UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-1381-D
EuroGas, Inc.
(Exact name of registrant as specified in its charter)
Utah 87-0427676
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
942 East 7145 South, #101A, Midvale, Utah 84047
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 255-0862
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
As of March 30, 1998, there were 63,179,917 shares of the Issuer's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$245,428,842, computed at the closing quotation for the Issuer's common stock of
$5.1875 as of March 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
TABLE OF CONTENTS
Item Number and Caption Page
.............................................................................................
PART I
1. & 2. Business & Properties........................................................................ 3
3. Legal Proceedings............................................................................ 15
4. Submission of Matters to a Vote of Security Holders.......................................... 17
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 18
6. Selected Financial Data...................................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 21
8. Financial Statements and Supplementary Data.................................................. 23
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................... 23
PART III
10. Directors and Executive Officers of the Registrant........................................... 24
11. Executive Compensation....................................................................... 27
12. Security Ownership of Certain Beneficial Owners and Management............................... 29
13. Certain Relationships and Related Transactions............................................... 30
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 32
SIGNATURES............................................................................................ 36
PART I
ITEMS 1. & 2. BUSINESS & PROPERTIES
GENERAL
EuroGas, Inc. (the "Company"), is primarily engaged in the acquisition of
rights to explore for and exploit natural gas, coal bed methane gas, and other
hydrocarbons. The Company has acquired several large concessions and is in
various stages of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop production. One of the
Company's early projects was a coal bed methane gas concession in Poland that
was sold, with a retained interest, to a subsidiary of Texaco, Inc. ("Texaco").
In connection with this transaction, the Company gave Texaco a right of first
refusal to acquire a controlling interest in two other coal bed methane
concessions the Company holds in Poland. The Company has subsequently been
granted another concession in Poland and has entered into an agreement with
Polish Oil and Gas Company ("POGC") to jointly explore 1.9 million acres in
which POGC holds, or has the right to acquire, interests. The Company has also
entered into a letter of intent with Ukrainian state oil and gas concerns to
expand potential exploration into the Ukraine.
The Company also holds an interest in a potential natural gas field located
in Slovakia. It is a joint venture partner there with NAFTA Gbely a.s.
("NAFTA"), an energy concern that was formerly part of the national oil and gas
company. The Company has drilled four wells on this location and is currently
drilling a fifth.
The Company recently acquired EuroGas Jakutien Exploration GmbH, formerly
known as OMV (Jakutien) Exploration GmbH ("EJ"), from OMV Group ("OMV"), which
holds a 50% interest in a joint venture established to explore for oil and gas
in the Sakha Republic in northeastern Siberia. The Company also holds an
interest in an oil and gas project in Canada and, in March 1998, purchased an
interest in a talc deposit located in Slovakia. The Company has terminated
an earlier interest it held in the Czech Republic.
The Company is in the early stages with respect to its exploration
interests and has not yet established production or a source of revenues. The
Company has been dependent to date on equity financings to meet its funding
needs and anticipates that it will continue to be so for the foreseeable future.
As a result of amounts spent in obtaining its concessions and its interests
in the joint ventures, negotiating and completing the acquisition of businesses
and related interests, completing exploration work to date, and funding the
ongoing activities of the Company, the Company had an accumulated deficit of
$32,197,306 at December 31, 1997. The Company did have working capital in
excess of $9 million at December 1997. However, due to the substantial drilling
and exploration commitments of the Company and its current lack of production,
the Company expects that it will continue to incur losses and that its
accumulated deficit will increase. The Company has not had reoccurring revenues
and does not currently have established production or proved reserves. The
Company has funded its cash flow requirements to date through a series of equity
and debt transactions. There can be no assurance that this source of funding
will continue to remain available to the Company. If available, there is no
assurance that it will provide the level of financing necessary for the Company
to meet its business objectives or even the Company's existing obligations.
(See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.")
When used herein, the "Company" includes EuroGas, Inc., and its wholly-
owned subsidiaries, Danube International Petroleum Company ("Danube"), EuroGas
Jakutien Exploration GmbH ("EJ," previously OMVJ), EuroGas Pulska Sp. zo.o. and
Energy Global A.G. ("Energy Global"), and the subsidiaries of each of these
subsidiaries, including GlobeGas B.V. ("GlobeGas"), Pol-Tex Methane, Sp. zo.o.
("Pol-Tex"), McKenzie Methane Ribnik Sp. zo.o. ("MMR"), McKenzie Methane
Jastrebie Sp. zo.o. ("MMJ"), Danube International Petroleum Holding B.V.
("Danube Netherlands"), and the NAFTA Danube Association ("Danube Slovakia").
(See the discussion under "History" below.)
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-KSB contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made based on information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including establishing beneficial
relationships with industry partners to provide funding and expertise to the
projects of the Company, locating commercial deposits of methane and natural gas
on the Company's concessions and licenses, the successful negotiation of
additional licenses and permits for the exploitation of any reserves located,
the successful completion of wells, the economic recoverability of in place
reservoirs of hydrocarbons, the successful addressing of technical problems in
competing wells and producing gas, the success of the marketing efforts of the
Company, the ability of the Company to establish required facilities to gather
and transport hydrocarbons that may be produced, and the ability of the Company
to obtain the necessary financing to successfully complete its goals. Should
one or more of these or other risks materialize or if the underlying assumptions
of management prove incorrect, actual results of the Company may vary materially
from those described. The Company does not intend to update the forward looking
statements contained in this report, except as may occur as part of its ongoing
periodic reports filed with the Securities and Exchange Commission.
ACTIVITIES IN POLAND
General
The Company believes that Poland offers an attractive environment in which
to explore for and develop methane gas. The Republic of Poland is bordered on
the north by the Baltic Sea and Russia, on the west by Germany, on the south by
the Czech Republic and Slovakia, and on the east by Lithuania, Belarus, and
Ukraine. Poland is comprised of approximately 120,000 square miles, with a
population of approximately 40 million people. Between 1945 and 1989, Poland's
communist political and economic systems were directly influenced by the former
Soviet Union. In 1989, Poland peacefully asserted its independence, adopted a
new constitution which established a parliamentary democracy, and began its
transition to a market based economy.
In August 1991, the United States Environmental Protection Agency (the
"EPA") and the United States Agency for International Development ("AID")
published a joint study on the possibility of economic recovery of methane gas
associated with Poland's extensive hard coal reserves. The joint study
concluded that coal bed methane was an abundant underdeveloped natural gas
resource in Poland and that the development and exploitation of this resource
would provide a much less environmentally harmful source of energy for Poland
than its extensive reliance on coal. The joint study stated that the potential
methane reserves were significant, estimating a total methane resource
associated with all coal mine concessions in Poland (both active and inactive
mines) of in excess of 1.3 trillion cubic meters. Shortly thereafter, Poland
began to solicit bids for concessions to explore for coal bed methane gas.
Coal bed methane gas production has been occurring for some time in the
United States and has drawn attention recently in Poland due in part to the
joint EPA/AID study. The Polish Concessions were originally pursued by
management of GlobeGas as they realized that there was a growing demand in
Europe for this type of gas that is a cleaner and more efficient source of
energy than coal. The Polish government adopted the position that production of
the potential methane reserves would not only benefit the country economically
but could also significantly reduce air pollution and acid rain in the country.
Methane is a component of natural gas that is used as a fuel in various
industries and as a source of residential heating. Before natural gas is used
as a fuel, heavy hydrocarbons such as butane, propane, and natural gasoline are
separated to meet pipeline specifications. The "heavy hydrocarbons" are
typically sold separately. The remaining gas constitutes "dry gas" composed of
methane and ethane. Once produced and separated, there is no substantial
difference between natural gas and methane. The demand in Europe for both
natural and methane gas has been traditionally high and the price generally runs
significantly higher than prices in the United States, although the price for
natural gas in Poland is generally lower than in the rest of the European
market. Gas production typically competes with coal and oil but is generally
considered to be a preferred product because of recent environmental concerns
expressed by governments in Europe.
Poland has an extensive collection pipeline network readily accessible to
it that should facilitate the transmission and sale of any gas discovered on the
Company's concessions.
The Pol-Tex Concession and Related Matters
In January 1993, the Company's wholly-owned subsidiary, Pol-Tex was awarded
exploration rights for coal bed methane gas in a concession located in the Upper
Silesian Coal Basin in Poland (the "Pol-Tex Concession"). In September 1993,
the Company's wholly owned subsidiary, GlobeGas, entered into a joint venture
agreement with Rybnicka Spolka Weglowa SA to form McKenzie Methane Ribnik Sp.
zo.o. ("MMR") to exploit a second concession located in the Upper Silesian Coal
Basin. In March 1996, the Company's 85%-owned subsidiary, McKenzie Methane
Jastrzebie Sp. zo.o. ("MMJ"), entered into a joint venture agreement for a
third concession in the same area. These three concessions (the "Polish
Concessions") cover approximately 92,000 acres in south central Poland.
In August of 1997, the Company completed an agreement with a subsidiary of
Texaco Incorporated ("Texaco") to sell the Pol-Tex Concession, the largest of
the coal bed methane gas concessions held by the Company, to Texaco in exchange
for an initial payment $500,000. The agreement granted Texaco the right to
commence an initial drilling program to appraise the concession and then to
proceed to develop the concession, if warranted. The agreement also grants a
first right of refusal to Texaco to obtain a controlling interest in two other
Polish concessions (the MMR and MMJ concessions) upon which EuroGas intends to
conduct development activities. The transaction included the sale of
approximately $200,000 in fair market value of assets and equipment.
Since August of 1997, Texaco has drilled six exploratory wells on the Pol-
Tex Concession that it intends to perforate and fract during the spring of 1998.
Texaco has also prepared for the drilling of two additional wells.
At the end of the 18-month period (approximately February of 1999), Texaco
can elect to continue to work on the Pol-Tex Concession in exchange for a
$2,500,000 payment to the Company. If Texaco elects to proceed, it has up to 30
months to undertake development work on the Concession and then Texaco must
elect whether or not to complete the acquisition of the Concession. If Texaco
then elects to proceed, it must pay the Company an additional $2,500,000 and 14%
of the net profit from the sale of the first 500 billion cubic feet of methane
gas; 16% of the net profit from the sale of the next 500 billion cubic feet; 18%
of the net profits of the next 1 trillion cubic feet sold; and 20% of the net
profits thereafter. If Texaco elects not to proceed after the initial 18
months, the Company would receive the Concession back, with any improvements,
subject to the approval of the Polish Ministry. If Texaco elects not to proceed
after the development phase, the Company can reacquire the Concession at a price
to be determined by the parties or a third party appraiser, again subject to
approval by the Polish Ministry.
In addition, the Company also granted Texaco the first right of refusal to
acquire control of its other coal bed methane concessions in Poland known as the
MMR and MMJ concessions, at a price to be determined either by the parties or a
third party appraiser. For now, the Company will continue to operate the MMR
and MMJ concessions.
On October 13, 1997, the Company received an additional concession from the
Polish Ministry of Environmental Protection of Natural Resources and Forestry to
explore and potentially develop 110 square kilometer coal bed methane concession
located near the MMR and MMJ concessions. The Company plans to conduct a
feasibility study to explore the possibilities of drilling gas wells for a
combined heat and power plant project or other uses. The agreement requires
expenditure of only $40,000 per year pending completion of a feasibility study
and negotiations with third parties for the eventual purchase of natural gas if
found.
On October 23,1997, the Company completed an agreement with Polish Oil &
Gas ("POGC") to undertake additional appraisal and development activities for a
large area located in the Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total expenditure by the Company of $15
million (US) over a three-year period. The parties established a joint team
whose initial work is the interpreting of the data generated by a $1.5 million
(US) wide-line seismic work program which was conducted in the Rymanow-Leske
area of the Carpathian Mountains in southeastern Poland. The technical team
expects to use the interpreted data to select the site for drilling a deep well
(5,000 to 5,500 meters) later this year.
Since the Company does not currently have the funds necessary to meet the
proposed development budget, it may seek to obtain an established industry
partner to participate in the proposed joint venture. There can be no assurance
that the Company will be able to do so or that such participation would be on
terms favorable to the Company.
The Company is also investigating the formation of a consortium of power
companies to purchase any methane gas production from the MMR and MMJ
concessions and to fund a proposed power plant to be constructed on the MMR and
MMJ concession areas.
ACTIVITIES IN SLOVAKIA
As part of its intent to diversify and expand its interests in Europe, in
July 1996, the Company acquired Danube International Petroleum Company
("Danube") which held rights to participate in exploration for natural gas in
Slovakia and the Czech Republic. (See discussion under "History" below.) The
Company has focused on the development of the Slovakian project, and abandoned
its interest in the Czech Republic during 1997. Danube is a partner in a joint
venture agreement (the "Slovakian Oil & Gas Joint Venture") with NAFTA Gbely
A.S. ("NAFTA") organized for natural gas exploration and development under a
license covering 128,000 acres located in the East Slovakian Basin, a
northeastern extension of the Pannonian Basin which covers large parts of
Hungary and the southeastern part of Slovakia. The joint venture now operates
pursuant to an exploration permit that expires April 24, 1999. The Slovakian
Oil & Gas Joint Venture recently completed four test wells and has commenced a
fifth test well. In late 1996, NAFTA and the Company agreed to add an
additional area of mutual interest to their joint activities (sometimes referred
to as the Lipany area).
In March 1998, the Company acquired a 55% interest in RimaMuran s.r.o.
("RimaMuran"), a closely-held entity whose principal asset is a 43% interest in
Rozmin s.r.o., a joint venture which holds the Gemerska Talc Deposit located in
Roznava, Slovakia. Thyssen Schachtbau GmbH, a leading international mining
engineering company, and Dorfner AG, a leading German processing and refining
company for industrial minerals, hold the majority interest in the Gemerska Talc
Deposit. The Company purchased its interest for a nominal cash payment and will
assume 43% of the development budget which is expected to be approximately $12
million over the next two and one-half years. (The Company's obligation will be
approximately $5 million.)
Slovakia was until recently part of Czechoslovakia. 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 Ukraine, on the south
by Hungary, and on the west by Austria and the Czech Republic. Slovakia has an
area of approximately 19,000 square miles and a population of approximately 5.5
million people. Slovakia has not been as quick to adopt free market reforms as
Poland and the Czech Republic and the former communist party, Party of the
Democratic Left, remains a major political force. Slovakia is a member of the
International Monetary Fund and the European Bank for reconstruction and
development and an associate member of the European Union. Bratislava is the
capital of Slovakia and its largest city.
The main economic segments of Slovakia are agricultural and manufacturing.
Various foreign companies have located manufacturing plants in Slovakia, taking
advantage of skilled, cheap professionals and other labor, as well as the close
proximity to "Western" Europe. A prime example of this is Volkswagen A.G.,
which has located manufacturing facilities in Slovakia. Energy in Slovakia is
primarily provided by massive gas and oil imports from countries formerly a part
of the Soviet Union. Domestic production of oil and gas cover only a small
percentage of Slovakia's energy needs.
Slovakian Oil & Gas Joint Venture
The activities of the Slovakian Oil & Gas Joint Venture with NAFTA are
conducted pursuant to a three-year exploration permit granted on April 24, 1996
(the "License"). As it continues its exploration and development on the area
subject to the License, the Joint Venture will seek to acquire additional
permits that have not yet been granted. Recently, an area known as Lipany was
added to the Slovakian Joint Venture. Prior to the Company acquiring its
interest in the Slovakia Oil & Gas Joint Venture 11 wells were drilled in the
area covered by the License between 1960 and 1982. All of these wells had gas
shows, though none were completed for commercial production. The Company
believes that new wells can be drilled offsetting the old wells that, if they
have similar gas shows, can be completed with routine techniques that now exist
for the recovery of gas from these types of formations.
The Slovakian Oil & Gas Joint Venture drilled its initial well, Trebisov 5R
in what is known as the South Cluster, which encountered a 980 meter thick gas
column subdivided into an upper interval (appearing at 1575 meters - 2100 meters
below ground level) and a lower interval (2100 meters - 2555 meters deep). In
December of 1996, after hydrological fracturing, the upper interval tested 1
million cubic feet of gas ("MMcf") per day through a 10 millimeter choke with a
flowing pressure of 450 pounds per square inch ("psi") and the lower interval
tested 0.4 MMcf per day through a 8 millimeter choke, with a flowing pressure of
275 psi. The tests were preliminary and were conducted prior to the cleaning up
of the well and removing water from the well.
Subsequently, the Joint Venture has completed the drilling of three
additional wells and has commenced the drilling of a fifth well in the area. In
consultation with its technical consultant, Schlumberger, the joint venture has
decided to complete all the wells drilled, construct a processing plant and tie
production to a nearby gas pipeline by the end of the year. The Company
recently engaged a leading petroleum engineering firm to prepare a reserve
analysis on the Trebisov reservoir.
The joint venture is also completing 3D seismic surveys in the northern
Trebisov area and if the results warrant, drill an exploration well in that
area. The Company expects to spend approximately $9 million during the
remainder of the year for its share of the cost in Slovakia. These expenditures
should permit the Company to meet all its contractual commitments outlined
below.
Under the terms of the agreement, the Company was obligated to provide 75%
($4.98 million) of the projected initial test phase funding of $6.64 million and
60% ($4.08 million) of the projected capital investment cost for the initial
production phase of $6.8 million. In addition to the wells, the Company is
obligated to complete a seismic program to collect additional geophysical data.
All funds required for the initial test phase have been expended and the
drilling is now being paid 60% by the Company and 40% by NAFTA. When the cost
of development and production exceeds $6.8 million, additional funds will be
paid 50% by the Company and 50% by NAFTA. The current projections indicate that
this limit will be exceeded later this year. (See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
In late 1996, the Company and NAFTA agreed to add an additional area in the
Lipany region of Slovakia as part of the joint venture. This area consists of
approximately 26,000 acres located in the northeastern part of Slovakia and lies
within a geological structure known as the Central Carpathian Paleogene Basin.
Six wells were drilled by the Communist regime in Lipany and tested with either
gas and/or oil showings. Those wells have not been plugged and the joint
venture may investigate re-entering those wells. The Company had originally
intended to farm out this additional area to a third party, but has determined
not to complete the farm out as previously contemplated.
During March of 1998, the Company was informed by NAFTA that there may be
certain title problems related to areas of mutual interest proposed to be
explored and developed by the Slovakian Oil & Gas Joint Venture outside of the
Trebisov area. All of the wells drilled by the Company to date are located in
the Trebisov area and the Company is not aware of any title problems in that
area. The disputed area is located in the southern portion of the property
covered by the designations contained in the joint venture agreement and is
subject to a competing claim of ownership by a private Slovakian company. To
the extent that the Slovakian Oil & Gas Joint Venture does not have the right to
explore certain areas as previously contemplated, the Company's expansion beyond
the Trebisov area may be limited. The Company has notified the former
shareholders of Danube of a claim against them by reason of this recent problem.
(See "ITEM 3. LEGAL PROCEEDINGS.")
On April 16, 1997, the Company announced that it had entered into a
Confidentiality Agreement that covered the possible participation in a number of
its projects by OMV Aktiengesellschaft. OMV is Austria's largest industrial
company and it explores and develops oil and gas projects in Europe, the
Mediterranean, and Asia, owns a number of oil refineries, and operates an
extensive pipeline network. OMV was granted an option to purchase 2,000,000
shares of the Company's restricted common shares. The area under current
investigation includes the Slovakian Concession (including the Lipany area) and
other areas which may reach into Poland. The discussions with OMV are
preliminary in nature and there can be no assurance that an agreement will
result.
The Slovakian Oil & Gas Joint Venture is managed by a joint management
committee consisting of four appointees of each of the joint venture
participants. Major decisions with respect to the development and operation of
the Slovakian Concession require the approval of the joint management committee.
Action taken by the joint management committee is required to be unanimous. The
Company, through its subsidiary, Danube, acts as the operator of the Slovakian
Concession during the initial test phase and for all subsequent drilling and
testing operations. NAFTA acts as the operator for production operations. All
of the assets acquired by the joint venture are owned 50% by each of the
participants. If one of the participants wishes to undertake any drilling,
testing, production, or exploration work on the Slovakian Concession and is
unable to obtain the approval of the joint management committee, it can proceed
with the work at its own expense and risk. Any party drilling a successful well
under such conditions is entitled to recover 200% of the direct investment in
the well if it is drilled in an existing field or 400% of the direct investment
if the well is a wildcat well.
The Slovakian Oil & Gas Joint Venture has not established the extent of any
reservoir that may have been tapped by its activities to date and has not
entered into any contracts for the sale or transportation of any gas that might
be recovered. If the Joint Venture is unable to obtain the necessary permits or
if it is unable to establish ongoing production and sell the gas at a
sufficiently high price to pay the associated production costs, provide a return
on the capital expenditures made, provide funds for ongoing activities, and
provide a profit, it may be unable to continue its exploration and development
activities or successfully produce any natural gas that may be discovered.
SLOVAKIAN TALC DEPOSIT
In March 1998, the Company acquired a controlling interest in RimaMuran
s.r.o. ("RimaMuran"), a closely-held entity whose principal asset is a minority
interest in a talc deposit (the "Gemerska Poloma-Talc Deposit") located
approximately 50 kilometers west of Kosice in eastern Slovakia. Exploratory
holes drilled between 1987 and 1994 confirmed the existence of a large talc
deposit located approximately 350 meters, or 1150 feet, below the surface.
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, and it is anticipated that the
necessary funding will be provided by the Company. While initial exploration
activities have indicated the existence of a large talc deposit, the commercial
recovery of the talc has not been established.
ACTIVITIES IN THE SAKHA REPUBLIC
On June 11, 1997, the Company acquired all of the issued and outstanding
stock of OMV (Jakutien) Exploration GmbH from OMV A.G., Austria's largest
industrial concern, in exchange for $6,252,754 (US), an option to acquire up to
2,000,000 shares of the Company's common stock, a 5% interest in the acquired
company's net profits from identified preliminary oil and gas licenses, and 1%
of gross production of the TAKT Joint Venture outside such licenses.
Subsequently, the subsidiary's name was changed to EuroGas Jakutien Exploration
GmbH ("EJ").
EJ's primary asset is a 50% interest in the joint venture (known as "TAKT")
with Sakhaneftegas, the national oil and gas company of the Sakha Republic. The
conversion of TAKT to a joint stock company with limited liability was approved
by the Company and Sakhaneftegas on December 1, 1997. TAKT was formed to
appraise, explore, and develop, and, when appropriate, export oil and gas
reserves, in two large areas of interest located in Yakutia (officially known as
the Sakha Republic and often referred to as "Jakutien" in German and "Yakutia"
or "Yakut" in English). Yakutia has the largest land area of the members of the
Russian Federation and is located in the far eastern portion of what was
formerly the Soviet Union. TAKT has negotiated a detailed agreement with the
Sakha Republic and the Russian Federation for the exploration, production, and
development of hydrocarbons located in the areas of interest. This agreement is
subject to execution and approval by the legislative bodies of the Sakha
Republic and the Russian Federation, which approval is currently being sought.
Yakutia is thinly populated (just over 1,000,000 people) and covers
approximately 3,100,000 square kilometers that the United States Geological
Service has rated as extremely rich in natural resources. There has been
limited commercial exploitation of hydrocarbons in Yakutia and current
production is generally limited to providing fuel for heat and energy to local
urban and industrial complexes, partly because of the general remoteness of the
area and the poor transportation network currently in existence. Since 1991,
the Yakutian government has put in place an economic and legal system that is
designed to encourage foreign investment and the export of hydrocarbons. The
Company's interest in acquiring EJ was based in large part on the Company's
belief that TAKT is well-positioned to participate in the perceived
international gas export project which has been envisioned pursuant to
feasibility studies conducted by Korean, Chinese, and Japanese consortiums.
TAKT currently holds two exploration blocks located near the city Lensk,
which cover approximately 21,300 square kilometers (approximately 8,225 square
miles) located in the southeast of the East Siberian platform or East Siberian
Basin. An application to extend the two exploration licenses for an additional
20 years was submitted to the Sakha Ministry of Justice in January 1998. TAKT
also holds first right refusal on adjoining exploration blocks. TAKT has been
conducting activities within the two blocks for the past six years, employing
modern seismic and exploration techniques with encouraging results. The
exploration for and, if justified, the production of, hydrocarbons, in Yakutia
is made more difficult by the climatic conditions, the general remoteness of the
area, and the lack of infrastructure. The area is subject to extreme arctic
conditions and does not have any facilities for transporting hydrocarbons to
existing markets. The Company's ability to exploit any potential benefit from
this project will rely in part on the activities of other independent entities
in constructing the necessary infrastructure and establishing markets for
hydrocarbons.
Under the terms of the proposed Exploration and Production Sharing
Contract, the exploration phase, which is expected to last for another three to
five years, is estimated to cost in its entirety approximately $28 million (US)
of which EJ's share would be $14 million (US). Under the proposed agreement,
TAKT has also agreed with the Yakutian government to spend 2.5% of its budget in
the exploration phase for environmental and social concern obligations and
another 2.0% of the development stage expenditures, but in no event will these
collective commitments exceed $30 million (US). Such expenses are recoverable
against royalties and profits payable. The production carries with it an 8%
royalty and a 40% net profit interest payable to the Yakutian and Russian
Federation governments.
Principal work which should be undertaken during 1998 will be to reprocess
17 kilometers of seismic information. The reprocessing work will be done by
Yakutskgeofisika, the geophysical arm of Sakhaneftegas. The parties are now
discussing whether or not a second well could be spudded prior to year-end.
EJ and Sakhaneftegas each appoint two members to the board of directors of
TAKT with EJ having the right to nominate the chairman who holds the tie-
breaking vote. Unanimous votes are required for any amendments of the joint
venture itself, the admission of new partners, any buying or selling of shares,
reappointment or dismissal of the director general, and certain other specified
actions.
EuroGas has selected Wolfgang Rauball and J. Toni Preuss as its
representatives, with Wolfgang Rauball to serve as the chairman.
ACTIVITIES IN CANADA
The Company had entered into an option agreement to acquire an interest in
the Beaver River natural gas field located in northeastern British Columbia.
The gas fields was originally developed by Amoco Canada in the 1960s and was one
of the largest producing gas fields in British Columbia. Technical problems led
to excess water production and Amoco shut-in the field in 1978. However, a
subsidiary of Canadian Occidental Petroleum has entered into an agreement to
attempt to reestablish commercial natural gas production in the project using
up-to-date technology and may, if warranted, spend up to $13 million (US) on the
project before requiring any participation from the other working interests.
The contracting parties amended the terms and structure of the transaction to
some degree so that the Company has exercised a portion of its option by first
purchasing 993,333 units of United Gunn Resources, Ltd. (one share of common
and one warrant), for a total of $950,000 (US). United Gunn Resources, Ltd.
holds an approximately 12% working interest in the project. The Company will
complete the exercise of its options by acquiring a direct 16% percent working
interest in the project by exchanging $300,000 and 2,400,000 shares of
restricted common stock with a third party. EuroGas will retain the right to
purchase back 1,900,000 of the 2,400,000 shares of restricted common stock,
for return of the interest, any time prior to April 15, 1999 if EuroGas
determines that the results produced do not warrant the continued holding of
the direct interest.
ACTIVITIES IN THE UKRAINE
EuroGas has entered into a letter of intent with an Ukrainian state-owned
company, Zahidukrgeologia, to acquire 13 oil and gas properties which include
both standard oil and gas and coal bed methane projects located in the western
Ukraine. The Company is looking for a partner and has recently signed a
Confidentiality Agreement with a major European energy concern concerning its
possible participation in this and other Ukrainian projects.
The Company had previously announced the signing of a letter of intent with
Ukrnafta, a joint stock company, to explore and develop several large potential
oil and gas fields, which it believes have the potential for substantial
reserves which the Company believes may be exploited by the introduction of
modern technology and secondary recovery technology. Part of the formations
subject to this letter of intent are a continuation of the Carpathian structures
present in the Company's activities in Slovakia and Poland.
The Company intends to spend at least the first half of 1998 with a number
of its key consultants in an attempt to formalize the acquisition and
development proposals covered by these letters of intent.
RISKS ASSOCIATED WITH THE STAGE OF EXPLORATION AND LOCATION OF COMPANY'S
INTERESTS
The Company has acquired interests in potential oil and gas projects that
are in the very early stages of exploration based on management's belief
that these projects have sufficient potential for reserves to justify the
acquisition and exploration costs. However, none of these projects have been
sufficiently developed to establish the existence of significant recoverable
hydrocarbons, and the Company does not currently have production or established
reserves. The value of the interests held by the Company is entirely dependent
on the successful completion of its exploratory activities, of which no
assurance can be given.
The Company's activities carry with them certain risks in addition to the
risks normally associated with the exploration and development of hydrocarbons.
Each of the eastern European countries in which the Company has obtained or is
obtaining concessions (Poland, Slovakia, Yakutia, and the Ukraine) are in the
process of developing capitalistic economies therefore, many of their laws,
regulations, and practices with respect to the exploration and development of
hydrocarbons have not been time tested or yet adopted. Each of the governments
have announced attempts to provide opportunities for foreign investment which
has been one of the factors encouraging the Company's attention to oil and gas
development in eastern Europe. Additionally, each of the governments, state
agencies, and national companies with which the Company now deals have
demonstrated a significant degree of stability and reliability. Nonetheless,
there remains a risk that any change in the government itself, government
personnel, or the development of new policies and practices may adversely effect
the Company's holdings at some future date.
Furthermore, the Company's concessions and licenses are often subject,
either explicitly or implicitly, to ongoing review by governmental ministries.
In the event that any of the countries elect to change such mining laws, it is
possible that the government might seek to annul or amend the governing
agreements in a manner unfavorable to the Company or impose additional taxes or
other duties on the activities of the Company. As a result of the potential for
political risks in these countries, it remains possible that the governments
might seek to nationalize or otherwise cause the interest of the Company in the
various concessions and licenses to be forfeited.
Each of the countries has, and continues to adopt, laws governing
environmental concerns and the Company's drilling and exploration activities are
required to be conducted in accordance with these laws. While these laws are
not usually as fully developed and detailed as similar laws that exist in the
United States, the Company is required to conduct its operations in compliance
with such laws and must prepare and submit to the appropriate agency various
operational plans, including a discussion of environmental matters, which must
be approved before the Company can proceed.
COMPETITION
In seeking to explore for, develop, and produce oil and gas, the Company
competes with some of the largest corporations in the world, in addition to many
smaller entities involved in this area. Many of the entities that the Company
competes with have access to far greater financial and managerial resources than
the Company. As a result of the exclusive nature of the concessions held by the
Company, to the extent that it is able to successfully explore for, develop, and
produce hydrocarbon resources, the Company will be able to exclude any
competitor from production of the resources located on the concessions, but it
cannot exclude competitors from providing natural gas or other energy sources at
prices or on terms that purchasers deem more beneficial.
EMPLOYEES AND CONSULTANTS
As of March 30, 1998, the Company had two administrative employees located
in Salt Lake City, Utah; six technical and field workers in Poland; one project
manager in Slovakia, and one engineer located in Vienna. The Company's four
principal consultants are located in Europe. None of the Company's employees is
represented by a collective bargaining organization, and the Company considers
its relationship with its employees to be satisfactory. In addition to its
employees, the Company regularly engages technical and other consultants to
provide specific geological, geophysical, and other professional services.
Because the Company has concentrated primarily on acquiring concessions for
later exploitation rather than operating them during 1997, the Company has
relied principally on consultants who are paid one-time fees for their work and
assistance. The Company expects to rely substantially on consultants for 1998,
but expects thereafter to rely more on employees and permanent operating
personnel.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the exploration for methane and natural gas and
the drilling of wells and, as such, its operations are subject to the usual
hazards incident to the industry. These hazards include blowouts, cratering,
explosions, uncontrollable flows of gas or well fluids, fires, pollution,
releases of toxic gas, and other environmental hazards and risks. These hazards
can cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
activities. The Company has not as yet obtained any hazard insurance although
it has applications pending. The occurrence of a significant adverse event
that is not covered by insurance would have a material adverse effect on the
Company.
OFFICE SPACE
The Company leases the 35th floor and penthouse of the building located at
80 Broad Street, New York, New York, consisting of approximately 8,800 square
feet, under the terms of a sublease ending on August 31, 2000. The rent under
this lease is $11,025 per month and required an initial prepaid rent of $481,100
on execution. The Company received a rent allowance equal to the first four
months of the lease term commencing on September 1, 1996. The monthly lease
payments are subject to annual escalation, based on the operating expenses of
the building. The offices are currently occupied by the Company's public and
shareholder relations firm that currently provides services to the Company in
lieu of rent. The Company expects to use more of the space itself as its
operations expand.
The New York office maintains the Company's Website at http://www.eugs.com
and also has available, for interested stockholders, maps and other material
concerning the Company's activities.
On September 3, 1996, the Company entered into a three-year lease for
property located at 942 East 7145 South, #101A, Midvale, Utah, that provides for
monthly payments of $1,631.40. The lease provides for annual increases in the
lease payment in an amount equal to the increase in Consumer Price Index;
provided that, such annual increase shall be not less than 6% or greater than
10%.
The Company maintains an office (approximately 600 square feet) at Parkring
10 A-1010 Vienna, Austria, that has a monthly rental of approximately $3,240
(US). The Company also has an office located at Chilehaus A Fischertwiete 2,
20095, Hamburg, Germany, with a monthly rent of approximately $2,603 (US). Both
of these offices are leased under one-year contracts. Finally, the Company owns
an office with approximately 2,230 square feet in Warsaw, Poland.
HISTORY
The Company was incorporated in the state of Utah under the name
Northampton, Inc. ("Northampton"), on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with Energy Global, the
initial step in the Company becoming an oil and gas development stage entity,
which turned control of the company over to the former owners of Energy Global.
Energy Global had been formed as a holding company for GlobeGas, an operating
entity in which it held a minority interest. The minority interest in GlobeGas
was initially reported on the equity method on Northampton's financial
statements.
The agreement with Energy Global required that Northampton complete a stock
consolidation of one share for each twenty-four shares previously issued and
outstanding and deliver a sufficient number of post-consolidation shares of
common stock to the former owners of Energy Global to reduce the prior
shareholders' interest to approximately 10%. (See "ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.") Thus the former shareholders of
Energy Global became the controlling shareholders of the Company, which changed
its name to EuroGas, Inc. Merlin V. Fish and Mark Burdge of the United States,
officers and directors of Northampton, continued to act as officers and
directors until December of 1995. (See "ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.")
The original asset of Energy Global was a 16% minority interest in
GlobeGas, a Netherlands corporation that held, through a joint venture,
concessions in Poland. (GlobeGas was an 85% partner with a formerly state owned
Polish coal company and held three different concessions for the exploration and
exploitation of methane coal bed gas reserves in the Upper Silesian region of
Poland.) From September of 1994 through May of 1995, the Company delivered
$3,380,963.00 in cash in exchange for additional interests in GlobeGas, which
raised the Company's participation in GlobeGas to 19.13%. In May 1995, the
Company acquired the remaining 80.87% interest in GlobeGas in exchange for
$1,150,000 in cash, the issuance of 2,256,560 shares of restricted common stock,
and the issuance of 2,391,968 shares of newly created preferred stock (the "1995
Preferred Stock"), convertible at the rate of two shares of common stock for
each share of 1995 Preferred Stock. The Company originally booked its interest
in GlobeGas as an interest in a minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas has restated its financial
presentation to reflect the historical cost basis of the assets held by GlobeGas
rather than the Company's purchase price, substantially reducing the carrying
value of these assets on the Company's balance sheets. Since the operations of
Energy Global and Northampton prior to the reorganization were immaterial, the
transaction has been accounted for as if GlobeGas were the acquiring entity and
the historical financial statements included in this report are those of
GlobeGas.
In May of 1996, the Company acquired the 15% interest in the Pol-Tex
Concession held by the Polish state coal company in exchange for a cash payment
of $25,000 and the release of the obligation of the Polish state coal company to
reimburse GlobeGas, the Company's then wholly-owned subsidiary, approximately
$1,200,000 for drilling and related costs.
In August of 1997, the Company completed an agreement with a subsidiary of
Texaco Incorporated ("Texaco") to sell the Pol-Tex concession, the largest of
the coal bed methane gas concessions held by the Company, to Texaco in exchange
for a payment $500,000 which granted Texaco the right to commence an initial
drilling program to appraise the concession and then to proceed to develop the
concession, if warranted. The agreement also grants a first right of refusal to
Texaco to obtain a controlling interest in two other Polish Concessions (the MMR
and MMJ concessions). The transaction included the sale of approximately
$200,000 in assets and equipment.
At the end of the 18-month period (approximately February of 1999), Texaco
can elect to continue to work on the Concession in exchange for a $2,500,000
payment to the Company. If Texaco elects to proceed, it has up to 30 months to
undertake development work on the Concession and then Texaco must elect whether
or not to complete the acquisition of the Concession. If Texaco then elects to
proceed, it must pay the Company an additional $2,500,000 and 14% of the net
profit from the sale of the first 500 billion cubic feet of methane gas; 16% of
the net profit from the sale of the next 500 billion cubic feet; 18% of the net
profits of the next 1 trillion cubic feet sold; and 20% of the net profits
thereafter. If Texaco elects not to proceed after the initial 18 months, the
Company would receive the Concession back, with any improvements, subject to the
approval of the Polish Ministry. If Texaco elects not to proceed after the
development phase, the Company can reacquire the Concession at a price to be
determined by the parties or a third party appraiser, again subject to approval
by the Polish Ministry.
In addition, the Company also granted Texaco the first right of refusal to
acquire control of its other coal bed methane concessions in Poland known as the
MMR and MMJ concessions, at a price to be determined either by the parties or a
third party appraiser. For now, the Company will continue to operate the MMR
and MMJ concessions.
In July 1996, the Company continued in its quest to acquire additional gas
interests in Eastern Europe by acquiring Danube. Danube was a participant in
joint ventures for the exploration and production of natural gas in Slovakia and
the Czech Republic. Danube was acquired for $3,000,000 in cash ($500,000 paid
at closing and $2,500,000 which was eventually converted into 383,790 shares of
common stock (the issuance of 2,500,000 shares of the Company's restricted
common stock) the issuance of 1,250,000 shares of a newly created preferred
stock (the "1996 Preferred Stock"), which was converted into an aggregate of
2,500,000 additional shares of the Company's common stock, and the issuance of
warrants to purchase up to 5,000,000 shares of common stock at $3.00 per share
during the five years subsequent to the closing. The Company has recently
lodged an indemnity claim against the former Danube shareholders. (See Item 3 -
Legal Proceedings.)
In connection with the transaction, the Company also issued 12,500,000
shares of common stock to Chemilabco, which held an interest in the operating
subsidiaries of Danube and options to participate in the Czech and Slovakian
operations of Danube. An outside investment group held a 5% interest in the gas
projects of Danube that it received in exchange for a $1,000,000 investment and
which was granted prior to the acquisition of Danube by the Company. The 5%
minority interest was recently acquired for 250,000 shares of restricted common
stock. As part of the acquisition, Danube agreed to pay advisory fees to SBC
Warburg, a United Kingdom investment bank, and Moyes Newby & Company.
In July of 1996, the Company added Dr. Martin A. Schuepbach, the President
of Danube, as a director of the Company and appointed him as the Company's
president and chief executive officer. Mr. Schuepbach subsequently resigned as
a director and officer of the Company.
On June 11, 1997, the Company acquired all of the issued and outstanding
stock of EJ from OMV Inc., Austria's largest industrial concern, in exchange for
$6,252,754 (US), an option to acquire up to 2,000,000 shares of the Company's
common stock, a 5% interest in EJ's net profits from identified preliminary oil
and gas licenses, and 1% of gross production of the TAKT Joint Venture outside
such licenses.
EJ's primary asset is a 50% interest in the joint venture (known as "TAKT")
with Sakhaneftegas, the national oil and gas company of the Sakha Republic.
On October 13, 1997, the Company received an additional concession from the
Polish Ministry of Environmental Protection of Natural Resources and Forestry to
explore and potentially develop a 110 square kilometer coal bed methane
concession located near the MMR and MMJ concessions. The Company plans to
conduct a feasibility study to explore the possibilities of drilling gas wells
for a combined heat and power plant project or other uses. The agreement
requires expenditure of only $40,000 per year pending completion of feasibility
study and negotiations with third parties for the eventual purchase of natural
gas if found.
On October 23 ,1997, Pol-Tex completed an agreement with Polish Oil & Gas
("POGC") to undertake additional appraisal and development activities for a
large area located in the Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total expenditure by the Company of $15
million over a three-year period. The parties established a joint team whose
initial work is the interpreting of the data generated by a $1.5 million (US)
wide-line seismic work program which was conducted in the Rymanow-Leske area of
the Carpathian Mountains in southeastern Poland. The technical team expects to
use the interpreted data to select the site for drilling a deep well (5,000 to
5,500 meters) later this year.
In late 1997, the Company entered into an option agreement to acquire an
interest in the Beaver River natural gas field located in northeastern British
Columbia. The gas field was originally developed by Amoco Canada in the 1960s
and was one of the largest producing gas field in British Columbia. Technical
problems led to excess water production and Amoco shut-in the field in 1978.
However, a subsidiary of Canadian Occidental Petroleum has entered into an
agreement to attempt to establish commercial natural gas production in the
project using up-to-date technology and may, if warranted, spend up to $13
million (US) on the project before requiring any participation from the other
working interests. The Company has proceeded to exercise its options by first
purchasing 993,333 units of United Gunn Resources, Ltd. (one share of common and
one warrant), for a total of $950,000 (US). United Gunn Resources, Ltd. holds
approximately a 12% working interest in the project. The Company completed the
exercise of its option by exchanging $300,000 and 2,400,000 shares of restricted
common stock for 16% direct working interest from a third party. EuroGas did
retain the right to purchase back, in exchange for return of the working
interest, 1,900,000 of the 2,400,000 shares of restricted common any time prior
to April 15, 1999 if EuroGas determines that the results produced do not warrant
the continued holding of the direct interest.
In March 1998, the Company acquired a 55% interest in RimaMuran s.r.o.
("RimaMuran"), a closely-held entity whose principal asset is a 43% interest in
Rozmin s.r.o., a joint venture which holds the Gemerska Talc Deposit located in
Roznava, Slovakia. Thyssen Schachtbau GmbH, a leading international mining
engineering company, and Dorfner AG, a leading German processing and refining
company for industrial minerals, hold the majority interest in the Gemerska Talc
Deposit. The Company purchased its interest for a nominal cash payment and will
assume 43% of the development budget which is expected to be approximately $12
million over the next two and one-half years. (The Company's obligation will be
approximately $5 million.)
ITEM 3. LEGAL PROCEEDINGS
In the annual report on form 10-KSB for the year ended December 31, 1996,
the Company listed seven material pending legal proceedings. During 1997, the
Company resolved a number of these matters, believes that the SEC investigation
is essentially dormant, and continues to litigate two related matters as
discussed below.
On August 1, 1995, the United States Securities and Exchange Commission
(the "SEC") issued a formal order In the Matter of EuroGas, Inc., to investigate
whether violations of applicable law may have occurred. The Company has
produced numerous documents pursuant to extensive subpoenas from the SEC and the
oral testimony of its officers and directors. The SEC has obtained similar
information from the Company's former independent public accountants. The
Company has not been contacted by the SEC in connection with this matter for
more than eighteen (18) months. However, the SEC has given no formal indication
that it has completed its investigation and, the Company cannot predict the
duration or outcome of this investigation.
The Company's active litigation is now limited to matters relating to KUKUI
and associated parties.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of the
Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie Methane
Corporation (McKenzie Methane Corporation was an affiliate of the former owner
of Pol-Tex), asserted certain claims against Pol-Tex and GlobeGas in connection
with lending activities between McKenzie Methane Corporation and the management
of GlobeGas prior to its acquisition by the Company. The claim asserted that
funds that were loaned to prior management may have been invested in GlobeGas
and, therefore, McKenzie Methane Corporation might have had an interest in
GlobeGas at the time of the acquisition of GlobeGas by the Company. These
claims were resolved pursuant to a settlement agreement entered into in November
1996. Under the terms of the settlement agreement, the Company issued 100,000
shares of restricted Common Stock and an option to purchase up to 2,000,000
shares of Common Stock at any time prior to December 31, 1998, to the Bishop's
Estate (KUKUI's parent). The option exercise price was $3.50 per share if
exercised within 90 days of the execution of the agreement with Texaco; $4.50
per share if exercised prior to December 31, 1997; and $6.00 per share if
exercised prior to December 31, 1998. The Company also granted registration
rights with respect to the securities.
In March of 1997, a trustee over certain of the individual McKenzies and
other related entities asserted a claim to the proceeds that the Company would
receive from the Texaco agreement and exploitation of the Pol-Tex Concession in
an action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie,
debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case
no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7,
respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co.,
Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane,
Sp. zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court
for the Southern District of Texas Houston Division). The trustee's claim is
apparently based upon the theory that the Company may have paid inadequate
consideration for its acquisition of GlobeGas (which indirectly controlled the
Pol-Tex Concession in Poland) from persons who were acting as nominees for the
McKenzies or in fact may be operating as a nominee for the McKenzies and
therefore McKenzies' creditors are the true owners of the proceeds received from
the development of the Pol-Tex Concession in Poland. (KUKUI is also the
principal creditor of the McKenzies in these other cases.) The Company plans to
vigorously defend against such claims. The Company believes that the litigation
is without merit based on its belief that the prior settlement with KUKUI bars
any such claim, the trustee over the McKenzies has no jurisdiction to bring such
claim against a Polish corporation (Pol-Tex) and the ownership of Polish mining
rights, that the Company paid substantial consideration for GlobeGas, and that
there is no evidence that the creditors of the McKenzies invested any money in
the Pol-Tex Concession. The Company also believes that continued pursuit of
the claim may give rise to a separate cause of action against third parties that
the Company will pursue if necessary.
On August 21, 1997, KUKUI, Inc. asserted a claim against EuroGas, Inc. in
an action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United States
District for the Southern District of Texas, Houston Division. KUKUI's claim is
based upon an alleged breach of the settlement agreement between the Company and
KUKUI as a result of the Company's failure to file and obtain the effectiveness
of a registration statement for the resale by KUKUI of 100,000 shares delivered
to KUKUI in connection with the settlement. In addition, KUKUI has informed the
Company and the court that Bishop's Estate, its parent, would be entering a
claim for failure to register the resale of the shares subject to its option to
purchase up to 2,000,000 shares in the Company's common stock. The Company has
denied any liability, intends to vigorously defend the claim and recently filed
a counterclaim against KUKUI and Bishop's Estate for breach of contract, in
particular concerning its joint activities with the Trustee over the McKenzies.
The Company has resolved three actions during the year and has one
resolution pending as follows.
The Kingdom of the Netherlands had assessed a tax against the Company's
operating subsidiary, GlobeGas in the amount of $911,051 even though it had
significant operating losses. During 1997, the income tax liability was
reduced on the financial statements of the Company to $753,306 due to
different exchange ratios. The Company has appealed the assessment and has
proposed a settlement with the Netherlands which would reflect a reduction
in the tax to $42,000. Pending final resolution, a liability for the total
amount assessed will continue to be reflected in the Company's financial
statement.
On August 30, 1997, the Company settled all matters outstanding between the
former shareholders of Danube and the Company by entering an agreement which
satisfied the outstanding past due principal and interest due on a promissory
note in the amount of $2,808,493 in exchange for 383,790 shares of the Company's
common restricted stock (calculated based on $7.00 per share). In connection
with this agreement, all claims held by the former Danube shareholders,
including claims previously asserted by Martin Schuepbach as a result of an
alleged breach of his employment agreement, were released.
In February 1998, the Company settled a claim asserted by Moyes, Newby &
Co., Inc., a financial consulting firm retained by the Company's subsidiary,
Danube, prior to the acquisition of Danube by the Company. The settlement was
for a cash payment of $310,000 which covered not only any funds raised or
invested in the Danube projects (Slovakia) through the date of settlement, but
covers any additional funds raised or invested by parties introduced directly or
indirectly by Moyes Newby in the future.
As a result of an analysis of the Czech properties, the Company determined
that the pursuit of those properties were no longer warranted and returned the
properties to its Czech partner. The Company does not believe it has any
continuing liability with respect to the activities in the Czech Republic, but
has reserved approximately $327,000 in the event of assertion of any liability
in the future.
As set forth in "ITEMS 1. & 2. BUSINESS & PROPERTIES: Slovakian Oil &
Gas Joint Venture," the Company has been notified of a potential title problem
with certain areas which the Company intended to explore and develop with NAFTA
in the future. The area of concern relates to rights acquired through the
acquisition of Danube. The Company believes that the owners of Danube knew or
should have known about the problem prior to the acquisition of Danube and that
no disclosure concerning the problem was made at the time. The Company has
initiated a further investigation concerning the matter and has notified the
former Danube shareholders of a claim for indemnity to the extent that the
Company suffers any damage by reason of the potential title problem. As the
matter is in its initial stages, the Company cannot predict whether it will be
ultimately damaged by the title problem or, if damaged, will be able to recover
from the former Danube shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a meeting of its shareholders on December 12, 1997, to
elect its five directors, Dr. Reinhard Rauball, Paul Hinterthur, Dr. Gregory P.
Fontana, Dr. Hans Fischer, and Hank Blankenstein. There were 21,549,618 shares
in attendance at the meeting, by person or by proxy. All proposals of
management were approved with the directors being elected by a vote of
21,549,618, all shares present, for the nominees.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The common stock of the Company is traded on the Bulletin Board under the
symbol "EUGS" under the symbol "EUGSF" on the Frankfurt Stock Exchange, the
symbol "EUGSBE" on the Berlin Stock Exchange, EUGSS on the Stuttgart Exchange
and EUGSH on the Hamburg Stock Exchange. As of March 30, 1998, there were
63,179,917 shares of the Company's common stock issued and outstanding.
The following table sets forth the approximate range of high and low bids
for the common stock of the Company during the periods indicated based on
information concerning the trading of the common stock on the Bulletin Board.
All prices reflected herein have been adjusted retroactively to reflect the 24-
for-1 reverse stock split recently approved by the Company. The quotations
presented reflect interdealer prices, without retail markup, markdown,
commissions, or other adjustments and may not necessarily represent actual
transactions in the common stock.
Quarter Ended High Bid Low Bid
------------------ --------- ----------
March 31, 1996 $ 3.25 $ 1.125
June 30, 1996 $ 7.875 $ 1.75
September 30 1996 $ 5.75 $ 2.875
December 31, 1996 $ 5.00 $ 2.875
March 31, 1997 $ 6.75 $ 3.4375
June 30, 1997 $ 12.50 $ 4.375
September 30, 1997 $ 10.6875 $ 4.9375
December 31, 1997 $ 7.625 $ 3.75
The liquidity of the common stock may be limited, and the reported price
quotes may not be indicative of prices that could be obtained in actual
transactions. On March 30, 1998, the closing quotation for the Company's
common stock in the over-the-counter market was $5.1875.
No dividends have been paid on the Company's common stock, and the Company
does not have retained earnings from which to pay dividends. The Company
accrued cumulative preferred dividends of $423,530 and $150,592 in 1997 and
1996, respectively. Of this amount, $305,325 was paid in 1997 by the issuance
of common stock in connection with the conversion of a portion of the preferred
stock. In 1996, the Company paid dividends on the preferred stock of $120,000
in cash at a time the Company had a stockholders' deficit. All cumulative
dividends with respect to the Company's preferred stock would be required to be
paid prior to the Company declaring or paying any dividend on its common stock.
(See "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.") Even if the Company was to generate the necessary earnings, it is
not anticipated that dividends will be paid in the foreseeable future, except to
the extent required by the terms of the cumulative preferred stock currently
issued and outstanding.
SALE OF UNREGISTERED SECURITIES
During 1997, the Company sold or delivered 10,544,030 shares of common
stock and 4,450,000 options in transactions that were not registered under the
Securities Act as described in more detail below. Unless otherwise noted, the
sales were made without the participation of underwriters and without the
payment of any commission. The Company relied upon the exemptions from
registration provided in Section 4(2) of the Securities Act and Regulation D.
No placement of securities involved a public offering. The two
offerings for cash proceeds were to sophisticated institutions. The balance
of shares and options were delivered in connection with either a conversion
of outstanding indebtedness or the acquisition of property or mineral
interests. In each instance, the Company used the proceeds for general
working capital.
The following summary does not include two sales previously reported in
which the Company relied principally on Regulation S as an exemption from
registration. The reports considering those sales were on the Company's
Form 8-K dated March 24, 1997, covering the sale of 500,000 shares for gross
proceeds of $2.5 million and Form 8-K dated May 30, 1997, covering the
issuance of a newly created preferred stock for gross proceeds of $15 million.
On June 11, 1997, the Company delivered an option to OMV A.G. in
connection with its purchase of a subsidiary of OMV A.G. whose principal
asset was a joint venture in the Sakha Republic as described under
ITEMS 1 & 2. BUSINESS & PROPERTIES: Activities in the Sakha Republic."
The terms of the option provide for an exercise price of $4.00 per share
until April 1, 1998, $5.00 per share until March 31, 1999, and $6.00 per
share until March 31, 2000, at which time the unexercised portion expires.
On June 30, 1997, the Company sold 1,430,000 shares of its restricted
stock, at $7.00 per share, for a gross purchase price of $10 million (US)
to Chemilabco B.V., a principal shareholder of the Company. (See "ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Also on June 30, 1997, the Company sold to Finance Credit & Development
Corporation, in a transaction that amended a prior financing agreement, a
total of 2,999,999 shares of restricted common stock for $7.5 million and
converted a $1 million outstanding debenture to 333,334 shares of restricted
common stock. In connection therewith, the Company also granted a warrant
for the acquisition of 2,200,000 shares of the Company's common stock at
$3.00 per share. The option expires December 31, 1998.
During the 1997 fiscal year, holders of convertible debenture notes
(proceeds of which were received prior to 1997), converted a total of
$10,947,991 of principal and accrued interest into 2,646,907 shares of the
Company stock pursuant to the terms of the various debentures.
On July 3, 1997, 1,250,000 shares of the 1996 Preferred Stock were
automatically converted into 2,500,000 shares of common stock. The shares
were held by the former shareholders of Danube that the Company acquired
during fiscal 1996.
On August 9, 1997, the Company sold an option to purchase 250,000 shares
to CIBC Oppenheimer in connection with the entering into of a financial
advisory agreement. The option provides for an exercise price $11.79, expires
August 9, 2002, and provides CIBC Oppenheimer with registration and cashless
exercise rights.
On August 30, 1997, the Company converted a promissory note held by the
former Danube shareholders in the amount of $2,846,590 of principal and
accrued interest into 383,790 shares of the Company's common stock.
On November 11, 1997, the Company delivered 250,000 shares of restricted
common stock for the acquisition of the 5% interest in the Danube subsidiary
which had been held by two foreign individuals which had invested $1 million
with the Danube project prior to its acquisition by the Company in 1996.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data were derived
from the consolidated financial statements of the Company. The consolidated
financial statements of the Company have been audited by the Company's
independent certified public accountants. The selected financial data below
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included with this filing and "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
STATEMENT OF OPERATIONS DATA
Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Net Sales $ 500,000 $ 0 $ 0 $ 0 $ 0
Loss from Operations $11,501,899 $ 6,413,183 $ 4,327,581 $ 3,699,439 $ 3,363,296
Loss per Common Share $ 0.22 $ 0.16 $ 0.13 $ 0.15 $ 0.18
BALANCE SHEET DATA
At December 31,
----------------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ----------- -----------
Total Assets $ 40,754,543 $ 15,902,139 $ 7,680,367 $ 7,599,962
Long-Term Obligations $ 3,157,789 $ 10,631,547 $ 4,011,750 $ 3,011,750
Cash Dividends
per Common Share $ 0 $ 0 $ 0 $ 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, and other hydrocarbons in
various parts of the world. The Company currently has several projects in
various stages of development, including a coal bed methane gas project in
Poland which has been sold to a subsidiary of Texaco, Inc. ("Texaco"), a natural
gas project in Slovakia, a natural gas project in the Sakha Republic, a member
of the Russian Federation located in eastern Siberia, a natural gas interest in
Canada, and an interest in a Talc deposit in Slovakia.
In addition, the Company has recently entered into a joint venture
agreement with Polish Oil & Gas Company ("POGC") concerning a separate project
in the Carpathian Flysch and Tectonic Foredeep formation located principally in
southeastern Poland. The Company is also in the final stages of negotiation for
an agreement to explore and develop projects in the Ukraine.
RECENT DEVELOPMENTS
Funding Activities
Prior to the second quarter of 1997, the Company suffered from a lack of
capital. The Company's activities to date have not generated revenue, except
for the gross revenue of $500,000 recognized in connection with the sale of a
single interest in property, so it is not able to meet any of its funding needs
from operations. During the 1997 fiscal year, the Company completed a number of
equity financings with cash proceeds to the Company of in excess of $33 million.
In addition, the Company converted approximately $11 million of debt to equity.
These transactions significantly improved the Company's working capital position
and provided it with funds to complete its recent acquisitions and to meet its
contractual obligations in the near term. At December 31, 1997, the Company had
$17,247,667 in cash and cash equivalents and $9,365,940 in working capital
available.
Financial Position
The Company had an accumulated deficit of $32,197,306 at December 31, 1997,
most of which has been funded out of proceeds received from the issuance of
stock or debt instruments (substantial portions of which were issued to related
parties), loan proceeds, and incurring payables. The Company's financing
activities provided net cash of approximately $31 million, $8.2 million, and
$2.9 million during the years ended 1997, 1996, and 1995, respectively. During
this same period, operating activities used net cash of $3.2 million, $4.0
million, and $2.4 million for the years ended December 31, 1997, 1996, and 1995,
respectively. The largest portion of the Company's cash was used in acquiring
mineral interests, property and equipment, either directly or indirectly through
the acquisition of subsidiaries, with $11.2 million, $3.7 million, and $1.3
million used in investing activities for the years ended December 31, 1997,
1996, and 1995, respectively.
The Company's principal assets consist of unproved and undeveloped gas
properties. All costs incidental to the acquisition, exploration, and
development of such properties are capitalized, including costs of drilling and
equipping wells and directly related overhead costs which include the costs of
Company owned equipment. Since the Company has no proved reserves or
established production, these properties have not been amortized. In the event
that the Company is ultimately unable to establish production or sufficient
reserves on these properties to justify the carrying costs, the value of the
assets will need to be written down and the related costs charged to operations,
resulting in additional losses. The Company periodically evaluates its
properties for impairment and if a property is determined to be impaired, the
carrying value of the property is reduced to its net realizable amount.
RESULTS OF OPERATIONS
The Company has not received any revenues since inception, except for the
$500,000 received from Texaco during the year ended December 31, 1997. These
revenues were offset against $500,000 of the cost of the property sold, and no
gain or loss was recognized on the sale. The Company does not currently have a
source of ongoing revenues.
The Company had a net loss applicable to common shares of approximately
$11,925,429 and $6,413,000, respectively, for the years ended December 31, 1997,
and 1996. The difference is due in large part to the expansion of the Company's
activities, primarily as a result of acquisitions, the growth of the Company's
administrative expenses, the Company's decision to write off the carrying value
associated with its interests in the Czech Republic in the amount of $1,972,612,
and additional interest expenses in 1997. The 1997 interest expense includes a
reserve of $1 million, which is management's estimate of the amount due to a
lender who provided funding from 1995 to 1997. This amount has not yet been
finally determined. (See Note 9 to Financial Statements.) A substantial
portion of the general and administrative expenses consist of payments to a
limited number of officers, directors, and consultants.
Due to the highly inflationary economies of the Eastern European countries
in which the Company operates, the Company is subject to extreme fluctuations in
currency exchange rates that can result in the recognition of significant gains
or losses during any period. Approximately $332,000, ($401,000), and ($131,000)
in gains (losses) were recognized as a result of currency transactions in the
years ended December 31, 1997, 1996, and 1995, respectively. The Company had a
cumulative foreign currency translation adjustment of ($14,749) at December 31,
1997. The Company does not currently employ any hedging techniques to protect
against the risk of currency fluctuations.
Under the full cost method by which the Company accounts for its mineral
interests in properties, costs of unproved properties are assessed periodically
and any resulting provision for impairment would normally be charged to the
proved property base, but since the Company does not have any proved properties,
the impairment is charged to operations. The impact of such reassessment and
resulting impairment charge could be significant during any particular period
and resulted in a write down of $1,972,612 in the carrying value of the assets
associated with the Company's interests in the Czech Republic during the year
ended December 31, 1997.
As of December 31, 1997, the Company's balance sheets reflected
approximately $22,723,000 in mineral interests in unproved mineral properties,
net of valuation allowance. These properties are held under licenses or
concessions that contain specific drilling or other exploration commitments and
that expire within one to three years, unless the concession or license
authority grants an extension or a new concession license, of which there can be
no assurance. If the Company is unable to establish productions or resources on
these properties, is unable to obtain any necessary future licenses or
extensions, or is unable to meet its financial commitments with respect to these
properties, it could be forced to write off the carrying value of the related
property.
CAPITAL AND LIQUIDITY
Throughout its existence, the Company has relied on cash from financing
activities to provide the funds required for acquisitions and operating
activities. Such net cash has been used principally to fund cumulative net
losses of approximately $32 million.
During the years ending December 31, 1997 and 1996, operations required
cash of approximately $3,245,000 and $3,985,000, respectively. Investing
activities used net cash of approximately $11,205,000 for the year ended
December 31, 1997, the largest component of which was the approximately
$6,315,000 booked in connection with the acquisition of EJ, and $3,727,000 in
1996.
Financing activities provided net cash of approximately $31,286,000 during
the year ended December 31, 1997, as compared to $8,194,000 in the prior year.
At December 31, 1997, the Company had total current assets of approximately
$17,450,000 and total current liabilities of approximately $8,085,000, resulting
in working capital of approximately $9,366,000 or a working capital ratio of
1.8-to-1.
While the Company had cash of approximately $17 million at December 31,
1997, it has substantial financial commitments with respect to exploration and
drilling obligations related to the mineral properties in which it has an
interest. Many of the Company's projects are long-term and will require to
expenditure of substantial amounts over a number of years before the
establishment, if ever, of production and ongoing revenues. As noted above, the
Company has relied principally on cash provided from equity and debt
transactions to meet its cash requirements. While the Company currently has
sufficient cash to meet its short-term needs, it will be required to obtain
additional cash either from financing transactions or operating activities to
meet its longer-term needs. Obtaining additional equity financing or
structuring strategic relationships will continue to result in dilution of the
percentage ownership of the Company by the current shareholders.
If the Company is unable to establish production or reserves sufficient to
justify the carrying value of its assets or to obtain the necessary funding to
meet its short and long-term obligations or to fund its exploration and
development program, all or a portion of the mineral interests in unproved
properties will be charged to operations, leading to significant additional
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth immediately
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name and age of each executive officer and director
of the Company, together with all positions and offices of the Company held by
each and the term of office and the period during which each has served:
Name Age Positions With the Company Director Since
- ---------------------- --- ----------------------------- ---------------
Dr. Reinhard Rauball 52 Director 1994 - August
Paul Hinterthur 60 President and Director 1995 - December
Hank Blankenstein 56 Vice-President and Director 1995 - December
Dr. Gregory P. Fontana 38 Director 1996 - January
Dr. Hans Fischer 52 Director 1996 - January
J. Toni Preuss 50 Managing Director of GlobeGas N/A
The current board of directors was elected at the December 12, 1997,
shareholders' meeting. A director's regular term continues until the next
annual meeting of shareholders and thereafter until his successor is duly
elected and qualified. Officers serve at the pleasure of the board of
directors. There is no family relationship among the current directors and
executive officers.
The Company's executive committee consist of three members, Paul
Hinterthur, Hank Blankenstein, and J. Toni Preuss, an officer and director of
the Company's subsidiary, GlobeGas. The executive committee is charged with
overseeing the day-to-day management of the Company and with making all
significant contractual and financial decisions.
COMPANY CONTROL
Dr. Reinhard Rauball, the chairman of the board of directors, and Wolfgang
Rauball, the Company's chief consultant, are brothers. Both gentlemen have been
key figures in arranging the original transaction with Energy Global, the
acquisition of the concessions in Poland, the later acquisition of Danube, which
holds concessions in Slovakia, the acquisition of EJ and the Yakutia Concession,
and the participation in the British Columbia project. From time to time, the
Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt
financing for the Company through parties with whom they have previous business
and personal relationships and have directly loaned some of their own funds to
the Company. (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
While there is no formal agreement among the Rauballs and other debt and
equity holders of Company, the practical result of the relationships is to vest
control of the Company in the Rauballs.
The following sets forth brief biographical information for each of the
foregoing individuals.
Dr. Reinhard Rauball is a director of the Company. He has been an attorney
in Dortmund, Germany, since 1974, as well as a government appointed Notary since
1991. He was a law instructor at Bochum University from 1977 to 1979 and is the
author of numerous legal publications and books on constitutional law in
Germany. Dr. Rauball currently represents a number of prominent German
industrial companies and acts as counsel to the German government on special
projects. From 1983 to 1990, he was the chairman of the Supervisory Board of
Etienne Aigner, AG, a publicly-held company in Munich, Germany, which is a
leading international fashion concern with franchise shops in over 50 countries
around the world. He was the president of Borussia Dortmund, a leading German
soccer club, from 1979 to 1982 and 1984 to 1986.
Wolfgang Rauball has acted as an independent consultant to the European
subsidiaries of the Company since August 1994. He is president of Pol-Tex
Methane Sp. zo.o. in Poland and also acts as a director of GlobeGas B.V.
Amsterdam. Mr. Rauball attended Darmstadt Technical University in Germany from
1967 through 1971 but did not receive a degree. Thereafter, Mr. Rauball worked
as a mining geologist in Canada from 1972 to the present date. During the
period 1976 through 1986, his consulting activities were primarily for companies
conducting exploration for gold ore bodies in Canada, the United States, and
South America. Wolfgang Rauball arranges for financing for business
enterprises, primarily public companies engaged in the mineral industry. In
1993, Wolfgang Rauball was convicted by a German court of negligently causing
the bankruptcy of a German subsidiary of a Canadian company. Mr. Rauball was a
managing director of the Canadian company. Beginning in 1987, he was involved
in a contest for control of the Canadian company. During the contest, the
German subsidiary used some of its capital to purchase restricted securities of
an unrelated company, which purchase caused the German subsidiary to become
insolvent from a balance sheet point of view. Prior to being able to solve the
problem, Mr. Rauball was deprived of his ability to participate in management of
the Canadian company (his right to participate in management was subsequently
restored by the British Columbia Securities Commission in Canada). German law
is very strict in this regard and generally holds managing directors of parent
companies responsible for either infusing additional funds to make the
subsidiary solvent or making the appropriate bankruptcy filings on behalf of the
subsidiary, neither of which was done in this case. The German court held that
Mr. Rauball was negligent in participating in the original stock purchase by the
German subsidiary. Mr. Rauball received a suspended sentence and a monetary
fine of approximately $70,000. This type of activity is not a crime in either
the United States or Canada, where Mr. Rauball then resided, and therefore, the
board of directors of the Company does not feel that this matter compromises in
any way the value of Mr. Rauball's services.
Paul Hinterthur is a director and president of the Company. He has held
executive positions with the Company since 1995. After completing studies in
Economics in Frankfurt, London and Paris, he served in executive positions for
Dresdner Bank, one of the leading banks in the world from 1965 to 1984. During
his tenure with Dresdner Bank, he served in the financial centers of Frankfurt,
London, Tokyo, and Hong Kong. After retiring from the banking business, he has
been an independent international business and finance consultant for many
years. Mr. Hinterthur speaks five languages.
Hank Blankenstein is a director and secretary/treasurer of the Company. He
has had over 30 years experience in various levels of management positions. He
served as an administrative financial officer for a large semiconductor facility
from 1973 to 1985. Prior to that, he served in a number of operational
positions for high tech industry companies, having engineering production
supervising responsibilities, in charge of a 400-person division. He has been
involved in several high tech start-up situations serving in senior management
positions. He holds a bachelor of science degree in finance and banking from
Brigham Young University that was awarded in 1966.
Dr. Gregory P. Fontana is a director of the Company. He is currently an
attending cardiothoracic surgeon at Brotman Medical Center and Cedars-Sinai
Medical Center in California. He received his M.D. in 1984 at the University of
California followed by ten years of postgraduate training at Duke University and
University of California at Los Angeles. Some of his academic appointments
include Clinical Fellow in Pediatric Cardiac Surgery at Harvard Medical School
and Clinical Assistant Professor of Surgery at UCLA School of Medicine and he
has received several research grants, including a National Research Service
Award and Minimally-Invasive Cardiac Surgery Grant. He belongs to several
professional organizations, including the American Heart Association, and has
authored numerous scientific presentations and bibliographies. He is currently
a consultant to Heartport, Inc., Redwood City, California.
Dr. Hans Fischer is a director of the Company. He is currently Professor
of Radiology at the University of California, Los Angeles, Harbor-UCLA Medical
Center where he has been on the faculty since 1992. He has been a chair,
member, and designated alternate on Research, Clinical Radiology, Quality
Assurance and Ambulatory Care Committees for Harbor-UCLA Medical Center since
1990. He trained at Leibniz-Gymnasium, Dortmund West Germany, School of
Medicine, University of Muenster West Germany and School of Sociology,
University of Muenster West Germany. He received his M.D. in 1971 and Ph.D. in
1985 from University of Muenster.
J. Toni Preuss serves on the executive committee of the Company and has
been the managing director of GlobeGas, a Company subsidiary, since November
1995. Since 1970, he has been a representative of Idua Nova Insurance Company
in Hamburg, Germany, specializing in investment strategies. In 1980, he
established his own Sports Marketing Agency and Services Company which has an
international reputation and operations in Russia, Czech Republic, Holland,
Switzerland, and Turkey. He is the personal financial advisor for several
international soccer players and coaches.
KEY CONSULTANTS AND EMPLOYEES
The following sets forth biographical information for certain of the
Company's key employees and consultants.
Andrew K. Andraczke, vice-president and secretary, and a member of the
management committee of Pol-Tex Methane, is responsible for business development
and coordination of administrative, legal, and political aspects of the venture
in Poland. He also directs computer operations and system support for
exploration and production.
Mr. Andraczke holds B.Sc., M.Sc., and Ph.D degrees in computer science and
application from Computer Science Institute of Polytechnical University in
Warsaw where he also taught as an Associate Professor. He served as the General
Manager of the Computing Center of the Center for Geological Research in the
Central Office of Geology (Ministry of Geology) from 1972 to 1976 where he
developed and implemented Poland's first general database of geological and
mineral resources of Poland. He also implemented computer mapping systems, oil
and gas reservoir simulations, and production control for mining operations.
In 1976, he moved from Poland to accept consulting contracts in France and
the United States. From 1976 to 1982, he worked for several oil and gas and
mining firms, including OTC Oklahoma Production in Tulsa, Kansas Oil
Consolidated in Tulsa, John W. Mecom Company in Houston, InteResources Group,
Inc. in Houston, and British Sulphur Corporation in London, performing reservoir
modeling of secondary and tertiary oil reservoirs, inorganic polymer floods, and
underground coal gasification projects. During this time, he also developed
data acquisition and reserve balance systems for mines in the U. S., Mexico, and
Egypt.
He joined Oil Exploration and Production Company in Houston in 1982 and
served as an internal consultant and management advisor on computer applications
and emerging technologies. He provided technical support for large projects
including integrated exploration systems, reservoir simulation, enhanced oil
recovery, and evaluation of production. He developed and supported reservoir
models for some of Tenneco's largest oil and gas fields and authored numerous
proprietary exploration and drilling systems for Tenneco.
Dr. F. Horvath is currently Professor at the Eotvos University in Budapest.
Dr. Horvath now acts as the Company's chief geological advisor. He is
particularly familiar with many of the formations in which the Company has or is
planning to obtain concessions. At Eotvos University, he specializes in
instructing students in geophysics and geology for general and applied
geophysics, basin research, petroleum exploration, and seismic interpretation.
His primary field of research has always been the tectonic interpretation of
geological and geophysical data, particularly in the evolution of sedimentary
basins and the exploration for hydrocarbon resources. He is the principal
investigator of eight major research projects and has worked with leading
academic and industrial experts in Europe and the Americas. His contribution to
earth sciences has been acknowledged by a number of awards, including an
honorary fellowship in the European Union of Geosciences, Academia Europaea, and
the Geological Society of America.
Armando Ulrich acted as a consultant to the Company and served as an
officer of two of the Company's subsidiaries, Energy Global and Pol-Tex Methane
until March of 1997. Mr. Ulrich remains available for consultation on projects
of which he helped develop. Mr. Ulrich made the original introduction of the
Company to Energy Global and GlobeGas. From 1981 to 1988, he worked with a
number of bio-chemical institutes in the development of various bio-medical
projects. He currently produces wine and olive oil on properties he owns in
Tuscany, Italy.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's stock is not registered under Section 12 of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and, as a
consequence, its officers, directors, and principal shareholders are not subject
to the reporting obligations of Section 16 of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and its
subsidiaries for the fiscal years ended December 31, 1997, 1996, and 1995, to
the chief executive officer of the Company and the other executive officers of
the Company who received compensation in excess of $100,000. The Company also
paid significant consulting fees as set forth below under "Executive Employment
and Consulting Arrangements."
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------
Annual Compensation Awards Payoffs
------------------------------ --------------------- -------
Other
Annual All Other
Compen- Restricted LTIP Compen-
Name and sation Stock Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($) Awards($) SARs(#) ($) ($)
- ------------------------ ---- --------- -------- ------- ---------- -------- ------- ---------
President
Paul Hinterthur 1997 $294,100 0 0 0 0 0 0
CEO and director 1996 $ 27,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
Merlin V. Fish 1997 $ 0 0 0 0 0 0 0
Former CEO 1996 $ 0 0 0 0 0 0 0
1995 $115,693 0 0 0 0 0 0
Reinhard Rauball 1997 $874,120(1) 0 0 0 0 0 0
1996 $ 33,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
Hank Blankenstein 1997 $300,000 0 0 0 0 0 0
1996 $ 84,000 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0 0
J. Toni Preuss 1997 $203,902 0 0 0 0 0 0
1996 $ 0 0 0 0 0 0
1995 $ 0 0 0 0 0 0
(1) Dr. Rauball was paid fees for services rendered to the Company in
connection with its acquisitions during 1997, particularly the
negotiation of the business transaction in which the Company acquired EJ
as a wholly-owned subsidiary.
EXECUTIVE EMPLOYMENT AND CONSULTING ARRANGEMENTS
The Company has relied heavily on consultants to identify potential
projects, to negotiate the terms of acquisitions, to develop relationships with
governmental regulators and industry partners, and to complete business and
financing transactions. As a result of services in these areas, the Company
paid $1,260,253 in 1997 and $479,166 in 1996 to Wolfgang Rauball, the brother of
Reinhard Rauball, the Chairman of the Board of the Company. The Company did not
make any payments to Wolfgang Rauball in 1995. The Company also paid $509,467
in 1997, $449,600 in 1996, and $69,447 in 1995 to Armando Ulrich. The Company
also paid $273,113 during 1997 to Andrew K. Andraczke, a key employee in Poland
who does not perform executive level functions. If the Company does not
continue to make significant acquisitions and as revenues are developed, the
Company anticipates that it will rely more on the services of employees and the
amounts paid to consultants will be reduced.
COMPENSATION OF DIRECTORS
The Company compensated its outside directors for service on the board of
directors by payment of a monthly fee of $10,000 and reimbursement of expenses
incurred in attending board meetings. The Company does not separately
compensate its board members who are also employees of the Company for their
service on the board.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Management compensation is overseen by the board of directors of the
Company. The board has not appointed a compensation committee. The board of
directors consists of three members of executive management, Dr. Reinhard
Rauball, Paul Hinterthur, and Hank Blankenstein, and two outside directors who
are not employees of the Company.
The Company has to date been involved in the acquisition of interests in
potential hydrocarbon resources and in obtaining the necessary governmental
approvals, industry partners, and financing for the exploration of such
resources. The Company has compensated senior management based on the perceived
contribution of each to the potential growth of the Company. The Company
anticipates that it will continue to rely on both executive management and
outside consultants in connection with the acquisition of additional projects
and the initial development of existing projects. However, the Company
anticipates that if it is able to establish ongoing revenues from production, it
will retain management personnel as employees of the Company and compensate them
on a salary basis, based on comparable compensation packages offered by
employers within the Company's general industry and geographical area.
The Company approved a stock option plan in 1996 pursuant to which options
to acquire 2,000,000 shares at $1.50 per share were issued to senior management
and consultants of the Company. The Company did not issue any stock bonuses or
grant stock options during 1997 and does not have a plan in effect currently
that would permit it to do so in 1998. However, the Company may at some point
propose and adopt such a plan.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 1998, the number of shares
of the Company's common stock, par value $0.001, held of record or beneficially
by each person who held of record or was known by the Company to own
beneficially, more than 5% of the Company's common stock, and the name and
shareholdings of each officer and director and of all officers and directors as
a group.
Name of Person or Group(1) Common Stock Options(2) Percent(3)
- -------------------------- ------------ ---------- ----------
Principal Shareholders:
Chemilabco, B.V.(4) 11,480,000 0 18.2%
World Trade Center
Amsterdam Netherlands
Finance Credit and 2,688,333 2,200,000 7.7%
Development Corporation
"Chateau Amiral"
Bloc B-42, Boulevard
d'Italic
MC 9800 Monaco
Officers, Directors, and
Controlling Persons:
Dr. Reinhard Rauball(5) 600,000 250,000 1.3%
Wolfgang Rauball(6) 1,000,000 50,000 1.7%
Paul Hinterthur(7) 100,000 200,000 0.5%
Dr. Gregory P. Fontana 0 100,000 0.2%
Dr. Hans Fischer 0 100,000 0.2%
Hank Blankenstein 0 200,000 0.3%
J. Toni Preuss 0 0 0.0%
--------- ------- ----
All Officers, Directors,
and Controlling Persons
as a Group (7 Persons) 1,700,000 950,000 4.2%
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record by the listed shareholder, and
each shareholder has sole voting and investment power.
(2) Represents options to acquire shares of Common Stock at an exercise price
of $1.50 per share except for the option held by Finance Credit &
Development Corporation which is exercisable at $3.00 per share, all
currently exercisable.
(3) The percentage indicated represents the number of shares of Common Stock
held by the indicated shareholder divided by the 63,179,917 shares of
Common Stock issued and outstanding as of March 30, 1997.
(4) Includes shares held by Chemilabco's parent, Oxbridge, Ltd.
(5) Dr. Rauball is the record owner, as trustee, of an additional 50,000
shares, although he relinquished his trusteeship effective August 26,
1996, and consequently, these shares are not reflected on the foregoing
table.
(6) These shares are held in the name of the spouse and children of Wolfgang
Rauball. Wolfgang Rauball disclaims a direct economic interest in these
shares, but may be deemed to beneficially own such shares under the
guidelines of the Exchange Act.
(7) These shares are held in the name of the spouse of Mr. Hinterthur. Mr.
Hinterthur disclaims a direct economic interest in these shares, but may
be deemed to beneficially own them under the guidelines of the Exchange
Act.
TERMS OF PREFERRED STOCK
There are 2,391,968 shares of the Company's 1995 Preferred Stock issued and
outstanding. The holders of the 1995 Preferred Stock are entitled to dividends
in the amount of $0.05 per share per annum, payable 30 days after the end of
each calendar year, with the first payment to be made on January 31, 1996. Each
share of 1995 Preferred Stock is convertible into two shares of common stock at
the election of the holder on lawful presentation. The Company has the right to
redeem the 1995 Preferred Stock on not less than 30 days written notice at a
price of $36.84 per share, plus any accrued but unpaid dividends.
In connection with the acquisition of Danube, the Company authorized the
1996 Series Preferred Stock consisting of 1,250, 000 shares, all of which were
converted to 2,500,000 shares of common stock in 1997.
On May 29, 1997, the company authorized the 1997 Series A Convertible
Preferred Stock. This series of preferred stock is nonvoting and accrues
dividends at six percent annually. The preferred stock has a liquidation of
preference of $1,000 per share plus unpaid dividends before liquidation payments
applicable to common shares but after liquidation payments to other previously
issued and outstanding preferred stock series. The 1997 Series Preferred Stock
along with unpaid dividends thereon is convertible into common stock at the rate
of $1,000 dividend by the lessor of 125 percent of the average closing bid price
for five trading days prior to issuance or 82 percent of the average closing bid
price for five trading days prior to conversion. At December 31, 1997, 14,740
of the 15,000 shares of 1997 Preferred Stock, together with accrued dividends,
had been converted into 2,763,165 shares of common stock.
During 1997 and 1996, the Company accrued dividends of $423,153 and
$150,592, respectively, with respect to the Preferred Stock outstanding. The
Company is prohibited from paying dividends with respect to any other class of
security until such time as all accrued dividends on Preferred Stock have been
paid. Of this amount, $305,325 was paid in 1997 by the issuance of common
stock and $120,000 was paid in 1996 in cash. The cash payment may have been
inappropriate under Utah law due to the existence of a stockholders' deficit,
which could create a right to recover the payment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to January 1, 1997, the Company had a number of related party
transactions, descriptions of which are set forth in the Company's prior
reports.
Unless otherwise indicated, the terms of any of the following transactions
were not the result of an arms-length negotiations because such transactions
were between parties that were related or had other business, professional or
personal relationships that may have effected the terms of such transaction.
DR. REINHARD RAUBALL AND WOLFGANG RAUBALL
Dr. Reinhard Rauball, the chairman of the board of directors, and Wolfgang
Rauball, the Company's chief consultant, are brothers. Both gentlemen have been
key figures in arranging the original transaction with Energy Global, the
acquisition of the concessions in Poland, the later acquisition of Danube, which
holds concessions in Slovakia, the acquisition of EJ and the Yakutia Concession,
and the participation in the British Columbia project. From time to time, the
Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt
financing for the Company through parties with whom they have previous business
and personal relationships and have directly loaned some of their own funds to
the Company.
While there is no formal agreement among the Rauballs and other debt and
equity holders of Company, the practical result of the relationships is to vest
control of the Company in the Rauballs.
RELATIONSHIP WITH OXBRIDGE AND CHEMILABCO
Chemilabco and its parent, Oxbridge, Ltd., constitute the largest single
shareholder of the Company. (See Item 12. - Security Ownership of Certain
Beneficial Owners and Management.)
In 1997, Chemilabco purchased 1,430,000 shares of the Company's restricted
stock for $10 million.
On December 31, 1997, the Company still owed Oxbridge an aggregate of
$1,230,235. Oxbridge holds (with others) the shares of Pol-Tex Methane Sp.
zo.o. as security for the debt.
HERBERT ZIMMER
Herbert Zimmer, a certified accountant, holds 700,000 shares of common
stock and represents some of the Company's shareholders and debenture holders.
Mr. Zimmer has from time to time assisted the Company in completing its internal
accounting. During 1997, Mr. Zimmer advanced $2,023,306 as a short-term loan.
In connection with this loan, Mr. Zimmer deposited proceeds from the issuance of
common stock by the company and paid company obligations from those proceeds for
approximately 90 days. Thereafter, Mr. Zimmer returned control over any funds
to the Company. In 1997, Mr. Zimmer received $104,493 for management services
from these funds. Mr. Zimmer received compensation of $26,000, and $70,000
during 1996, and 1995, respectively, for accounting services.
LOAN TRANSACTIONS
The Company has also funded part of its on-going operations requirements in
funds advanced from related parties, including certain advances in 1997.
At December 31, 1997, the company owed $2,181,563 to related parties other
than Chemilabco. Approximately $1,772,000 of this amount was owed to Wolfgang
Rauball or his affiliates. These advances are evidenced by promissory notes
that bear interest at the rate of 10 percent per annum and are due December 31,
1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial statements,
are included immediately following the signatures to this report.
EXHIBITS
SEC
Exhibit Reference
Number Number Title of Document Location
------- --------- ---------------------------------------------------- ----------------------
1 (2) 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 EuroGas, Inc., Report on Form 8-K
and Danube International Petroleum Company, Inc., dated July 12, 1996,
dated July 3, 1996, as amended Exhibit No. 5*
3 (2) English translation of Transfer Agreement between Report on Form 8-K
EuroGas and OMV, Inc. for the Acquisition of dated June 11, 1997
OMV (Yakut) Exploration GmbH dated June 11, 1997 Exhibit No. 1*
4 (3) Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
5 (3) Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
6 (3) Designation of Rights, Privileges, and Preferences Quarterly Report on
of 1995 Series Preferred Stock Form 10-QSB dated
March 31, 1995,
Exhibit No. 1*
7 (3) Designation of Rights, Privileges, and Preferences Report on Form 8-K
of 1996 Series Preferred Stock dated July 12, 1996,
Exhibit No. 1*
8 (3) Designation of Rights, Privileges, and Preferences Report on Form 8-K
1997 Series A Convertible Preferred Stock dated May 30, 1997
Exhibit No. 1*
9 (3) Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
10 (4) Warrant Agreement dated July 12, 1996, with Report on Form 8-K
Danube shareholders dated July 12, 1996,
Exhibit No. 2*
11 (4) Registration Rights Agreement dated July 12, 1996, Report on Form 8-K
with Danube shareholders dated July 12, 1996
Exhibit No. 3*
12 (4) Option granted to the Trustees of the Estate of Annual Report on
Bernice Pauahi Bishop Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*
13 (4) Registration Rights Agreement by and among Annual Report on
EuroGas, Inc., and Kukui, Inc., and the Trustees of Form 10-KSB for the
the Estate of Bernice Pauahi Bishop fiscal year ended
December 31, 1995,
Exhibit No. 11*
14 (4) Convertible Debenture issued to Lux Immobilien Annual Report on
for $2,200,000 Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 12*
15 (4) Option issued to OMV Aktiengesellschaft to acquire up Annual Report on
to 2,000,000 shares of restricted common stock Form 10-KSB for the
fiscal year ended
December 31, 1996,
Exhibit No. 13*
16 (10) Agreement in Principle between EuroGas, Inc., Annual Report on
and Chemilabco B.V., dated June 1996, Form 10-KSB for the
as amended November 1996 fiscal year ended
December 31, 1995,
Exhibit No. 13*
17 (10) 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
18 (10) Settlement Agreement by and among Kukui, Inc., and Annual Report on
Pol-Tex Methane, Sp. zo.o., McKenzie Methane Form 10-KSB for the
Rybnik, McKenzie Methane Jastrzebie, GlobeGas, fiscal year ended
B.V. (formerly known as McKenzie Methane Poland, December 31, 1995,
B.V.), and the Unsecured Creditors' Trust of the Exhibit No. 15*
Bankruptcy Estate of McKenzie Methane Corporation
19 (10) Employment Agreement with Martin A. Schuepbach Report on Form 8-K
dated July 12, 1996 dated July 12, 1996,
Exhibit No. 6*
20 (10) General Agreement governing the operation of Report on Form 8-K
McKenzie Methane Poland, B.V. dated August 3, 1994,
Exhibit No. 2*
21 (10) Concession Agreement between Ministry of Annual Report on
Environmental Protection, Natural Resources, and Form 10-KSB for the
Forestry and Pol-Tex Methane Ltd. fiscal year ended
December 31, 1995,
Exhibit No. 18*
22 (10) Association Agreement between NAFTA a.s. Gbely Annual Report on
and Danube International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 19*
23 (10) Agreement between Moravske' Naftove' Doly a.s. Annual Report on
and Danube International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 20*
24 (10) Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*
25 (10) Form of Promissory Note, as amended, with attached Annual Report on
list of holders Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*
26 (10) Amendment #1 to the Association Agreement Entered Annual Report on
on 13th July 1995, between NAFTA a.s. Gbely and Form 10-KSB for the
Danube International Petroleum Company fiscal year ended
December 31, 1996,
Exhibit No. 25*
27 (10) Initial Agreement between Belmont Resources, Inc., Annual Report on
EuroGas Incorporated, and Danube International Form 10-KSB for the
Petroleum Company dated April 21, 1997 fiscal year ended
December 31, 1996,
Exhibit No. 26*
28 (10) Letter of Intent by and between Polish Oil and Gas Annual Report on
Company and Pol-Tex Methane, dated April 28, 1997 Form 10-KSB for the
fiscal year ended
December 31, 1996,
Exhibit No. 27*
29 (10) Purchase and Sale Agreement between Texaco Slask Report on Form 8-K
Sp. zo.o., Pol-Tex Methane Sp. zo.o. and dated March 24, 1997
GlobeGas B.V. Exhibit No. 1*
30 (10) English translation of Articles of Association of the Report on Form 8-K/A
TAKT Joint Venture dated June 7, 1991, as amended dated June 11, 1997
April 4, 1993 Exhibit No. 3*
31 (10) English translation of Proposed Exploration and Report on Form 8-K/A
Production Sharing Contract for Hydrocarbons dated June 11, 1997
between the Republic of Sakha (Yakutia) and the Russian Exhibit No. 4*
Federation and the TAKT Joint Venture
32 (10) Mining Usufruct Contract between The Minister of Quarterly Report on
Environmental Protection, Natural Resources and Form 10-Q dated
Forestry of the Republic of Poland and Pol-Tex September 30, 1997
Methane, dated October 3, 1997 Exhibit No. 1*
33 (10) Agreement between Polish Oil and Gas Mining Joint Quarterly Report on
Stock Company and EuroGas, Inc., dated Form 10-Q dated
October 23, 1997 September 30, 1997
Exhibit No. 2*
34 (10) Agreement for Acquisition of 5% Interest in a Quarterly Report on
Subsidiary by and between EuroGas, Inc., B. Grohe, Form 10-Q dated
and T. Koerfer, dated November 11, 1997 September 30, 1997
Exhibit No. 3*
35 (10) Option Agreement by and between EuroGas, Inc., Quarterly Report on
and Beaver River Resources, Ltd., dated Form 10-Q dated
October 31, 1997 September 30, 1997
Exhibit No. 4*
36 (21) Subsidiaries Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 24*
37 (27) Financial Data Schedule This Filing
[FN]
*Incorporated by reference
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1997, the
Company did not file any reports on Form 8-K.
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 report to be
signed on its behalf by the undersigned, hereunto duly authorized.
EUROGAS, INC.
Dated: March 31, 1998 By /s/ Paul Hinterthur
Paul Hinterthur, President
(Principal Executive Officer)
Dated: March 31, 1998 By /s/ Hank Blankenstein
Hank Blankenstein, Vice-President
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: March 31, 1998 By /s/ Paul Hinterthur
Paul Hinterthur, Director
Dated: March 31, 1998 By /s/ Reinhard Rauball
Dr. Reinhard Rauball, Director
Dated: March 31, 1998 By /s/ Gregory P. Fontana
Dr. Gregory P. Fontana, Director
Dated: March 31, 1998 By /s/ Dr. Hans Fischer
Dr. Hans Fischer, Director
Dated: March 31, 1998 By /s/ Hank Blankenstein
Hank Blankenstein, Director
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Eurogas, Inc.
We have audited the accompanying consolidated balance sheets of
Eurogas, Inc. (a Utah corporation) and Subsidiaries (referred to
herein as "the Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits. We did not audit the consolidated statements of
operations, stockholders' equity (deficit) and cash flows of Globegas
B.V. and subsidiaries, wholly-owned subsidiaries, for the year ended
December 31, 1995, which statements reflect a net loss of $2,210,336.
Those statements were audited by other auditors whose report has been
furnished to us and included an explanatory paragraph describing
conditions which raised substantial doubt about the ability of
Globegas B.V. to continue as a going concern. Our opinion, insofar
as it relates to the amounts included for Globegas B.V. and
subsidiaries, is based solely on the report of the other auditors.
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
and the report of the other auditors provide a reasonable basis for
our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Eurogas, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 1998
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 17,247,667 $ 642,605
Other receivables 173,691 122,047
Other current assets 29,370 4,942
------------ ------------
Total Current Assets 17,450,728 769,594
------------ ------------
Property and Equipment
Mineral interests and equipment,
net of valuation allowance 22,723,660 14,252,754
Other property and equipment 1,010,772 2,423,039
------------ ------------
23,734,432 16,675,793
Less: accumulated depreciation (767,177) (2,144,113)
------------ ------------
Net Property and Equipment 22,967,255 14,531,680
------------ ------------
Other Assets 336,560 600,865
------------ ------------
Total Assets $ 40,754,543 $ 15,902,139
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 1,532,949 $ 1,389,859
Accrued liabilities 3,420,042 2,659,721
Accrued income taxes 753,306 911,051
Notes payable - current portion 1,107,944 3,688,788
Notes payable to related
parties - current portion 1,270,547 1,062,091
------------ ------------
Total Current Liabilities 8,084,788 9,711,510
------------ ------------
Long-Term Debt
Notes payable 2,246,773 5,733,702
Notes payable to related
parties 911,016 4,897,845
------------ ------------
Total Long-Term Debt 3,157,789 10,631,547
------------ ------------
Minority Interest - 950,000
------------ ------------
Stockholders' Equity (Deficit)
Preferred stock, $.001
par value; 3,661,968 shares
authorized; 2,392,228 and
3,641,968 shares issued and
outstanding; $499,197 liquidation
preference 2,392 3,642
Common stock, $.001 par value;
325,000,000 shares authorized;
62,283,934 shares and 49,143,862
shares issued and outstanding 62,284 49,144
Additional paid-in capital 61,644,596 14,828,173
Accumulated deficit (32,197,306) (20,271,877)
------------ ------------
Total Stockholders' Equity
(Deficit) 29,511,966 (5,390,918)
------------ ------------
Total Liabilities and
Stockholders' Equity (Deficit) $ 40,754,543 $ 15,902,139
============ ============
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1997 1996 1995
------------ ----------- -----------
Sale of Mineral Interests
and Equipment $ 500,000 $ - $ -
Operating Expenses
Cost of mineral interests
and equipment sold 500,000 - -
Impairment of mineral interests
and equipment 1,972,612 - -
Depreciation and amortization 25,637 132,459 480,999
General and administrative 6,716,365 4,739,380 3,528,114
------------ ----------- -----------
Total Operating Expenses 9,214,614 4,871,839 4,009,113
------------ ----------- -----------
Other Income (Expenses)
Interest income 517,845 18,588 9,580
Interest expense (3,680,090) (1,057,039) (644,991)
Foreign currency exchange
gains (losses), net 331,837 (401,141) (81,213)
Other income 43,123 48,840 16,184
------------ ----------- -----------
Other Expenses, Net (2,787,285) (1,390,752) (700,440)
------------ ----------- -----------
Loss Before Income Taxes (11,501,899) (6,262,591) (4,709,553)
Benefit from Income Taxes - - 468,148
------------ ----------- -----------
Net Loss (11,501,899) (6,262,591) (4,241,405)
Preferred Dividends 423,530 150,592 86,176
------------ ----------- -----------
Loss Applicable to Common
Shares $(11,925,429) $(6,413,183) $(4,327,581)
============ =========== ===========
Basic and Diluted Loss
Per Common Share $ (0.22) $ (0.16) $ (0.13)
============ =========== ===========
Weighted Average Number
of Common Shares Used
In Per Share Calculation 54,705,726 41,059,000 32,459,436
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumulated Total
Additional During the Stockholders'
Preferred Stock Common Stock Paid-in Development Equity
Shares Amount Shares Amount Capital Stage (Deficit)
---------- -------- ---------- -------- ------------ ------------ ------------
Balance - December
31, 1994 2,391,968 $ 2,392 31,932,314 $ 31,932 $ 9,355,196 $ (9,531,113) $ (141,593)
Issuance of common
stock upon exercise
of stock options for
cash - - 157,793 158 38,648 - 38,806
Issuance of common
stock for compensation
to officer upon exercise
of stock option - - 41,667 42 9,958 - 10,000
Distribution to two
shareholders - - - - (1,150,000) - (1,150,000)
Issuance of common stock
for cash and conversion
of a $1,671,567 debenture,
$3.12 per share, net
of $75,546 offering
costs - - 842,259 842 2,626,520 - 2,627,362
Dividends on preferred
shares - - - - - (86,176) (86,176)
Net loss - - - - - (4,241,405) (4,241,405)
---------- -------- ---------- -------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1995 2,391,968 2,392 32,974,033 32,974 10,880,322 (13,858,694) (2,943,006)
Issuance of common
stock for cash - - 18,912 19 6,789 - 6,808
Issuance of common stock
upon conversion of
debentures - - 1,128,917 1,129 3,340,621 - 3,341,750
Issuance of common stock
as settlement costs - - 22,000 22 100,678 - 100,700
Issuance of preferred
and common stock for
purchase of subsidiary 1,250,000 1,250 15,000,000 15,000 499,763 - 516,013
Dividends on preferred
shares - - - - - (150,592) (150,592)
Net loss - - - - - (6,262,591) (6,262,591)
---------- -------- ---------- -------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1996 3,641,968 3,642 49,143,862 49,144 14,828,173 (20,271,877) (5,390,918)
Issuance of common
stock and 2,200,000
options for cash, net
of $75,000 offering
costs - - 4,929,999 4,930 20,170,070 - 20,175,000
Conversion of notes
payable and related
interest - - 2,646,907 2,647 10,945,344 - 10,947,991
Issuance for cash,
net of $1,750,000
offering costs 15,000 15 50,000 50 13,249,935 - 13,250,000
Options granted in
connection with
acquisition of OMV
(Jakutien) Exploration
GmbH - - - - 1,150,000 - 1,150,000
Conversion of 1996
Series Preferred
shares and related
accrued dividends (1,250,000) (1,250) 2,500,001 2,500 71,524 - 72,774
Conversion of 1997
Series
Preferred
shares and related
accrued dividends (14,790) (15) 2,763,165 2,763 229,800 - 232,548
Issuance to acquire
minority interest
in subsidiary - - 250,000 250 999,750 - 1,000,000
Dividends on preferred
shares - - - - - (423,530) (423,530)
Net loss - - - - - (11,501,899) (11,501,899)
---------- -------- ---------- -------- ------------ ------------ ------------
Balance - December 31, 1997 2,392,228 $ 2,392 62,283,934 $ 62,284 $ 61,644,596 $(32,197,306) $ 29,511,966
========== ======== ========== ======== ============ ============ ============
[FN]
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996 1995
------------ ----------- -----------
Cash Flows From Operating
Activities
Net loss $(11,501,899) $(6,262,591) $(4,241,405)
Adjustments to reconcile
net loss to cash provided
by operating activities:
Impairment of mineral
interests and equipment 1,972,612 - -
Depreciation and amortization 25,637 132,458 480,999
Expenses paid by issuance
of notes payable 1,321,295 - -
Compensation paid by issuance
of common stock - 351,808 10,000
Exchange (gain) loss (331,837) (401,141) (81,213)
Changes in assets and liabilities,
net of acquisitions:
Receivables 26,510 (97,595) 11,155
Accounts payable 1,814,545 (210,990) 177,508
Accrued liabilities 3,271,804 2,468,676 1,746,946
Accrued income taxes - - (468,938)
Other 156,451 33,903 9,200
------------ ----------- -----------
Net Cash Used in Operating
Activities (3,244,882) (3,985,472) (2,355,748)
------------ ----------- -----------
Cash Flows From Investing
Activities
Purchases of mineral interests,
property and equipment (5,391,568) (3,368,342) (1,294,324)
Proceeds from sale of property
and equipment 501,646 - -
Acquisition of subsidiaries,
net of cash acquired (6,314,287) 181,743 -
Increase in deposits and
prepayments - (540,000) -
------------ ----------- -----------
Net Cash Used In Investing
Activities (11,204,208) (3,726,599) (1,294,324)
------------ ----------- -----------
Cash Flows From Financing
Activities
Proceeds from issuance of notes
payable - related parties 339,191 4,542,487 3,398,854
Repayment of notes payable -
related parties (905,866) (1,002,026) (2,293,898)
Proceeds from issuance of
notes payable 1,135,729 4,846,995 1,245,196
Principal payments on notes
payable (2,707,551) (80,123) (397,500)
Proceeds from issuance of
common stock 20,175,000 6,808 974,060
Proceeds from issuance of
preferred stock 13,250,000 - -
Dividends paid on preferred
stock - (120,000) -
------------ ----------- -----------
Net Cash Provided By
Financing Activities 31,286,503 8,194,141 2,926,712
------------ ----------- -----------
Effect of Exchange Rate
Changes on Cash and Cash
Equivalents (232,351) 88,323 (2,253)
------------ ----------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents 16,605,062 570,393 (725,613)
Cash and Equivalents at
Beginning of Period 642,605 72,212 797,825
------------ ----------- -----------
Cash and Equivalents at
End of Period $ 17,247,667 $ 642,605 $ 72,212
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31,
1997 1996 1995
------------ ----------- -----------
Supplemental Disclosure of
Cash Flow Information
Cash paid for interest $ 362,622 $ 97,162 $ 8,025
Cash paid for income taxes - - -
Supplemental Schedule of Noncash Investing and Financing Activities
For the Years Ended December 31,
1997 1996 1995
------------ ----------- -----------
Common stock issued upon
conversion of notes payable
and accrued interest $ 10,947,991 $ 4,091,750 $ 1,692,108
Equity distribution to two
shareholders by issuance
of notes payable, which
were immediately repaid $ - $ - $ 1,150,000
Common stock issued as payment
of preferred dividends $ 305,322 $ - $ -
Common stock issued to acquire
minority interest in subsidiary $ 1,000,000 $ - $ -
Business acquisitions:
Fair value of assets
acquired $ 7,506,621 $ 4,999,405
Liabilities assumed (28,317) (433,392)
Obligation to sellers - (2,500,000)
Minority interest recognized - (950,000)
Preferred and common stock
issued - (516,013)
Stock options granted (1,150,000) -
------------ -----------
Cash Paid 6,328,304 600,000
Less cash acquired (14,017) (781,743)
------------ -----------
Net Cash Paid (Received) $ 6,314,287 $ (181,743)
============ ===========
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Eurogas, Inc. and Subsidiaries (the Company) have
acquired oil and gas properties through investments in joint ventures
in Poland, Slovakia and Yukutia, Russia. The Company's operations to
date have consisted of evaluation, acquisition, exploration and
disposition of interests in oil and gas properties.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of all majority-owned subsidiaries
and joint ventures from the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The presentation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions which affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
OIL AND GAS PROPERTIES--The full cost method of accounting is used
for oil and gas properties. Under this method, all costs associated
with acquisition, exploration, and development of oil and gas
properties are capitalized. These costs include costs of drilling and
equipping wells and directly related overhead costs. Capitalized
costs are categorized either as being subject to amortization (proved
properties) or not subject to amortization (unproved properties). The
cost of unproved properties, which is the only category of costs the
Company has to date, are not subject to amortization but instead are
assessed periodically and any resulting provision for impairment
which is required is charged to operations. The assessment for
impairment is based upon estimated fair value of the unproved
properties. All capitalized costs of properties subject to
amortization, including the estimated future costs to develop proved
reserves, if found, will be amortized on the unit-of-production
method using estimates of proved reserves.
Sales of unproved properties are accounted for as adjustments of
capitalized costs by recognizing cost of properties sold equal to the
sales proceeds which results in no recognition of gain or loss.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment are stated
at cost. Minor repairs, enhancements and maintenance costs are
expensed when incurred; major improvements are capitalized.
Depreciation of property is provided on a straight-line basis over
the estimated useful lives, as follows: buildings--40 years;
equipment--3 to 5 years. Upon retirement, sale, or other disposition
of other property and equipment, the cost and accumulated
depreciation are eliminated from the accounts, and gain or loss is
included in operations. Depreciation expense for the years ended
December 31, 1997, 1996 and 1995 was $83,885, $196,232 and $480,999,
respectively, of which $65,639 and $63,773 were capitalized in
mineral interests and equipment in 1997 and 1996, respectively.
FINANCIAL INSTRUMENTS--The Company considers all highly-liquid debt
instruments purchased with maturities of three months or less to be
cash equivalents. The amounts reported as cash and cash equivalents,
other receivables, accounts payable and notes payable are considered
to be reasonable approximations of their fair values. The fair value
estimates presented herein were based on estimated future cash flows.
The Company had cash in Polish banks in the amount of $532,627 and
$63,385 at December 31, 1997 and 1996 for which the Company would
incur certain taxes if the cash were transferred out of Poland.
LOSS PER SHARE--In the fourth quarter of 1997 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share". Under SFAS 128, 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 loss per share reflects the potential dilution which could
occur if all contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock. In the Company's present position, diluted loss per share is
the same as basic loss per share because potentially issuable common
shares would decrease the loss per share and have been excluded from
the calculation. The effect of the new standard on prior years was
immaterial; accordingly, prior periods have not been restated.
FOREIGN CURRENCY TRANSLATION--Foreign currency exchange gains and
losses have been reflected in the results of operations. Due to the
highly-inflationary Polish economy in which the Polish subsidiaries
operate, the U.S. dollar is considered their functional currency. The
U.S. dollar is also considered the functional currency of all other
foreign subsidiaries. Financial statements of foreign subsidiaries
are translated into U.S. dollars using historical exchange rates.
INCOME TAXES--Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences in the
balances of existing assets and liabilities on the Company's
financial statements and their respective tax bases and attributable
to operating loss carry forwards, computed at enacted tax rates when
such amounts are expected to be realized or settled.
STOCK BASED COMPENSATION--The Company accounts for stock-based
compensation from stock options granted to employees and consultants
based on the intrinsic value of the options on the date granted.
NEW ACCOUNTING STANDARDS--The Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information" in 1997. These statements, which are effective for
fiscal years beginning after December 15, 1997, expand or modify
disclosures and will have no impact on the Company's consolidated
financial position, results of operations or cash flows.
The Company adopted SFAS No. 128, "Earnings per Share", and SFAS No.
129, "Disclosures of Information about Capital Structure", in 1997.
In accordance with SFAS Nos. 128 and 129, both basic net loss per
share and diluted net loss per share as well as rights and
liquidation preferences of debt and equity securities and have been
presented in the accompanying consolidated financial statements.
NOTE 2--BUSINESS ACQUISITIONS
ACQUISITION OF DANUBE INTERNATIONAL PETROLEUM COMPANY, INC.-- On July
12, 1996, the Company completed an acquisition of Danube
International Petroleum Company, Inc. and Subsidiaries (Danube).
Danube is a joint venture partner in agreements for the exploration
and production of natural gas in Slovakia and the Czech Republic. All
of the issued and outstanding common stock of Danube was acquired for
$500,000 paid at closing, an obligation to pay $2,500,000 on or
before December 31, 1996, 15,000,000 shares of the Company's common
stock, 1,250,000 shares of 1996 Series preferred stock (which is
convertible into an aggregate of 2,500,000 shares of common stock),
and warrants to purchase up to 5,000,000 shares of common stock at
$3.00 per share during the five years subsequent to the date of the
acquisition. In addition, a $100,000 finder's fee was paid to a third
party. The acquisition of Danube was accomplished by Eurogas forming
a wholly-owned Texas subsidiary into which Danube was merged.
The acquisition was accounted for under the purchase method of
accounting, with the total purchase price being $3,616,013,
determined primarily based upon the fair value of the mineral
interests acquired. Accordingly, the preferred stock and common stock
issued were assigned values of $73,716 and $442,297, respectively,
which was equal to the par value of these shares. Goodwill was not
recognized from the acquisition but the portion of the purchase price
in excess of historical cost was allocated to the mineral interests
in unproved properties. The operations of Danube have been included
in the consolidated results of operations of the Company from July 1,
1996.
ACQUISITION OF REMAINING INTEREST IN POL-TEX METHANE AND DANUBE -- On
May 17, 1996 the Company acquired the remaining 15% interest in the
Company's subsidiary, Pol-Tex Methane Sp.Zo.o. from the Polish
Government for a cash payment of $5,225 and the release of the
obligation of the Polish Government to fund development costs of the
concession. The Company's operations are unchanged on a proforma
basis from this acquisition. On November 11, 1997, the Company
acquired a remaining minority interest in the Danube project by
issuing 250,000 shares of common stock valued at $1,000,000, which
was equal to the carrying value of the minority interest after
reclassification of related liabilities.
ACQUISITION OF OMV (JAKUTIEN) EXPLORATION GASELLSCHAFT m.b.H. -- On
June 11, 1997 the Company acquired all the issued and outstanding
stock of OMV (Jakutien) Exploration Gasellschaft m.b.H. (OMVJ), in
exchange for $6,252,724 in cash, options to purchase 2,000,000 shares
of common stock valued at $1,150,000, and a 5% interest in OMVJ's net
profits. OMVJ's primary asset is a 50% interest in a joint venture in
the Republic of Sakha (commonly known as Yakutia) of the Russian
Federation. Expenses relating to the purchase were $75,580.
The acquisition was accounted for under the purchase method of
accounting with the total purchase price of $7,478,304 determined
based upon the consideration paid and the fair value of the options
granted. The purchase price was allocated to the acquired assets and
liabilities of OMVJ based upon their fair values on the date of the
acquisition. The operations of OMVJ have been included in the
consolidated results of operations of the Company since the
acquisition date.
Summary unaudited pro forma results of operations for the years
ended December 31, 1997, 1996 and 1995, assuming the acquisition of
Danube occurred on January 1, 1995 and the acquisition of OMVJ
occurred on January 1, 1996 are as follows:
1997 1996 1995
------------ ----------- -----------
Revenues $ 500,000 $ - $ -
Net loss (11,589,555) (7,233,786) (4,443,798)
Net loss applicable to
common shares (12,913,085) (8,346,878) (4,592,474)
Net loss per common share (0.23) (0.20) (0.10)
NOTE 3--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
The Company has interests in oil and gas properties located in
Poland, Slovakia and Yakutia, Russia. A determination was not made,
nor has a determination been subsequently made, regarding the extent
of any potential oil and gas reserves relating to the Company's
interests in properties. The properties are periodically assessed for
impairment. During 1997, the investment in oil and gas interests in
the Czech Republic were determined to be impaired and an impairment
loss of $1,972,612 was recognized and charged to operations. The
capitalized costs of the other unproved properties were also
evaluated. The evaluation resulted in a determination that further
recognition of impairment of those properties was not necessary. All
oil and gas property interests are presently in the exploration stage
and no production has been obtained. Accordingly, amortization of the
cost of the properties has not begun.
Capitalized costs relating to oil and gas acquisition and exploration
activities and the related valuation allowance for impairment as of
December 31 are as follows:
1997 1996 1995
------------ ----------- -----------
Unproved properties $ 25,665,373 $15,221,855 $ 8,006,345
Less: Accumulated valuation
allowance (2,941,713) (969,101) (969,101)
------------ ----------- -----------
Net Capitalized Costs $ 22,723,660 $14,252,754 $ 7,037,244
============ =========== ===========
Costs incurred in oil and gas acquisition and exploration activities
during the three years ended December 31, are set forth below.
Property acquisition costs represent costs incurred to purchase or
lease oil and gas properties. Exploration costs include costs of
geological and geophysical activity and drilling exploratory wells.
1997 1996 1995
------------ ----------- -----------
Unproved property acquisition
costs $ 7,574,601 $ 4,217,069 $ -
Exploration costs 3,370,563 2,998,441 1,261,295
------------ ----------- -----------
Total Expenditures $ 10,945,164 $ 7,215,510 $ 1,261,295
============ =========== ===========
In August 1997, the Company closed a transaction with a subsidiary of
Texaco for the exploration and potential development of the Company's
coal bed methane gas interests held by a concession in Poland. The
Company retained a 14-percent to 20-percent carried interest in the
net profits from the property, computed after deducting capital and
operating costs incurred by the Texaco subsidiary, and transferred
the remaining interest in the property to Texaco in exchange for an
initial payment of $500,000 and payments of $2,500,000 due in
December 1998 and June 2000 if Texaco elects at those dates to
continue with the project. The agreement also granted first right of
refusal to Texaco to obtain a controlling interest in two other
property interests in Poland held by the Company. The payment
received during 1997 was recognized as a sale of the mineral interest
with costs of the property interest sold also recognized for the same
amount.
NOTE 4--OTHER PROPERTY AND EQUIPMENT
Other property and equipment consist of the following at December 31:
1997 1996
---------- -----------
Land $ 22,156 $ 17,725
Buildings 92,914 92,914
Drilling rigs and related equipment 895,702 2,312,400
---------- -----------
1,010,772 2,423,039
Less: Accumulated depreciation (767,177) (2,144,113)
---------- -----------
Net Other Property and Equipment $ 243,595 $ 278,926
========== ===========
NOTE 5--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at December 31, 1997 and 1996 were
as follows:
1997 1996
----------- -----------
Loan from a former officer, director and
employee, due on demand with interest at
10%, unsecured $ 290,206 $ 290,206
Amount due to a former officer - 652,601
Loan from a company associated with an
officer and director, due in 1999 with
interest at 7.5%, unsecured 362,477 269,643
Loan from an officer and director, due
in 1999, interest of 7.5% to 10%, unsecured 1,409,596 1,142,047
Loans from an officer and director who is
acting as trustee on behalf of others,
interest at 7.5% to 10%, due on demand
and in 1999, unsecured 119,284 1,405,439
7.5% convertible debenture, payable to
a consultant, converted during 1997 to
852,630 shares of common stock - 2,200,000
----------- -----------
Total Notes Payable to Related Parties 2,181,563 5,959,936
Less: Current Portion (1,270,547) (1,062,091)
----------- -----------
Notes Payable to Related Parties - Long-Term $ 911,016 $ 4,897,845
=========== ===========
NOTE 6--NOTES PAYABLE
Other loans and notes payable at December 31, 1997 and 1996 were as
follows:
1997 1996
----------- -----------
Loans due 1999, interest at 10%, unsecured $ 3,354,717 $ 4,022,591
Amount due to the former owners of Danube - 1,847,399
7% note paid in February 1997 - 1,802,500
7.5% convertible debentures - 1,750,000
----------- -----------
Total Notes Payable 3,354,717 9,422,490
Less: Current Portion (1,107,944) (3,688,788)
----------- -----------
Note Payable - Long-Term $ 2,246,773 $ 5,733,702
=========== ===========
Annual maturities of notes payable to related parties and others are
as follows:
Years Ending December 31:
1998 $2,378,491
1999 3,157,789
----------
$5,536,280
==========
NOTE 7--INCOME TAXES
For the Years Ended December 31,
1997 1996 1995
------------ ----------- -----------
Current foreign income tax
benefit $ - $ - $ 468,148
============ =========== ===========
Foreign currency exchange gains of $157,745 reduced accrued income
taxes by that amount during 1997 and were included in foreign
currency exchange gain during 1997. The related income tax
liability, which is payable in a foreign currency, did not change
during 1997.
Deferred tax assets are comprised of the following:
December 31,
1997 1996
----------- -----------
Tax loss carry forwards $ 2,885,384 $ 1,001,917
Reserves for contingencies 396,863 -
Less: Valuation allowance (3,282,247) (1,001,917)
----------- -----------
Net Deferred Tax Asset $ - $ -
=========== ===========
The following is a reconciliation of the amount of tax (benefit) that
would result from applying the federal statutory rate to pretax loss
with the provision for income taxes for the years ended December 31:
1997 1996 1995
------------ ----------- -----------
Tax at statutory rate (34%) $ (3,910,646) $(2,129,281) $(1,601,248)
Non-deductible expenses - - 763
State taxes, net of federal
benefit (154,969) - -
Deferred tax asset valuation
change 2,280,330 295,877 220,563
Effect of lower tax rates and
foreign losses with no federal
benefit 1,785,285 1,833,404 911,774
------------ ----------- -----------
Total Income Tax Benefit $ - $ - $ (468,148)
============ =========== ===========
The Company has operating loss carry forwards of approximately
$7,822,776 in various countries which expire from 1998 through 2012.
The Company's subsidiary, Globegas BV, has applied for a reduction in
an income tax liability of $753,306 in the Netherlands. The tax arose
from the sale of equipment at a profit by the former owner of
Globegas to the Company's Poland subsidiary. The Company's position
is that the gain on the sale should not have been taxable to
Globegas. The liability will continue to be reflected in the
Company's financial statements until the proposed reduction is
accepted by the Netherlands' tax authorities.
NOTE 8--RELATED PARTY TRANSACTIONS
Loans from related parties are described in Note 5.
During 1996, a shareholder of the Company, through his employer,
raised $1,992,000 in convertible debentures for the Company and was
paid a fee for the related services of $208,000. During 1997, the
shareholder advanced $2,023,306 as a short-term loan. In connection
with this loan, the shareholder retained control of the proceeds from
the issuance of common stock by the Company, and paid Company obligations
from those proceeds. The shareholder received $104,493 for management
services from these funds. The shareholder received compensation of
$26,000 and $70,000 during 1996 and 1995, respectively, for
accounting services.
NOTE 9--COMMITMENTS AND CONTINGENCIES
In 1995, the Company was issued a formal order that it was the
subject of an investigation by the United States Securities and
Exchange Commission (SEC), involving the financial and other
information set forth in the Company's periodic filings and press
releases. The Company has produced numerous documents and the oral
testimony of its officers and directors pursuant to extensive
subpoenas from the SEC. The SEC has obtained similar information from
the Company's prior independent public accountants. The SEC has given
no formal indication that it has completed its investigation and, the
Company cannot currently predict the duration or outcome of this
investigation.
Employment contracts with certain former officers of a subsidiary of
the Company were terminated during 1997 with no further liability
associated with those contracts.
A financial consulting firm retained by Danube prior to its acquisition
by the Company asserted a claim in 1996 that it was entitled to
commissions on financing raised for Danube. The claim was settled in
1997 by the Company paying $310,000. The settlement covers all
commissions due from funds raised or invested to date as well as funds
which may be raised in the future from parties which were introduced
directly or indirectly by the consulting firm.
As discussed further in Note 7, the Company recently proposed a
settlement of its tax liability in the Kingdom of the Netherlands.
A bankruptcy trustee appointed for certain former shareholders of
Globegas has asserted a claim to the proceeds that the Company has
and may receive from the Texaco agreement discussed in Note 3. The
Trustee's claim is apparently based upon the theory that the Company
may have paid inadequate consideration for its acquisition of
Globegas (which indirectly controlled the Pol-Tex Methane concession
in Poland) from former shareholders and therefore they are the true
owners of the proceeds received from the development of the Pol-Tex
Concession in Poland. The Company is vigorously defending against the
claim. The Company believes that the claim is totally without merit
based on the fact that a condition of a prior settlement with the
principal creditor of the estate bars any such claim, that the court
has no jurisdiction over Pol-Tex Methane or its interests held in
Poland, and that the Company paid substantial consideration for
Globegas.
During 1997, a shareholder asserted a claim against the Company based
upon an alleged breach of the settlement agreement between the
shareholder and the Company as a result of the Company's failure to
file and obtain the effectiveness of a registration statement for the
resale by the shareholder of 100,000 shares delivered to the shareholder
in connection with the settlement. In addition, the shareholder has
informed the Company and the court that it would be entering a claim
for failure to register the resale of the shares subject to its option
to purchase up to 2,000,000 shares of the Company's common stock. The
Company had denied any liability and intends to vigorously defend
the claims. The Company has filed a counterclaim against the shareholder
for breach of contract concerning its joint activities with the bankruptcy
trustee appointed for certain former shareholders of Globegas.
As a result of the Company's analysis of the Czech properties, the
Company's pursuit of those properties was terminated in 1997 and the
property was returned to the Czech partner. The Company has accrued
$328,000 for any continuing liability, although none has been
specifically identified, with respect to the Czech properties.
The Company paid $120,000 of dividends on its 1995 Series preferred
stock during 1996. The dividends may have been inappropriately paid
under Utah law due to the existence of a stockholders' deficit
throughout the year ended December 31, 1996. As a result, the Company
may have a claim against the preferred shareholders who received the
dividends for their repayment.
On August 30, 1997 the Company settled an obligation payable to the
former shareholders of Danube. In satisfaction of the $2,500,000
obligation and $346,590 of accrued interest, the Company issued
383,790 shares of common stock valued at $2,846,590. All claims
related to employment contracts with the former owners were released
in connection with the settlement.
During March of 1998 the Company was notified there may be certain
title problems related to an area of mutual interest to be explored
and developed by the Slovakian joint venture. The problem area is
outside of the Trebisov area where the Company has drilled five wells
and which are unaffected by the claim. The disputed area is located
in the southern portion of the property covered by the designations
contained in the Slovakian joint venture agreements and is subject to
a competing claim of ownership by a private Slovakian company. To the
extent the Slovakian joint venture may not have exploration rights as
previously contemplated, the Company's expansion beyond the Trebisov
area may be limited.
The Company believes the owners of Danube knew or should have known
about the problem prior to the acquisition of Danube and made no
disclosure concerning the problem. The Company has made a claim against
the former Danube shareholders for indemnity to the extent the Company
suffers any damage by reason of the potential title claim. As the
matter is in its initial stages, the Company cannot predict whether
impairment of the Slovakian mineral interests will be warranted, or if
impaired, whether the Company will be able to recover from the former
Danube shareholders.
The Company has determined that it has an obligation to a lender in
in connection with loans made principally to a subsidiary from 1995
through 1997. Management is in the process of negotiating a final
agreement with the lender to settle and determine all amounts owing,
but no agreement has yet been reached. Management has estimated that
the obligation will not exceed $1 million which amount has been
included in accrued liabilities at December 31, 1997 and charged to
interest expense during the year then ended. Because the amount of the
actual obligation has not been finally established with the lender, it
could ultimately be determined to be in excess of the amount accrued.
NOTE 10--STOCKHOLDERS' EQUITY
PREFERRED STOCK--The 1995 Series Preferred Stock (the 1995 Series),
issued on April 12, 1995, is non-voting, non-participating , and has
a liquidation preference of $0.10 per share plus unpaid dividends.
The 1995 Series stockholders are entitled to an annual
dividend of $0.05 per share. Each share of the 1995 Series shall
be converted into two shares of the Company's common stock upon lawful
presentation and shall pay dividends until converted. The Company has
the right to redeem the 1995 Series, on not less than 30 days written
notice, at a price of $36.84 per share, plus any accrued but unpaid
dividends. Annual dividend requirements of the 1995 Series are $119,598.
The 1996 Series Preferred Stock was issued on July 12, 1996. All of
the shares of 1996 Series Preferred Stock were converted into 2,500,001
shares of common stock (at the rate of two common shares per 1996 Series
Preferred share) on July 3, 1997, along with accrued but unpaid dividends.
On May 29, 1997, the Company authorized the 1997 Series A Convertible
Preferred Stock (the 1997 Series). This series of preferred stock is
non-voting and accrues dividends at $60.00 per share, or six percent
annually. The 1997 Series has a liquidation preference of $1,000 per
share, plus unpaid dividends before liquidation payments applicable to
common shares but after liquidation payments to other previously issued
and outstanding preferred stock series. The 1997 Series along with unpaid
dividends thereon is convertible into common stock at the rate of $1,000
divided by the lessor of 125 percent of the average closing bid price for
five trading days prior to issuance or 82 percent of the average closing
bid price for five trading days prior to conversion. At December 31, 1997,
14,740 of the 15,000 shares of 1997 Series preferred stock along with
related accrued dividends had been converted into 2,763,165 shares of
common stock.
NOTE 11--STOCK OPTIONS AND WARRANTS
The Company granted stock options and warrants during 1996 in
connection with the acquisition of Danube and the settlement of
claims relating to the Globegas reorganization in prior years.
During 1997, options to purchase 2,000,000 common shares were issued
in connection with the acquisition of OMVJ. The options are
exercisable at $4.00 per share until April 1, 1998, then at $5.00 per
share until March 31, 1999 and then at $6.00 per share until March
31, 2000 at which time they expire if not exercised. Options to
purchase 2,200,000 shares of common stock were granted in conjunction
with the issuance of 2,999,999 shares of common stock for $7,500,000
(less $75,000 in offering costs). The options are exercisable at $3.00
per share through December 31, 1998. Options to purchase 250,000 were
granted in connection with an investment firm contract. The options
are exercisable at $11.79 per share through August 9, 2002.
The Company granted options to its employees and consultants during
1996 under the Stock Option and Award Plan which was adopted in
January 1996. Options for 2,000,000 shares of common stock were
authorized and granted in January 1996. The options granted to
employees and consultants are exercisable at $1.50 over a period of
five years beginning July 18, 1996 and expire January 18, 2001. The
market value of the underlying common stock was equal to the exercise
price on the date granted and, therefore, no compensation relating to
the options was recognized during 1996 or 1997.
The Company has accounted for stock-based compensation from stock
options granted to employees and consultants based on the intrinsic
value of the options on the date granted. Had compensation cost for
the Company's Stock Option and Award Plan been determined based on
the fair value at the grant dates for options under that plan
consistent with the alternative method of SFAS No. 123, "Accounting
for Stock-Based Compensation", the Company's loss applicable to
common shares and loss per common share for the years ended December
31, would have been increased to the pro forma amounts shown below.
1997 1996 1995
------------ ------------ -----------
Net loss applicable to
common shares:
As reported $(11,925,429) $ (6,413,183) $(4,327,581)
Pro forma 11,925,429 (8,492,547) (4,327,581)
Basic and diluted net loss
per common share:
As reported $ (0.22) $ (0.16) $ (0.13)
Pro forma (0.22) (0.21) (0.13)
The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for
1997 and 1996, respectively: average risk-free interest rate - 5.7% and
5.7%; expected volatility - 95.5% and 82.6%; expected life - 1.4 years and
5.0 years.
A summary of the status of stock options as of December 31, 1997 and
1996 and changes during the years ended December 31, are presented
below:
1997 1996
------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning ---------- ------- --------- ---------
of year 9,000,000 $ 2.78 - $ -
Granted 4,450,000 3.94 9,000,000 2.78
---------- ---------
Outstanding at end of year 13,450,000 3.54 9,000,000 2.78
========== =========
Exercisable at end of year 13,300,000 3.56 8,800,000 2.81
Weighted-average fair value of
options granted during the
year $2.07 $1.04
Options and warrants outstanding at December 31, 1997 were exercisable at
prices ranging from $1.50 to $11.75 with remaining contractual lives from
1.0 to 4.6 years.
NOTE 12--SUBSEQUENT EVENTS (UNAUDITED)
In March 1998, the Company exercised its option to acquire a 16-
percent carried interest in the Beaver River Project in British
Columbia, Canada in exchange for $300,000 and 2,400,000 shares of
common stock. The Company will retain the right to purchase back
1,900,000 of the 2,400,000 common shares any time prior to April 15,
1999 if the Company determines that the results produced do not
warrant the continued holding of the carried interest. The
acquisition has been preliminarily valued at $7,875,000. Subsequent
to December 31, 1997, the Company acquired 993,333 units of United
Gunn Resources, Ltd. (each unit consisting of one share of common
stock and one warrant) for $950,000. United Gunn Resources, Ltd.
holds an approximately 12-percent working interest in the Beaver
River Project.
In March 1998, the Company acquired an indirect, minority interest in
a talc deposit located in Slovakia for $90,000 in cash and the
requirement to spend approximately $5,000,000 in development of the talc
deposit over the next two and one-half years.
On January 28, 1998, the Company entered into an agreement with a
public relations firm in Europe. The firm agreed to provide for
dissemination of information regarding the Company in Germany and
other European countries for a period of one year. The Company is
obligated to pay the firm $9,315 per month and granted the firm an
option to purchase up to 100,000 restricted shares of common stock at
$6.50 per share through January 28, 2000.
As discussed further in Note 9, the Company has become aware of a
potential title dispute with respect to a portion of its oil and gas
properties in Slovakia.
Report of Independent Registered Auditors
-----------------------------------------
To the Board of Directors of Globegas B.V.
We have audited the accompanying consolidated balance sheets of Globegas B.V.
(formerly McKenzie Methane Poland, B.V.) (a development stage enterprise) as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years then
ended and for the period from June 7, 1991 (inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. 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 Globegas B.V. (a
development stage enterprise) as of December 31, 1995 and 1994 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years then ended and for the period of June 7, 1991
(inception) through December 31, 1995 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company and its subsidiaries will continue as a going concern. The Company's
subsidiaries have experienced losses since inception as a result of their
development activities. As discussed in Note B to the financial statements, the
Company's subsidiaries are in the process of developing coal bed methane gas
reserves but commercial production has not begun. In addition, the future of the
Company is dependent on obtaining additional financing and compliance with its
concession agreement with the Polish Ministry of Environmental Protection of
Natural Resources and Forestry. These factors, among others, as discussed in
Note B to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton
GRANT THORNTON
Warsaw, Poland
Date October 31, 1996
Globegas B.V.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1995 1994
CURRENT ASSETS
Cash and Cash equivalents $ 71,870 $ 793,795
Sundry debtors 19,691 16,900
Material and supplies 8,251 8,284
Prepayments 2,071 22,647
---------- ----------
Total current assets 101,883 841,626
PROPERTY AND EQUIPMENT - AT COST
Gas properties not subject to amortization,
at cost using the full cost method of 8,006,345 6,745,050
accounting
Other property and equipment 2,377,751 2,341,903
---------- ----------
10,384,096 9,086,953
Less accumulated depreciation and valuation
allowance 2,916,557 2,446,002
---------- ----------
7,467,539 6,640,951
---------- ----------
$ 7,569,422 $ 7,482,577
=========== ===========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 312,350 $ 114,050
Current maturities of long-term debt 1,802,500 2,200,000
Accrued expenses 1,119,804 226,880
Unsecured notes payable 1,134,660 621,130
Taxes payable 762,575 1,231,613
Due to related parties 1,607,652 58,860
----------- -----------
Total current liabilities 6,739,541 4,452,533
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Common stock - $57.80 par value; authorized
2000 shares; issued and outstanding 600
shares on 1995 and 424 shares in 1994 34,680 24,507
Contributed capital 11,056,243 11,056,243
Cumulative foreign currency translation adjustment
(14,749) (14,749)
Deficit accumulated in the development stage (10,246,293) (8,035,957)
----------- -----------
Total stockholders' equity 829,881 3,030,044
----------- -----------
$ 7,569,422 $ 7,482,577
=========== ===========
Globegas B.V.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
June 7 1991
(inception)
through
Year ended December 31, December 31,
------------------------------------------- ------------
1995 1994 1993 1995
Revenues
Interest income $ 7,795 $ 18,562 $ 239,423 $ 277,780
Foreign exchange gains --- 83,422 72,810 211,676
Other 16,184 --- --- 16,184
---------- ----------- ---------
23,979 101,984 312,233 505,640
Costs and expenses
Impairment of gas properties --- --- 969,101 969,101
Depreciation and valuation
allowance 470,555 614,393 588,345 1,947,456
General and administrative 1,816,676 1,087,913 1,614,116 5,401,223
Foreign exchange losses, net 80,175 --- --- 370,312
Interest 315,805 316,330 258,797 890,932
Other 20,142 132,975 105,166 410,334
---------- ---------- --------- ----------
2,703,353 2,151,611 3,535,525 9,989,358
---------- ---------- --------- ----------
LOSS BEFORE TAXES 2,679,374 2,049,627 3,223,292 9,483,718
INCOME TAXES (469,038) 154,656 140,004 762,575
NET LOSS $ 2,210,336 $ 2,204,283 $ 3,363,296 $10,246,293
========== =========== ========== ==========
Net loss per share $ 4,733.05 $ 5,324.36 $ 8,408.24 $ 24,512.66
========== =========== ========== ==========
Weighted average outstanding
shares 467 414 400 418
========== =========== ========== ==========
Globegas B.V.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995, 1994, and 1993 and the period from June, 1991 (inception)
through December 31, 1995
Deficit Total
accumulated capital
Capital stock Cumulative the and
------- -----
Contributed translation development stockholders'
Shares Amount capital adjustment deficit equity
------ ------ ----------- ----------- ----------- -------------
Balance at June, 1991 --- $ --- $ --- $ --- $ --- $ ---
(Inception)
Contributed capital --- --- 3,675,264 --- 3,675,264
Net loss --- --- --- --- (835,015) (835,015)
--------- ----------- ------------- ------------ -------------
Balance January 1, 1992 --- --- 3,675,264 --- (835,015) 2,840,249
Issuance of capital stock 400 23,120 --- --- --- 23,120
Net loss --- --- --- --- (1,633,363) (1,633,363)
Foreign currency translation
adjustment --- --- --- (382) --- (382)
--------- ----------- ------------- ------------ -------------
Balance December 31, 1992 400 23,120 3,675,264 (382) (2,468,378) 1,229,624
Contributed capital --- 4,000,000 4,000,000
Foreign currency translation
adjustment --- --- --- 16,563 16,563
Net loss --- --- --- --- (3,363,296) (3,363,296)
--------- ---------- ------------- ------------ -------------
Balance, December 31, 1993 400 23,120 7,675,264 16,181 (5,831,674) 1,882,891
Issuance of additional shares
of capital stock 24 1,387 3,380,979 --- --- 3,382,366
Foreign currency translation
adjustment --- --- --- (30,930) --- (30,930)
Net loss --- --- --- --- (2,204,283) (2,204,283)
Balance December 31, 1994 424 $ 24,507 11,056,243 $ (14,749) $ (8,035,957) $ 3,030,044
Issuance of additional shares
of capital stock 176 10,173 --- --- --- 10,173
Net loss --- --- --- --- (2,210,336) (2,210,336)
--------- ---------- ------------- ----------- ------------ -----------
Balance December 31, 1995 600 $ 34,680 $ 11,056,243 $ (14,749) $(10,246,293) $ 829,881
========= =========== ============= ============ ============ ===========
Globegas B.V.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
June 7 1991
(inception)
through
Year ended December 31, December 31,
-------------------------------------------------------------------
1995 1994 1993 1995
Net loss $ $ $ $
Adjustments to reconcile net loss to (2,210,336) (2,204,283) (3,363,296) (10,246,293)
net cash used in operating
activities
Impairment -- -- 969,101 969,101
Depreciation and amortization 470,555 614,393 588,345 1,947,456
Decrease (increase) in sundry debtors 9,662 11,593 9,426 121,993
Decrease (increase) in materials and
supplies 35 43,652 12,025 (7,482)
Decrease (increase) in prepayments 20,675 13,540 10,728 (36,466)
(Decrease) increase in accounts
payable 186,517 (63,616) (143,284) 381,322
Increase(decrease) in accrued
expenses 894,406 223,457 (21,815) 1,136,208
Increase (decrease) in taxes pending (469,038) 154,565 140,004 762,575
------------- ------------ ------------ -------------
Net cash used in operating
activities (1,097,524) (1,206,608) (1,798,766) (4,971,586)
Cash flows from investing activities
Payments for gas properties (1,261,295) (1,650,424) (1,951,464) (8,006,345)
Capital expenditure for other
property and equipment (35,848) (185,470) (186,835) (2,377,751)
------------- ------------ ------------- -------------
Net cash used in investing
activities (1,297,143) (1,835,894) (2,138,299) (10,384,096)
Cash flows from financing activities
Proceeds from related party
borrowings 1,548,792 286,339 1,516,264 7,152,829
Repayment of related party
borrowings -- (331,709) (3,665,160) (5,545,177)
Proceeds from issuance of long-term
debt -- -- 2,200,000 2,200,000
Proceeds from issuance of notes
payable 116,030 390,481 114,804 793,283
Proceeds from issuance of stock and
capital contributions
10,173 3,382,366 4,000,000 11,090,923
------------- ------------ ------------ -------------
Net cash provided by financing
activities 1,674,995 3,727,477 4,165,908 15,691,858
Effect of exchange rate changes on
cash
(2,253) (57,386) (66,456) (264,306)
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (721,925) 627,589 162,387 71,780
Cash and cash equivalents at
beginning of year
793,795 166,206 3,819 --
------------- ------------ ------------ ------------
Cash and cash equivalents at end of
year $ 71,870 $ 793,795 $ 166,206 71,870
============= ============ ============ ============
Supplemental information: No interest or tax payments have been made since
inception.
Globegas B.V.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, l994, and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Description of Business and Principles of Consolidation
-------------------------------------------------------
On August 2, 1994 MCK Development entered into an agreement with Energy Global
AG (EGA), a subsidiary of EuroGas Inc., to sell all of the outstanding shares of
Globegas B.V. The agreement provided for the acquisition to be on an instalment
basis which has resulted in 100% ownership of Globegas B.V. by EGA as of October
4, 1995. Effective August 25, 1995 Globegas B.V. changed its name from McKenzie
Methane Poland B.V.
The consolidated financial statements include the accounts of Globegas B.V. and
its three Polish subsidiaries -- Pol-Tex Methane Sp. z o.o. (PTM), McKenzie
Methane Rybnik Sp. z o.o. (MMR) and McKenzie Methane Jastrzebie Sp. z. o.o.
(MMJ). Globegas B.V. (the Company) is a Dutch holding company. PTM and MMJ
were formed with the state owned Jastrzebska Spolka Weglowa Spolka Akcjna
(JSWSA) who hold a 15% interest (Refer to Note I - Subsequent events). MMR was
formed with the state owned Rybnicka Spolka Weglowa Spolka Akcjna (RSWSA) who
hold a 15% interest. PTM has obtained a 35 year concession for exploration from
the Polish Ministry of Environmental Protection of Natural Resources and
Forestry and is in the process of developing coal bed methane gas reserves in
the Upper Silesian Coal Fields of Poland. The Company began methane gas
exploration in 1991. It is devoting substantially all of its efforts to
exploring and developing the methane gas reserves. However, proved reserves have
not been established. MMR commenced preliminary exploration activities during
the year. MMJ has no current activities. All intercompany accounts and
transactions have been eliminated on consolidation. As operating losses in PTM
applicable to the minority interest (JSWSA) exceed the minority interest's share
capital, all the losses have been charged to PTM and included in the
accompanying financial statements.
2. Use of estimates
----------------
The preparation of financial statements in conformity with United States
generally accepted accounting principles ("US GAAP") requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
3. Development Stage Enterprise
----------------------------
The Company's operating subsidiary has devoted substantially all of it's efforts
to exploring for and development of coal bed methane gas reserves. Commercial
production has not commenced at December 31, 1995.
4. Gas Properties Not Subject to Amortization
------------------------------------------
The full cost method of accounting is used to account for gas properties. Under
this method of accounting all costs incidental to the acquisition, exploration,
and development of properties are capitalized and amortised using the units of
production method. These costs include costs of drilling and equipping wells,
as well as directly related overhead costs which includes the costs of company
owned equipment. At December 31, 1995, a determination cannot be made about the
extent of methane gas reserves that should be classified as proven reserves.
Consequently, the associated properties have not yet been amortized. The
Company expects to begin gas production in 1997. These costs are evaluated
periodically for impairment and if an impairment is indicated, the costs are
charged to operations. Due to drilling in certain areas for which the Company
did not have its concession confirmed and currently has no rights to future
production, impairment has been deemed to occur and the capitalised costs and
certain properties are included in costs and expenses in the accompanying
statement of operations for the year ended December 31, 1993.
Costs incurred for gas properties consist of the following:
Acquisition and
Period incurred Exploration
Costs
Year ended December 31. 1995 $ 1,261,295
Year ended December 31. 1994 1,650,424
Year ended December 31, 1993 1,951,464
Year ended December 31, 1992 1,850,442
Period from June 7, 1991 to December 31, 1991 1,292,720
-----------
$ 8,006,345
===========
All the Company's gas properties are located in Poland. The Company had the
following capitalized costs relating to gas properties at December 31,
1995 1994
Unevaluated gas properties $ 7,037,244 $ 5,775,949
Proved gas properties 969,101 969,101
----------- -----------
8,006,345 6,745,050
Less accumulated valuation allowance 969,101 969,101
----------- -----------
$ 7,037,244 $ 5,775,949
=========== ===========
5. Depreciation
------------
Depreciation is provided on a straight-line basis over the estimated useful
lives, at the following rates:
Buildings 40 years
Equipment and vehicle 3 to 5 years
6. Loss Per Share
--------------
Loss per share is calculated using the weighted average number of shares
outstanding during each year. Common stock equivalents result in negative
dilution and have not been included in the calculation.
7. Cash Equivalents
----------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. At December 31, 1995
and 1994 $64,466 and $64,489 respectively were held by banks in Poland. The
Company would incur certain costs if the cash were to be transferred out of
Poland.
8. Foreign Currency Translation
----------------------------
In the year ended December 31, 1995, the financial statements of the Company are
measured using US Dollars, as the functional currency. The consolidated balance
sheet accounts are translated into US dollars at the year-end rates of exchange
and the consolidated statements of operations items are translated at the
weighted average exchange rates for the year. Accordingly, the effect of
translating the Company's financial statements into U.S. dollars has
historically been recorded as a separate component of stockholders' equity.
Foreign exchange adjustments attributable to the financial statements of the
Company's subsidiaries, due to the highly inflationary Polish economy in which
they operate, are reflected in the operating statement.
9. Date of Inception - Stock Agreement
-----------------------------------
The Company was formed under an agreement dated June 7, 1991. The Company was
"in-formation" until the stock was formally issued in July, 1992.
The June 7, 1991 agreement identified a former investor as a 50% owner. The
agreement also required the former investor to make cash contributions up to
$20,300,000 for funding of the Polish methane gas exploration. Of the
$20,300,000 required contribution, the former investor made cash contributions
prior to March, 1992 of $3,675,264. When the stock was issued in July, 1992,
due to the unfulfillment of the former investor's required cash contributions,
he was not issued shares of stock. Instead, the amount is included as capital
contribution.
10. Income Taxes
------------
Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases at enacted tax rates when such amounts are expected to be realised or
settled.
11. Long life assets
----------------
The introduction of FASB 121 - "Impairment of Long Life Assets" in the 1996
financial statements is unlikely to have a material impact.
NOTE B - REALIZATION OF ASSETS
At December 31, 1995, current liabilities exceeded current assets by $6,637,658
and the Company has losses of $10,246,293 accumulated since inception in July,
1991. The Company is considered a development stage company as defined by
Statement of Financial Accounting Standard No. 7, having not commenced planned
principal operations. Activities have been limited to exploration activities
with no significant production of methane gas to date. Realization of the
amounts included in gas properties is dependent on the Company developing
sufficient quantities of proven and probable reserves of methane gas. If
exploration activities prove to be unsuccessful, all or a portion of the gas
properties not subject to amortization will be charged to operations. These
factors raise substantial doubt about the ability of the Company to continue in
its current form. In order to continue, the Company will need to raise debt and
equity capital to meet the short and long term obligations of the Company and to
fund the exploration and development of proven reserves of methane gas on
concessions currently held by the Company. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence
NOTE C - OTHER PROPERTY AND EQUIPMENT
Other property and equipment consist of the following at:
December 31.
------------
1995 1994
Buildings and land $ 254,440 $ 254,440
Drilling rigs and related equipment 2,123,311 2,087,463
2,377,751 2,341,903
Less accumulated depreciation 1,947,456 1,476,901
$ 430,295 $ 865,002
NOTE D - LONG-TERM DEBT
Long-term debt payable at December 31, 1995 and 1994 is as follows
December 31.
------------
1995 1994
Note payable to OMV Aktiengcsellschaft an Austrian $ 1,802,500 $ 2,200,000
Company, with interest at 7% repayable $400,000 due
March 31, 1995 and subsequent quarterly instalments of
$260,000 plus interest beginning July 1, 1995. The note is
denominated in US dollars. The note is secured by certain
drilling equipment, office equipment and land and
buildings. The note contains an option OMV can exercise
to purchase 25% of Pol-Tex Methane Sp. z o. o. should the
Company default on the repayment of the note.
1,802,500 2,200,000
Less Current Maturities (1,802,500) (2,00,000)
$ ------ $ ------
=========== ============
The company has not made the quarterly repayments as required by the terms of
the note payable to OMV. As a result the Company is in default, and
accordingly, the whole amount of the note has been classified as current in the
accompanying balance sheet. OMV has not exercised their option to purchase PTM.
NOTE E - UNSECURED NOTES PAYABLE
December 31
-----------
1995 1994
Unsecured notes payable to employee, denominated in US
dollars, payable on demand with interest rate at 12.5% $ 290,206 $ 290,206
Unsecured note payable to former director, denominated in
US dollars, payable in March 1995 with an interest
rate of 10% 108,027 108,027
Unsecured loan payable to minority shareholder of EuroGas Inc,
denominated in US dollars, payable in July 1996 with an
interest rate of 10% 245,196 ----
Unsecured loan payable to company controlled by alternate director
denominated in US dollars, payable by December 1996 with
an interest rate of 10% 268,334 ----
Other 222,897 222,897
---------- ----------
$1,134,660 $ 621,130
========== ==========
NOTE F - DUE TO RELATED PARTIES
Due to related parties consist of the following at:
December 31.,
-------------
1995 1994
Payable to holding company, EGA 1,548,792
Payable to former holding company, MCK Development 58,860 58,860
---------- ---------
$1,607,652 $ 58,860
========== =========
NOTE G - INCOME TAXES
December 31,
1995 1994 1993
The provision for income tax expense,
all current, consists of the following:
Dutch Domestic Income Tax (469,038) 154,656 140,004
========== ========= =========
Deferred tax assets are comprised of the following:
Tax loss carry forwards 323,000 264,000 167,000
Less valuation allowance (323 000) (264,000) (167,000)
---------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
The net charge in the deferred tax valuation allowance was $59,000 and $97,000
for the years ended 1995 and 1994, respectively. At December 31, 1995 PTM had
tax loss carry forwards of approximately $323,000 in Poland, expiring at various
dates through 1997.
Dutch Domestic income tax is assessed at various rates on foreign exchange
gains, gains on the sale of property and equipment and interest income
NOTE H - RELATED PARTY TRANSACTIONS
A former stockholder and director of the Company provided various administrative
services through a company for which he is an employee. The payments for these
services in the years ended December 31, 1994 and 1993 were approximately
$194,000 and $237,000, respectively.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company has entered into employment contracts for consulting services with
certain individuals, which include a former director and members of his
immediate family. The contracts range from six months to three years and will
continue until either party to the contract gives notice to terminate.
Current Future commitments under these contracts are as follows;
Payable in 1996 $ 170,400
Payable in 1997 99,400
----------
$ 269,800
==========
By a decision of the Ministry of Environmental Protection of Natural Resources
and Forestry dated March 19, 1996 the Company is committed to investing
$2,918,000 by December 31, 1996 in accordance with a specific investment
schedule set out by the Ministry. As at September 30, 1996 the Company has met
approximately 80% of its obligations.
The concession agreement with the Ministry of Environmental Protection of
Natural Resources and Forestry stipulates that the following payments are to be
made once commercial production commences:
i one time cost of $287,900
ii 9% of sales over a period of 20 years
The Company has not entered into agreements with the owners of land where
drilling has taken place or where proposed drilling is too take place as to the
price for the land once commercial production commences.
On August 9,1995 the Company's parent, EuroGas Inc. was served a formal order of
private investigation by the US Securities and Exchange Commission (SEC). To
date the SEC has issued a subpoena requiring the production of certain
documents. The SEC staff has advised that its inquiry should not be construed
as an indication by the SEC or its staff that any violations of law have
occurred.
Dutch law requires the annual statutory filing of financial statements with the
Chamber of Commerce in the Netherlands. The company has only filed through the
year ended December 31, 1992 and as a result could incur a maximum penalty of
$5,000.
NOTE J - SUBSEQUENT EVENT
On May 17, 1996 the Company acquired the remaining 15% interest in PTM.
On June 7, 1996 the Company entered into an agreement with a major oil and gas
entity which provided that the Company would only negotiate with such a major
oil and gas entity concerning the sale of PTM or the joint development of the
concessions held by PTM until January 31, 1997.