________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______________ TO _______________
EUROGAS, INC.
----------------------------
(Exact name of registrant as
specified in its charter)
Utah 33-1381-D 87-0427676
---------------- ------------- -------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification
incorporation) No.)
942 East 7145 South, Suite 101A
Midvale, Utah 84047
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 255-0862
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value None
------------------------------- ---------------------------------
(Title of Class) (Name of each exchange on which
registered)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on July 31, 2000, based upon the
closing bid price for the Common Stock of $.6875 per share on
July 31, 2000, was approximately $65,378,191. Common Stock held
by each officer and director and by each other person who may be
deemed to be an affiliate of the Registrant have been excluded.
As of July 31, 2000, the Registrant had 104,786,979 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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EuroGas, Inc. (the "Company") is filing this Amendment No. 2
on Form 10-K/A (this "Amendment") to its Annual Report on Form 10-
K for the year ended December 31, 1999, filed with the SEC on
April 14, 2000, as previously amended by Amendment No. 1 of Form
10-K/A filed on May 1, 2000 (the "Form 10-K") for the purpose of
amending and updating the information required in the following
Form 10-K Items:
. Item 1 "Business" to indicate more clearly the status and
stage of development of each of the Company's major projects,
. Item 8 "Financial Statements and Supplementary Data" in
order to make an adjustment to the current liabilities of the
Company and make related revisions to the financial statements,
and
. Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operation" to reflect the revisions made
to Item 8.
In addition, this Amendment restates the remaining sections
of the Form 10-K in order to avoid any confusion caused by
multiple documents and in order to correct certain non-material
typographical errors. All subsequent references to "Form 10-K"
shall refer to the Form 10-K, as amended by and restated in this
Amendment.
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INDEX TO FORM 10-K
ITEMS 1 & 2. BUSINESS AND PROPERTIES 5
GENERAL 5
SUMMARY DESCRIPTION OF CURRENT ACTIVITIES 5
ACTIVITIES IN CANADA 6
BIG HORN RESOURCES LIMITED 6
BEAVER RIVER NATURAL GAS FIELD 7
ACTIVITIES IN POLAND 7
ENERGETYKA LUBUSKA POWER PLANTS 7
POLISH METHANE GAS CONCESSIONS 7
CARPATHIAN FLYSCH AND TECTONIC FOREDEEP OIL & GAS FIELDS 8
CARPATHIAN NEW CONCESSION 8
ACTIVITIES IN UKRAINE 8
ACTIVITIES IN SLOVAKIA 9
GEMERSKA TALC DEPOSIT 9
SLOVAKIAN OIL & GAS JOINT VENTURE 10
MASEVA NATURAL GAS RESERVOIR 11
ENVIGEO-CARPATHIAN FLYSCH CONCESSION 11
ACTIVITIES IN THE SAKHA REPUBLIC 11
TAKT EXPLORATION BLOCKS NEAR LENSK 11
ACTIVITIES IN SLOVENIA 12
DISCLOSURE OF OIL AND GAS OPERATIONS 12
COMPETITION 14
EMPLOYEES AND CONSULTANTS 15
OPERATIONAL HAZARDS AND INSURANCE 15
OFFICE FACILITIES 15
HISTORY 16
PURCHASE, LOAN AND MERGER TRANSACTIONS WITH TETON
PETROLEUM COMPANY 17
ISSUANCE OF CONVERTIBLE DEBENTURES 18
RESIGNATION OF CHIEF FINANCIAL OFFICER 18
DEFAULT JUDGMENT AND SUBSEQUENT SETTLEMENT AGREEMENT. 18
ACTIVITIES IN THE UNITED KINGDOM 19
WHERE YOU CAN FIND MORE INFORMATION 20
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS 20
FACTORS THAT MAY AFFECT FUTURE RESULTS 20
RISKS RELATED TO GENERAL ACTIVITIES 20
WE HAVE A WORKING CAPITAL DEFICIT AND WILL CONTINUE
TO NEED SIGNIFICANT FUNDS 20
WE ARE DEPENDENT UPON FINANCING ACTIVITIES TO FUND OUR
OPERATIONS 20
WE HAVE SIGNIFICANT FUTURE OBLIGATIONS UNDER A
SETTLEMENT AGREEMENT 21
OUR PROJECTS ARE HIGHLY SPECULATIVE AND GENERALLY ONLY
AT THE EXPLORATION STAGE 21
MANY OF OUR PROJECTS ARE IN LOCATIONS WHERE THE
INFRASTRUCTURE IS INADEQUATE TO SUPPORT OUR NEEDS 21
MANY OF OUR PROJECTS ARE IN COUNTRIES THAT HAVE FRAGILE
AND UNPREDICTABLE POLITICAL AND SOCIO-ECONOMIC SYSTEMS 21
THE CONTINUANCE, COMPLETION OR RENEWAL OF MANY OF OUR
LICENSES ARE SUBJECT TO THE DISCRETION OF GOVERNMENT
AUTHORITIES 22
WE ARE THE SUBJECT OF AN INACTIVE SEC INVESTIGATION AND
A DEFENDANT IN VARIOUS OTHER LAWSUITS 22
OUR PROJECTS MAY NEVER BEGIN PRODUCING VALUABLE
HYDROCARBONS 22
WE ARE DEPENDENT UPON CERTAIN OFFICERS, KEY EMPLOYEES,
AND CONSULTANTS 22
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WE ARE THINLY STAFFED 23
SUBSEQUENT EVALUATION MAY REVEAL THAT OUR UNPROVED
PROPERTIES ARE NOT VALUABLE, AND WE MAY NEED TO RECORD
AN IMPAIRMENT OF THE VALUE OF SUCH PROPERTIES 23
SEVERE WEATHER WILL INTERRUPT, AND MAY ADVERSELY
AFFECT, OUR ACTIVITIES IN VARIOUS PARTS OF THE WORLD 23
RISK FACTORS RELATED TO THE OIL AND GAS INDUSTRY 23
THE PRICE OF THE VARIOUS HYDROCARBONS WE PRODUCE OR MAY
PRODUCE ARE VOLATILE AND UNSTABLE 23
OUR OPERATIONS INVOLVE NUMEROUS HAZARDS, AND WE
MAINTAIN NO INSURANCE AGAINST SUCH RISKS 24
THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE, AND
WE ARE AT A COMPETITIVE DISADVANTAGE 24
OUR OPERATIONS ARE SUBJECT TO NUMEROUS ENVIRONMENTAL
LAWS, COMPLIANCE WITH WHICH MAY BE EXTREMELY COSTLY 24
OTHER RISKS RELATING TO THE COMMON STOCK 25
MOST OF OUR OUTSTANDING SHARES ARE FREE TRADING AND,
IF SOLD IN LARGE QUANTITIES, MAY ADVERSELY AFFECT
THE MARKET PRICE FOR OUR COMMON STOCK 25
WE HAVE A SUBSTANTIAL NUMBER OF WARRANTS, OPTIONS AND
DEBENTURES OUTSTANDING 25
WE HAVE THE RIGHT TO, AND EXPECT TO, ISSUE ADDITIONAL
SHARES OF COMMON STOCK WITHOUT SHAREHOLDER APPROVAL 25
WE HAVE NOT PAID ANY DIVIDENDS AND DO NOT EXPECT TO PAY
DIVIDENDS IN THE NEAR FUTURE 25
RISKS RELATED TO PROPOSED TETON TRANSACTIONS 25
THE PROPOSED MERGER WITH TETON MAY NOT BE CONSUMMATED 25
ISSUANCE OF SHARES IN THE MERGER WILL CREATE SUBSTANTIAL
DILUTION 26
PROPERTIES OBTAINED AS A RESULT OF THE MERGER MAY PROVE
TO HAVE NO VALUE 26
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 29
MARKET FOR COMMON STOCK 29
DIVIDENDS 29
RECENT SALES OF UNREGISTERED SECURITIES 30
ITEM 6. SELECTED FINANCIAL DATA 30
CERTAIN FINANCIAL DATA 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 31
GENERAL 31
RECENT DEVELOPMENTS 32
OUTLOOK 32
RESULTS OF OPERATIONS-1999, 1998, AND 1997 FISCAL YEARS 33
CAPITAL AND LIQUIDITY 34
INFLATION 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 37
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CERTAIN INFORMATION REGARDING EXECUTIVE OFFICERS, DIRECTORS
AND CONTROL PERSONS 37
BIOGRAPHICAL INFORMATION 37
FAMILY RELATIONSHIPS 39
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE
ACT OF 1934 39
ITEM 11. EXECUTIVE COMPENSATION 39
SUMMARY COMPENSATION TABLE 39
OPTION GRANTS IN LAST FISCAL YEAR 40
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
YEAR END OPTION VALUES 41
EXECUTIVE EMPLOYMENT AND CONSULTING ARRANGEMENTS 41
COMPENSATION OF DIRECTORS 41
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS 42
COMPENSATION COMMITTEE REPORT 42
PERFORMANCE GRAPH 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 47
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PART I
This Annual Report on Form 10-K for the year ended December 31,
1999 contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve risks and
uncertainties. The reader is cautioned that the actual results
of EuroGas, Inc. and its consolidated subsidiaries (collectively,
"we," "EuroGas" or the "Company") will differ (and may differ
materially) from the results discussed in such forward-looking
statements. Factors that could cause or contribute to such
differences include those factors discussed herein under "Factors
That May Affect Future Results" and elsewhere in this Form 10-K
generally. The reader is also encouraged to review other filings
made by the Company with the Securities and Exchange Commission
(the "SEC") describing other factors that may affect future
results of the Company.
Items 1 & 2. Business and Properties
General
We are primarily engaged in the acquisition of rights to
explore for and exploit natural gas, coal bed methane gas, crude
oil and other hydrocarbons. We have acquired interests in
several large exploration concessions and are in various stages
of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop
production. We are also involved in several planning-stage, co-
generation and mineral reclamation projects. Unless otherwise
indicated, all dollar amounts in this Form 10-K are reflected in
United States dollars.
When used herein, "we", the "Company" and "EuroGas" includes
EuroGas, Inc., and its wholly owned subsidiaries, EuroGas (UK)
Limited, Danube International Petroleum Company, EuroGas GmbH
Austria, EuroGas Polska Sp. zo.o., and Energy Global A.G., and
the subsidiaries of each of these subsidiaries, including
GlobeGas B.V., Pol-Tex Methane, Sp zo.o., McKenzie Methane
Jastrzebie SP. zo.o., Energetyka Lubuska, Danube International
Petroleum Holding B.V., and the NAFTA Danube Association.
Summary Description of Current Activities
Activities in Canada. We hold an equity interest of
slightly more than 50% of the capital stock of Big Horn Resources
Ltd., a Canadian full-service oil and gas producer ("Big Horn").
Big Horn's business is conducted primarily in western Canada,
particularly in the provinces of Alberta and Saskatchewan, and
its stock is currently traded on the Toronto Stock Exchange.
Although we currently hold one seat on Big Horn's board of
directors, we are not involved in the day-to-day management or
operations of Big Horn.
Activities in Poland. EuroGas Polska, our wholly-owned
subsidiary, has created a consortium with two European utility
companies to develop a power project in Zielona Gora (Western
Poland). As an initial step, we created and registered
"Energetyka Lubuska" ("Energetyka"). Energetyka intends to
submit a proposal to the Ministry of Treasury of Poland to
acquire the existing EC Zielona Gora power plant through
privatization. We expect the Ministry of Treasury to make a
final decision on this matter sometime during 2000. If
privatization is approved, we intend to commence the multi-year
process of obtaining financing for and updating the proposed
power plant. If acquired, the power plant is expected to
deliver 180 megawatts of electricity and 180 megawatt Thermal
generated heat to be used for a district heating system.
Separately, Energetyka executed a letter of intent with the
Polish Oil and Gas Company ("Polish Oil") to develop a new power
plant near Gorzow in northwestern Poland. The proposed project
involves the construction of a 5 megawatt power plant that uses
gas produced by a nearby oilfield to produce electricity that
will be marketed to a nearby de-sulfurisation plant owned by
Polish Oil. The project is at a conceptual stage, and we must
enter into a final agreement with the Polish Oil, complete design
of the plant and obtain financing before the several years' long
construction process can commence. We expect to enter into a
final agreement by the end of 2000.
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Activities in Ukraine. Our activities in the Ukraine
involve ZahidUkrGeologyia, a state-owned company. We have
entered into a nonbonding letter of intent with ZahidUkrGeologyia
to acquire two oil and gas concessions totaling approximately 150
sq. kilometers (60 square miles). We also have signed a joint
operation agreement with ZahidUkrGeologyia that details plans to
explore a natural gas reservoir in Western Ukraine. Under both
the letter of intent and the joint operating agreement, we are
required to fund the exploration operations and provide 30% of
any revenues to ZahidUkrGeologyia.
Activities in Slovakia. We are pursuing four projects in
Slovakia, including the development of the Gemerska-Poloma talc
deposit located near Roznava. We own a 24.5% indirect interest
in this talc deposit, operated by Rozmin s.r.o., with the
remaining interest being held by Belmont Resources, Ltd, a
Vancouver British Columbia entity and an affiliate of a
significant shareholder of EuroGas. Our work schedule for the
talc mine calls for an accelerated drive to commercial production
in 2001, subject to our being able to obtain financing for the
development of the deposit.
Our remaining three Slovakian projects involve the
exploration for oil or natural gas in the Trebisov gas field in
eastern Slovakia, the Maseva concession in eastern Slovakia and
the Evigeo concession in the northeastern corner of Slovakia.
Each of the projects is at an early exploratory or appraisal
stage.
Activities in Sakha Republic. In 1997, we acquired OMV
(Jakutien) GmbH, which holds a 50% interest in the TAKT Joint
Venture, an entity based in Yakutsk, Sakha Republic, Russia.
The TAKT Joint Venture held two oil and gas exploration licenses
in Yakutsk. We participated in a work program of seismic
reprocessing of over 1,700km of data and its interpretation prior
to the expiration of the licenses in October 1998. Recently, we
have been negotiating to have the licenses renewed to allow us to
move forward towards choosing a drilling location for a future
test well.
Activities in Canada
Big Horn Resources Limited
On March 31, 1999, we completed the acquisition of 5,600,000
shares of Big Horn common stock, representing slightly more than
a 50% interest in Big Horn. Big Horn currently produces
approximately 1,000 barrels of oil equivalent per day. At
December 31, 1999, Big Horn had estimated proven reserves of
approximately 806,400 barrels of oil and 7,772,800 mcf of natural
gas. The estimated net future discounted cash flows of Big Horn
as of December 31, 1999 were approximately $12.4 million.
During 1999, Big Horn acquired the assets of Edinburgh
Resources, Ltd. for approximately $1,700,000 ($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.
We are not engaged in the day-to-day management of Big Horn
and its operations. We do, however, have one seat on Big Horn's
board of directors, which is presently occupied by Karl Arleth,
our President, Chief Executive Officer and a member of our board
of directors. Big Horn earned net income of $ 757,781 during the
year ended December 31, 1999 when measured according to United
States generally accepted accounting principles and calculating
this figure based on Eurogas' investment in Big Horn;
nonetheless, Big Horn has not distributed any dividends to
shareholders and indicates that it does not intend to distribute
any dividends to shareholders in the near future.
Beaver River Natural Gas Field
We hold a 15% interest in the "Beaver River" natural gas
project, which is an attempt to reestablish commercial production
in an old Amoco field; however, we are presently negotiating an
agreement pursuant to which we expect to return our 15% interest
to the former owners in exchange for the return of the shares of
our Common Stock issued in acquiring the interest.
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Activities in Poland
Energetyka Lubuska Power Plants
In February of 1999, we formed a consortium with large
United Kingdom and German utility companies to develop a power
generation project in Zielona Gora, Western Poland. Pursuant to
the agreement, we created a joint venture company "Energetyka
Lubuska," which intends to submit a proposal to the Ministry of
Treasury of Poland to acquire the existing EC Zielona Gora power
plant through privatization. We expect to submit such proposal
in the third quarter of 2000 and expect that the Ministry of
Treasury will take between two to three months to evaluate and
approve the project. If privatization is approved, the process
of obtaining financing for and updating the proposed power plant
can commence. It is expected that the follow-up development will
take two to three years. If developed, the power plant is
expected to deliver up to 180 megawatts of electricity and 180
megawatt thermal (generated heat to be used for district heating
system).
We currently anticipate that the total investment required
to develop the project will be approximately $150 million. Of
that amount, it is proposed that our United Kingdom and German
partners pay approximately 92.5% of the total project costs in
exchange for an 87.5% interest in distributions and that we pay
7.5% of the cost in exchange for a 12.5% interest in
distributions. We do not currently have the funds necessary to
fund our anticipated $11.25 million contribution and will need to
raise additional capital before such process can commence.
Separately, Energetyka executed a letter of intent with
Polish Oil to develop a new power plant near Gorzow in
northwestern Poland. The proposed project involves the
construction of a 5 Megawatt power plant that uses gas produced
by a nearby oilfield to produce electricity that will be marketed
to a nearby de-sulfurisation plant owned by Polish Oil. The
project is at a conceptual stage, and we must enter into a final
agreement with the Polish Oil, complete design of the plant and
obtain financing before the several years' long construction
process can commence. We expect to enter into a final agreement
by the end of 2000.
Polish Methane Gas Concessions
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 a related study funded by the United States
Government. Methane is a component of natural gas that is used
as a fuel in various industries and as a source of residential
heating. Before natural gas is used as a fuel, heavy
hydrocarbons such as butane, propane, and natural gasoline are
separated to meet pipeline specifications. The "heavy
hydrocarbons" are typically sold separately. The remaining gas
constitutes "dry gas" composed of methane and ethane. Once
produced and separated, there is no substantial difference
between natural gas and methane. The demand in Europe for both
natural and methane gas has been traditionally high and the price
generally runs significantly higher than prices in the United
States, although the price for natural gas in Poland is generally
lower than in the rest of the European market. Gas production
typically competes with coal and oil but is generally considered
to be a preferred product because of recent environmental
concerns expressed by governments in Europe.
On October 13, 1997, we received a concession from the
Polish Ministry of Environmental Protection of Natural Resources
and Forestry to explore and potentially develop a 112 square
kilometer coal bed methane concession located in Upper Silesian
Coal Basin. We conducted a feasibility study to explore the
possibilities of drilling gas wells for a combined heat and power
plant project or other uses. The results of the study suggest
that the volume of the gas in place could exceed 30 billion cubic
meters, although no assurance can be given that marketable
methane gas will be found. Additional works connected with
evaluation of the productivity of the concession are under way.
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields
On October 23, 1997, EuroGas Polska completed an agreement
with Polish Oil to undertake appraisal and development activities
with respect to a large area located in the Carpathian Flysch and
tectonic Foredeep areas of Poland. The agreement contemplates
total expenditures of $15 million. To date, we and Polish Oil
have conducted and interpreted a $1.5 million wide-line seismic
work and geological exploration program in the Rymanow-Lesko area
of the Carpathian Mountains in southeastern Poland. Polish Oil
has produced a report based on the program, which suggests the
7
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potential for substantial oil and gas reserves in the Rymanow-
Leske area. If subsequent feasibility studies indicate that oil
or gas can economically be recovered from this concession, of
which there is no assurance, an estimated two years of further
testing, seeking regulatory approvals and construction will be
required before commercial production can commence, at an
estimated minimum cost of $2,000,000. We do not currently have
the funds necessary to complete a feasibility study, drill test
wells or develop this concession and will need to bring in a
joint venture partner or raise additional capital before such
process can commence.
Carpathian New Concession
On December 20, 1999, we executed a usufruct agreement with
the Poland Ministry of Environmental Protection, Natural
Resources and Forestry. This agreement tentatively secures for
us the exclusive rights to explore for and develop hydrocarbons
in an area of over 1,100,000 acres in Southeastern Poland. We
expect that the final concession will be granted before the end
of the third quarter of the year 2000. We currently expect to
conduct additional seismic work and drill the first well in the
spring of 2002 at the site we select based on our interpretation
of existing data.
Our work on this concession is at an early exploratory
stage. If subsequent exploration and testing indicate that oil
or gas can economically be recovered from this concession, of
which there is no assurance, an estimated two years of further
testing, seeking regulatory approvals and construction will be
required before commercial production could commence, at an
estimated minimum cost of $3,000,000. We do not currently have
the funds necessary to complete the exploration, testing or
development of this concession and will need to bring in a joint
venture partner or raise additional capital before such process
can commence.
Activities in Ukraine
We are involved in numerous projects in the Ukraine, each of
which is at an early exploratory stage. These projects include
the following:
. We have entered into a non-binding letter of intent with a
Ukrainian state-owned company, ZahidUkrGeologyia, to acquire two
Ukrainian oil and gas concessions totaling approximately 150 sq.
kilometers (60 sq. miles). The agreement calls for EuroGas to
fund the project with future revenue divided in the following
proportions: EuroGas 70% and ZahidUkrGeologyia 30%. We have no
definitive plans with respect to consummation of such acquisition
or exploration of such properties.
. We also have signed a joint operation agreement with a
ZahidUkrGeologyia calling for study and development of the
Kamienska natural gas reservoir in Western Ukraine. The agreement
calls for EuroGas to fund the project with future revenue divided
in the following proportions: EuroGas 70% and ZahidUkrGeologyia
30%. We have no definitive plans with respect to exploration of
such properties
With respect of each to these projects, our joint venture
partners or other sources have indicated that the respective
concession contains substantial potential reserves of recoverable
hydrocarbons. Neither we, nor any independent engineering firm,
has confirmed any such estimates or performed studies to evaluate
whether such hydrocarbons can be economically recovered. Our
exploratory work on each such concession is at an early
exploratory stage. If subsequent exploration and testing
indicates that oil or gas can economically be recovered, of which
there is no assurance, an extensive period of additional testing,
seeking regulatory approvals, and construction will be required
before commercial production could commence. We do not currently
have the funds necessary to complete the exploration or
development of such concessions and will need to bring in a joint
venture partner or raise additional capital before such process
can commence.
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Activities in Slovakia
On January 1, 1993, the Czech Republic and Slovakia emerged
as separate independent nations. Slovakia is bounded on the
north by Poland, on the east by the Ukraine, on the south by
Hungary, and on the west by Austria and the Czech Republic.
Slovakia has an area of approximately 19,000 square miles and a
population of approximately 5.5 million people. Slovakia has not
been as quick to adopt free market reforms as Poland and the
Czech Republic, and the former communist party remains a major
political force. Slovakia is a member of the International
Monetary Fund and the European Bank for reconstruction and
development and an associate member of the European Union.
Gemerska Talc Deposit
In March 1998, we acquired a 55% interest in RimaMuran
s.r.o., a closely-held entity whose principal asset is a 43%
interest in Rozmin s.r.o., which has the right to develop the
Gemerska Talc Deposit located in Roznava, in eastern Slovakia.
Belmont Resources, Ltd, a Canadian entity which is affiliated
with a significant shareholder of EuroGas, holds 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 below the surface. The
feasibility study demonstrated the potential of approximately 30
million tons of recoverable talc, of which the highest grade ore
is developed in the western part of the deposit. This western
part, containing an estimated 5.9 million tons of ore rock
yielding 26% talc mineral, would be the focus of our initial
extraction efforts. The feasibility study was prepared by a
leading German engineering group, Hansa GeoMin Consult, for a
wholly-owned financing subsidiary of the German government.
RimaMuran has the obligation to fund 43% of the projected
$12 million of capital costs over the next two and one-half
years. RimaMuran does not have the assets necessary to meet this
obligation. To date, we have advanced a total of $1,433,651, in
the form of shareholder loans and other forms of investment, to
RimaMuran to fund our participation in the project. We expect,
subject to our ability to obtain sufficient capital, to provide
$1,000,000 in funding over the next 2 years for these
development costs.
We believe the exploitation of the talc deposit may be
favorable due to a strong feasibility study and, the willingness
of the German financing subsidiary to participate. The joint
venture has negotiated a non-recourse financing package which
would give the German financing subsidiary a 10% equity
participation in the project in exchange for financing, of which
9% would be contributed by RimaMuran and 1% by Belmont. The
completion of the loan package is subject to the receipt by the
German financing subsidiary of a guaranty from certain entities
to purchase a portion of the mined talc.
Slovakian Oil & Gas Joint Venture
In July 1996, as part of our effort to diversify and expand
our interests in Europe, we acquired Danube International
Petroleum Company ("Danube"), which held participation rights for
natural gas exploration in Slovakia and the Czech Republic.
Since the acquisition, we have focused our efforts on the
development of the Slovakian project and abandoned our interest
in the Czech Republic. Danube is a partner in a joint venture
agreement (the "Slovakian Oil & Gas Joint Venture") with NAFTA
Gbely A.S. ("NAFTA"). The principal focus of the Slovakian Oil &
Gas Joint Venture is natural gas exploration and development
under a license covering 128,000 acres located in the East
Slovakian Basin, a northeastern extension of the Pannonian Basin
that covers large parts of Hungary and the southeastern part of
Slovakia.
The activities of the Slovakian Oil & Gas Joint Venture are
conducted pursuant to a four-year exploration license that was
granted on April 24, 1995 and expired in April 1999. We are
presently in discussions with officials of NAFTA and Slovakian
Governmental officials regarding an extension or re-issue of the
present license. Although we can provide no assurance that the
license will be re-issued, early negotiations indicate that there
is a reasonable likelihood that the license will not be extended
or re-issued.
Prior to obtaining our interest in the Slovakian Oil & Gas
Joint Venture, Nafta Gbely, Slovakian National Oil Company
drilled eleven wells in the area covered by the license. All of
these wells had gas shows, although none were completed for
commercial production. We believe 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 techniques that now
exist for the recovery of gas from these types of formations.
9
<PAGE>
In 1998, we drilled an initial well in the "South Cluster"
area of the Slovakian property. Based upon the promising results
of such initial testing, we engaged Ryder Scott, a petroleum
engineering firm, to prepare a reserve analysis on the Trebisov
reservoir. The joint venture also completed a 148 sq. km. three-
dimensional seismic survey covering the South Cluster and a
prospective area to the north. 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 2000.
Under the terms of the joint venture agreement, we were
obligated to provide 75% ($4.98 million) of the projected initial
test phase (including seismic testing) funding of $6.64 million
and 60% ($4.08 million) of the projected capital investment cost
for the initial production phase of $6.8 million. All funds
required for the initial test phase have been expended and
expenses associated with drilling are being paid 60% by us and
40% by NAFTA. When the cost of development and production
exceeds $6.8 million, we will be required to pay 50% of
additional funds and NAFTA will be required to pay the remaining
50%. The current projections indicate that this limit will be
exceeded during 2000.
During March 1998, NAFTA informed us 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 we
have drilled to date are located in the Trebisov area, where we
are not aware of any title problems. The disputed title area is
located in the southern portion of the property covered by the
designations contained in the joint venture agreement and was
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, our expansion beyond the Trebisov area
may be limited. We have notified the former shareholders of
Danube of a claim against them by reason of this recent problem.
The work of the Slovakian Oil & Gas Joint Venture is at an
early exploratory stage. If subsequent tests indicate that oil
or gas can economically be recovered from this concession, of
which there is no assurance, an estimated two years of further
testing, seeking regulatory approvals and construction will be
required before commercial production can commence, at an
estimated minimum cost of $4,000,000. We do not currently have
the funds necessary to place the test wells into production or
develop this concession and will need to bring in a joint venture
partner or raise additional capital before such process can
commence.
Maseva Natural Gas Reservoir
In 1998, we completed an agreement with NAFTA to acquire a
majority interest in an oil and gas concession adjacent to the
Trebisov concession. The new concession, known as Maseva, has
overlapping claims with our other concessions. We completed
exploration work consisting of a survey to map anomalous
concentrations of gas in surface soil samples to define areas for
new seismic surveys during 1998 and 1999. We plan to conduct a
three-dimensional seismic survey during 2001 at an approximate
cost of $1.5 to $2.5 million. Based upon the survey results, we
intend to draft a comprehensive development plan. No drilling is
planned in the licensed area during 2000.
The Maseva agreement provides for our acquisition of the
Maseva interest in exchange for the issuance of 2,500,000 shares
of our common stock and the grant of two-year warrants enabling
the holder to purchase up to 2,500,000 shares of our common stock
for $2.50 per share (adjusted from an original $5.00 per share
warrant price because of the decline of our stock price). The
division of the working interest for this territory will be 67.5%
EuroGas and 22.5% NAFTA, provided that we carry the cost of
drilling the first two wells in the previously disputed area.
We believe that purchasing the Maseva concession will solve
any title problems with the original venture and acquire
additional property. We have notified the former shareholders 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.
10
<PAGE>
Envigeo-Carpathian Flysch Concession
In September 1998, we acquired a 51% interest in Envigeo
s.r.o., 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. We have not yet commenced exploration
on this concession and have no plans to conduct any exploration
or drilling activities on the concession during 2000.
Activities in the Sakha Republic
The Republic of Sakha (often referred to as "Yakutia" in
English) has the largest land area of the members of the Russian
Federation and is located in the far eastern portion of the
former Soviet Union. Yakutia is thinly populated (just over
1,000,000 people) and covers approximately 3,100,000 square
kilometers. 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. Our interest
in acquiring EG (explained below) was based in large part on our
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.
TAKT Exploration Blocks Near Lensk
On June 11, 1997, we acquired all of the issued and
outstanding stock of EuroGas Austria GmbH ("EG") (formerly known
as OMV (Jakutien) Exploration GmbH). 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 privately owned joint stock company with
limited liability was approved by EuroGas and Sakhaneftegas on
December 1, 1997 and is expected to be finalized in the first
half of 2000. TAKT was formed to appraise, explore, develop,
and export oil and gas reserves in two large areas in Yakutia.
TAKT currently holds two exploration concessions 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. Our exploration licenses expired with respect to these
sections. An application to extend the two exploration licenses
for an additional 20 years was submitted to the Sakha Ministry of
Justice in January 1998. Some of our Russian affiliates are
negotiating to have the licenses renewed. We cannot predict when
a decision will be made on extending our exploration licenses.
TAKT also holds rights of first refusal on Sakha oil and gas
projects offered by Sakhaneftegas to third parties. TAKT has
been conducting activities within the two concessions for the
past six years, employing modern seismic and exploration
techniques.
During 1999, TAKT completed the reprocessing of 1,700
kilometers of seismic lines. TAKT has completed a preliminary
interpretation of the reprocessed data related to the area
surrounding a well that successfully tested for gas in 1992. We
presently anticipate that during 2000 TAKT will complete the
interpretation and mapping of the reprocessed seismic lines and
will select a location for drilling a test well. The date for
commencement of this well will depend on technical discussions
with local drilling contractors and the ability of each of
EuroGas and Sakhaneftegas to provide its 50% contribution to the
estimated $5,000,000 cost of drilling a test well.
Our exploratory work in Yakutia is at an early exploratory
stage. If subsequent testing and drilling indicates that oil or
gas can economically be recovered, of which there is no
assurance, an extensive period of additional testing, seeking
regulatory approvals and construction will be required before
commercial production could commence. In addition, we cannot
commence commercial production in Yakutia until a commercial
pipeline is constructed by independent entities. We do not
expect any such pipeline to be completed until 2007, if at all.
Moreover, exploration for and any production of hydrocarbons in
Yakutia is made particularly 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. Our 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. We are considering the
prospect of selling our interest in TAKT.
11
<PAGE>
Activities in Slovenia
During 1999, we entered into an arrangement to purchase an
interest in an operating lubricant refinery facility in Slovenia
that is owned by the Slovenian government. In order to
participate, we were required to fund a letter of credit in the
amount of $359,760 in the form of a cash bond that is refundable
if the transaction is not completed. The entire refinery project
is being reconsidered with the intent of focusing our limited
financial resources on other projects.
Disclosure of Oil and Gas Operations
Reserves Reported to Other Agencies. No reserves were
reported to any other Federal agency or authority for the year
ended December 31, 1998 or for the year ended December 31, 1999.
Oil and Gas Production and Production Costs. The
following table sets forth the average sales price per unit of
oil and gas produced and the average production cost per unit of
production. During the following periods, oil and gas production
related solely to operations in Canada.
For the year For the year
ended ended
December 31, December 31,
1999 1998
------------ -------------
Average sales prices liquids per barrel $13.56 $ 9.02
Natural Gas per thousand cubic feet (Mcf) $1.55 $ 1.51
Average production cost, per barrel of $3.90 $ 3.13
equivalent oil(1)
(1) Natural gas converted to barrels of equivalent oil at a rate of
10 mcf = 1 barrel of equivalent oil.
Except for the oil and gas produced by Big Horn Resources,
Ltd. in Canada and described above, we have not produced any gas
or oil in any geographic area during our history.
Productive Wells. The following table sets forth the number
of gross productive wells and net productive wells in which we
have a working interest.
Productive Oil and Gas Wells at December 31,
1999
Productive Oil Wells (1) Productive Gas Wells (1)
------------------------ ------------------------
Gross(2) Net(2) Gross(2) Net(2)
----------- ----------- ----------- -----------
Canada 57 15.8 43 10.0
Eastern Europe
and Russia -- -- -- --
----------- ----------- ----------- -----------
Total 57 15.8 43 10.0
=========== =========== =========== ===========
(1) Includes wells producing or capable of producing and
injection wells temporarily functioning as producing
wells. Wells that produce both oil and gas are
classified as oil wells.
(2) Gross wells include the total number of wells in which
we have an interest. Net wells are the sum of our
fractional interest in gross wells.
Developed and Undeveloped Acres. An acre is deemed to be
developed if wells have been drilled on such acre to a point that
would permit the production of commercial quantities of oil. The
following table sets forth the number of gross and net developed
and undeveloped acres in which we have a working interest.
12
<PAGE>
<TABLE>
<CAPTION>
Acreage (*) At December 31, 1999
Undeveloped Developed Total
---------------------- ---------------------- ----------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Canada 18,244 6,719 22,500 8,000 40,744 14,719
Eastern Europe and Russia 6,444,506 3,586,671 -- -- 6,444,506 3,586,671
---------- ---------- ---------- ---------- ---------- ----------
Total 6,462,750 3,593,390 22,500 8,000 6,485,250 3,601,390
========== ========== ========== ========== ========== ==========
</TABLE>
(*) Gross acreage includes the total number of acres in all
tracts in which we have an interest. Net acreage is
the sum of our fractional interests in gross acreage.
13
<PAGE>
Drilling Activities. The following table sets forth
the number of development wells (productive and dry) and
exploratory wells (productive and dry) for which drilling was
completed during each of the four years ended December 31, 1999,
1998, 1997 and 1996.
<TABLE>
<CAPTION>
Drilling Activities
Development Wells Drilled Exploratory Wells Drilled
------------------------- -------------------------
Productive Dry Productive Dry
Wells(2) Wells(1) Wells(2) Wells(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
For the year ended
December 31, 1999:
Canada 1.2 0.1 3.6 0.5
Eastern Europe and Russia - - - -
---------- ---------- ----------- -----------
Total 1.2 0.1 3.6 0.5
========== ========== =========== ===========
For the year ended
December 31, 1998:
Canada 0.4 - 0.9 -
Eastern Europe and Russia - - - -
---------- ---------- ----------- -----------
Total 0.4 - 0.9 -
========== ========== =========== ===========
For the year ended
December 31, 1997:
Canada - - - -
Eastern Europe and Russia - - - 12.0
---------- ---------- ----------- -----------
Total - - - 12.0
========== ========== =========== ===========
For the year ended
December 31, 1996:
Canada - - - -
Eastern Europe and Russia - - - -
---------- ---------- ----------- -----------
Total - - - -
========== ========== =========== ===========
</TABLE>
(1) A dry well is any well found to be incapable of
producing either oil or gas in sufficient quantities to
justify completion as an oil or gas well.
(2) A productive well is any well other than a dry well.
As of April 14, 2000, the Company and its wholly- or
partially-owned subsidiaries are presently in the process of
drilling (including wells temporarily suspended but not those for
which drilling is planned) the following exploratory and
developed wells.
Development Wells Exploratory Wells
Drilling Drilling
------------------ ------------------
Gross Net Gross Net
-------- -------- -------- --------
As of December 31, 1999
Canada 1.0 0.5 2.0 1.1
Eastern Europe and Russia 6.0 3.0 1.0 0.5
-------- -------- -------- --------
Total 7.0 3.5 3.0 1.6
======== ======== ======== ========
Competition
In seeking to explore for, develop, and produce oil and gas
resources, we compete with some of the largest corporations in
the world, in addition to many smaller entities involved in this
area. Many of the entities that we compete with have access to
far greater financial and managerial resources than we do. As a
result of the exclusive nature of the concessions we hold, to the
extent that we are able to successfully explore for, develop, and
produce hydrocarbon resources, we will be able to exclude any
competitor from production of the resources located on the
concessions, but we cannot exclude competitors from providing
natural gas or other energy sources at prices or on terms that
purchasers deem more beneficial.
14
<PAGE>
Employees and Consultants
As of December 31, 1999, we had two administrative employees
located in Salt Lake City, Utah; three administrative employees
located in London; and six technical and field workers in Poland.
Our four principal consultants are located in Europe. None of
our employees are represented by a collective bargaining
organization, and we consider our relationship with our employees
to be satisfactory. In addition to our employees, we regularly
engage technical and other consultants to provide specific
geological, geophysical, and other professional services.
Operational Hazards and Insurance
We are engaged in the exploration for methane and natural
gas and the drilling of wells and, as such, our operations are
subject to the usual hazards incident to the industry. These
hazards include blowouts, cratering, explosions, uncontrollable
flows of gas or well fluids, fires, pollution, releases of toxic
gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental
damage, and suspension of activities. We have not obtained any
hazard insurance. The occurrence of a significant adverse event
that is not covered by insurance would have a material adverse
effect on EuroGas.
Office Facilities
We lease 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 a public and shareholder
relations firm that currently provides services to us in lieu of
rent. The offices serve as our representative location in the
financial district of New York City. We are using the New York
offices periodically for board meetings as well as other meetings
with members of the investment community, such as investment
firms and banks. The New York office maintains our Website at
http://www.eugs.com and also has available, for interested
shareholders, maps and other materials concerning our activities.
We do not intend to renew this lease once it expires.
On October 1, 1999, we extended until September 30, 2002 our
lease for property located at 942 East 7145 South, #101A,
Midvale, Utah. Rent for such lease is currently $1,836 per
month. 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%.
We have an oral month-to-month lease on an office with
approximately 2,230 square feet in Warsaw, Poland. The rental
amount on such lease is included in the compensation of one of
our Poland-based technical employees.
We maintain an office (approximately 2,500 square feet) at
22 Upper Brook Street, Mayfair, London, UK. We have subleased the
remaining space to two other companies. In November 1998, we
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 our portion is approximately $580,000 per year.
Our subsidiary GlobeGas maintains office space under an
agreement with First Alliance Trust, at Herengracht 466,
Amsterdam, The Netherlands. Under this agreement First Alliance
provides office space, accounting and legal functions for
GlobeGas. The agreement calls for payment for these services on
an as needed basis.
15
<PAGE>
History
EuroGas, Inc., was incorporated in the State of Utah under
the name Northampton, Inc. 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 a 16% 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 interests in two other concessions for the exploration
and exploitation of methane coal bed gas reserves in the Upper
Silesian region of Poland.) In May 1995, we acquired the
remaining 80.87% interest in GlobeGas. In 1996, we acquired the
remaining 15% Pol-Tex interest held by the Polish state coal
company. Pol-Tex has acquired exploration or development rights
in various parts of Poland.
Beginning in 1996, we began directly or indirectly acquiring
oil exploration or development rights throughout Eastern Europe
and Canada, including the following:
. In 1996, we acquired Danube International Petroleum Company,
a participant in a joint venture for the exploration and
production of natural gas in Slovakia.
. In 1997, we acquired all of the issued and outstanding stock
of EG, whose primary asset is the 50% interest in the TAKT joint
venture with the national oil and gas company of the Sakha
Republic.
. In early 1998, we acquired the 55% interest in RimaMuran,
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 April 1998, we acquire a 15% interest in the "Beaver
River" natural gas project, which is an attempt to reestablish
commercial production in an old Amoco field; however, we are
presently negotiating an agreement pursuant to which we expect to
return our 15% interest to the former owners in exchange for the
return of the shares of our Common Stock issued in acquiring the
interest.
. In mid 1998, we 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.
. On March 31, 1999, we completed the acquisition of 5,600,000
shares of Big Horn common stock, representing slightly more than
a 50% interest in Big Horn. Big Horn currently produces
approximately 1,000 barrels of oil equivalent per day.
. On April 5, 2000, we entered into a master transaction
agreement and merger agreement with Teton Petroleum Company and
related entities pursuant to which we agreed (subject to the
satisfactory completion of a due diligence investigation that is
still ongoing) to fund the Teton's construction of a pipeline in
Russia and to acquire Teton through a merger.
Certain Developments Since December 31, 1999
16
<PAGE>
Purchase, Loan and Merger Transactions with Teton Petroleum Company
On April 5, 2000, we entered into a Master Transaction
Agreement with Teton Petroleum Company, a Delaware corporation,
and Goltech Petroleum, LLC, a Texas limited liability company and
wholly-owned subsidiary of Teton. The Master Transaction
Agreement and accompanying documents describe and contemplate the
following three interrelated transactions:
. the merger of Teton with and into a wholly-owned subsidiary
of EuroGas in exchange for (based on current capitalization)
14,981,744 shares of common stock and warrants to purchase an
additional 2,599,249 shares of common stock,
. the purchase by EuroGas of a 35% membership interest in
Goltech for $2,300,000, and
. our providing an up to $4,000,000 credit facility for
Goltech.
To date, we have paid $300,000 toward the purchase of an
interest in Goltech and loaned $550,000 to Goltech under the
credit facility and are conducting due diligence with respect to
the proposed merger. Until the end of the due diligence period,
the Master Transaction Agreement (and related merger agreement)
is terminable at will be either party.
Teton's primary asset is its 100% ownership interest in
Goltech, and Goltech's primary asset is its ownership of 70.59%
of a Russian closed joint stock company known as Goloil. Teton
has represented to EuroGas that Goloil is the operator of the
Eguryakhskiy License Territory, also referred to as the Goloil
Project, a 187 square kilometer (46,200 acre) oil field centrally
located in the southern half of the West Siberian basin in
Russia. Goltech is in the early stages of constructing an
approximately 20 mile-long pipeline from the Eguryakhskiy license
area to an existing pipeline in order to increase the volume of
oil extracted from the Eguryakhskiy license area.
The Teton Merger. Pursuant to a merger agreement entered
into concurrently with the Teton Master Agreement, Teton has
agreed to merge with and into a wholly-owned subsidiary of
EuroGas, with such wholly-owned subsidiary surviving the merger.
In the merger, subject to adjustment as described below, each
outstanding share of Teton common stock will be converted into
the right to receive one share of EuroGas common stock (and any
options, warrants and other right to purchase Teton common stock
will become rights to purchase EuroGas common stock). Teton has
represented that it has 14,981,744 shares of Teton common stock
outstanding and 2,599,249 shares of Teton common stock subject to
options warrants and other rights to purchase Teton common
stock.
In the event that the number of shares of EuroGas common
stock outstanding on or before the date 180 days following the
consummation of the proposed merger exceeds 136,000,000 shares,
the aggregate number of shares of EuroGas common stock issuable
with respect to each outstanding share of Teton common stock will
be increased so that the percentage of outstanding shares of
EuroGas common stock received by the Teton shareholders as a
group is equal to the quotient of (a) the number of shares of
Teton common stock outstanding on the date of consummation of the
merger, (b) divided by 136,000,000. Shares of EuroGas common
stock issuable upon the exercise of outstanding options, warrants
and other rights to purchase Teton common stock will also be
adjusted proportionately.
Teton's obligation to close the merger is contingent upon
the occurrence of several events, including without limitation
(i) approval of the merger by the shareholders of Teton and
EuroGas, (ii) our compliance with certain loan and purchase
obligations under the Teton Master Agreement, and (iii) neither
Teton nor EuroGas terminating the Teton Master Agreement at the
end of the due diligence period, which is currently ongoing. Due
to the delay of both Teton and EuroGas in completing due
diligence and liabilities associated with a default judgment
entered against EuroGas, there is a substantial risk that Teton
will terminate (or desire to renegotiate the terms of) the merger
agreement.
17
<PAGE>
Purchase of Membership Interest and Credit Facility. The
Master Agreement contemplates our purchasing a 35% membership in
Goltech and loaning Goltech $4,000,000 through periodic payments
of installments to the purchase price and periodic fundings
during the summer and fall of 2000. Because due diligence is
still ongoing, we have loaned Goltech only $550,000 as of July
24, 2000 and have paid only $300,000 of the $2,300,000 purchase
price for a 35% membership in Goltech. Due to the delay of both
EuroGas and Teton in completing due diligence, it is possible
that EuroGas and/or Teton will terminate the credit facility and
our right/obligation to purchase an interest in Goltech. If
either such transaction is terminated, there is a substantial
likelihood that the proposed merger will also be terminated.
Issuance of Convertible Debentures
On or about January 12, 2000, we issued four Convertible
Debentures in the aggregate face amount of $3,000,000 (the
"Convertible Debentures") to several individual investors in
exchange for an aggregate of $1,591,336 in cash, conversion of
$422,288 in outstanding EuroGas indebtedness, and payments made by
investors on behalf of EuroGas to creditors of EuroGas in the
amount of $986,376. The Convertible Debentures accrue interest at
the rate of prime plus two percent per annum. Payment of the
principal amount of the Convertible Debentures is due on February
10, 2001, and accrued interest is payable annually eginning on
January 8, 2001. Each Convertible Debenture is convertible into
(a) shares of Common Stock at the rate of one share per $0.35
indebtedness (for a total of 2,857,143 shares per million dollars
of principal), and (b) warrants to purchase one share Common Stock
at the rate of two warrants for each $0.35 in indebtedness (for a
total of 5,714,286 warrants per million dollars of principal). Each
such warrant entitles the holder to purchase one share of Common
Stock for an exercise price of $0.35.
As of March 31, 2000, the holders of all four Convertible
Debentures exercised their conversion rights under the
Convertible Debentures, and we issued 8,571,429 shares of Common
Stock and warrants to purchase 17,142,858 shares of Common Stock
at an exercise price of $0.35 per share on or before March 31,
2001.
The private placement of the Convertible Debentures 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:
(a) the investors confirmed to us that they were "accredited
investors," 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; (c) the investors were provided with any
and all other information requested by the investors with respect
to the Company, (d) the investors 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 Convertible
Debentures 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.
Resignation of Chief Financial Officer
Hank Blankenstein, who was serving as our chief financial
officer and one of our directors, resigned from the Company and
participation on the board of directors in March 2000. We are
presently seeking to hire a qualified replacement and expect to
have hired a qualified replacement by the end of September 2000.
Because we have not found a new chief financial officer as of the
date this Form 10-K is filed, Karl Arleth, the President of the
Company, is temporarily acting as our principal financial
officer.
Default Judgment and Subsequent Settlement Agreement.
On March 16, 2000, the United States District Court,
District of Utah, Central Division entered a default judgment
against EuroGas, and in favor of Finance & Credit Development
Corporation, Ltd. ("FCDC"), in the amount of $19,773,113, in a
case styled Finance & Credit Development Corporation Ltd., an
Ireland Corporation vs. EuroGas, Inc., a Utah corporation, Case
No. 2:00VC-1024K. On or about June 16, 2000, we entered into a
memorandum of understanding, to be followed by a definitive
agreement, with FCDC in satisfaction of its default judgment. In
consideration for FCDC's stipulation to vacate its default
judgment, we agreed to do the following:
18
<PAGE>
. issue to FCDC 3,700,000 shares of our common stock,
. grant FCDC an option to purchase 3,000,000 shares of our
common stock at an exercise price of $.65 during a 30 day period
commencing June 30, 2001,
. guarantee that the market price of the shares of our common
stock issuable upon exercise of the option would be $3.00 per
share on the date of exercise by compensating FCDC in cash or our
common stock in an amount equal to the difference between $3.00
and the market price of our common stock on the date of exercise,
. guarantee that the value of the shares of our common stock
issuable upon exercise of the option will retain their value
throughout the period during which FCDC is permitted to liquidate
the shares by compensating FCDC in cash or our common stock, with
respect to the 400,000 shares FCDC is permitted to sell and
deemed to have sold during every month, in an amount equal to
the difference between $3.00 per share and the sum of the market
price of such share and the per-share amount received pursuant to
the above-described exercise date top-up requirement,
. cause our subsidiary EuroGas GmbH to back up our guarantee
by pledging its stock in Rima Muran S.R.O., which indirectly
holds a 24% interest in a talc deposit in Slovakia,
. consider nomination of a designee of FCDC to serve on our
board of directors, and
. register for resale all of the shares of our common stock
issued to FCDC pursuant to the settlement agreement.
Activities in the United Kingdom
On January 20, 2000, we entered into an agreement with
Slovgold GesmbH, an Austrian company with headquarters in Vienna,
to conduct a six-well pilot program on a 500 sq. kilometer
(125,000 sq. acre) concession in South Wales held by UK Gas
Limited to test for coalbed methane gas. We plan to continue the
pilot program with an additional ten-well development program in
the next several years.
The terms of the agreement call for EuroGas to cover the
costs for the six-well pilot program (estimated at $700,000) and
the first stage of any subsequent development program in exchange
for 40% of the cash flow until payout, after which EuroGas
contribution obligation and cash flow interest will be reduced to
25%. In order to minimize the amount of capital we need to
contribute to conduct the pilot program, we have entered into
discussions with UK Gas in order to permit us to participate in
the pilot program by utilizing drilling equipment owned by our
Polish subsidiary. UK Gas Limited and Slovgold have formed a
joint venture, owned 50% by each of them, to engage in
exploration activities. We purchased 50% of Slovgold's 50%
interest in this joint venture. SlovGold has not actually
reached an agreement with UK Gas, which prevents us from being
involved in this pilot program through our affiliation with
Slovgold. UK Gas may be willing to enter into some financing and
exploration arrangement directly with us. However, we have not
yet pursued this prospect and remain uncertain about the
prospects of pursuing the pilot program in any form.
Where You Can Find More Information
We file 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 we file
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 ourselves, that file
electronically with the SEC.
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In addition, we will provide, without charge, to each person
to whom this Form 10-K is delivered, upon written or oral
request, 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: Principal Financial
Officer. Telephone requests may be directed to the office of the
Company at (801) 255-0862.
We maintain an Internet Website at http://www.eugs.com and
have available, for interested shareholders, maps and other
material concerning our activities.
Financial Information About Foreign and Domestic Operations
The information set forth as "NOTE 9 - GEOGRAPHIC
INFORMATION" of our consolidated financial statements included in
this Form 10-K contains information regarding financial
information about foreign and domestic operations of the Company
and its subsidiaries.
Factors That May Affect Future Results
This Form 10-K contains various forward-looking
statements. Such 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 noted in "Factors That May Affect Future Results"
below and other cautionary statements throughout this Form 10-K
and our other periodic filings with the SEC that are incorporated
herein by reference. 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.
Risks Related To General Activities
We Have A Working Capital Deficit And Will Continue To Need
Significant Funds
EuroGas has historically been undercapitalized. We had a
working capital deficit of approximately $19 million on March 31,
2000, and 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 Are Dependent Upon Financing Activities to Fund Our Operations
Prior to our acquisition of an approximately 50% interest in
a Canadian gas production entity (Big Horn) in 1998, we had not
earned any cash 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 Big Horn 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 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.
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We Have Significant Future Obligations Under a Settlement Agreement
On March 16, 2000, the United States District Court,
District of Utah, Central Division entered a default judgment
against EuroGas in the amount of $19,773,113 in a case styled
Finance & Credit Development Corporation, Ltd., an Ireland
Corporation vs. EuroGas, Inc., a Utah corporation, Case No.
2:00VC-1024K. We entered into a memorandum of understanding with
Finance & Credit Development Corporation, Ltd. settling the
default judgment on June 16, 2000. We agreed, among other
things, to issue to FCDC 3,700,000 shares of common stock, to
grant FCDC an option exercisable for the 30-day period following
June 30, 2001 to purchase an additional 3,000,000 shares of
common stock at an exercise price of $.65, and to pay to FCDC in
cash or shares of common stock the difference between $3.00 per
share and the market value of the shares of common stock received
upon exercise of the option. If the option would have been
exercise on June 16, 2000, we would have been obligated to issue
3,000,000 shares of common stock and pay FCDC an aggregate of
$6,700,000 in cash or additional shares of common stock. This
settlement and the consideration given to FCDC in the Settlement
Agreement are more fully described in "Subsequent Events."
Our Projects Are Highly Speculative And Generally Only At the
Exploration Stage
Our assets and interests are primarily in methane gas,
natural gas, and crude oil exploration and development projects.
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.
Many of Our Projects Are In Locations Where The Infrastructure is
Inadequate to Support Our Needs
Many of the projects in which we have invested are located
in areas of the world, primarily eastern Europe and the former
Soviet Union, 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.
Many Of Our Projects Are In Countries That Have Fragile and
Unpredictable Political and Socio-Economic Systems
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 may be required to obtain and renew licenses
and permits on an ongoing basis in connection with further
exploration, the drilling of wells, the construction of
transportation facilities and pipelines, the marketing of any
fuel that may be produced, and financial transactions necessary
for all of the foregoing. The rules, regulations, and laws
governing all such matters are subject to change by the various
governmental agencies involved. We can provide no assurance that
the laws, regulations, and policies applicable to our interests
in various countries in which our projects are located will not
be radically and adversely altered at some future date.
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The Continuance, Completion Or Renewal of Many of Our Licenses
Are Subject to the Discretion of Government Authorities
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, which entities have broad
discretion in determining whether or not to grant permits and
licenses. Moreover, even if obtained, such licenses, permits,
and agreements will generally contain numerous restrictions and
require payment by us of a development/exploration fee, typically
based on the market value of the economically recoverable
reserves. The amount of 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.
We Are The Subject Of An Inactive SEC Investigation and A
Defendant In Various Other Lawsuits
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 several years; however, we cannot currently predict the
duration or outcome of this investigation.
If the SEC concludes that we or our representatives have
violated the securities laws, it has available a large range of
civil and criminal remedies. Such remedies include the
suspension of trading in the common stock, the levying of
substantial fines, and the exclusion of our current officers and
directors from participating in a public company. In addition,
we are subject to certain other pending or threatened legal
claims. The adverse resolution of the SEC investigation or any
pending litigation affecting us would have a material adverse
effect on our operations and proposed business.
Our Projects May Never Begin Producing Valuable Hydrocarbons
Other than the production of an average of approximately
1,000 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.
We are Dependent Upon Certain Officers, Key Employees, and
Consultants
We are dependent on the services of Mr. Karl Arleth, the
President of EuroGas, Inc. We are also dependent on certain key
employees, including Andrew J. Andraczke in connection with our
business activities. Mr. Andraczke has been instrumental in
establishing our operations in Poland. The loss of one or more
of these individuals could materially and adversely impact our
operations. We have not entered into employment agreements with
any of these individuals other than Mr. Arleth and do not
maintain key-man life insurance on any EuroGas officers or
employees.
We Are Thinly Staffed
We have numerous projects throughout the world, which we
attempt to direct and manage with only a few employees. In
addition to our president and chief financial officer (expected
to commence employment on July 1, 2000), we have 9 full-time
equivalent employees, 3 significant consultants and a contract
with a geo-engineering firm. Unless and until additional
employees are hired, our attempt to manage our numerous projects
and obligations with such a limited staff could have serious
adverse consequences, including without limitation, a possible
failure to meet a material contractual, court or SEC deadline or
a possible failure to consummate investment or acquisition
opportunities.
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Subsequent Evaluation May Reveal That Our Unproved Properties Are
Not Valuable, and We May Need to Record an Impairment of the
Value of Such 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. On March 31, 2000, we had capitalized costs related to
the acquisition of oil and gas properties not subject to
amortization in the amount of approximately $26,865,731. Should
future events, such as the drilling of dry holes, evidence that
an impairment of recorded value has taken place, we will be
obligated to proportionate reduce the recorded value of the
respective asset on our balance sheet.
Severe Weather Will Interrupt, and May Adversely Affect, Our
Activities In Various Parts of the World
Severe weather conditions frequently interrupt much of our
exploratory and testing work. Heavy precipitation sometimes makes
travel to exploration sites or drilling locations difficult or
impossible. Extremely cold temperatures may delay or interrupt
drilling, well servicing, and production (if commenced, of which
we can give no assurance). The temperatures in all of the
regions in which we have exploratory or other operations are
extremely cold, and 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
The Price Of The Various Hydrocarbons We Produce or May Produce
Are Volatile and Unstable
The prices of oil, natural gas, methane gas and other fuels
have been, and are likely to continue to be, volatile and subject
to wide fluctuations in response to numerous factors, including
the following:
. changes in the supply and demand for such fuels;
. political conditions in oil, natural gas, and other fuel-
producing and fuel-consuming areas;
. the extent of domestic production and importation of such
fuels and substitute fuels in relevant markets;
. weather conditions;
. the competitive position of each such fuel as a source of
energy as compared to other energy sources;
. the refining capacity of crude purchasers;
. the effect of governmental regulation on the production,
transportation, and sale of oil, natural gas, and other fuels.
Low prices, 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.
Our Operations Involve Numerous Hazards, and We Maintain No
Insurance Against Such Risks
Exploring for fuel, drilling wells, and producing fuel
involves numerous hazards, including the following:
. fire,
. explosions,
. blowouts,
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. pipe failures,
. casing collapses,
. unusual or unexpected formations and pressures, and
. environmental hazards such as spills, leaks, ruptures, and
discharges of toxic substances.
If any 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, due to
limitations in the insurance policies, or other factors. Any
uninsured loss may have a material adverse impact on our business
and operations.
The Oil and Gas Industry Is Highly Competitive, and We Are At a
Competitive Disadvantage
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.
Our Operations Are Subject to Numerous Environmental Laws,
Compliance With Which May be Extremely Costly
Our operations are subject to environmental laws and
regulations in the various countries in which they are conducted.
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 can provide no assurance that we will be able to comply
with applicable environmental laws and regulations or that those
laws, regulations or administrative policies or practices will
not be changed by the various governmental entities. The cost of
compliance with current laws and regulations or changes in
environmental laws and regulations could require significant
expenditures. Moreover, if we 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.
Other Risks Relating To The Common Stock
Most of Our Outstanding Shares Are Free Trading And, If Sold In
Large Quantities, May Adversely Affect the Market Price For Our
Common Stock
Most of the approximately 100,736,979 shares of the common
stock issued and outstanding as of March 31, 2000; (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 we are contractually obligated to
file. Although the resale of certain of these shares may be
subject to the volume limitations and other restrictions under
Rule 144, the possible resale of the remaining shares may have an
adverse effect on the market price for the common stock.
We Have A Substantial Number of Warrants, Options and Debentures
Outstanding
As of June 15, 2000, there are outstanding warrants and
options to purchase up to 28,892,858 shares of common stock at
exercise prices ranging from $0.35 to $11.79. This is in
addition to the estimated 9,000,000 shares of our common stock we
are obligated to issue to certain persons pursuant to litigation
settlements. The existence of such warrants and options may
hinder our future equity offerings, and the exercise of such
warrants and options may further dilute the interests of all our
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 our common
stock. Furthermore, the holders of warrants and options may
exercise them at a time when we would otherwise be able to obtain
additional equity capital on terms more favorable to us.
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We Have The Right To, and Expect to, Issue Additional Shares of
Common Stock Without Shareholder Approval
EuroGas, Inc. has authorized capital of 325,000,000 shares
of common stock, par value $0.001 per share, and 3,661,968 shares
of preferred stock, par value $0.001 per share. As of July 15,
2000, 104,786,979 shares of common stock and 2,392,228 shares of
preferred stock were issued and outstanding. In addition, there
are 28,892,858 shares of common stock reserved for issuance on
the exercise or conversion of outstanding warrants, options, and
similar rights to acquire common stock and 9,000,000 shares of
stock issuable to certain persons pursuant to litigation
settlement agreements. We have no means to control the timing of
the conversion of convertible securities. Our board of directors
has authority, without action or vote of our shareholders, to
issue all or part of the authorized but unissued shares. Any
such issuance will dilute the percentage ownership of our
shareholders and may dilute the book value of the common stock.
We Have Not Paid Any Dividends and Do Not Expect To Pay Dividends
In the Near Future
We have not paid, and do not plan to pay, dividends on our
common stock in the foreseeable future, even if we become
profitable. Earnings, if any, are expected to be used to advance
our activities and for general corporate purposes, rather than to
make distributions to shareholders.
Risks Related To Proposed Teton Transactions
The Proposed Merger With Teton May Not Be Consummated
We have entered into an Agreement and Plan of Merger with
Teton Petroleum Company, pursuant to which Teton is expected to
merge with and into one of our wholly-owned subsidiaries. Teton
is not obligated to consummate the proposed merger unless
numerous conditions precedent are satisfied, including, without
limitation, the following:
. neither Teton nor EuroGas having terminated the Teton Master
Agreement or the Teton Merger Agreement by the end of the due
diligence period ending approximately September 1, 2000;
. the proposed merger being approved by the shareholders of
Teton and EuroGas;
. neither Teton nor EuroGas having terminated the Teton Merger
Agreement or Teton Master Agreement as a result of a breach by
the other party;
. the holders of no more than 10% of the outstanding shares of
EuroGas common stock or Teton common stock not having exercised
appraisal rights under governing corporate law, if available; and
. The absence of a material adverse change in our business,
operations, properties or assets.
For the reasons set forth above, and other possible reasons
(including the existence of a substantial default judgment
against EuroGas), the proposed merger of Teton into our
subsidiary may not be consummated. In the event the merger is
not consummated, we will not realize any anticipated benefits of
the merger, particularly the acquisition of all of Teton's rights
in the Eguryakhskiy license area.
Issuance of Shares in the Merger Will Create Substantial Dilution
Each of the outstanding shares of Teton common stock will be
converted into the right to receive one share of EuroGas common
stock, and each outstanding option, warrant or other right to
purchase a share of Teton common stock shall become the right to
purchase one share of EuroGas common stock (each subject to
adjustment if the number of outstanding shares of EuroGas common
stock exceeds 136,000,000 at any time within 180 days of
closing). As of July 15, 2000 we believe that Teton has
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outstanding 14,981,744 shares of common stock and 2,599,249
warrants, options and other rights to purchase Teton common
stock. In addition, it is anticipated that Teton will issue
approximately 500,000 shares of its common stock prior to
consummation of the merger. The issuance of those numbers of
shares of our common stock in connection with the merger may
substantially dilute the interest of our shareholders.
Properties Obtained As a Result of the Merger May Prove to Have
No Value
Our primary motivation in entering into the Teton Master
Agreement and Teton Merger Agreement is to obtain all or part of
the rights presently held by Goltech in the Eguryakhskiy license
area. Even if the proposed Teton merger and transactions
contemplated by the Teton Master Agreement are consummated, the
amount of extractable oil in the Eguryakhskiy license area may
be less than reserve estimates, and/or extracting or transporting
such oil may be economically or logistically impracticable. Even
if the Teton merger and Goltech purchase transaction are
consummated, we can provide no assurance that our interest in the
Eguryakhskiy license area will generate revenues in excess of
costs, or otherwise prove valuable to us.
ITEM 3. Legal Proceedings
On March 16, 2000, the United States District Court,
District of Utah, Central Division entered a default judgment
against EuroGas, and in favor of Finance & Credit Development
Corporation, Ltd., in the amount of $19,773,113, in a case styled
Finance & Credit Development Corporation Ltd., an Ireland
Corporation vs. EuroGas, Inc., a Utah corporation, Case No.
2:00VC-1024K. On or about June 16, 2000, we entered into a
settlement agreement with FCDC in satisfaction of its default
judgment. In consideration for FCDC's stipulation to vacate its
default judgment, we agreed, among other things, to issue to FCDC
3,700,000 shares of common stock, to grant FCDC an option
exercisable for the 30-day period following June 30, 2001 to
purchase an additional 3,000,000 shares of common stock at an
exercise price of $.65 and to pay to FCDC in cash or shares of
common stock the difference between $3.00 per share and the
market value of the shares of common stock received upon exercise
of the option. We are in the process of implementing the
memorandum of understanding.
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 our acquisition of GlobeGas. 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, we 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. We 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 we 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 we paid inadequate consideration for
our 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.)
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We believe that the litigation is without merit based on our
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 we 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 October 1999, the Trustee filed a Motion
for Leave to Amend and Supplement Pleadings and Join Additional
Parties in this action and in adversary proceeding 97-4155
(described below) in which he is seeking to add new parties and
additional causes of action including claims for damages based on
fraud, conversion, breach of fiduciary duties, concealment and
perjury. In January 2000, that motion was approved by the
bankruptcy court.
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. We
dispute the allegations and have 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, we have
engaged in settlement discussions in an attempt to reach a
negotiated resolution of the dispute.
On August 21, 1997, KUKUI asserted a claim against us 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 our 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. This
action has been settlement under a settlement agreement described
in the following paragraph.
In early December 1999, we signed a settlement agreement
with KUKUI, the Bishop Estate and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires us
to pay $900,000 over the 12 months beginning in January 2000 and
to issue 100,000 shares of registered common stock to the Bishop
Estate by June 30, 2000. Recently, the Trustee declared that
certain conditions precedent set forth in the settlement
agreement have not been met, and the Trustee does not intend to
seek bankruptcy court approval of the agreement. We are now
evaluating what effect this has on the agreement. If the
settlement agreement does not resolve the foregoing litigation,
we intend to vigorously defend the litigation. Pursuant to the
settlement, we have made monthly payments to KUKUI and have
executed all pleadings required to be submitted to the United
States District Court, District of Utah.
In July 1999, an action was commenced by Randy Crawford
styled "Randy Crawford, PhD. P.E., Plaintiff, v. EuroGas, Inc.,
Danube International Petroleum company, Ltd., Danube Acquisition
Corp., and Martin Schuepback, Defendant," in the State District
Court, Dallas, Texas, Cause # DV 9805298. In this litigation,
Crawford asserted that the Defendants breached a service
agreement under which he was employed to provide consulting and
engineering services and that he was owed $159,500 and the right
to purchase 284,000 shares of common stock at the price of $1.50.
EuroGas recently settled this action with pursuant to an
agreement requiring (i) Crawford to dismiss his claims against
EuroGas, (ii) Schuepback to pay $300,000 to EuroGas, and (iii)
EuroGas to issue 250,000 shares of restricted common stock to
Schuepback
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 asserted that we breached an agreement by
failing to seek registration of certain restricted and
unregistered shares issued to Plaintiffs in connection with our
acquisition of its interest in Beaver River Resources, Ltd. The
action sought rescission of the agreement, or in the alternative,
damages, and included claims for costs, attorney's fees and
interest. We filed an answer denying the allegations contained
in the lawsuit. We reached a settlement in principle, and
Eurogas anticipates signing the settlement agreement in the near
future.
28
<PAGE>
On or about November 1, 1999, a settlement was reached with
Stephen Jeu and Susanna Calvo resolving their claims in a suit
filed in the District Court, Harris County, Texas, 55th Judicial
District. We have not fully performed the terms of the settlement
agreement and are seeking to amend the settlement. If an
amendment is not obtained, an Agreed Judgment for $570,000 may be
presented by the plaintiffs for entry by the district court.
For the 1992 year, the Kingdom of the Netherlands assessed a
tax against GlobeGas, one of our subsidiaries, in the amount of
approximately $911,000 even though it had significant operating
losses. The amount fluctuates on our financial statements due to
adjustments in exchange ratios. At December 31, 1999, the income
tax liability recorded in our financial statements was $692,431.
We have appealed the assessment and proposed a settlement that
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 our financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
28
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market for Common Stock
Our Common Stock is quoted on the OTC Bulletin Board market
maintained by the National Association of Securities Dealers
under the symbol "EUGS" and is traded under the symbol "EUGS.F"
on the Frankfurt Stock Exchange. As of July 15, 2000, there were
104,786,979 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.
High Bid Low Bid
-------- -------
Year Ended December 31, 1998
Quarter ended March 31, 1998 $6.8125 $3.9375
Quarter ended June 30, 1998 5.75 3.625
Quarter ended September 30, 1998 4.97 2.0625
Quarter ended December 31, 1998 2.25 1.1875
Year Ended December 31, 1999
Quarter ended March 31, 1999 $2.50 $1.0312
Quarter ended June 30, 1999 1.0938 0.5469
Quarter ended September 30, 1999 0.9375 0.5469
Quarter ended December 31, 1999 0.7969 0.4531
Year Ending December 31, 2000
Quarter ended March 31, 2000 $1.875 $0.4219
Quarter ended June 30, 2000 1.09 0.75
The liquidity of our Common Stock may be limited, and the
reported price quotes may not be indicative of prices that could
be obtained in actual transactions. On July 31, 2000, the high
and low bids for our Common Stock on the OTC Bulletin Board were
$.7031 and $.6562 respectively.
Dividends
No dividends have been paid on our Common Stock, and we do
not have retained earnings from which to pay dividends. We have
accrued cumulative preferred dividends of $1,442,345, $2,861,301
and $423,530 in 1999, 1998 and 1997, respectively. Of this
amount, $39,502 was paid in 1999 and $165,008 was paid in 1998 by
the issuance of shares of our Common Stock in connection with the
conversion of a portion of the preferred stock and $1,261,875 was
recognized as dividends related beneficial conversion feature
granted in connection with preferred stock. All cumulative
dividends with respect to our preferred stock would be required
to be paid prior to our declaring or paying any dividend on our
Common Stock. Even if we were able to generate the necessary
earnings, it is not anticipated that dividends will be paid in
the foreseeable future, except to the extent required by the
terms of the cumulative preferred stock currently issued and
outstanding.
29
<PAGE>
Recent Sales of Unregistered Securities
On November 4, 1999, we completed a private placement
of 1,800 shares of Series C Preferred Stock to an accredited
investor, resulting in net proceeds 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: (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-K 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. During the first quarter
of 2000, all such shares of Series C Preferred Stock were
converted in exchange for 5,329,713 shares of Common Stock.
During 1999, we completed two private placements of
1998 Series B Convertible Preferred Stock to an existing
shareholder of the Company. We sold an aggregate of 6,500 shares
of Series B Convertible Preferred Stock, resulting in net
proceeds 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 our pre-existing relationship
with the purchaser and representations and warranties provided by
the purchaser. During 1999, such 6,500 shares of 1998 Series B
Convertible Preferred Stock (in addition to 1,500 shares of 1998
Series B Convertible Preferred Stock issued in prior periods)
were converted into 10,576,208 shares of Common Stock.
Item 6. Selected Financial Data
Certain Financial Data
The following statement of operations and balance sheet data
were derived from our consolidated financial statements. Our
consolidated financial statements have been audited by our
independent certified public accountants. The selected financial
data below should be read in conjunction with our consolidated
financial statements and the notes thereto included with this
filing and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth in this
Report.
<TABLE>
<CAPTION>
Statement of Operations Data
----------------------------
Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales $ 4,973,508 $ 879,404 $ 0 $ 0 $ 0
Loss from Operations $28,946,667 $11,024,180 $11,501,899 $ 6,262,591 $ 4,241,405
Loss per Common Share $ 0.36 $ 0.22 $ 0.22 $ 0.16 $ 0.13
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
------------------
At December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Assets $53,968,578 $65,334,387 $40,754,543 $15,902,139 $ 7,680,367
Long-Term Obligations $ 0 $ 1,840,224 $ 3,157,789 $10,631,547 $ 4,011,750
Cash Dividends per
Common Share $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
We are engaged primarily in the acquisition of rights to
explore for and exploit oil, natural gas, coal bed methane gas
and mineral mining. We have also extended our business into co-
generation (power and heat) projects. We have acquired interests
in a number of large exploration concessions, for oil, natural
gas and coal bed methane gas, and are in various stages of
identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop
production. We currently have several projects in various stages
of development, including a coal bed methane gas project in
Poland, a natural gas project and several additional undeveloped
concession areas in Slovakia, 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. We have
several joint venture projects in the Ukraine to explore for and
exploit oil, natural gas and coal bed methane gas with various
Ukrainian government and private companies. We have 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.
We have also acquired holdings in several oil and natural
gas projects in Canada. One acquisition has given us a majority
interest in a full-service oil and gas producing company.
Separately, we are currently in negotiations to sell our interest
in a Canadian joint venture with a major oil and gas company
formed to reclaim a Canadian natural gas field. In addition, as
further described in "Items 1 & 2. Business and
Properties-Certain Developments Since December 31, 1999," we have
entered into agreements to fund the production of a pipeline for,
and then acquire through merger, the Teton Petroleum Company,
which has a 70.59% interest in a Western Siberian Basin oil
field.
Our principal assets consist both of proven and developed
properties, as well as unproven and undeveloped properties. All
costs incidental to the acquisition, exploration, and development
of such properties are capitalized, including costs of drilling
and equipping wells and directly-related overhead costs, which
include the costs of equipment we own. Since we have limited
proven reserves and established production, most of our holdings
have not been amortized. In the event that we are ultimately
unable to establish production or sufficient reserves on some of
these properties to justify the carrying costs, the value of the
assets will need to be written down and the related costs charged
to operations, resulting in additional losses. We periodically
evaluate our properties for impairment and if a property is
determined to be impaired, the carrying value of the property is
reduced to its net realizable amount.
Recent Developments
Funding Activities. On November 4, 1999, we sold 1,800
shares of Series C Preferred Stock, resulting in net proceeds of
approximately $1,651,500. At December 31, 1999, we had
approximately $1 million in cash and cash equivalents and $21.5
million in negative working capital.
31
<PAGE>
As further described in "Items 1 & 2 Business and
Properties-Certain Developments Since December 31, 1999," on or
about January 12, 2000, we issued four convertible debentures in
the aggregate face amount of $3,000,000 to several individual
investors in exchange for an aggregate of $1,591,336 in cash,
conversion of $422,288 in outstanding EuroGas indebtedness, and
payments made by investors to creditors of EuroGas in the amount
of $986,376. As of March 31, 2000, the holders of all four
convertible debentures exercised their rights to convert the
convertible debentures into our Common Stock. Upon such
conversion, we issued 8,571,429 shares of our Common Stock. We
are obligated to issue warrants to purchase 17,142,858 shares of
our Common Stock at an exercise price of $0.35 per share.
Capital Expenditures. Effective October 1998, we completed
the acquisition of approximately 51% of the shares of capital
stock of Big Horn Resources Ltd., of Calgary, Alberta Canada
("Big Horn"). Big Horn is a full-service producer of oil and
natural gas, producing the equivalent of approximately 1,000
barrels of oil a day. At December 31, 1999, Big Horn had
estimated proven reserves of approximately 806,400 barrels of oil
and 7,772,800 mcf of natural gas, and its estimated net future
discounted cash flows were approximately $12.4 million.
Outlook
In the past, we have focused our resources on pre-
exploration or early-exploration stage natural gas, coal bed
methane gas, and other hydrocarbon projects with little short-
term revenue potential. We believe that our investment in 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 our holdings, the focus of
our 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 we are actively
seeking investments of that type.
32
<PAGE>
Results of Operations-1999, 1998, and 1997 Fiscal Years
The following table sets forth consolidated income statement
data and other selected operating data for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Oil and Gas Sales $ 4,973,508 $ 879,404 $ ---
Oil and gas production 1,330,526 305,009 ---
Impairment of mineral
interests and equipment 7,217,426 3,512,792 1,972,612
Depreciation, depletion
and amortization 1,810,176 293,955 25,637
Settlement costs 12,527,000 --- ---
General and administrative 8,485,939 7,804,401 6,716,365
------------ ------------ ------------
Total Costs and Operating
Expenses 31,371,067 11,916,157 8,714,614
------------ ------------ ------------
Other Income (Expenses)
Interest Income 179,538 593,570 517,845
Other Income 103,878 152,776 43,123
Interest expense (567,195) (465,371) (3,680,090)
Loss on sale and impairment
of securities and equipment (1,682,045) --- ---
Foreign exchange net gains
(losses) 170,315 (130,419) 331,837
Minority interest in income
subsidiary (753,599) (137,983) ---
------------ ------------ ------------
Total Other Income (Expense) (2,549,108) 12,573 (2,787,285)
------------ ------------ ------------
Net Loss $(28,946,667) $(11,024,180) $(11,501,899)
============ ============ ============
Basic and Diluted Loss
Per Common Share $ (0.36) $ (0.22) $ (0.22)
============ ============ ============
Weighted Average Number of
Common Shares Used in Per
Share Calculation 83,368,053 64,129,062 54,705,726
============ ============ ===========
</TABLE>
Revenues. Prior to 1998, we had not generated any revenues
from oil and gas sales. As a result of our acquisition of the
controlling interest in Big Horn, our results of operations for
1999 and 1998 reflect oil and gas sales of approximately
$4,973,508 and $879,404. In 1997, the only material revenues we
received 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, depletion and
amortization, settlement costs, cost of mineral interests and
equipment and impairment of mineral interests and equipment. Oil
and gas production expenses were $1,330,526 in 1999, $305,009 in
1998 and $0 in 1997. All of our oil and gas production expenses
are from our majority owned subsidiary, Big Horn. The increase
in oil and gas production expenses from 1997 through 1999
reflects the acquisition of our interest in Big Horn effective
October 1998; accordingly, we recognized none of Big Horn's
production expenses for 1997, only a fraction for 1998, and our
full 51% of such expenses for 1999.
General and administrative expenses were $8,485,939 for
1999, compared to $7,804,401 for 1998, an increase of more than
8.7%. General and administrative expenses for 1998 reflected an
increase of 16% from 1997 general and administrative expenses of
$6,716,365. The principal factors that contributed to the
increase from 1998 to 1999 were legal expenses incurred in
connection with sales of registered and unregistered securities,
ongoing securities compliance, litigation issues, additional
consulting fees, reduction of a number of staff members and
closing of several offices. The increase from 1997 to 1998 was
due primarily to payment of legal expenses incurred in connection
with sales of registered and unregistered securities, ongoing
securities compliance, litigation issues, hiring of new staff
members, opening new offices and the engagement of additional
consultants. Depreciation, depletion and amortization expenses
were $1,810,176 for 1999 compared to $293,955 for 1998. During
1999, we significantly increased the number of properties
amortized as compared to 1998.
34
<PAGE>
Impairment of mineral interests and expenses were $7,217,426
in 1999, $3,512,792 in 1998, and $1,972,612 in 1997. The
principal factor that contributed to the increase in impairment
expenses from 1998 to 1999 was the recognition of a $7,217,426
impairment against the Pol-Tex concession as of December 31,
1999, based upon our reassessment of estimated future net cash
flows. Settlement costs for financial statement purposes
increased from none in 1997 and 1998 to $12,527,000 in 1999. The
primary cause of this increase in settlement costs was the
issuance of a default judgment against the Company on March 16,
2000 in a case styled Finance & Credit Development Corporation
Ltd., an Ireland Corporation vs. EuroGas, Inc., a Utah
corporation, Case No. 2:00VC-1024K. As discussed in "Item 3.
Litigation," we have entered into a memorandum of understanding
in an attempt to settle the suit and default judgment and have
recorded our obligations under such settlement memorandum as an
$11,527,000 current liability.
Income Taxes. Historically, we have not been required to
pay income taxes, due to our absence of net profits. For future
years, we anticipate being able to utilize a substantial portion
of our accumulated deficit, which was approximately $76.5 million
as of December 31, 1999, to offset profits, if and when achieved,
resulting in a reduction in income taxes payable.
Net Loss. We incurred net losses of approximately $28.9
million, $11.0 million and $11.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. These losses
were due in part to the absence of revenues, combined with
continued expansion of our activities, primarily as a result of
acquisition and the growth of our administrative expenses. In
addition, a substantial portion of the recognized net losses in
1999 are the result of $7,217,426 in impairment of mineral
interests recognized against the Pol-Tex Concession and the
default judgment entered against us on March 16, 2000. We
recognized approximately $5 million of revenue in 1999 as a
result of our majority interest in Big Horn.
Due to the highly inflationary economies of the Eastern
European countries in which we operate, we are subject to extreme
fluctuations in currency exchange rates that can result in the
recognition of significant gains or losses during any period.
Approximately $170,315, ($130,419), and $331,837 in gains
(losses) were recognized as a result of currency transactions in
the three years ended December 31, 1999, 1998, and 1997,
respectively. We had a cumulative foreign currency translation
adjustment of ($2,797,088) at December 31, 1999. We do not
currently employ any hedging techniques to protect against the
risk of currency fluctuations.
Capital and Liquidity
We had an accumulated deficit of $76,471,799 at December 31,
1999, substantially all of which has been funded out of proceeds
received from the issuance of stock and the incurrence of
payables. At December 31, 1999, we had total current assets of
approximately $4.9 million and total current liabilities of
approximately $26.4 million (which number includes our obligation
with respect to the default judgment entered against us on March
16, 2000 resulting in negative working capital of approximately
$21.5 million. As of December 31, 1999, our balance sheet
reflected approximately $26.9 million in mineral interests in
properties not subject to amortization, net of valuation
allowance. These properties are held under licenses or
concessions that contain specific drilling or other exploration
commitments and that expire within one to three years, unless the
concession or license authority grants an extension or a new
concession license, of which there can be no assurance. If we
are unable to establish production or resources on these
properties, are unable to obtain any necessary future licenses or
extensions, or are unable to meet our financial commitments with
respect to these properties, we could be forced to write off the
carrying value of the applicable property.
Throughout our existence, we have relied on cash from
financing activities to provide the funds required for
acquisitions and operating activities. Our financing activities
provided net cash of approximately $6.5 million and $12 million
during the years ended December 31, 1999 and 1998, respectively.
Such net cash has been used principally to fund net losses of
approximately $28.9 million and $11 million during the years
ended December 31, 1999 and December 31, 1998, respectively.
During the years ended December 31, 1999 and 1998, our operating
activities used net cash of approximately $3.8 million and $8.3
million, respectively. A portion of our cash was used in
acquiring mineral interests, property and equipment, either
directly or indirectly through the acquisition of subsidiaries,
34
<PAGE>
with approximately $8.9 million and $13.6 million used in
investing activities for the years ended December 31, 1999 and
1998, respectively, of which approximately $7.0 million and $9.3
million, respectively, was used in acquiring mineral interests.
While we had cash of approximately $1 million at December
31, 1999, we have substantial short-term and long-term financial
commitments with respect to exploration and drilling obligations
related to our interests in mineral properties, potential
litigation liabilities, and our commitments to Teton Petroleum
Company under the Teton Master Agreement. Excluding potential
litigation costs and liabilities, we estimate our financial
commitments for the first nine months of 2000 to be approximately
$7 million. Many of our projects are long-term and will require
the expenditure of substantial amounts over a number of years
before the establishment, if ever, of production and ongoing
revenues. As noted above, we have relied principally on cash
provided from equity and debt transactions to meet our cash
requirements. We do not have sufficient cash to meet our short-
term or long-term needs and we will require additional cash,
either from financing transactions or operating activities, to
meet our immediate and long-term obligations. There can be no
assurance that we will be able to obtain additional financing,
either in the form of debt or equity, or that, if such financing
is obtained, it will be available to us on reasonable terms. If
we are able to obtain additional financing or structure strategic
relationships in order to fund existing or future projects,
existing shareholders will likely experience further dilution of
their percentage ownership of the Company.
If we are unable to establish production or reserves
sufficient to justify the carrying value of our assets or to
obtain the necessary funding to meet our short and long-term
obligations or to fund our exploration and development program,
all or a portion of the mineral interests in unproven properties
will be charged to operations, leading to significant additional
losses.
Inflation
The amounts presented in our consolidated financial
statements do not provide for the effect of inflation on our
operations or our financial position. Amounts shown for
property, plant and equipment and for costs and expenses reflect
historical costs and do not necessarily represent replacement
costs or charges to operations based on replacement costs. Our
operations, together with other sources, are intended to provide
funds to replace property, plant and equipment as necessary. Net
income would be lower than reported if the effects of inflation
were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation
adjustments. Due to inflationary problems in Eastern Europe
reflected in currency exchange losses, we have seen losses on the
values of our assets in those countries.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We conduct business in many foreign currencies. As a
result, we are subject to foreign currency exchange rate risk due
to effects that foreign exchange rate movements of those
currencies have on our costs and on the cash flows that we
receive from foreign operations. We believe that we currently
have no other material market risk exposure. To date, we have
addressed our foreign currency exchange rate risks principally by
maintaining our liquid assets in interest-bearing accounts in
U.S. Dollars, until payments in foreign currency are required,
but we do not reduce this risk by hedging. For further
discussion of our policies regarding derivative financial
instruments and foreign currency translation, see Note 1 to our
Consolidated Financial Statements contained in "Item 8.
Financial Statements and Supplementary Data."
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and its
subsidiaries, together with note and supplementary data related
thereto are set forth following the signature page of this Report.
35
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain Information Regarding Executive Officers, Directors and
Control Persons
Set forth below is the name and age of each individual who
was a director or executive officer of EuroGas as of December 31,
1999 or as of June 15, 2000, 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:
Positions With
Name Age the Company Term of Office
------------- ------- ---------------------- ----------------
Karl Arleth 50 President and Director April 1999 -
Present
Dr. Gregory P. Fontana 39 Director January 1996 -
Present
Andrew Andraczke 57 Director March 2000 -
Present
Hank Blankenstein 57 Vice-President, Treasurer December 1995 -
and Director March 2000
Dr. Hans Fischer 53 Director January 1996 -
January 2000
Rudolph Heinz 58 Director June 1999 --
April 2000
Biographical Information
The following paragraphs set forth brief biographical
information for each of the aforementioned directors and
executive officers:
Karl Arleth. Mr. Arleth commenced serving as the President
and a director of EuroGas in April 1999. Prior to joining
EuroGas, Mr. Arleth served as a Director of Azerbaijan
International Operating Company (AIOC) 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. From
January 1998 until January 1999, Mr. Arleth was also President of
Amoco Caspian Sea 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 our controlling interest
acquisition in Big Horn, Mr. Arleth has served as a director of
Big Horn since July 1999. Mr. Arleth serves as outside director
for First Capitol Petroleum, LLC based in Fredericksberg, Texas.
Dr. Gregory P. Fontana. Dr. 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.
37
<PAGE>
Andrew K. Andraczke. Mr. Andraczke was appointed a director
of the Company in March 2000. In addition, Mr. Andraczke has
been Vice President, Secretary, and a member of the management
committee of Pol-Tex since 1992, and is responsible for business
development and coordination of administrative, legal, and
political aspects of the Pol-Tex venture. Mr. Andraczke also
directs computer operations and system support for the venture's
exploration and production activities. Mr. Andraczke holds
B.Sc., M.Sc., and Ph.D degrees in computer science and
applications from the Computer Science Institute of Polytechnical
University in Warsaw where he also was an Associate Professor.
He served as the General Manager of the Computing Center of the
Center for Geological Research in the Central Office of Geology
(Ministry of Geology) from 1972 to 1976, where he developed and
implemented Poland's first general database of geological and
mineral resources of Poland. He also implemented computer
mapping systems, oil and gas reservoir simulations, and
production control for mining operations. From 1976 to 1982, he
worked for several oil and gas and mining firms, including OTC
Oklahoma Production in Tulsa, Oklahoma, Kansas Oil Consolidated
in Tulsa, Oklahoma, John W. Mecom Company in Houston, Texas,
InteResources Group, Inc. in Houston, Texas, and British Sulphur
Corporation in London, U.K., performing reservoir modeling of
secondary and tertiary oil reservoirs, inorganic polymer floods,
and underground coal gasification projects. During this time, he
also developed data acquisition and reserve balance systems for
mines in the U.S., Mexico, and Egypt. Mr. Andraczke joined
Tenneco Oil Exploration and Production Company in Houston in 1982
and served as an internal consultant and management advisor on
computer applications and emerging technologies until 1987.
Hank Blankenstein. Prior to his resignation from all offices
in March 2000, Mr. Blankenstein was Vice President, Treasurer and
a director of EuroGas. He had served as a director since
December 1995 and as Vice President and Treasurer since 1996.
Mr. Blankenstein continues to provide limited consulting services
to EuroGas. 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, 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, and was 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.
Blankenstein has served as a director of Big Horn since July
1999.
Dr. Hans Fischer. From January 1996 to March 2000, Mr.
Fisher served as a director of EuroGas. 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 the University
of Muenster.
Rudoph Heinz. Between June 14, 1999 and March 2000, Mr.
Heinz served as a director of EuroGas. 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.
38
<PAGE>
Family Relationships
Dr. Reinhard Rauball, the former Chairman of the Board of
Directors, and Wolfgang Rauball, an independent consultant to
EuroGas, are brothers. Wolfgang Rauball has been instrumental in
substantially all of our acquisitions and joint ventures during
the past four years. From time to time, the Rauballs,
principally Wolfgang Rauball, have also arranged for equity and
debt financing for us through parties with whom they have
previous business and personal relationships and have made loans
to us. Dr. Reinhard Rauball resigned from all of his positions
with EuroGas on February 18, 1999.
Compliance With Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our officers,
directors and certain shareholders to file reports concerning
their ownership of our Common Stock with the SEC and to furnish
to us copies of such reports. Based solely upon our review of
the reports required by Section 16 and amendments thereto
furnished to us, we believe that all reports required to be filed
pursuant to Section 16(a) of the Exchange Act were filed with the
SEC on a timely basis.
Item 11. Executive Compensation
The compensation of our chief executive officer during 1999
and the other executive officers of EuroGas whose total cash
compensation for the 1999 fiscal year exceeded $100,000 (the
"Named Officers") is shown on the following pages in three tables
and discussed in a compensation report of the Board of Directors.
Summary Compensation Table
The following table sets forth, for our three most recent
fiscal years, the compensation paid to the Named Officers.
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------
Annual Compensation Awards Payouts
------------------------------------- ----------------- -------
Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Awards SARs Payouts Compensation
Position Year ($) ($) ($) (#) ($) ($) ($)
------------- ---- ---------- ----- ------------ ------ --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Hinterthur(1) 1999 $120,000 Nil Nil Nil Nil Nil Nil
President and 1998 200,003 Nil Nil Nil Nil Nil Nil
Director 1997 294,100 Nil Nil Nil Nil Nil Nil
Karl Arleth(2) 1999 $266,667 Nil 81,465(4) Nil 1,000,000 Nil Nil
President, CEO 1998 Nil Nil Nil Nil Nil Nil Nil
and Director 1997 Nil Nil Nil Nil Nil Nil
Hank 1999 $228,000 Nil Nil Nil Nil Nil Nil
Blankenstein,(3) 1998 Nil Nil Nil Nil Nil Nil Nil
Vice President and 1997 Nil Nil Nil Nil Nil Nil Nil
Treasurer
</TABLE>
(1) Paul Hinterthur died in May 1999.
(2) Mr. Arleth commenced serving as the President and a
director of EuroGas on April 20, 1999.
(3) Mr. Blankenstein resigned as an officer and director of
EuroGas in March 2000, but continues to provide services to us as
an independent consultant.
(4) Represents amounts to which Mr. Arleth is entitled to
receive as a housing and service allowance; such amounts were
accrued but not paid in 1999.
40
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth, for the 1999 fiscal year,
certain information regarding options grants to the Named
Officers.
<TABLE>
<CAPTION>
Potential
Realizable Value At
Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants For Option Term
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Grant(#) Fiscal Year ($/Sh) Date 5%($) 10%($)
----------- ----------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Karl Arleth(1) 1,000,000 74% $.95 05/20/2009 $597,440 $1,514,055
</TABLE>
(1) Mr. Arleth commenced serving as the President and a
director of EuroGas on April 20, 1999.
40
<PAGE>
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 our Common Stock held on December
31, 1999 and the aggregate value of such options held by the
Named Officers. The Named Officers did not exercise any options
to acquire shares of our Common Stock during 1999. As of
December 31, 1999, we had not granted any stock appreciation
rights to any of the Named Officers.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercisable Options In-the Money Options at
at December 31, 1999 December 31, 1999(1)
--------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Paul Hinterthur(2) 200,000 0 Nil --
Karl Arleth(3) 1,000,000 0 Nil --
Hank Blankenstein(4) 200,000 0 Nil --
</TABLE>
(1) Reflects the difference between the exercise price of the
the unexercised options and the market value of shares of
our Common Stock as of December 31, 1999. The last transaction
for our Common Stock on December Stock on December 31, 1999,
the last trading date of our fiscal year, was $.5156 per share.
(2) Paul Hinterthur died in May 1999.
(3) Mr. Arleth commenced serving as the President and a director
EuroGas on April 20, 1999.
(4) Mr. Blankenstein resigned as an officer and director of EuroGas
in March 2000, but continues to provide transitional administrative
services to us.
Executive Employment and Consulting Arrangements
On April 20, 1999, we entered into an employment agreement
with Karl Arleth, our President and Chief Executive Officer.
Such employment agreement expires on April 20, 2002, subject to
automatic renewal for an additional three-year term unless either
party provides notice of intent to terminate at least 60 days
prior to the expiration of the initial term. Under such
agreement, Mr. Arleth is entitled to (i) a base salary of
$400,000 per year, (ii) options to purchase 1,000,000 shares of
common stock (granted on April 20, 1999 at an exercise price of
$0.95 per share), (iii) a housing allowance of not less than
$1,750 per week, and (iv) a commodities and services allowance of
not less than $600 per week. We have the right to terminate the
agreement at any time for cause or upon the death or disability
of Mr. Arleth (subject to an obligation to continue paying Mr.
Arleth's salary for one year in the event of death). In
addition, Mr. Arleth has the right to terminate the agreement in
the event of breach by EuroGas, a significant change in duties
(i.e. a demotion), the failure of EuroGas to obtain the
assumption of the agreement by a successor corporation in a
change of control, in which case Mr. Arleth is entitled to one
year of base salary as severance. No other employee of EuroGas
is employed pursuant to a written agreement.
We have 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, we paid $200,000 in 1999, $600,000 in
1998, and $1,260,253 in 1997 to Wolfgang Rauball, the brother of
Reinhard Rauball, our former Chairman of the Board. We also paid
$320,000 in 1999, $240,000 in 1998, and $273,113 (including
payments in arrears related to services for previous years)
during 1997 to Andrew K. Andraczke, a key employee in Poland and
recently appointed director. If we continue to make significant
acquisitions, and as we develop revenues, we anticipate relying
more on the services of employees and amounts paid to consultants
will decrease.
Compensation of Directors
We compensate our outside directors for their services by
payment of a monthly fee of $5,000 and reimbursement of expenses
incurred in attending board meetings. We do not separately
compensate our board members who are also our employees for their
service on the board.
41
<PAGE>
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
As of December 31, 1999, the Compensation Committee included
Gregory Fontana, Ruldoph Heinz, and Hans Fischer, none of whom
served as executive officers. Mr. Heinz and Mr. Fischer have
subsequently resigned, and because governing law requires a
committee to have at least two members, the following
compensation report is being issued by the Board of Directors as
a whole. The Board of Directors includes Gregory Fontana, who is
not an employee of the Company, Karl Arleth, our President and
Chief Executive Officer, and Andrew Andraczke, an officer of a
key EuroGas subsidiary.
Compensation Committee Report
Notwithstanding anything to the contrary set forth in any of
the Company's previous filings under the Securities Act or the
Exchange Act that incorporates by reference, in whole or in part,
subsequent filings, including, without limitation, this Annual
Report on Form 10-K, the Compensation Committee Report and the
Performance Graph set forth below shall not be deemed to be
incorporated by reference in any such filings.
As required by rules promulgated by the SEC, this
Compensation Committee Report describes the overall compensation
goal and policies applicable to our executive officers, including
the basis for determining the compensation of executive officers
for the 1999 fiscal year.
General. Management compensation is overseen by the Board
of Directors (the "Board"). For the year ended December 31,
1998, the Board had not appointed an independent Compensation
Committee. In July 1999, the Board established a Compensation
Committee comprised of Dr. Gregory P. Fontana, Dr. Hans Fischer
and Rudolph Heinz, who also constituted the Compensation
Committee on December 31, 1999. However, Mr. Fischer and Mr.
Heinz have subsequently resigned, and the Compensation Committee
has been dissolved as a matter of law. Accordingly, the
following compensation report was prepared by Board members
serving as of March 31, 1999.
Compensation Objectives. In determining the amount of
compensation for our executive officers, the Board is guided by
several factors. Because we have very few employees,
compensation practices are flexible in response to the needs and
talents of the individual officer and are geared toward rewarding
contributions that enhance stockholder value. Historically, we
have compensated senior management based on the perceived
contribution to the development of our operations, consisting
principally of salaries believed to reflect their contributions.
In addition, because we have only recently begun to generate
revenues from operations and have attempted to preserve capital
for development of our business and operations, we have used
stock options as a form of compensation for executive officers.
The use of stock options is designed to align the interests of
the executive officers with the long-term interests of EuroGas
and to attract and retain talented employees who can enhance our
value. Although certain members of the Board are also executive
officers, none participates in the determination of his own
compensation.
Compensation Components. The compensation of our executive
officers consists of three components: base salary, bonuses and
long-term incentive awards in the form of stock options. The
Board establishes base salaries based primarily on its objective
judgment, taking into consideration both qualitative and
quantitative factors. Among the factors considered by the Board
are: (i) the qualifications and performance of each executive
officer; (ii) the performance of EuroGas as measured by such
factors as development activities and increased shareholder
value; (iii) salaries provided by other companies inside and
outside the industry that are of comparable size and at a similar
stage of development, to the extent known; and (iv) our capital
position and needs. The Board does not assign any specific
weight to these factors in determining salaries.
From time to time, we also compensate our executive officers
in the form of bonuses. Because we are presently in an early
stage of development and do not have a history of earnings per
share, net income, or other conventional data to use as a
benchmark for determining the amount or existence of bonus
awards, any bonuses granted by the Board in the near term will be
based upon its subjective evaluation of each individual's
contribution to EuroGas. In some cases, however, bonuses payable
to executive officers may be tied to specific criteria identified
at the time of engagement. For the years ended December 31,
1997, 1998 and 1999, the Board did not pay bonuses to any
executive officers. The Board's action was based on its
conclusion that, despite the superior personal performance of the
executive officers, no cash incentive bonuses should be awarded,
due to the Board's desire to preserve capital for future growth
and development.
42
<PAGE>
The third component of our compensation structure consists
of the grant of stock options to compensate executive officers
and other key employees. Having granted all options available
under the 1996 Stock Option and Award Plan, on November 20, 1999,
the Board determined to grant options outside of any option plan
(but on terms and conditions identical to those contained in our
1996 Stock Option and Award Plan), to certain officers, directors
and outside consultants. The purpose of such options is to give
each option recipient an interest in preserving and maximizing
shareholder value in the long term, to reward option recipients
for past performance and to give option recipients the incentive
to remain with EuroGas over an extended period. The right to
determine the amount of such grants was delegated to the
Compensation Committee based on its assessment of the proposed
recipients' current and expected future performance, level of
responsibilities, and the importance of his or her position with,
and contribution to, EuroGas. In the year ended December 31,
1999, pursuant to such delegation, the Compensation Committee
awarded (in addition to the 1,000,000 options granted to Mr.
Arleth pursuant to his employment agreement) a total of 950,000
options to purchase Common Stock at an exercise price of $.45 per
share. Of such options, 350,000 were granted to Andrew Andraczke
(key employee and director as of March 2000), and 250,000 were
granted to Greg Fontana (director).
Chief Executive Compensation. Based upon the Board's
subjective impression of the salaries of presidents or chief
executive officers of similarly situated companies (both inside
and outside of our industry), EuroGas' progress in developing its
interests, properties and operations and exploiting its assets
and the Board's subjective assessment of the potential and actual
contributions of Mr. Arleth, the Board approved an employment
agreement with Mr. Arleth in early 1999 pursuant to which he is
entitled to receive (i) a base salary of $400,000 per year, (ii)
options to purchase 1,000,000 shares of common stock (granted on
April 20, 1999 at an exercise price of $0.85 per share, (iii) a
housing allowance of not less than $1,750 per week, and (iv) a
commodities and services allowance of not less than $600 per
week. Consistent with the Board's desire to preserve capital for
future growth and development, the Board elected not to pay a
bonus to Mr. Arleth or any other executive officer for the 1999
fiscal year.
Use of Consultants. We anticipate continuing 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, we anticipate that,
if able to establish ongoing revenues from production, we will
retain management personnel as employees of EuroGas and
compensate them on a salary basis, based on comparable
compensation packages offered by employers within our general
industry and geographical area.
The foregoing report is submitted by the Compensation
Committee, which consists of all Board members.
Karl Arleth
Gregory Fontana
Andrew Andraczke
43
<PAGE>
Performance Graph
The following graph shows a comparison of cumulative
shareholder return for our 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, 1999, as
well as the cumulative total return for the NASDAQ Composite
Index and the Howard Weil, Bloomberg Oilfield Service and
Manufacturing Index. The Peer Group Index is a price-weighted
composite index comprised of the cumulative shareholder return
for forty-seven companies involved in oilfield services.
The performance graph assumes that $100 was invested at the
market close on 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.
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 --Total Return To Stockholders]
<TABLE>
<CAPTION>
Total Return Analysis
12/30/94 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EuroGas $ 100.00 $ 51.85 $ 120.37 $ 200.00 $ 46.30 $ 15.11
HW BBG Oilfield Svc. &
Manf'g $ 100.00 $ 146.32 $ 236.64 $ 359.99 $ 179.46 $ 260.02
Nasdaq Composite $ 100.00 $ 140.98 $ 173.46 $ 211.87 $ 297.02 $ 552.81
</TABLE>
(Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677.
Date from Bloomberg Financial Markets.)
The figures for EuroGas reflect a 24-to-1 reverse stock split of our
common shares effective 9/6/94.
44
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following beneficial ownership table sets forth
information regarding beneficial ownership of our Common Stock as
of April 15, 2000 by:
. each person or entity who is known by us to own beneficially
5% or more of the outstanding shares of our Common Stock;
. each of our directors;
. our present and former chief executive officer and former
Vice President and Treasurer (our only other executive officer
during 1999); and
. all of our executive officers and directors as a group.
Under relevant provisions of the Exchange Act, a person is
deemed to be a "beneficial owner" of a security if he or she has
or shares the power to vote or direct the voting of the security
or the power to dispose or direct the disposition of the
security. A person is also deemed to be a beneficial owner of
any securities of which that person has the right to acquire
beneficial ownership in 60 days. More than one person may be
deemed to be a beneficial owner of the same securities. The
percentage ownership of each stockholder is calculated based on
the total number of outstanding shares of our Common Stock as of
April 15, 2000, plus those shares of our Common Stock that the
stockholder has the right to acquire within 60 days.
Consequently, the denominator for calculating the percentage
ownership may be different for each stockholder.
The table is based upon information provided by our
directors and executive officers.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Ownership as of April 15, 2000(1)
-------------------------------------------------
Exercisable
Name and Address of Common Options & Total
Beneficial Owner Shares Warrants(2) Ownership Percent(3)
------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Principal Stockholders:
Wolfgang Rauball(4) 9,671,429 17,192,858 26,864,287 22.78%
Officers, Directors and
Controlling Persons:
Karl Arleth, President
and Director Nil 1,000,000 1,000,000 *
22 Upper Brook Street
Mayfair, London W1Y 1PD
Dr. Gregory P. Fontana, Nil 350,000 350,000 *
Director
2269 Worthing Lane
Los Angeles, California 90077
Andrew Andraczke, Director Nil 350,000 350,000 *
Warsaw:str. Lektykarska 18
01-687 Warszawa, Poland
Hank Blankenstein, Director, Nil 200,000 200,000 *
Vice President and Treasurer
until March 2000.
942 East 7145 South
Suite 101A
Midvale, Utah 84047
Hans Fisher, Director
until March 2000 Nil 100,000 100,000 *
9 Via Arribo Rancho Sta.
Margarita, California 92688
Rudolph Heinz, Director
until April, 2000, Nil 0 0 Nil
Niedenau 82
60352 Frankfurt/Main
Germany
All officers and directors Nil 2,000,000 2,000,000 1.9%
as a group (3 persons)
</TABLE>
* Represents less than 1% of the issued and outstanding
_________________________
(1) Unless otherwise indicated, to our best knowledge, all
stock is owned beneficially and of record by the listed
stockholder, and each stockholder has sole voting and
investment power with respect to our Common Stock
beneficially owned by such person.
(2) Represents options or warrants exercisable within 60
days of April 15, 2000, held by such individual or
entity.
(3) The percentage indicated represents the number of
shares of our Common Stock, warrants and options
exercisable within 60 days held by the indicated
stockholder divided by the sum of (a) the number of
shares subject to options exercisable by such
stockholder within 60 days and (b) 100,736,979, which
is the number of shares of our Common Stock issued and
outstanding as of April 15, 2000.
(4) Includes shares in which Mr. Rauball disclaims
beneficial ownership and which he temporarily holds as
a nominee for other persons.
46
<PAGE>
Item 13. Certain Relationships and Related Transactions
On or about January 12, 2000, we issued four convertible
debentures in the aggregate face amount of $3,000,000 in exchange
for an aggregate of $1,591,336 in cash, conversion of $422,288 in
outstanding EuroGas indebtedness, and payments made by investors on
behalf EuroGas to creditors of EuroGas in the amount of $986,376.
The debentures were issued to Wolfgang Rauball and certain affiliates
of Wolfgang Rauball, who directly or indirectly owns 22.78%
percent of our outstanding common stock as of April 15, 2000, and
serves as a consultant to us. The convertible debentures accrue
interest at the rate of prime plus two percent per annum.
Payment of the principal amount of the convertible debentures is
due on February 10, 2001, and accrued interest is payable
annually beginning on January 8, 2001. Each $1,000,000 in
principal amount of convertible debenture is convertible into (a)
shares of common stock at the rate of one share per $0.35
indebtedness (for a total of 2,857,143 shares per $1,000,000 of
convertible debenture), and (b) warrants to purchase one share of
our common stock at the rate of two warrants for each $0.35 in
indebtedness (for a total of 5,714,286 warrants per $1,000,000 of
convertible debenture). Each such warrant entitles the holder to
purchase one share of our common stock for an exercise price of
$0.35. As of April 15, 2000, Mr. Rauball and his affiliates had
converted all $3,000,000 in principal amount of convertible
debentures in exchange for 8,571,429 shares of our common stock
and 17,142,858 warrants to purchase common stock.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial
Statements of the Company and report of independent accountants
are included immediately following the signature page of this
Report.
A. Report of Hansen, Barnett & Maxwell,
independent certified public accountants, for
the years ended December 31, 1999, 1998 and
1997
B. Consolidated Balance Sheets at December 31,
1999 and 1998
C. Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997
D. Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1997,
1998 and 1999
E. Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997
F. Notes to Consolidated Financial Statements
47
<PAGE>
2. Exhibits.
Exhibit
Number Title of Document Location
2.1 Exchange Agreement between Northampton, 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 Report on Form 8-K
EuroGas, Inc., and Danube International dated July 12, 1996,
Petroleum Company, Inc., dated July 3, Exhibit No. 5*
1996, as amended
2.3 English translation of Transfer Agreement Report on Form 8-K
between EuroGas and OMV, Inc. for the dated June 11, 1997
Acquisition of OMV (Yakut) Exploration GmbH Exhibit No. 1*
dated June 11, 1997
2.4 Asset Exchange Agreement between EuroGas, Report on Form S-1
Inc., and Beaver River Resources, Ltd., dated July, 23, 1998
dated April 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, Privileges, Quarterly Report on
and Preferences of 1995 Series Form 10-QSB dated
Preferred Stock March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights, Privileges, Report on Form 8-K
and Preferences of 1996 Series Preferred dated July 12, 1996,
Stock Exhibit No. 1*
3.5 Designation of Rights, privileges, and Report on Form 8-K
Preferences 1997 Series A Convertible dated May 30, 1997
Preferred Stock Exhibit No. 1*
3.6 Designation of Rights, Privileges, and Report on Form S-1
Preferences of 1998 Series B Convertible Dated July 23, 1998
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, and Registration Statement
Preferences of 1999 Series C 6% on Form S-1, File No.
Convertible Preferred Stock No. 333-92009, filed
on December 2, 1999
48
<PAGE>
4.1 Subscription Agreement between EruoGas, Report on Form S-1
Inc., and Thomson Kernaghan & Co., Ltd., dated July 23, 1998
dated May 29, 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*
4.3 Registration Rights Agreement Between Report on Form S-1
EuroGas, Inc., and Thomson 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, Exhibit No. 4.06*
Ltd., 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*
4.9 Form of Convertible Debenture issued Filed herewith.
on January 12, 2000.
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*
49
<PAGE>
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*
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*
50
<PAGE>
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
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, Registration Statement
between Potomac Corporation and the on Form S-1, File No.
Company; Letter of Amendment dated 333-92009, filed on
September 30, 1999 December 2, 1999
10.26 Sublease dated November 2, 1999, between Registration Statement
Scotdean Limited and the Company on Form S-1, File No.
333-92009, filed on
December 2, 1999
51
<PAGE>
10.27 Securities Purchase Agreement dated Registration Statement
November 4, 1999, between the Company on Form S-1, File No.
and Arkledun Driver LLC 333-92009, filed on
December 2, 1999
10.28 Registration Rights Agreement dated Registration Statement
November 4, 1999, between the Company and on Form S-1, File No.
Arkledun Drive LLC 333-92009, filed on
December 2, 1999
10.29 Supplemental Agreement dated November 4, Registration Statement
1999, between the Company and Arkledun Drive on Form S-1, File No.
LLC 333-92009,filed on
December 2, 1999
10.30 Executive Employment Agreement dated Registration Statement
April 20, 1999 between the Company and Karl on Form S-1, File No.
Arleth 333-92009, filed on
December 2, 1999
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
23.1 Consent of Ryder Scott Company, Registration Statement
Petroleum Engineers on Form S-1 dated July
23, 1998*
24 Power of Attorney Included on the
Signature Page hereof.
27.1 Financial Data Schedule Filed herewith
--------------------------------
*Incorporated by reference
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December
31, 1999, we did not file any reports on Form 8-K.
(c) Exhibits
Exhibits to this Report are attached following Page F-1 hereof.
(d) Financial Statement Schedules
None.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Company has
caused this Amendment to be signed on its behalf by the
undersigned, hereunto duly authorized, on July 31, 2000.
EUROGAS, INC.
By /s/ Karl Arleth
------------------------------
Karl Arleth, President
(Principal Executive Officer)
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets--December 31, 1999
and 1998 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Supplemental Information Regarding Oil and Gas
Producing Activities F-27
F-1
<PAGE>
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 Shareholders
EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of
EuroGas, Inc., a Utah corporation, and Subsidiaries as of December 31,
1999 and 1998, 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, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
in the financial statements, the Company has suffered recurring
losses from operations and negative cash flows from operating
activities. At December 31, 1999, the Company has negative working
capital. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 16, 2000, except for Notes 2 and 17,
as to which the date is June 22, 2000.
F-2
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,047,141 $ 7,489,510
Investment in securities available-for-sale 317,084 1,088,488
Trade accounts receivable 907,269 1,107,508
Value added tax receivables 1,057,628 431,235
Receivable from joint venture partners 1,217,149 1,751,292
Other receivables 74,696 788,291
Other current assets 236,044 457,899
------------ ------------
Total Current Assets 4,857,011 13,114,223
------------ ------------
Property and Equipment - Full Cost Accounting
Oil and gas properties subject to amortization 21,553,571 18,064,186
Oil and gas properties not subject to
amortization 26,862,072 32,763,353
Other mineral interests 755,539 709,570
Other property and equipment 1,052,098 580,017
------------ ------------
Total Property and Equipment 50,223,280 52,117,126
Less: accumulated depletion depreciation
and amortization (2,060,386) (307,054)
------------ ------------
Net Property and Equipment 48,162,894 51,810,072
------------ ------------
Other Investments at Cost 358,857 --
Long-Term Notes Receivable 500,000 --
Receivable From Related Party -- 200,000
Other Assets 89,816 210,092
------------ ------------
Total Assets $ 53,968,578 $ 65,334,387
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,085,777 $ 4,060,125
Accrued liabilities 3,554,095 2,618,014
Accrued income taxes 708,931 870,836
Accrued settlement obligation 12,527,000 --
Notes payable - current portion 4,155,492 4,010,729
Notes payable to related parties 1,329,161 1,346,204
------------ ------------
Total Current Liabilities 26,360,456 12,905,908
------------ ------------
Long-Term Liabilities
Notes payable -- 1,226,816
Notes payable to related parties -- 613,408
------------ ------------
Total Long-Term Liabilities -- 1,840,224
------------ ------------
Minority Interest 3,824,903 2,865,376
Stockholders' Equity
Preferred stock, $.001 par value; 3,661,968
shares authorized; issued and outstanding:
1999 - 2,394,028 shares, 1998 - 2,393,728
shares; 1999 liquidation preference:
$2,561,291 2,001,949 1,733,027
Common stock, $.001 par value; 325,000,000
shares authorized; issued and outstanding:
1999 - 86,835,838 shares, 1998 - 76,254,630
shares 86,836 76,255
Additional paid-in capital 102,032,174 92,833,328
Accumulated deficit (76,471,799) (46,082,787)
Accumulated other comprehensive loss (3,865,941) (836,944)
------------ ------------
Total Stockholders' Equity 23,783,219 47,722,879
------------ ------------
Total Liabilities and Stockholders' Equity $ 53,968,578 $ 65,334,387
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Oil and Gas Sales $ 4,973,508 $ 879,404 $ --
------------ ------------ ------------
Costs and Operating Expenses
Oil and gas production 1,330,526 305,009 --
Impairment of mineral interests and equipment 7,217,426 3,512,792 1,972,612
Depreciation, depletion, and amortization 1,810,176 293,955 25,637
Settlement costs 12,527,000 -- --
General and administrative 8,485,939 7,804,401 6,716,365
------------ ------------ ------------
Total Costs and Operating Expenses 31,371,067 11,916,157 8,714,614
------------ ------------ ------------
Other Income (Expenses)
Interest income 179,538 593,570 517,845
Other income 103,878 152,776 43,123
Interest expense (567,195) (465,371) (3,680,090)
Loss on sale and impairment of securities
and equipment (1,682,045) -- --
Foreign exchange net gains (losses) 170,315 (130,419) 331,837
Minority interest in income of subsidiary (753,599) (137,983) --
------------ ------------ ------------
Total Other Income (Expense) (2,549,108) 12,573 (2,787,285)
------------ ------------ ------------
Net Loss (28,946,667) (11,024,180) (11,501,899)
Preferred Dividends 1,442,345 2,861,301 423,530
------------ ------------ ------------
Loss Applicable to Common Shares $(30,389,012) $(13,885,481) $(11,925,429)
============ ============ ============
Basic and Diluted Loss Per Common Share $ (0.36) $ (0.22) $ (0.22)
============ ============ ============
Weighted Average Number of Common
Shares Used In Per Share Calculation 83,368,053 64,129,062 54,705,726
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Other Stockholders'
------------------------- ------------------------ Paid-in Accumulated Compre- Equity
Shares Amount Shares Amount Capital Deficit hensive Loss (Deficit)
----------- ------------ ------------ ---------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31,
1996 3,641,968 $ 198,541 49,143,862 $ 49,144 $ 14,648,023 $(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 13,018,511 50,000 50 231,439 -- -- 13,250,000
Warrants 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) (73,716) 2,500,001 2,500 143,990 -- -- 72,774
Conversion of 1997
Series Preferred
shares and related
dividends (14,740) (12,792,857) 2,763,165 2,763 13,022,642 -- -- 232,548
Issuance to acquire
minority interest in
subsidiary -- -- 250,000 250 999,750 -- -- 1,000,000
----------- ------------ ------------ ---------- ------------ ----------- ---------- ------------
Balance - December
31, 1997 2,392,228 350,479 62,283,934 62,284 61,311,258 (32,197,306) (14,749) 29,511,966
------------
Net loss -- -- -- -- -- (11,024,180) -- (11,024,180)
Dividends on preferred
shares -- -- -- -- -- (2,861,301) -- (2,861,301)
Net change in unrealized
losses on securities -- -- -- -- -- -- (379,266) (379,266)
Translation adjustments -- -- -- -- -- -- (442,929) (442,929)
------------
Comprehensive loss (14,707,676)
------------
Issuance of 1998 Series
Preferred Shares for
cash, net of $1,275,005
offering costs 17,000 15,668,875 50,000 50 56,070 -- -- 15,724,995
Beneficial conversion
feature recognized on
1998 Series B Preferred
Shares -- -- -- -- 2,550,000 -- -- 2,550,000
Conversion of 1998 Series
Preferred shares and
related dividends (15,500) (14,286,327) 8,860,196 8,860 14,442,474 -- -- 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 $ 1,733,027 76,254,630 $ 76,255 $ 92,833,328 $(46,082,787) $ (836,944) $ 47,722,879
=========== ============ ============ ========== ============ =========== ========== ============
(Continued)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Other Stockholders'
------------------------- ---------------------- Paid-in Accumulated Compre- Equity
Shares Amount Shares Amount Capital Deficit hensive Loss (Deficit)
----------- ------------ ------------ -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December
31, 1998 2,393,728 $ 1,733,027 76,254,630 $ 76,255 $ 92,833,328 $(46,082,787) $ (836,944) $ 47,722,879
------------
Net loss -- -- -- -- -- (28,946,667) -- (28,946,667)
Dividends on preferred
shares -- -- -- -- -- (1,442,345) -- (1,442,345)
Net change in unrealized
losses on securities -- -- -- -- -- -- (2,360,980) (2,360,980)
Reclassification
adjustment for realized
losses on securities
included in net loss -- -- -- -- -- -- 1,671,393 1,671,393
Translation adjustments -- -- -- -- -- -- (2,339,410) (2,339,410)
Comprehensive loss (33,418,009)
------------
Issuance of Series B 1998
preferred stock for
proceeds of $6,500,000
less $487,500 in issuance
costs 6,500 6,012,500 -- -- -- -- -- 6,012,500
Beneficial conversion
feature of 1998 Series
preferred shares -- -- -- -- 901,875 -- -- 901,875
Conversion of Series B
preferred stock plus
accrued dividends of
49,729 shares, or
$39,501 (8,000) (7,395,048) 10,576,208 10,576 7,423,973 -- -- 39,501
Issuance of Series C
preferred stock for
proceeds of $1,800,000
less $148,530 in
issuance costs 1,800 1,651,470 -- -- -- -- -- 1,651,470
Beneficial conversion
feature of Series C
preferred shares -- -- -- -- 360,000 -- -- 360,000
Compensation related to
the grant of stock
options -- -- -- -- 487,553 -- -- 487,553
Issuance as payment
of interest -- -- 5,000 5 25,445 -- -- 25,450
----------- ------------ ------------ -------- ----------- ------------ ----------- -------------
Balance - December
31, 1999 2,394,028 $ 2,001,949 86,835,838 $ 86,836 $102,032,174 $(76,471,799) $(3,865,941) $ 23,783,219
=========== ============ ============ ======== ============ ============ =========== ============
</TABLE>
(1) Accumulated other comprehensive loss consisted of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Cumulative translation adjustments $(2,797,088) $ (457,678)
Unrealized loss on investments in
securities-available-for-sale (1,068,853) (379,266)
----------- -----------
Accumulated Other Comprehensive Loss $(3,865,941) $ (836,944)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(28,946,667) $(11,024,180) $(11,501,899)
Adjustments to reconcile net loss to cash
provided by operating activities:
Impairment of mineral interests and equipment 7,217,426 3,512,792 1,972,612
Accrued settlement obligations 12,527,000 -- --
Depreciation depletion and amortization 1,810,176 293,955 25,637
Amortization of discount on notes payable 39,074 -- --
Expenses paid by issuance of notes payable -- -- 1,321,295
Interest expense by issuance of common stock 25,450 -- --
Compensation paid by issuance of common stock -- 226,125 --
Compensation paid by reduction of note receivable 200,000 -- --
Minority interest in income of subsidiary 753,599 137,983 --
Compensation from stock options 487,553 -- --
Loss on sale of securities available for sale 1,671,393 -- --
Exchange (gain) loss (170,315) 130,419 (331,837)
Changes in assets and liabilities, net of
acquisitions:
Trade receivables (68,235) (72,121) --
Other receivables (238,945) 549,973 26,510
Prepaid expense (125,475) (337,723) --
Accounts payable 669,777 (751,640) 1,814,545
Accrued liabilities 346,193 (812,107) 3,271,805
Other -- (115,783) 156,451
------------ ------------ ------------
Net Cash Used in Operating Activities (3,801,996) (8,262,307) (3,244,881)
------------ ------------ ------------
Cash Flows From Investing Activities
Expenditure for other investments (358,857) -- --
Purchases of mineral interests, property
and equipment (7,004,275) (9,291,719) (5,391,568)
Proceeds from sale of interest in gas property
and equipment 207,509 -- 501,646
Acquisition of subsidiaries, net of cash acquired -- (2,159,363) (6,314,287)
Net change in deposits and long-term prepayments 408,391 (168,575) --
Investment in securities available-for-sale (1,656,434) (1,467,754) --
Proceeds from sale of securities available-for-sale 66,858 -- --
Payments for notes receivable (600,000) (500,000) --
------------ ------------ ------------
Net Cash Used In Investing Activities (8,936,808) (13,587,411) (11,204,209)
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable
to related parties -- -- 339,191
Principal payments on notes payable to
related parties (218,355) (999,439) (905,866)
Proceeds from issuance of notes payable 57,506 -- 1,135,729
Principal payments on notes payable (981,611) (3,192,109) (2,707,551)
Proceeds from issuance of common stock,
net of offering costs -- 150,000 20,175,000
Proceeds from issuance of preferred stock,
net of offering costs 7,663,970 15,724,995 13,250,000
Dividends paid on preferred stock -- (260,139) --
Proceeds from issuance of common stock by subsidiary -- 592,568 --
------------ ------------ ------------
Net Cash Provided By Financing Activities 6,521,510 12,015,876 31,286,503
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (225,075) 75,685 (232,351)
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents (6,442,369) (9,758,157) 16,605,062
Cash and Equivalents at Beginning of Period 7,489,510 17,247,667 642,605
------------ ------------ ------------
Cash and Equivalents at End of Period $ 1,047,141 $ 7,489,510 $ 17,247,667
============ ============ ============
(Continued)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 376,700 $ 485,157 $ 362,622
Supplemental Schedule of Noncash Investing and
Financing Activities
Common stock and stock options issued to
acquire property $ -- $ 14,102,462 $ --
Common stock issued upon conversion of
notes payable and accrued interest 25,450 -- 10,947,991
Common stock issued as payment of preferred dividends 39,502 165,008 305,322
Beneficial conversion feature granted in
connection with preferred stock 1,261,875 2,550,000 --
Common stock issued to acquire minority interest
in subsidiary -- -- 1,000,000
Assigned note receivable in satisfaction of
note payable 600,000 -- --
Cash paid in connection with business acquisitions:
Fair value of assets acquired $ 11,923,200 $ 7,506,621
Excess property cost over fair value 3,512,792 --
Liabilities assumed and incurred (7,484,675) (28,317)
Obligation to sellers -- --
Minority interest recognized (2,112,348) --
Common stock issued -- --
Stock options granted -- (1,150,000)
------------ ------------
Cash paid 5,838,969 6,328,304
Less cash acquired (3,679,606) (14,017)
------------ ------------
Net Cash Paid (Received) $ 2,159,363 $ 6,314,287
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- EuroGas, Inc. and its subsidiaries ("EuroGas"
or the "Company") are engaged primarily in the evaluation,
acquisition, exploration and disposition of mineral interests, and
rights to exploit oil, natural gas, coal bed methane gas 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 $76,471,799 since
their inception in 1995 through December 31, 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, 1999. These conditions raise substantial doubt regarding the
Company's ability to continue as a going concern. Although the
Company had positive working capital and stockholders' equity at
December 31, 1998 and had positive stockholders' equity at December
31, 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, 1999, was $238,658, $78,765, and
$83,885, respectively, of which $33,482, $19,229 and $65,639 were
capitalized in mineral interests and equipment in 1999, 1998 and
1997, respectively.
Political Risk --EuroGas has mineral interest property and interests
in projects in Poland, Slovakia, Slovenia, Ukraine, and in the Sakha
Republic (Eastern Russia). Although recent political and economic
trends in these countries have been toward the development of market
economies that encourage foreign investment, EuroGas has a
concentration of risk related to its Eastern Europe and Russian
properties and interests which are subject to political instability,
changes in government, unilateral renegotiation of concessions or
contracts, nationalization, foreign exchange restrictions, or other
uncertainties.
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 foreign banks at December 31, 1999 in excess of
$980,000 which cash is not insured by the U.S. Federal Deposit
Insurance Corporation. Included in that amount is cash held in Polish
banks in the amount of approximately $300,000 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 19,079,713, 17,004,647 and 13,450,000 potentially issuable
common shares at December 31, 1999, 1998 and 1997, respectively, 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 required by FAS 123.
New Accounting Standards--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.
Prior Year Presentation -- Certain 1998 amounts have been reclassified
in order to conform with the 1999 presentation.
NOTE 2 - RESTATEMENT
The accompanying financial statements have been restated to reflect
the recognition of additional settlement obligations of $8,127,000, to
reduce accrued liabilities of $697,608 and recognize additional
expense related to stock options granted in the amount of $158,215. As
described in Note 17 - Commitments and Contingencies, on June 16,
2000, the Company entered into a settlement agreement in satisfaction
of a $19,773,113 default judgement entered against the Company on
March 16, 2000. Considering certain counterclaims and assignments, the
Company initially estimated an obligation pursuant to the default
judgement in the amount of $3,400,000 and recorded a charge to
operations in the same amount for the year ended December 31, 1999.
The cost of the settlement obligation under the terms of the
settlement agreement was $11,527,000, an increase of $8,127,000 or
$0.10 per share. In addition to the increase in the settlement
obligations, accrued liabilities at December 31, 1999 decreased by
$697,608 or $0.01 per share, after reclassifying a related party
note payable to accrued liabilities in the amount of $225,206. Also,
liabilities carried by the Company had been previously paid or
otherwise satisfied by the Company and expensed. As a result of this
restatement, accumulated deficit increased $7,158,215 or $0.09 per
share for the year ended December 31, 1999.
F-11
<PAGE>
NOTE 3 - 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 1999, EuroGas made a $358,857
payment towards the purchase of a 40% interest in an operating oil
refinery in Slovenia. Upon governmental approval, EuroGas will be
obligated to make an additional investment of approximately $500,000
for the interest.
Acquisition of Talc Mineral Interest -- During 1998, 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 $755,539
and $709,570 during 1999 and 1998, respectively. At December 31, 1999
and 1998 EuroGas had a receivable for advances to the joint venture
company in the amount of $517,738.
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. During 1999, the purchased entity's name was changed to
EuroGas Austria GmbH. The operations of EuroGas Austria GmbH have been
included in the consolidated results of operations of EuroGas since
the acquisition date.
NOTE 4 - RECEIVABLE FROM RELATED PARTIES
On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a
promissory note with an officer and member of management in the amount
of $200,000. During March 1999, the note was forgiven in exchange for
services performed by the director. The Company recognized $200,000 as
consulting expense related to this transaction.
NOTE 5 - NOTES RECEIVABLE
During 1999, the Company executed a promissory note in the amount of
$600,000 to an independent third party. During the fourth quarter of
1999 this note was assigned in satisfaction of notes payable.
On October 28, 1998, EuroGas executed a promissory note in the amount
of $500,000 to an independent third party. Terms of the note dictate
that interest accrues at7.5%. The balance was due on May 28, 1999 and
is unpaid at December 31, 1999.
F-13
<PAGE>
NOTE 6 - 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.
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:
December 31, December 31,
1999 1998
----------- -----------
Cost $ 1,385,937 $ 1,467,754
Gross unrealized losses (1,068,853) (379,266)
----------- -----------
Estimated fair value $ 317,084 $ 1,088,488
=========== ===========
EuroGas sold 139,000 shares of United Gunn during the year ended
December 31, 1999, for $100,557 which resulted in a realized loss of
$71,801. The cost of securities sold was determined by the average
cost method.
NOTE 7 - MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
Impairment of Properties -- 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 known as the Pol-Tex concession for $172,000.
During February 2000, the Company assessed the capitalized costs of
properties not subject to amortization based on estimated future
discounted net cash flows. Accordingly, an impairment of $7,217,426
was charged to operations for the year ended December 31, 1999 related
to the Pol-Tex concession.
Amortization of Mineral Interest Properties -- 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
F-14
<PAGE>
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 15 - 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.
The following is a summary of changes to oil and gas properties:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Properties Subject to Amortization
Cost at beginning of period $ 18,064,186 $ -- $ --
Reclassification from
properties not subject to
amortization 333,465 8,333,863 --
Acquisition costs 1,752,245 8,784,050 --
Development costs 2,830,308 4,459,065 --
Proceeds from sale of property (167,371) -- --
Less ceiling test and valuation
adjustments -- (3,512,792) --
Translation adjustments (1,259,262) -- --
------------ ------------ ------------
Cost at end of period 21,553,571 18,064,186 --
Less depreciation, depletion and
amortization (1,817,371) (220,600) --
------------ ------------ ------------
Net Properties Subject to
Amortization $ 19,736,200 $ 17,843,586 $ --
============ ============ ============
Properties Not Subject To Amortization
Cost at beginning of period $ 32,763,353 $ 22,723,660 $ 14,252,754
Acquisition costs 1,259,696 17,804,072 7,574,601
Exploration costs 1,327,737 573,569 3,368,917
Reclassification to properties
subject to amortization (333,465) (8,333,863) --
Proceeds from sale of property (53,232) -- (500,000)
Less accumulated valuation and
adjustments (6,775,114) -- (1,972,612)
Translation adjustment (1,326,903) (4,085) --
------------ ------------ ------------
Net Property Not Subject to
Amortization at End of Period $ 26,862,072 $ 32,763,353 $ 22,723,660
============ ============ ============
Other Mineral Interest Property
Cost at beginning of year $ 709,570 $ -- $ --
Property costs 45,969 -- --
Acquisition costs -- 709,570 --
------------ ------------ ------------
Net Other Mineral Interest Property $ 755,539 $ 709,570 $ --
============ ============ ============
</TABLE>
F-15
<PAGE>
NOTE 8 - OTHER PROPERTY AND EQUIPMENT
Other property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Land $ -- $ -- $ 22,156
Buildings -- 19,571 92,914
Equipment 1,052,098 560,446 895,702
------------ ------------ ------------
1,052,098 580,017 1,010,772
Less: Accumulated depreciation (243,015) (86,454) (767,177)
------------ ------------ ------------
Net Other Property and Equipment $ 809,083 $ 493,563 $ 243,595
============ ============ ============
</TABLE>
NOTE 9 - GEOGRAPHIC INFORMATION
EuroGas and its subsidiaries operate primarily 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:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Canada $ 20,039,572 $ 15,995,000 $ --
Eastern Europe and Russia 28,571,995 36,025,164 23,303,815
------------ ------------ ------------
Total Property and Equipment
and Other Assets $ 48,611,567 $ 52,020,164 $ 23,303,815
============ ============ ============
</TABLE>
Sales and net loss were in the following geographic areas:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Oil and Gas Sales - Canada $ 4,973,508 $ 879,404 $ --
============ ============ ============
Net Loss
United States (Corporate) $(17,687,833) $ (2,625,306) $ (4,915,997)
Canada 757,781 (3,362,517) --
Eastern Europe and Russia (12,016,615) (5,036,357) (6,585,902)
------------ ------------ ------------
Net Loss $(28,946,667) $(11,024,180) $(11,501,899)
============ ============ ============
</TABLE>
F-16
<PAGE>
NOTE 10 - NOTES PAYABLE TO RELATED PARTIES
During October 1999, the Company reached a settlement agreement on a
defaulted loan from a former director with principal owed of $225,206
and accrued interest of $163,071. Pursuant to the terms of the
agreement, the Company will pay $130,000 in cash and will issued
common stock with a market value of $440,000.
Notes payable to related parties were as follows:
December 31,
--------------------------
1999 1998
------------ ------------
Loan from a former director, due on demand
with interest at 10%, unsecured $ -- $ 290,206
Loans from companies associated with a
director, due in 1999 with interest at 7.0%
to 10%, unsecured 600,983 960,481
Loan from a director, due in 1999 and 2000,
interest: 7.5% to 10%, unsecured 613,221 606,951
Loans from a former director and his
affiliates, interest at 7.5% to 10%, due on
demand, unsecured 119,284 119,284
Less: discount on note (4,327) (17,310)
------------ ------------
Total Notes Payable to Related Parties 1,329,161 1,959,612
Less: Current Portion (1,329,161) (1,346,204)
------------ ------------
Notes Payable to Related Parties - Long-Term $ -- $ 613,408
============ ============
NOTE 11 - NOTES PAYABLE
Other loans and notes payable were as follows:
December 31,
--------------------------
1999 1998
------------ ------------
Loans due 1999, interest at 10%, unsecured $ 329,907 $ 336,359
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 3,314,136 3,708,990
7.5% Notes due in 2000, unsecured 520,105 1,226,816
Less: Discount on note (8,656) (34,620)
------------ ------------
Total Notes Payable 4,155,492 5,237,545
Less: Current Portion (4,155,492) (4,010,729)
------------ ------------
Note Payable - Long-Term $ -- $ 1,226,816
============ ============
NOTE 12 - INCOME TAXES
Deferred tax assets are comprised of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Tax loss carry forwards $ 7,424,514 $ 4,904,209
Property and equipment (4,298,723) --
Impairment losses 2,997,925 --
Reserves for contingencies 1,496,000 396,863
Less: Valuation allowance (7,619,716) (5,301,072)
------------ ------------
Net Deferred Tax Asset $ -- $ --
============ ============
F-17
<PAGE>
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>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory rate (34%) $ (9,788,074) $ (3,748,221) $ (3,910,646)
Non-deductible expenses 6,794,233 1,729,396 --
State taxes, net of federal benefit (227,710) (195,944) (154,969)
Deferred tax asset valuation change 2,318,643 603,635 2,280,330
Effect of lower tax rates and foreign
losses with no federal benefit 902,908 1,611,134 1,785,285
------------ ------------ ------------
Total Income Tax Benefit $ -- $ -- $ --
============ ============ ============
</TABLE>
As of December 31, 1999, EuroGas has operating loss carry forwards of
approximately $21,836,805 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 $692,431 at December 31, 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 13 - RELATED PARTY TRANSACTIONS
Effective October 21, 1999, the Company transferred all its shares of
EuroGas Deutschland GmbH to a related party for its fair value of $0.
The Company was required to fund EuroGas Deutschland GmbH's deficit of
$98,898 before the transfer could be made.
Related party loans are described in Note 9--Notes Payable To Related
Parties and loans to related parties are described in Note 3--
Receivable From Related Parties.
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.
NOTE 14 - 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.
F-18
<PAGE>
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.
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 November 1999, the Company designated a new Series C 6%
convertible preferred stock ("Series C"). The Series C 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 Series C shares
are non-voting and bear a 6% dividend rate per annum, or $60.00 per
share. The Series C 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.
During the year ended December 31, 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 and issued 1,800 shares of Series C
Preferred Stock for $1,800,000 or $1,000 per share, less $148,530 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 and Series C issued during
1999 were immediately convertible into common shares at a 15% and 20%
discount respectively, EuroGas has recognized a favorable conversion
feature as preferred dividends on the dates the preferred shares were
issued. During 1999, $1,261,875 in preferred dividends were recognized
relating to the favorable conversion feature.
The following is a summary of the preferred stock outstanding at
December 31, 1999:
<TABLE>
<CAPTION> Annual
Liquidation Preference 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
Series C Convertible 1,800 1,000 1,800,000 60.00 108,000
------------ --------- ------------ --------- ----------
Total 2,394,028 $ 2,299,197 $ 243,198
============ ============ ==========
</TABLE>
Common Stock - During 1999, 8,000 shares of 1998 Series preferred
stock were converted, according to the conversion factors mentioned,
into 10,576,208 common shares at a weighted-average price of $0.79 per
share. In connection with the conversion, 49,729 common shares were
issued for $39,502 in accrued dividends on the converted 1998 Series
shares at a weighted average price of $0.79 per common share. Also
during 1999, the Company issued 5,000 common shares as payment of
interest on notes payable.
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.
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 15 - STOCK OPTIONS
During October 1999, the Company granted 250,000 options related to a
settlement agreement. The options granted vest immediately and are
exercisable at $1.00 per share for a period of five years. The Company
recognized expense in the amount of $140,509 when granted.
EuroGas granted options to employees and consultants during 1999.
Options for 950,000 shares were authorized and granted on October 22,
1999. The options granted vested immediately and are exercisable at
$0.45 for a period of ten years. Compensation in the amount of
$347,044 was recognized when granted.
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.
EuroGas granted options to 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. Since 1999,
EuroGas has accounted for options granted to consultants and directors
according to their fair value as prescribed in SFAS No. 123,
Accounting for Stock Based Compensation. 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, EuroGas' loss applicable to
common shares and loss per common share for the year ended December
31, 1999, 1998, and 1997 would have been increased to the pro forma
amounts shown below.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common shares:
As reported $(30,389,012) $(13,885,481) $(11,925,429)
Pro forma (31,447,876) (13,885,481) (11,925,429)
Basic and diluted net loss per common share:
As reported $ (0.36) $ (0.22) $ (0.22)
Pro forma (0.38) (0.22) (0.22)
</TABLE>
The fair value of 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, 1997 and 1996,
respectively: average risk-free interest rate - 4.85 - 6.0%, 5%, 5.7%
and 5.7%; expected volatility - 120.0 - 126.2%, 63.5%, 95.5% and
82.6%; expected life - 5 - 10 years, 2.0 years, 1.4 years and 5.0
years.
A summary of the status of stock options as of December 31, 1999, 1998
and 1997 and changes during the years then ended are presented below:
F-21
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------- ---------------------
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 2,000,000 $ 1.50 2,000,000 $ 1.50 2,000,000 $ 1.50
Granted 2,200,000 0.74 -- - -- -
Exercised -- - -- - -- -
Expired (200,000) 1.50 -- - -- -
---------- -------- ---------- -------- ---------- --------
Outstanding at end of year 4,000,000 1.08 2,000,000 1.50 2,000,000 1.50
========== ========== ==========
Exercisable at end of year 2,950,000 1.12 1,900,000 1.50 1,850,000 1.50
========== ========== ==========
Weighted-average fair value of
options granted during the year $ 0.71 $ -- $ --
</TABLE>
Options outstanding at December 31, 1999 were exercisable at prices
ranging from $0.95 to $1.50 with remaining contractual lives from 1.0
to 10 years and an average contractual life of 5.5 years.
NOTE 16 - STOCK WARRANTS
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. The warrants were valued at
$1,527,462.
During 1997, warrants to purchase 2,000,000 common shares were issued
in connection with the acquisition of OMVJ. The warrants 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. The warrants were valued
at $1,150,000. Warrants 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 warrants were
exercisable at $3.00 per share through December 31, 1998 when they
expired. Warrants to purchase 250,000 common shares were granted in
connection with an investment firm contract. The warrants are
exercisable at $11.79 per share through August 9, 2002.
At December 31, 1999, the Company had warrants outstanding to purchase
9,750,000 shares of common stock.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
An assertion has been made against EuroGas by alleged holders of
registration rights that EuroGas failed to file a registration
statement for certain shares and warrants. On March 16, 2000, a
default judgement in the amount of $19,773,113 was entered against
EuroGas by the United States District Court District of Utah, Central
Division due to lack of response by EuroGas. At April 14, 2000,
EuroGas had retained counsel and estimated its liability to be
$3,400,000. Management believed at that time that EuroGas had
mitigated the effect of the claim against it because of counter claims
and assignments. Accordingly, EuroGas and its legal counsel estimated
that after the counter claims and assignments, the remaining amount
probable of loss resulting from the claim was approximately
$3,400,000. However, EuroGas did not pursue the counter claims and
planned assignments and on June 16, 2000, the Company entered into a
settlement agreement, with the holders of the registration rights in
satisfaction of the default judgement. Under the terms of the
agreement, the Company is required to issue 3,700,000 shares of its
common stock and an option to purchase an additional 3,000,000 shares
of common stock exercisable in one year at an exercise price of $0.65
per share. The terms of the agreement further require the Company to
register the shares of common stock issued and to pay, either in cash
or additional common stock, the difference between $3.00 per share and
F-22
<PGAE>
the market value of the shares of common stock received by the holders
of the registration rights upon exercise of the options. The Company
has recognized a charge of $11,527,000 related to the settlement
agreement against its operations during the year ended December 31,
1999.
As discussed further in Note 11 - Income Taxes, EuroGas has proposed
a settlement of its tax liability in the Kingdom of the Netherlands.
A bankruptcy estate trustee appointed in the McKenzie Bankruptcy case
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 McKenzie's, or in fact may be operating as a nominee
for the McKenzie's, 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 October 1999, the Trustee filed a Motion for Leave to Amend and
Supplement Pleadings and Join Additional Parties in this action and in
adversary proceeding 97-4155 (described below) in which he is seeking
to add new parties and assert additional causes of action against
EuroGas and the other defendants in this action. These new causes of
action include claims for damages based on fraud, conversion, breach
of fiduciary duties, concealment and perjury. In January 2000, that
motion was approved by the Bankruptcy Court.
In July 1999, the above mentioned trustee filed another suit in the
same bankruptcy cases 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.
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.
In early December 1999, EuroGas signed a settlement agreement with
Kukui, the Bishop Estate and the bankruptcy Trustee, which, if fully
performed, would resolve all claims made by Kukui and the bankruptcy
Trustee in the aforementioned litigation. That settlement, in part,
requires EuroGas to pay $900,000 over the next 12 months and issue
100,000 shares of registered common stock to the Bishop Estate by June
30, 2000. Subsequently, however, the Trustee declared that certain
conditions precedent set forth in the settlement agreement have not
been met and the Trustee does not intend to seek bankruptcy court
approval of the agreement. EuroGas is now evaluating what effect this
has on the agreement. In the event the settlement agreement does not
resolve the foregoing litigation, EuroGas intends to vigorously defend
the litigation. Pursuant to the settlement, EuroGas has made the
monthly payments to Kukui and has executed all pleadings required to
be submitted to the Federal District Court in Utah.
F-23
<PAGE>
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.
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 the fourth quarter of 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.
During October 1997 EuroGas 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. 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.
In October 1997, EuroGas completed an agreement on a 50/50 cost basis
for appraisal and development activities for an area located in the
Carpathian Flysch and tectonic Fordeep areas of Poland. The agreement
contemplates a total expenditure by EuroGas of $15 million over a
three- year period. EuroGas does not presently have the assets
necessary to meet this obligation.
F-24
<PAGE>
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 $1,433,651 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.
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 per share 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, Ukraine, the Netherlands, and the United
Kingdom. Rent expenses for the years ended December 31, 1999, 1998 and
1997 were $517,354, $290,991, and $178,733, respectively. Annual
commitments for future minimum rental payments required under the
leases as of December 31, 1999 were as follows:
Lease
Payments
Year Ending December 31: ---------
2000 $ 154,452
2001 154,452
2002 104,814
---------
Total $ 413,718
=========
NOTE 18 - SUBSEQUENT EVENTS
On March 16, 2000 a default judgement was entered against EuroGas of
approximately $19.8 million dollars as described in Note 16 -
Commitments and Contingencies. On June 16, 2000 the Company entered
into a memorandum of understanding with the plaintiff in satisfaction
of the default judgment. Pursuant to the terms of the agreement,
EuroGas has accrued $11,527,000 as a provision for this loss and has
charged operations for the year ended December 31, 1999.
During January 2000, all 1,800 outstanding shares of 1999 Series C
Convertible Preferred Stock were converted, according to the
conversion factors described in Note 13- Stockholders' Equity, into
5,329,713 common shares at a weighted-average price of $0.34 per
share. In connection with the conversion, 63,261 common shares were
issued for $21,599 in accrued dividends on the converted 1999 Series
shares at a weighted-average price of $0.54 per common share.
During January 2000, EuroGas entered into an agreement with Slovgold
GmbH, a related party, to conduct a six-well pilot program in South
Wales to test for coalbed methane gas. Under the terms of the
agreement, EuroGas will cover the costs for the pilot program and the
first stage of any subsequent development program in exchange for 40%
of the cash flow until payout of its investment. EuroGas' interest
will be reduced to 25% after the payout point is reached. Slovgold
GmbH is affiliated with a director of EuroGas.
F-25
<PAGE>
During the first quarter of 2000 EuroGas completed the issuance of two-
year 10.5% convertible debentures in the amount of $3,000,000 in
exchange for cash proceeds of $2,653,712 and the conversion of prior
outstanding EuroGas debt into debentures in the amount of $346,288.
The debentures are convertible into common shares at $0.35 per share,
which represents a discount of 20% from quoted market values on the
date of the issuance. Upon conversion the holders also receive
warrants to purchase 17,142,858 common shares at $0.35 per share. The
convertibility of the debentures at a discount, and the detachable
warrants issued below market on the date of issuance, constitute a
beneficial conversion feature of the offering. The Company will
record the three instruments at their relative fair values on the date
of issuance and will amortize the resulting debt discounts as interest
expense in the amount of $2,192,109 over the three-month life of the
debentures. The debentures were subsequently converted at the
election of the holders on March 30, 2000 into 8,571,429 common
shares.
Teton Petroleum Company ("Teton"), through Goltech Petroleum, LLC
("Goltech"), owns a 71% interest in Goloil, a Russian oil and gas
company. On April 5, 2000, EuroGas entered into an agreement with
Teton for the acquisition of Teton and a 35% interest in Goltech by
September 1, 2000. If the acquisition is completed under the terms of
the agreement by the required closing date, EuroGas would purchase
Teton and the interest in Goltech in exchange for $2,300,000, the
issuance of 13,621,744 shares of common stock and the issuance of
options, warrants and other rights to purchase 2,599,249 shares of
common stock at $0.35 for1 year. In addition, EuroGas would be
obligated under the terms of the agreement to lend Goltech up to
$4,000,000 under a credit facility which would bear interest at 15%
per annum on the amount loaned. EuroGas will place additional common
shares with a market value of $4,000,000 into an escrow account to
ensure EuroGas' ability to provide the cash payments and the credit
facility. EuroGas has paid a deposit of $300,000 as consideration for
the agreement and has placed $500,000 and a promissory note from an
individual in the amount of $500,000 and securities of the individual
into an escrow account to ensure the ability of EuroGas to provide the
remaining purchase price. Until April 21, 2000, the agreement can be
terminated without payment by either party except for the loss of the
deposit paid by EuroGas. In the event either Teton or EuroGas fails to
perform under the terms of the agreement after April 21, 2000, that
party will be obligated to pay $1,000,000 in liquidation damages.
(Unaudited.)
F-26
<PAGE>
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, 1999 and 1998, by
geographic area, were as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
At December 31, 1999
Unproved oil and gas properties $ 36,583,835 $ 8,875,353 $ 27,708,482
Proved oil and gas properties 25,066,363 16,198,578 8,867,785
------------ ------------ ------------
Gross capitalized costs 61,650,198 25,073,931 36,576,267
Less: Ceiling test adjustment and impairments (13,234,555) (3,512,792) (9,721,763)
Less: Accumulated depreciation, depletion,
and amortization (1,817,371) (1,817,371) --
Future abandonment and restoration (140,517) (140,517) --
------------ ------------ ------------
Net capitalized costs $ 46,457,755 $ 19,603,251 $ 26,854,504
============ ============ ============
At December 31, 1998
Unproved oil and gas properties $ 35,709,152 $ 8,721,360 $ 26,987,792
Proved oil and gas properties 21,576,978 10,968,152 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
============ ============ ============
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized
and expensed, during the years ended December 31, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Property acquisition costs
Proved $ 1,752,246 $ 1,752,246 $ --
Unproved 1,259,696 469,249 790,447
Exploration costs 1,327,737 -- 1,327,737
Development costs 2,830,308 2,705,268 125,040
------------ ------------ ------------
Total Costs Incurred $ 7,169,987 $ 4,926,763 $ 2,243,224
============ ============ ============
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
============ ============ ============
</TABLE>
F-27
<PAGE>
The results of operations from oil and gas producing activities for
the years ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Oil and gas sales $ 4,973,508 $ 4,973,508 $ --
Production costs (1,330,526) (1,330,526) --
Impairment of mineral interests (7,217,426) -- (7,217,426)
Depreciation, depletion, and amortization (1,810,176) (1,810,176) --
------------ ------------ ------------
Results of operations for oil and gas
producing activities (excluding corporate
overhead and financing costs) $ (5,384,620) $ 1,832,806 $ (7,217,426)
============ ============ ============
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) $ --
============ ============ ============
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>
<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 , 1999 905,880 12,369,485 811,000 6,881,700 94,880 5,487,785
Purchases of minerals in place -- 4,069,200 -- 4,069,200 -- --
Extensions and discoveries 972,054 4,167,580 972,054 4,617,580 -- --
Production (161,054) (1,805,080) (161,054) (1,805,080) -- --
---------- ---------- ---------- ----------- ---------- ----------
Balance - December 31, 1999 1,716,880 19,251,185 1,622,000 13,763,400 94,880 5,487,785
========== ========== ========== =========== ========== ==========
Proved Developed Reserves -
December 31, 1999 806,400 7,772,800 806,400 7,772,800 -- --
========== ========== ========== =========== ========== ==========
</TABLE>
F-28
<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, 1999 and 1998
were as follows. There were no proved oil and gas reserves at
December 31, 1997:
<TABLE>
<CAPTION>
Eastern Europe
Total Canada and Russia
------------ ------------ ------------
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Future cash inflows $ 58,352,415 $ 42,466,594 $ 15,885,821
Future production costs and
development costs (14,451,638) (12,946,144) (1,505,494)
Future income tax expenses (10,760,417) (9,478,107) (1,282,310)
------------ ------------ ------------
Future net cash flows 33,140,360 20,042,343 13,098,017
10% annual discount for estimated
timing of cash flows (13,388,091) (7,552,584) (5,835,507)
------------ ------------ ------------
Standardized measures of discounted
future net of cash flows relating to
proved oil and gas reserves $ 19,752,269 $ 12,489,759 $ 7,262,510
============ ============ ============
For the Year Ended December 31, 1998
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>
F-29
<PAGE>
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>
For the Year Ended December 31, 1999
Beginning of year $ 13,662,990 $ 6,400,480 $ 7,262,510
Purchase of minerals in place 10,716,408 10,716,408 --
Extensions and discoveries -- -- --
Development 1,120,835 1,120,835 --
Production (598,055) (598,055) --
Revisions of estimates:
Sales prices -- -- --
Development costs -- -- --
Accretion of discount 188,021 188,021 --
Net change in income taxes (5,753,022) (5,753,022) --
Change in exchange rate 415,092 415,092 --
------------ ------------ ------------
End of year $ 19,752,269 $ 12,489,759 $ 7,262,510
============ ============ ============
For the Year Ended December 31, 1998
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-30
