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 our acquisition of GlobeGas. These claims were resolved pursuant to a settlement agreement entered into in November 1996 (the "KUKUI Settlement Agreement"). Under the terms of the settlement agreement, we issued to the Bishop's Estate (KUKUI's parent) 100,000 shares of common stock and an option to purchase up to 2,000,000 shares of common stock at any time prior to December 31, 1998. The option exercise price was $3.50 per share if exercised within 90 days of the execution of the Company's 1997 agreement with Texaco (the "Texaco Agreement"); $4.50 per share if exercised prior to December 31, 1997; and $6.00 per share if exercised prior to December 31, 1998. We also granted registration rights with respect to the securities.
In March 1997, a trustee over certain of the McKenzie parties and other related entities asserted a claim to the proceeds that we would receive from the Texaco Agreement and exploitation of the Pol-Tex Concession in an action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie, debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane, Sp. zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas Houston Division). The trustee's claim alleges that we paid inadequate consideration for our acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession) from persons who were acting as nominees for the McKenzie parties or in fact may be operating as a nominee for the McKenzie parties, and, therefore, the creditors of the McKenzie parties are the true owners of the proceeds received from the development of the Pol- Tex Concession. (KUKUI is also the principal creditor of the McKenzie parties in these other cases.) We believe that the litigation is without merit based on our belief that the prior settlement with KUKUI bars any such claim, that the trustee over the McKenzie parties has no jurisdiction to bring such claim against a Polish corporation (Pol- Tex) and the ownership of Polish mining rights, that we paid substantial consideration for GlobeGas, and that there is no evidence that the creditors of the McKenzie parties invested any money in the Pol-Tex Concession. In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in this action and in adversary proceeding 97-4155 (described below) in which he is seeking to add new parties and additional causes of action including claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury. In January 2000, that motion was approved by the bankruptcy court. Currently a trial is set on this action for July 2001. We have initiated settlement discussions with the Trustee.
In June 1999, the Trustee filed another suit in the same bankruptcy cases styled "Steve Smith, Trustee, Plaintiff vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, Sp. z.o.o., et al." Adversary #99-3287. That suit sought sanctions against the Defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper. The Defendants filed a motion to dismiss the lawsuit, which was granted in August 1999. In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled "Steve Smith, Trustee, Plaintiff, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, Sp. z.o.o." Adversary #99-3444. This suit seeks damages in excess of $170,000 for the defendants' alleged violation of an agreement with the Trustee executed in March 1997, which agreement, in part, allowed the Texaco Agreement to proceed. We dispute the allegations and have filed a motion to dismiss or alternatively, to abate this suit which motion is currently pending before the court. Nonetheless, in order to avoid additional costs associated with extended litigation, we have engaged in settlement discussions in an attempt to reach a negotiated resolution of the dispute.
On August 21, 1997, KUKUI asserted a claim against us in an action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United States District for the Southern District of Texas, Houston Division. KUKUI's claim is based upon an alleged breach of the KUKUI Settlement Agreement as a result of our failure to file and obtain the effectiveness of a registration statement for the resale by KUKUI of 100,000 shares of common stock delivered to KUKUI in connection with the settlement. In addition, Bishop Estate, KUKUI's parent, has entered a claim for failure to register the resale of shares of common stock subject to its option to purchase up to 2,000,000 shares of common stock. We have denied any liability and have filed a counterclaim against KUKUI and Bishop's Estate for breach of contract.
In early December 1999, we signed a settlement agreement with KUKUI, the Bishop Estate and the bankruptcy Trustee in the aforementioned litigation. That settlement, in part, requires us to pay $900,000 over the 12 months beginning in January 2000 and to issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000. Although a substantial amount of this payment was made, we failed to pay the full amount. We are currently engaged in negotiations to reinstate this settlement. The bankruptcy court approved the settlement, but it is unclear whether the Trustee considers the settlement to be enforceable. If the settlement agreement does not resolve the foregoing litigation, we will vigorously defend such litigation.
On October 11, 1999, an action was filed against EuroGas entitled "Fred L. Oliver. Petroleum Ventures of Texas, Inc. R.A. Morse and R.A. Morse, Trustee, Plaintiffs vs. EuroGas, Inc. and Beaver River Resources, Ltd., Defendants" in the State District Court of Dallas County, Texas, Cause #DV99-08032-A. In this action, Plaintiffs assert that we breached an agreement by failing to seek registration of certain restricted and unregistered shares issued to Plaintiffs in connection with our acquisition of its interest in Beaver River Resources, Ltd. The action sought rescission of the agreement, or in the alternative, damages, and includes claims for costs, attorney's fees and interest. We filed an answer denying the allegations contained in the lawsuit. A settlement was reached whereby half of our interest in the Beaver River project was returned in exchange of half of the shares that were issued.
For the 1992 year, the Kingdom of the Netherlands assessed a tax against GlobeGas in the amount of approximately $911,000, even though it had significant operating losses. The amount fluctuates on our financial statements due to adjustments in exchange ratios. As of December 31, 2000, the income tax liability recorded in our financial statements was $692,431. We have appealed the assessment and 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 our financial statements.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
Our common stock is quoted on the OTC Bulletin Board market maintained by the National Association of Securities Dealers under the symbol "EUGS" and is traded under the symbol "EUGS.F" on the Frankfurt Stock Exchange. As of March 31, 2001, there were 138,996,460 shares of common stock issued and outstanding, held by approximately 270 holders of record (300 estimated beneficial owners).
The following table sets forth the approximate range of high and low bids for the common stock during the periods indicated. Such quotations reflect interdealer prices, without retail markup, markdown, commissions, or other adjustments and may not necessarily represent actual transactions in the common stock.
High Bid Low Bid -------- ------- Year Ended December 31, 1998 ---------------------------- Quarter ended March 31, 1998 $ 6.81 $ 3.94 Quarter ended June 30, 1998 5.75 3.63 Quarter ended September 30, 1998 4.97 2.06 Quarter ended December 31, 1998 2.25 1.19
Year Ended December 31, 1999 ---------------------------- Quarter ended March 31, 1999 $ 2.50 $ 1.03 Quarter ended June 30, 1999 1.09 0.55 Quarter ended September 30, 1999 0.94 0.55 Quarter ended December 31, 1999 0.80 0.45
Year Ending December 31, 2000 Quarter ended March 31, 2000 $ 1.88 $ 0.42 Quarter ended June 30, 2000 1.09 0.75 Quarter ended September 30, 2000 0.91 0.47 Quarter ended December 31, 2000 0.48 0.25
The liquidity of our common stock may be limited, and the reported price quotes may not be indicative of prices that could be obtained in actual transactions. On March 30, 2001, the high and low bids for our common stock on the OTC Bulletin Board were $.297 and $.266 respectively.
Dividends
No dividends have been paid on our common stock, and we do not have retained earnings from which to pay dividends. We have accrued cumulative preferred dividends of $139,932, $1,442,345 and $2,861,301 in 2000, 1999 and 1998, respectively. Of this amount, $21,599 was paid in 2000, $1,301,376 was paid in 1999 and $165,008 was paid in 1998 by the issuance of shares of our common stock in connection with the conversion of a portion of the preferred stock. All cumulative dividends with respect to our preferred stock would be required to be paid prior to our declaring or paying any dividend on our common stock. Even if we were able to generate the necessary earnings, it is not anticipated that dividends will be paid in the foreseeable future, except to the extent required by the terms of the cumulative preferred stock currently issued and outstanding.
Recent Sales of Unregistered Securities
On or about January 12, 2000, the Company issued four Convertible Debentures in the aggregate face amount of $3,000,000 (the "Convertible Debentures") to several individual investors in exchange for an aggregate of $3,000,000 cash. As of March 31, 2000, the holders of all four Convertible Debentures exercised their conversion rights under the Convertible Debentures, and we issued 8,571,428 shares of common stock and warrants to purchase 17,142,858 shares of common stock at an exercise price of $0.35 per share on or before June 1, 2001.
During 2000, 1,800 shares of Series C Preferred Stock were converted, according to their terms, into 5,266,452 common shares at a weighted-average price of $0.34 per share. In connection with the conversion, 63,261 common shares were issued for $21,599 in accrued dividends on the converted Series C Preferred Stock, at a weighted average price of $0.34 per common share.
In May 2000, the Company issued 250,000 common shares for cash in the amount of $195,000, or $0.78 per share. During September 2000, the Company issued 500,000 common shares to a shareholder as compensation for services valued at $365,000, or $0.73 per share.
During July 2000, the Company issued 500,000 common shares to Oxbridge Ltd., a related party, in exchange for the assumption by Oxbridge Ltd. of the Company's commitment to provide additional financing to Pan Asia Mining Corp. The 500,000 common shares were valued at $365,000, or $0.73 per share.
During 2000, the Company issued 3,700,000 common shares and 3,700,000 options under the terms of a settlement obligation. The Company also issued 1,842,983 common shares as payment of accrued settlement obligations. The common shares issued were valued at $1,033,514, or an average of $0.56 per share.
During 2000, notes payable to related parties totaling $1,173,896 and $502,871 of accrued interest were converted into 3,891,954 common shares at an average of $0.43 per share.
During September 2000, the Company entered into an agreement with a broker/dealer for the resale of 2,000,000 common shares that had been registered for resale by a recent Form S-3 Registration Statement filed with the Securities and Exchange Commission. Under the agreement, the broker/dealer was issued 2,000,000 common shares. As of December 31, 2000, 400,000 shares were resold for proceeds totaling $209,500, or $0.52 per share. Total proceeds received by the Company were $205,000, net of offering costs. The Company expects to receive either proceeds from the sale of the remaining 1,600,000 shares or the return of those shares.
On October 2, 2000, the Company entered into a Common Stock Purchase Agreement with Arkledun Drive LLC ("Arkledun") whereby the Company issued 7,000,000 common shares to Arkledun for resale under a public offering of common shares. Arkledun agreed to purchase 5,500,000 common shares for $2,165,000. If Arkledun did not realize $2,489,750 from the resale of the 5,500,000 shares, after the deduction of customary broker's fees, any resulting shortfall would be made up by Arkledun selling as many of the additional 1,500,000 common shares issued as required. If there still was a shortfall after selling the 1,500,000 common shares, the Company agreed to issue additional common shares or pay Arkledun the remaining shortfall.
On November 14, 2000, Arkledun notified the Company of a remaining shortfall after the 7,000,000 shares had been sold. To resolve the shortfall and to settle all claims and demand rights of Arkledun under the Agreement, the Company issued an additional 2,000,000 common shares to Arkledun. The additional 2,000,000 common shares have piggy-back registration rights to be included in any future public offering conducted by the Company.
In November, 832,760 common shares were issued to SlovGold GmbH, a related party, for payments made on behalf of the Company. The common shares were recorded at $291,466, or $0.35 per share, based on the market value of the common shares on the date issued.
The Company also issued 400,000 common shares under the registration statement for Form S-3 that it filed with the SEC on June 28, 2000, and amended on August 17, 2000, for cash proceeds of $208,500, or an average of $0.52 per share. The Company incurred offering costs for the overall public offering of $168,500. The public offering resulted in the Company issuing 9,400,000 common shares for net proceeds of $2,205,000.
The private issuances of securities discussed above were effected in reliance upon the exemption for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act of 1933, as amended, based upon the following: (a) the investors confirmed to us that they were "accredited investors," as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education, and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with any and all other information requested by the investors with respect to the Company, (d) the investors acknowledged that all securities being purchased were "restricted securities" for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered with the SEC under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates and other documents representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.
Item 6.
Item 6. Selected Financial Data
Certain Financial Data
The following statement of operations and balance sheet data were derived from our consolidated financial statements. Our consolidated financial statements have been audited by our independent certified public accountants. The selected financial data below should be read in conjunction with our consolidated financial statements and the notes thereto included with this filing and "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
We are engaged primarily in the acquisition of rights to explore for and exploit oil, natural gas, coal bed methane gas, and mineral mining. We have also extended our business into co-generation (power and heat) projects. We have acquired interests in a number of large exploration concessions, for oil, natural gas, and coal bed methane gas, and are in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. We currently have several projects in various stages of development, including a coal bed methane gas project in Poland, a natural gas project and several additional undeveloped concession areas in Slovakia, and an interest in a talc deposit in Slovakia. We have 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 government and private companies. We also have holdings in oil and natural gas projects in Canada.
Our principal assets consist both of proven and developed properties, as well as unproven and undeveloped properties. All costs incidental to the acquisition, exploration, and development of such properties are capitalized, including costs of drilling and equipping wells and directly-related overhead costs, which include the costs of equipment we own. Since we have limited proven reserves and established production, most of our holdings have not been amortized. In the event that we are ultimately unable to establish production or sufficient reserves on some of these properties to justify the carrying costs, the value of the assets will need to be written down and the related costs charged to operations, resulting in additional losses. We periodically evaluate our properties for impairment and if a property is determined to be impaired, the carrying value of the property is reduced to its net realizable amount.
Recent Developments
In February 2001, the Company sold 2,087,000 shares of Big Horn for Cdn. $ 0.80 per share. The Company intends to sell 6,000,000 additional shares, which would constitute the complete divestiture of its investment in Big Horn. The proceeds shall go towards financing projects in Poland and developing the talc mine in Slovakia, in which the Company has increased its investment, as discussed previously. In addition to our normal private issuances of common stock, the Company registered 12,000,000 of its shares for sale on Form S-3 in August 2000, along with 9,000,000 shares registered on behalf of selling shareholders, pursuant to contractual registration rights.
Outlook
In the past, we have focused our resources on pre-exploration or early-exploration stage natural gas, coal bed methane gas, and other hydrocarbon projects with little short-term revenue potential. We believe that our investment in such early-stage projects will prove profitable in the long run, and may continue to invest in additional early-stage projects from time to time in the future. Nonetheless, present management believes that, in order to balance out our holdings, the focus of our acquisition, investment and development strategy should be on hydrocarbon projects that have the potential to generate revenues within 1-5 years of the date of investment and we are actively seeking investments of that type. Specifically, we intend to take the following actions over the coming months:
(i) Divest some of our shareholdings in Big Horn, in order to raise capital to finance core projects without further diluting our existing shareholders. Proceeds from the sales of our Big Horn shares will be re-deployed into projects that have the potential to yield substantial and near-term cash flow;
(ii) Determine whether to retain or divest the 12% interest that we hold in Teton. Our management team is currently evaluating this investment, and will make a formal recommendation to our Board of Directors regarding its retention or divestiture;
(iii) Focus our efforts on projects in Central Europe and Canada. We will concentrate our financial and management resources on Central Europe (Poland, Slovakia, Ukraine and possibly Hungary), as well as Canada, where the Company has a carried interest in the Beaver River gas project;
(iv) Bring the Gemerska Poloma Talc Deposit into production;
(v) Begin an exploration program on our ten oil and gas concessions covering approximately 4,300 km2 in southeast Poland; POGC is the operator of this venture. EuroGas, in conjunction with POGC, is currently in discussions with a number of international oil and gas companies who are interested in a possible participation in this project;
(vi) Enter into a joint venture with large international oil and gas companies on our oil and gas concession in Slovakia;
(vii) Continue our efforts to reduce corporate overhead, as we recently demonstrated by closing our London office, effective as of March 31, 2001. We will continue to manage the Company from our Warsaw and Vienna Central European headquarters.
In summary, the outlook, based on our strategic approach, is simple--we intend to use the proceeds from the Big Horn divestiture and possibly the sale of other non-core assets to fund production of the Gemerska Poloma Talc project and oil and gas projects in Central and Eastern Europe. Further, we will closely monitor the Beaver River gas project in British Columbia. The ultimate goal is to transform the company from an asset-rich exploration concern to a significant cash flow-producing resource company.
Results of Operations-1999, 1998, and 1997 Fiscal Years
The following table sets forth consolidated income statement data and other selected operating data for the years ended December 31, 2000, 1999 and 1998.
For the Years Ended December 31, 2000 1999 1998 ------------ ------------ ------------ Oil and Gas Sales $ 6,395,037 $ 4,973,508 $ 879,404
Oil and gas production 1,521,471 1,330,526 305,009
Impairment of mineral interests and equipment 26,783,790 7,217,426 3,512,792
Depreciation, depletion and amortization 2,023,425 1,810,176 293,955
Settlement costs 7,200,205 12,527,000 -
General and administrative 6,854,636 8,485,939 7,804,401 ------------ ------------ ------------- Total Costs and Operating Expenses 36,735,793 31,371,067 11,916,115
Other Income (Expenses)
Interest Income 89,698 179,538 593,570
Other Income 455,938 103,878 152,776
Interest expense (7,123,750) (567,195) (465,371)
Loss on sale and impairment of securities and equipment (2,731,628) (1,682,045) -
Foreign exchange net gains (losses) (263,523) 170,315 (130,419)
Minority interest in income of subsidiary (103,022) (753,599) (137,983) ------------ ------------ ------------- Total Other Income Expense (16,676,628) (2,549,108) 12,573 ------------ ------------ -------------
Net Loss $(49,545,322) $(28,946,667) $(11,024,180) ------------ ------------ ------------ Basic and Diluted Loss Per Common Share $ (0.47) $ (0.36) $ (0.22) ------------- ------------ ------------ Weighted Average Number of Common Shares Used in Per Share Calculation 106,145,361 83,368,053 64,129,062 ------------- ------------ ------------
REVENUES. Prior to 1998, we had not generated any revenues from oil and gas sales. As a result of our acquisition of the controlling interest in Big Horn, our results of operations for 2000 and 1999 reflect oil and gas sales of approximately $6,395,037 and $4,973,508, respectively. We intend to divest our holdings in Big Horn in 2001.
OPERATING EXPENSES. Operating expenses include general and administrative expenses, depreciation, depletion and amortization, settlement costs, cost of mineral interests and equipment and impairment of mineral interests and equipment. Oil and gas production expenses were $1,521,471 in 2000, $1,330,526 in 1999, and $305,009 in 1998. All of our oil and gas production expenses are from our Big Horn subsidiary. The increase in oil and gas production expenses from 1998 through 2000 reflects the acquisition of our interest in Big Horn effective October 1998; accordingly, we only recognized a fraction for 1998, and our full 51% of such expenses for 1999 and 2000.
General and administrative expenses were $7,037,165 for 2000, compared with $8,485,939 for 1999, representing a decrease of 22%. The principal factors that contributed to the decrease from 1999 to 2000 were reductions in (i) legal expenses incurred in connection with sales of registered and unregistered securities, ongoing securities compliance, and litigation; (ii) consulting fees; (iii) payroll, caused by a reduction in the number of staff members; and (iv) rent and other office expenses, which we reduced by closing several offices.
Depreciation, depletion and amortization expenses were $ 2,023,425 for 2000, compared to $1,810,176 for 1999.
Impairment of mineral interests and expenses were $26,783,790 for 2000, $7,217,426 in 1999, and $3,512,792 in 1998. The principal factor that contributed to the increase in impairment expenses from 1999 to 2000 was the recognition of a $7,672,511 impairment against the TAKT joint venture as of December 31, 2000, based upon our reassessment of estimated future net cash flows. Settlement costs for financial statement purposes increased from 0 in 1998 to $12,527,000 in 1999 and $7,200,205 in 2000. The primary cause of this increase in settlement costs was the issuance of a default judgment against the Company on March 16, 2000 in the amount of $19,773,113 in a case styled Finance & Credit Development Corporation Ltd., an Ireland Corporation vs. EuroGas, Inc., a Utah corporation, Case No. 2:00VC-1024K. As discussed in "Item 3. Litigation," such judgment was entered based on our failure to comply with procedural rules, not based on any hearing on the merits, and we have entered into a settlement agreement concerning the suit and the default judgment.
INCOME TAXES. Historically, we have not been required to pay income taxes, due to our absence of net profits. For future years, we anticipate being able to utilize a substantial portion of our accumulated deficit, which was approximately $126.4 million as of December 31, 2000, to offset profits, if and when achieved, resulting in a reduction in income taxes payable at such time.
NET LOSS. We incurred net losses of approximately $49.7 million, $30.4 million, and $13.9 million for the years ended December 31, 2000, 1999, and 1998, respectively. These losses were due in part to the absence of revenues, combined with continued expansion of our activities, primarily as a result of acquisition and the growth of our administrative expenses. In addition, a portion of the recognized net losses in 2000 resulted from the $7,672,511 impairment of mineral interests recognized against the TAKT joint venture and the default judgment entered against us on March 16, 2000.
Due to the highly inflationary economies of the Eastern European countries in which we operate, we are subject to extreme fluctuations in currency exchange rates that can result in the recognition of significant gains or losses during any period. Approximately $(263,523) $170,315 and ($130,419) in gains (losses) were recognized as a result of currency transactions in eacg if the three years ended December 31, 2000, 1999 and 1998, respectively. We had a cumulative foreign currency translation adjustment of ($3,916,641) as of December 31, 2000. We do not currently employ any hedging techniques to protect against the risk of currency fluctuations.
Capital and Liquidity
We had an accumulated deficit of $125,863,803 as of December 31, 2000, substantially all of which has been funded out of proceeds received from the issuance of stock and the incurrence of payables. As of December 31, 2000, we had total current assets of approximately $4.8 million and total current liabilities of approximately $21.7 million (which number includes our estimated obligation with respect to the default judgment entered against us on March 16, 2000) resulting in negative working capital of approximately $16.9 million. As of December 31, 2000, our balance sheet reflected approximately $7.4 million in mineral interests in properties not subject to amortization, net of valuation allowance. These properties are held under licenses or concessions that contain specific drilling or other exploration commitments and that expire within one to three years, unless the concession or license authority grants an extension or a new concession license, of which there can be no assurance. If we are unable to establish production or resources on these properties, are unable to obtain any necessary future licenses or extensions, or are unable to meet our financial commitments with respect to these properties, we could be forced to write off the carrying value of the applicable property.
Throughout our existence, we have relied on cash from financing activities to provide the funds required for acquisitions and operating activities. Our financing activities provided net cash of approximately $4.4 million, $6.5 million and $12 million during the years ended December 31, 2000, 1999 and 1998, respectively. Such net cash has been used principally to fund net losses of approximately $50 million, $29 million and $11 million during the years ended December 31, 2000, 1999 and December 31, 1998, respectively. Our operating activities provided $2.9 million of net cast during the year ended December 31, 2000 and used net cash of approximately $3.8 million and $8.3 million during the years ended December 31, 1999 and 1998, respectively. A portion of our cash was used in acquiring mineral interests, property and equipment, either directly or indirectly through the acquisition of subsidiaries, with approximately, $7.7 million, $8.9 million and $13.6 million used in investing activities for the years ended December 31, 2000, 1999 and 1998, respectively, of which approximately $4.4 million, $7.0 million and $9.3 million, respectively, was used in acquiring mineral interests.
While we had cash on hand of approximately $0.6 million as of December 31, 2000, we have short-term and long-term financial commitments with respect to exploration and drilling obligations related to our interests in mineral properties and potential litigation liabilities We estimate our financial commitments for the first nine months of 2001 to be approximately $4 million. Many of our projects are long-term and will require the expenditure of substantial amounts over a number of years before the establishment, if ever, of production and ongoing revenues. As noted above, we have relied principally on cash provided from equity and debt transactions to meet our cash requirements. We do not have sufficient cash to meet our short-term or long-term needs and we will require additional cash, either from financing transactions or operating activities, to meet our immediate and long-term obligations. There can be no assurance that we will be able to obtain additional financing, either in the form of debt or equity, or that, if such financing is obtained, it will be available to us on reasonable terms. If we are able to obtain additional financing or structure strategic relationships in order to fund existing or future projects, existing shareholders will likely experience further dilution of their percentage ownership of the Company.
If we are unable to establish production or reserves sufficient to justify the carrying value of our assets or to obtain the necessary funding to meet our short and long-term obligations or to fund our exploration and development program, all or a portion of the mineral interests in unproven properties will be charged to operations, leading to significant additional losses.
Inflation
The amounts presented in our consolidated financial statements do not provide for the effect of inflation on our operations or our financial position. Amounts shown for property, plant and equipment and for costs and expenses reflect historical costs and do not necessarily represent replacement costs or charges to operations based on replacement costs. Our operations, together with other sources, are intended to provide funds to replace property, plant and equipment as necessary. Net income would be lower than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments. Due to inflationary problems in Eastern Europe reflected in currency exchange losses, we have seen losses on the values of our assets in those countries.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We conduct business in many foreign currencies. As a result, we are subject to foreign currency exchange rate risk due to effects that foreign exchange rate movements of those currencies have on our costs and on the cash flows that we receive from foreign operations. We believe that we currently have no other material market risk exposure. To date, we have addressed our foreign currency exchange rate risks principally by maintaining our liquid assets in interest-bearing accounts in U.S. Dollars, until payments in foreign currency are required, but we do not reduce this risk by hedging. For further discussion of our policies regarding derivative financial instruments and foreign currency translation, see Note 1 to our Consolidated Financial Statements contained in "Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and its subsidiaries, together with note and supplementary data related thereto, are set forth following pages of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Certain Information Regarding Executive Officers, Directors and Control Persons
Set forth below is the name and age of each individual who was a director or executive officer of EuroGas as of December 31, 2000 or as of March 31, 2001, 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:
Biographical Information
The following paragraphs set forth brief biographical information for each of the aforementioned directors and executive officers:
KARL ARLETH. Prior to his resignation in January 2001 Mr. Arleth commenced seerving as the President and a director of EuroGas in April 1999. Prior to joining EuroGas, Mr. Arleth served as a Director of Azerbaijan International Operating Company (AIOC) from January 1998 to April 1999. In this role, Mr. Arleth chaired the shareholder board of AIOC, and an international consortium of 11 companies engaged in the development and transportation of oil from Azeri-Chirag-Gunashli offshore field complex in Azerbaijan. From January 1998 until January 1999, Mr. Arleth was also President of Amoco Caspian Sea Petroleum Limited in Baku, Azerbaijan. From January 1997 until January 1998, he was Director of Strategic Planning for Amoco Corporation Worldwide Exploration and Production Sector in Chicago. From 1992 until 1997, Mr. Arleth was President of Amoco Poland Limited in Warsaw, Poland, where he was responsible for oil and gas exploration and production projects as well as business development activities that focused on natural gas transmission, distribution, storage and electric power generation. As a result of our controlling interest acquisition in Big Horn, Mr. Arleth has served as a director of Big Horn since July 1999.
DR. GREGORY P. FONTANA. Dr. Fontana is a director of EuroGas. He is currently an attending cardio thoracic surgeon at 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, Harvard 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 papers. He is currently a consultant to Edwards Life Science and Venpro Inc. He is on the Scientific Advisory Board for Genzyme Biosurgery and BioHeart, Inc.
ANDREW K. ANDRACZKE. Mr. Andraczke was appointed a director of the Company in March 2000 and Chief executive officer in November 2000. In addition, Mr. Andraczke has been Vice President, Secretary, and a member of the management committee of Pol-Tex since 1992, and is responsible for business development and coordination of administrative, legal, and political aspects of the Pol-Tex venture. Mr. Andraczke also directs computer operations and system support for the venture's exploration and production activities. Mr. Andraczke holds B.Sc., M.Sc., and PhD degrees in computer science and applications from the Computer Science Institute of Polytechnical University in Warsaw where he also was an Associate Professor. He served as the General Manager of the Computing Center of the Center for Geological Research in the Central Office of Geology (Ministry of Geology) from 1972 to 1976, where he developed and implemented Poland's first general database of geological and mineral resources of Poland. He also implemented computer mapping systems, oil and gas reservoir simulations, and production control for mining operations. From 1976 to 1982, he worked for several oil and gas and mining firms, including OTC Oklahoma Production in Tulsa, Oklahoma, Kansas Oil Consolidated in Tulsa, Oklahoma, John W. Mecom Company in Houston, Texas, InteResources Group, Inc. in Houston, Texas, and British Sulphur Corporation in London, U.K., performing reservoir modeling of secondary and tertiary oil reservoirs, inorganic polymer floods, and underground coal gasification projects. During this time, he also developed data acquisition and reserve balance systems for mines in the U.S., Mexico, and Egypt. Mr. Andraczke joined Tenneco Oil Exploration and Production Company in Houston in 1982 and served as an internal consultant and management advisor on computer applications and emerging technologies until 1987.
BORRE DAHL. He became Chief Financial Officer in July 2000. From 1998 until 2000, Mr. Dahl was Finance Director, Norsk Hydro Poland, based in Warsaw, Poland. Previously, from 1996 until 1998, Mr. Dahl worked as an independent consultant with Gemini Consultants (formerly Bossard) in Poland, on issues such as business plan development, new company financing, due diligence and the restructuring of several large companies. From 1994-96, Mr. Dahl was Customer Focus Manager for Asea Brown Boveri, Ltd. (ABB) Poland where he was responsible for the restructuring and recapitalization of a number of both private and public companies, as well as the implementation of modern financial and reporting systems. From 1989-94, Mr. Dahl was senior Management Consultant for ABB Norway. From 1984-88, he worked with a group of high technology companies. From 1979-84, he served as a management consultant with Asbjorn Habberstad A/S (now A.T. Kearney, Norway). During his work with both ABB and various high technology companies, he held assignments in the United States and is thoroughly familiar with US financial systems, accounting practices and standards. Between 1974-78, Mr. Dahl was Assistant Professor (I. Amanuensis) at the Norwegian School of Management. He received a MBA in 1973 from the IMEDE Management Development Institute, Lausanne, Switzerland.
WOLFGANG RAUBALL. He was appointed director of the Company in November 2000. He was already managing director of EuroGas Austria GesmbH and Globegas BV. He has worked for the Company in various functions since 1994. Mr. Rauball attended Darmstadt Technical University in Germany from 1967 through 1971. 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 financing for business enterprises, primarily public companies engaged in the mineral industry.
HANK BLANKENSTEIN. Prior to his resignation from all offices in March 2000, Mr. Blankenstein was Vice President, Treasurer and a director of EuroGas. He had served as a director since December 1995 and as Vice President and Treasurer since 1996. Mr. Blankenstein continues to provide limited consulting services to EuroGas. Mr. Blankenstein has had over 30 years experience in various levels of management positions. He served as an administrative and financial
officer for American Micro Systems and National Semiconductor, from 1973 to 1985. Prior to that, he served in a number of operational positions for high-tech industry companies, having engineering- production supervising responsibilities, and was in charge of a 400- person division. He has been involved in several high-tech start-up situations, serving in senior management positions. He holds a Bachelor of Science degree in Finance and Banking from Brigham Young University that was awarded in 1966.
DR. HANS FISCHER. From January 1996 to March 2000, Mr. Fisher served as a director of EuroGas. He is currently Professor of Radiology at the University of California, Los Angeles, Harbor-UCLA Medical Center where he has been on the faculty since 1992. He has been a chair, member, and designated alternate on Research, Clinical Radiology, Quality Assurance and Ambulatory Care Committees for Harbor- UCLA Medical Center since 1990. He trained at Leibniz-Gymnasium, Dortmund West Germany, School of Medicine, University of Muenster West Germany and School of Sociology, University of Muenster West Germany. He received his M.D. in 1971 and Ph.D. in 1985 from the University of Muenster.
RUDOPH HEINZ. Between June 14, 1999 and March 2000, Mr. Heinz served as a director of EuroGas. Mr. Heinz presently serves as the General Manager of the German Federation of Money Managers, a position he has held since May 1997. Prior to becoming an independent money manager and Independent Financial Advisor, Mr. Heinz was manager of the securities department for the Frankfurt based BHF Bank from April 1990 until June 1992 and was also responsible for that bank's United States, Japan, and United Kingdom subsidiaries. From 1983 until 1990, Mr. Heinz was the sole General Manager of DB Capital Management GmbH, a Deutsche Bank subsidiary with operations in Germany, United States, Japan and the United Kingdom.
Family Relationships
Dr. Reinhard Rauball, the former Chairman of the Board of Directors, and Wolfgang Rauball, an independent consultant to EuroGas, are brothers. Wolfgang Rauball has been instrumental in substantially all of our acquisitions and joint ventures during the past four years. From time to time, the Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt financing for us through parties with whom they have previous business and personal relationships and have made loans to us. Dr. Reinhard Rauball resigned from all of his positions with EuroGas on February 18, 1999.
Compliance With Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our officers, directors and certain shareholders to file reports concerning their ownership of our common stock with the SEC and to furnish to us copies of such reports. Based solely upon our review of the reports required by Section 16 and amendments thereto furnished to us, we believe that all reports required to be filed pursuant to Section 16(a) of the Exchange Act were filed with the SEC on a timely basis.
Item 11.
Item 11. Executive Compensation
The compensation of our chief executive officer during 2000 and the other executive officers of EuroGas whose total cash compensation for the 2000 fiscal year exceeded $100,000 (the "Named Officers") is shown on the following pages in three tables and discussed in a compensation report of the Board of Directors.
Summary Compensation Table
The following table sets forth, for our three most recent fiscal years, the compensation paid to the Named Officers.
(2) Mr. Arleth commenced serving as the President and a director of EuroGas in April 1999, and resigned from the Company in January 2001. (4) Represents amounts to which Mr. Arleth is entitled to receive as a housing and service allowance; such amounts were accrued but not paid in 1999.
Option Grants in Last Fiscal Year
The following table sets forth, for the 1999 fiscal year, certain information regarding options grants to the Named Officers.
Potential Realizable Value At Individual Grants Assumed Annual Rates of Stock Price Appreciation For Option Term
(1) Mr. Arleth commenced serving as the President and a director of EuroGas on April 1999, and resigned in January 2001.
Aggregated Option Exercises in the Last Fiscal Year and Year End Option Values
The following table sets forth the number of unexercised options to acquire shares of our common stock held on December 31, 2000 and the aggregate value of such options held by the Named Officers. The Named Officers did not exercise any options to acquire shares of our common stock during 2000. As of December 31, 2000, we had not granted any stock appreciation rights to any of the Named Officers.
(1) Reflects the difference between the exercise price of the unexercised options and the market value of shares of our common stock as of December 31, 2000. The last transaction for our common Stock on December 29, 2000, the last trading date of our fiscal year, was $0.25 per share.
(3) Mr. Arleth commenced serving as the President and a director of EuroGas in April 1999, and resigned from the Company in January 2001.
(4) Mr. Blankenstein resigned as an officer and director of EuroGas in March 2000.
Executive Employment and Consulting Arrangements
No other employee of EuroGas is employed pursuant to a written agreement.
We have relied heavily on consultants to identify potential projects, to negotiate the terms of acquisitions, to develop relationships with governmental regulators and industry partners, and to complete business and financing transactions. As a result of services in these areas, we paid $150,000 in 2000, $200,000 in 1999, $600,000 in 1998, and $1,260,253 in 1997 (including payments in arrears related to services for previous years) to Wolfgang Rauball, the brother of Reinhard Rauball, our former Chairman of the Board. We also paid $322,900 in 2000, $320,000 in 1999, and $240,000 in 1998 (including payments in arrears related to services for previous years) to Andrew K. Andraczke, a key employee in Poland and recently appointed director who was appointed President and CEO of the Company in March 2001. If we do not continue to make significant acquisitions, and as we develop revenues, we anticipate relying more on the services of employees and amounts paid to consultants will decrease.
Compensation of Directors
We compensate our outside directors for their services by payment of a monthly fee of $5,000 and reimbursement of expenses incurred in attending board meetings. We do not separately compensate our board members who are also our employees for their service on the board.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
As of December 31, 2000, the Compensation Committee consisted of the Board of Directors. The Board of Directors as of December 31,2000 included Gregory Fontana, Director since 1994. Greg Fontana is not an employee of the Company. Karl Arleth served as Director, President and Chief Executive Officer from June 1999 until December 2000, Andrew Andraczke has served as Director since June 2000 and became President and Chief Executive Officer in December 2000. Garry Henry has served as Director since December 2000 and Wolfgang Rauball has served as Director since November 2000. Wolfgang Rauball has also served as Managing Director of EuroGas Austria GesmbH since 1998 and as Managing Director of GlobeGas B.V. Amsterdam since 1996.
Compensation Committee Report
Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act or the Exchange Act that incorporates by reference, in whole or in part, subsequent filings, including, without limitation, this Annual Report on Form 10- K, the Compensation Committee Report and the Performance Graph set forth below shall not be deemed to be incorporated by reference in any such filings.
As required by rules promulgated by the SEC, this Compensation Committee Report describes the overall compensation goal and policies applicable to our executive officers, including the basis for determining the compensation of executive officers for the 2000 fiscal year.
GENERAL. Management compensation is overseen by the Board of Directors (the "Board"). In July 1999, the Board established a Compensation Committee comprised of Dr. Gregory P. Fontana, Dr. Hans Fischer and Rudolph Heinz, who also constituted the Compensation Committee on December 31, 1999. However, Mr. Fischer and Mr. Heinz have subsequently resigned, and the Compensation Committee has been dissolved as a matter of law. Accordingly, the following compensation report was prepared by Board members serving as of March 31, 2001.
COMPENSATION OBJECTIVES. In determining the amount of compensation for our executive officers, the Board is guided by several factors. Because we have very few employees, compensation practices are flexible in response to the needs and talents of the individual officer and are geared toward rewarding contributions that enhance stockholder value. Historically, we have compensated senior management based on the perceived contribution to the development of our operations, consisting principally of salaries believed to reflect their contributions. In addition, because we have only recently begun to generate revenues from operations and have attempted to preserve capital for development of our business and operations, we have used stock options as a form of compensation for executive officers. The use of stock options is designed to align the interests of the executive officers with the long-term interests of EuroGas and to attract and retain talented employees who can enhance our value. Although certain members of the Board are also executive officers, none participates in the determination of his own compensation.
COMPENSATION COMPONENTS. The compensation of our executive officers consists of three components: base salary, bonuses and long- term incentive awards in the form of stock options. The Board establishes base salaries based primarily on its objective judgment, taking into consideration both qualitative and quantitative factors. Among the factors considered by the Board are: (i) the qualifications and performance of each executive officer; (ii) the performance of EuroGas as measured by such factors as development activities and increased shareholder value; (iii) salaries provided by other companies inside and outside the industry that are of comparable size and at a similar stage of development, to the extent known; and (iv) our capital position and needs. The Board does not assign any specific weight to these factors in determining salaries.
From time to time, we also compensate our executive officers in the form of bonuses. Because we are presently in an early stage of development and do not have a history of earnings per share, net income, or other conventional data to use as a benchmark for determining the amount or existence of bonus awards, any bonuses granted by the Board in the near term will be based upon its subjective evaluation of each individual's contribution to EuroGas. In some cases, however, bonuses payable to executive officers may be tied to specific criteria identified at the time of engagement. For the years ended December 31, 1998, 1999 and 2000, the Board did not pay bonuses to any executive officers. The Board's action was based on its conclusion that, despite the superior personal performance of the executive officers, no cash incentive bonuses should be awarded, due to the Board's desire to preserve capital for future growth and development.
The third component of our compensation structure consists of the grant of stock options to compensate executive officers and other key employees. Having granted all options available under the 1996 Stock Option and Award Plan, on November 20, 1999, the Board determined to grant options outside of any option plan (but on terms and conditions identical to those contained in our 1996 Stock Option and Award Plan), to certain officers, directors and outside consultants. The purpose
of such options is to give each option recipient an interest in preserving and maximizing shareholder value in the long term, to reward option recipients for past performance and to give option recipients the incentive to remain with EuroGas over an extended period. The right to determine the amount of such grants was delegated to the Compensation Committee based on its assessment of the proposed recipients' current and expected future performance, level of responsibilities, and the importance of his or her position with, and contribution to, EuroGas. In the year ended December 31, 1999, pursuant to such delegation, the Compensation Committee awarded (in addition to the 1,000,000 options granted to Mr. Arleth pursuant to his employment agreement) a total of 950,000 options to purchase common stock at an exercise price of $.45 per share. Of such options, 350,000 were granted to Andrew Andraczke (key employee and director as of March 2000), and 250,000 were granted to Greg Fontana (director), as well as 200,000 options granted to Borre Dahl at an exercise price of 0.73 per share.
CHIEF EXECUTIVE COMPENSATION. Mr. Karl Arleth had a base salary of $ 400,000 per year. The salary of Andrew Adraczke has not been changed from his $240,000 per year since he became President and CEO. Consistent with the Board's desire to preserve capital for future growth and development, the Board elected not to pay a bonus to any executive officer for the 2000 fiscal year.
USE OF CONSULTANTS. We anticipate continuing to rely on both executive management and outside consultants in connection with the acquisition of additional projects and the initial development of existing projects. However, we anticipate that, if able to establish ongoing revenues from production, we will retain management personnel as employees of EuroGas and compensate them on a salary basis, based on comparable compensation packages offered by employers within our general industry and geographical area.
The foregoing report is submitted by the Compensation Committee, which consists of all Board members.
Andrew Andraczke Borre Dahl Gregory Fontana Wolfgang Rauball
Performance Graph
The following graph shows a comparison of cumulative shareholder return for our common stock for the period beginning August 3, 1994 (the date the common stock was first quoted in the over-the-counter market) and ending December 31, 2000, as well as the cumulative total return for the NASDAQ Composite Index and the Howard Weil, Bloomberg Oilfield Service and Manufacturing Index. The Peer Group Index is a price-weighted composite index comprised of the cumulative shareholder return for forty-seven companies involved in oilfield services.
The performance graph assumes that $100 was invested at the market close on August 3, 1994 and that dividends, if any, were reinvested for all companies, including those on the NASDAQ Composite Index and the Peer Group Index.
Total Return Analysis 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98 12/31/99 -------- -------- -------- -------- -------- -------- EuroGas $ 100.00 $ 51.85 $ 120.37 $ 200.00 $ 46.30 $ 15.11 HW BBG Oilfield Svc. & Manf'g $ 200.00 $ 146.32 $ 236.44 $ 359.99 $ 179.46 $ 260.02 NASDAQ Composite $ 100.00 $ 140.98 $ 173.46 $ 211.87 $ 297.02 $ 552.81
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from Bloomberg Financial Markets.
The figures for EuroGas reflect a 24-to-1 reverse stock split of our common shares effective 9/6/94.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following beneficial ownership table sets forth information regarding beneficial ownership of our common stock as of April 15, 2000 by:
(i) each person or entity that is known by us to own beneficially 5% or more of the outstanding shares of our common stock;
(ii) each of our directors;
(iii) our present and former chief executive officer and former Vice President and Treasurer (our only other executive officer during 2000); and
(iv) all of our executive officers and directors as a group.
Under relevant provisions of the Exchange Act, a person is deemed to be a "beneficial owner" of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership in 60 days. More than one person may be deemed to be a beneficial owner of the same securities. The percentage ownership of each stockholder is calculated based on the total number of outstanding shares of our common stock as of March 31, 2001, plus those shares of our common stock that the stockholder has the right to acquire within 60 days. Consequently, the denominator for calculating the percentage ownership may be different for each stockholder.
The table is based upon information provided by our directors and executive officers.
Amount and Nature of Beneficial Ownership as of March 31, 2001(1) ----------------------------------------------------- Name and Address Exercisable of Beneficial Common Options & Total Owner Shares Warrants(2) Ownership Percent(3) - ----------------- --------- ----------- --------- --------- Principal Stockholders: Wolfgang Rauball(4) 9,671,429 17,192,858 26,864,287 22.78%
Officers, Directors, and Controlling Persons:
Dr. Gregory P.Fontana, Nil 350,000 350,000 * Director 2269 Worthing Lane Los Angeles, California 90077
Andrew Andraczke, Nil 350,000 350,000 * Director Warsaw:str. Lektykarska 18 01-687 Warszawa, Poland
All officers and directors as a group (2 persons) Nil 200,000 200,000 _________________________
(1) Unless otherwise indicated, to our best knowledge, all stock is owned beneficially and of record by the listed stockholder, and each stockholder has sole voting and investment power with respect to our common stock beneficially owned by such person.
(2) Represents options or warrants exercisable within 60 days of March 31, 2001, held by such individual or entity.
(3) The percentage indicated represents the number of shares of our common stock, warrants and options exercisable within 60 days held by the indicated stockholder divided by the sum of (a) the number of shares subject to options exercisable by such stockholder within 60 days and (b) 100,736,979, which is the number of shares of our common stock issued and outstanding as of April 15, 2000.
(4) Includes shares in which Mr. Rauball disclaims beneficial ownership and which he temporarily holds as a nominee for other persons.
Item 13.
Item 13. Certain Relationships and Related Transactions
On or about January 12, 2000, we issued four convertible debentures in the aggregate face amount of $3,000,000 in exchange for $3,000,000 in cash to Wolfgang Rauball and certain affiliates of Wolfgang Rauball, who directly or indirectly own 22.78% percent of our outstanding common stock as of April 15, 2000, and who serves as a consultant to us. The convertible debentures accrue interest at the rate of prime plus two percent per annum. Payment of the principal amount of the convertible debentures is due on February 10, 2001, and accrued interest is payable annually beginning on January 8, 2001. Each $1,000,000 in principal amount of convertible debenture is convertible into (a) shares of common stock at the rate of one share per $0.35 indebtedness (for a total of 2,857,143 shares per $1,000,000 of convertible debenture), and (b) warrants to purchase one share of our common stock at the rate of two warrants for each $0.35 in indebtedness (for a total of 5,714,286 warrants per $1,000,000 of convertible debenture). Each such warrant entitles the holder to purchase one share of our common stock for an exercise price of $0.35. As of April 15, 2000, Mr. Rauball and his affiliates have converted all $3,000,000 in principal amount of convertible debentures in exchange for 8,571,429 shares of our common stock and 17,142,858 warrants to purchase common stock.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed
1. Financial Statements. The following Consolidated Financial Statements of the Company and report of independent accountants are included immediately following the signature page of this Report.
A. Report of Hansen, Barnett & Maxwell, independent certified public accountants, for the years ended December 31, 2000, 1999, 1998 and 1997
B. Consolidated Balance Sheets at December 31, 2000 and
C. Consolidated Statements of Income for the years ended December 31, 2000, 1999, 1998 and 1997
D. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1998, 1999 and 2000
E. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, 1998 and 1997
F. Notes to Consolidated Financial Statements
2. Exhibits.
Exhibit Title of Document Location Number - ------ ------------------------------ --------------- 2.1 Exchange Agreement between Report on Form Northampton, Inc., 8-K and Energy Global, A.G. dated August 3, 1994, Exhibit No. 1*
Exhibit Title of Document Location Number - ------ ------------------------------ ---------------
2.2 Agreement and Plan of Merger Report on Form between EuroGas, Inc., 8-K and Danube International dated July 12, Petroleum Company, Inc., 1996, dated July 3, 1996, as amended Exhibit No. 5*
2.3 English translation of Transfer Report on Form Agreement between 8-K EuroGas and OMV, Inc. for the dated June 11, Acquisition of 1997 OMV (Yakut) Exploration GmbH Exhibit No. 1* dated June 11, 1997
2.4 Asset Exchange Agreement between Report on Form EuroGas, Inc., S-1 and Beaver River Resources, Ltd., dated July, dated April 1, 1988 23, 1998 Exhibit No. 2.03*
3.1 Articles of Incorporation Registration Statement on Form S-18, File No. 33-1381-D Exhibit No. 1*
3.2 Amended Bylaws Annual Report on Form 10-K for the fiscal year ended September 30, 1990, Exhibit No. 1*
3.3 Designation of Rights, Quarterly Privileges, and Preferences Report on of 1995 Series Preferred Stock Form 10-QSB dated March 31, 1995, Exhibit No. 1*
3.4 Designation of Rights, Report on Form Privileges, and Preferences 8-K of 1996 Series Preferred Stock dated July 12, 1996, Exhibit No. 1*
3.5 Designation of Rights, Report on Form Privileges, and Preferences 8-K 1997 Series A Convertible dated May 30, Preferred Stock 1997 Exhibit No. 1* 3.6 Designation of Rights, Report on Form Privileges, and Preferences S-1 of 1998 Series B Convertible Dated July 23, Preferred Stock 1998 Exhibit No. 3.06*
3.7 Articles of Share Exchange Report on Form 8-K dated August 3, 1994, Exhibit No. 6*
3.8 Designation of Rights, Registration Privileges, and Preferences of Statement on 1999 Series C 6% Convertible Form S-1, File Preferred Stock No. 333-92009, filed on December 2,
4.1 Subscription Agreement between Report on Form EuroGas, Inc., and S-1 Thomson Kernaghan & Co., Ltd., dated July 23, dated May 29, 1998 1998 Exhibit No. 4.01*
4.2 Warrant Agreement dated July 12, Report on Form 1996, with 8-K Danube Shareholder dated July 12, 1996, Exhibit No. 2*
Exhibit Title of Document Location Number - ------ ------------------------------ ---------------
4.3 Registration Rights Agreement Report on Form Between EuroGas, Inc., S-1 dated July and Thomson Kernaghan & Co., 23, 1998 Ltd., dated May 29, 1998 Exhibit No. 4.02*
4.4 Registration Rights Agreement Report on Form dated July 12, 1996, 8-K with Danube Shareholder dated July 12, Exhibit No. 3*
4.5 Registration Rights Agreement by Report on Form and among EuroGas, Inc., and S-1 Finance Credit & Development dated July 23, Corporation, Ltd., dated June 30, 1998 1997 Exhibit No. 4.06*
4.6 Option granted to the Trustees of Annual Report the Estate of on Bernice Pauahi Bishop Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 10*
4.7 Registration Rights Agreement by Annual Report and among on EuroGas, Inc., and Kukui, Inc., Form 10-KSB and the Trustees of for the the Estate of Bernice Pauahi fiscal year Bishop ended December 31, 1995, Exhibit No. 11*
4.8 Option issued to OMV Annual Report Aktiengesellschaft to acquire up on to 2,000,000 shares of restricted Form 10-KSB common stock for the fiscal year ended December 31, 1996, Exhibit No. 13*
4.9 Form of Convertible Debenture Filed issued on January 12, 2000. herewith.
10.1 English translation of Mining Quarterly Usufruct Contract between The Report on Form Minister of Environmental 10-Q dated Protection, Natural Resources and September 30, Forestry of the Republic of 1997 Exhibit Poland and Pol-Tex Methane, dated No. 1* October 3, 1997
10.2 Agreement between Polish Oil and Quarterly Gas Mining Joint Stock Company Report on Form and EuroGas, Inc., dated October 10-Q dated 23, 1997 September 30, 1997 Exhibit No. 2*
10.3 1996 Stock Option and Award Plan Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 14*
10.4 Settlement Agreement by and among Annual Report Kukui, Inc., and on Pol-Tex Methane, Sp. zo.o., Form 10-KSB McKenzie Methane for the Rybnik, McKenzie Methane fiscal year Jastrzebie, GlobeGas, ended B.V. (formerly known as McKenzie December 31, Methane Poland, 1995, B.V.), and the Unsecured Exhibit No. Creditors' Trust of the 15* Bankruptcy Estate of McKenzie Methane Corporation
Exhibit Title of Document Location Number - ------ ------------------------------ ---------------
10.5 Acquisition Agreement between Report on Form EuroGas, Inc., and Belmont S-1 dated Resources, Inc., dated July 22, July 23, 1998 1998 Exhibit No. 10.20*
10.6 General Agreement governing the Report on Form operation of 8-K McKenzie Methane Poland, B.V. dated August 3, 1994, Exhibit No. 2*
10.7 Concession Agreement between Annual Report Ministry of on Environmental Protection, Natural Form 10-KSB Resources, and for the Forestry and Pol-Tex Methane Ltd. fiscal year ended December 31, 1995, Exhibit No. 18*
10.8 Association Agreement between Annual Report NAFTA a.s. Gbely on and Danube International Form 10-KSB Petroleum Company for the fiscal year ended December 31, 1995, Exhibit No. 19*
10.9 Agreement between Moravske' Annual Report Naftove' Doly a.s. on and Danube International Form 10-KSB Petroleum Company for the fiscal year ended December 31, 1995, Exhibit No. 20*
10.10 Form of Convertible Debenture Report on Form 8-K dated August 3, 1994, Exhibit No. 7*
10.11 Form of Promissory Note, as Annual Report amended, with attached on list of shareholders Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 23*
10.12 Amendment #1 to the Association Annual Report Agreement Entered on on 13th July 1995, between NAFTA Form 10-KSB a.s. Gbely and for the Danube International Petroleum Fiscal year Company ended December 31, 1996, Exhibit No. 25*
10.13 Acquisition Agreement by and Form 10-Q among Belmont Resources, Inc., Dated EuroGas Incorporated, dated September 30, October 9, 1998 1998 Exhibit No. 1*
10.14 Letter of Intent by and between Annual Report Polish Oil and Gas on Company and Pol-Tex Methane, Form 10-KSB dated April 28, 1997 for the Fiscal year ended December 31, 1996, Exhibit No. 27*
10.15 Purchase and Sale Agreement Report on Form between Texaco Slask 8-K Sp. zo.o., Pol-Tex Methane Sp. Dated March zo.o. and 24, 1997 GlobeGas B.V. Exhibit No. 1*
Exhibit Title of Document Location Number - ------ ------------------------------ ---------------
10.16 English translation of Articles Report on Form of Association of the 8-K/A TAKT Joint Venture dated June 7, Dated June 11, 1991, as amended 1997 April 4, 1993 Exhibit No. 3*
10.17 English translation of Proposed Report on Form Exploration and 8-K/A Production Sharing Contract for Dated June 11, Hydrocarbons 1997 between the Republic of Sakha Exhibit No. 4* (Yakutia) and the Russian Federation and the TAKT Joint Venture
10.18 English translation of Agreement Registration on Joint Investment and Statement on Production Activities between Form S-1 dated EuroGas, Inc., and July 23, 1998 Zahidukrgeologia, dated May 14, Exhibit No. 1998 10.21*
10.19 English translation of Statutory Registration Agreement of Association of Statement on Limited Liability Company with Form S-1 dated Foreign Investments between July 23, 1998 EuroGas, Inc., and Makyivs'ke Exhibit No. Girs'ke Tovarystvo, dated June 10.22* 17, 1998
10.20 Partnership Agreement between Amendment No. EuroGas, Inc., and RWE-DEA 1 to Altiengesellschaft for Mineraloel Registration and Chemie AG, date July 22, 1998 Statement on Form S-1 dated August 3, 1998 Exhibit No. 10.23
10.21 Mining Usufruct Contract between Quarterly The Minister of Report on Environmental Protection, Natural Form 10-Q Resources and dated Forestry of the Republic of September 30, Poland and Pol-Tex 1997 Methane, dated October 3, 1997 Exhibit No. 1*
10.22 Agreement between Polish Oil and Quarterly Gas Mining Joint Report on Stock Company and EuroGas, Inc., Form 10-Q dated dated October 23, 1997 September 30, Exhibit No. 2*
10.23 Agreement for Acquisition of 5% Quarterly Interest in a Report on Subsidiary by and between Form 10-Q EuroGas, Inc., B. Grohe, dated and T. Koerfer, dated November September 30, 11, 1997 1997 Exhibit No. 3*
10.24 Option Agreement by and between Quarterly EuroGas, Inc., Report on and Beaver River Resources, Ltd., Form 10-Q dated dated October 31, 1997 September 30, Exhibit No. 4*
10.25 Lease Agreement dated September Registration 3, 1996, between Potomac Statement Corporation and the Company; on Form S-1, Letter of Amendment dated File No. September 30, 1999. 333-92009, filed on December 2,
10.26 Sublease dated November 2, 1999, Registration between Scotdean Limited and the Statement on Company Form S-1, File No. 333-92009, filed on December 2,
Exhibit Title of Document Location Number - ------ ------------------------------ ---------------
10.27 Securities Purchase Agreement Registration dated November 4, 1999, between Statement on the Company and Arkledun Drive Form S-1, File LLC No. 333-92009, filed on December 2,
10.28 Registration Rights Agreement Registration dated November 4, 1999, between Statement on the Company and Arkledun Drive Form S-1, File LLC No. 333-92009, filed on December 2,
10.29 Supplemental Agreement dated Registration November 4, 1999, between the Statement on Company and Arkledun Drive LLC Form S-1, File No. 333-92009, filed on December 2,
10.30 Executive Employment Agreement Registration dated April 20, 1999 between the Statement on Company and Karl Arleth Form S-1, File No. 333-92009, filed on December 2,
21.1 Subsidiaries Annual Report on Form 10-KSB for the Fiscal year ended December 31, 1995, Exhibit No. 24*
23.1 Consent of Ryder Scott Company, Registration Petroleum Engineers Statement on Form S-1 dated July 23, 1998.*
24 Power of Attorney Included on the Signature Page hereof.
*Incorporated by reference
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 2000, we did not file any reports on Form 8K. (c) Exhibits
Exhibits to this Report are attached following Page hereof.
(d) Financial Statement Schedules
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EUROGAS, INC. (Registrant)
By /s/ Andrew Andraczke ------------------------- Andrew Andraczke President and Chief Executive Officer
DATE: April 17, 2001
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 Registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/ Borre Dahl ______________________ April 17, 2001 Borre Dahl Chief Financial Officer and Chief Accounting Officer
/s/ Dr. Gregory P. Fontana _______________________ April 17, 2001 Dr. Gregory P. Fontana, Director
/s/ Wolfgang Rauball _______________________ April 17, 2001 Wolfgang Rauball, Director
/s/ Garry Henry _______________________ April 17, 2001 Garry Henry, Director
EUROGAS, INC. AND SUBSIDIARIES
Page
Report of Independent Certified Public Accountants
Consolidated Balance Sheets-December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Supplemental Information Regarding Oil and Gas Producing Activities
HANSEN, BARNETT & MAXWELL A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200 Member of AICPA Division of Firms Fax (801) 532-7944 Member of SECPS 345 East 300 South, Suite 200 Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of EuroGas, Inc., a Utah corporation, and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 in the financial statements, the Company has suffered recurring losses from operations and negative cash flows from operating activities. At December 31, 2000, the Company has negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Hansen, Barnett & Maxwell ----------------------------- HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah March 23, 2001, except for Note 4 - Acquisition of Talc Mineral Interest, as to which the date is April 16, 2001
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------
Oil and Gas Sales $ 6,395,037 $ 4,973,508 $ 879,404 ------------ ------------ ------------ Costs and Operating Expenses Oil and gas production 1,521,471 1,330,526 305,009 Impairment of mineral interests and equipment 26,783,790 7,217,426 3,512,792 Depreciation, depletion, and amortization 2,023,425 1,810,176 293,955 Litigation settlement expense, net of $105,000 settlement income in 2000 7,200,205 12,527,000 - General and administrative 6,908,264 8,485,939 7,804,401 ------------ ------------ ------------ Total Costs and Operating Expenses 44,437,155 31,371,067 11,916,157 ------------ ------------ ------------ Other Income (Expenses) Interest income 89,698 179,538 593,570 Interest expense (7,124,100) (567,195) (465,371) Loss on sale and impairment of securities (2,029,916) (1,682,045) - Foreign exchange net gains (losses) (263,523) 170,315 (130,419) Other income 455,938 103,878 152,776 Minority interest in income of subsidiary (103,022) (753,599) (137,983) ------------ ------------ ------------ Total Other Income (Expense) (8,974,925) (2,549,108) 12,573 ------------ ------------ ------------ Loss Before Income Taxes (47,017,043) (28,946,667) (11,024,180)
Provision for Income Taxes 2,528,279 - - ------------ ------------ ------------ Net Loss (49,545,322) (28,946,667) (11,024,180)
Preferred Dividends 139,932 1,442,345 2,861,301 ------------ ------------ ------------ Loss Applicable to Common Shares $(49,685,254) $(30,389,012) $(13,885,481) ============ ============ ============ Basic and Diluted Loss Per Common Share $ (0.47) $ (0.36) $ (0.22) ============ ============ ============ Weighted Average Number of Common Shares Used In Per Share Calculation 106,145,361 83,368,053 64,129,062 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
The accompanying notes are an integral part of these consolidated financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The accompanying notes are an integral part of these consolidated financial statements.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - EuroGas, Inc. and its subsidiaries ("EuroGas" or the "Company") are engaged primarily in the evaluation, acquisition, exploration and disposition of mineral interests, and rights to exploit oil, natural gas, coal bed methane gas, talc, and other minerals. EuroGas has also begun efforts to participate in the development of co-generation (power and heat) projects. EuroGas is in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. During 1998, EuroGas acquired a controlling interest in Big Horn Resources Ltd., an exploration and production company operating in Western Canada. EuroGas has an interest in a joint venture to reclaim a natural gas field in Western Canada. EuroGas holds and is developing properties in Eastern Europe including coal bed methane gas properties in Poland, proved natural gas properties and unproved oil and gas concessions in Slovakia, unproved natural gas properties in Eastern Russia and an interest in a talc deposit in Slovakia. EuroGas has entered into and is in the process of entering into joint ventures in the Ukraine to explore for and develop oil, natural gas and coal bed methane gas with various Ukrainian State and private companies.
Business Condition-Through the activities explained above, EuroGas and its subsidiaries have accumulated deficits of $76,471,799 since their inception in 1995 through December 31, 1999. They have had losses from operations and negative cash flows from operating activities during each of the three years in the period ended December 31, 1999. These conditions raise substantial doubt regarding the Company's ability to continue as a going concern. Although the Company had positive working capital and stockholders' equity at December 31, 1998 and had positive stockholders' equity at December 31, 1999, realization of the investment in properties and equipment is dependent on EuroGas obtaining financing for the exploration, development and production of those properties. If exploration of unproved properties is unsuccessful, all or a portion of recorded amount of those properties will be recognized as impairment losses. Further, EuroGas is dependent on improvement in oil and gas prices in order to establish profitable operations from oil and gas production. As in the past, management plans to finance operations and acquisitions through issuance of additional equity securities, the realization of which is not assured.
Principles of Consolidation-The accompanying consolidated financial statements include the accounts of all majority-owned subsidiaries and EuroGas' share of properties held through joint ventures from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Pro Forma Balance Sheet - On February 22, 2001, EuroGas announced its intention to sell up to 8,000,000 of its 14,100,000 common shares of Big Horn Resources Ltd. ("Big Horn"). From February 28, 2001 through March 16, 2001, EuroGas sold 2,140,500 shares of Big Horn for $1,087,600. As a result of the sale, EuroGas' interest in common stock of Big Horn was reduced from 50.1% to 42.5% and will result in the investment in Big Horn being accounted for by the equity method rather that on a consolidated basis as presented herein. The accompanying unaudited pro forma balance sheet has been prepared to present the financial condition of EuroGas, Inc. and subsidiaries as though the sale of 2,140,500 Big Horn common shares had occurred on December 31, 2000. The pro forma balance sheet has been prepared for illustrative purposes only and does not purport to represent what the Company's financial position actually would have been had the sale of Big Horn common shares occurred on December 31, 2000.
Use of Estimates-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Mineral Interests in Properties - The full cost method of accounting is used for oil and gas properties. Under this method, all costs associated with acquisition, exploration, and development of oil and
gas properties are capitalized on a country by country basis. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. Proceeds from disposal of properties are applied as a reduction of cost without recognition of a gain or loss except where such disposal would result in a major change in the depletion rate. Capitalized costs are categorized either as being subject to amortization or not subject to amortization. The cost of properties not subject to amortization are assessed periodically and any resulting provision for impairment which may be required is charged to operations. The assessment for impairment is based upon estimated fair value of the properties. Fair value is determined based upon estimated future discounted net cash flows.
Capitalized costs of properties subject to amortization and estimated future costs to develop proved reserves are amortized and depreciated using the unit-of-production method based on the estimated proven oil and natural gas reserves as determined by independent engineers. Units of natural gas are converted into barrels of equivalent oil based on the relative energy content basis. Capitalized costs of properties subject to amortization, net of accumulated amortization and depreciation, are limited to estimated future discounted net cash flows from proven reserves, based upon year-end prices, and any resulting impairment is charged to operations.
Other Property and Equipment-Other property and equipment are stated at cost. Minor repairs, enhancements and maintenance costs are expensed when incurred; major improvements are capitalized. Depreciation of other property and equipment is provided on a straight- line basis over the estimated useful lives, as follows: buildings- 40 years and equipment-3 to 5 years. Upon retirement, sale, or other disposition of other property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in operations. Depreciation expense for each of the three years in the period ended December 31, 2000, was $117,875, $238,658 and $78,765.
Political Risk -EuroGas has mineral interest property and interests in Eastern Europe and Eastern Russia which are subject to political instability, changes in governments, unilateral renegotiation of concessions and contracts, nationalization, foreign exchange restrictions, or other uncertainties.
Financial Instruments -EuroGas considers all highly-liquid debt instruments purchased with maturities of three months or less to be cash equivalents. The amounts reported as cash and cash equivalents, investment in securities available-for-sale, trade and other receivables, accounts payable and notes payable are considered to be reasonable approximations of their fair values. The fair value estimates presented herein were based on estimated future cash flows. The amounts reported as investment in securities available-for-sale are based upon quoted market prices. The cost of securities sold is based on the average purchase price per share.
EuroGas had cash in foreign banks at December 31, 2000 in excess of $562,282 which cash is not insured by the U.S. Federal Deposit Insurance Corporation. Included in that amount is cash held in Polish banks in the amount of approximately $300,000 for which EuroGas would incur certain taxes if the cash were transferred out of Poland.
Derivative Financial Instruments - EuroGas and its international subsidiaries occasionally incur obligations payable in currencies other than their functional currencies. This subjects EuroGas to the risks associated with fluctuations in foreign currency exchange rates. EuroGas does not reduce this risk by utilizing hedging. The amount of risk is not material to EuroGas' financial position or results of operations.
Loss Per Share - Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share during periods of income reflect potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and options, convertible notes payable and preferred
shares resulted in the issuance of common shares. In the present position, diluted loss per share is the same as basic loss per share because 50,074,794, 19,079,713 and 17,004,647 potentially issuable common shares at December 31, 2000, 1999 and 1998, respectively, would have decreased the loss per share and have been excluded from the calculation.
Foreign Currency Translation - The functional currencies of the subsidiaries operating in Poland and Slovakia are the local currencies. The effect of changes in exchange rates with respect to those subsidiaries is recognized as a separate component of comprehensive loss Where the functional currencies of foreign subsidiaries is the U.S. dollar, financial statements of the foreign subsidiaries are translated into U.S. dollars using historical exchange rates and net foreign exchange gains and losses from those subsidiaries are reflected in the results of operations. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of operations.
Income Taxes-Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences in the balances of existing assets and liabilities on the Company's financial statements and their respective tax bases and attributable to operating loss carry forwards. Deferred taxes are computed at the enacted tax rates for the periods when such amounts are expected to be realized or settled.
Stock-Based Compensation-Prior to 1999, EuroGas accounted for stock- based compensation from stock options granted to employees and consultants based on the intrinsic value of the options on the date granted. Since January 1, 1998, EuroGas has accounted for stock options granted to employees based on the intrinsic value of the options on the date granted and has accounted for options granted to consultants and other non-employees based on the fair value of the options as required by FAS 123.
New Accounting Standards-In June 1999, SFAS No.133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.133 was issued and establishes accounting and reporting standards requiring that derivative instruments be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 was adopted on January 1, 2000 and did not had a material impact on the financial condition or results of operations of EuroGas.
NOTE 2 - INVESTMENT IN EQUITY SECURITIES
Investment in Securities Available-for-Sale - During the first quarter of 1998, EuroGas acquired 933,333 units of United Gunn Resources, Ltd. (each unit consisting of one share of common stock and one warrant) through a private placement subscription agreement for $962,398. United Gunn Resources, Ltd. holds an approximate 12% working interest in the Beaver River Project. Through December 31, 1998, EuroGas acquired an additional 613,500 shares of United Gunn through market purchases at a cost of $491,460. Through the purchase of equity securities, EuroGas held approximately 9% of the outstanding United Gunn shares at December 31, 1998. The United Gunn Resources, Ltd. shares have been accounted for as investment in securities available-for-sale and are carried at market value.
During the year ended December 31, 2000, management determined that there had been an other-than-temporary decline in the fair value of the Company's investment in shares available-for-sale of United Gunn. Accordingly, during the fourth quarter of 2000, EuroGas recognized a $1,248,073 impairment of the investments.
During the year ended December 31, 2000, EuroGas recorded an unrealized gain of $84 on its other securities available-for-sale. Investment in securities available-for-sale consisted of the following at December 31:
2000 1999 1998 -------- ---------- ---------- Cost $137,864 $1,385,937 $1,467,754 Gross unrealized gains (losses) 84 (1,068,853) (379,266) -------- ---------- ----------
Estimated fair value $137,948 $ 317,084 $1,088,488 ======== ========== ==========
EuroGas sold 139,000 shares of United Gunn during the year ended December 31, 1999, for $100,557 which resulted in a realized loss of $71,801. The cost of securities sold was determined by the average cost method.
Investment in Other Equity Securities at Cost - EuroGas paid a deposit of $300,000 towards a potential acquisition of an interest in a Russian oil and gas company owned by Teton Petroleum Company ("Teton"), made loans to Teton in the amount of $1,000,000. During October 2000, EuroGas and Teton terminated their merger agreement EuroGas received 2,700,000 shares of Teton common stock in consideration of their advances to Teton under the termination agreement. Since there is no regular and active market for the Teton common stock and the fair value was not readily determinable it was recorded at its historical cost of $1,300,000 as a long term investment. During December 2000, management evaluated the investment and determined it to be impaired and recorded an impairment charge of $781,843 against the Teton stock. The investment in Teton stock is carried at its new historical cost of $518,157.
Equity securities purchased during 1999 were recorded at cost because their resale was restricted and their fair value was not readily determinable. The investments consisted of $1,000,000 of 20% cumulative convertible preferred stock of Intergold Corporation and $600,000 in share capital of Hansageomyn GmbH, both of which are mining companies.
During the third quarter of 1999, EuroGas determined not to further invest in the two companies. The value of the underlying common shares to the preferred stock had dropped substantially, and management determined there had been an other-than-temporary decline in the fair value of both investments. Accordingly, during the third quarter, EuroGas recognized a $1,600,000 impairment of the investments.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
During 1999, the Company executed a promissory note in the amount of $600,000 to an independent third party. During the fourth quarter of 1999 this note was assigned in satisfaction of notes payable.
On October 28, 1998, EuroGas executed a promissory note in the amount of $500,000 to an independent third party. Terms of the note dictate that interest accrues at7.5%. The balance was due on May 28, 1999. During the second quarter of 2000 EuroGas determined that the note receivable was unrecoverable. Accordingly, the Company provided an allowance against the note and recorded a bad debt charge of $500,000 to its operations for the year ended December 31, 2000.
On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a promissory note with an officer and member of management in the amount of $200,000. During March 1999, the note was forgiven in exchange for services performed by the director. The Company recognized $200,000 as consulting expense related to this transaction.
NOTE 4 - MINERAL INTERESTS IN PROPERTIES
Acquisition of Big Horn Resources, Ltd. - Effective October 5, 1998, EuroGas acquired slightly more than a 50% interest in Big Horn Resources Ltd. ("Big Horn"), an oil and gas exploration and production company operating in Western Canada. EuroGas acquired the majority interest by cash payments of $4,723,498 on October 17, 1998, by executing promissory notes effective October 1998, in the aggregate amount of $1,840,224, and by EuroGas' cancellation of a note receivable from Big Horn shareholders in the amount of $1,100,000. These payments, and the face amount of the notes, were discounted $70,238 to October 5, 1998 using a 10% discount rate.
The acquisition was accounted for under the purchase method of accounting. The total purchase price of $7,593,484 was determined based upon the fair value of the consideration paid. The purchase price was allocated to the acquired net assets of Big Horn based upon their fair values on the effective date of the acquisition. The fair value of the acquired properties was based upon a reserve report prepared by independent petroleum engineers. The purchase price exceeded the fair value of the net assets acquired by $3,512,792 which was recognized as a non-recurring impairment expense at the date of the acquisition. The operations of Big Horn have been included in the consolidated results of operations of EuroGas since acquisition.
Summary unaudited pro forma results of operations for the year ended December 31, 1998, assuming the acquisition of Big Horn had occurred on January 1, 1998, excluding non-recurring items, are as follows:
Revenues $2,138,415 Net loss (7,528,473) Net loss applicable to common shares (10,389,774) Net loss per common share (0.16)
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 1999, EuroGas made a $358,857 payment towards the purchase of a 40% interest in an operating oil refinery in Slovenia. Upon governmental approval, EuroGas will be obligated to make an additional investment of approximately $500,000 for the interest.
Trebisov Property - A dispute arose with the joint venture partner on the Trebisov property in Slovalia, Nafta Gbely a.s. ("Nafta"). EuroGas has asserted a claim for misrepresentation of the property asset at the time of its acquisition and has made demand on Nafta in an amount equal to EuroGas' investment in the property. Efforts to bring the property to production were suspended pending resolution of the claims. EuroGas has received indications the Slovak government may seek to resolve the dispute. Recently, the government completed its nationalization of Nafta. Although discussions are scheduled between EuroGas and Nafta, resolution of this matter is not assured.
Acquisition and Disposition of Maseva Gas s.r.o. - During October 1998, EuroGas acquired a 90% interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company, from Belmont Resources Inc. ("Belmont"). Meseva holds a 850 square kilometer concession to explore for oil and natural gas. The concession is adjacent to the southern boarder of the Trebisov concession held by EuroGas through the Nafta/Danube joint venture in Slovakia. EuroGas purchased Maseva by issuing 2,500,000 common shares and warrants to purchase an additional 2,500,000 shares at $2.50 per share within two years. The purchase price was $6,527,462 based upon the $2.00 per share quoted market value of the EuroGas common shares issued, and the fair value of the warrants on the acquisition date. The fair value of the options was determined by using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0.0%, expected volatility of 63.2%, risk-free interest rate of 5.0% and an expected life of 2 years. The unproved oil and gas concession is the primary asset acquired. Maseva had no operations prior to the acquisition. The acquisition was considered to be the purchase of properties and the cost of the acquisition was allocated to oil and gas properties not subject to amortization.
On June 14, 2000, EuroGas agreed to transfer its 90% interest in Meseva back to Belmont as explained below. EuroGas and Belmont are related parties as a result of a common individual serving on the board of directors of both companies. Although the transfer of Meseva back to Belmont was not an arms-length transaction, it resulted in the recognition of a loss on the disposition of $6,527,462.
Acquisition of Talc Mineral Interest - During 1998, EuroGas acquired a 24% interest in an undeveloped talc deposit in Eastern Slovakia through an indirect investment in Rozmin s.r.o. During the third quarter of 2000, EuroGas determined that Oxbridge Ltd., a related party, had paid $879,000 on behalf of EuroGas in 1998 as part of the purchase of the 24% interest in the talc deposit. On March 19, 1998, EuroGas reimbursed Oxbridge Ltd. for their payment and accounted for the payment to Oxbridge Ltd. as a reduction of a separate promissory note payable to Oxbridge Ltd. In light of a demand in 2000 by Oxbridge Ltd. for payment of the promissory note, EuroGas reclassified the payment to Oxbridge Ltd. as an increase in the cost of the 24% interest in the talc deposit and recorded the principal and $272,490 of accrued interest due under the promissory note payable to Oxbridge Ltd. In November 2000, EuroGas issued 2,391,162 shares of common, valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in satisfaction of the principal and accrued interest due on the promissory note. Through December 31, 2000 and 1999, EuroGas had invested $2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and $915,913 (excluding the payment to Oxbridge Ltd.), respectively, in the acquisition and development of the talc deposit and related equipment.
On June 14, 2000, EuroGas agreed to transfer its 90% interest in Meseva back to Belmont, a related party as explained above, and to modify the warrants to purchase 2,500,000 common shares held by Belmont to reduce the exercise price from $2.50 to $0.82 per share and to extend their expiration date from October 8, 2000 to June 14, 2002. In exchange, Belmont agreed to provide $1,000,000 of debt financing to Rozmin s.r.o. and Belmont agreed to waive its right of first refusal to acquire the shares in Rima Muran s.r.o. from EuroGas. The modification to the options increased their fair value by $1,246,718. The fair value of the options was determined using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6.5%; expected dividend yield of 0%; volatility of 110% and an expected life of 2.0 years. The modification to the warrants was accounted for as a prepaid financing fee. Belmont did not provide the $1,000,000 financing as required under the related agreement. EuroGas did not pursue its rights to require Belmont to meet its obligation and, therefore, charged the prepaid financing fee to interest expense during 2000.
On March 27, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from Belmont in exchange for EuroGas issuing 12,000,000 common shares. EuroGas agreed to register the common shares issued. EuroGas has the right to repurchase up to 6,000,000 common shares at $2.00 per share for up to one year, upon thirty days written notice to Belmont. EuroGas agreed to issue additional common shares if the ten-day average NASD OTC quoted trading price of the Company's common shares is less than $0.30 per share for any ten-trading-day period through March 27, 2002. Under the terms of the guarantee, EuroGas agreed to issue an additional 1,000,000 common shares to Belmont for each $0.05 decrease in the ten- day average quoted market price below $0.30 per share. Additionally, if Belmont is unable to realize $1,911,700 from the resale of the 12,000,000 common shares by March 27, 2002, EuroGas has agreed to issue additional common shares to compensate for any shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont.
EuroGas agreed to pay Belmont a $100,000 non-refundable advanced royalty to Belmont. In connection with the purchase, Rozmin s.r.o. granted a royalty to Belmont a two percent royalty on the gross revenues from any talc sold. EuroGas agreed to arrange the necessary financing to place the talc deposit into commercial production by March 27, 2002, and if not in commercial production within one year, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. EuroGas granted Belmont the right to appoint one member of the EuroGas, Inc. board of directors for not less than one year.
In connection with the acquisition, EuroGas further modified the options held by Belmont for the purchase of 2,500,000 common shares at $0.82 per share to being exercisable at $0.40 per share. The modification to the options increased their fair value on January 4, 2001, the date modified, by $143,560. The fair value of the options was determined using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 5.0%; expected dividend yield of 0%; volatility of 111% and an expected life of 1.5 years. The purchase of the additional 57% interest in Rozmin s.r.o. will be recorded at $3,807,560 during the first quarter 2001, based on the market value of the common shares issued (including the guarantee of the future stock value), the increase in the fair value from the modification of the stock options and the cash to be paid. If additional common shares are issued in the future under the guarantee of the future market value of the Company's common shares, no additional cost will be recognized.
EuroGas acquired the original 24% mineral interest through the acquisition of a 53% interest in RimaMuran s.r.o. whose principal asset is the 24% investment in Rozmin s.r.o. RimaMuran s.r.o. has an obligation to fund 33% to 39% of the projected $12,000,000 capital cost requirements over the next year. RimaMuran s.r.o. 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. In addition, EuroGas has the obligation to provide 57% of the capital cost requirements as a result of the purchase of the 57% interest from Belmont in March 2001.
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.
South Wales Drilling Program - During January 2000, EuroGas entered into an agreement with Slovgold GmbH, a related party, to conduct a six-well pilot program in South Wales to test for coal methane gas. Under the terms of the agreement, EuroGas agreed to pay the costs for the pilot program and the first stage of any subsequent development program in exchange for 40% of the cash flows from the development until payout of the amount EuroGas invests. EuroGas' interest would then be reduced to 25%. Slovgold GmbH is owned by a shareholder and director of EuroGas. During December 2000, EuroGas and Slovgold GmbH abandoned the program with no further obligation to EuroGas.
Impairment of Properties -The Company periodically assesses the capitalized costs of properties for impairment based on estimated future discounted net cash flows. As a result of the assessments, impairment loss of $3,512,792 was recognized during 1998 relating to properties held by Big Horn in Canada, $6,775,114 was recognized during 1999 relating to properties held by Pol-Tex Methane in Poland, and the following losses were recognized during 2000: Trebisov property in Slovakia - $7,306,943, Mesava property in Slovakia - $6,558,230, Beaver River property in Canada - $3,937,500, Ukraine properties - $1,200,310, TAKT properties in Russia - $7,701,362, and other - $79,445.
Amortization of Mineral Interest Properties - Prior to 1998, EuroGas had no property subject to amortization. Through the acquisition of Big Horn, EuroGas acquired properties with both proved and unproved reserves. Certain of the Big Horn reserves are in production and are being amortized. In addition to the Canadian property, the extent of reserves relating to Company's interests in the Slovak Trebisov oil and gas properties was established in May 1998 when an independent
reserve report relating to those properties was obtained and which reported proved reserves of oil and gas. Accordingly, the cost of those properties were reclassified in 1998 as oil and gas properties subject to amortization. The wells drilled on the property have been completed; however, a gas gathering system is yet to be constructed. During 2000, those properties were reclassified to properties not subject to amortization and impaired as explained above.
The following is a summary of changes to oil and gas properties:
NOTE 5 - FURNITURE AND OFFICE EQUIPMENT
Other property and equipment consisted of the following at December:
NOTE 6 - GEOGRAPHIC INFORMATION
EuroGas and its subsidiaries operate primarily in the oil and gas exploration and production industry. Accordingly, segment information is not presented separately from the accompanying balance sheets and statements of operations. Property and equipment and other non- current assets were located in the following geographic areas at December 31:
Sales and net loss were in the following geographic areas during the years ended December 31:
NOTE 7 - ACCRUED SETTLEMENT OBLIGATIONS
FCDC Settlement Agreement and Contingently Issuable Common Shares - On March 16, 2000, the United States District Court, District of Utah, Central Division entered a default judgment against EuroGas, and in favor of Finance & Credit Development Corporation, Ltd., an Ireland Corporation ("FCDC") in the amount of $19,773,113. On June 16, 2000, EuroGas entered into a memorandum of understanding with FCDC in satisfaction of its default judgment. In consideration for FCDC's stipulation to vacate its default judgment, EuroGas agreed to do the following:
. issue to FCDC 3,700,000 common shares, . grant FCDC options to purchase 3,000,000 common shares at an exercise price of $0.65 per share during the 30 day period commencing June 30, 2001, . guarantee that the market price of the common shares issuable upon exercise of the options would be $3.00 per share on the date of exercise by compensating FCDC in cash or common shares in an amount equal to the difference between $3.00 and the market price, . guarantee that the common shares issuable upon exercise of the options will retain a value of $3.00 per share throughout the period during which FCDC is permitted to liquidate the shares by compensating FCDC in cash or common shares, with respect to the 400,000 shares FCDC is permitted to sell during every month, in an amount equal to the difference between $3.00 per share and 90% of the highest quoted market price per share during each month, . cause EuroGas GmbH, a wholly-owned, Austrian subsidiary of EuroGas, to back up the guarantee by pledging its stock in Rima Muran s.r.o., which indirectly held, at the time of the agreement, a 24% interest in a talc deposit in Slovakia,
. nominate a designee of FCDC to serve on the board of directors of EuroGas, . register for resale all of the common shares issued to FCDC pursuant to the settlement agreement.
Pursuant to the memorandum of understanding, the Company issued to FCDC 3,700,000 common shares and options to purchase 3,000,000 common shares exercisable at $0.65 per share from June 30, 2001 through July 29, 2001. The Company obtained effectiveness of a registration statement in September 2000 relating to the resale by FCDC of the common shares issued and the common shares underlying the options granted.
Under the guarantee, unless the market value of the 3,000,000 shares issuable upon exercise of the options at least equals $3.00 per share during the period from June 30, 2001 until the common shares underlying the option and any additional common shares issued under the guarantee are deemed sold, the Company is required to transfer cash or issue additional common shares sufficient to make the current value of the total consideration FCDC receives equal to $9,000,000, or $3.00 per share. The $9,000,000 guaranteed value less the $1,944,000 ($0.65 per share) exercise price has been added to the $2,997,000 ($0.81 per share) market value of the 3,700,000 common shares issued on the date of the agreement, which totaled $10,053,000 and was the amount recorded for the issuance of the 3,700,000 common shares. If additional common shares are issued in the future under the guarantee, no additional expense will be recognized.
On the date of the settlement agreement, the 3,000,000 options to be issued were valued at $1,560,000, or $0.52 per option, utilizing the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6.4%; expected dividend yield of 0%; volatility of 155% and an expected life of 1.1 years. The amount to be settled by issuance of the common shares (including the guarantee), the options and $400,000 of settlement costs was recognized as an accrued settlement obligation and a litigation settlement expense of $11,527,000 related to the settlement agreement during the year ended December 31, 1999 and an additional expense from revision of the estimated value of the contingently issuable common shares of $486,000 during the year ended December 31, 2000. During 2000, the $11,613,000 accrued settlement obligation was paid by issuing 3,700,000 common shares and issuing options to purchase 3,000,000 common shares. No additional common shares have been issued but it is likely that a substantial number of common shares will need to be issued under the guarantee.
MeKenzie Bankruptcy Claim and Proposed Settlement - A bankruptcy trustee appointed in the McKenzie Methane Corporation Bankruptcy (the "McKenzie Estate") and its shareholders' bankruptcy cases (the "Trustee") (McKenzie Methane Corporation was an affiliate of the former owner of a EuroGas subsidiary, Pol-Tex Methane, a Polish corporation) has asserted a claim to the proceeds that EuroGas was to have received from an agreement with Texaco during 1997 relating to the exploitation of the Pol-Tex Methane gas concession in Poland, which agreement was subsequently terminated. The Trustee's claim was apparently based upon the theory that EuroGas paid inadequate consideration for its acquisition of Globegas (which indirectly controlled the Pol-Tex Methane concession) from persons who were acting as nominees for the McKenzie Estate, or in fact may be operating as a nominee for the McKenzie Estate, and therefore, the creditors of the McKenzie Estate are the true owners of the proceeds received or to have been received from the exploration and development of the Pol-Tex Methane concession. EuroGas believed that the claim was without merit based on the fact that a condition of a prior settlement with the principal creditor of the estate bars any such claim, that the Trustee has no jurisdiction over Pol-Tex Methane or its interests held in Poland, that EuroGas paid substantial consideration for Globegas, and that there is no evidence that the creditors invested any money in the Pol-Tex Methane concession.
In July 1999, the Trustee filed another suit in the same bankruptcy cases seeking damages in excess of $170,000 for the defendants' alleged violation of an agreement with the Trustee which allowed the Texaco agreement to proceed. EuroGas disputed the allegations and filed a motion to dismiss or alternately, to abate this suit. In October 1999, the Trustee filed a motion seeking to add new parties and assert additional causes of action against EuroGas and the other defendants in this action. These new causes of action included claims for damages based on fraud, conversion, breach of fiduciary duties,
concealment and perjury. In January 2000, that motion was approved by the Bankruptcy Court. This suit was administratively consolidated with the above claims.
During October 2000, the Company entered into a mediation settlement agreement with the Trustee to resolve all related disputes and issues. Under the terms of the agreement, the Company agreed to pay $1,500,000 by December 31, 2000, execute a promissory note for $1,500,000 payable to the Trustee, bearing an interest rate of 8% per annum and maturing on December 31, 2002, issue 2,000,000 common shares to the Trustee, issue 2,800,000 warrants to the Trustee with an exercise price of $0.405 per share and expiring in October 2002, and indemnify the Trustee against any claims filed by Bertil Nordling in the McKenzie Estate bankruptcy cases. The Company agreed to file, for the benefit of the Trustee, a registration statement by January 15, 2001for the registration of the common shares to be issued and the common shares underlying the exercise of the warrants. In return, EuroGas and its affiliates will receive a global release from the Trustee and Kukui (and its affiliates) releasing EuroGas from all claims they could assert against EuroGas. The parties are in the process of preparing a final settlement agreement which will be submitted to the bankruptcy court in the McKenzie Estate cases for approval.
In connection with the mediation settlement agreement, Mr. Wolfgang Rauball, a shareholder and director of EuroGas, entered into a side agreement with EuroGas under which Mr. Rauball agreed to fund the cash payment due December 31, 2000 through the purchase of 1,875,000 common shares from EuroGas for $750,000, or $0.40 per share, and by assuming and paying $750,000 of the cash payment obligation to the Trustee, by December 31, 2000. Mr. Rauball further agreed to fund each of the payments due under the $1,500,000 promissory note 30 days prior to their due dates through the purchase of common shares from EuroGas for one-half of each payment at market value as of the date purchased and by assuming and paying the remaining one-half of each payment to the Trustee. The Company agreed to register the common shares to be issued to Mr. Rauball in a registration statement to be filed with the Securities and Exchange Commission. Mr. Rauball has not provided any of the required funding to EuroGas nor has he made any of the required payments to the Trustee. The Company has not initiated nor does it intend to initiate any action against Mr. Rauball relating to his default of the side agreement.
The Company has not issued the common shares, the warrants or the promissory note to the Trustee. As a result of the failure to make the required payment and issue the securities, the Company is in default of the mediation settlement agreement. The Trustee also has not met certain conditions of the agreement and, accordingly, has verbally agreed to discuss an extension of the payment terms and the due dates of the payments due under the promissory notes.
Under the terms of the settlement agreement, the Company agreed to make all past due installment payments due under the Kukui settlement agreement, as discussed below. Mr. Rauball also agreed to pay EuroGas the installment payments. Since the date of the mitigation settlement agreement, Mr. Rauball has not provided the required payments.
The Company recorded a litigation settlement expense and a related accrued settlement obligation in the amount of $4,583,824 during the fourth quarter of 2000 relating to the mitigation settlement agreement. The value of the settlement was based upon the fair value of the financial instruments to be issued as of the settlement date. The 2,000,000 common shares to be issued were valued at $810,000, or $0.405 per share, based on the closing market price of the common shares on October 20, 2000. The warrants to be issued to purchase 2,800,000 common shares were valued at their fair value of $773,824, or $0.277 per warrant, computed utilizing the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.84%, expected dividend yield of 0%, and expected volatility of 136%, and expected life of two years. Interest has been accrued on $1,500,000 of the accrued settlement obligation at the rate of eight percent per annum through December 31, 2000.
Kukui Claim and Settlement - In November 1996, the Company entered into a settlement agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie bankruptcy case, whereby the Company issued 100,000 common shares and an option to purchase 2,000,000 common shares, which option expired on December 31, 1998. The Company granted registration rights with respect to the 100,000 common shares issued. On August 21, 1997, Kukui asserted a claim against EuroGas, which was based upon an alleged breach of the 1996 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 the 100,000 shares delivered to Kukui in connection with the 1996 settlement. In addition, the Bishop Estate, Kukui's parent company, entered a claim for failure to register the resale of common shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any liability and filed a counterclaim against Kukui and the Bishop Estate for breach of contract concerning their activities with the McKenzie Bankruptcy Trustee.
In December 1999, EuroGas entered into a settlement agreement with Kukui, the Bishop Estate and the MeKenzie Bankruptcy Trustee, which was intended to resolve all claims made by Kukui and the Bishop Estate against EuroGas. Under the terms of the settlement agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 1999, paid Kukui $782,232 of the settlement obligation in 2000 and accrued an additional settlement obligation liability and expense of $251,741 during 2000. During 2000, EuroGas issued the Bishop Estate 100,000 registered common shares which were valued at $100,000, or 1.00 per share. The resulting accrued settlement obligation of $369,509 at December 31, 2000 for the estimated cost of settling the claim includes an estimated default penalty and interest. At December 31, 2000, EuroGas was delinquent in its payments under the settlement agreement.
Winzer-Mauer Claim and Proposed Settlement - On October 27, 2000, the Company reached an agreement in principal related to a dispute involving the issuance of common shares upon conversion of notes payable. Under the terms of the agreement, the Company agreed to issue 3,800,000 common shares, which were required to be registered with the Securities and Exchange Commission by the submission of a Form S-3 no later than January 15, 2001, which did not occur. The Company also agreed to issue warrants to purchase 5,200,000 common shares at $1.00 per share. The warrants, when issued, will expire on January 15, 2002.
The Company recorded a litigation settlement expense and related accrued settlement obligation in the amount of $1,864,872 during the fourth quarter of 2000 relating to the settlement agreement. The value of the settlement was based upon the fair value of the financial instruments to be issued as of the settlement date. The 3,800,000 common shares to be issued were valued at $1,292,000, or $0.34 per share, based on the closing market price of the common shares on October 27, 2000. The warrants to be issued to purchase 5,200,000 common shares were valued at their fair value of $572,872, or $0.11 per warrant, computed utilizing the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.84%, expected dividend yield of 0%, and expected volatility of 136%, and expected life of 1.2 years. The accrued settlement obligation was reduced upon the issuance of 877,983 of the required 3,800,000 common shares at the date of the settlement agreement. The shares issued were valued at $298,514, or $0.34 per share. The balance of the accrued settlement obligation relating to the settlement with Winzer-Mauer at December 31, 2000 was $1,566,358.
Crawford Settlement - During July 1999, an action was commenced by Crawford, a former consultant, asserting breach of a service agreement related to consulting and engineering services provided to the Company in a prior year. Crawford made an assertion for $159,500 and the right to purchase 284,000 common shares at $1.50 per share as compensation for services provided to the Company. During the second quarter of 2000, the Company reached a settlement agreement in satisfaction of this action. Pursuant to the agreement, the Company received $300,000 from a former officer of EuroGas and issued 250,000 common shares to Crawford. The Company recorded the issuance of the common shares at the fair value of $195,000, or $0.78 per share and settlement income in the amount of $105,000 during the year ended December 31, 2000. The former officer also made payments to Crawford in full satisfaction of his claims.
Jeu-Calvo Settlement - In January 1999, Stephen Jeu and Sasanna Calvo initiated and action in District Court, Harris County, Texas, 55th Judicial District, asserting claims against EuroGas stemming from an alleged breach of contract. On or about November 1, 1999, EuroGas entered into a settlement agreement with Mr. Jeu and MS. Calvo pursuant to which EuroGas was required to make specified cash payments to Mr. Jeu and Ms. Calvo an to issue to Mr. Jeu and Ms. Calvo common shares having a market value of $440,000 on the date of issue. During August 2000, EuroGas issued 615,000 common shares to Mr. Jeu and Ms. Calvo in full satisfaction and settlement of the asserted claims. The common shares issued were valued at $440,000, or $0.72 per share, based on the market value of the common shares on the date issued. At December 31, 1999, the Company had recognized obligations relating to the settlement, in accrued liabilities, notes payable and accrued interest, of $570,000. During 2000, the estimated obligation was adjusted to $440,000 for the value of the common shares issued.
Petroleum Ventures Settlement - On October 11, 1999, an action was filed against EuroGas asserting that EuroGas breached an agreement by failing to seek registration of certain restricted and unregistered shares issued to certain investors in connection with the acquisition of an interest in Beaver River Resources, Ltd. A settlement was reached whereby half of the interest in the Beaver River project was returned in exchange of half of the shares that where issued originally.
Other - An accrued liability payable to a law firm for legal services in the amount of $122,053 at December 31, 2000 is secured by 1,000,000 shares of Teton Petroleum Company.
NOTE 8 - NOTES PAYABLE TO RELATED PARTIES
2000 Convertible Debentures - During the first quarter of 2000 EuroGas completed the issuance of two-year 10.5% convertible debentures in the amount of $3,000,000 to related parties in exchange for cash proceeds of $1,591,336, the conversion of prior outstanding EuroGas debt into debentures in the amount of $422,288 and proceeds in the form of payments to creditors on behalf of EuroGas by a debenture holder in the amount of $986,376. The debentures are convertible into common shares at $0.35 per share, which represents a discount of 20% from quoted market values on the date of the issuance. Upon conversion, the debenture holders also received warrants to purchase 17,142,858 common shares at $0.35 per share. The convertibility of the debentures at a discount, and the detachable warrants issued below market on the date of issuance, constitute a beneficial conversion feature of the debentures. The Company recorded the three instruments at their relative fair values on the date of issuance with $1,898,138 allocated to warrants, $330,439 allocated to the debentures and $771,429 allocated to the beneficial conversion feature with the remaining $2,669,567 recorded as a debt discount. Since the debentures were immediately convertible, the Company recognized the resulting debt discount of $2,669,567 as interest expense. The values of the options was determined using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.2%, volatility of 126% and an expected life of two years. The debentures were subsequently converted, at the election of the holders, on March 30, 2000, into 8,571,428 common shares and warrants to purchase 17,142,858 common shares at $0.35 were issued as units of two warrants per common share issued concurrent with the conversion.
During September and November 2000, the Company issued 3,870,960 common shares upon conversion of notes payable to related parties in the amount of $1,345,701, or $0.35 per share, including conversion of principal on related party notes payable in the amount of $909,907 and related accrued and unpaid interest in the amount of $437,794. The grant of convertibility of the notes payable and notes payable to related parties, at a discount below market during the September, constitutes the grant of a beneficial conversion feature of $0.31 for the difference between market and the conversion price of the debt. The Company recognized $459,242 as interest expense related to the beneficial conversion feature. There was no beneficial conversion feature related to the November conversion.
Apart from the first quarter debentures, during 2000 the Company issued notes payable to shareholders totaling $448,093 for payments made to or on behalf of the Company. Included in the payments an advance by an officer of $100,000 to Teton Petroleum Company as a note receivable.
During September 2000, the Company reached a settlement agreement pursuant to the default on repayment of notes payable and notes payable to related parties. Under the terms of the agreement, the Company issued 4,999,998 warrants. The warrants vest immediately, are exercisable at $0.55 per share and expire on December 31, 2003. The Company recorded interest expense in the amount $2,639,038 related to the warrants. The warrants were valued utilizing the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 5.8 percent; volatility of 137.3 percent; an expected life of 3.3 years.
During October 1999, the Company reached a settlement agreement on a defaulted loan from a former director with principal owed of $225,206 and accrued interest of $163,071. Pursuant to the terms of the agreement, the Company paid $130,000 in cash and issued 615,000 common shares during August 2000 with a market value of $440,000 or $0.71 per share. The excess in the value of the settlement and the previously accrued amount was charged to operations during 2000.
Notes payable to related parties were as follows:
December 31, ------------------------------------ 2000 1999 1998 --------- ---------- --------
Loan from a former director, due on demand with interest at 10%, unsecured $ - $ - $ 290,206
Loans from companies associated with a director, due in 1999 and 2000 with interest at 7.0% to 10%, unsecured 452,051 600,983 960,481 Loan from a director, due in 1999 and 2000, and 2001, interest: 7.5% to 10%, unsecured 5,549 613,221 606,951 Loans from a former director and his affiliates, interest at 7.5% to10%, due on demand, unsecured 119,284 119,284 Less: discount on note - (4,327) (17,310) --------- ---------- ---------- Total Notes Payable to Related Parties 457,600 1,329,161 1,959,612 Less: Current Portion (457,600) (1,329,161) (1,346,204) --------- ---------- ---------- Notes Payable to Related Parties - Long-Term $ - $ - $ 613,408 ========= ========== ==========
NOTE 9 - NOTES PAYABLE
Current notes payable to sustained an increased during 2000 by $8,856 which primarily consisted of a net increase in a line of credit to a bank in Canada.
During September and November 2000, the Company issued 3,389,944 common shares upon conversion of notes payable in the amount of $1,191,115, or $0.35 per share, including principal on notes payable of $813,277 and related accrued and unpaid interest in the amount of $377,838. The grant of convertibility of the notes payable and notes payable to related parties, at a discount below market during the September conversion, constitutes the grant of a beneficial conversion feature of $0.31 for the difference between market and the conversion price of the debt. The Company recognized $458,758 as interest expense related to the beneficial conversion feature. There was no beneficial conversion feature related to the November conversion.
Other loans and notes payable were as follows:
December 31, ------------------------------------- 2000 1999 1998 --------- ---------- --------- Loans due 1999 and 2000, interest at 10%, unsecured $ 29,531 $ 329,907 $ 336,359 Line of credit with a bank, payable by a subsidiary on demand with interest at 1% above the bank's prime, and secured by all of the subsidiary's assets 3,204,480 3,314,136 3,708,990 7.5% Notes due in 2000, unsecured - 520,105 1,226,816 Less: Discount on note - (8,656) (34,620) --------- ---------- --------- Total Notes Payable 3,234,011 4,155,492 5,237,545 Less: Current Portion (3,234,011) (4,155,492) (4,010,729) ---------- ---------- ---------
Note Payable - Long-Term $ - $ - $1,226,816 ========== ========== ==========
NOTE 10 - INCOME TAXES
Deferred tax assets and liabilities are comprised of the following:
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:
As of December 31, 1999, EuroGas has operating loss carry forwards of approximately $53,309,000 in various countries which expire from 2001 through 2020.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an income tax liability in the Netherlands of an amount equivalent to approximately $745,905 at December 31, 2000. The tax arose from the sale of equipment at a profit by the former owner of Globegas to a EuroGas Polish subsidiary. EuroGas' position is that the gain on the sale should not have been taxable to Globegas. The liability will continue to be reflected in EuroGas' financial statements until the proposed reduction is accepted by the Netherlands' taxing authorities.
NOTE 11 - RELATED PARTY TRANSACTIONS
EuroGas is entering into a purchase agreement to acquire the remaining 47% interest in Roznin, s.f.o.
Effective October 21, 1999, the Company transferred all its shares of EuroGas Deutschland GmbH to a related party for its fair value of $0. The Company was required to fund EuroGas Deutschland GmbH's deficit of $98,898 before the transfer could be made.
Related party loans are described in Note 9--Notes Payable To Related Parties and loans to related parties are described in Note 3-- Receivable From Related Parties.
During 1997, a shareholder advanced $2,023,306 as a short-term loan to EuroGas. In connection with this loan, the shareholder retained control of the proceeds from an issuance of common shares during 1997 by EuroGas and paid Company obligations from those proceeds. The shareholder received $104,493 for management services from these funds.
NOTE 12 - STOCKHOLDERS' EQUITY
Preferred Stock There are 2,391,968 shares of 1995 Series Preferred Stock (the "1995 Series preferred stock") issued and outstanding. The 1995 Series preferred stock is non-voting, non-participating and has a liquidation preference of $0.10 per share plus unpaid dividends. The 1995 Series preferred shareholders are entitled to annual dividends of $0.05 per share. Each share of the 1995 Series preferred shares are convertible into two common shares upon lawful presentation of the share certificates. Dividends are payable until converted. EuroGas has the right to redeem the 1995 Series preferred stock 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 preferred stock are $119,598.
On May 29, 1997, EuroGas authorized the 1997 Series A Convertible Preferred Stock (the "1997 Series preferred stock"). The 1997 Series preferred stock is non-voting and accrues dividends at $60.00 per share, or six percent annually. The 1997 Series preferred stock has a liquidation preference of $1,000 per share, plus unpaid dividends before liquidation payments applicable to common shares but after liquidation payments to the 1995 Series preferred stock outstanding. The 1997 Series preferred stock, along with unpaid dividends thereon, are 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. From December 31, 1997, there have been 260 shares of 1997 Series preferred stock outstanding with a liquidation preference of $260,000.
Of the total authorized preferred stock, 30,000 shares have been designated as 1998 Series B Convertible Preferred Stock (the "1998 Series preferred stock") 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 preferred stock is non-voting and carries a dividend rate of 6% per annum. Dividends may be paid in common shares at the Company's option. During 1998, the Company issued 17,000 shares of 1998 Series preferred stock in a private placement offering at $1,000 per share for proceeds of $15,224,995, net of $1,275,005 in commissions and $500,000 paid directly to an unrelated third-party on behalf of EuroGas. EuroGas recognized the $500,000 as a note receivable from the third party.
The 1998 Series preferred stock was convertible into shares of common shares 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 1998 Series preferred stock, or 85% of the average closing price five trading days prior to conversion. Because the 1998 Series preferred stock was immediately convertible into common shares at a 15% discount, EuroGas recognized the beneficial conversion feature as preferred dividends on the dates the preferred shares were issued.
During 1998, $2,550,000 in preferred dividends were recognized relating to the beneficial conversion feature of the 1998 Series preferred stock.
During 1998, shareholders converted 15,500 shares of 1998 Series preferred stock and $165,007 of accrued dividends thereon into 8,860,196 common shares. During 1999, eight thousand shares of 1998 Series preferred and $39,501 of accrued preferred dividends were converted into 10,576,208 common shares at a weighted average price of $0.76 per share.
During November 1999, the Company designated a Series C 6% convertible preferred stock (the "Series C preferred stock"). The Series C preferred stock has a par value of $0.001 per share and a liquidation preference of $1,000 per share plus all accrued but unpaid dividends. The Series C preferred stock is non-voting and carries a 6% dividend rate per annum, or $60.00 per share. The Series C preferred stock is convertible into common shares of EuroGas at the rate of $1,000 divided by 85.0% of the average closing bid price for five trading days preceding the date of issuance or the conversion date. EuroGas issued 1,800 shares of Series C Preferred Stock for $1,800,000 or $1,000 per share, less $148,530 of offering costs during 1999.
During the year ended December 31, 1999, EuroGas issued 6,500 shares of 1998 Series preferred stock for $6,500,000 at $1,000 per share before $487,500 of offering costs. The 1998 Series preferred stock and the Series C preferred stock issued during 1999 were immediately convertible into common shares at a 15% and 20% discount respectively. Therefore, EuroGas recognized a beneficial conversion feature as preferred dividends on the dates the preferred shares were issued. During 1999, $901,875 and $360,000 in preferred dividends were recognized relating to the beneficial conversion feature from the 1998 Series preferred stock and the Series C preferred stock, respectively.
During 2000, shareholders converted 1,800 shares of Series C preferred stock and $21,599 of accrued dividends thereon into 5,329,713 common shares at a weighted-average price of $0.34 per common share.
The following is a summary of the preferred stock outstanding at December 31, 2000:
Common Stock
2000 Common Stock Offering - On October 2, 2000, EuroGas entered into a Common Stock Purchase Agreement (the "Agreement") with Arkledun Drive LLC (the "Purchaser") whereby EuroGas issued 7,000,000 common shares to the Purchaser for resale under a public offering of common shares. The Purchaser agreed to purchase 5,500,000 common shares for $2,165,000. If the Purchaser did not realize $2,489,750 from the resale of the 5,500,000 shares, after the deduction of customary broker's fees, any resulting shortfall would be made up by the Purchaser selling as many of the additional 1,500,000 common shares issued as required. If there still was a shortfall after selling the 1,500,000 common shares, EuroGas agreed to issue additional common shares or pay the Purchaser the remaining shortfall.
On November 14, 2000, the Purchaser notified EuroGas of a remaining shortfall after the 7,000,000 shares had been sold. To resolve the shortfall and to settle all claims and demand rights of the Purchaser under the Agreement, EuroGas issued an additional 2,000,000 common shares to the Purchaser. The additional 2,000,000 common shares have piggy-back registration rights to be included in any future public offering conducted by EuroGas. The additional 3,500,000 common shares
issued over the 5,500,000 common shares the Purchaser originally agreed to purchase were accounted for as contingently issuable shares based on the market price of the common shares. Accordingly, the proceeds received were allocated to all 9,000,000 common shares issued.
The Company also issued 400,000 common shares under the public offering for cash proceeds of $208,500, or an average of $0.52 per share. The Company incurred offering costs for the overall public offering of $168,500. The public offering resulted in the Company issuing 9,400,000 common shares for net proceeds of $2,205,000.
Oxbridge Ltd. Purchase of Note Receivable and Lending Commitment - During March and May 1999, EuroGas loaned Pan Asia Mining Corp., a Canadian company, $600,000 under the terms of an unsecured note receivable and made a commitment to provide Pan Asia Mining Corp. an additional $2,025,000 of financing by March 2000. The note receivable bore interest at the prime rate of a Canadian bank plus three percent and was due in four installments through March 2002. During 1999, EuroGas sold the note receivable to Oxbridge Ltd., a related party, in exchange for $600,000 of reductions in three notes payable to Oxbridge Ltd. two other shareholders. During July 2000, Oxbridge Ltd. assumed EuroGas' commitment to provide the additional financing to Pan Asia Mining Corp. in exchange for EuroGas issuing 500,000 common shares to Oxbridge Ltd. The 500,000 common shares were valued at $365,000, or $0.73 per share based upon the market value of EuroGas' common shares on the date issued, and recognized as a general and administrative expense for Oxbridge Ltd. assuming the financing commitment.
Other Common Stock Issuances - During 2000, the Company issued 3,700,000 common shares and 3,000,000 options to purchase common stock to FCDC under the terms of a settlement agreement. The Company issued 1,842,983 common shares as payment of accrued settlement obligations. The common shares issued were valued at $1,033,514, or an average of $0.56 per share. In November, 832,760 common shares were issued to SlovGold GmbH, a related party, for payments made on behalf of EuroGas. The common shares were recorded at $291,466, or $0.35 per share, based on the market value of the common shares on the date issued. The Company issued 331,672 common shares for services valued at $108,496, or an average of $0.33 per share, based on the market value of the common shares on the dates issued.
During 2000, notes payable to related parties totaling $1,173,896 and $502,871 of accrued interest were converted into 3,891,954 common shares at an average of $0.43 per share. The Company issued 8,571,428 common shares upon conversion of debentures with a carrying value of $3,000,000, or $0.35 per share, and issued 5,760,112 common shares upon conversion of $2,016,036 of notes payable at $0.35 per share.
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 shares issued were 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.
NOTE 14 - EMPLOYEE STOCK OPTIONS
On July 1, 2000, five-year options to purchase 200,000 common shares at $0.73 per share were granted in connection with an employment agreement. The options vest on July 1, 2001. No compensation expense was recognized in connection with the grant because the exercise price was equal to the fair value of the underlying shares on the date of grant.
During October 1999, the Company granted 250,000 options related to a settlement agreement. The options granted vest immediately and are exercisable at $1.00 per share for a period of five years. The Company recognized expense in the amount of $140,509 when granted. EuroGas granted options to employees and consultants during 1999. Options for 950,000 shares were authorized and granted on October 22, 1999. The options granted vested immediately and are exercisable at $0.45 for a period of ten years. Compensation in the amount of $347,044 was recognized on the when grant date.
On April 20, 1999, ten-year options to purchase 1,000,000 common shares at $0.95 per share were issued in connection with an employment agreement. The options vest on January 1, 2000. No compensation was recognized in connection with the grant because the exercise price was equal to the fair value of the underlying shares on the date of the grant.
A summary of the status of stock options as of December 31, 2000, 1999 and 1998 and changes during the years then ended are presented below:
The following table summarizes information about stock options outstanding at December 31, 2000:
EuroGas has accounted for stock-based compensation from stock options granted to employees and consultants prior to 1998 based on the intrinsic value of the options on the date granted. Since 1999, EuroGas has accounted for options granted to consultants according to their fair value as prescribed in SFAS No. 123, Accounting for Stock Based Compensation.
Had compensation cost for stock options been determined based on the fair value at the grant dates for options under that plan consistent with the alternative method of SFAS No. 123, EuroGas' loss applicable to common shares and loss per common share for the year ended December 31, 2000, 1999 and 1998 would have been increased to the pro forma amounts shown below.
The fair value of options granted during 2000, 1999, 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2000, 1999 and 1998 respectively: average risk-free interest rate - 6.18%, 6.0% and 5%; expected volatility - 138.4%, 126.2% and 63.5%; expected life - 5 years, 5 years and 2.0 years.
NOTE 15 - STOCK WARRANTS
During October 1998, the Company issued 2,500,000 warrants to purchase common shares in connection with the acquisition of the Maseva property. The Company was not able to meet its obligaton to develop the Maseva property. In order to dispose of those obligations, the Company entered into an agreement with Belmont Resources, Inc. on June 23, 2000 to return the 90% its interest in the Maseva property back to Belmont Resources, Inc. As part of this agreement, the Company modified the exercise price from $2.50 to $0.82 and the expiration date from October 9, 2000 to June 14, 2002. As a result of this repricing, the Company has recognized a charge to operations of $1,246,718.
Subsequent to December 31, 2000, the Company further amended its agreement with Belmont Resources, Inc. by modifying the exercise price on the 2,500,000 warrants from $0.82 per warrant to $0.40 per warrant. As a result of this repricing, the Company will recognize an additional $118,089 charge to operations during the first quarter of 2001.
During the first quarter of the year ended December 31, 2000, a warrant to purchase 3,000,000 common shares was granted pursuant to an accrued settlement obligation to FCDC. The warrant is valued at $1,560,000. The warrants granted vest in one year and are exercisable at $0.65 per share for a period of thirty days.
During the first quarter of 2000, EuroGas completed the issuance of two-year 10.5% convertible debentures in the amount of $3,000,000 in exchange for cash proceeds of $1,591,336, the conversion of prior outstanding EuroGas debt into debentures in the amount of $422,288 and proceeds in the form of payments to creditors on behalf of EuroGas by a shareholder in the amount of $986,376. The debentures are convertible into common shares at $0.35 per share, which represents a discount of 20% from quoted market values on the date of the issuance. Upon conversion the holders also receive warrants to purchase 17,142,858 common shares at $0.35 per share. The convertibility of the debentures at a discount, and the detachable warrants issued below
market on the date of issuance, constitute a beneficial conversion feature of the offering. The Company recorded the three instruments at their relative fair values on the date of issuance and began amortizing the resulting debt discounts as interest expense in the amount of $2,912,109 over the three-month life of the debentures. The debentures were subsequently converted at the election of the holders on March 30, 2000 into 8,571,428 common shares and warrants to purchase 17,142,858 additional shares at $0.35 per share.
As discussed in Note 17 - Commitments and Contingencies, the Company issued 2,800,000 warrants in connection with a legal settlement with KUKUI. These options have an exercise price of $0.40, vest immediately, and expire in two years. The warrants have a fair value of $773,824, which was provided for as part of the KUKUI settlement accrual.
On September 7, 2000, the Company issued warrants for the purchase of 1,666,666 shares of the Company's common shares to each of the following: Rockwell International, Ltd., Oxbridge Limited and Conquest Financial Corporation. These warrants were issued in connection with outstanding notes payable, vest immediately, and are exercisable at $0.41 per share. These warrants expire on December 31, 2003. The warrants had a fair value of $2,639,038 on the grant date which was charged to operations during the third quarter of 2000.
On October 27, 2000, the Company entered into a settlement agreement with Mr. Winzer and Mr. Maurer, which calls for the issuance of warrants to purchase 5,200,000 common shares at $1.00 per share. If unexercised, the warrants will expire by January 15, 2002. The warrants had a fair value of $572,872 on the grant date which was charged to operations during the fourth quarter of 2000.
The fair value of options granted during 2000, 1999, 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998 respectively: average risk-free interest rate - 5.95%, 0.00%, and 5.00%; expected volatility - 139.8%, 0.00% and 63.2%; expected life - 2.0 years, 0.0 years and 2.0 years.
At December 31, 2000 and 1999, the Company had warrants outstanding to purchase 40,892,856 and 9,750,000 common shares, respectively.
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following at December 31, 2000 and 1999:
2000 1999 ----------- ----------- Foreign currency translation adjustments $(3,666,133) $(2,797,088) Unrealized loss on investments in securities available-for-sale 84 (1,068,853) ----------- -----------
Accumulated Other Comprehensive Loss $(3,666,049) $(3,865,941) =========== =========== NOTE 17 - CONTINGENCIES AND COMMITMENTS
The Company is obligated to register common shares issued to FCDC upon exercise of 3,000,000 options and to pay, either in cash or additional common shares, at the Company's option, the difference between $3.00 per share and the market value of the common shares sold or deemed sold by FCDC.
EuroGas' subsidiary, GlobeGas BV, has applied for a reduction in an income tax liability in the Netherlands of an amount equivalent to approximately $692,431 at December 31, 1999. The tax arose from the sale of equipment at a profit by the former owner of Globegas to a EuroGas Polish subsidiary. EuroGas' position is that the gain on the sale should not have been taxable to GlobeGas. The liability is reflected in EuroGas' financial statements.
During April 1999, EuroGas entered into a three-year employment contract with its new chief executive officer. The contract provides for annual salary of $400,000 plus living and other allowances of $28,200. In addition, options to purchase 1,000,000 common shares at $0.95 per share were granted in connection with the employment contract. The options vest on January 1, 2000, and expire in April 2009. Subsequent to December 31, 2000, the officer resigned in January 2001. EuroGas has accrued salary obligations to the officer in the amount of $230,000, which is included in accrued liabilities.
The Company leases office facilities from various lessors in Poland and the United Kingdom. Rent expenses for the years ended December 31, 1999, 1998 and 1997 were $517,354, $290,991, and $178,733, respectively. Annual commitments for future minimum rental payments required under the leases as of December 31, 1999 were as follows:
Year Ending December 31: 2000 $154,452 2001 154,452 2002 104,814 -------- Total $413,718 ========
NOTE 18 - SUBSEQUENT EVENTS
On January 4, 2001, the Company amended its agreement with Belmont Resources, Inc. by reducing the exercise price on the 2,500,000 warrants from $0.82 per warrant to $0.40 per warrant. This repricing of warrants will result in the Company recognizing an additional $143,561 of expense during the year ending December 31, 2001.
On February 22, 2001, EuroGas announced its intention to sell up to 8,000,000 of its 14,100,000 common shares of Big Horn Resources Ltd. From February 28, 2001 through March 16, 2001, EuroGas sold 2,140,500 shares of Big Horn Resources Ltd. for $1,087,600. The sale reduced EuroGas' interest in Big Horn Resources Ltd. to 42.5%.
On March 27, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in a talc deposit in Slovakia in exchange for issuing 12,000,000 common shares and paying $100,000, as further described in Note 4 - Acquisition of Talc Mineral Interest.
EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion, and amortization as of December 31, 2000, 1999 and 1998, by geographic area, were as follows:
Costs incurred in oil and gas producing activities, both capitalized and expensed, during the years ended December 31, 2000, 1999 and 1998 were as follows:
Europe Total Canada and Russia ----------- ------------ -----------
For the Year Ended December 31, 2000 Property acquisition costs Proved $ - $ - $ - Unproved 1,748,618 1,683,266 65,352 Exploration costs 4,582,695 4,307,116 275,579 Development costs 2,075,923 2,075,923 - ----------- ------------ ---------- Total Costs Incurred $ 8,407,236 $ 8,066,305 $ 340,931 =========== ============ ==========
EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 1999
Property acquisition costs Proved $ 1,752,246 $ 1,752,246 $ - Unproved 1,259,696 469,249 790,447 Exploration costs 1,327,737 - 1,327,737 Development costs 2,830,308 2,705,268 125,040 ------------ ------------ ------------ Total Costs Incurred $ 7,169,987 $ 4,926,763 $ 2,243,224 ============ ============ ============
For the Year Ended December 31, 1998 Property acquisition costs Proved $ 8,784,050 $ 8,784,050 $ - Unproved 17,804,072 9,776,610 8,027,462 Exploration costs 573,570 - 573,570 Development costs 4,459,065 1,128,852 3,330,213 ------------ ------------ ------------ Total Costs Incurred $ 31,620,757 $ 19,689,512 $ 11,931,245 ============ ============ ============
The results of operations from oil and gas producing activities for the years ended December 31, 2000, 1999 and 1998 were as follows:
Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2000 Oil and gas sales $ 6,395,037 $ 6,395,037 $ - Production costs (1,521,471) (1,521,471) - Impairment of mineral interests (26,783,790) (2,661,585) (24,122,205) Depreciation, depletion, and amortization (1,885,107) (1,885,107) - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $(23,795,331) $ 326,874 $(24,122,205) ============ ============ ============
For the Year Ended December 31, 1999 Oil and gas sales $ 4,973,508 $ 4,973,508 $ - Production costs (1,330,526) (1,330,526) - Impairment of mineral interests (7,217,426) - (7,217,426) Depreciation, depletion, and amortization (1,810,176) (1,810,176) - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ (5,384,620) $ 1,832,806 $ (7,217,426) ============ ============ ============
For the Year Ended December 31, 1998 Oil and gas sales $ 879,404 $ 879,404 $ - Production costs (305,009) (305,009) - Impairment of mineral interests (3,512,792) (3,512,792) - Depreciation, depletion, and amortization (220,600) (220,600) - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ (3,158,997) $ (3,158,997) $ - ============ ============ ============
Reserve Information - The following estimates of proved and proved developed reserve quantities, presented in barrels and thousand cubic feet (MCF), and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of EuroGas' reserves. EuroGas emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. EuroGas' proved reserves are located in Canada and the Slovak Republic. Unproved reserve properties are located in the Slovak Republic, Sakha Republic (Russian Federation), Canada, Poland, and the Ukraine.
Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less the tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows.
The standardized measure of discounted estimated net cash flows related to proved oil and gas reserves at December 31, 2000, 1999 and 1998 were as follows. There were no proved oil and gas reserves at December 31, 1997:
The primary changes in the standardized measure of discounted estimated future net cash flows for the year ended December 31, 1998 were as follows: