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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
EUROGAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 33-1381-D 87-0427676
(STATE OR OTHER JURISDICTION (COMMISSION FILE NO.) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
942 EAST 7145 SOUTH, SUITE 101A
MIDVALE, UTAH 84047
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (801) 255-0862
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE NONE
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant on March 31, 1999, based upon the closing bid price for the
Common Stock of $1.0625 per share on March 31, 1999, was approximately
$81,947,535. Common Stock held by each officer and director and by each other
person who may be deemed to be an affiliate of the Registrant have been
excluded. As of March 31, 1999 the Registrant had 79,402,925 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INDEX TO FORM 10-K
PAGE
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PART I
Items 1 and 2. Business and Properties..................................... 1
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
Documents Filed
1. Financial Statements
2. Financial Statement Schedule
3. Exhibit List
Reports on Form 8-K
Exhibits
Financial Statement Schedules
SIGNATURES.................................................................... 36
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PART I
This Annual Report on Form 10-K for the year ended December 31, 1998 (the
"Form 10-K") contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that involve risks and uncertainties. The reader is cautioned that the
actual results of EuroGas, Inc. (the "Company") will differ (and may differ
materially) from the results discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include those factors
discussed herein under "Factors That May Affect Future Results" and elsewhere in
this Form 10-K generally. The reader is also encouraged to review other filings
made by the Company with the Securities and Exchange Commission (the
"Commission") describing other factors that may affect future results of the
Company.
ITEMS 1. & 2. BUSINESS AND 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 interests in several large exploration
concessions and is in various stages of identifying industry partners, farming
out exploration rights, undertaking exploration drilling, and seeking to develop
production. The Company is also involved in co-generation and several mineral
reclamation projects. Unless otherwise indicated in this Report, all dollar
amounts are reflected in United States dollars.
When used herein, the "Company" includes EuroGas, Inc., and its wholly
owned subsidiaries, Euro Gas (UK) Limited, Danube International Petroleum
Company ("Danube"), EuroGas GsmbH Austria ("EG," previously OMVJ), EuroGas
Polska Sp. zo.o. ("EuroGas Polska") and EnergyGlobal A.G. ("EnergyGlobal"), and
the subsidiaries of each of these subsidiaries, including GlobeGas B.V.
("GlobeGas"), Pol-Tex Methane, Sp zo.o. ("Pol-Tex"), McKenzie Methane 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 "-- History."
Poland. One of the Company's early projects was a coal bed methane gas
concession in Poland that was transferred in 1997, with a retained net profits
interest, to a subsidiary of Texaco, Inc. ("Texaco"). Texaco drilled six wells
to complete its appraisal and evaluation of the concession and spent over $12
million, but recently determined not to proceed with the project due to early
gas production figures received from the project which were considered
un-economical by Texaco. On March 19, 1999, EuroGas Polska, a wholly-owned
subsidiary of the Company, entered into a purchase agreement with Texaco,
providing for the acquisition of the Texaco coal-bed methane project in Poland,
and the transfer from Texaco of the concession to EuroGas Polska, in exchange
for a payment in the amount of $175,000. The agreement is subject to approval by
the Polish Ministry of Environmental Protection, Natural Resources and Forestry.
The Company is of the opinion that gas production figures obtained by Texaco may
have been considered un-economical to Texaco but, due to the Company's belief
that EuroGas Polska will incur lower operating costs than Texaco, could be
economical to the Company. The Company also has entered into joint venture
agreements with major state-owned coal mines in Poland to exploit other
concessions in Poland which are not affected by the Texaco decision. The Company
has subsequently been granted, in April 1998, through its subsidiary Pol-Tex,
another concession in Upper Silesia, Poland, only recently has the Company
received the paperwork on this concession, dated March 31, 1999. Also in 1998,
the Company, through its subsidiary EuroGas Polska, applied to the Ministry of
Environmental Protection, Natural Resources and Forestry for an oil and gas
concession in the Carpathian area in south east Poland.
EuroGas Polska has created a consortium with National Power Plc., the
largest power generation company in Great Britain, and with VEW Energie AG, a
large utility company in Germany, to develop a power project in Zielona Gora
(Western Poland). The agreement calls for creation of a joint venture company
"Energetyka Lubuska" which will submit the proposal to the Polish partner EC
Zielona Gora. The Company expects that the proposal will be approved in the next
90 days. The power plant plans to deliver 180 Mega
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Watts ("Mwe") of electricity and 180 Mega Watt Thermal (generated heat to be
used for district heating system)("MWt"). The cost of the project is
approximately $150 million.
In the fall of 1997, the Company 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, oil and natural gas concession interests.
The Company, through EuroGas Polska, is presently exploring for oil and natural
gas under this agreement in southeastern Poland. See "-- Activities in Poland."
Ukraine. The Company recently entered into an agreement with
Aktiengesellschaft for Mineraloel and Chemie AG ("RWE-DEA"), a large German
integrated oil and natural gas concern, to undertake a 50/50 development of
projects with various Ukrainian State and private companies to be selected by
RWE-DEA. The Company has identified several possible projects and is currently
in the process of completing a plan with RWE-DEA to proceed in the Ukraine. The
Company has entered into several Joint Activity and Joint Venture Agreements
with several State owned Ukrainian oil and gas concerns to continue exploration
and development of oil, natural gas and coal bed methane gas in the Ukraine. See
"-- Activities in Ukraine."
Slovakia. The Company now has four projects in Slovakia. The first is a
joint venture to develop a natural gas field with NAFTA Gbely a.s. ("NAFTA"), an
energy concern that was formerly part of the Czechkoslovakian national oil and
gas company. The second is the majority ownership in a private Slovak Company
Maseva s.r.o, which owns an adjacent oil and gas concession, next to the NAFTA
concession area, known as Maseva. The third project for the exploration of oil
and gas reserves is a large 2500 sq. kilometer concession in the Carpathian
Mountains adjacent to the Polish and Ukrainian borders. The fourth is a 43%
working interest in development of a large talc deposit; the majority interest
being held by Thyssen Schachtbau GmbH and Dorfner AG, two leading German
industrial companies. See "-- Activities in Slovakia."
Sakha Republic. In 1997, the Company acquired EuroGas (Jakutien)
Exploration GesmbH ("EJ"), formerly known as OMV (Jakutien) Exploration GesmbH,
from OMV Group ("OMV"), Austria's largest industrial company. EJ holds a 50%
interest in a joint venture established to explore and develop for oil and gas
in the Sakha Republic in northeastern Siberia. In January of 1999 the name of EJ
was changed to EuroGas GesmbH Austria ("EG"). See "-- Activities in the Sakha
Republic."
Canada. The Company holds two oil and natural gas interests in Canada. The
first is a 16% interest in the "Beaver River" natural gas project being
developed and operated by Wascana Energy Inc. ("Wascana"), a wholly-owned
subsidiary of Canadian Occidental Petroleum Limited. The second is an equity
interest of slightly more than 50% of the capital stock of Big Horn Resources
Ltd. ("Big Horn"), a Canadian full-service oil and gas producer. Big Horn's
business is conducted primarily in western Canada, particularly in the provinces
of Alberta and Saskatchewan, and its stock is quoted and traded on the Toronto
Stock Exchange. See "-- Activities in Canada."
Other Areas. In addition to the operations described above, the Company has
recently commenced projects in Slovenia, Germany and the United States. These
projects, which are in various stages of preliminary development, consist of a
participation interest in a Slovenian refinery, a short-term loan and potential
equity investment in a toxic waste disposal plant in Germany and an option to
acquire an equity interest in a gold mine located in central Idaho.
ACTIVITIES IN POLAND
General. The Company believes that Poland offers an attractive environment
in which to explore for and develop oil, natural gas and coal bed methane gas.
The Republic of Poland is bordered on the north by the Baltic Sea and Russia, on
the west by Germany, on the south by the Czech Republic and Slovak Republic and
on the east by Belarus and Ukraine. Poland is comprised of approximately 120,000
square miles, with a population of approximately 40 million people. Between 1945
and 1989, Poland's communist political and economic systems were directly
influenced by the former Soviet Union. In 1989, Poland peacefully asserted its
independence and adopted a new constitution, which established a parliamentary
democracy, and began
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Poland's transition to a market-based economy. In March 1999, Poland became a
member of NATO and is expected to join the European Union within the next
several years.
In August 1991, the United States Environmental Protection Agency (the
"EPA") and the United States Agency for International Development ("AID")
published a joint study on the possibility of economic recovery of methane gas
associated with Poland's extensive hard coal reserves. The joint study concluded
that coal bed methane was an abundant underdeveloped natural gas resource in
Poland and that the development and exploitation of this resource could provide
a much less environmentally harmful source of energy for Poland than its
extensive reliance on coal. The joint study stated that the potential methane
reserves were significant, estimating a total methane resource associated with
all coal mine concessions in Poland (both active and inactive mines) of in
excess of 1.3 trillion cubic meters (44 Tcf). Shortly thereafter, Poland began
to solicit bids for concessions to explore for coal bed methane gas.
Coal bed methane gas production has been occurring for some time in the
United States and has drawn attention in Poland due in part to the joint EPA/AID
study. Methane is a component of natural gas that is used as a fuel in various
industries and as a source of residential heating. Before natural gas is used as
a fuel, heavy hydrocarbons such as butane, propane, and natural gasoline are
separated to meet pipeline specifications. The "heavy hydrocarbons" are
typically sold separately. The remaining gas constitutes "dry gas" composed of
methane and ethane. Once 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.
The Company's Polish concessions were originally pursued by management of
GlobeGas as they realized that there was a growing demand in Europe for this
type of gas that is a cleaner and more efficient source of energy than coal. In
1989, the Polish government adopted the position that production of the
potential methane reserves would not only benefit the country economically but
could also significantly reduce air pollution and acid rain in the country.
Management believes that Poland's extensive collection pipeline network may
facilitate the transmission and sale of any gas discovered on the Company's
concessions.
The Polish Concessions and Related Matters. The Company's Polish
concessions were originally pursued by GlobeGas as management realized that
there was a growing demand in Europe for this type of gas that is a cleaner and
more efficient source of energy than coal. In January 1993, the Company's
wholly-owned subsidiary, Pol-Tex, was awarded exploration and exploitation
rights for coal bed methane gas in a concession, Nr.134/93, granted to Pol-Tex
by the Ministry of Environmental Protection, Natural Resources and Forestry,
located in the Upper Silesian Coal Basin (the "Pol-Tex Concession"). In
September 1993, the Company's wholly-owned subsidiary, GlobeGas, entered into a
joint venture agreement with Rybnicka Spolka Weglowa SA, ("Rybnicka"), a large
coal mining company owned by the Republic of Poland, to form McKenzie Methane
Ribnik Sp. zo.o. ("MMR") to exploit a second coal bed methane concession owned
by Rybnicka, also located in the Upper Silesian Coal Basin. In March 1996, the
Company's subsidiary, McKenzie Methane Jastrzebie Sp. zo.o. ("MMJ"), entered
into a joint venture agreement relating to a concession owned by Kopalnia Wegla
Kamiennego SA ("Jastrzebie"), another large coal mining company owned by the
Republic of Poland to develop coal bed methane gas production located in the
same area. These three concession areas (the "Polish Concessions") are located
in the Upper Silesian Coal Basin, covering approximately 92,000 acres in south
central Poland.
In August 1997, the Company completed an agreement with Texaco to transfer
the Pol-Tex Concession Nr. 134-93, the largest of the coal bed methane gas
concessions held by the Company, to Texaco in exchange for an initial payment of
$500,000. The transaction included the sale of assets and equipment having a
fair market value of approximately $200,000. Subsequent to the sale, Texaco
drilled six exploratory wells on the Pol-Tex Concession to complete its
appraisal and evaluation of the concession and spent over $12 million. Recently,
however, Texaco determined not to proceed with the project due to early gas
production figures received from the project which were considered uneconomic
for Texaco and a reduction in Texaco's world
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wide exploration budgets, which included all Polish activities, Texaco has
elected to curtail its Polish coal bed methane operations. Following a review of
the information gathered by Texaco, the Company concluded that EuroGas Polska
may be able to economically develop the concession due to its lower operating
costs. EuroGas has decided to buy back the concession rights and related matters
from Texaco. Early in 1999 Texaco made formal application to the Ministry of
Environmental Protection, Natural Resources and Forestry to transfer the
concession back to EuroGas Polska. The Ministry of Environmental Protection,
Natural Resources and Forestry has recently given verbal approval to issue a new
concession to EuroGas Polska to replace the one held by Texaco. On March 19,
1999, EuroGas Polska and Texaco executed a purchase agreement providing for
Texaco's transfer of the usufruct agreement to EuroGas Polska in exchange for a
payment of $175,000. The agreement is subject to approval by the Ministry of
Environmental Protection, Natural Resources and Forestry. In connection with the
1997 transfer of Pol-Tex Nr. 134/93 concession, the Company also granted Texaco
a right of first refusal to acquire control of the Company's subsidiaries MMR
and MMJ. With its planned return of the former Pol-Tex Nr. 134/93 concession,
Texaco also relinquished its option right to acquire majority interest in MMR
and MMJ. The Company will continue to operate these concession areas through its
subsidiaries MMR and MMJ.
EuroGas Polska currently anticipates that it will place seven wells in test
production on the Pol-Tex Concession before the end of the year. Because these
wells were previously drilled by Texaco and Pol-Tex, EuroGas Polska anticipates
that the cost of putting these wells into production will be approximately
$800,000.
On October 13, 1997, the Company received additional concession rights from
the Polish Ministry of Environmental Protection of Natural Resources and
Forestry to explore and potentially develop a 111 square kilometer coal bed
methane concession located near the MMR and MMJ concession areas. This
concession was granted to Pol-Tex by the Ministry of Environmental Protection,
Natural Resources and Forestry in April of 1998 according to Polish Government
documents; however, the Company only recently received the original concession
paperwork. The Company plans to prepare a feasibility study to explore the
possibilities of drilling gas wells for a combined heat and power plant project
or other uses. The concession agreement requires expenditure of $40,000 per year
pending completion of a feasibility study and negotiations with third parties
for the eventual purchase of natural gas.
During 1998, Pol-Tex acquired Katowice Drilling Enterprise, subject to
final governmental approval, through the Polish governmental privatization
program. Upon the payment of the equity contribution described below, Pol-Tex
will acquire a 51.4% stake of EuroSilesia Sp. zo.o. ("EuroSilesia"), a new
enterprise formed by the Company and the Ministry of Treasury of the Republic of
Poland. The newly created company will drill and service wells in Poland (Slask
and Belchatow) and in the Ukraine (Western Ukraine and Donetsk area). Pol-Tex
proposes to obtain a controlling interest in EuroSilesia. by putting equity into
the newly created company of approximately $400,000. EuroSilesia, currently
employs 120 people in Poland.
On October 23, 1997, the Company completed an agreement with Polish Oil &
Gas ("POGC") to mutually undertake, on a 50/50 cost basis, additional appraisal
and development activities for a large area located in the Carpathian, Flysch
and tectonic Foredeep areas of Poland. The agreement contemplates a total
expenditure by the Company of $15 million over a three-year period. The parties
established a joint team whose initial work is the interpretation of the data
generated by a $1.5 million wide-line seismic work program which was conducted
in the Rymanow-Leske area of the Carpathian Mountains in southeastern Poland. In
the framework of the agreement, a study for the Rymanow-Lesko block
(southeastern Poland) was prepared. The results of the study, based on the
seismic exploration and geological evaluation, identified substantial potential
for oil and gas accumulations exceeding 50 billion cubic meters of gas and 60
million barrels of oil. The potential reserve estimates are those of POGC and
its engineering staff and have not been independently verified by the Company.
The processing of wide line seismic for the area of Rymanow-Lesko has been
concluded. The final report from POGC will be received during the second quarter
of 1999. If the Company determines that the results are positive, it anticipates
that it will drill the first well in the fall of 1999. With positive results,
the Company expects to be able to raise the funds necessary to fund the project.
The technical team expects to use the interpreted data to select the site for
drilling a deep well (5,000 to 5,500 meters).
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The Company may seek to obtain an established industry partner to
participate in the proposed joint venture with POGC. 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.
In February 1999, the Company formed a consortium with National Power Plc.
(the largest power generation company in the UK) and with a large German utility
company, VEW Energie AG, ("VEW"), to develop a power generation project in
Zielona Gora, Western Poland. The agreement calls for creation of a joint
venture company "Energetyka Lubuska". The venture submitted an offer to regional
Polish power company, EC Zielona Gora, ("Zielona Gora"), to build a gas-fired
combined heat and power plant. The proposed power plant has been designed to
deliver up to 180 Mwe and 80MWt. The Company currently anticipates that the
total investment required to develop the project will be approximately $150
million. Of that amount, it is proposed that National Power Plc. and VEW will
pay approximately 55% and 37.5%, respectively, of the total project costs. The
Company will hold a 12.5% share in "Energetyka Lubuska" and will be required to
pay approximately 7.5% of the project cost. The Company presently anticipates
that the proposal will be approved by Zielona Gora within 60 days.
The Company has executed a memorandum of understanding with Erdol und
Erdgas Gommern, ("EEG"), a unit of Gaz de France, Paris, and Bayernwerk/VIAG of
Munich, Germany, to enter into negotiations with POGC to develop several sizable
proven gas reservoirs in Western Poland and to build gas treatment facilities
and gas transmission systems to supply natural gas to the power plant in Zielona
Gora. The agreement calls for creation of a 50/50 joint venture with the Polish
partner. The Company presently anticipates that the project will need an
investment of approximately $80 million, in addition to the $40 million already
invested by POGC.
ACTIVITIES IN UKRAINE
EuroGas has entered into a letter of intent with an Ukrainian state-owned
company, ZahidUkrGeologyia, to acquire 13 Ukrainian oil and gas properties,
which include both standard oil and gas and coal bed methane projects located in
the western Ukraine. The Company has recently entered into an agreement with
RWE-DEA to jointly establish a new company "RWE-DEA -- EuroGas E+D (Ukraine)"
under the terms and conditions the joint company would give RWE-DEA the right to
select those properties that have promising oil and natural gas reserves for
further exploration and development. Under the terms of the agreement, the
Company and RWE-DEA will be equal owners, although RWE-DEA will maintain
administrative control and will be the operator with respect to any proposed
field activities. To date, the parties have identified several potential joint
ventures in the Ukraine.
The Company has also signed two joint operation agreements with
ZahidUkrGeologyia and Chernihivnaftogasgeologyia, Ukrainian state-owned company.
The joint operation agreement with ZahidUkrGeologyia calls for study and
development of Ortinichska, a potential oil reservoir in the western Ukraine
with potential reserves exceeding 70 million barrels of oil and Kamienska
natural gas reservoir with potential reserves exceeding 20 billion cubic meters.
The projected reserves are those of ZahidUkrGeologyia and its engineers and have
not been independently verified by the Company. The project with
Chernihivnaftogasgeologiya calls for evaluation of two potentially large
reservoirs, the Selukivska oil reservoir, with potential reserves exceeding 100
million barrels, and the Pivdinno-Berestivska oil-gas-condensate reservoir. In
addition, the Company will conduct exploration work for U-prospect in the
Donetsk-Dniepr Depression. According to Ukrainian engineering estimates, these
multiple oil and gas exploration concessions contain potential oil reserves
exceeding 1 billion barrels in place and potential total gas reserves exceeding
500 billion cubic meters in place. The projected reserves are those of
Chernihivnaftogasgeologiya and its engineers and have not been independently
verified by the Company.
The Company has also executed a joint operation agreement with Ukraine's
largest oil company, Ukrnafta. The agreement calls for creation of a joint
venture to rejuvenate and increase the production for three producing oil
fields: Dolina and Kohanovka (Western Ukraine) and Glinsk-Rozbyshewsk (Poltava
Basin). The Dolina field is the largest producing field in the Western Ukraine,
with estimates of oil in place exceeding 1 billion barrels. The field produced
over 120 million barrels of oil and, with use of new technology,
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it is expected that a newly discovered reservoir from in the field can exceed an
additional 100 million barrels. The Glinsk-Rozbyshewsk and Kohanovka fields are
also estimated to have substantial remaining reserves which could exceed over
100 million barrels. Reservoir evaluation studies by the Company are currently
underway. The projected reserves are those of Ukrnafta and its engineers, and
have not been independently verified by the Company.
In October 1998, the Company formed a joint venture company, EuroDonGas,
with MGO (Ukrainian Mining Company) to explore and develop coal bed methane and
natural gas reservoirs in the Donetsk Coal Basin. MGO engineering documentation
places the potential recoverable reserves in excess of 20 billion cubic meters
to a depth of 1500 meters. The first exploration well in the concession area
will be drilled in the first half of 1999.
The Company has also executed an agreement to create a new joint venture
with a private Ukrainian company, Vuhlegas. The project is a coal-bed methane
recovery and utilization operation. The concession area is approximately 300
square km. It is estimated that the area contains 6-10 trillion cubic feet
("Tcf") of natural gas. The foundation of the a joint venture company
Eurovuglegas was finalized in December 1998. EuroGas will receive 70% of the
revenues from the production until the Company has recovered the full amount of
its investment, following which the revenues will be split on a 50/50 basis. The
joint venture will drill six coal bed methane/gas wells in the area of Gorska
mine (Donetsk area) as a part of a program to be financed by Global
Environmental Fund of the World Bank. This program is expected to be completed
in 1999.
ACTIVITIES IN SLOVAKIA
General. As part of its effort to diversify and expand its interests in
Europe, in July 1996 the Company acquired Danube International Petroleum Company
("Danube"), which held rights to participate in exploration for natural gas in
Slovakia and the Czech Republic. See "-- History." Since the acquisition, the
Company has focused its efforts on the development of the Slovakian project, and
abandoned its interest in the Czech Republic during 1997. Danube is a partner in
a joint venture agreement (the "Slovakian Oil & Gas Joint Venture") with NAFTA
Gbely A.S. ("NAFTA"). The principal focus of the Slovakian Oil & Gas Joint
Venture is natural gas exploration and development under a license covering
128,000 acres located in the East Slovakian Basin, a northeastern extension of
the Pannonian Basin which covers large parts of Hungary and the southeastern
part of Slovakia
In March 1998, the Company acquired a 55% equity interest in RimaMuran
s.r.o. ("RimaMuran"), a closely-held entity whose principal asset is a 43%
interest in Rozmin s.r.o. ("Rozmin"), the operating company which holds the
Gemerska Talc Deposit located in Roznava, Slovakia, approximately 50 kilometers
west of Kosice in eastern Slovakia. Thyssen Schachtbau GmbH, a leading
international mining engineering company, and Dorfner Group, a leading German
processing and refining company for industrial minerals, hold the remaining
shares in Rozmin. The Company purchased its interest for a cash payment in the
amount of $30,362 and 43% of the development budget which is expected to be
approximately $12 million over the next two and one-half years. (The Company's
obligation will be approximately $5 million).
Slovakia was until recently part of Czechoslovakia. On January 1, 1993, the
Czech Republic and Slovak Republic ("Slovakia") emerged as separate independent
nations. Slovakia is bounded on the north by Poland, on the east by Ukraine, on
the south by Hungary, and on the west by Austria and the Czech Republic.
Slovakia has an area of approximately 19,000 square miles and a population of
approximately 5.5 million people. Slovakia has not been as quick to adopt free
market reforms as Poland and the Czech Republic and the former communist party,
Party of the Democratic Left, remains a major political force. Slovakia is a
member of the International Monetary Fund and the European Bank for
Reconstruction and Development and an associate member of the European Union.
Bratislava is the capital of Slovakia and its largest city.
The main economic segments of Slovakia are agriculture and manufacturing.
Various foreign companies have located manufacturing plants in Slovakia, taking
advantage of skilled, cheap professionals and other labor, as well as the close
proximity to "Western" Europe. A prime example of this is Volkswagen A.G., which
has located manufacturing facilities in Slovakia. Energy in Slovakia is
primarily provided by massive gas and
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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 are conducted pursuant to a four-year exploration permit
granted on April 24, 1995 (the "License"). As it continues its exploration and
development of the area subject to the License, the Slovakian Oil & Gas Joint
Venture will seek to acquire additional permits that have not yet been granted.
The Company is presently in discussions with officials of NAFTA and the
Slovakian government to discuss extension of or re-issue of the License. Early
negotiations indicate low risk potential for the License not to be extended or
re-issued. Prior to the Company's acquisition of its interest in the Slovakian
Oil & Gas Joint Venture, eleven wells were drilled in the area covered by the
License. All of these wells had gas shows, although none were completed for
commercial production. The Company believes that new wells can be drilled
offsetting the old wells and that, if the new wells have similar gas shows, they
can be completed with routine western completion techniques that now exist for
the recovery of gas from these types of formations.
The Slovakian Oil & Gas Joint Venture drilled its initial well, Trebisov
5R, in what is known as the South Cluster. In the course of such drilling, the
Company encountered a 980 meter thick gas column subdivided into an upper
interval (appearing at 1575 meters - 2100 meters below ground level) and a lower
interval (2100 meters - 2555 meters deep). In December of 1996, after
hydrological fracturing, the upper interval tested 1 million cubic feet of gas
("MMcf") per day through a 10 millimeter choke with a flowing pressure of 450
pounds per square inch ("psi") and the lower interval tested 0.4 MMcf per day
through an 8 millimeter choke, with a flowing pressure of 275 psi. The
preliminary testing, conducted by Schlumberger, an internationally recognized
oil and gas service company, was conducted prior to the cleaning up of the well
and removing water from the well.
Based upon the initial test results, the Company has engaged Ryder Scott, a
leading petroleum engineering firm, to prepare a reserve analysis on the
Trebisov reservoir. The joint venture also completed a 148 sq. km. 3-D seismic
survey covering the South Cluster and a prospective area to the north. A survey
to map anomalous concentrations of gas in the surface soil samples was completed
in the licensed acreage to highlight areas for new seismic surveys. In 1998, the
Slovakian Oil & Gas Joint Venture completed the remaining three wells of the six
wells planned for initial drilling. No drilling is planned in the licensed area
during 1999.
Under the terms of the joint venture agreement, the Company was obligated
to provide 75% ($4.98 million) of the projected initial test phase funding of
$6.64 million (including seismic testing) and 60% ($4.08 million) of the
projected capital investment cost for the initial production phase of $6.8
million. All funds required for the initial test phase have been expended and
the drilling is now being paid 60% by the Company and 40% by NAFTA. When the
cost of development and production exceeds $6.8 million, additional funds will
be paid 50% by the Company and 50% by NAFTA. The current projections indicate
that this limit will be exceeded during 1999.
During March 1998, the Company was informed by NAFTA that there may be
certain title problems related to areas of mutual interest proposed to be
explored and developed by the Slovakian Oil & Gas Joint Venture outside of the
Trebisov area. All of the wells drilled by the Company to date are located in
the Trebisov area and the Company is not aware of any title problems in that
area. The disputed area is located in the southern portion of the property
covered by the designations contained in the joint venture agreement and is
subject to a competing claim of ownership by a private Slovakian company. To the
extent that the Slovakian Oil & Gas Joint Venture does not have the right to
explore certain areas as previously contemplated, the Company's expansion beyond
the Trebisov area may be limited. The Company has asserted a claim against its
joint venture partner for the misrepresentation of the areas of mutual interest,
and has made a demand to be properly compensated. There have been ongoing
negotiations between the Company and its joint venture partner and the Company
received indications that the issue will soon be resolved. The Company has also
notified the former shareholders of Danube of a claim against them by reason of
this recent problem.
The Slovakian Oil & Gas Joint Venture has not established the extent of any
reservoir that may have been tapped by its activities to date and has not
entered into any contracts for the sale or transportation of any
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gas that might be recovered. If the Slovakian Oil & Gas Joint Venture is unable
to obtain the necessary permits or if it is unable to establish ongoing
production and sell the gas at a sufficiently high price to pay the associated
production costs, provide a return on the capital expenditures made, provide
funds for ongoing activities, and provide a profit, it may be unable to continue
its exploration and development activities or successfully produce any natural
gas that may be discovered.
Other Concessions. The Company recently completed an agreement to acquire a
majority interest a private Slovakian company Maseva s.r.o. which holds an oil
and gas concession adjacent to the Trebisov concession. This new concession,
known as Maseva, has overlapping claims with the Company's other concessions and
the Company expects to conduct appraisal and exploration work in the Trebisov
area during 1999. The Company completed exploration work consisting of a survey
to map anomalous concentrations of gas in surface soil samples to define areas
for new seismic surveys. The Company plans to conduct a three dimensional
seismic survey during the first six months of 1999. The approximate cost will be
$1.5 to $2.5 million. Based upon the survey results, the Company intends to
draft a comprehensive development plan. No drilling is planned in the licensed
area during 1999.
The Maseva agreement provides for the Company's acquisition of the Maseva
interest in exchange for the issuance of 2,500,000 shares of the Company's
common stock, $0.001 par value (the "Common Stock") and the grant of two-year
warrants enabling the holder to purchase up to 2,500,000 shares of Common Stock
for $2.50 per share (adjusted from an original $5.00 per share warrant price
because of the decline of the price of the Common Stock). The division of the
working interest for this territory will now be 67.5% for the Company, rather
than the 50% split which governs the adjacent Trebisov joint venture, provided
that the Company carries the cost of drilling the first two wells in the
previously disputed area.
By the purchase of the Maseva concession, the Company believes it will
solve any title problems it had with its original venture. The Company has
notified the former shareholders of Danube of a claim against them by reason of
the requirement to pay additional consideration for concession interests
originally represented as owned by Danube.
In September of 1998, the Company acquired a 51% interest in Envigeo Trade
s.r.o.("Envigeo"), a Slovakian private company which owns a 2,300 square
kilometer appraisal and survey concession in the northeast corner of Slovakia,
referred to as the Carpathian Flysch region, expiring in August 2001. This
region extends into Poland and Ukraine, where extensive discoveries of oil and
gas have been found. The acquisition was made from McCallan Oil and Gas GmbH of
Austria. The total price for the 51% participation interest was $1,500,000,
consisting of an initial payment of $500,000, which was made in September 1998,
and the balance of $1,000,000, which was paid in December 1998. McCallan Oil has
spent over $300,000 in exploratory activities over the last 18 months. The
Company is currently conducting a soil sampling survey in the Envigeo
concession. If the survey results are favorable, the Company intends to pursue
additional exploration and, if justified, development and production.
Slovakian Talc Deposit. In March 1998, the Company acquired a 55% interest
in RimaMuran s.r.o. ("RimaMuran"), a closely-held entity whose principal asset
is a 43% interest in Rozmin s.r.o. ("Rozmin"), the operating entity which holds
the Gemerska Talc Deposit located in Roznava, Slovakia, approximately 50
kilometers west of Kosice in eastern Slovakia. RimaMuran is a drilling service
company and presently employs approximately 70 people. Thyssen Schachtbau GmbH,
a leading international mining engineering company, and Dorfner Group, a leading
German processing and refining company for industrial minerals, hold the
remaining ownership interest in Rozmin. Exploratory holes drilled between 1987
and 1994 confirmed the existence of a large, world class, talc deposit located
approximately 350 meters, or 1150 feet, below the surface. The feasibility study
was prepared by one of Germany's leading engineering groups, Hansa GeoMin
Consult, GmbH for Deutsche Investitions- u. Entwicklungsgesellschaft mbH,
("DEG"). RimaMuran has the obligation to fund 44% of the projected $12 million
of capital costs over the next two and one-half years. RimaMuran does not have
the assets necessary to meet this obligation, and it is anticipated that the
necessary funding, if provided, would have to be provided by the Company.
The Company's majority owned subsidiary, RimaMuran, and the other joint
venture participants have continued to develop the Slovakian talc deposit. The
Company believes the exploitation of the talc deposit will
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be particularly favorable due to a strong feasibility study, the willingness of
DEG, a wholly-owned financing subsidiary of the German government, to
participate, and the presence of majority partners, Thyssen and Dorfner. The
joint venture has negotiated a non-recourse financing package which would give
DEG a 10% equity participation in the project in exchange for financing of which
9% would be contributed by RimaMuran and 1% by Thyssen and Dorfner. The
completion of the loan package is subject to the receipt by DEG of a Dorfner
guarantee to purchase a portion of the mined talc. Dorfner is now completing a
market survey to determine the amount of the guarantee it is willing to offer.
During the last two quarters of 1998, the Company advanced $801,178, consisting
of shareholder loans, to RimaMuran to fund its participation in the project. In
December 1998, the Company advanced an additional payment of approximately
$595,000 to Rosmin on behalf of RimaMuran as its percentage portion of the
feasibility study and the budget.
During the fourth quarter of 1998, Rosmin entered into discussions with
Lucenac, a member of the Rio Tinto Group, which is considered to be the largest
mining company in the world. As a result of these discussions, Lucenac has asked
for drilling of two more core holes in order to confirm previous test results
and data that is contained in the feasibility study performed by Thyssen and
Dorfner.
ACTIVITIES IN THE SAKHA REPUBLIC
General. On June 11, 1997, the Company acquired all of the issued and
outstanding stock of OMV (Jakutien) Exploration GmbH from OMV A.G., Austria's
largest industrial concern, in exchange for (a) the payment of $6,252,754, (b)
the grant of an option to acquire up to 2,000,000 shares of Common Stock at a
per share exercise price of $4.00 to $6.00 on a yearly sliding scale, (c) a five
percent interest in the acquired company's net profits from identified
preliminary oil and gas licenses, and (d) a one percent interest in the gross
production of the TAKT Joint Venture outside such licenses. Subsequently, the
subsidiary's name was changed to EuroGas (JAKUTIEN) Exploration GmbH ("EJ"). In
January of 1999, the name of EJ was changed to EuroGas GesmbH Austria ("EG").
The Republic of Sakha (Yakutia) (often referred to as "Yakutia" in English
and as "Jakutien" in German) is thinly populated (just over 1,000,000 people)
and covers approximately 3,100,000 square kilometers that the United States
Geological Service has rated as extremely rich in natural resources. There has
been limited commercial exploitation of hydrocarbons in Yakutia and current
production is generally limited to providing fuel for heat and energy to local
urban and industrial complexes, partly because of the general remoteness of the
area and the poor transportation network currently in existence. Since 1991, the
Yakutian government has put in place an economic and legal system that is
designed to encourage foreign investment and the export of hydrocarbons. The
Company's interest in acquiring EG was based in large part on the Company's
belief that EG's joint venture operations are well-positioned to participate in
the potential international gas export project which has been envisioned
pursuant to feasibility studies conducted by Korean, Chinese, and Japanese
consortiums. This region is currently again the subject of multinational
negotiations and discussions to build a pipe line from the Irkutsk natural gas
fields in Russia to China and Japan with the possibility of connecting the large
Sakha gas fields into the pipe line.
TAKT Joint Venture. EG's primary asset is a 50% interest in the joint
venture (known as "TAKT") with Sakhaneftegas, the national oil and gas company
of Yakutia. The conversion of TAKT to a joint stock company with limited
liability was approved by the Company and Sakhaneftegas on December 1, 1997 and
is expected to be finalized in the first half of 1999. TAKT was formed to
appraise, explore, develop, and, when appropriate, export oil and gas reserves
in two large areas of interest located in Yakutia. Yakutia has the largest land
area of the members of the Russian Federation and is located in the far eastern
portion of what was formerly the Soviet Union. TAKT has negotiated a detailed
agreement with Yakutia and the Russian Federation for the exploration,
production, and development of hydrocarbons located in the areas of interest.
TAKT currently holds two exploration blocks located near the city of Lensk,
which cover approximately 21,300 square kilometers (approximately 8,225 square
miles) located in the southeast section of the East Siberian platform or East
Siberian Basin. An application to extend the two exploration licenses for an
additional 20 years was submitted to the Sakha Ministry of Justice in January
1998. TAKT also holds rights of first refusal on any Sakha oil and gas projects
offered by Sakhaneftegas to third parties in the Sahka Republic.
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TAKT has been conducting activities within the two blocks for the past six
years, employing modern seismic and exploration techniques with encouraging
results. The exploration for and the production of hydrocarbons in Yakutia is
made more difficult by the climatic conditions, the general remoteness of the
area, and the lack of infrastructure. The area is subject to extreme arctic
conditions and does not have any facilities for transporting hydrocarbons to
existing markets. The Company's ability to exploit any potential benefit from
this project will rely, in part, on the activities of other independent entities
in constructing the necessary infrastructure and establishing markets for
hydrocarbons. The Company considers the TAKT project as a long-term investment.
In a feasibility study done by OMV, Austria's largest industrial concern, dated
March 30, 1993, OMV estimated future revenues for the TAKT Joint Venture at
$26.08 billion with net profits to OMV (Jakutien) GesmbH, now called EuroGas
Austria GesmbH, at $2.68 billion. The projected revenues are those of OMV and
its engineers and have not been independently verified by the Company.
Principal work undertaken by TAKT, during 1998, consisted of reprocessing
1700 kilometers of seismic lines. The reprocessing work was completed in January
1999 by Yakutskgeofisika, the geophysical arm of Sakhaneftegas, in Yakutsk. TAKT
has completed a preliminary interpretation of the first 400 kilometers of
reprocessed data in the vicinity of the 314-2 well that successfully tested gas
in a large structure in 1992. A pilot survey was conducted in the vicinity of
this well to test the applicability of a soil sampling method for detecting
anomalous concentrations of gas in surface soils. Results are expected during
the second quarter of 1999.
The Company presently anticipates that during 1999 TAKT will complete the
interpretation and mapping of the reprocessed seismic lines and will select a
well location. The date for commencement of this well will depend on technical
discussions with local drilling contractors and the ability of Sakhaneftegas to
provide its 50% contribution to the well cost. If the results of the
above-mentioned soil survey are positive, a new survey will be planned to cover
an extensive part of the license area.
EG and Sakhaneftegas each appoint two members to the Board of Directors of
TAKT with EG having the right to nominate the chairman who holds the
tie-breaking vote. Unanimous votes are required for any amendments of the joint
venture itself, the admission of new partners, any buying or selling of shares,
reappointment or dismissal of the director general, and certain other specified
actions. The Company has selected Paul Hinterthur, the Company's Chief Executive
Officer, and Dr. Mikhail Tsikel, the former Vice President of Sakhaneftegas and
an independent industry consultant engaged by the Company, as its
representatives on TAKT's Board of Directors, with Mr. Hinterthur serving as
Chairman.
ACTIVITIES IN CANADA
Beaver River. In October 1997, the Company entered into an option agreement
to acquire an interest in the Beaver River natural gas field located in
northeastern British Columbia. The gas field was originally discovered and
developed by Amoco Canada in the 1960s and was one of the largest producing gas
fields in British Columbia, producing at a daily rate of approximately 250 to
300 MMcf. Technical problems, due to over-production of natural gas, led to
excess water production and Amoco shut-in the field in 1978. In 1997, Wascana, a
subsidiary of Canadian Occidental Petroleum, has entered into an agreement to
attempt to reestablish commercial natural gas production in the project using
up-to-date technology. The contracting parties amended the terms and structure
of the transaction to some degree so that the Company has exercised a portion of
its option by first purchasing 993,333 units of United Gunn Resources, Ltd. (one
share of common and one warrant), for a total of $950,000. United Gunn
Resources, Ltd. holds an approximately 12% working interest in the project. At
its election, the Company may complete the exercise of its options and acquire 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 Common
Stock, for return of the interest, any time prior to April 15, 1999. EuroGas has
determined that the results produced warrant the continued holding of the direct
interest and will therefore exercise its option.
The operator of the Beaver River property, Wascana, is a wholly-owned
subsidiary of Canadian Occidental Petroleum Ltd. Since April of 1997, Wascana
has re-completed the B-2 well and a new salt water disposal well next to the B-2
well. Drilling operations have moved to the A-5 well site to complete a
work-over of that well. However, once Wascana has spent all amounts required to
earn its interest, the parties will be
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bearing their relative percentages of the cost. The Company expects that its
carrying costs, directly and indirectly, will be approximately $16,000 a month
as Wascana has notified the parties that it had spent $20,000,000 CDN through
the end of December 31, 1998. In early March of 1999, Wascana informed the
parties that it has begun test production on one of the re-completed wells.
Big Horn. In October 1998, the Company entered into an agreement with Big
Horn Resources Limited ("Big Horn") to purchase a 31% interest in Big Horn in
exchange for $6,500,000 CDN (approximately US $4,200,000). As an interim step,
the Company lent Big Horn $2,500,000 CDN (approximately US $1,600,000) to
complete the purchase of a company with producing properties. Completion of the
transaction for issuance of shares was subject to Big Horn shareholder approval
which has been granted. The Company subsequently entered into an agreement with
three large shareholders of Big Horn, who also had previously provided
substantial working capital to the Company, to purchase their shareholding
interest in Big Horn at fair market prices, enabling the Company to acquire
controlling interest of Big Horn. The Company now has slightly more than 50% or
controlling interest in Big Horn. Big Horn currently has production equivalent
to approximately 900 barrels of oil per day and proven reserves of 7692.7 mbbl
of equivalent oil with a 10% NPV of $7,690,670. See "Item 7. Management's
Discussion and analysis of Financial Condition and Results of Operations".
ACTIVITIES IN SLOVENIA
In the summer of 1998, the Company entered into an arrangement to purchase
an interest in an operating lubricant refinery facility in Slovenia. At present,
the company that controls the refinery, "Mapetrol," is owned by the Slovenian
government. In order to participate, the Company was required to post a cash
bond in the amount of $337,723 (which cash bond is refundable if the transaction
is not completed). It is anticipated that the privatization will take a number
of months, after which additional cash and stock will be required to finance the
total package, all the details of which have yet to be negotiated. The refinery
is presently producing high quality lubricating oils that have wide distribution
potential.
ACTIVITIES IN GERMANY
The Company has provided a short-term loan, convertible to equity, to
Seiler Trenn-Schmelzanlagen Betriebs GmbH of Freiberg, Germany. The company
specializes in toxic waste disposal using a proprietary methodology. Seiler
presently has an operating plant in Freiberg. The Company loaned Seiler $500,000
that is due and payable on May 28, 1999. Seiler Trenn-Schmelzanlagen has pledged
to the Company substantially all of the assets of the Freiberg plant as
collateral for the loan. The Company is presently evaluating the possibility of
proceeding with a possible equity investment into Seiler, which would likely
consist of conversion of the existing the loan to equity. Seiler TSB GmbH is a
subsidiary of Seiler SPCS Inc., a US corporation.
During the first quarter of 1999, the Company made an investment of
$300,000 into Hansa GeoMin Exploration Ltd. of Duisburg, Germany. Hansa GeoMin
Exploration Ltd. is involved in numerous mineral reclamation projects,
particularly gold, on the African continent.
ACTIVITIES IN THE UNITED STATES
During the first quarter of 1999, the Company acquired options in a
potential gold mining project located in central Idaho. The Company has acquired
an equity interest in Intergold Corporation, which has a controlling interest in
several mining claims in the central Idaho area. A recent report produced by
"Dames & Moore," a recognized mining consulting group, concluded that the mining
claim to be developed may have significant potential. The Company has committed
$300,000 to purchase the options.
COMPETITION
In seeking to explore for, develop, and produce oil and gas resources, the
Company competes with some of the largest corporations in the world, in addition
to many smaller entities involved in this area. Many of the entities that the
Company competes with have access to far greater financial and managerial
resources than the Company. As a result of the exclusive nature of the
concessions held by the Company, to the extent that it
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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, 1999, the Company had two administrative employees located
in Salt Lake City, Utah; three administrative employees located in Dusseldorf,
Germany; one administrative employee and one engineer located in Berlin Germany;
two administrative employees located in London; 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 1998, the
Company has relied principally on consultants who are paid one-time fees for
their work and assistance. The Company expects to rely substantially on
consultants through the first half of 1999, 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 FACILITIES
The Company leases the 35th floor and penthouse of the building located at
80 Broad Street, New York, New York, consisting of approximately 8,800 square
feet, under the terms of a sublease ending on August 31, 2000. The rent under
this lease is $11,025 per month and required an initial prepaid rent of $481,100
on execution. The Company received a rent allowance equal to the first four
months of the lease term commencing on September 1, 1996. The monthly lease
payments are subject to annual escalation, based on the operating expenses of
the building. The offices are also currently occupied by the Company's public
and shareholder relations firm that currently provides services to the Company
in lieu of rent. The offices serve as representative location in the Financial
District of New York City. The Company is using the New York offices
periodically for its board meetings as well as other meetings with members of
the investment community such as investment firms and banks.
The New York office maintains the Company's Website at http://www.eugs.com
and also has available, for interested 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.
This office is leased under a one-year contract. The Company has an office
(approximately 1000 square feet) in Dusseldorf, Germany, that has a monthly
rental of approximately $2950 a month. The Company owns an office with
approximately 2,230 square feet in
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Warsaw, Poland. In February of 1999 the Company opened an office (approximately
2785 square feet) in Berlin, Germany. The property is located at
Friedrichstrasse 95 10117 Berlin, Germany. This office is leased under a 5-year
contract and has a monthly rental of approximately $9684.
The Company maintains an office (approximately 2500 square feet) at 22
Upper Brook Street, Mayfair, London, UK. The Company has subleased the remaining
space to two other companies. In November 1998, the Company entered into a
ten-year lease that provides for an annual payment of $1,740,000, of which the
Company's portion is approximately $580,000.
The Company maintains an office (approximately 400 square feet) at
Mitskiewich Sq. 8, Lviv, Ukraine. The agreement for the office was signed in
March of 1998. The monthly rent is approximately $250.
The Company's subsidiary GlobeGas maintains office space under an agreement
with First Alliance Trust, at Herengracht 466, Amsterdam, The Netherlands. Under
this agreement First Alliance provides office space, accounting and legal
functions for GlobeGas. The agreement calls for payment for these services on an
as needed basis.
HISTORY
The Company was incorporated in the State of Utah under the name
Northampton, Inc. ("Northampton"), on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with EnergyGlobal, pursuant
to which the former owners of EnergyGlobal obtained voting control of
Northampton and EnergyGlobal became a wholly-owned subsidiary of Northhampton.
Energy Global had been formed as a holding company for GlobeGas, an oil and gas
operating entity in which Energy Global held a minority interest. The minority
interest in GlobeGas was initially reported on the equity method on
Northampton's financial statements. The agreement with EnergyGlobal required
that Northampton complete a stock consolidation of one share for each twenty
four shares previously issued and outstanding and deliver a sufficient number of
post-consolidation shares of the Company's common stock to the former owners of
EnergyGlobal to reduce the prior shareholders' interest to approximately 10%.
Thus, the former shareholders of EnergyGlobal became the controlling
shareholders of the Company, which changed its name to EuroGas, Inc.
The original asset of EnergyGlobal was a 16% minority interest in GlobeGas,
a Netherlands corporation that held, through Pol-Tex a concession in Poland.
(GlobeGas was an 85% partner with a formerly state-owned Polish coal company in
Pol-Tex and held additional interest in two other concessions for the
exploration and exploitation of methane coal bed gas reserves in the Upper
Silesian region of Poland.) From September of 1994 through May of 1995, the
Company raised $3,380,963.00 in cash which was used to acquire additional
interests in GlobeGas and increased the Company's participation in GlobeGas to
19.13%. In May 1995, the Company acquired the remaining 80.87% interest in
GlobeGas in exchange for $1,150,000 in cash, the issuance of 2,256,560 shares of
Common Stock, and the issuance of 2,391,968 shares of newly created preferred
stock (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 EnergyGlobal and Northampton prior to the reorganization were
immaterial, the transaction has been accounted for as if GlobeGas were the
acquiring entity.
In 1996, the Company acquired the remaining 15% interest in the Pol-Tex
held by the Polish state coal company. In 1997, the Company received additional
concession rights in the form of a usufruct from the Polish ministry of
Environmental Protection of Natural Resource and Forestry to explore and
potentially develop a 111 square kilometer coal bed methane concession. This
concession was granted Pol-Tex by the Ministry of Environmental Protection,
Natural Resources and Forestry in April of 1998 according to Polish Government
documents. In 1996, the Company continued in its quest to acquire additional gas
interests in Eastern Europe by acquiring Danube. Danube was a participant in
joint ventures for the exploration and production of natural gas in Slovakia and
the Czech Republic. In connection with the transaction, the
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Company also issued 12,500,000 shares of restricted Common Stock to Chemilabco,
which held an interest in the operating subsidiaries of Danube and held options
to participate in the Czech and Slovakian operations of Danube. The issuance of
the 12.5 million share to Chemilabco was subject to Chemilabco providing a
minimum of $5,000,000 of financing to the Company in 1996.
In mid 1997, the Company acquired all of the issued and outstanding stock
of EG from OMV Inc., Austria's largest industrial concern. EG's primary asset is
a 50% interest in the TAKT joint venture with Sakhaneftegas, the national oil
and gas company of the Sakha Republic. In late 1997, Pol-Tex completed an
agreement with POGC to undertake additional appraisal and development activities
for a large area located in the Carpathian Flysch and tectonic Foredeep areas of
Poland. In late 1997, the Company entered into an option agreement to acquire an
interest in the Beaver River natural gas field located in northeastern British
Columbia.
In early 1998, the Company acquired a 55% interest in RimaMuran 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. In early 1998, the Company entered into an arrangement to
participate in a refinery facility in Slovenia. In mid 1998, the Company
completed an agreement to acquire a majority interest in an adjacent oil and gas
concession known as Maseva which had overlapping claims with the Company's other
concessions and expects to conduct appraisal and exploration work in that area
during 1999. In mid 1998, the Company acquired a 51% interest in Envigeo, a
Slovakian private company, which owns a 2,300 square kilometer appraisal and
survey concession in the North East corner of Slovakia, referred to as the
Carpathian Flysch region. In October 1998, the Company entered into an agreement
with Big Horn to purchase a 31% interest in Big Horn. As part of the
transaction, three parties that arranged the Company's participation in Big Horn
granted the Company a first right to purchase all of their interest in Big Horn,
at fair market prices, with the intent of the Company to acquire a controlling
interest in Big Horn. As of February, 1999 the Company exercised its rights to
acquire the stock and warrants held by such third parties and now has slightly
over 50% of the total interest in Big Horn. Late in 1998, the Company provided a
short term loan, convertible to equity, to Seiler Trenn-Schmelzanlagen Betriebs
GmbH of Freiberg, Germany, a company that specializes in toxic waste disposal
using a proprietary methodology.
During early 1999, the Company made several small investments in several
companies specializing in the reclamation of precious metals.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K 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 can be identified by the use of the
words "anticipate," "estimate," "project," "likely," "believe," "intend,"
"expect" or similar words. Forward-looking statements reflect the current views
of management of the Company and are not intended to be accurate descriptions of
the future. When considering such statements, the reader should bear in mind the
cautionary information set forth in this section and other cautionary statements
throughout this Form 10-K and set forth in the Company's other filings with the
Commission. All forward-looking statements are based on management's existing
beliefs about present and future events outside of management's control and on
assumptions that may prove to be incorrect. The discussion of the future
business prospects of the Company is subject to a number of risks and
assumptions, including those identified below. 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
anticipated, estimated, projected or intended. Among the factors that may affect
the Company's results are the Company's ability to establish beneficial
relationships with industry partners to provide funding and expertise to the
Company's projects, the Company's efforts to locate commercial deposits of
hydrocarbons on the Company's concessions and licenses, the negotiation of
additional licenses and permits for the exploitation of any reserves located,
the success of the Company's exploratory activities, the completion of wells
drilled by the Company, its joint venture partners and other parties allied with
the Company's efforts, the economic recoverability of in-place reservoirs of
hydrocarbons, technical problems in completing wells and producing gas, the
Company's marketing efforts, the ability of the Company
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to obtain the necessary financing to successfully pursue its business strategy,
operating hazards and uninsured risks, the intense competition and price
volatility associated with the oil and gas industry and international and
domestic economic conditions.
The Company's activities also 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 Ukraine)
are in the process of developing capitalistic economies. As a result, many of
their laws, regulations, and practices with respect to the exploration and
development of hydrocarbons have not been time tested or yet adopted. The
Company's operations are subject to a significant risk that any change in the
government itself, government personnel, or the development of new policies and
practices may adversely effect the Company's operations and financial results 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 elects to change its
regulatory system, 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. Many of
the areas in which the Company's prospects are located lack the necessary
infrastructure for transporting, delivering, and marketing the products which
the Company seeks to identify and exploit. Consequently, even if the Company is
able to locate hydrocarbons in commercial quantities, it may be required to
invest significant amounts in developing the infrastructure necessary to carry
out its business plan. The Company does not presently have a source of funding
available to meet these costs.
ITEM 3. LEGAL PROCEEDINGS.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of the
Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie Methane
Corporation (McKenzie Methane Corporation was an affiliate of the former owner
of Pol-Tex), asserted certain claims against Pol-Tex and GlobeGas in connection
with lending activities between McKenzie Methane Corporation and the management
of GlobeGas prior to its acquisition by the Company. The claim asserted that
funds that were loaned to prior GlobeGas management may have been invested in
GlobeGas and, therefore, McKenzie Methane Corporation might have had an interest
in GlobeGas at the time of the acquisition of GlobeGas by the Company. These
claims were resolved pursuant to a settlement agreement entered into in November
1996 (the "KUKUI Settlement Agreement"). Under the terms of the settlement
agreement, the Company issued to the Bishop's Estate (KUKUI's parent) 100,000
shares of Common Stock and an option to purchase up to 2,000,000 shares of
Common Stock at any time prior to December 31, 1998. The option exercise price
was $3.50 per share if exercised within 90 days of the execution of the
Company's 1997 [CONFIRM] agreement with Texaco (the "Texaco Agreement"); $4.50
per share if exercised prior to December 31, 1997; and $6.00 per share if
exercised prior to December 31, 1998. The Company also granted registration
rights with respect to the securities.
In March 1997, a trustee over certain of the McKenzie parties and other
related entities asserted a claim to the proceeds that the Company would receive
from the Texaco Agreement and exploitation of the Pol-Tex Concession in an
action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie,
debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case
no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7,
respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co.,
Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane, Sp.
zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court for
the Southern District of Texas Houston Division). The trustee's claim alleges
that the Company paid inadequate consideration for its acquisition of GlobeGas
(which indirectly controlled the Pol-Tex Concession) from persons who were
acting as nominees for the McKenzie parties or in fact may be operating as a
nominee for the McKenzie parties and therefore the creditors of the McKenzie
parties are the true owners of the proceeds received from the development of the
Pol-Tex Concession (KUKUI is also the principal creditor of the McKenzie parties
in these other cases.). The Company plans to vigorously defend against such
claims. The Company believes that
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the litigation is without merit based on its belief that the prior settlement
with KUKUI bars any such claim, the trustee over the McKenzie parties has no
jurisdiction to bring such claim against a Polish corporation (Pol-Tex) and the
ownership of Polish mining rights, that the Company paid substantial
consideration for GlobeGas, and that there is no evidence that the creditors of
the McKenzie parties invested any money in the Pol-Tex Concession. 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 the Company in an
action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United States
District for the Southern District of Texas, Houston Division. KUKUI's claim is
based upon an alleged breach of the KUKUI Settlement Agreement as a result of
the Company's failure to file and obtain the effectiveness of a registration
statement for the resale by KUKUI of 100,000 shares of Common Stock delivered to
KUKUI in connection with the settlement. In addition, Bishop Estate, KUKUI's
parent, has entered a claim for failure to register the resale of shares of
Common Stock subject to its option to purchase up to 2,000,000 shares of Common
Stock. The Company has denied any liability, 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 McKenzie parties.
For the 1992 year, the Kingdom of the Netherlands 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 an adjustment in exchange ratios. At December 31, 1998, the income tax
liability recorded in the Company's financial statements was $806,429. The
Company has appealed the assessment and has proposed a settlement which would
result in a reduction in the tax to $42,000. Pending final resolution, a
liability for the total amount assessed will continue to be reflected in the
Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Common Stock is quoted on the over-the-counter Bulletin Board market
maintained by the National Association of Securities Dealers under the symbol
"EUGS" and is traded under the symbols "EUGF" on the Frankfurt Stock Exchange,
"EUGBE" on the Berlin Stock Exchange, "EUGS" on the Stuttgart Exchange, "EUGM"
on the Munich Stock Exchange and EUGH on the Hamburg Stock Exchange. As of March
31, 1999, there were 79,402,925 shares of Common Stock issued and outstanding,
held by approximately 260 holders of record.
The following table sets forth the approximate range of high and low bids
for the Common Stock during the periods indicated. The quotations presented
below have been adjusted retroactively to reflect the 24-for-1 reverse stock
split effected by the Company on September 6, 1994. Such quotations reflect
interdealer prices, without retail markup, markdown, commissions, or other
adjustments and may not necessarily represent actual transactions in the Common
Stock.
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
March 31, 1997.............................................. $ 6.75 $3.4375
June 30, 1997............................................... 12.50 4.375
September 30, 1997.......................................... 10.6875 4.9375
December 31, 1997........................................... 7.625 3.75
March 31, 1998.............................................. 6.8125 3.9375
June 30, 1998............................................... 5.75 3.625
September 30 1998........................................... 4.97 2.0625
December 31, 1998........................................... 2.25 1.1875
March 31, 1999.............................................. 2,8125 0.9688
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 31, 1999, the high and low bids for the Common Stock on
the OTC Bulletin Board market were $1.125 and $1.0312, respectively.
DIVIDENDS
No dividends have been paid on the Common Stock, and the Company does not
have retained earnings from which to pay dividends. The Company accrued
cumulative preferred dividends of $341,810 and $423,530 in 1998 and 1997,
respectively. Of this amount, $165,007 was paid in 1998 by the issuance of
shares of Common Stock in connection with the conversion of a portion of the
preferred stock. All cumulative dividends with respect to the Company's
preferred stock would be required to be paid prior to the Company declaring or
paying any dividend on the Common Stock. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management." Even if the Company were able to
generate the necessary earnings, it is not anticipated that dividends will be
paid in the foreseeable future, except to the extent required by the terms of
the cumulative preferred stock currently issued and outstanding.
RECENT SALES OF UNREGISTERED SECURITIES
During 1998, the Company completed three rounds of equity financing with a
single investor, resulting in total cash proceeds to the Company of
approximately $15.7 million. On May 29, 1998, the Company sold 8,000 shares of
Series B Convertible Preferred Stock, resulting in net proceeds to the Company
of approximately $7,400,000. On September 12, 1998, the Company sold 5,500
shares of Series B Convertible Preferred Stock, resulting in net proceeds of
approximately $5,100,000. On November 13, 1998, the Company sold another 3,500
shares of Series B Convertible Preferred Stock, resulting in net proceeds of
approximately $3,200,000.
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The Company's sales of the Series B Convertible Preferred Stock was
effected in reliance upon the exemption for sales of securities not involving a
public offering, as set forth in Section 4(2) of the Securities Act of 1933, as
amended, based upon representations and warranties provided by the investor in
subscription agreements executed between the Company the investor.
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" set forth in this Report.
STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
Net Sales..................... $ 879,404 $ 500,000 $ 0 $ 0 $ 0
Loss from Operations.......... 11,024,180 11,501,899 6,413,183 4,327,581 3,699,439
Loss per Common Share......... 0.18 0.22 0.16 0.13 0.15
BALANCE SHEET DATA
AT DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
Total Assets.................. $65,334,387 $40,754,543 $15,902,139 $7,680,367 $7,599,962
Long-Term Obligations......... 1,788,294 3,157,789 10,631,547 4,011,750 3,011,750
Cash Dividends per
Common Share................ 0 0 0 0 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is engaged primarily in the acquisition of rights to explore
for and exploit oil, natural gas, coal bed methane gas and mineral mining. The
Company has also extended its business into co-generation (power and heat)
projects. The Company has acquired interests in a number of large exploration
concessions, for oil, natural gas and coal bed methane gas, and is in various
stages of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop production. The Company
currently has several projects in various stages of development, including a
coal bed methane gas project in Poland, a natural gas project and several
additional undeveloped concession areas in Slovakia, a natural gas project in
the Sakha Republic (a member of the Russian Federation located in eastern
Siberia) and an interest in a talc deposit in Slovakia. The Company has at least
seven joint venture projects in the Ukraine to explore for and exploit oil,
natural gas and coal bed methane gas with various Ukrainian State and private
companies. The Company has entered into an agreement with a large German
integrated oil and natural gas concern, to undertake the development of projects
with various Ukrainian State and private companies. The Company recently created
a consortium with the largest power generation company in Great Britain, and
with a large utility company in Germany, to develop a medium size co-generation
power project in Western Poland.
The Company has also acquired holdings in several oil and natural gas
projects in Canada. One acquisition has given the Company a majority interest in
full-service oil and gas producing company. The other project is a joint venture
with a major oil and gas company to reclaim one Canada's largest natural gas
fields.
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The Company's principal assets consist of both proven and developed
properties, as well as unproven and undeveloped properties. All costs incidental
to the acquisition, exploration, and development of such properties are
capitalized, including costs of drilling and equipping wells and
directly-related overhead costs, which include the costs of Company-owned
equipment. Since the Company has limited proven reserves and established
production, most of its holdings have not been amortized. In the event that the
Company is ultimately unable to establish production or sufficient reserves on
some of these properties to justify the carrying costs, the value of the assets
will need to be written down and the related costs charged to operations,
resulting in additional losses. The Company periodically evaluates its
properties for impairment and if a property is determined to be impaired, the
carrying value of the property is reduced to its net realizable amount.
RECENT DEVELOPMENTS
Funding Activities. During 1998, the Company completed three rounds of
equity financing with a single investor, resulting in cash proceeds to the
Company of approximately $15.7 million, with the ability to draw down another
$13.5 million upon the Company's request. See "Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered
Securities." At December 31, 1998, the Company had approximately $7.5 million in
cash and cash equivalents $.5 million in working capital available.
Capital Expenditures. In 1998, the Company initiated a major investment in
a Canadian oil and gas development and production company. In October 1998, the
Company purchased the initial 31% of the outstanding shares of capital stock of
Big Horn Resources Ltd., of Calgary, Alberta, Canada ("Big Horn"). See "Items 1
& 2. Business and Properties -- Activities in Canada." Big Horn is a
full-service producer of oil and natural gas, producing the equivalent of
approximately 900 barrels of oil a day, with proven reserves of approximately
7.7 million barrels of equivalent oil and with a net present value of
approximately $7.7 million, based on a 10% valuation rate. In March 1999, the
Company acquired additional shares of Big Horn common stock from certain third
parties, giving the Company an ownership interest in excess of 50% of the
outstanding shares of Big Horn's capital stock. The total cost of the
acquisition of Big Horn by the Company was $7,593,913. Because of the temporary
decline in oil prices, the acquisition price paid by the Company reflects a
premium over the Company's proportionate share of the book value of Big Horn.
See Note set forth in "Item 8. Financial Statements and Supplementary Data."
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RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and other
selected operating data for the years ended December 31, 1998, 1997 and 1996.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
REVENUES
Oil and Gas Sales............................... $ 879,404 $ -- $ --
Total Revenues.......................... 879,404 -- --
OPERATING EXPENSES
Oil and gas production.......................... 305,009
General and administrative...................... 7,804,401 6,716,635 4,739,380
Depreciation and amortization................... 293,955 25,637 132,459
Impairment of mineral interests and equipment... 3,512,792 1,972,612 --
Total Operating Expenses................ 11,916,157 8,714,884 4,871,839
OTHER INCOME (EXPENSE)
Interest Income................................. 593,570 517,845 18,588
Interest Expense................................ (465,371) (3,680,090) (1,057,039)
Foreign currency exchange gains (losses), net... (130,419) 331,837 (401,141)
Other Income.................................... 152,776 43,123 48,840
Other Expense, Net...................... 150,556 (2,787,285) (1,390,752)
Minority interest in earnings of subsidiary..... 137,983
Net Loss................................ (11,024,180) (11,501,899) (6,262,591)
Revenues. Prior to 1998, the Company had not generated any revenues from
oil and gas sales. As a result of the Company's acquisition of the controlling
interest in Big Horn, the Company's results of operations for 1998 reflect oil
and gas sales of approximately $.9 million. For the 1997 and 1996 years, the
only material revenues received by the Company resulted from a one-time sale of
mineral interest and equipment in 1997, resulting in revenues of approximately
$500,000.
Operating Expenses. Operating expenses include general and administrative
expenses, depreciation and amortization, cost of mineral interests and equipment
and impairment of mineral interests and equipment. General and administrative
expenses were $7,804,401 for 1998, compared to $6,716,365 for 1997, an increase
of 14%. General and administrative expenses for 1997 reflected an increase of
42% from 1996 general and administrative expenses of $4,739,380. The principal
factors that contributed to the increase from 1997 to 1998 were legal expenses
incurred in connection with sales of registered and unregistered securities,
ongoing securities compliance, litigation issues, additional consulting fees,
hiring of additional staff members and opening of new offices. The increase from
1996 to 1997 was due primarily to payment of accrued and unpaid salaries to
member of the staff and certain consultants, hiring of new staff members and the
engagement of additional consultants. Depreciation and amortization expenses
were $293,955 for 1998, compared to $25,637 for 1997. During 1998 there was a
significant increase in properties that were amortized as compared to 1997.
During 1998 the Company realized a significant impairment mainly due to the
acquisition of the Canadian company. The interest was bought a fair market
value, but due to low oil prices for the last eighteen months the actual book
value of the investment was lower than fair market value, requiring the Company
to take an impairment charge. Under the full-cost method by which the Company
accounts for its mineral interests in properties, costs of unproven properties
are assessed periodically and any resulting provision for impairment would
normally be charged to the proven property base. Because the Company has limited
proven properties, if impairment charges are required, a portion of those
charges may be charged to operations. The impact of such reassessment and
resulting impairment charges could be significant during any particular period.
Income Taxes. Historically, the Company has not been required to pay income
taxes, due to the Company's absence of net profits. For future years, the
Company anticipates that it will be able to utilize a
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substantial portion of its accumulated deficit, which was approximately
$43,352,787 as of December 31, 1999, to offset profits, if and when achieved,
resulting in a reduction in income taxes payable.
Net Loss. The Company incurred net losses of approximately $11.0 million,
$11.5 million and $6.3 million for the years ended December 31, 1998, 1997 and
1996, respectively. These losses were due in large part to the absence of
revenues, combined with continued expansion of the Company's activities,
primarily as a result of acquisitions, the growth of the Company's
administrative expenses. The Company did see a limited amount of revenue from
one of its projects in 1998.
Due to the highly inflationary economies of the Eastern European countries
in which the Company operates, the Company is subject to extreme fluctuations in
currency exchange rates that can result in the recognition of significant gains
or losses during any period. Approximately (130,149), $332,000, ($401,000) in
gains (losses) were recognized as a result of currency transactions in the years
ended December 31, 1998, 1997, and 1996, respectively. The Company had a
cumulative foreign currency translation adjustment of $(289,926) at December 31,
1998. The Company does not currently employ any hedging techniques to protect
against the risk of currency fluctuations.
CAPITAL AND LIQUIDITY
The Company had an accumulated deficit of $43,352,787 at December 31, 1998,
substantially all of which has been funded out of proceeds received from the
issuance of stock and the incurrence of payables. At December 31, 1998, the
Company had total current assets of approximately $13.5 million and total
current liabilities of approximately $12.96 million, resulting in working
capital of approximately $.5 million. As of December 31, 1998, the Company's
balance sheet reflected approximately $33,817,752 in mineral interests in
unproven mineral properties, net of valuation allowance. These properties are
held under licenses or concessions that contain specific drilling or other
exploration commitments and that expire within one to three years, unless the
concession or license authority grants an extension or a new concession license,
of which there can be no assurance. If the Company is unable to establish
production or resources on these properties, is unable to obtain any necessary
future licenses or extensions, or is unable to meet its financial commitments
with respect to these properties, it could be forced to write off the carrying
value of the related property.
Throughout its existence, the Company has relied on cash from financing
activities to provide the funds required for acquisitions and operating
activities. The Company's financing activities provided net cash of
approximately $12 million, $31 million, and $8.2 million during the years ended
December 31, 1998, 1997, and 1996, respectively. Such net cash has been used
principally to fund cumulative net losses of approximately $8,966,340. During
the years ending December 31, 1998, 1997 and 1996, the Company's operating
activities used net cash of approximately $9 million, $3.2 million, and $4.0
million, 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 approximately $6.2,
$11.2 million, and $3.7 million used in investing activities for the years ended
December 31, 1998, 1997, and 1996, respectively. The largest single components
of the Company's investing activities during the period were the approximately
$4.5 million booked in connection with the acquisition of Big Horn, and
approximately $6.3 million recorded for acquisition of OMV (Jakutien) GesmbH in
1997.
While the Company had cash of approximately $7.5 million at December 31,
1998, it has substantial financial commitments with respect to exploration and
drilling obligations related to the mineral properties in which it has an
interest. Many of the Company's projects are long-term and will require the
expenditure of substantial amounts over a number of years before the
establishment, if ever, of production and ongoing revenues. As noted above, the
Company has relied principally on cash provided from equity and debt
transactions to meet its cash requirements. While the Company currently has
sufficient cash to meet its short-term needs, it will require additional cash,
either from financing transactions or operating activities, to meet its
longer-term needs. There can be no assurance that the Company will be able to
obtain additional financing, either in the form of debt or equity, or that, if
such financing is obtained, it will be available to the Company on reasonable
terms. If the Company is able to obtain additional financing or structure
strategic relationships
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in order to fund existing or future projects, existing shareholders will likely
continue experience further dilution of their percentage ownership of the
Company.
If the Company is unable to establish production or reserves sufficient to
justify the carrying value of its assets or to obtain the necessary funding to
meet its short and long-term obligations or to fund its exploration and
development program, all or a portion of the mineral interests in unproven
properties will be charged to operations, leading to significant additional
losses.
INFLATION
The amounts presented in the Company's consolidated financial statements do
not provide for the effect of inflation on the Company's operations or its
financial position. Amounts shown for property, plant and equipment and for
costs and expenses reflect historical costs and do not necessarily represent
replacement costs or charges to operations based on replacement costs. The
Company's operations, together with other sources, are intended to provide funds
to replace property, plant and equipment as necessary. Net income would be lower
than reported if the effects of inflation were reflected either by charging
operations with amounts that represent replacement costs or by using other
inflation adjustments. Due to inflationary problems in Eastern Europe that is
seen in currency exchange losses, the Company has seen losses on its assets
values in those countries.
YEAR 2000 ISSUES
General. The Company is actively engaged in assessing and correcting
potential year 2000 ("Y2K") information system problems. In short, the Y2K
problem is a result of information technology systems being designed to
recognize the year portion of a date as two rather then four digits, which means
that years coded "00" may be recognized as the year 1900, rather than the year
2000. As a result, certain hardware and software products may not properly
function or may fail beginning in year 2000.
During 1998, the Company initiated an information system implementation
project (the "Project"), which affects nearly every aspect of the Company's U.S.
operations. In an effort to address compliance issues, the scope of the Project
was expanded to ensure Y2K compliance for newly acquired software and hardware.
The Project has two significant phases that are designed to improve both
operating processes and information systems capabilities.
The first phase of the Project included hardware and software for the
Company's U.S. financial reporting operations. During 1998, phase one was
completed with hardware and software that has been tested and certified as Y2K
compliant. Phase two focuses on the Company's offshore financial reporting
systems and is expected to be operational in June 1999.
State of Readiness. The Company's information systems consist principally
of it financial system. The Company's financial system includes the general
ledger, accounts payable, sales and use tax calculations, payroll and human
resources applications. Phase one of the Project provided systems that are Y2K
compliant for the general ledger, accounts payable and payroll.
The Company's office support system includes network hardware and operating
systems, desktop and laptop computers and servers. The Company is in the process
of evaluating Y2K compliance for these systems and has identified potential
compliance issues primarily related to imbedded time clocks. However, since he
majority of the Company's hardware has been replaced or upgraded over the past
two years, critical systems compliance is not expected to be a major issue.
Costs to Address Y2K Issues. As of December 31, 1998, the Company had spent
$50,000 on hardware and $25,000 for software in connection with the Project.
Risks of the Company's Y2K Issues. The Company anticipates that the risks
related to its information and non-information systems will be mitigated by
current efforts being made in conjunction with the Project, as well as ongoing
assessment and correction programs. However, the primary Y2K risk to the
Company's operations is service disruption from third-party providers that
supply telephone, electrical, banking, and
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financial reporting services. Any disruption of these critical services would
hinder the Company's ability to operate. Therefore, efforts are currently under
way to obtain Y2K compliance certification from the Company's major service
providers. Most of the Company's third-party joint venture organizations are
outside of the U.S., particularly in eastern Europe. The Company has very little
control, other than awareness, over these organizations. Concern about potential
problems has been raised, but commitment to compliance is beyond the Company's
control.
Contingency Plans. The Company has not yet approved a formal contingency
plan for Y2K issues. However, the Company is preparing well-defined manual
processes, to be completed by July 1, 1999, that could be used in the event of
system and service disruption. A formal contingency plan is expected to be
completed and approved during 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business in many foreign currencies. As a result, it
is subject to foreign currency exchange rate risk due to effects that foreign
exchange rate movements of those currencies have on the Company's costs and on
the cash flows which it receives from its foreign operations. The Company
believes that it currently has no other material market risk exposure. To date,
the Company has addressed its foreign currency exchange rate risks principally
by maintaining its liquid assets in U.S. Dollars, in interest-bearing accounts,
until payments in foreign currency are required, but does not reduce this risk
by utilizing hedging. For further discussion of the Company's policies regarding
derivative financial instruments and foreign currency translation, see Note 1 to
the Consolidated Financial Statements of the Company contained in "Item 8.
Financial Statements and Supplementary Data."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries,
together with note and supplementary data related thereto are set forth on pages
F-1 through F-23 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is the name and age of each director and executive officer
director of the Company, together with all positions and offices of the Company
held by each and the term of office and the period during which each has served:
NAME AGE POSITIONS WITH THE COMPANY DIRECTOR SINCE
---- --- -------------------------- --------------
Paul Hinterthur............ 61 President and Director December 1995
Hank Blankenstein.......... 57 Vice-President Treasurer and Director December 1995
Dr. Gregory P. Fontana..... 39 Director January 1996
Dr. Hans Fischer........... 53 Director January 1996
BIOGRAPHICAL INFORMATION
The following paragraphs set forth brief biographical information for each
of the directors and executive officers of the Company:
Paul Hinterthur is President and a director of the Company. Mr. Hinterthur
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. Since retiring from the banking
business in 1984, Mr. Hinterthur has been an independent international business
and finance consultant. Mr. Hinterthur speaks five languages.
Hank Blankenstein is Vice President, Treasurer and a director of the
Company. In addition to his service as a director since December 1995, Mr.
Blankenstein has served as Vice President and Treasurer since 1996. Mr.
Blankenstein has had over 30 years experience in various levels of management
positions. He served as an administrative and financial officer for American
Micro Systems and National Semiconductor, several large semiconductor
operations, from 1973 to 1985. Prior to that, he served in a number of
operational positions for high-tech industry companies, having engineering
production supervising responsibilities, in charge of a 400-person division. He
has been involved in several high-tech start-up situations, serving in senior
management positions. He holds a Bachelor of Science degree in Finance and
Banking from Brigham Young University that was awarded in 1966.
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 has served as a director of the Company since January
1996. He is currently Professor of Radiology at the University of California,
Los Angeles, Harbor-UCLA Medical Center where he has been on the faculty since
1992. He has been a chair, member, and designated alternate on Research,
Clinical Radiology, Quality Assurance and Ambulatory Care Committees for
Harbor-UCLA Medical Center since 1990. He trained at Leibniz-Gymnasium, Dortmund
West Germany, School of Medicine, University of Muenster West Germany and School
of Sociology, University of Muenster West Germany. He received his M.D. in 1971
and Ph.D. in 1985 from University of Muenster.
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KEY CONSULTANTS AND EMPLOYEES
The following paragraphs sets forth brief biographical information for
certain of the Company's key employees and consultants:
Dr. Reinhard Rauball served as a director of the Company from August 1994
to February 1999. From August 1997 until February 1999, Dr. Rauball served as
Chairman of the Company's Board of Directors. (Dr. Rauball resigned from his
positions with the Company on February 18, 1999) 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 from 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 managing director of GlobeGas
B.V. Amsterdam, managing director of Eurogas GesmbH and managing director of
EuroGas/UK. 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.
Andrew K. Andraczke, Vice President, Secretary, and a member of the
management committee of Pol-Tex since 1992, is responsible for business
development and coordination of administrative, legal, and political aspects of
the Pol-Tex venture. Mr. Andraczke also directs computer operations and system
support for the venture's exploration and production activities. Mr. Andraczke
holds B.Sc., M.Sc., and Ph.D degrees in computer science and applications from
the Computer Science Institute of Polytechnical University in Warsaw where he
also taught as an Associate Professor. He served as the General Manager of the
Computing Center of the Center for Geological Research in the Central Office of
Geology (Ministry of Geology) from 1972 to 1976, where he developed and
implemented Poland's first general database of geological and mineral resources
of Poland. He also implemented computer mapping systems, oil and gas reservoir
simulations, and production control for mining operations. From 1976 to 1982, he
worked for several oil and gas and mining firms, including OTC Oklahoma
Production in Tulsa, Kansas Oil Consolidated in Tulsa, John W. Mecom Company in
Houston, InteResources Group, Inc. in Houston, and British Sulphur Corporation
in London, performing reservoir modeling of secondary and tertiary oil
reservoirs, inorganic polymer floods, and underground coal gasification
projects. During this time, he also developed data acquisition and reserve
balance systems for mines in the U. S., Mexico, and Egypt. Mr. Andraczke joined
Oil Exploration and Production Company in Houston in 1982 and served as an
internal consultant and management advisor on computer applications and emerging
technologies until 1987.
Dr. F. Horvath is currently a Professor at the Eotvos University in
Budapest, a position he has held for more than six years. Dr. Horvath now acts
as the Company's chief geological advisor. He is particularly familiar with many
of the formations in which the Company has or is planning to obtain concessions.
At Eotvos University, he specializes in instructing students in geophysics and
geology for general and applied geophysics, basin research, petroleum
exploration, and seismic interpretation. His primary field of research has been
the tectonic interpretation of geological and geophysical data, particularly in
the evolution of sedimentary basins and the exploration for hydrocarbon
resources. He is the principal investigator of eight major research projects and
has worked with leading academic and industrial experts in Europe and the
Americas. His contribution to earth sciences has been acknowledged by a number
of awards, including an honorary fellowship in the European Union of
Geosciences, Academia Europaea, and the Geological Society of America.
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BOARD OF DIRECTORS
The current Board of Directors was elected at the December 12, 1997 annual
meeting of shareholders. A director's regular term continues until the next
annual meeting of shareholders and thereafter until his successor is duly
elected and qualified. The Board of Directors has not established standing audit
or compensation committees. See "Item 10. Executive Compensation -- Compensation
Committee Report." The Board of Directors met one time during the year ended
December 31, 1998.
Executive officers of the Company 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. The Company's executive
committee is charged with overseeing the day-to-day management of the Company
and with making all significant contractual and financial decisions.
Dr. Reinhard Rauball, the former Chairman of the Board of Directors, and
Wolfgang Rauball, an independent consultant to the Company, are brothers. Both
gentlemen have been key figures in arranging the original transaction with
Energy Global. The brother, Wolfgang Rauball, was instrumental the acquisition
of the concessions in Poland, the later acquisition of Danube, which holds
concessions in Slovakia, the acquisition of EG and the Yakutia Concession,
Ukrainian joint ventures, the acquisition of control of Big Horn Resources, the
participation in the British Columbia project, the participation of RWE-DEA in
the Ukraine, and the negotiations regarding the participation of National Power,
VEW, EEG, Polish Oil and Gas in the matter relating to the proposed power plant
in western Poland. From time to time, the Rauballs, principally Wolfgang
Rauball, have also arranged for equity and debt financing for the Company
through parties with whom they have previous business and personal relationships
and have made loans to the Company. See "Item 13. Certain Relationships and
Related Transactions."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, as
well as persons who own more than ten percent of the Common Stock, to file with
the Commission initial reports of ownership and reports of changes in ownership
of the Common Stock and other securities from which shares of Common Stock may
be derived. Such directors, officers and ten percent holders are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
reports that they file with the Commission. Based solely upon the fact that the
Company has not received any reports indicating that required filings were not
filed on a timely basis, the Company believes that all reports filed by the
Company's directors, officers and ten percent holders were filed timely.
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ITEM 11. EXECUTIVE COMPENSATION
The compensation of the Company's chief executive officer and the other
executive officers of the Company whose total cash compensation for the 1998
fiscal year exceeded $100,000 (the "Named Officers") is shown on the following
pages in two tables and discussed in a compensation report of the Board of
Directors.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- --------------------- -------------------
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARDS SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
--------------------------- ---- -------- ----- ------- ---------- -------- ------- ---------
Paul Hinterthur................ 1998 $200,003 0 0 0 0 0 0
President 1997 $294,100 0 0 0 0 0 0
CEO and Director 1996 $ 27,000 0 0 0 200,000 0 0
Reinhard Rauball,(1)........... 1998 $245,000 0 0 0 0 0 0
Chairman of the Board 1997 $874,120(2) 0 0 0 0 0 0
and Director 1996 $ 33,000 0 0 0 250,000 0 0
Hank Blankenstein.............. 1998 $198,462 0 0 0 0 0 0
Vice President and 1997 $300,000 0 0 0 0 0 0
Treasurer 1996 $ 84,000 0 0 0 200,000 0 0
- ---------------
(1) Dr. Rauball resigned as Chairman of the Board and as a director effective
February 18, 1999.
(2) Dr. Rauball was paid for services rendered to the Company, that had not been
reimbursed to him, beginning in August of 1994 to the present.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant to Named Officers any options to acquire shares
of Common Stock during 1998. The Company has not granted any stock appreciation
rights to the Named Officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table sets forth the number of unexercised options to acquire
shares of Common Stock held on December 31, 1998 and the aggregate value of such
options held by the Named Officers. The Named Officers did not exercise options
to acquire shares of Common Stock during 1998. As of December 31, 1998, the
Company had not granted any stock appreciation rights to any of the Named
Officers.
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Paul Hinterthur............................ 200,000 -- $12,500 --
Reinhard Rauball........................... 250,000 -- 15,625 --
Hank Blankenstein.......................... 200,000 -- 12,500 --
- ---------------
(1) Reflects the difference between the exercise price of the unexercised
options and the market value of shares of Common Stock of December 31, 1998.
The last transaction of the Common Stock on December 31, 1998, the last
trading date of the Company's fiscal year, was $1.5625 per share.
EXECUTIVE EMPLOYMENT AND CONSULTING ARRANGEMENTS
The Company has relied heavily on consultants to identify potential
projects, to negotiate the terms of acquisitions, to develop relationships with
governmental regulators and industry partners, and to complete business and
financing transactions. As a result of services in these areas, the Company paid
$600,000 in 1998, $1,260,253 in 1997 and $479,166 in 1996 to Wolfgang Rauball,
the brother of Reinhard Rauball, the Chairman of the Board of the Company. The
Company did not make any payments to Wolfgang Rauball in
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30
1995. The Company also paid $509,467 in 1997, and $449,600 in 1996 to Armando
Ulrich. The Company also paid $240,000 in 1998, and $273,113 during 1997 to
Andrew K. Andraczke, a key employee in Poland who does not perform executive
level functions. If the Company does not continue to make significant
acquisitions and as revenues are developed, the Company anticipates that it will
rely more on the services of employees and the amounts paid to consultants will
be reduced.
COMPENSATION OF DIRECTORS
The Company compensated its outside directors for service on the Board of
Directors by payment of a monthly fee of $5,000 and reimbursement of expenses
incurred in attending board meetings, this has been reduced to $2500 per month
beginning in 1999. The Company does not separately compensate its board members
who are also employees of the Company for their service on the board.
COMPENSATION REPORT OF THE BOARD OF DIRECTORS
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THAT INCORPORATES BY REFERENCE, IN WHOLE OR IN PART,
THIS ANNUAL REPORT ON FORM 10-K, THE COMPENSATION REPORT AND PERFORMANCE GRAPH
SET FORTH BELOW SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY
SUCH FILINGS.
General. Management compensation is overseen by the Board of Directors. The
Board has not appointed an independent compensation committee. The Board of
Directors consists of two members of executive management, Paul Hinterthur and
Hank Blankenstein, and two outside directors who are not employees of the
Company.
Compensation Objectives. In determining the amount of compensation for the
Company's executive officers, the Board of Directors is guided by several
factors. Because the Company has very few employees, compensation practices are
flexible in response to the needs and talents of the individual officer and are
geared toward rewarding contributions that enhance shareholder value.
Historically, the Company has compensated senior management based on the
perceived contribution to the development of the Company's operations. This
compensation has consisted principally of salaries believed to reflect the
contributions of the respective officers. In addition, because the Company has
only recently begun to generate revenues from operations and has attempted to
preserve capital for development of the Company's business and operations, the
Company has used stock options as a form of compensation for executive officers.
The use of stock options is designed to align the interests of the executive
officers with the long-term interests of the Company and to attract and retain
talented employees who can enhance the Company's value. Although certain members
of the Board of Directors are also executive officers, none participates in the
determination of his own compensation.
Compensation Components. The Company's compensation of its executive
officers consists of three components: base salary, bonuses and long-term
incentive awards in the form of stock options. The Board of Directors
establishes base salaries based primarily on its objective judgment, taking into
consideration both qualitative and quantitative factors. Among the factors
considered by the Board are: (i) the qualifications and performance of each
executive officer; (ii) the performance of the Company as measured by such
factors as development activities and increased shareholder value; (iii)
salaries provided by other companies inside and outside the industry that are
the comparable size and at a similar stage of development, to the extent known;
and (iv) the capital position and needs of the Company. The Board of Directors
does not assign any specific weights to these factors in determining salaries.
It does, however, attempt to maintain base salaries as low as possible,
consistent with the needs and status of the executive officers, in order to
preserve capital for future growth and development.
From time to time, the Company may also compensate its executive officers
in the form of bonuses. Because the Company is presently in the early stage of
its development and does not have a history of earnings per share, net income,
or other conventional data to use as a benchmark for determining the amount or
existence of bonus awards, any bonuses granted by the Board of Directors in the
near term will be based upon
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its subjective evaluation of each individual's contribution to the Company. In
some cases, however, bonuses payable to executive officers may be tied to
specific criteria identified at the time of engagement. For the years ended
December 31, 1996, 1997 and 1998, the Board of Directors did not pay bonuses to
any executive officers. The Board's action was based on its conclusion that,
despite the superior personal performance of the executive officers, no cash
incentive bonuses should be awarded due to the Board's desire to preserve
capital for future growth and development.
The third component of the Company's compensation structure consists of the
grant of stock options to compensate executive officers and other key employees.
In 1996, the Company adopted the 1996 Stock Option and Award Plan, which is
designed to give each option holder an interest in preserving and maximizing
shareholder value in the long term, to reward option holders for past
performance and to give option holders the incentive to remain with the Company
over an extended period. Individual grants are determined on the basis of the
Board's assessment of an individual's current and expected future performance,
level of responsibilities, and the importance of his or her position with, and
contribution to, the Company. In the year ended December 31, 1996, the Board
awarded options to purchase 200,000 shares of Common Stock, 250,000 shares of
Common Stock and 200,000 shares of Common Stock to Mr. Hinterthur, Dr. Rauball
and Mr. Blankenstein, respectively.
Chief Executive Compensation. Based upon the Board's subjective impression
of the salaries of presidents or chief executive officers of similarly situated
companies (both in and outside the industry), the Company's progress in
developing its interests, properties and operations and exploiting its assets
and the Board's subjective assessment of the contributions of Mr. Hinterthur,
the Board of Directors determined to pay Mr. Hinterthur a base salary of
approximately $200,000 for the year ended December 31, 1998. Consistent with the
Board's desire to preserve capital for future growth and development, the Board
elected not to pay a bonus to Mr. Hinterthur or any other executive officer for
the 1998 fiscal year. The Board did not grant any options under the stock option
plan during the 1998 fiscal year to Mr. Hinterthur or any other executive
officer.
Use of Consultants. The Company anticipates that it will continue to rely
on both executive management and outside consultants in connection with the
acquisition of additional projects and the initial development of existing
projects. However, the Company anticipates that if it is able to establish
ongoing revenues from production, it will retain management personnel as
employees of the Company and compensate them on a salary basis, based on
comparable compensation packages offered by employers within the Company's
general industry and geographical area.
Respectfully submitted,
Paul Hinterthur
Hank Blankenstein
Dr. Gregory P. Fontana
Dr. Hans Fischer
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PERFORMANCE GRAPH
The following graph shows a comparison of cumulative shareholder return for the
Common Stock for the period beginning August 3, 1994 (the date the Common Stock
was first quoted in the over-the-counter market) and ending December 31, 1998,
as well as the cumulative total return for the NASDAQ Composite Index and the
Howard Weil, Blumberg Oilfield Service and Manufacturing Index (the "Peer Group
Index") for the same period.
The Peer Group Index is a price-weighted composite index comprised of the
cumulative shareholder return for forty seven companies involved in oilfield
services.
.
HW BBC Oilfield
Total Return Analysis EuroGas Svc. & MA Nasdaq Composite
8/3/94 100 100 100
12/30/94 703.13 93.76 103.90
12/29/95 364.58 137.19 146.48
12/31/96 846.36 221.87 180.22
12/31/97 1,406.25 337.53 220.13
12/31/98 325.52 168.26 308.60
The performance graph assumes that $100 was invested at the market close on
August 3, 1994 and that dividends, if any, were reinvested for all companies,
including those on the NASDAQ Composite Index and the Peer Group Index.
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33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, information with
respect to Common Stock owned beneficially by each Director, by the Named
Officers, by all Offices and Directors as a group and by each person known by
the Company to be a beneficial owner of more than 5% of the outstanding Common
Stock. Except as otherwise indicated below, each person named has sole voting
and investment power with respect to the shares indicated.
NAME OF PERSON OR GROUP(1) COMMON STOCK OPTIONS(2) PERCENT(3)
-------------------------- ------------ ---------- ----------
PRINCIPAL SHAREHOLDERS:
Finance Credit and Development Corporation................. 2,175,833 2,200,000 5.6%
"Chateau Amiral"
Bloc B -- 42, Boulevard
d'Italic
MC 9800 Monaco
OFFICERS, DIRECTORS, AND CONTROLLING PERSONS:
Dr. Reinhard Rauball....................................... 600,000 250,000 1.3%
Wolfgang Rauball(4)........................................ 1,100,000 50,000 1.9%
Paul Hinterthur(5)......................................... 100,000 200,000 *
Dr. Gregory P. Fontana..................................... 0 100,000 *
Dr. Hans Fischer........................................... 0 100,000 *
Hank Blankenstein.......................................... 0 200,000 *
--------- --------- ---
All Officers, Directors, and Controlling Persons as a Group
(7 Persons).............................................. 1,800,000 950,000 5.0%
- ---------------
* less than one percent
(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 79,402,925 shares of Common
Stock issued and outstanding as of March 31, 1999.
(4) 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.
(5) 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
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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 Stock 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. All of the 1997 Series A Convertible Preferred Stock has been
converted.
On May 29, 1998, the company authorized the 1998 Series B 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 Stock but after liquidation payments to other previously
issued and outstanding preferred stock series. The 1998 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, 1998, 17,000 of
the 1998 Preferred Stock, together with accrued dividends, had been converted
into 8,890,601 shares of Common Stock.
During 1998, 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
Dr. Reinhard Rauball, formerly 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 brother, Wolfgang Rauball, was instrumental the acquisition of the
concessions in Poland, the later acquisition of Danube, which holds concessions
in Slovakia, the acquisition of EG and the Yakutia Concession, Ukrainian joint
ventures, the acquisition of control of Big Horn Resources, the participation in
the British Columbia project, the participation of RWE-DEA in the Ukraine, and
the negotiations regarding the participation of National Power, VEW, EEG, Polish
Oil and Gas in the matter relating to the proposed power plant in western
Poland. From time to time, the Rauballs, principally Wolfgang Rauball, have also
arranged for equity and debt financing for the Company through parties with whom
they have previous business and personal relationships and have directly loaned
some of their own funds to the Company.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED
1. Financial Statements. The following Consolidated Financial Statements of
the Company and report of independent accountants are included immediately
following the signature page of this Report.
A. Report of Hansen, Barnett & Maxwell, independent public
accountants, for the years ended December 31, 1998, 1997 and 1996
B. Consolidated Balance Sheets at December 31, 1998 and 1997
C. Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
D. Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
E. Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
F. Notes to Consolidated Financial Statements
2. Exhibits.
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------- --------
1 (2) Exchange Agreement between Northampton, Inc., and Report on Form 8-K
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 OMV dated June 11, 1997
(Yakut) Exploration GmbH dated June 11, 1997 Exhibit No. 1*
4 (2) Asset Exchange Agreement between EuroGas, Inc., and Report on Form S-1
Beaver River Resources, Ltd., dated April 1, 1988 dated July 23, 1998
Exhibit No. 2.03*
5 (3) Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
6 (3) Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
7 (3) Designation of Rights, Privileges, and Preferences of Quarterly Report on Form
1995 Series Preferred Stock 10-QSB dated March 31,
1995, Exhibit No. 1*
8 (3) Designation of Rights, Privileges, and Preferences of Report on Form 8-K dated
1996 Series Preferred Stock July 12, 1996, Exhibit
No. 1*
33
36
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------- --------
9 (3) Designation of Rights, Privileges, and Preferences Report on Form 8-K dated
1997 Series A Convertible Preferred Stock May 30, 1997 Exhibit No.
1*
10 (3) Designation of Rights, Privileges, and Preferences of Report on Form S-1 Dated
1998 Series B Convertible Preferred Stock July 23, 1998 Exhibit
No. 3.06*
11 (3) Articles of Share Exchange Report on Form 8-K dated
August 3, 1994, Exhibit
No. 6*
12 (4) Subscription Agreement between EuroGas, Inc., and Report on Form S-1 dated
Thomson Kernaghan & Co., Ltd., dated May 29, 1998 July 23, 1998 Exhibit
No. 4.01*
13 (4) Warrant Agreement dated July 12, 1996, with Danube Report on Form 8-K dated
shareholders July 12, 1996, Exhibit
No. 2*
14 (4) Registration Rights Agreement Between EuroGas, Inc., Report on Form S-1 dated
and Thomson Kernaghan & Co., Ltd., dated May 29, 1998 July 23, 1998 Exhibit
No. 4.02*
15 (4) Registration Rights Agreement dated July 12, 1996, Report on Form 8-K dated
with Danube shareholders July 12, 1996 Exhibit
No. 3*
16 (4) Registration Rights Agreement by and among EuroGas, Report on Form S-1 dated
Inc., and Finance Credit & Development Corporation, July 23, 1998 Exhibit
Ltd., dated June 30, 1997 No. 4.06*
17 (4) Option granted to the Trustees of the Estate of Annual Report on Form
Bernice Pauahi Bishop 10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 10*
18 (4) Registration Rights Agreement by and among EuroGas, Annual Report on Form
Inc., and Kukui, Inc., and the Trustees of the Estate 10-KSB for the fiscal
of Bernice Pauahi Bishop year ended December 31,
1995, Exhibit No. 11*
19 (4) Option issued to OMV Aktiengesellschaft to acquire up Annual Report on Form
to 2,000,000 shares of restricted common stock 10-KSB for the fiscal
year ended December 31,
1996, Exhibit No. 13*
20 (10) English translation of Mining Usufruct Contract Quarterly Report on Form
between The Minister of Environmental Protection, 10-Q dated September 30,
Natural Resources and Forestry of the Republic of 1997 Exhibit No. 1*
Poland and Pol-Tex Methane, dated October 3, 1997
21 (10) Agreement between Polish Oil and Gas Mining Joint Quarterly Report on Form
Stock Company and EuroGas, Inc., dated October 23, 10-Q dated September 30,
1997 1997 Exhibit No. 2*
34
37
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------- --------
22 (10) 1996 Stock Option and Award Plan Annual Report on Form
10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 14*
23 (10) Settlement Agreement by and among Kukui, Inc., and Annual Report on Form
Pol-Tex Methane, Sp. zo.o., McKenzie Methane Rybnik, 10-KSB for the fiscal
McKenzie Methane Jastrzebie, GlobeGas, B.V. (formerly year ended December 31,
known as McKenzie Methane Poland, B.V.), and the 1995, Exhibit No. 15*
Unsecured Creditors' Trust of the Bankruptcy Estate
of McKenzie Methane Corporation
24 (10) Acquisition Agreement between EuroGas, Inc., and Report on Form S-1 dated
Belmont Resources, Inc., dated July 22, 1998 July 23, 1998 Exhibit
No. 10.20*
25 (10) General Agreement governing the operation of McKenzie Report on Form 8-K dated
Methane Poland, B.V. August 3, 1994, Exhibit
No. 2*
26 (10) Concession Agreement between Ministry of Annual Report on Form
Environmental Protection, Natural Resources, and 10-KSB for the fiscal
Forestry and Pol-Tex Methane Ltd. year ended December 31,
1995, Exhibit No. 18*
27 (10) Association Agreement between NAFTA a.s. Gbely and Annual Report on Form
Danube International Petroleum Company 10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 19*
28 (10) Agreement between Moravske' Naftove' Doly a.s. and Annual Report on Form
Danube International Petroleum Company 10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 20*
29 (10) Form of Convertible Debenture Report on Form 8-K dated
August 3, 1994, Exhibit
No. 7*
30 (10) Form of Promissory Note, as amended, with attached Annual Report on Form
list of holders 10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 23*
31 (10) Amendment #1 to the Association Agreement Entered on Annual Report on Form
13th July 1995, between NAFTA a.s. Gbely and Danube 10-KSB for the fiscal
International Petroleum Company year ended December 31,
1996, Exhibit No. 25*
32 (10) Acquisition Agreement by and among Belmont Resources, Form 10-Q Dated
Inc., EuroGas Incorporated, dated October 9, 1998 September 30, 1998
Exhibit No. 1*
35
38
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------- --------
33 (10) Letter of Intent by and between Polish Oil and Gas Annual Report on Form
Company and Pol-Tex Methane, dated April 28, 1997 10-KSB for the fiscal
year ended December 31,
1996, Exhibit No. 27*
34 (10) Purchase and Sale Agreement between Texaco Slask Sp. Report on Form 8-K dated
zo.o., Pol-Tex Methane Sp. zo.o. and GlobeGas B.V. March 24, 1997 Exhibit
No. 1*
35 (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*
36 (10) English translation of Proposed Exploration and Report on Form 8-K/A
Production Sharing Contract for Hydrocarbons between dated June 11, 1997
the Republic of Sakha (Yakutia) and the Russian Exhibit No. 4*
Federation and the TAKT Joint Venture
37 (10) English translation of Agreement on Joint Investment Report on Form S-1 dated
and Production Activities between EuroGas, Inc., and July 23, 1998 Exhibit
Zahidukrgeologia, dated May 14, 1998 No. 10.21*
38 (10) English translation of Statutory Agreement of Report on Form S-1 dated
Association of Limited Liability Company with Foreign July 23, 1998 Exhibit
Investments between EuroGas, Inc., and Makyivs'ke No. 10.22*
Girs'ke Tovarystvo, dated June 17, 1998
39 (10) Partnership Agreement between EuroGas, Inc., and RWE- Amendment No. 1 dated
DEA Altiengesellschaft for Mineraloel and Chemie AG, August 3, 1998 Exhibit
date July 22, 1998 No. 10.23
40 (10) Mining Usufruct Contract between The Minister of Quarterly Report on Form
Environmental Protection, Natural Resources and 10-Q dated September 30,
Forestry of the Republic of Poland and Pol-Tex 1997 Exhibit No. 1*
Methane, dated October 3, 1997
41 (10) Agreement between Polish Oil and Gas Mining Joint Quarterly Report on Form
Stock Company and EuroGas, Inc., dated October 23, 10-Q dated September 30,
1997 1997 Exhibit No. 2*
42 (10) Agreement for Acquisition of 5% Interest in a Quarterly Report on Form
Subsidiary by and between EuroGas, Inc., B. Grohe, 10-Q dated September 30,
and T. Koerfer, dated November 11, 1997 1997 Exhibit No. 3*
43 (10) Option Agreement by and between EuroGas, Inc., and Quarterly Report on Form
Beaver River Resources, Ltd., dated October 31, 1997 10-Q dated September 30,
1997 Exhibit No. 4*
36
39
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------- --------
44 (21) Subsidiaries Annual Report on Form
10-KSB for the fiscal
year ended December 31,
1995, Exhibit No. 24*
45 (27) Financial data Schedule This Filing
- ---------------
* Incorporated by reference
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1998, the
Company did not file any reports on Form 8-K.
(c) EXHIBITS
Exhibits to this Report are attached following Page F-23 hereof.
(d) FINANCIAL STATEMENT SCHEDULES
None
37
40
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, 1999 By: /s/ PAUL HINTERTHUR
------------------------------------
Paul Hinterthur, President
(Principal Executive Officer)
Dated: March 31, 1999 By: /s/ HANK BLANKENSTEIN
------------------------------------
Hank Blankenstein,
Vice-President and Treasurer
(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, 1999 By: /s/ PAUL HINTERTHUR
------------------------------------
Paul Hinterthur, Director
Dated: March 31, 1999 By: /s/ DR. GREGORY P. FONTANA
------------------------------------
Dr. Gregory P. Fontana, Director
Dated: March 31, 1999 By: /s/ DR. HANS FISCHER
------------------------------------
Dr. Hans Fischer, Director
Dated: March 31, 1999 By: /s/ HANK BLANKENSTEIN
------------------------------------
Hank Blankenstein, Director
38
41
EUROGAS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS INDEX
PAGE
----
Report of Independent Certified Public Accountants.................................. F-2
Consolidated Balance Sheets--December 31, 1998 and 1997............................. F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997 and 1996............................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998............................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996............................................. F-6
Notes to Consolidated Financial Statements ......................................... F-8
Supplemental Information Regarding Oil and Gas Producing Activities (Unaudited) .... F-21
-------------------------------
F-1
42
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 "EuroGas," as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the EuroGas' management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EuroGas, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ HANSEN, BARNETT & MAXWELL
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 1999
F-2
43
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 7,489,510 $ 17,247,667
Investment in securities available-for-sale.......................... 1,088,488 --
Trade accounts receivable............................................ 1,107,508 --
Value added tax receivables.......................................... 431,235 173,691
Receivable from joint ventures....................................... 2,293,048 --
Receivable from related party........................................ 200,000 --
Other receivables.................................................... 788,291 --
Other current assets................................................. 120,176 29,370
------------ ------------
TOTAL CURRENT ASSETS............................................. 13,518,256 17,450,728
------------ ------------
PROPERTY AND EQUIPMENT -- FULL COST ACCOUNTING
Oil and gas properties subject to amortization....................... 16,788,336 --
Oil and gas properties not subject to amortization................... 33,817,752 22,723,660
Other mineral interest property...................................... 167,814 --
Other property and equipment......................................... 580,868 1,010,772
------------ ------------
TOTAL PROPERTY AND EQUIPMENT..................................... 51,354,770 23,734,432
Less: accumulated depreciation....................................... (86,454) (767,177)
------------ ------------
NET PROPERTY AND EQUIPMENT....................................... 51,268,316 22,967,255
------------ ------------
OTHER ASSETS........................................................... 547,815 336,560
------------ ------------
TOTAL ASSETS........................................................... $ 65,334,387 $ 40,754,543
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable..................................................... $ 4,060,125 $ 1,532,949
Accrued liabilities.................................................. 2,618,014 3,420,042
Accrued income taxes ................................................ 870,836 753,306
Notes payable -- current portion..................................... 4,226,739 1,107,944
Notes payable to related parties -- current portion.................. 1,182,124 1,270,547
------------ ------------
TOTAL CURRENT LIABILITIES........................................ 12,957,838 8,084,788
------------ ------------
LONG-TERM LIABILITIES
Notes payable........................................................ 1,788,294 2,246,773
Notes payable to related parties..................................... -- 911,016
------------ ------------
TOTAL LONG-TERM LIABILITIES...................................... 1,788,294 3,157,789
------------ ------------
MINORITY INTEREST...................................................... 2,865,376 --
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 3,661,968 shares authorized;
issued and outstanding: 1998 -- 2,393,728 shares, 1997 -- 2,392,228
shares; 1998 liquidation preference: $1,999,197..................... 2,394 2,392
Common stock, $.001 par value; 325,000,000 shares authorized;
issued and outstanding: 1998 -- 76,254,630 shares,
1997 -- 62,283,934 shares........................................... 76,255 62,284
Additional paid-in capital........................................... 92,013,961 61,659,345
Accumulated deficit.................................................. (43,532,787) (32,197,306)
Accumulated other comprehensive income............................... (836,944) (14,749)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY....................................... 47,722,879 29,511,966
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................... $ 65,334,387 $ 40,754,543
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
44
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
REVENUE AND INCOME
Oil and gas sales.......................................... $ 879,404 $ -- $ --
Interest income............................................ 593,570 517,845 18,588
Other income............................................... 152,776 43,123 48,840
------------ ---------- ----------
TOTAL REVENUE AND INCOME.............................. 1,625,750 560,968 67,428
------------ ---------- ----------
EXPENSES
Oil and gas production..................................... 305,009 -- --
Impairment of mineral interests and equipment.............. 3,512,792 1,972,612 --
Depreciation, depletion, and amortization................. 293,955 25,637 132,459
General and administrative................................. 7,804,401 6,716,365 4,739,380
Interest................................................... 465,371 3,680,090 1,057,039
Foreign exchange net (gains) losses........................ 130,419 (331,837) 401,141
Minority interest in loss of subsidiary.................... 137,983 -- --
----------- ---------- ----------
TOTAL EXPENSES........................................ 12,649,930 12,062,867 6,330,019
------------ ---------- ----------
NET LOSS .................................................... (11,024,180) (11,501,899) (6,262,591)
PREFERRED DIVIDENDS ......................................... 311,301 423,530 150,592
------------ ---------- ----------
LOSS APPLICABLE TO COMMON SHARES............................. $(11,335,481) $(11,925,429) $(6,413,183)
============ ============ ===========
BASIC AND DILUTED LOSS PER COMMON SHARE...................... $ (0.18) $ (0.22) $ (0.16)
============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATION....................... 64,129,062 54,705,726 41,059,000
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
45
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER SHAREHOLDERS'
----------------- -------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS (DEFICIT)
--------- ------ ---------- ------- ----------- ------------ ------------ -------------
BALANCE -- DECEMBER 31, 1995.. 2,391,968 $2,392 32,974,033 $32,974 $10,895,071 $(13,858,694) $ (14,749) $ (2,943,006)
Net loss...................... -- -- -- -- -- (6,262,591) -- (6,262,591)
Dividends on preferred shares. -- -- -- -- -- (150,592) -- (150,592)
------------
COMPREHENSIVE LOSS............ (6,413,183)
------------
Issuance 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 1996 Series
preferred and common for
purchase of subsidiary...... 1,250,000 1,250 15,000,000 15,000 499,763 -- -- 516,013
--------- ------ ---------- ------- ----------- ------------ ---------- ------------
BALANCE - DECEMBER 31, 1996... 3,641,968 3,642 49,143,862 49,144 14,842,922 (20,271,877) (14,749) (5,390,918)
-------------
Net loss...................... -- -- -- -- -- (11,501,899) -- (11,501,899)
Dividends on preferred shares. -- -- -- -- -- (423,530) -- (423,530)
-------------
COMPREHENSIVE LOSS............ (11,925,429)
-------------
Issuance of common stock and
2,200,000 options for cash,
net of $75,000 offering
costs....................... -- -- 4,929,999 4,930 20,170,070 -- -- 20,175,000
Conversion of notes payable
and related interest........ -- -- 2,646,907 2,647 10,945,344 -- -- 10,947,991
Issuance for cash, net of
$1,750,000 offering costs... 15,000 15 50,000 50 13,249,935 -- -- 13,250,000
Options granted in connection
with acquisition of OMV
(Jakutien) Exploration GmbH -- -- -- -- 1,150,000 -- -- 1,150,000
Conversion of 1996 Series
Preferred shares and
related accrued dividends.. (1,250,000) (1,250) 2,500,001 2,500 71,524 -- -- 72,774
Conversion of 1997 Series
Preferred shares and related
dividends................... (14,740) (15) 2,763,165 2,763 229,800 -- -- 232,548
Issuance to acquire minority
interest in subsidiary...... -- -- 250,000 250 999,750 -- -- 1,000,000
--------- ------ ---------- ------- ----------- ------------ ---------- ------------
BALANCE -- DECEMBER 31, 1997.. 2,392,228 2,392 62,283,934 62,284 61,659,345 (32,197,306) (14,749) 29,511,966
------------
Net loss...................... -- -- -- -- -- (11,024,180) -- (11,024,180)
Dividends on preferred shares. -- -- -- -- -- (311,301) -- (311,301)
Net change in unrealized
losses on securities........ -- -- -- -- -- -- (379,266) (379,266)
Translation adjustments....... -- -- -- -- -- -- (442,929) (442,929)
------------
COMPREHENSIVE LOSS............ (12,157,676)
------------
Issuance of 1998 Series for
cash, net of $1,275,005
offering costs.............. 17,000 18 50,000 50 15,724,927 -- -- 15,724,995
Conversion of 1998 Series
Preferred shares and related
dividends................... (15,500) (16) 8,860,196 8,860 156,163 -- -- 165,007
Issuance for financing and
other services.............. -- -- 60,500 61 226,064 -- -- 226,125
Issuance upon exercise of
stock options for cash...... -- -- 100,000 100 149,900 -- -- 150,000
Issuance of stock and warrants
for oil and gas property
interests................... -- -- 4,900,000 4,900 14,097,562 -- -- 14,102,462
--------- ------ ---------- ------- ----------- ------------ ---------- ------------
BALANCE -- DECEMBER 31, 1998.. 2,393,728 $2,394 76,254,630 $76,255 $92,013,961 $ (43,532,787) $ (836,944) $ 47,722,879
========= ====== ========== ======= =========== ============= =========== ============
The accompanying notes are an integral part of these financial statements.
F-5
46
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................... $(11,024,180) $(11,501,899) $(6,262,591)
Adjustments to reconcile net loss to cash
provided by operating activities:
Impairment of mineral interests and equipment................... 3,512,792 1,972,612 --
Depreciation and amortization................................... 293,955 25,637 132,458
Expenses paid by issuance of notes payable...................... -- 1,321,295 --
Compensation paid by issuance of common stock................... 226,125 -- 351,808
Minority interest in loss of subsidiary......................... 137,983 -- --
Exchange (gain) loss............................................ 113,294 (331,837) (401,141)
Changes in assets and liabilities, net of acquisitions:
Trade receivables............................................. (72,121) -- --
Other receivables............................................. (491,783) 26,510 (97,595)
Accounts payable.............................................. (734,515) 1,814,545 (210,990)
Accrued liabilities........................................... (812,107) 3,271,804 2,468,676
Other......................................................... (115,783) 156,451 33,903
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES......................... (8,966,340) (3,244,882) (3,985,472)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mineral interests, property and equipment............ (9,087,686) (5,391,568) (3,368,342)
Proceeds from sale of interest in gas property.................... -- 501,646 --
Acquisition of subsidiaries, net of cash acquired................. (2,159,363) (6,314,287) 181,743
Increase in deposits and prepayments.............................. (168,575) -- (540,000)
Investment in securities available-for-sale....................... (1,467,754) -- --
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES......................... (12,883,378) (11,204,208) (3,726,599)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable to related parties........ -- 339,191 4,542,487
Principal payments on notes payable to related parties........... (999,439) (905,866) (1,002,026)
Proceeds from issuance of notes payable........................... -- 1,135,729 4,846,995
Principal payments on notes payable............................... (3,192,109) (2,707,551) (80,123)
Proceeds from issuance of common stock, net of offering costs..... 150,000 20,175,000 6,808
Proceeds from issuance of preferred stock, net of offering costs.. 15,724,995 13,250,000 --
Dividends paid on preferred stock................................. (260,139) -- (120,000)
Proceeds from issuance of common stock by subsidiary.............. 592,568 -- --
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 12,015,876 31,286,503 8,194,141
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS........ 75,685 (232,351) 88,323
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (9,758,157) 16,605,062 570,393
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................... 17,247,667 642,605 72,212
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD............................... $ 7,489,510 $ 17,247,667 $ 642,605
============ ============ ============
(Continued)
The accompanying notes are an integral part of these financial statements.
F-6
47
EUROGAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 485,157 $ 362,622 $ 97,162
Cash paid for income taxes.................................. -- -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock and stock options issued to acquire property............ $14,102,462 $ -- $ --
Common stock issued upon conversion of notes payable
and accrued interest............................................... -- 10,947,991 4,091,750
Common stock issued as payment of preferred dividends................ 165,008 305,322 --
Common stock issued to acquire minority interest in..................
subsidiary......................................................... -- 1,000,000 --
The Company paid the following amounts in connection with
business acquisitions:
Fair value of assets acquired................................... $11,923,200 $ 7,506,621 $ 4,999,405
Excess property cost over fair value............................ 3,512,792 -- --
Liabilities assumed and incurred................................ 7,484,675) (28,317) (433,392)
Obligation to sellers........................................... -- -- (2,500,000)
Minority interest recognized.................................... (2,112,348) -- (950,000)
Common stock issued............................................. -- -- (516,013)
Stock options granted........................................... -- (1,150,000) --
------------ ------------ -----------
CASH PAID................................................... 5,838,969 6,328,304 600,000
Less cash acquired.............................................. (3,679,606) (14,017) (781,743)
------------ ------------ -----------
NET CASH PAID (RECEIVED).................................... $ 2,159,363 $ 6,314,287 $ (181,743)
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-7
48
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--EuroGas, Inc. and its subsidiaries ("EuroGas") are engaged
primarily in the evaluation, acquisition, exploration and disposition of
interests, and rights to exploit oil, natural gas, coal bed methane gas and to
pursue mineral mining. Recently, EuroGas has also begun efforts to participate
in the development of co-generation (power and heat) projects. EuroGas is in
various stages of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop production. During the
current year EuroGas acquired a controlling interest in Big Horn Resources Ltd.,
an exploration and production company operating in Western Canada. EuroGas also
entered into a joint venture to reclaim a natural gas field in Western Canada.
EuroGas holds and is developing properties in Eastern Europe including coal bed
methane gas properties in Poland, proved natural gas properties and unproved oil
and gas concessions in Slovakia, unproved natural gas properties in Eastern
Russia and an interest in a talc deposit in Slovakia. EuroGas has entered into
and is in the process of entering into, joint ventures in the Ukraine to explore
for and develop oil, natural gas and coal bed methane gas with various Ukrainian
State and private companies.
BUSINESS CONDITION--Through the activities explained above, EuroGas and its
subsidiaries have accumulated deficits of $43,532,787 since their inception in
1995. They have had losses from operations and negative cash flows from
operating activities during each of the three years in the period ended December
31,1998. The Company has positive working capital and stockholders' equity at
December 31, 1998. Realization of the investment in properties is dependent on
EuroGas financing the exploration, development and production of those
properties. If exploration of unproved properties are unsuccessful, all or a
portion of recorded amount of those properties will be recognized as impairment
losses. Further, EuroGas is dependent on improvement in oil and gas prices in
order to establish profitable operations from oil and gas production. As in the
past, management plans to finance operations and acquisitions through issuance
of additional equity securities, realization of which is not assured.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements
include the accounts of all majority-owned subsidiaries and EuroGas' share of
properties held through joint ventures from the date of acquisition. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reporting period. Actual results could differ from those estimates.
MINERAL INTEREST PROPERTIES -- The full cost method of accounting is used for
oil and gas properties. Under this method, all costs associated with
acquisition, exploration, and development of oil and gas properties are
capitalized on a country by country basis. Costs capitalized include acquisition
costs, geological and geophysical expenditures, lease rentals on undeveloped
properties and costs of drilling and equipping productive and non-productive
wells. Drilling costs include directly related overhead costs. Proceeds from
disposal of properties are applied as a reduction of cost without recognition of
a gain or loss except where such disposal would result in a major change in the
depletion rate. Capitalized costs are categorized either as being subject to
amortization ("proved properties") or not subject to amortization ("unproved
properties"). The cost of unproved properties are not subject to amortization
but instead are assessed periodically and any resulting provision for impairment
which may be required is charged to operations. The assessment for impairment is
based upon estimated fair value of the unproved properties.
Capitalized costs of properties subject to amortization and estimated future
costs to develop proved reserves are amortized and depreciated using the
unit-of-production method based on the estimated proven oil and natural gas
reserves as determined by independent engineers. Units of natural gas are
converted into barrels of equivalent oil on the relative energy content basis.
F-8
49
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized costs, net of accumulated amortization and depreciation, are limited
to estimated future discounted net cash flows from proven reserves, based upon
year-end prices.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment are stated at cost.
Minor repairs, enhancements and maintenance costs are expensed when incurred;
major improvements are capitalized. Depreciation of other property and equipment
is provided on a straight-line basis over the estimated useful lives, as
follows: buildings-- 40 years; 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, 1998, 1997 and
1996 was $78,765, $83,885, and $196,232, respectively, of which $19,229 and
$65,639 were capitalized in mineral interests and equipment in 1998 and 1997,
respectively.
FINANCIAL INSTRUMENTS --EuroGas considers all highly-liquid debt instruments
purchased with maturities of three months or less to be cash equivalents. The
amounts reported as cash and cash equivalents, trade and other receivables,
notes receivable, accounts payable and notes payable are considered to be
reasonable approximations of their fair values. The fair value estimates
presented herein were based on estimated future cash flows. The amounts reported
as investments in securities available-for-sale are based upon quoted market
prices.
EuroGas had cash in Polish banks in the amount of approximately $1,570,000 at
December 31, 1998 for which EuroGas would incur certain taxes if the cash were
transferred out of Poland.
DERIVATIVE FINANCIAL INSTRUMENTS -- EuroGas and its international subsidiaries
occasionally incur obligations payable in currencies other than their functional
currencies. This subjects EuroGas to the risks associated with fluctuations in
foreign currency exchange rates. EuroGas does not reduce this risk by utilizing
hedging. The amount of risk is not material to EuroGas' financial position or
results of operations.
LOSS PER SHARE -- Basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share during periods of
income reflect potential dilution which could occur if all potentially issuable
common shares from stock purchase warrants and options or convertible notes
payable and preferred stock resulted in the issuance of common stock. In the
present position, diluted loss per share is the same as basic loss per share
because 17,004,647 and 13,450,000 potentially issuable common shares at December
31, 1998 and 1997, respectively, would have decreased the loss per share and
have been excluded from the calculation.
FOREIGN CURRENCY TRANSLATION--Effective January 1, 1998, the functional
currencies of the subsidiaries operating in Poland and Slovakia were changed
from the U.S. dollar to the local currencies due to those economies ceasing to
be considered highly inflationary. The change had no effect on consolidated
financial position at the date of the change or on the consolidated results of
operations for periods prior to the change. The effect of changes in exchange
rates during the year ended December 31, 1998, and in the future with respect to
those subsidiaries has been and will be recognized as a separate component of
comprehensive loss whereas those changes were previously recognized in the
results of operations. Where the functional currencies of foreign subsidiaries
continue to be the U.S. dollar, financial statements are translated into U.S.
dollars using historical exchange rates and net foreign exchange gains and
losses from those subsidiaries are reflected in the results of operations.
Exchange gains and losses from holding foreign currencies and having liabilities
payable in foreign currencies are included in the results of operations.
INCOME TAXES--Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences in the balances of existing assets
and liabilities on the Company's financial statements and their respective tax
bases and attributable to operating loss carry forwards. Deferred taxes are
computed at the enacted tax rates for the periods when such amounts are expected
to be realized or settled.
F-9
50
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION--Prior to 1998, EuroGas accounted for stock-based
compensation from stock options granted to employees and consultants based on
the intrinsic value of the options on the date granted. Since January 1, 1998,
EuroGas has accounted for stock options granted to employees based on the
intrinsic value of the options on the date granted and has accounted for options
granted to consultants and other non-employees based on the fair value of the
options as determined by the Black-Scholes option pricing model.
NEW ACCOUNTING STANDARDS--During 1998, EuroGas adopted Statements of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information in
1997. SFAS No. 131 requires certain information to be reported about operating
segments on a basis consistent with management's decision making process and
requires the presentation of revenue and total assets by country. These
statements expanded or modified disclosures and had no impact on consolidated
financial position, results of operations or cash flows when adopted.
In June 1998, SFAS No.133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No.133 was issued and establishes accounting and reporting
standards requiring that derivative instruments be recorded in the balance sheet
as either an asset or liability measured at its fair value. SFAS No. 133 is
effective for year beginning January 1, 2000 and, is not expected to have a
material impact on the financial condition or results of operations of EuroGas.
NOTE 2--PROPERTY ACQUISITIONS
ACQUISITION OF BIG HORN RESOURCES, LTD. -- Effective October 5, 1998, EuroGas
acquired a 52% interest in Big Horn Resources Ltd. ("Big Horn"), an oil and gas
exploration and production company operating in Western Canada. EuroGas acquired
the majority interest by cash payments of $4,723,498 on October 17, 1998, by
executing promissory notes on March 30, 1999 in the aggregate amount of
$1,840,224, and by EuroGas' cancellation of a note receivable from one of Big
Horn shareholders in the amount of $1,100,000. These payments, and the face
amounts of the notes, were discounted $70,238 to October 5, 1998 using a 10%
discount rate.
The acquisition was accounted for under the purchase method of accounting; the
total purchase price of $7,593,484 was determined based upon the fair value of
the consideration paid. The purchase price was allocated to the acquired net
assets of Big Horn based upon their fair values on the effective date of the
acquisition. The fair value of the acquired properties were determined by
independent engineers. The purchase price exceeded the fair value of the net
assets acquired by $3,512,792 which was recognized as an impairment expense at
the date of the acquisition. The operations of Big Horn have been included in
the consolidated results of operations of EuroGas since acquisition.
Summary unaudited pro forma results of operations for the years ended December
31, 1998 and 1997, assuming the acquisition of Big Horn had occurred on January
1, 1997, excluding non-recurring items, are as follows:
1998 1997
------------- ------------
Revenues................................................ $ 2,001,000 $ 1,916,000
Net loss................................................ ( 12,644,000) (14,538,000)
Net loss applicable to common shares.................... ( 12,956,000) (14,962,000)
Net loss per common share............................... (0.20) (0.27)
ACQUISITION OF MASEVA GAS S.R.O. -- During October 1998, EuroGas acquired a 90%
interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company which holds a 850
square kilometer concession to explore for oil and natural gas. The concession
is adjacent to the southern boarder of the Trebisov concession held by the
EuroGas through the Nafta/Danube joint venture in Slovakia. EuroGas purchased
Maseva by issuing 2,500,000 common shares and warrants to purchase an additional
2,500,000 shares at $2.50 per share within two years. The purchase price was
$6,527,462 based upon the $2.00 per share quoted market value of the
F-10
51
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EuroGas common shares issued, and the fair value of the warrants on the
acquisition date. The fair value of the options was determined by using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 63.2%, risk-free interest rate of 5.0% and
an expected life of 2 years. The unproved oil and gas concession is the primary
asset acquired. Maseva has had no operations. The acquisition is considered to
be the purchase of properties. Accordingly, pro forma amounts are not presented.
The cost of the acquisition was allocated to oil and gas properties not subject
to amortization.
ACQUISITION OF BEAVER RIVER PROJECT--In March 1998, EuroGas exercised its option
to acquire a 16% carried interest in the Beaver River Project in British
Columbia, Canada in exchange for $300,000 and the issuance of 2,400,000 common
shares which were valued at $3.16 per share. The acquisition has been valued at
$7,875,000. The interest in the Beaver River Project has been classified as oil
and gas properties not subject to amortization. EuroGas retains the right to
purchase back 1,900,000 of the 2,400,000 common shares issued any time prior to
April 15, 1999 by returning the carried interest if EuroGas determines that the
results produced do not warrant the continued holding of the carried interest.
ACQUISITION OF OIL REFINERY--During the third quarter of 1998, EuroGas posted a
refundable cash bond of $337,723 which will allow EuroGas to purchase an
interest in an operating oil refinery in Slovenia. If purchased, EuroGas will be
required to pay cash and issue common shares to complete the acquisition. The
refundable bond has been included as a long-term other asset in the accompanying
financial statements.
ACQUISITION OF MAJORITY INTEREST IN ENVIGEO TRADE s.r.o.--During September 1998,
EuroGas acquired a 51% interest in Envigeo Trade s.r.o. ("Envigeo"), a private
Slovakian company which owns a 2,300 square kilometer oil and gas concession in
Northeast Slovakia. The concession expires in August 2001. EuroGas paid $500,000
at the date of the acquisition, and the balance of $1,000,000 during November
1998. The unproved oil and gas concession is the primary asset acquired and
Envigeo has had no operations of any significance. The acquisition is considered
to be the purchase of properties. Accordingly, pro forma amounts are not
presented. The cost of the acquisition was allocated to oil and gas properties
not subject to amortization. To date, EuroGas has invested $1,620,000 in the
Envigeo properties.
ACQUISITION OF OMV (JAKUTIEN) EXPLORATION GASELLSCHAFT m.b.H. -- On June 11,
1997 EuroGas acquired all the issued and outstanding stock of OMV (Jakutien)
Exploration Gasellschaft m.b.H. (OMVJ), in exchange for $6,252,724 in cash,
options to purchase 2,000,000 common shares valued at $1,150,000, and a 5%
interest in OMVJ's net profits. OMVJ's primary asset is a 50% interest in a
joint venture in the Republic of Sakha (commonly known as Yakutia) of the
Russian Federation. Expenses relating to the purchase were $75,580.
The acquisition was accounted for under the purchase method of accounting with
the total purchase price of $7,478,304 determined based upon the consideration
paid and the fair value of the options granted. The purchase price was allocated
to the acquired assets and liabilities of OMVJ based upon their fair values on
the date of the acquisition. The operations of OMVJ have been included in the
consolidated results of operations of EuroGas since the acquisition date.
F-11
52
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--RECEIVABLE FROM RELATED PARTY AND OTHER RECEIVABLES
On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a promissory
note with an officer and member of management in the amount of $200,000. The
note, due on March 31, 1999, was repaid in full on January 7, 1999.
On October 28, 1998, EuroGas executed a promissory note in the amount of
$500,000 to an independent third party. Terms of the note dictate that interest
accrues at 5% with the balance due on May 28, 1999.
NOTE 4--INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE
EuroGas acquired 993,333 units of United Gunn Resources, Ltd. (each unit
consisting of one share of common stock and one warrant) through a private
placement subscription agreement for $962,398 during the first quarter of 1998.
United Gunn Resources, Ltd. holds an approximate 12% working interest in the
Beaver River Project. Through December 31, 1998, EuroGas acquired an additional
613,500 shares of United Gunn through market purchases at a cost of $491,460.
Through the purchase of equity securities EuroGas holds approximately 9% of the
outstanding United Gunn shares as of December 31, 1998. The United Gunn
Resources, Ltd. shares have been accounted for as investment in securities
available-for-sale and are carried at market value. During the year ended
December 31, 1998, an unrealized loss in the amount of $379,266 on securities
available-for-sale resulted from the decline in the trading value of the
securities and is presented in the financial statements as a component of
accumulated other comprehensive loss.
NOTE 5--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
Prior to 1998, EuroGas had no property subject to amortization. Through the
acquisition of Big Horn, EuroGas acquired both proved and unproved reserves. The
Big Horn reserves are in production and are being amortized. In addition to the
Canadian property, the extent of reserves relating to Company's interests in the
Slovak Trebisov oil and gas properties was established in May 1998 when an
independent reserve report relating to those properties was obtained and which
reported proved reserves of oil and gas. Accordingly, the cost of that property
were reclassified in 1998 as oil and gas properties subject to amortization. The
wells drilled on the property have been completed and a gas gathering system is
being constructed. As described more fully in Note 13 - Commitments and
Contingencies below, a dispute arose as a result of a conflicting property
claim, and work to bring the wells to production was temporarily suspended.
Amortization will begin when and if production begins from wells on that
property.
In August 1997, EuroGas closed a transaction with a subsidiary of Texaco for the
exploration and potential development of EuroGas' coal bed methane gas interests
held by a concession in Poland. EuroGas retained a 14% to 20% carried interest
in the net profits from the property, and transferred the remaining interest in
the property to Texaco in exchange for an initial payment of $500,000 and two
subsequent payments of $2,500,000 each if Texaco elected to continue phase 2 and
3 of the project. The payment received during 1997 was applied as a reduction of
the cost of the properties without recognition of a gain or loss.
In the fourth quarter of 1998, Texaco informed EuroGas that it has elected not
to proceed with phase 2 or 3 of the agreement between the companies. Texaco
stated that the testing results from the exploration wells it drilled do not
meet the financial criteria of Texaco. EuroGas' management determined that gas
production from the concession may still meet the economic requirements for
EuroGas and, therefore, decided to buy back the concession rights from Texaco.
On March 19, 1999, EuroGas Polska, a wholly-owned subsidiary, and Texaco
executed a purchase agreement providing for Texaco's transfer of the usufruct
agreement to
F-12
53
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EuroGas Polska in exchange for cash in the amount of $172,000. The agreement is
subject to approval by the Polish government. During January 1999 Texaco made
formal application to the Ministry of Environmental Protection Natural Resources
and Forestry to return the concession back to EuroGas through its subsidiary,
EuroGas Polska. The Ministry has given EuroGas verbal notification it will
comply with the request and grant the concession to EuroGas Polska.
The following is a summary of changes to oil and gas properties for the years
ended December 31:
1998 1997 1996
------------ ------------ ------------
PROPERTY SUBJECT TO AMORTIZATION
Cost at beginning of year............................ $ -- $ -- $ --
Reclassification from unproved property.............. 7,278,613 -- --
Acquisition costs.................................... 8,784,050 -- --
Development costs.................................... 4,459,065 -- --
------------ ------------ ------------
Cost at end of year.................................. 20,521,728 --
Less depreciation, depletion and amortization........ (220,600) -- --
Less ceiling test and valuation adjustment........... (3,512,792) -- --
------------ ------------ ------------
Net Property Subject to Amortization................. $ 16,788,336 $ -- $ --
============ ============ ============
PROPERTY NOT SUBJECT TO AMORTIZATION
Cost at beginning of year............................ $ 25,665,373 $ 15,221,855 $ 8,006,345
Acquisition costs.................................... 17,804,072 7,574,601 4,217,069
Exploration costs.................................... 573,569 3,368,917 2,998,441
Reclassification to proved property.................. (7,278,613) -- --
Proceeds from sale of property....................... -- (500,000) --
------------ ------------ ------------
Cost at end of year.................................. 36,764,401 25,665,373 15,221,855
Less accumulated valuation and adjustments........... (2,946,649) (2,941,713) (969,101)
------------ ------------ ------------
Net Property Not Subject to Amortization............ $ 33,817,752 $ 22,723,660 $ 14,252,754
============ ============ ============
Oil and gas sales were derived from production and sale of crude oil and
natural gas in Canada. Property and equipment and other assets were located in
the following geographic areas at December 31:
1998 1997
----------- -----------
Canada ................................................ $15,995,000 $ --
Eastern Europe and Russia.............................. 35,821,122 23,303,812
----------- -----------
Total Property and Equipment and Other assets.......... $51,816,131 $23,303,812
=========== ===========
NOTE 6--OTHER PROPERTY AND EQUIPMENT
Other property and equipment consisted of the following at December 31:
1998 1997
------------ ------------
Land .................................................. $ -- $ 22,156
Buildings.............................................. 47,199 92,914
Drilling rigs and related equipment.................... 1,526,348 895,702
------------ ------------
1,573,547 1,010,772
Less: Accumulated depreciation........................ (792,382) (767,177)
------------ ------------
Net Other Property and Equipment...................... $ 781,165 $ 243,595
============ ============
F-13
54
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at December 31, 1998 and 1997 were as follows:
1998 1997
------------ ------------
Loan from a former director, due on demand with
interest at 10%, unsecured ......................... $ 290,206 $ 290,206
Loan from a company associated with a director, due
in 1999 with interest at 7.5%, unsecured............. 165,683 362,477
Loan from a director, due in 1999, interest: 7.5% to
10%, unsecured....................................... 606,951 1,409,596
Loans from a director and his affiliates, interest at
7.5% to 10%, due on demand and in 1999, unsecured.... 119,284 119,284
------------ ------------
Total Notes Payable to Related Parties................. 1,182,124 2,181,563
Less: Current Portion.................................. (1,182,124) (1,270,547)
------------ ------------
NOTES PAYABLE TO RELATED PARTIES -- LONG-TERM.......... $ -- $ 911,016
============ ============
NOTE 8--NOTES PAYABLE
Other loans and notes payable at December 31, 1998 and 1997 were as follows:
1998 1997
------------ ------------
Loans due 1999, interest at 10%, unsecured............. $ 517,749 $ 3,354,717
Line of credit with a bank, payable by a subsidiary on
demand with interest at 1% above the bank's prime,
and secured by all of the subsidiaries assets........ 3,708,990 --
10% Notes due in 2000, unsecured, net of $51,930
discount............................................. 1,788,294 --
------------ ------------
Total Notes Payable.................................... 6,015,033 3,354,717
Less: Current Portion.................................. (4,226,739) (1,107,944)
------------ ------------
NOTE PAYABLE -- LONG-TERM.............................. $ 1,788,294 $ 2,246,773
============ ============
Annual maturities of notes payable to related parties and others are as follows:
Years Ending December 31:
1999............................................. 5,408,863
2000............................................. 1,788,294
NOTE 9--INCOME TAXES
Deferred tax assets are comprised of the following:
DECEMBER 31,
--------------------------------
1998 1997
------------ ------------
Tax loss carry forwards................................ $ 4,904,209 $ 2,885,384
Reserves for contingencies............................. 396,863 396,863
Less: Valuation allowance............................. (5,301,072) (3,282,247)
------------ ------------
Net Deferred Tax Asset................................. $ -- $ --
============ ============
F-14
55
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
1998 1997 1996
------------ ------------ ------------
Tax at statutory rate (34%)............................ $ (3,748,221) $ (3,910,646) $ (2,129,281)
Non-deductible expenses................................ 1,729,396 -- --
State taxes, net of federal benefit.................... (195,944) (154,969) --
Deferred tax asset valuation change.................... 603,635 2,280,330 295,877
Effect of lower tax rates and foreign losses with
no federal benefit................................... 1,611,134 1,785,285 1,833,404
------------ ------------ ------------
Total Income Tax Benefit............................... $ -- $ -- $ --
============ ============ ============
EuroGas has operating loss carry forwards of approximately $13,760,047 in
various countries which expire from 1999 through 2013.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an income tax
liability of $806,429 in the Netherlands. The tax arose from the sale of
equipment at a profit by the former owner of Globegas to a EuroGas Polish
subsidiary. EuroGas' position is that the gain on the sale should not have been
taxable to Globegas. The liability will continue to be reflected in EuroGas'
financial statements until the proposed reduction is accepted by the
Netherlands' taxing authorities.
NOTE 10--RELATED PARTY TRANSACTIONS
Related party loans are described in Notes Payable To Related Parties and loans
to related parties are described in Receivable From Related Party.
During 1997, a shareholder advanced $2,023,306 as a short-term loan to EuroGas.
In connection with this loan, the shareholder retained control of the proceeds
from an issuance of common shares during 1997 by EuroGas and paid Company
obligations from those proceeds. The shareholder received $104,493 for
management services from these funds.
NOTE 11--STOCKHOLDERS' EQUITY
PREFERRED STOCK--There were 2,391,968 shares of 1995 Series Preferred Stock (the
"1995 Series") issued on April 12, 1995. The 1995 Series is non-voting,
non-participating , and has a liquidation preference of $0.10 per share plus
unpaid dividends. The 1995 Series stockholders are entitled to an annual
dividend of $0.05 per share. Each share of the 1995 Series shall be converted
into two shares of EuroGas' common stock upon lawful presentation and shall pay
dividends until converted. EuroGas has the right to redeem the 1995 Series, on
not less than 30 days written notice, at a price of $36.84 per share, plus any
accrued but unpaid dividends. Annual dividend requirements of the 1995 Series
are $119,598.
EuroGas issued 1,250,000shares of 1996 Series Preferred Stock (the "1996
Series") on July 12, 1996. All of the shares of 1996 Series Preferred Stock were
converted into 2,500,001 common shares, at the rate of two common shares per
1996 Series Preferred share, on July 3, 1997, along with accrued but unpaid
dividends.
On May 29, 1997, EuroGas authorized the 1997 Series A Convertible Preferred
Stock (the "1997 Series"). This series of preferred stock is non-voting and
accrues dividends at $60.00 per share, or six percent annually. The 1997 Series
has a liquidation preference of $1,000 per share, plus unpaid dividends before
liquidation payments applicable to common shares but after liquidation payments
to other previously issued
F-15
56
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and outstanding preferred stock series. The 1997 Series, along with unpaid
dividends thereon, is convertible into common shares at the rate of $1,000
divided by the lessor of 125% of the average closing bid price for five trading
days prior to issuance or 82% of the average closing bid price for five trading
days prior to conversion. At December 31, 1997, 14,740 of the 15,000 shares of
1997 Series along with related accrued dividends had been converted into
2,763,165 common shares.
From May through November 1998, EuroGas issued 17,000 shares of 1998 Series B
Convertible Preferred Stock (the "1998 Series") in an ongoing private placement
offering. Of the total authorized preferred shares, 30,000 shares have been
designated as the 1998 Series with a par value of $0.001 per share and a
liquidation preference of $1,000 per share plus all accrued but unpaid
dividends. The 1998 Series shares are non-voting and bear a dividend rate of 6%
per annum. Dividends may be paid in shares of EuroGas common stock at its
option. The 1998 Series stock was issued for proceeds in the amount of
$15,224,995 and a $500,000 note receivable to an unrelated third party. The
proceeds were net of $1,275,005 in commissions.
These 1998 Series preferred shares are convertible into that number of shares of
common stock at the rate of $1,000, plus any accrued but unpaid dividends
through the conversion date, divided by the lesser of 125% of the average
closing price five trading days prior to issuance of the Series B shares, or 85%
of the average closing price five trading days prior to conversion.
During 1998, 15,500 share of 1998 Series preferred stock were converted,
according to the conversion factors mentioned, into 8,860,196 common shares at a
weighted-average price of $1.77 per share. In connection with the conversion,
88,914 common shares were issued for $165,007 in accrued dividends on the
converted 1998 Series shares at a weighted average of $1.86 per common share.
The dividend requirement for the 1,500 shares of 1998 Series shares outstanding
at December 31, 1998 was $11,096.
EuroGas retains the rights to issue an additional 4,000 shares of 1998 Series
preferred stock at $1,000 per share less commissions of 7.5% every 30 days
beginning January 1, 1999, to a maximum 13,000 shares, if the common stock of
EuroGas is trading in excess of $3.00 per share or if the subscribers otherwise
consent. EuroGas filed a registration statement with the U.S. Securities and
Exchange Commission relating to the common stock underlying the 1998 Series
shares. The registration statement became effective on August 7, 1998. EuroGas
is required to maintain the effective status of the registration statement for
the period the 1998 Series shares remain outstanding.
COMMON STOCK - During February 1998 EuroGas issued 13,000 common shares valued
at $61,737, or $4.75 per share in connection with an earlier private placement.
EuroGas also issued 7,500 common shares valued at $24,375, or $3.25 per share,
on August 19, 1998, to compensate a former employee, and 40,000 shares valued at
$140,000, or $3.50 per share, were issued during August 1998 to compensate for
services relating to unsuccessful acquisitions. The services provided were
valued at the market price at which EuroGas' common shares were trading on the
date of the issuance of shares.
On April 1, 1998, EuroGas issued 2,400,000 common shares valued at $7,575,000,
or $3.16 per share, in connection with the acquisition of an interest in the
Beaver River Project. In addition, 2,500,000 shares valued at $5,000,000, or
$2.00 per share, together with warrants to purchase 2,500,000 common shares,
were issued on October 9, 1998 to acquire an interest in the Maseva property.
The fair value of the warrants issued of $1,527,462 was determined by the
Black-Scholes option pricing model. The portion of the purchase prices relating
to the common stock issued was based upon the market value of the common shares
issued as consideration.
EuroGas issued 100,000 common shares during 1998 upon the exercise of stock
options for $150,000 or $1.50 per share.
F-16
57
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--STOCK OPTIONS AND WARRANTS
On October 9, 1998, warrants to purchase 2,500,000 common shares were issued in
connection with the acquisition of the Maseva property. The warrants are
exercisable at $2.50 per share until October 8, 2000 at which time they expire
if not exercised.
During 1997, options to purchase 2,000,000 common shares were issued in
connection with the acquisition of OMVJ. The options are exercisable at $4.00
per share until April 1, 1998, at $5.00 per share until March 31, 1999 and then
at $6.00 per share until March 31, 2000 at which time they expire if not
exercised. Options to purchase 2,200,000 common shares were granted in
conjunction with the issuance of 2,999,999 common shares for $7,500,000 (less
$75,000 in offering costs). The options were exercisable at $3.00 per share
through December 31, 1998 when they expired. Options to purchase 250,000 common
shares were granted in connection with an investment firm contract. The options
are exercisable at $11.79 per share through August 9, 2002.
EuroGas granted options to its employees and consultants during 1996 under the
Stock Option and Award Plan which was adopted in January 1996. Options for
2,000,000 common shares were authorized and granted in January 1996. The options
granted to employees and consultants are exercisable at $1.50 over a period of
five years beginning July 18, 1996 and expire January 18, 2001. The market value
of the underlying common shares was equal to the exercise price on the date
granted and, therefore, no compensation relating to the options was recognized
when granted.
EuroGas has accounted for stock-based compensation from stock options granted to
employees and consultants (prior to 1998) are based on the intrinsic value of
the options on the date granted. Had compensation cost for EuroGas' Stock Option
and Award Plan been determined based on the fair value at the grant dates for
options under that plan consistent with the alternative method of SFAS No. 123,
Accounting for Stock-Based Compensation, EuroGas' loss applicable to common
shares and loss per common share for the years ended December 31, 1998, 1997 and
1996 would have been increased to the pro forma amounts shown below.
1998 1997 1996
------------ ------------ ------------
Net loss applicable to common shares:
As reported................................. $(11,335,481) $(11,925,429) $ (6,413,183)
Pro forma................................... (11,335,481) (11,925,429) (8,492,547)
Basic and diluted net loss per common share:
As reported................................. (0.18) $ (0.22) $ (0.16)
Pro forma................................... (0.18) (0.22) (0.21)
The fair value of the warrants and option granted during 1998, 1997 and 1996
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1998, 1997 and 1996, respectively: average
risk-free interest rate - 5%, 5.7% and 5.7%; expected volatility - 63.5%, 95.5%
and 82.6%; expected life - 2.0 years, 1.4 years and 5.0 years.
F-17
58
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of stock warrants and options as of December 31, 1998,
1997 and 1996 and changes during the years then are presented below:
1998 1997 1996
----------------------- ----------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- ---------
Outstanding at beginning of year...... 13,450,000 $ 3.54 9,000,000 $ 2.78 -- --
Granted............................... 2,600,000 2.46 4,450,000 3.94 9,000,000 $2.78
Exercised............................. (100,000) 1.50 -- -- -- --
Expired............................... (2,200,000) 3.00 -- -- -- --
---------- ---------- ---------
Outstanding at end of year............ 13,750,000 3.43 13,450,000 3.54 9,000,000 2.78
========== ========== =========
Exercisable at end of year............ 13,650,000 3.45 13,300,000 3.56 8,800,000 2.81
========== ========== =========
Weighted-average fair value of
options granted during the year.... $0.61 $2.07 $1.04
Options and warrants outstanding at December 31, 1998 were exercisable at prices
ranging from $1.50 to $11.79 with remaining contractual lives from 2.0 to 3.6
years and an average contractual life of 1.8 years.
NOTE 13--COMMITMENTS AND CONTINGENCIES
As discussed further in Note 9 - Income Taxes, EuroGas has proposed a settlement
of its tax liability in the Kingdom of the Netherlands.
A bankruptcy trustee appointed for certain former shareholders of Globegas has
asserted a claim to the proceeds that EuroGas has received from the Texaco
agreement discussed in Note 5 - Mineral Interests in Properties and Equipment
and exploitation of the Pol-Tex Concession. The Trustee's claim is apparently
based upon the theory that EuroGas may have paid inadequate consideration for
its acquisition of Globegas (which indirectly controlled the Pol-Tex Methane
concession in Poland) from persons who were acting as nominees for the former
shareholders, or in fact may be operating as a nominee for the former
shareholder, and therefore, they are the true owners of the proceeds from the
development of the Pol-Tex Concession in Poland. EuroGas is vigorously defending
against the claim. EuroGas 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 EuroGas paid
substantial consideration for Globegas. EuroGas also believes continued pursuit
of the claim might give rise to a separate cause of action against third parties
EuroGas will pursue if necessary.
During 1997, a shareholder, who is also the principal creditor in the above
claim, asserted a claim against EuroGas based upon an alleged breach of the
settlement agreement between the shareholder and EuroGas as a result of EuroGas'
failure to file and obtain the effectiveness of a registration statement for the
resale by the shareholder of 100,000 shares delivered to the shareholder in
connection with the settlement. In addition, the shareholder's parent company
entered a claim for failure to register the resale of the shares subject to its
option to purchase up to 2,000,000 common shares of EuroGas. EuroGas has denied
any liability and intends to vigorously defend the claims. EuroGas 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.
EuroGas has engaged technical and business consultants for its various projects
under terms which will require a minimum payment of $1,200,000 during the year
ending December 31, 1999.
F-18
59
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During March of 1998, EuroGas was notified there may be certain title problems
related to an area of mutual interest to be explored and developed by the
Nafta/Danube joint venture in Slovakia. The problem area is outside of the
Trebisov area where EuroGas has drilled six wells and which is unaffected by the
claim. The disputed area is located in the southern portion of the property
covered by the designations contained in the Nafta/Danube joint venture
agreements and was subject to a competing claim of ownership by a private Slovak
company. EuroGas' expansion beyond the Trebisov was limited by the extent the
Nafta/Danube joint venture did not have exploration rights as previously
contemplated. During the second quarter of 1998, EuroGas acquired a 90% interest
Maseva Gas Spol, s.r.o. ("Maseva") which holds the rights to the exploration
territory known as "Kralovsky Chlmec" and includes the disputed area located to
the south of Trebisov. The division of the working interest for this territory
is 67.5% for EuroGas (rather than the 50% split which governs the Trebisov
area), provided that EuroGas carries the cost of drilling the first two wells in
the Maseva concession.
EuroGas has notified the former shareholders of Danube of a potential claim
against them by reason of this recent problem. EuroGas believes the owners of
Danube knew, or should have known, about the problem prior to the acquisition of
Danube and made no disclosure concerning the problem. EuroGas has made a claim
against the former Danube shareholders for indemnity to the extent EuroGas
suffers any damage by reason of the potential title claim. It is uncertain
whether EuroGas will be able to recover from the former Danube shareholders.
As a result of the title problems with the Nafta/Danube property, a dispute has
arisen with the joint venture partner, Nafta a.s. ("Nafta"). EuroGas has
asserted a claim for misrepresentation of the property asset at the time of its
acquisition and has made demand on Nafta in an amount equal to EuroGas'
investment in the property. Efforts to bring the property to production were
suspended pending resolution of the claims. Very recently, the Slovak government
has begun taking the first legal steps to re-nationalize Nafta, and EuroGas has
received indications the Slovak government will quickly resolve the dispute and
EuroGas expects the project to move forward.
During 1997, EuroGas accrued a $1,000,000 obligation to a lender. During 1998
following resolution of the contingency, management revised its estimate to zero
and reversed the accrual. The reversal is accounted for as change in an
accounting estimate.
An assertion has been made against EuroGas by holders of registration rights
that EuroGas failed to file a Registration Statement for certain shares and
warrants held. EuroGas has not completed settlement negotiations; no amount has
been estimated or provided with respect to this claim.
In March 1998, EuroGas acquired a 53% interest in RimaMuran s.r.o. whose
principal asset is a minority interest in a talc deposit in eastern Slovakia.
RimaMuran will have an obligation to fund 33 to 39% of the projected $12,000,000
capital cost requirements over the next two and one-half years. RimaMuran does
not have the assets necessary to meet this obligation, and it is anticipated
that the necessary funding will need to be provided by EuroGas. To date,
EuroGas has invested $1,387,682 in the RimaMuran project.
During February 1999, EuroGas formed a consortium with a large United Kingdom
power producer and with a German Utility company to develop a power generation
project in Zielona Gora, Western Poland. EuroGas anticipates the total
investment required to develop the project will approximate $150 Million.
EuroGas will hold a 12.5% share interest in the joint venture created by the
consortium and will be required to pay approximately 7.5%, or $11,250,000 of the
estimated project cost. EuroGas does not presently have the assets necessary to
meet this obligation.
F-19
60
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the EuroGas entered into six agreements which grant rights to
jointly explore prospects within the Ukraine. The agreements commit EuroGas to
form joint ventures and joint companies and use the partners' concession
agreements in exploiting the potential standard oil and gas, as well as coal-bed
methane gas reserves. The potential reserves in the Ukraine have not been
independently verified.
NOTE 14--SUBSEQUENT EVENTS
During January 1999 EuroGas converted 1,500 Series B preferred shares into
1,144,116 common shares at a weighted-average price of $1.31 per share. In
connection with the conversion,13,726 common shares were issued for $11,096 in
accrued dividends on the converted Series B shares at a weighted-average $1.31
per common share.
During February 1999, EuroGas purchased options for $120,000 to acquire mineral
property interests in the Western United States. EuroGas is waiting for the
results from production analysis and feasibility studies before exercising its
options.
During March, 1998 EuroGas issued 1,000 shares of its 1998 Series preferred
stock for proceeds of $1,850,000 net of $150,000 commissions.
F-20
61
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
EASTERN EUROPE
TOTAL CANADA AND RUSSIA
----------- ------------ ------------
CAPITALIZED COSTS RELATING TO OIL AND GAS
PRODUCING ACTIVITIES AT DECEMBER 31, 1998
Unproved oil and gas properties....................... $36,764,402 $ 9,776,610 $ 26,987,792
Proved oil and gas properties.......................... 20,521,728 9,912,902 10,608,826
----------- ------------ ------------
Gross capitalized costs................................ 57,286,130 19,689,512 37,596,618
Less: Ceiling test adjustment and impairment........... (6,459,441) (3,512,792) (2,946,649)
Less: Accumulated depreciation, depletion,
and amortization.................................... (220,600) (220,600) --
----------- ------------ ------------
Capitalized costs...................................... 50,606,089 15,956,120 34,649,969
Future abandonment and restoration..................... (246,125) (246,125) --
----------- ------------ ------------
Net capitalized costs.................................. $50,359,964 $ 15,709,995 $ 34,649,969
=========== ============ ============
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
FOR THE YEAR ENDED DECEMBER 31, 1998
Property acquisition costs
Proved............................................ $ 8,784,050 $ 8,784,050 $ --
Unproved.......................................... 17,804,072 9,776,610 8,027,462
Exploration costs...................................... 573,570 -- 573,570
Development costs...................................... 4,459,065 1,128,852 3,330,213
Amortization rate per equivalent local
predominant unit of production..................................... $ 3.0366/BBL $ 1.3164/MCF
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING
ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 1998
Oil and gas sales...................................... 879,404 879,404 --
Production costs....................................... (305,009) (305,009) --
Impairment of mineral interests........................ (3,512,792) (3,512,792) --
Depreciation, depletion, and amortization.............. (220,600) (220,600) --
--------------- -------------- --------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs)..................................... $(3,158,997) $ (3,158,997) $ --
=========== ============ ============
RESERVE INFORMATION - The following estimates of proved and proved developed
reserve quantities and related standardized measure of discounted net cash flow
are estimates only, and do not purport to reflect realizable values or fair
market values of EuroGas' reserves. EuroGas emphasizes that reserve estimates
are inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties. Accordingly, these
estimates are expected to change as future information becomes available.
EuroGas' proved reserves are located in Canada and the Slovak Republic. Unproved
reserve properties are located in the Slovak Republic, Sakha Republic (Russian
Federation), Canada, Poland, and the Ukraine.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells
equipment and operating methods.
F-21
62
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent a
year to reflect the estimated timing of the future cash flows.
EASTERN EUROPE
IN TOTAL CANADA AND RUSSIA
--------------------- -------------------- --------------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------- --------- ------- --------- ------- ---------
PROVED DEVELOPED AND UNDEVELOPED RESERVES
Beginning of year...................... -- -- -- -- -- --
Purchases of minerals in place......... 884,000 6,881,700 884,000 6,881,700 -- --
Extensions and discoveries............. 94,880 5,487,785 -- -- 94,880 5,487,785
Production............................. (73,000) -- (73,000) -- -- --
------- --------- ------- --------- ------ ---------
End of year............................ 905,880 12,369,485 811,000 6,881,700 94,880 5,487,785
======= ========== ======= ========= ====== =========
EASTERN EUROPE
IN TOTAL CANADA AND RUSSIA
----------- ----------- -----------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AT DECEMBER 31, 1998:
Future cash inflows.......................... $36,750,126 $20,864,305 $15,885,821
Future production costs and
development costs ........................ (9,937,200) (8,431,705) (1,505,494)
Future income tax expenses................... (3,379,138) (2,096,829) (1,282,310)
----------- ----------- -----------
Future net cash flows........................ 23,433,788 10,335,771 13,098,017
10% annual discount for estimated
timing of cash flows...................... (9,770,798) (3,935,291) (5,835,507)
----------- ----------- -----------
Standardized measures of discounted future
net of cash flows relating to proved oil
and gas reserves............................ $13,662,990 $ 6,400,480 $ 7,262,510
=========== =========== ===========
F-22
63
EUROGAS, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
EASTERN EUROPE
IN TOTAL CANADA AND RUSSIA
----------- ----------- -----------
THE FOLLOWING RECONCILES THE CHANGE IN THE
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOW DURING 1998:
Beginning of year............................... $ -- $ -- $ --
Purchase of minerals in place................... 6,948,967 6,948,967 --
Extensions and discoveries...................... 6,857,937 -- 6,857,937
Development..................................... 4,406,706 1,076,493 3,330,213
Production...................................... (574,395) (574,395) --
Revisions of estimates:
Sales prices................................ (320,693) -- (320,693)
Development costs........................... (2,580,213) -- (2,580,213)
Accretion of discount........................... 866,857 180,583 686,274
Net change in income taxes...................... (2,004,491) (1,293,483) (711,008)
Change in exchange rate......................... 62,315 62,315 --
----------- ----------- ----------
End of year..................................... $13,662,990 $ 6,400,480 $7,262,510
=========== =========== ==========
F-23