the Buyer to exercise its right to
convert the Preferred Stock by telecopying or delivering an executed and
completed Notice of Conversion to the Company in accordance with the
provisions of the Certificate of Designations.
(ii) The term "Conversion Date" means, with respect to any conversion
elected by the holder of the Preferred Stock, the date specified in the
Notice of Conversion, provided the copy of the Notice of Conversion is
telecopied to or otherwise delivered to the Company in accordance with
the provisions hereof so that it is received by the Company on or before
such specified date.
(iii) The Company will transmit the certificates representing the
Converted Shares issuable upon conversion of any Preferred Stock
(together with, unless otherwise instructed by the Buyer, one or more
certificates representing the Preferred Stock not being so converted if
the certificates submitted in connection with such conversion
represented more shares than then being converted) to the Buyer at the
address specified in the Notice of Conversion (which may be the Buyer=s
address for notices as contemplated by Section 11 hereof or a different
address) via recognized express or overnight courier, by electronic
transfer or otherwise, within three (3) business days (such third
business day, the "Delivery Date") after (A) the business day on which
the Company has received or has possession of both of the Notice of
Conversion (by facsimile or other delivery) and the certificate of the
Preferred Stock being converted (and if the same are not delivered to
the Company on the same date, the date of delivery of the second of such
items) or (B) the date a dividend payment on the Preferred Stock which
the Company has elected to pay by the issuance of Common Stock, as
contemplated by the Preferred Stock, was due. If, at any time, the
Buyer directs the Company or its counsel, its transfer agent or another
designated agent to hold the Preferred Stock on behalf of the Buyer,
such possession shall satisfy the Buyer=s delivery obligation in
connection with any conversion. Such possession shall be for solely and
exclusively for the benefit of Buyer and shall not represent any other
interest of the Company in the Preferred Stock. The original
certificates of the unconverted Preferred Stock shall be returned to the
Buyer at any time immediately upon direction from the Buyer.
C. The Company understands that a delay in the delivery of the Shares
of Common Stock beyond the Delivery Date could result in economic loss
to the Buyer. As compensation to the Buyer for such loss, the Company
agrees to pay payments to the Buyer for late issuance of the shares in
accordance with the following schedule (where "No. Business Days Late"
is defined as the number of business days beyond two (2) business days
from the Delivery Date):
Late Payment For Each $10,000
of Liquidation Preference or Dividend No. Business
Days Late Amount Being Converted
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10
$1,000 +
additional $200
for each Business
Day Late in excess
of 10 days
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the
Buyer=s right to pursue actual damages for the Company's failure to
issue and deliver the Common Stock to the Buyer. Furthermore, in
addition to any other remedies which may be available to the Buyer, in
the event that the Company fails for any reason to effect delivery of
such shares of Common Stock by the Delivery Date, the Buyer will be
entitled to revoke the relevant Notice of Conversion by delivering a
notice to such effect to the Company whereupon the Company and the Buyer
shall each be restored to their respective positions immediately prior
to delivery of such Notice of Conversion.
D. If, by the Delivery Date, the Company fails for any reason to
deliver the Shares to be issued upon conversion of shares of Preferred
Stock and thereafter the holder of the Preferred Stock being converted
(a "Converting Holder") purchases, in an arm=s-length open market
transaction or otherwise, shares of Common Stock (the "Covering Shares")
in order to make delivery in satisfaction of a sale of Common Stock by
the Converting Holder (the "Sold Shares"), which delivery such
Converting Holder anticipated to make using the Shares to be issued upon
such conversion (a "Buy-In"), the Company shall pay to the Converting
Holder, in addition to all other amounts contemplated in other
provisions of the Transaction Agreements, and not in lieu thereof, the
Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment
Amount" is the amount equal to the excess, if any, of (x) the Converting
Holder's total purchase price (including brokerage commissions, if any)
for the Covering Shares over (y) the net proceeds (after brokerage
commissions, if any) received by the Converting Holder from the sale of
the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to
the Converting Holder in immediately available funds immediately upon
demand by the Converting Holder. By way of illustration and not in
limitation of the foregoing, if the Converting Holder purchases shares
of Common Stock having a total purchase price (including brokerage
commissions) of $11,000 to cover a Buy-In with respect to shares of
Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment
Amount which Company will be required to pay to the Converting Holder
would be $1,000.
E. In lieu of delivering physical certificates representing the
shares of Company Common Stock issuable upon conversion, provided the
Company=s transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, upon request
of the Buyer and its compliance with the provisions contained in this
paragraph, so long as the certificates therefor do not bear a legend and
the Buyer thereof is not obligated to return such certificate for the
placement of a legend thereon, the Company shall use its best efforts to
cause its transfer agent to electronically transmit the shares of
Company Common Stock issuable upon conversion to the Buyer by crediting
the account of Buyer's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission system.
F. If, at any time (i) the Company challenges, disputes or denies the
right of a holder of Preferred Stock to effect a conversion of the
Preferred Stock into Common Stock or otherwise dishonors or rejects any
Conversion Notice delivered in accordance with the terms of this
Agreement or the Certificate of Designations or (ii) any third party who
is not and has never been an Affiliate of such holder commences any
lawsuit or proceeding or otherwise asserts any claim before any court or
public or governmental authority, which lawsuit, proceeding or claim
seeks to challenge, deny, enjoin, limit, modify, delay or dispute the
right of such holder to effect the conversion of the Preferred Stock
into Common Stock, then such holder shall have the right, by written
notice to the Company, to require the Company to promptly redeem the
Preferred Stock for cash at a redemption price (the "Mandatory Purchase
Amount") equal to (x) one hundred thirty-five percent (135%) of the
liquidation preference of the unconverted Preferred Stock held by such
holder plus (y) all accrued but unpaid dividends on the Preferred Stock
through the date of payment of the Mandatory Purchase Amount. Under any
of the circumstances set forth above, the Company shall be responsible
for the payment of all costs and expenses of such holder, including, but
not necessarily limited to, reasonable legal fees and expenses, as and
when incurred in connection with such holder's disputing any such action
or pursuing such holder's rights hereunder (in addition to any other
rights such holder may have hereunder or otherwise). The Mandatory
Purchase Amount will be payable to such holder in cash within five (5)
business days from the date such holder gives the Company written notice
that it is exercising its rights under this paragraph.
G. To the extent permitted by applicable laws and regulations, the
holder of any Preferred Stock shall be entitled to exercise its
conversion privilege with respect to the Preferred Stock notwithstanding
the commencement of any case under 11 U.S.C. '101 et seq. (the
"Bankruptcy Code"). In the event the Company is a debtor under the
Bankruptcy Code, the Company hereby waives, to the fullest extent
permitted, any rights to relief it may have under 11 U.S.C. '362 in
respect of the conversion of the Preferred Stock. The Company agrees,
without cost or expense to any holder, to take or to consent to any and
all actions permitted under applicable laws and regulations and
reasonably necessary or requested by the Buyer to effectuate relief
under 11 U.S.C. '362 in such circumstances.
H. The Company will authorize its transfer agent to give information
relating to the Company directly to the Buyer or the Buyer=s
representatives upon the request of the Buyer or any such
representative. The Company will provide the Buyer with a copy of the
authorization so given to the transfer agent.
6. CLOSING DATE.
A. The Closing Date shall occur on the date which is the first
trading day on New York Stock Exchange after each of the conditions
contemplated by Sections 7 and 8 hereof shall have either been satisfied
or been waived by the party in whose favor such conditions run.
B. The closing of the purchase and issuance of the Preferred Stock
shall occur on the Closing Date at the offices of the Escrow Agent and
shall take place no later than 3:00 P.M., New York time, on such day or
such other time as is mutually agreed upon by the Company and the Buyer.
C. Notwithstanding anything to the contrary contained herein, the
Escrow Agent will be authorized to release the Escrow Funds to the
Company and to others and to release the other Escrow Property on the
Closing Date upon satisfaction of the conditions set forth in Sections 7
and 8 hereof and as provided in the Joint Escrow Instructions.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the
Preferred Stock to the Buyer pursuant to this Agreement on the Closing
Date is conditioned upon:
A. The execution and delivery of this Agreement and the other
Transaction Agreements by the Buyer;
B. Delivery by the Buyer to the Escrow Agent of good funds as payment
in full of an amount equal to the Purchase Price in accordance with this
Agreement;
C. The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement, each as if made on
such date, and the performance by the Buyer on or before such date of
all covenants and agreements of the Buyer required to be performed on or
before such date; and
D. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or
requiring any consent or approval which shall not have been obtained.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Stock to the Buyer pursuant to this Agreement on the Closing
Date is conditioned upon:
A. The execution and delivery of this Agreement and the other
Transaction Agreements, including the Share Escrow Agreement
substantially in the form of ANNEX VI attached hereto (the "Share Escrow
Agreement"), by the Company;
B. The due adoption and execution of the Certificate of Designations
by all required corporate action and, to the extent required for the
Preferred Stock to be authorized, the filing of the Certificate of
Designations with the appropriate state office;
C. The delivery by the Company to the Escrow Agent of the
Certificates in accordance with this Agreement;
D. The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this
Agreement. each as if made on such date, and the performance by the
Company on or before such date of all covenants and agreements of the
Company required to be performed on or before such date;
E. On the Closing Date, the Buyer shall have received an opinion of
counsel for the Company, dated such Closing Date, in form, scope and
substance reasonably satisfactory to the Buyer, substantially to the
effect set forth in ANNEX III attached hereto;
F. There shall not be in effect any law, rule or regulation
prohibiting or restricting the transactions contemplated hereby, or
requiring any consent or approval which shall not have been obtained;
G. From and after the date hereof to and including the Closing Date,
the trading of the Common Stock shall not have been suspended by the SEC
or the NASD and trading in securities generally on the New York Stock
Exchange or The NASDAQ/Bulletin Board Market shall not have been
suspended or limited, nor shall minimum prices been established for
securities traded on The NASDAQ/Bulletin Board Market, nor shall there
be any outbreak or escalation of hostilities involving the United States
or any material adverse change in any financial market that in either
case in the reasonable judgment of the Buyer makes it impracticable or
inadvisable to purchase the Preferred Stock.
9. GOVERNING LAW: MISCELLANEOUS.
A. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to
the jurisdiction of the federal courts whose districts encompass any
part of the City of New York or the state courts of the State of New
York sitting in the City of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company shall
reimburse the Buyer for any reasonable legal fees and disbursements
incurred by the Buyer in enforcement of or protection of any of its
rights under any of the Transaction Agreements.
B. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
C. This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto.
D. All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
E. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
F. This Agreement may be signed in one or more counterparts, each of
which shall be deemed an original.
G. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this
Agreement.
H. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement or the validity or enforceability of this Agreement in any
other jurisdiction.
I. This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement thereof.
J. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof.
10. NOTICES. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given on the earliest of
(a) the date delivered, if delivered by personal delivery as
against written receipt therefor or by confirmed facsimile
transmission,
(b) the seventh business day after deposit, postage prepaid,
in the United States Postal Service by registered or
certified mail, or
(c) the third business day after mailing by international
express courier, with delivery costs and fees prepaid,
in each case, addressed to each of the other parties thereunto entitled
at the following addresses (or at such other addresses as such party may
designate by ten (10) days= advance written notice similarly given to
each of the other parties hereto):
COMPANY: EUROGAS, INC..
At its address at the head of this Agreement
Attn: Chief Executive Officer
Telephone No.: (801) 255-0862
Telecopier No.: (801) 255-2005
and with a copy to:
Parr Waddoups Brown Gee & Loveless
185 South State Street, Suite 1300
Salt Lake City, Utah 84111-1536
Attn: Brian Lloyd, Esq.
Telephone No.: (801) 532-7840
Telecopier No.: (801) 532-7750
BUYER: At the address set forth on the signature page of this
Agreement.
with a copy to:
Krieger & Prager, Esqs.
319 Fifth Avenue
Attn: Samuel Krieger, Esq.
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No. (212) 213-2077
ESCROW AGENT: Krieger & Prager, Esqs.
319 Fifth Avenue
Attn: Samuel Krieger, Esq.
New York, New York 10016
Telephone No.: (212) 689-3322
Telecopier No.: (212) 213-2077
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the
Buyer's representations and warranties herein shall survive the
execution and delivery of this Agreement, the delivery of the
Certificates and the payment of the Purchase Price for a period of two
years beyond the Closing Date, and shall inure to the benefit of the
Buyer and the Company and their respective successors and assigns.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
by one of its officers thereunto duly authorized as of the date set
forth below.
LIQUIDATION PREFERENCE OF PREFERRED STOCK: $
NO. OF SHARES OF PREFERRED STOCK:
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Securities
Purchase Agreement to be duly executed on its behalf this
day of , 1999.
________________________________ ARKLEDUN DRIVE LLC
Address Printed Name of Subscriber
________________________________
By:
Telephone No. __________________ (Signature of Authorized Person)
_____________________________________
Telecopier No. __________________ Printed Name and Title
Jurisdiction of Incorporation
or Organization
As of the date set forth below, the undersigned hereby accepts this
Agreement and represents that the foregoing statements are true and
correct and that it has caused this Securities Purchase Agreement to be
duly executed on its behalf.
EUROGAS, INC.
By:
Title:
Date: ,1999
DRAFT -3 10/28/99
ANNEX I FORM OF CERTIFICATE OF
DESIGNATIONS
ANNEX II JOINT ESCROW INSTRUCTIONS
ANNEX III OPINION OF COUNSEL
ANNEX IV REGISTRATION RIGHTS AGREEMENT
ANNEX V COMPANY DISCLOSURE MATERIALS
ANNEX VI SHARE ESCROW AGREEMENT
ANNEX V
TO
SECURITIES PURCHASE AGREEMENT
COMPANY DISCLOSURE
[TO BE PROVIDED BY COMPANY]
EXHIBIT 10.28
ANNEX IV
TO
SECURITIES PURCHASE
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 4, 1999 (this
"Agreement"), is made by and between EUROGAS, INC., a Utah corporation,
with headquarters located at 942 East 7145 South, #101A, Midvale, Utah
84047 (the "Company"), and ARKLEDUN DRIVE LLC, a Cayman Islands limited
liability corporation (the "Initial Investor").
Terms not otherwise defined herein shall have the meanings ascribed to
them in the Securities Purchase Agreement, dated as of November 4, 1999
(the "Securities Purchase Agreement"), between the Initial Investor and
the Company.
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the Securities
Purchase Agreement, the Company has agreed to issue and sell to the
Initial Investor shares of the Convertible Preferred Stock having an
aggregate liquidation preference of up to $1,800,000 (the "Preferred
Stock"); and
WHEREAS, the Preferred Stock is convertible into shares of Company
Common Stock (the "Conversion Shares"; which term, for purposes of this
Agreement, shall include shares of Company Common Stock issuable in lieu
of accrued dividends on conversion as contemplated by the Securities
Purchase Agreement) upon the terms and subject to the conditions
contained in the Certificate of Designations and the Securities Purchase
Agreement; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and
the rules and regulations thereunder, or any similar successor statute
(collectively, the "Securities Act"), with respect to the Conversion
Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
Company and the Initial Investor hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Investor" means the Initial Investor and any permitted transferee
or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof and who holds Preferred
Stock or Registrable Securities.
(b) "Potential Material Event" means any of the following: (i) the
possession by the Company of material information not ripe for
disclosure in a registration statement, which shall be evidenced by a
determination in good faith by the Board of Directors of the Company
that disclosure of such information in the registration statement would
be detrimental to the business and affairs of the Company; or (ii) any
material engagement or activity by the Company which would, in the good
faith determination of the Board of Directors of the Company, be
adversely affected by disclosure in a registration statement at such
time, which determination shall be accompanied by a good faith
determination by the Board of Directors of the Company that the
registration statement would be materially misleading or contain a
material omission absent the inclusion of such information.
(c) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement
or Statements in compliance with the Securities Act and pursuant to Rule
415 under the Securities Act or any successor rule providing for
offering securities on a continuous basis ("Rule 415"), and the
declaration or ordering of effectiveness of such Registration Statement
by the United States Securities and Exchange Commission (the "SEC").
(d) "Registrable Securities" means shares of Company Common Stock
constituting Conversion Shares.
(e) "Registration Statement" means a registration statement of the
Company under the Securities Act covering the Registrable Securities.
(f) "Required Effective Date" means the relevant Initial Required
Effective Date or Increased Required Effective Date (as those terms are
defined below).
2. REGISTRATION.
(A) MANDATORY REGISTRATION.
(i) The Company shall prepare and file with the SEC, as soon as
possible after the Closing Date but no later than five (5) days after
the Closing Date (the "Required Filing Date"), a post-effective
amendment to the Company=s currently effective Registration Statement on
Form S-1 (as heretofore amended; the "Existing Registration Statement")
registering for resale by the Investor the number of shares equal to the
sum of a sufficient number of shares of Company Common Stock for the
Initial Investors to sell the Registrable Securities (or such lesser
number as may be required by the SEC, but in no event less than the
aggregate number of shares equal to two hundred percent (200%) of (I)
the aggregate number of shares into which the Preferred Stock would be
convertible at the time of filing of such amendment (assuming for such
purposes that all shares of Preferred Stock had been eligible to be
converted, and had been converted, into Conversion Shares consisting of
Company Common Stock in accordance with the terms of the Certificate of
Designations and the Transaction Agreements, whether or not such
eligibility or conversion had in fact occurred as of such date) and (II)
the aggregate number of shares which the Company might issue in lieu of
dividends on the Preferred Stock through the date which is two years
from the Closing Date (assuming for such purposes that all dividends
accrued on the liquidation preference of all of the Preferred Stock
issued to the Initial Investor through such date and had then been
converted into shares of Company Common Stock in accordance with the
terms of the Certificate of Designations, whether or not such accrual or
conversion had in fact occurred as of such date). The Registration
Statement (i) shall include only the Registrable Securities and the
shares referred to in the Existing Registration Statement and (ii) shall
also state that, in accordance with Rules 416 and 457 under the
Securities Act, it also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of the
Preferred Stock to prevent dilution resulting from stock splits, or
stock dividends. The Company will use its reasonable best efforts to
cause such Registration Statement to be declared effective on a date (a
"Required Effective Date") which is no later than the earlier of (x)
five (5) days after notice by the SEC that it may be declared effective
or (y) ten (10) days after the Closing Date.
(ii) If at any time, the number of shares of Company Common Stock
represented by the Registrable Shares, issued or to be issued as
contemplated by the Transaction Agreements, exceeds the aggregate number
of shares of Company Common Stock then registered (an "Increased
Registered Shares Date"), the Company shall, within ten (10) business
days after receipt of a written notice from any Investor, either (X)
amend the Registration Statement filed by the Company pursuant to the
preceding provisions of this Section 2, if such Registration Statement
has not been declared effective by the SEC at that time, to register
such Registrable Shares, computed, (1)with respect to shares of Company
Common Stock previously issued, as the number of shares actually issued,
plus (2) with respect to shares of Company Common Stock not yet issued,
utilizing a Conversion Price which is the lower of the Conversion Price
then applicable or the Conversion Price contemplated by the immediately
preceding subparagraph (i), or (Y) if such Registration Statement has
been declared effective by the SEC at that time but for any reason
whatsoever can not be amended, file with the SEC an additional
Registration Statement on Form S-1 or other appropriate registration
statement form (an "Additional Registration Statement") to register the
shares of Company Common Stock represented by the Registrable
Securities, computed as contemplated by the immediately preceding
subparagraph (i), that exceed the aggregate number of shares of Company
Common Stock already registered. The Company will use its reasonable
best efforts to cause such Registration Statement to be declared
effective on a date (each, an "Increased Required Effective Date") which
is no later than (Q) with respect to a Registration Statement under
clause (X) of this subparagraph (ii), the Initial Required Effective
Date and (R) with respect to an Additional Registration Statement, the
earlier of (I) five (5) days after notice by the SEC that it may be
declared effective or (II) fifteen (15) days after the Increased
Registered Shares Date.
(B) PAYMENTS BY THE COMPANY.
(i) If the Registration Statement covering the Registrable Securities
is not filed with the SEC by the Required Filing Date in the proper form
required by this Agreement, the Company will make payment to the
Initial Investor in such amounts and at such times as shall be
determined pursuant to this Section 2(b).
(ii) If the Registration Statement covering the Registrable Securities
is not effective by the relevant Required Effective Date or if the
Investor is restricted from making sales of Registrable Securities
covered by a previously effective Registration Statement at any time
(the date such restriction commences, a ARestricted Sale Date@) after
the Effective Date other than during a Permitted Suspension Period (as
defined below), then the Company will make payments to the Initial
Investor in such amounts and at such times as shall be determined
pursuant to this Section 2(b).
(iii) The amount (the "Periodic Amount") to be paid by the Company to
the Initial Investor shall be determined as of each Computation Date (as
defined below) and such amount shall be equal to the Periodic Amount
Percentage of the Preference Principal (as those terms are defined
below) for the period from the date following the relevant Required
Filing Date, Required Effective Date or Restricted Sale Date, as the
case may be, to the first relevant Computation Date, and thereafter to
each subsequent Computation Date. The "Periodic Amount Percentage" means
(A) two percent (2%) for the period from the date following the relevant
Required Filing Date, Required Effective Date or Restricted Sale Date,
as the case may be, to the first relevant Computation Date, and (B)
three percent (3%) to each Computation Date thereafter. The "Preference
Principal" means (X) until the Effective Date, the liquidation
preference of all the Preferred Stock, and (Y) after the Effective Date,
the sum of (I) the liquidation preference of all Preferred Stock not yet
converted and (II) the Held Shares Value (as defined below). The "Held
Shares Value" means, for shares acquired by the Investor upon a
conversion within the thirty (30) days preceding the Restricted Sale
Date, but not yet sold by the Investor, the liquidation preference of
the Preferred Stock converted into such Conversion Shares; provided,
however, that if the Investor effected more than one conversion during
such thirty (30) day period and sold less than all of such shares, the
sold shares shall be deemed to be derived first from the conversions in
the sequence of such conversions (that is, for example, until the number
of shares from the first of such conversions have been sold, all shares
shall be deemed to be from the first conversion; thereafter, from the
second conversion until all such shares are sold). By way of
illustration and not in limitation of the foregoing, if the Registration
Statement is timely filed but is not declared effective until ninety
(90) days after the Initial Closing Date, the Periodic Amount will
aggregate eight percent (8%) of the Preference Principal (2% for days
11-40, plus 3% for days 41-70, plus 3% for days 71-90).
(iv) Each Periodic Amount will be payable by the Company in cash or
other immediately available funds to the Investor monthly, without
requiring demand therefor by the Investor.
(v) The parties acknowledge that the damages which may be incurred by
the Investor if the Registration Statement is not filed by the Required
Filing Date or if the Registration Statement has not been declared
effective by a Required Effective Date, including if the right to sell
Registrable Securities under a previously effective Registration
Statement is suspended, may be difficult to ascertain. The parties
agree that the Periodic Amounts represent a reasonable estimate on the
part of the parties, as of the date of this Agreement, of the amount of
such damages.
(vi) Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this provision shall not be payable to the extent any delay
in the effectiveness of the Registration Statement occurs because of an
act of, or a failure to act or to act timely by the Initial Investor or
its counsel, or in the event all of the Registrable Securities may be
sold pursuant to Rule 144 or another available exemption under the Act.
(vii) "Computation Date" means (A) the date which is the earlier of (1)
thirty (30) days after the Required Filing Date, any relevant Required
Effective Date or a Restricted Sale Date, as the case may be, or (2) the
date after the Required Filing Date, such Required Effective Date or
Restricted Sale Date on which the Registration Statement is filed (with
respect to payments due as contemplated by Section 2(b)(i) hereof) or is
declared effective or has its restrictions removed (with respect to
payments due as contemplated by Section 2(b)(ii) hereof), as the case
may be, and (B) each date which is the earlier of (1) thirty (30) days
after the previous Computation Date or (2) the date after the previous
Computation Date on which the Registration Statement is filed (with
respect to payments due as contemplated by Section 2(b)(i) hereof) or is
declared effective or has its restrictions removed (with respect to
payments due as contemplated by Section 2(b)(ii) hereof), as the case
may be.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC by the Required Filing Date
a Registration Statement with respect to not less than the number of
Registrable Securities provided in Section 2(a) above, and thereafter
use its reasonable best efforts to cause such Registration Statement
relating to Registrable Securities to become effective by the Required
Effective Date and keep the Registration Statement effective at all
times during the period (the "Registration Period") continuing until the
earliest of (i) the date that is two (2) years after the last day of the
calendar month following the month in which the Effective Date occurs,
(ii) the date when the Investors may sell all Registrable Securities
under Rule 144 without volume or other restrictions or limits or (iii)
the date the Investors no longer own any of the Registrable Securities,
which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement
and the prospectus used in connection with the Registration Statement as
may be necessary to keep the Registration Statement effective at all
times during the Registration Period, and, during the Registration
Period, comply with the provisions of the Securities Act with respect to
the disposition of all Registrable Securities of the Company covered by
the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods
of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(c) Permit a single firm of counsel designated by the Initial
Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three
(3) business days) prior to their filing with the SEC, and not file any
document in a form to which such counsel reasonably objects.
(d) Notify each Investor, such Investor=s legal counsel identified to
the Company (which, until further notice, shall be deemed to be Krieger
& Prager, ATTN: Samuel Krieger, Esq.; each, an "Investor's Counsel"),
and any managing underwriters immediately (and, in the case of (i)(A)
below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later
than one (1) business day following the day (i)(A) when a Prospectus or
any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) whenever the SEC
notifies the Company whether there will be a Areview@ of such
Registration Statement; (C) whenever the Company receives (or a
representative of the Company receives on its behalf) any oral or
written comments from the SEC in respect of a Registration Statement
(copies or, in the case of oral comments, summaries of such comments
shall be promptly furnished by the Company to the Investors at least one
business day in advance of the filing of such responses with the SEC so
that the Investors shall have the opportunity to comment thereon); and
(D) with respect to the Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by
the SEC or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or
for additional information; (iii) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the
representations or warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be
true and correct in all material respects; (v) of the receipt by the
Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; and (vi) of the
occurrence of any event that to the best knowledge of the Company makes
any statement made in the Registration Statement or Prospectus or any
document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the
case of the Registration Statement or the Prospectus, as the case may
be, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
(e) Furnish to each Investor and such Investor=s Counsel (i) promptly
after the same is prepared and publicly distributed, filed with the SEC,
or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, and
all amendments and supplements thereto and such other documents, as such
Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor;
(f) As promptly as practicable after becoming aware thereof, notify
each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and use
its best efforts promptly to prepare a supplement or amendment to the
Registration Statement or other appropriate filing with the SEC to
correct such untrue statement or omission, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor
may reasonably request;
(g) As promptly as practicable after becoming aware thereof, notify
each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of a Notice of Effectiveness or any notice of
effectiveness or any stop order or other suspension of the effectiveness
of the Registration Statement at the earliest possible time;
(h) Notwithstanding the foregoing, if at any time or from time to time
after the date of effectiveness of the Registration Statement, the
Company notifies the Investors in writing of the existence of a
Potential Material Event, the Investors shall not offer or sell any
Registrable Securities, or engage in any other transaction involving or
relating to the Registrable Securities, from the time of the giving of
notice with respect to a Potential Material Event until such Investor
receives written notice from the Company that such Potential Material
Event either has been disclosed to the public or no longer constitutes a
Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Registrable Securities during the
periods the Registration Statement is required to be in effect other
than during a Permitted Suspension Period. The term "Permitted
Suspension Period" means no more than two suspension periods during any
consecutive 12-month period, provided, however, that no one such
suspension period shall either (i) be for more twenty (20) days or (ii)
begin less than ten (10) business days after the last day of the
preceding suspension (whether or not such last day was during or after a
Permitted Suspension Period).
(i) Use its reasonable efforts to secure and maintain the designation
of all the Registrable Securities covered by the Registration Statement
on the "OTC Bulletin Board Market" of the National Association of
Securities Dealers Automated Quotations System ("NASDAQ") within the
meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Securities on The NASDAQ Bulletin Board Market; and, without
limiting the generality of the foregoing, to arrange for at least two
market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities;
(j) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(k) Cooperate with the Investors to facilitate the timely preparation
and delivery of certificates for the Registrable Securities to be
offered pursuant to the Registration Statement and enable such
certificates for the Registrable Securities to be in such denominations
or amounts as the case may be, as the Investors may reasonably request,
and, within three (3) business days after a Registration Statement which
includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the
Company to deliver, to the transfer agent for the Registrable Securities
(with copies to the Investors whose Registrable Securities are included
in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(l) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration
of the Registrable Securities, the Investors shall have the following
obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor
shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of
disposition of the Registrable Securities held by it, as shall be
reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least ten (10)
days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the
Company requires from each such Investor (the "Requested Information")
if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement. If at least two (2)
business days prior to the filing date the Company has not received the
Requested Information from an Investor (a "Non-Responsive Investor"),
then the Company may file the Registration Statement without including
Registrable Securities of such Non-Responsive Investor;
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested
by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section
3(f) or 3(h), above, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration
Statement covering such Registrable Securities until such Investor's
receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(f) or 3(h) and, if so directed by the Company,
such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of
such notice.
5. EXPENSES OF REGISTRATION. (a) All reasonable expenses (other than
underwriting discounts and commissions of the Investor) incurred in
connection with registrations, filings or qualifications pursuant to
Section 3, but including, without limitation, all registration, listing,
and qualifications fees, printers and accounting fees, the fees and
disbursements of counsel for the Company and a fee for a single counsel
for the Investors not exceeding, in the aggregate for all Investors,
$3,500, shall be borne by the Company.
(b) Neither the Company nor any of its subsidiaries has, as of the date
hereof, nor shall the Company nor any of its subsidiaries, on or after
the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Investors
in this Agreement or otherwise conflicts with the provisions hereof.
Except as reflected in the Existing Registration Statement, neither the
Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its
securities to any Person. Without limiting the generality of the
foregoing, without the written consent of the Investors holding a
majority of the Registrable Securities, the Company shall not grant to
any person the right to request the Company to register any securities
of the Company under the Securities Act unless the rights so granted are
subject in all respects to the prior rights in full of the Investors set
forth herein, and are not otherwise in conflict or inconsistent with the
provisions of this Agreement and the other Transaction Agreements.
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such
Investor, each person, if any, who controls any Investor within the
meaning of the Securities Act or the Exchange Act (each, an "Indemnified
Person" or "Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such Claims (or actions
or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements,
omissions or violations in the Registration Statement, or any
post-effective amendment thereof, or any prospectus included therein:
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective amendment
thereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to
state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements
therein were made, not misleading or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation under the Securities Act,
the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations").
Subject to clause (b) of this Section 6, the Company shall reimburse the
Investors, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a) shall not (I)
apply to a Claim arising out of or based upon a Violation which occurs
in reliance upon and in conformity with information furnished in writing
to the Company by or on behalf of any Indemnified Person expressly for
use in connection with the preparation of the Registration Statement or
any such amendment thereof or supplement thereto, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof;
(II) be available to the extent such Claim is based on a failure of the
Investor to deliver or cause to be delivered the prospectus or the
amendment or supplement thereto made available by the Company; or (III)
apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent
shall not be unreasonably withheld or delayed. Each Investor will
indemnify the Company and its officers, directors and agents (each, an
"Indemnified Person" or "Indemnified Party") against any claims arising
out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company, by or
on behalf of such Investor, expressly for use in connection with the
preparation of the Registration Statement or the amendment or supplement
thereto, subject to such limitations and conditions as are applicable to
the Indemnification provided by the Company to this Section 6. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made
against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense
thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In
case any such action is brought against any Indemnified Person or
Indemnified Party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, assume the defense thereof,
subject to the provisions herein stated and after notice from the
indemnifying party to such Indemnified Person or Indemnified Party of
its election so to assume the defense thereof, the indemnifying party
will not be liable to such Indemnified Person or Indemnified Party under
this Section 6 for any legal or other reasonable out-of-pocket expenses
subsequently incurred by such Indemnified Person or Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action
to its final conclusion. The Indemnified Person or Indemnified Party
shall have the right to employ separate counsel in any such action and
to participate in the defense thereof, but the fees and reasonable
out-of-pocket expenses of such counsel shall not be at the expense of
the indemnifying party if the indemnifying party has assumed the defense
of the action with counsel reasonably satisfactory to the Indemnified
Person or Indemnified Party, provided such counsel is of the opinion
that all defenses available to the Indemnified Party can be maintained
without prejudicing the rights of the indemnifying party. The failure
to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action.
The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred and is
due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to
make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent
permitted by law; provided, however, that (a) no contribution shall be
made under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 6; (b) no
seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the
sale of such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time
permit the Investors to sell securities of the Company to the public
without registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the
Exchange Act, or, if the provisions of Rule 144(c)(2) are applicable,
ensure that the standards contemplated by Rule 144(c) to permit sales by
the Investors under said Rule 144 are satisfied at all times; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule
144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company and (iii) such other information
as may be reasonably requested to permit the Investors to sell such
securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall
be automatically assigned by the Investors to any transferee of the
Registrable Securities (or all or any portion of any unconverted
Preferred Stock) only if: (a) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after
such assignment, (b) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (i) the name
and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or
assigned, (c) immediately following such transfer or assignment the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time the Company received the written
notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the
provisions contained herein. In the event of any delay in filing or
effectiveness of the Registration Statement as a result of such
assignment, the Company shall not be liable for any damages arising from
such delay, or the payments set forth in Section 2(b) hereof arising
from such delay.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement
may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and
Investors who hold, in the aggregate, at least a sixty-seven (67%)
percent interest of the Registrable Securities. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. TERMINATION. This Agreement shall terminate on the date the
Investors no longer own any Registrable Securities or the right to
acquire any Registrable Securities; but without prejudice to (i) the
parties= rights and obligations arising from breaches of this Agreement
occurring prior to such termination and (ii) other indemnification
obligations under this Agreement.
12. MISCELLANEOUS.
(a) Notices required or permitted to be given hereunder shall be given
in the manner contemplated by the Securities Purchase Agreement, (i) if
to the Company or to the Initial Investor, to their respective address
contemplated by the Securities Purchase Agreement, and (iii) if to any
other Investor, at such address as such Investor shall have provided in
writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 12(a).
(b) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(c) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to
the jurisdiction of the federal courts whose districts encompass any
part of the City of New York or the state courts of the State of New
York sitting in the City of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum
non coveniens, to the bringing of any such proceeding in such
jurisdictions. To the extent determined by such court, the Company
shall reimburse the Buyer for any reasonable legal fees and
disbursements incurred by the Buyer in enforcement of or protection of
any of its rights under this Agreement.
(d) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement or the validity or enforceability of this Agreement in any
other jurisdiction.
(e) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(f) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(g) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning thereof.
(h) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may
be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the
party so delivering this Agreement.
(i) The Company acknowledges that any failure by the Company to perform
its obligations under Section 3(a) hereof, or any delay in such
performance could result in loss to the Investors, and the Company
agrees that, in addition to any other liability the Company may have by
reason of such failure or delay, the Company shall be liable for all
direct damages caused by any such failure or delay, unless the same is
the result of force majeure. Neither party shall be liable for
consequential damages.
(j) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to
the subject matter hereof. This Agreement may be amended only by an
instrument in writing signed by the party to be charged with enforcement
thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of
the day and year first above written.
COMPANY:
EUROGAS, INC.
By:
Name:
Title:
INITIAL INVESTOR:
ARKLEDUN DRIVE LLC
By:
Name:
Title:
EXHIBIT 10.29
THIS SUPPLEMENTAL AGREEMENT made this 4th day of November, 1999, by
and between EUROGAS, INC., a Utah corporation ("Eurogas"), and ARKELUND
DRIVE LLC.
R E C I T A L S
A. In connection with the execution of that certain Securities
Purchase Agreement and related agreements (collectively the "Agreements"),
and the issuance of the 1999 Series C. Convertible Preferred Stock of
EuroGas, EuroGas has, pursuant to that certain Escrow Agreement, delivered
8,500,000 shares of Big Horn Resources, Ltd. ("Big Horn"), a Canadian
corporation, to the Escrow Agent.
B. Pursuant to the terms of this Supplemental Agreement, the
parties have agreed that Arkelund Drive LLC is entitled to exchange the
1999 Series C. Convertible Preferred Stock for shares of Big Horn on the
following terms and conditions.
NOW, THEREFORE, the parties hereto mutually agree as follows:
1. Capitalized terms used in this Agreement and not defined
elsewhere in the securities Purchase Agreement shall have the following
meanings:
(a) The "Exchange Rate":
If the Exchange Date is x days
after the Closing Date The Exchange Rate is
------------------------------- --------------------
between 46 and 75 days 80.0%
more than 75 days 77.5%
(b) "Big Horn Common Stock" means the 8,500,000 shares of
common stock of Big Horn held of record by EuroGas
on the Closing Date.
(c) "Market Price" means (i) with respect to Big Horn
Common Stock, the average closing bid price of a share
of the Big Horn Common Stock as reported by Bloomberg,
L.P. for the five (5) trading days preceding the
respective Exchange Date.
-1-
2. EuroGas warrants and represents that it owns the Big Horn
Common Stock free and clear of all liens and encumbrances, and that the
Big Horn Common Stock to be transferred to Arkelund Drive LLC pursuant to
this Supplemental Agreement are to be transferred free of any stop transfer
orders or restrictive legends, and shall be delivered with stock powers
duly endorsed.
3. Commencing forty-five (45) days after the issuance of 1999
Series C 6% Convertible Preferred Stock but prior to the Effective Date,
the holder is entitled, at its option to exchange each share of 1999
Series C 6% Convertible Preferred Stock for shares of Big Horn Comon
Stock at a rate equal to the product of the Exchange Rate and the Market
Price of the Big Horn Common Stock. The minimum number of shares of
1999 Series C 6% Convertible Preferred Stock the holder may exchange
under this Section is the number of shares of 1999 Series C 6%
Convertible Preferred Stock having a Liquidation Preference of at least
US $10,000 (unless if at the time of such election to exchange the
aggregate Liquidation Preference of all shares of shares of 1999 Series
C 6% Convertible Preferred Stock registered to the holder is less than
US $10,000, then the whole amount thereof).
4. Any accrued but unpaid dividends, whether or not declared, as of
the Exchange Date on any share of 1999 Series C 6% Convertible Preferred
Stock exchanged shall be paid at the time of exchange in (i) cash or in,
(ii) shares of Big Horn Common Stock.
-2-
5. Any exchange shall be effected by sending to EuroGas, or its
attorney, the certificate representing the shares of 1999 Series C 6%
Convertible Preferred Stock to be exchanged and a facsimile or original
of a signed notice of exchange which evidences the holder's intention to
exchange the shares or a specified portion thereof ("Notice of Exchange"),
accompanied by a proper assignment if the shares of Common Stock (or Big
Horn Common Stock) are to be issued in a different name. No fractional
shares or scrip representing fractions of shares will be issued on
conversion (or exchange), but the number of shares issuable shall be
rounded down or up, as the case may be, to the nearest whole share.
Such Notice of Exchange shall be deemed effective on the Exchange Date.
Facsimile delivery of the Notice of Exchange shall be accepted by the
Corporation at facsimile number (801) 255-2005; ATTN: Chief Financial
Officer, or at any other facsimile number that the Corporation may provide
to the holder(s) of the 1999 Series C 6% Convertible Preferred Stock
subsequent to the date of this Agreement, with a copy to Krieger &
Prager, Esqs., 319 Fifth Avenue, New York, New York 10016.
6. In the event any of the terms of this Agreement and the Escrow
Agreement conflict, the terms of the Escrow Agreement shall prevail.
IN WITNESS WHEREOF, the parties have executed this Agreement the
day and year first above written.
EUROGAS, INC.
By:
________________________________
Its
________________________________
ARKELUND DRIVE LLC
By:
________________________________
Its
________________________________
-3-
EXHIBIT 10.30
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "Agreement") is made
and entered into this 20th day of April, 1999, by and between KARL
F. ARLETH ("Executive") and EUROGAS, INC., a Utah corporation
("EuroGas" or the "Company"), based on the following:
The Board of Directors of EuroGas (the "Board") has determined
that it is in the best interests of EuroGas and its shareholders for
EuroGas to employ the Executive and to provide the Executive with
compensation and benefits arrangements which ensure that his
expectations with respect to compensation and benefits will be
satisfied and which are competitive with those of other corporations.
Agreement
NOW, THEREFORE, based on the foregoing premises, which are
incorporated herein by reference, and for and in consideration of
the mutual covenants and agreements hereinafter set forth and the
mutual benefit to the parties to be derived herefrom, it is hereby
agreed as follows:
1. Employment and Term.
(a) EuroGas hereby employs Executive and Executive hereby
accepts employment upon the terms and conditions set forth
herein. The term of employment of the Executive under this
Agreement will commence on April 20, 1999, or such earlier date
as mutually agreed, and will end at midnight, London, England
time, on the third anniversary of the date the term of
employment commences; provided, however, that such term shall
automatically be extended for an additional three-year period
commencing on the third anniversary of the date hereof unless
Executive or EuroGas by written notice to the other not less
than 60 days prior to such anniversary notifies the other that
the term hereof shall not be so extended (such term of
employment, as the same may be extended from time to time as
provided herein, is referred to in this Agreement as the
"Employment Period").
(b) During the Employment Period, Executive will serve as
EuroGas' President and Chief Executive Officer, reporting to
the Chairman of the Board of Directors. Executive shall have
full authority to manage and operate the Company with the
concurrence of the Board of Directors. Executive shall be
appointed a director of the Company promptly upon his assuming
his position. The Company shall take all necessary action to
cause Executive to be elected a member of the Board of
Directors at such time as he is required to be elected by the
shareholders to the Board of Directors. Executive shall serve
as a member of the Board and the Executive Committee of the
Board at all times during the Employment Period. Executive
agrees to serve as President and Chief Executive Officer of
EuroGas and agrees to perform such duties appropriate for such
offices as may be assigned to him from time to time by the
Chairman of the Board and as described in the bylaws of
EuroGas, reporting to the Chairman of the Board and subject to
the oversight of the Board of Directors.
-1-
<PAGE>
(c) The Executive shall have the right to nominate
individuals for election to the Board of Directors of the Company.
(d) During the Employment Period, the Executive shall
reside in London, England and the services to be provided by
him hereunder shall be performed in London, England and in such
other locations as EuroGas has offices and operations.
Executive shall undertake travel as is necessary for the
business at the Company's expense, by business class or better.
2. Performance of Services.
(a) During the Employment Period, Executive agrees to
perform faithfully the duties of President and Chief Executive
Officer, to devote his full and undivided business time,
attention, and services to the business of EuroGas; provided,
however, that nothing herein shall restrict Executive from
conducting incidental personal business that does not conflict
with his obligations under the terms of this Agreement or from
investing in the equity of any other entity (whether public or
private), in any amount Executive deems advisable in his sole
discretion, even if such other entity is indirectly in
competition with EuroGas or any of its subsidiaries;
(b) Executive shall observe and comply with the
commercially reasonable operating rules and regulations of
EuroGas respecting its business and shall carry out and perform
such lawful orders, directions, and policies of EuroGas as they
may be from time to time communicated to Executive by the
Chairman of the Board of Directors either orally or in writing.
Executive shall make good faith efforts to observe and comply
with all applicable rules, regulations, and laws governing the
business of EuroGas known to Executive.
3. Exclusivity of Services and Nondisclosure of Confidential
Information.
(a) Executive agrees that, in the event the Executive
voluntarily terminates his employment with EuroGas during the
Employment Term, other than for Good Reason (as defined below),
or is terminated by EuroGas for Cause pursuant to Subsection
6(a), for a period ending on the first anniversary of the
termination of the Employment Period:
(i) he will not engage in any Covered Activity (as
defined below) in competition with the business of EuroGas
or any of its subsidiaries (the "EuroGas Group"), directly
or indirectly, in the Covered Area (as defined below),
whether as employer, director, officer, employee,
consultant, or agent, except that it is expressly
understood that Executive may invest in the equity of any
other entity, in whatever amount he deems advisable in his
sole discretion, even if such entity is directly or
indirectly in competition with the business of EuroGas or
any of its subsidiaries;
-2-
<PAGE>
(ii) he will not solicit, in competition with the
EuroGas Group, any person who is a customer of the
business conducted by the EuroGas Group and to whom
EuroGas provides contracts or services related to any
Covered Activity in the Covered Area at any time during
the Employment Period; and
(iii) he will not induce or attempt to persuade any
employee of the EuroGas Group to terminate his or her
employment relationship in order to enter into employment
with any party engaged in any Covered Activity in the
Covered Area in competition with the EuroGas Group.
(b) Executive further agrees that he will not, at any
time during the Employment Period or at any time after the
termination of this Agreement, irrespective of the time,
manner, or cause of termination, use, disclose, copy, or assist
any other person or firm in the use, disclosure, or copying of
any trade secrets or other Confidential Information, as defined
below, of the EuroGas Group, except to the extent authorized in
writing by EuroGas or as required in connection with the due
and proper performance of his duties under this Agreement.
Upon termination of his employment hereunder, Executive will
surrender to EuroGas all records and other documents containing
Confidential Information, as defined below, obtained by him or
entrusted to him during the course of his employment by EuroGas
(together with all copies thereof); provided, however, that
Executive may retain copies of such documents as are necessary
for Executive's personal records for income tax and other
personal purposes. For purposes of this Section 3,
"Confidential Information" shall be defined as proprietary
information about the business of the EuroGas Group which has
not been published or is not generally or publicly known
outside the EuroGas Group, or has not been recognized as
standard practice outside the EuroGas Group. The provisions of
this Subsection 3(b) shall remain in effect for a period of
three (3) years subsequent to the termination of the Employment
Period.
(c) The following provisions shall apply to the covenants
of Executive contained in this Section 3:
(i) The activities in which the Executive will be
restricted from engaging pursuant to Subsection 3(a) above
(the "Covered Activities") will consist of the exploration
for, and development and production of, oil and gas
reserves, including coal bed methane gas reserves.
(ii) The covenants contained in clauses (i) and (ii)
of Subsection 3(a) shall apply in the area (the "Covered
Area") within 100 miles of any location where EuroGas is
actively engaged in conducting any Covered Activity at the
termination of the Employment Period and those locations
in which the EuroGas Group has publicly or internally
issued written plans to conduct such activities which have
been approved by the Board of Directors of EuroGas prior
to the termination of the Employment Period.
-3-
<PAGE>
(iii) Executive agrees that a breach or threatened
breach on his part of any covenant contained in this
Section 3 will cause such damage to EuroGas as will be
irreparable. Therefore, without limiting the right of
EuroGas to pursue all other legal and equitable remedies
available for violation by Executive of the covenants
contained in this Section 3, it is expressly agreed that
remedies other than injunctive relief cannot fully
compensate the EuroGas Group for such a violation and that
EuroGas and the EuroGas Group shall be entitled to seek
injunctive relief to prevent any such violation or
continuing violation thereof.
(iv) It is the intent and understanding of each party
hereto that if, in any action before any court or agency
legally empowered to enforce the covenants contained in
this Section 3, any term, restriction, covenant, or
promise contained therein is found to be unreasonable and
for that reason unenforceable, then such term,
restriction, covenant, or promise shall be deemed modified
to the extent necessary to make it enforceable by such
court or agency.
(v) The Executive shall not be subject to the
restrictions set forth in Subsection 3(b) with respect to
information which (A) was in Executive's possession or was
known to him prior to his receipt of it; (B) was
subsequently independently developed by Executive without
the use of such Confidential Information; (C) has become
part of the public domain by publication or otherwise
without Executive's fault; (D) is required to be disclosed
by court, government order or regulation; (E) is approved
for disclosure or use by the Company.
4. Compensation and Benefits. For all services rendered by
Executive pursuant to this Agreement, EuroGas shall compensate
Executive as follows:
(a) As annual compensation for Executive's services
hereunder, in accordance with its normal payroll practices,
EuroGas agrees to pay Executive during the Employment Period a
base salary of US$400,000 per annum, payable in equal
semi-monthly installments, with any annual increase (should
there be one), as shall be determined in the sole discretion of
the Board of Directors of EuroGas or the designated
compensation committee thereof, taking into consideration the
performance of EuroGas and its subsidiaries, and the
contribution of Executive to such performance, and such other
factors as the Board of Directors or the designated
compensation committee thereof may deem appropriate. In
addition, the rate of salary may be further or otherwise
increased at any time and in such amount as the Board of
Directors or the designated compensation committee thereof may
determine appropriate. In no event may the base salary of the
Executive be decreased at any time during the Employment Period
without the prior written consent of the Executive.
-4-
<PAGE>
(b) EuroGas may provide to Executive such money bonuses
and additional grants of stock options as shall be determined
appropriate in the sole discretion of the Board of Directors or
the designated compensation committee thereof, taking into
consideration the performance of EuroGas and its subsidiaries,
and the contribution of Executive to such performance, or such
other factors as the Board or the designated compensation
committee thereof may deem appropriate.
(c) Upon the execution hereof, EuroGas shall grant to
Executive an option to acquire 1,000,000 shares of common stock
of EuroGas at a per share exercise price of fair market value
on the date of grant at any time prior to ten years from date
of grant. Such option shall vest and Executive shall have the
right to exercise the full amount of such option beginning
January 1, 2000 (the "Vesting Date"). No later than the
Vesting Date all shares of common stock issuable upon the
exercise of the option shall be registered by an effective
registration statement on Form S-8 kept current by EuroGas
until at least three months after such time as the options are
no longer exercisable or have all been exercised. The option
granted to the Executive shall not be subject to forfeiture
except as expressly provided herein. Executive and EuroGas
shall enter into a mutually acceptable stock option agreement
containing the foregoing provisions among others within a
reasonable period after the execution of this Agreement.
(d) Executive shall receive a housing allowance or
housing reasonably acceptable to Executive. In either case,
housing shall be in the form of a furnished rental apartment in
an area of London, England reasonably acceptable to Executive
and the Company. If Executive receives a housing allowance, it
shall be in an amount not less than US$1,750.00 per week (the
"Housing Allowance"). Executive shall also receive an
allowance for commodities and services in an amount not less
than US$600.00 per week (the "Commodities and Services
Allowance"). With respect to the Commodities and Services
Allowance and the Housing Allowance, Executive shall also
receive a tax make up from the Company such that Executive will
receive the Commodities and Services Allowance and the Housing
Allowance net (or value of the housing supplied by the Company,
if such be the case) of all taxes due on such amounts.
(e) EuroGas shall include Executive as a participant in
any stock option or benefit plans hereinafter adopted,
including but not limited to, incentive stock option plans,
director stock option plans, or 401k retirement plans in
accordance with the most favorable plans, practices, programs,
and policies of EuroGas in effect for similarly situated
executives. However, EuroGas shall not be required to adopt
any such plans.
(f) EuroGas shall provide to Executive in London, England
suitable executive offices and facilities appropriate for
Executive's position and suitable for the performance of
Executive's responsibilities.
(g) Executive shall be entitled to vacation of at least
four weeks in any calendar year or such greater period of time
as may be mutually agreed by EuroGas and the Executive.
Vacations shall be taken by Executive at any time and with
starting and ending dates mutually convenient to EuroGas and
Executive. Vacations or portions of vacations not used in one
employment year shall carry over to the succeeding employment
year, but shall thereafter expire if not used within such
succeeding year.
-5-
<PAGE>
(h) EuroGas shall reimburse Executive for all proper
expenses incurred by him in the performance of his duties
hereunder.
(i) The Company shall pay Executive's relocation expenses
from the United States to London.
(j) To the extent EuroGas has such plans, practices, programs
and policies, EuroGas shall provide Executive, at EuroGas'
expense, with life and disability insurance policies in
accordance with the most favorable plans, practices, programs,
and policies of EuroGas in effect for similarly situated
executives. To the extent EuroGas has such plans, practices,
programs and policies, EuroGas shall further provide to
Executive incentive, retirement, pension, profit sharing, stock
option, or other employee benefit plans which are consistent
with and similar to such plans provided by EuroGas to its
executive employees generally in accordance with the most
favorable plans, practices, programs, and policies of EuroGas
in effect for similarly situated executives. Executive shall
also have the right to participate in any other employee
benefit programs provided by the EuroGas Group in accordance
with the most favorable plans, practices, programs, and
policies of EuroGas in effect for similarly situated executives.
(k) EuroGas shall make available to Executive the
services of Ernst & Young to assist Executive in his tax return
preparation in light of Executive's status as an expatriate.
Any cost shall be borne by the Company.
(l) EuroGas shall make low-cost loans to Executive to
make purchases of the stock of the Company in a principal
amount to be determined at a later date and mutually agreed,
which shall be repaid on terms reasonably acceptable to
Executive and mutually agreeable to Executive and the Company
agreed upon at the time any such loans are made.
(m) EuroGas shall assume and pay reasonable dues of
Executive in local, state, and national societies and
associations, and in such other clubs and organizations, as
shall be approved and authorized by the board of directors of
EuroGas.
(n) EuroGas shall withhold from Executive's compensation
hereunder all proper federal and state payroll taxes and income
taxes on compensation paid to Executive and shall provide an
accounting to Executive for such amounts withheld.
(o) EuroGas shall reimburse Executive for legal expenses
incurred by him in the preparation and negotiation of this
Agreement.
-6-
<PAGE>
(p) The Company will reimburse Executive (with an amount
net of U.S. taxes) for foreign taxes to the extent such taxes
exceed Executive's U.S. taxes.
5. Continuation of Compensation During Disability.
(a) If Executive is unable to perform his services by
reason of total disability (as determined in accordance with
Subsection 5(b) below), Executive shall be entitled to all of
the compensation and benefits, as provided in Section 4 hereof
for one year from the date of such total disability. If such
total disability does not cease to exist by the end this one
year period, Executive and EuroGas may thereupon terminate this
Agreement, in accordance with Subsection 6(b).
(b) For purposes of this Agreement, determination of
whether Executive is or is not totally disabled shall be made
as follows:
(i) Executive's inability, physical or mental, for
whatever reason, to be able to perform his duties to the
Company shall be total disability; and
(ii) If any difference shall arise between the
Company and Executive as to whether he is totally
disabled, such difference shall be resolved as follows:
Executive shall be examined by a physician appointed by
the Company and a physician appointed by Executive. If
said two physicians shall disagree concerning whether
Executive is totally disabled, that question shall be
submitted to a third physician, who shall be selected by
such two physicians. The medical opinion of such third
physician, after examination of Executive and consultation
with such other two physicians, shall decide the question.
6. Termination of Agreement.
(a) Termination by EuroGas for Cause. EuroGas shall have
the right, without further obligation to Executive other than
for compensation previously accrued, to terminate this
Agreement for cause ("Cause") by showing that (i) Executive has
materially breached his obligations under Subsection 3(b)
hereof which breach has not been cured within 30 days after
notice thereof from EuroGas to the Executive; or (ii) Executive
has been convicted of fraud, embezzlement, theft, or dishonesty
or other criminal conduct against EuroGas, Executive has been
convicted of sexual harassment of an employee of EuroGas or a
supplier or vendor of EuroGas, or Executive has been grossly
negligent in the performance of his duties.
(b) Termination Upon Death or Disability of Executive.
This Agreement shall terminate immediately upon Executive's
death. If this Agreement is terminated as a result of
Executive's death, EuroGas shall continue to provide
Executive's estate with all of the compensation provided in
Section 4 until the first anniversary of such termination and
the benefits provided in Subsection 6(c)(B) below. This
Agreement may be terminated in accordance with Subsection 5(a)
if Executive becomes totally disabled, as defined in Subsection
5(b). If this Agreement is terminated because of Executive's
total disability, EuroGas shall have no obligation to provide
further compensation to the Executive except for compensation
previously accrued, provided that Executive shall receive the
benefits provided in Subsection 6(c)(B) below.
-7-
<PAGE>
(c) Termination by Executive for Cause, for Good Reason;
Termination by EuroGas for Any Other Reason. Executive shall
have the right to terminate this Agreement in the event of (i)
EuroGas' breach of any covenant or term of this Agreement, but
only if EuroGas fails to cure such breach within thirty (30)
days following the receipt of notice by Executive setting forth
the conditions giving rise to such breach; (ii) an assignment
to Executive of any duties inconsistent with, or a significant
change in the nature or scope of, Executive's authority or
duties from the authority and duties held by Executive as of
the date hereof and as increased from time to time, including
the removal, replacement, or non-election of Executive as a
member of the Board or nonappointment of Executive to the
Executive Committee; (iii) the failure by EuroGas to obtain
the assumption of the commitment to perform this Agreement by
any successor corporation; or (iv) upon a Change in Control (as
defined below) (any such grounds for termination by the
Executive being hereafter referred to as "Good Reason").
If this Agreement is terminated pursuant to this
Subsection 6(c), the Executive shall be entitled to receive all
compensation previously accrued and the following amounts and
benefits:
(A) the amount of base salary that would have been
paid to Executive pursuant to the provisions of this
Agreement for one year, such amounts to be payable at the
same and under the same terms and conditions as would have
been applicable had Executive's employment continued;
(B) effective as of the date of termination, (x)
immediate vesting and exercisability of, and termination
of any restrictions on sale or transfer (other than any
such restriction arising by operation of law) with respect
to each and every stock option, restricted stock award,
restricted stock unit award and other equity-based award
and performance award (each a "Compensatory Award") that
is outstanding as of a time immediately prior to the date
of termination, including, but not limited to, the option
referred to in Subsection 4(d) hereof, and (y) the
extension of the term during which each and every
Compensatory Award may be exercised by the Executive in
accordance with the 1996 Stock Option and Award Plan of
EuroGas which provides that after employment has been
terminated, Executive has three months to exercise an
option unless such termination results from death or
disability of Executive (and employee dies prior to or
within three months of termination) in which event, in the
case of disability, Executive shall have a one year period
following termination in which to exercise the option and
in case of death, the option must be exercised within six
months after the issuance of letters testamentary or
administration or the appointment of an administrator,
executor, or personal representative but not later than
one year after the date of termination of employment.
-8-
<PAGE>
The Executive shall also be entitled to the foregoing
compensation if EuroGas terminates or purports to terminate this
Agreement other than as expressly permitted pursuant to Subsections
6(a) and (b) hereof.
(d) "Change in Control" shall mean (i) the date of public
announcement that a person has become, without the approval of
the Company's Board of Directors, the beneficial owner of 20%
or more of the voting power of all securities of the Company
then outstanding; (ii) the date of the commencement of a tender
offer or tender exchange by any person, without the approval of
the Company's Board of Directors, if upon the consummation
thereof such person would be the beneficial owner of 20% or
more of the voting power of all securities of the Company then
outstanding; or (iii) the date on which individuals who
constituted the Board of Directors of the Company on the date
this Agreement was adopted cease for any reason to constitute a
majority thereof, provided that any person becoming a director
subsequent to such date whose election or nomination was
approved by at least three quarters of such incumbent Board of
Directors shall be considered as though such person were an
incumbent director.
7. Indemnification. EuroGas shall indemnify Executive and
hold Executive harmless from liability for acts or decisions made by
Executive while performing services for EuroGas to the greatest
extent permitted by applicable law and shall enter into an
indemnification agreement with Executive to that effect within a
reasonable time after the execution of this Agreement. EuroGas
shall use its best efforts to obtain coverage for Executive under
any insurance policy now in force or hereafter obtained during the
term of this Agreement insuring officers and directors of EuroGas
against such liability.
8. Notice. Any notice or request required or permitted to be
given hereunder shall be sufficient if in writing and delivered
personally, sent by facsimile transmission, or sent by registered
mail, return receipt requested, to the addresses hereinabove set
forth or to any other address designated by either of the parties
hereto by notice similarly given. Such notice shall be deemed to
have been given upon such personal delivery, facsimile transmission,
or mailing, as the case may be, to the addresses set forth below:
If to Executive, to: Karl F. Arleth
c/o Ira S. Nordlicht, Esq.
Nordlicht & Hand
Olympic Tower
645 Fifth Avenue
New York, New York 10022
With a copy to: Ira S. Nordlicht, Esq.
Nordlicht & Hand
Olympic Tower
645 Fifth Avenue
New York, New York 10022
Fax: (212) 421-0499
Confirmation: (212) 421-6500
-9-
<PAGE>
If to EuroGas, to: Chairman of the Board of Directors
EuroGas, Inc.
435 West Universal Circle
Sandy, Utah 84070
Fax: (801) 255-2005
Confirmation: (801) 255-0862
With a copy to: David B. Finlay, Esq.
Finlay Livingstone Bancroft
1006-100 Park Royal
West Vancouver, B.C.
V7T IA2
Canada
Fax: (604) 925-1067
Confirmation: (604) 925-1958
9. Successors.
(a) This Agreement is personal to the Executive and
without the prior written consent of EuroGas shall not be
assignable by the Executive otherwise than by will or the laws
of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon EuroGas and its successors and assigns.
(c) EuroGas will require any successor (whether direct or
indirect, by purchase merger, consolidation, or otherwise) to
all or substantially all of the business and/or assets of
EuroGas to assume expressly and agree to perform this Agreement
in the same manner and to the same extent that EuroGas would be
required to perform it if no such succession had taken place.
As used in this Agreement, "EuroGas" shall mean EuroGas as
hereinabove defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
10. Attorneys' Fees. In the event that any action, suit,
arbitration, or other proceeding is instituted concerning or arising
out of this Agreement, the prevailing party shall be entitled to
recover all of such party's costs, including reasonable attorneys'
fees, incurred in each and every such action, suit, arbitration, or
other proceeding, including any and all appeals or petitions therefrom.
-10-
<PAGE>
11. Validity of Provisions and Severability. If any provision
of this Agreement is, or becomes, or is deemed invalid, illegal, or
unenforceable in any jurisdiction, such provision shall be deemed
amended to conform to the applicable jurisdiction, or if it cannot
be so amended without materially altering the intention of the
parties, it will be stricken. However, the validity, legality, and
enforceability of any such provisions shall not in any way be
effected or impaired thereby in any other jurisdiction and the
remainder of this Agreement shall remain in full force and effect.
12. Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties pertaining to the
subject matter of this Agreement. This Agreement supersedes all
prior agreements, if any, any understandings, negotiations, and
discussions, whether oral or written. No supplement, modification,
waiver, or termination of this Agreement shall be binding unless
executed in writing by the party to be bound thereby.
13. Governing Law. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of the state
of Utah.
14. Authority. Prior to, or simultaneous with, and as a
condition to the execution of this Agreement, EuroGas shall provide
Executive with a resolution of the Board of Directors of EuroGas
authorizing the execution, delivery and performance of this
Agreement on the terms set forth herein certified by the Secretary
of EuroGas.
15. Survival. The provisions of Subsection 3(b) and Sections
6 and 13 shall survive the termination of this Agreement.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
-11-
<PAGE>
IN WITNESS WHEREOF, EuroGas has caused this Agreement to be
signed by its duly authorized officer and Executive has signed this
Agreement as of the date first above written.
EuroGas:
EUROGAS, INC.
By: /S/ 4/26/99
----------------------------
Name:
Title:
Executive:
/S/ 4/20/99
----------------------------
Karl F. Arleth
-12-
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form S-1 and related Prospectus of
EuroGas, Inc. for the registration of 3,861,625 shares of common stock
and to the use therein of our report dated March 31, 1999, with respect
to the consolidated financial statements of EuroGas, Inc. and Subsidiaries.
/s/ Hansen, Barnett & Maxwell
______________________________
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
November 29, 1999
EXHIBIT 23.3
To the Board of Directors
Big Horn Resources Ltd.
Dear Sirs
We consent to the use of our report dated March 26, 1999 with
respect to the consolidated balance sheets of Big Horn Resources
Ltd. as of December 31, 1998 and 1997 and the related consolidated
statements of earnings and deficit and changes in financial position
for the years then ended included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/S/ KPMG LLP
- ------------------------------
Calgary, Canada
December 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of September 30, 1999 and December 31, 1998, and statements of
operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 2,070,092 7,489,510
<SECURITIES> 708,117 1,088,488
<RECEIVABLES> 5,249,881 4,820,082
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,316,877 13,518,256
<PP&E> 54,883,218 51,575,370
<DEPRECIATION> (1,748,830) (307,054)
<TOTAL-ASSETS> 62,148,918 65,334,387
<CURRENT-LIABILITIES> 16,099,002 12,957,838
<BONDS> 0 0
0 0
2,392 2,394
<COMMON> 86,831 76,255
<OTHER-SE> 42,630,457 47,644,230
<TOTAL-LIABILITY-AND-EQUITY> 62,148,918 65,334,387
<SALES> 3,326,629 879,404
<TOTAL-REVENUES> 3,326,629 879,404
<CGS> 2,418,705 598,964
<TOTAL-COSTS> 2,418,705 598,964
<OTHER-EXPENSES> 9,900,072 11,432,819
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 405,731 465,371
<INCOME-PRETAX> (9,099,336) (11,024,180)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (9,099,336) (11,024,180)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,131,015) (13,885,481)
<EPS-BASIC> (0.11) (0.22)
<EPS-DILUTED> (0.11) (0.22)
</TABLE>
