ITEM 3. LEGAL PROCEEDINGS.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of the Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie Methane Corporation (McKenzie Methane Corporation was an affiliate of the former owner of Pol-Tex), asserted certain claims against Pol-Tex and GlobeGas in connection with lending activities between McKenzie Methane Corporation and the management of GlobeGas prior to its acquisition by the Company. The claim asserted that funds that were loaned to prior GlobeGas management may have been invested in GlobeGas and, therefore, McKenzie Methane Corporation might have had an interest in GlobeGas at the time of the acquisition of GlobeGas by the Company. These claims were resolved pursuant to a settlement agreement entered into in November 1996 (the "KUKUI Settlement Agreement"). Under the terms of the settlement agreement, the Company issued to the Bishop's Estate (KUKUI's parent) 100,000 shares of Common Stock and an option to purchase up to 2,000,000 shares of Common Stock at any time prior to December 31, 1998. The option exercise price was $3.50 per share if exercised within 90 days of the execution of the Company's 1997 [CONFIRM] agreement with Texaco (the "Texaco Agreement"); $4.50 per share if exercised prior to December 31, 1997; and $6.00 per share if exercised prior to December 31, 1998. The Company also granted registration rights with respect to the securities.
In March 1997, a trustee over certain of the McKenzie parties and other related entities asserted a claim to the proceeds that the Company would receive from the Texaco Agreement and exploitation of the Pol-Tex Concession in an action entitled: Harven Michael McKenzie, debtor; Timothy Stewart McKenzie, debtor; Steven Darryl McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively) W. Steve Smith, trustee, plaintiff v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane, Sp. zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas Houston Division). The trustee's claim alleges that the Company paid inadequate consideration for its acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession) from persons who were acting as nominees for the McKenzie parties or in fact may be operating as a nominee for the McKenzie parties and therefore the creditors of the McKenzie parties are the true owners of the proceeds received from the development of the Pol-Tex Concession (KUKUI is also the principal creditor of the McKenzie parties in these other cases.). The Company plans to vigorously defend against such claims. The Company believes that
the litigation is without merit based on its belief that the prior settlement with KUKUI bars any such claim, the trustee over the McKenzie parties has no jurisdiction to bring such claim against a Polish corporation (Pol-Tex) and the ownership of Polish mining rights, that the Company paid substantial consideration for GlobeGas, and that there is no evidence that the creditors of the McKenzie parties invested any money in the Pol-Tex Concession. The Company also believes that continued pursuit of the claim may give rise to a separate cause of action against third parties that the Company will pursue if necessary.
On August 21, 1997, KUKUI, Inc. asserted a claim against the Company in an action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United States District for the Southern District of Texas, Houston Division. KUKUI's claim is based upon an alleged breach of the KUKUI Settlement Agreement as a result of the Company's failure to file and obtain the effectiveness of a registration statement for the resale by KUKUI of 100,000 shares of Common Stock delivered to KUKUI in connection with the settlement. In addition, Bishop Estate, KUKUI's parent, has entered a claim for failure to register the resale of shares of Common Stock subject to its option to purchase up to 2,000,000 shares of Common Stock. The Company has denied any liability, intends to vigorously defend the claim and recently filed a counterclaim against KUKUI and Bishop's Estate for breach of contract, in particular concerning its joint activities with the Trustee over the McKenzie parties.
For the 1992 year, the Kingdom of the Netherlands assessed a tax against the Company's operating subsidiary, GlobeGas in the amount of $911,051 even though it had significant operating losses. During 1997, the income tax liability was reduced on the financial statements of the Company to $753,306 due to an adjustment in exchange ratios. At December 31, 1998, the income tax liability recorded in the Company's financial statements was $806,429. The Company has appealed the assessment and has proposed a settlement which would result in a reduction in the tax to $42,000. Pending final resolution, a liability for the total amount assessed will continue to be reflected in the Company's financial statements.
ITEM 4.
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
The Common Stock is quoted on the over-the-counter Bulletin Board market maintained by the National Association of Securities Dealers under the symbol "EUGS" and is traded under the symbols "EUGF" on the Frankfurt Stock Exchange, "EUGBE" on the Berlin Stock Exchange, "EUGS" on the Stuttgart Exchange, "EUGM" on the Munich Stock Exchange and EUGH on the Hamburg Stock Exchange. As of March 31, 1999, there were 79,402,925 shares of Common Stock issued and outstanding, held by approximately 260 holders of record.
The following table sets forth the approximate range of high and low bids for the Common Stock during the periods indicated. The quotations presented below have been adjusted retroactively to reflect the 24-for-1 reverse stock split effected by the Company on September 6, 1994. Such quotations reflect interdealer prices, without retail markup, markdown, commissions, or other adjustments and may not necessarily represent actual transactions in the Common Stock.
The liquidity of the Common Stock may be limited, and the reported price quotes may not be indicative of prices that could be obtained in actual transactions. On March 31, 1999, the high and low bids for the Common Stock on the OTC Bulletin Board market were $1.125 and $1.0312, respectively.
DIVIDENDS
No dividends have been paid on the Common Stock, and the Company does not have retained earnings from which to pay dividends. The Company accrued cumulative preferred dividends of $341,810 and $423,530 in 1998 and 1997, respectively. Of this amount, $165,007 was paid in 1998 by the issuance of shares of Common Stock in connection with the conversion of a portion of the preferred stock. All cumulative dividends with respect to the Company's preferred stock would be required to be paid prior to the Company declaring or paying any dividend on the Common Stock. See "Item 12. Security Ownership of Certain Beneficial Owners and Management." Even if the Company were able to generate the necessary earnings, it is not anticipated that dividends will be paid in the foreseeable future, except to the extent required by the terms of the cumulative preferred stock currently issued and outstanding.
RECENT SALES OF UNREGISTERED SECURITIES
During 1998, the Company completed three rounds of equity financing with a single investor, resulting in total cash proceeds to the Company of approximately $15.7 million. On May 29, 1998, the Company sold 8,000 shares of Series B Convertible Preferred Stock, resulting in net proceeds to the Company of approximately $7,400,000. On September 12, 1998, the Company sold 5,500 shares of Series B Convertible Preferred Stock, resulting in net proceeds of approximately $5,100,000. On November 13, 1998, the Company sold another 3,500 shares of Series B Convertible Preferred Stock, resulting in net proceeds of approximately $3,200,000.
The Company's sales of the Series B Convertible Preferred Stock was effected in reliance upon the exemption for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act of 1933, as amended, based upon representations and warranties provided by the investor in subscription agreements executed between the Company the investor.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data were derived from the consolidated financial statements of the Company. The consolidated financial statements of the Company have been audited by the Company's independent certified public accountants. The selected financial data below should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included with this filing and "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged primarily in the acquisition of rights to explore for and exploit oil, natural gas, coal bed methane gas and mineral mining. The Company has also extended its business into co-generation (power and heat) projects. The Company has acquired interests in a number of large exploration concessions, for oil, natural gas and coal bed methane gas, and is in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. The Company currently has several projects in various stages of development, including a coal bed methane gas project in Poland, a natural gas project and several additional undeveloped concession areas in Slovakia, a natural gas project in the Sakha Republic (a member of the Russian Federation located in eastern Siberia) and an interest in a talc deposit in Slovakia. The Company has at least seven joint venture projects in the Ukraine to explore for and exploit oil, natural gas and coal bed methane gas with various Ukrainian State and private companies. The Company has entered into an agreement with a large German integrated oil and natural gas concern, to undertake the development of projects with various Ukrainian State and private companies. The Company recently created a consortium with the largest power generation company in Great Britain, and with a large utility company in Germany, to develop a medium size co-generation power project in Western Poland.
The Company has also acquired holdings in several oil and natural gas projects in Canada. One acquisition has given the Company a majority interest in full-service oil and gas producing company. The other project is a joint venture with a major oil and gas company to reclaim one Canada's largest natural gas fields.
The Company's principal assets consist of both proven and developed properties, as well as unproven and undeveloped properties. All costs incidental to the acquisition, exploration, and development of such properties are capitalized, including costs of drilling and equipping wells and directly-related overhead costs, which include the costs of Company-owned equipment. Since the Company has limited proven reserves and established production, most of its holdings have not been amortized. In the event that the Company is ultimately unable to establish production or sufficient reserves on some of these properties to justify the carrying costs, the value of the assets will need to be written down and the related costs charged to operations, resulting in additional losses. The Company periodically evaluates its properties for impairment and if a property is determined to be impaired, the carrying value of the property is reduced to its net realizable amount.
RECENT DEVELOPMENTS
Funding Activities. During 1998, the Company completed three rounds of equity financing with a single investor, resulting in cash proceeds to the Company of approximately $15.7 million, with the ability to draw down another $13.5 million upon the Company's request. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered Securities." At December 31, 1998, the Company had approximately $7.5 million in cash and cash equivalents $.5 million in working capital available.
Capital Expenditures. In 1998, the Company initiated a major investment in a Canadian oil and gas development and production company. In October 1998, the Company purchased the initial 31% of the outstanding shares of capital stock of Big Horn Resources Ltd., of Calgary, Alberta, Canada ("Big Horn"). See "Items 1 & 2. Business and Properties -- Activities in Canada." Big Horn is a full-service producer of oil and natural gas, producing the equivalent of approximately 900 barrels of oil a day, with proven reserves of approximately 7.7 million barrels of equivalent oil and with a net present value of approximately $7.7 million, based on a 10% valuation rate. In March 1999, the Company acquired additional shares of Big Horn common stock from certain third parties, giving the Company an ownership interest in excess of 50% of the outstanding shares of Big Horn's capital stock. The total cost of the acquisition of Big Horn by the Company was $7,593,913. Because of the temporary decline in oil prices, the acquisition price paid by the Company reflects a premium over the Company's proportionate share of the book value of Big Horn. See Note set forth in "Item 8. Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and other selected operating data for the years ended December 31, 1998, 1997 and 1996.
Revenues. Prior to 1998, the Company had not generated any revenues from oil and gas sales. As a result of the Company's acquisition of the controlling interest in Big Horn, the Company's results of operations for 1998 reflect oil and gas sales of approximately $.9 million. For the 1997 and 1996 years, the only material revenues received by the Company resulted from a one-time sale of mineral interest and equipment in 1997, resulting in revenues of approximately $500,000.
Operating Expenses. Operating expenses include general and administrative expenses, depreciation and amortization, cost of mineral interests and equipment and impairment of mineral interests and equipment. General and administrative expenses were $7,804,401 for 1998, compared to $6,716,365 for 1997, an increase of 14%. General and administrative expenses for 1997 reflected an increase of 42% from 1996 general and administrative expenses of $4,739,380. The principal factors that contributed to the increase from 1997 to 1998 were legal expenses incurred in connection with sales of registered and unregistered securities, ongoing securities compliance, litigation issues, additional consulting fees, hiring of additional staff members and opening of new offices. The increase from 1996 to 1997 was due primarily to payment of accrued and unpaid salaries to member of the staff and certain consultants, hiring of new staff members and the engagement of additional consultants. Depreciation and amortization expenses were $293,955 for 1998, compared to $25,637 for 1997. During 1998 there was a significant increase in properties that were amortized as compared to 1997. During 1998 the Company realized a significant impairment mainly due to the acquisition of the Canadian company. The interest was bought a fair market value, but due to low oil prices for the last eighteen months the actual book value of the investment was lower than fair market value, requiring the Company to take an impairment charge. Under the full-cost method by which the Company accounts for its mineral interests in properties, costs of unproven properties are assessed periodically and any resulting provision for impairment would normally be charged to the proven property base. Because the Company has limited proven properties, if impairment charges are required, a portion of those charges may be charged to operations. The impact of such reassessment and resulting impairment charges could be significant during any particular period.
Income Taxes. Historically, the Company has not been required to pay income taxes, due to the Company's absence of net profits. For future years, the Company anticipates that it will be able to utilize a
substantial portion of its accumulated deficit, which was approximately $43,352,787 as of December 31, 1999, to offset profits, if and when achieved, resulting in a reduction in income taxes payable.
Net Loss. The Company incurred net losses of approximately $11.0 million, $11.5 million and $6.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. These losses were due in large part to the absence of revenues, combined with continued expansion of the Company's activities, primarily as a result of acquisitions, the growth of the Company's administrative expenses. The Company did see a limited amount of revenue from one of its projects in 1998.
Due to the highly inflationary economies of the Eastern European countries in which the Company operates, the Company is subject to extreme fluctuations in currency exchange rates that can result in the recognition of significant gains or losses during any period. Approximately (130,149), $332,000, ($401,000) in gains (losses) were recognized as a result of currency transactions in the years ended December 31, 1998, 1997, and 1996, respectively. The Company had a cumulative foreign currency translation adjustment of $(289,926) at December 31, 1998. The Company does not currently employ any hedging techniques to protect against the risk of currency fluctuations.
CAPITAL AND LIQUIDITY
The Company had an accumulated deficit of $43,352,787 at December 31, 1998, substantially all of which has been funded out of proceeds received from the issuance of stock and the incurrence of payables. At December 31, 1998, the Company had total current assets of approximately $13.5 million and total current liabilities of approximately $12.96 million, resulting in working capital of approximately $.5 million. As of December 31, 1998, the Company's balance sheet reflected approximately $33,817,752 in mineral interests in unproven mineral properties, net of valuation allowance. These properties are held under licenses or concessions that contain specific drilling or other exploration commitments and that expire within one to three years, unless the concession or license authority grants an extension or a new concession license, of which there can be no assurance. If the Company is unable to establish production or resources on these properties, is unable to obtain any necessary future licenses or extensions, or is unable to meet its financial commitments with respect to these properties, it could be forced to write off the carrying value of the related property.
Throughout its existence, the Company has relied on cash from financing activities to provide the funds required for acquisitions and operating activities. The Company's financing activities provided net cash of approximately $12 million, $31 million, and $8.2 million during the years ended December 31, 1998, 1997, and 1996, respectively. Such net cash has been used principally to fund cumulative net losses of approximately $8,966,340. During the years ending December 31, 1998, 1997 and 1996, the Company's operating activities used net cash of approximately $9 million, $3.2 million, and $4.0 million, respectively. The largest portion of the Company's cash was used in acquiring mineral interests, property and equipment, either directly or indirectly through the acquisition of subsidiaries, with approximately $6.2, $11.2 million, and $3.7 million used in investing activities for the years ended December 31, 1998, 1997, and 1996, respectively. The largest single components of the Company's investing activities during the period were the approximately $4.5 million booked in connection with the acquisition of Big Horn, and approximately $6.3 million recorded for acquisition of OMV (Jakutien) GesmbH in 1997.
While the Company had cash of approximately $7.5 million at December 31, 1998, it has substantial financial commitments with respect to exploration and drilling obligations related to the mineral properties in which it has an interest. Many of the Company's projects are long-term and will require the expenditure of substantial amounts over a number of years before the establishment, if ever, of production and ongoing revenues. As noted above, the Company has relied principally on cash provided from equity and debt transactions to meet its cash requirements. While the Company currently has sufficient cash to meet its short-term needs, it will require additional cash, either from financing transactions or operating activities, to meet its longer-term needs. There can be no assurance that the Company will be able to obtain additional financing, either in the form of debt or equity, or that, if such financing is obtained, it will be available to the Company on reasonable terms. If the Company is able to obtain additional financing or structure strategic relationships
in order to fund existing or future projects, existing shareholders will likely continue experience further dilution of their percentage ownership of the Company.
If the Company is unable to establish production or reserves sufficient to justify the carrying value of its assets or to obtain the necessary funding to meet its short and long-term obligations or to fund its exploration and development program, all or a portion of the mineral interests in unproven properties will be charged to operations, leading to significant additional losses.
INFLATION
The amounts presented in the Company's consolidated financial statements do not provide for the effect of inflation on the Company's operations or its financial position. Amounts shown for property, plant and equipment and for costs and expenses reflect historical costs and do not necessarily represent replacement costs or charges to operations based on replacement costs. The Company's operations, together with other sources, are intended to provide funds to replace property, plant and equipment as necessary. Net income would be lower than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments. Due to inflationary problems in Eastern Europe that is seen in currency exchange losses, the Company has seen losses on its assets values in those countries.
YEAR 2000 ISSUES
General. The Company is actively engaged in assessing and correcting potential year 2000 ("Y2K") information system problems. In short, the Y2K problem is a result of information technology systems being designed to recognize the year portion of a date as two rather then four digits, which means that years coded "00" may be recognized as the year 1900, rather than the year 2000. As a result, certain hardware and software products may not properly function or may fail beginning in year 2000.
During 1998, the Company initiated an information system implementation project (the "Project"), which affects nearly every aspect of the Company's U.S. operations. In an effort to address compliance issues, the scope of the Project was expanded to ensure Y2K compliance for newly acquired software and hardware. The Project has two significant phases that are designed to improve both operating processes and information systems capabilities.
The first phase of the Project included hardware and software for the Company's U.S. financial reporting operations. During 1998, phase one was completed with hardware and software that has been tested and certified as Y2K compliant. Phase two focuses on the Company's offshore financial reporting systems and is expected to be operational in June 1999.
State of Readiness. The Company's information systems consist principally of it financial system. The Company's financial system includes the general ledger, accounts payable, sales and use tax calculations, payroll and human resources applications. Phase one of the Project provided systems that are Y2K compliant for the general ledger, accounts payable and payroll.
The Company's office support system includes network hardware and operating systems, desktop and laptop computers and servers. The Company is in the process of evaluating Y2K compliance for these systems and has identified potential compliance issues primarily related to imbedded time clocks. However, since he majority of the Company's hardware has been replaced or upgraded over the past two years, critical systems compliance is not expected to be a major issue.
Costs to Address Y2K Issues. As of December 31, 1998, the Company had spent $50,000 on hardware and $25,000 for software in connection with the Project.
Risks of the Company's Y2K Issues. The Company anticipates that the risks related to its information and non-information systems will be mitigated by current efforts being made in conjunction with the Project, as well as ongoing assessment and correction programs. However, the primary Y2K risk to the Company's operations is service disruption from third-party providers that supply telephone, electrical, banking, and
financial reporting services. Any disruption of these critical services would hinder the Company's ability to operate. Therefore, efforts are currently under way to obtain Y2K compliance certification from the Company's major service providers. Most of the Company's third-party joint venture organizations are outside of the U.S., particularly in eastern Europe. The Company has very little control, other than awareness, over these organizations. Concern about potential problems has been raised, but commitment to compliance is beyond the Company's control.
Contingency Plans. The Company has not yet approved a formal contingency plan for Y2K issues. However, the Company is preparing well-defined manual processes, to be completed by July 1, 1999, that could be used in the event of system and service disruption. A formal contingency plan is expected to be completed and approved during 1999.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business in many foreign currencies. As a result, it is subject to foreign currency exchange rate risk due to effects that foreign exchange rate movements of those currencies have on the Company's costs and on the cash flows which it receives from its foreign operations. The Company believes that it currently has no other material market risk exposure. To date, the Company has addressed its foreign currency exchange rate risks principally by maintaining its liquid assets in U.S. Dollars, in interest-bearing accounts, until payments in foreign currency are required, but does not reduce this risk by utilizing hedging. For further discussion of the Company's policies regarding derivative financial instruments and foreign currency translation, see Note 1 to the Consolidated Financial Statements of the Company contained in "Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries, together with note and supplementary data related thereto are set forth on pages through 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.
Set forth below is the name and age of each director and executive officer director of the Company, together with all positions and offices of the Company held by each and the term of office and the period during which each has served:
BIOGRAPHICAL INFORMATION
The following paragraphs set forth brief biographical information for each of the directors and executive officers of the Company:
Paul Hinterthur is President and a director of the Company. Mr. Hinterthur has held executive positions with the Company since 1995. After completing studies in Economics in Frankfurt, London and Paris, he served in executive positions for Dresdner Bank, one of the leading banks in the world from 1965 to 1984. During his tenure with Dresdner Bank, he served in the financial centers of Frankfurt, London, Tokyo, and Hong Kong. Since retiring from the banking business in 1984, Mr. Hinterthur has been an independent international business and finance consultant. Mr. Hinterthur speaks five languages.
Hank Blankenstein is Vice President, Treasurer and a director of the Company. In addition to his service as a director since December 1995, Mr. Blankenstein has served as Vice President and Treasurer since 1996. Mr. Blankenstein has had over 30 years experience in various levels of management positions. He served as an administrative and financial officer for American Micro Systems and National Semiconductor, several large semiconductor operations, from 1973 to 1985. Prior to that, he served in a number of operational positions for high-tech industry companies, having engineering production supervising responsibilities, in charge of a 400-person division. He has been involved in several high-tech start-up situations, serving in senior management positions. He holds a Bachelor of Science degree in Finance and Banking from Brigham Young University that was awarded in 1966.
Dr. Gregory P. Fontana is a director of the Company. He is currently an attending cardiothoracic surgeon at Brotman Medical Center and Cedars-Sinai Medical Center in California. He received his M.D. in 1984 at the University of California followed by ten years of postgraduate training at Duke University and University of California at Los Angeles. Some of his academic appointments include Clinical Fellow in Pediatric Cardiac Surgery at Harvard Medical School and Clinical Assistant Professor of Surgery at UCLA School of Medicine and he has received several research grants, including a National Research Service Award and Minimally-Invasive Cardiac Surgery Grant. He belongs to several professional organizations, including the American Heart Association, and has authored numerous scientific presentations and bibliographies. He is currently a consultant to Heartport, Inc., Redwood City, California.
Dr. Hans Fischer has served as a director of the Company since January 1996. He is currently Professor of Radiology at the University of California, Los Angeles, Harbor-UCLA Medical Center where he has been on the faculty since 1992. He has been a chair, member, and designated alternate on Research, Clinical Radiology, Quality Assurance and Ambulatory Care Committees for Harbor-UCLA Medical Center since 1990. He trained at Leibniz-Gymnasium, Dortmund West Germany, School of Medicine, University of Muenster West Germany and School of Sociology, University of Muenster West Germany. He received his M.D. in 1971 and Ph.D. in 1985 from University of Muenster.
KEY CONSULTANTS AND EMPLOYEES
The following paragraphs sets forth brief biographical information for certain of the Company's key employees and consultants:
Dr. Reinhard Rauball served as a director of the Company from August 1994 to February 1999. From August 1997 until February 1999, Dr. Rauball served as Chairman of the Company's Board of Directors. (Dr. Rauball resigned from his positions with the Company on February 18, 1999) He has been an attorney in Dortmund, Germany, since 1974, as well as a government appointed Notary since 1991. He was a law instructor at Bochum University from 1977 to 1979 and is the author of numerous legal publications and books on constitutional law in Germany. Dr. Rauball currently represents a number of prominent German industrial companies and acts as counsel to the German government on special projects. From 1983 to 1990, he was the chairman of the Supervisory Board of Etienne Aigner, AG, a publicly-held company in Munich, Germany, which is a leading international fashion concern with franchise shops in over 50 countries around the world. He was the president of Borussia Dortmund, a leading German soccer club, from 1979 to 1982 and from 1984 to 1986.
Wolfgang Rauball has acted as an independent consultant to the European subsidiaries of the Company since August 1994. He is president of Pol-Tex Methane Sp. zo.o. in Poland and also acts as a managing director of GlobeGas B.V. Amsterdam, managing director of Eurogas GesmbH and managing director of EuroGas/UK. Mr. Rauball attended Darmstadt Technical University in Germany from 1967 through 1971 but did not receive a degree. Thereafter, Mr. Rauball worked as a mining geologist in Canada from 1972 to the present date. During the period 1976 through 1986, his consulting activities were primarily for companies conducting exploration for gold ore bodies in Canada, the United States, and South America. Wolfgang Rauball arranges for financing for business enterprises, primarily public companies engaged in the mineral industry.
Andrew K. Andraczke, Vice President, Secretary, and a member of the management committee of Pol-Tex since 1992, is responsible for business development and coordination of administrative, legal, and political aspects of the Pol-Tex venture. Mr. Andraczke also directs computer operations and system support for the venture's exploration and production activities. Mr. Andraczke holds B.Sc., M.Sc., and Ph.D degrees in computer science and applications from the Computer Science Institute of Polytechnical University in Warsaw where he also taught as an Associate Professor. He served as the General Manager of the Computing Center of the Center for Geological Research in the Central Office of Geology (Ministry of Geology) from 1972 to 1976, where he developed and implemented Poland's first general database of geological and mineral resources of Poland. He also implemented computer mapping systems, oil and gas reservoir simulations, and production control for mining operations. From 1976 to 1982, he worked for several oil and gas and mining firms, including OTC Oklahoma Production in Tulsa, Kansas Oil Consolidated in Tulsa, John W. Mecom Company in Houston, InteResources Group, Inc. in Houston, and British Sulphur Corporation in London, performing reservoir modeling of secondary and tertiary oil reservoirs, inorganic polymer floods, and underground coal gasification projects. During this time, he also developed data acquisition and reserve balance systems for mines in the U. S., Mexico, and Egypt. Mr. Andraczke joined Oil Exploration and Production Company in Houston in 1982 and served as an internal consultant and management advisor on computer applications and emerging technologies until 1987.
Dr. F. Horvath is currently a Professor at the Eotvos University in Budapest, a position he has held for more than six years. Dr. Horvath now acts as the Company's chief geological advisor. He is particularly familiar with many of the formations in which the Company has or is planning to obtain concessions. At Eotvos University, he specializes in instructing students in geophysics and geology for general and applied geophysics, basin research, petroleum exploration, and seismic interpretation. His primary field of research has been the tectonic interpretation of geological and geophysical data, particularly in the evolution of sedimentary basins and the exploration for hydrocarbon resources. He is the principal investigator of eight major research projects and has worked with leading academic and industrial experts in Europe and the Americas. His contribution to earth sciences has been acknowledged by a number of awards, including an honorary fellowship in the European Union of Geosciences, Academia Europaea, and the Geological Society of America.
BOARD OF DIRECTORS
The current Board of Directors was elected at the December 12, 1997 annual meeting of shareholders. A director's regular term continues until the next annual meeting of shareholders and thereafter until his successor is duly elected and qualified. The Board of Directors has not established standing audit or compensation committees. See "Item 10. Executive Compensation -- Compensation Committee Report." The Board of Directors met one time during the year ended December 31, 1998.
Executive officers of the Company serve at the pleasure of the Board of Directors. There is no family relationship among the current directors and executive officers. The Company's executive committee consist of three members, Paul Hinterthur, Hank Blankenstein, and J. Toni Preuss. The Company's executive committee is charged with overseeing the day-to-day management of the Company and with making all significant contractual and financial decisions.
Dr. Reinhard Rauball, the former Chairman of the Board of Directors, and Wolfgang Rauball, an independent consultant to the Company, are brothers. Both gentlemen have been key figures in arranging the original transaction with Energy Global. The brother, Wolfgang Rauball, was instrumental the acquisition of the concessions in Poland, the later acquisition of Danube, which holds concessions in Slovakia, the acquisition of EG and the Yakutia Concession, Ukrainian joint ventures, the acquisition of control of Big Horn Resources, the participation in the British Columbia project, the participation of RWE-DEA in the Ukraine, and the negotiations regarding the participation of National Power, VEW, EEG, Polish Oil and Gas in the matter relating to the proposed power plant in western Poland. From time to time, the Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt financing for the Company through parties with whom they have previous business and personal relationships and have made loans to the Company. See "Item 13. Certain Relationships and Related Transactions."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors and executive officers, as well as persons who own more than ten percent of the Common Stock, to file with the Commission initial reports of ownership and reports of changes in ownership of the Common Stock and other securities from which shares of Common Stock may be derived. Such directors, officers and ten percent holders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports that they file with the Commission. Based solely upon the fact that the Company has not received any reports indicating that required filings were not filed on a timely basis, the Company believes that all reports filed by the Company's directors, officers and ten percent holders were filed timely.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of the Company's chief executive officer and the other executive officers of the Company whose total cash compensation for the 1998 fiscal year exceeded $100,000 (the "Named Officers") is shown on the following pages in two tables and discussed in a compensation report of the Board of Directors.
SUMMARY COMPENSATION TABLE
- --------------- (1) Dr. Rauball resigned as Chairman of the Board and as a director effective February 18, 1999.
(2) Dr. Rauball was paid for services rendered to the Company, that had not been reimbursed to him, beginning in August of 1994 to the present.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant to Named Officers any options to acquire shares of Common Stock during 1998. The Company has not granted any stock appreciation rights to the Named Officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND YEAR END OPTION VALUES
The following table sets forth the number of unexercised options to acquire shares of Common Stock held on December 31, 1998 and the aggregate value of such options held by the Named Officers. The Named Officers did not exercise options to acquire shares of Common Stock during 1998. As of December 31, 1998, the Company had not granted any stock appreciation rights to any of the Named Officers.
- --------------- (1) Reflects the difference between the exercise price of the unexercised options and the market value of shares of Common Stock of December 31, 1998. The last transaction of the Common Stock on December 31, 1998, the last trading date of the Company's fiscal year, was $1.5625 per share.
EXECUTIVE EMPLOYMENT AND CONSULTING ARRANGEMENTS
The Company has relied heavily on consultants to identify potential projects, to negotiate the terms of acquisitions, to develop relationships with governmental regulators and industry partners, and to complete business and financing transactions. As a result of services in these areas, the Company paid $600,000 in 1998, $1,260,253 in 1997 and $479,166 in 1996 to Wolfgang Rauball, the brother of Reinhard Rauball, the Chairman of the Board of the Company. The Company did not make any payments to Wolfgang Rauball in
1995. The Company also paid $509,467 in 1997, and $449,600 in 1996 to Armando Ulrich. The Company also paid $240,000 in 1998, and $273,113 during 1997 to Andrew K. Andraczke, a key employee in Poland who does not perform executive level functions. If the Company does not continue to make significant acquisitions and as revenues are developed, the Company anticipates that it will rely more on the services of employees and the amounts paid to consultants will be reduced.
COMPENSATION OF DIRECTORS
The Company compensated its outside directors for service on the Board of Directors by payment of a monthly fee of $5,000 and reimbursement of expenses incurred in attending board meetings, this has been reduced to $2500 per month beginning in 1999. The Company does not separately compensate its board members who are also employees of the Company for their service on the board.
COMPENSATION REPORT OF THE BOARD OF DIRECTORS
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INCORPORATES BY REFERENCE, IN WHOLE OR IN PART, THIS ANNUAL REPORT ON FORM 10-K, THE COMPENSATION REPORT AND PERFORMANCE GRAPH SET FORTH BELOW SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
General. Management compensation is overseen by the Board of Directors. The Board has not appointed an independent compensation committee. The Board of Directors consists of two members of executive management, Paul Hinterthur and Hank Blankenstein, and two outside directors who are not employees of the Company.
Compensation Objectives. In determining the amount of compensation for the Company's executive officers, the Board of Directors is guided by several factors. Because the Company has very few employees, compensation practices are flexible in response to the needs and talents of the individual officer and are geared toward rewarding contributions that enhance shareholder value. Historically, the Company has compensated senior management based on the perceived contribution to the development of the Company's operations. This compensation has consisted principally of salaries believed to reflect the contributions of the respective officers. In addition, because the Company has only recently begun to generate revenues from operations and has attempted to preserve capital for development of the Company's business and operations, the Company has used stock options as a form of compensation for executive officers. The use of stock options is designed to align the interests of the executive officers with the long-term interests of the Company and to attract and retain talented employees who can enhance the Company's value. Although certain members of the Board of Directors are also executive officers, none participates in the determination of his own compensation.
Compensation Components. The Company's compensation of its executive officers consists of three components: base salary, bonuses and long-term incentive awards in the form of stock options. The Board of Directors establishes base salaries based primarily on its objective judgment, taking into consideration both qualitative and quantitative factors. Among the factors considered by the Board are: (i) the qualifications and performance of each executive officer; (ii) the performance of the Company as measured by such factors as development activities and increased shareholder value; (iii) salaries provided by other companies inside and outside the industry that are the comparable size and at a similar stage of development, to the extent known; and (iv) the capital position and needs of the Company. The Board of Directors does not assign any specific weights to these factors in determining salaries. It does, however, attempt to maintain base salaries as low as possible, consistent with the needs and status of the executive officers, in order to preserve capital for future growth and development.
From time to time, the Company may also compensate its executive officers in the form of bonuses. Because the Company is presently in the early stage of its development and does not have a history of earnings per share, net income, or other conventional data to use as a benchmark for determining the amount or existence of bonus awards, any bonuses granted by the Board of Directors in the near term will be based upon
its subjective evaluation of each individual's contribution to the Company. In some cases, however, bonuses payable to executive officers may be tied to specific criteria identified at the time of engagement. For the years ended December 31, 1996, 1997 and 1998, the Board of Directors did not pay bonuses to any executive officers. The Board's action was based on its conclusion that, despite the superior personal performance of the executive officers, no cash incentive bonuses should be awarded due to the Board's desire to preserve capital for future growth and development.
The third component of the Company's compensation structure consists of the grant of stock options to compensate executive officers and other key employees. In 1996, the Company adopted the 1996 Stock Option and Award Plan, which is designed to give each option holder an interest in preserving and maximizing shareholder value in the long term, to reward option holders for past performance and to give option holders the incentive to remain with the Company over an extended period. Individual grants are determined on the basis of the Board's assessment of an individual's current and expected future performance, level of responsibilities, and the importance of his or her position with, and contribution to, the Company. In the year ended December 31, 1996, the Board awarded options to purchase 200,000 shares of Common Stock, 250,000 shares of Common Stock and 200,000 shares of Common Stock to Mr. Hinterthur, Dr. Rauball and Mr. Blankenstein, respectively.
Chief Executive Compensation. Based upon the Board's subjective impression of the salaries of presidents or chief executive officers of similarly situated companies (both in and outside the industry), the Company's progress in developing its interests, properties and operations and exploiting its assets and the Board's subjective assessment of the contributions of Mr. Hinterthur, the Board of Directors determined to pay Mr. Hinterthur a base salary of approximately $200,000 for the year ended December 31, 1998. Consistent with the Board's desire to preserve capital for future growth and development, the Board elected not to pay a bonus to Mr. Hinterthur or any other executive officer for the 1998 fiscal year. The Board did not grant any options under the stock option plan during the 1998 fiscal year to Mr. Hinterthur or any other executive officer.
Use of Consultants. The Company anticipates that it will continue to rely on both executive management and outside consultants in connection with the acquisition of additional projects and the initial development of existing projects. However, the Company anticipates that if it is able to establish ongoing revenues from production, it will retain management personnel as employees of the Company and compensate them on a salary basis, based on comparable compensation packages offered by employers within the Company's general industry and geographical area.
Respectfully submitted,
Paul Hinterthur Hank Blankenstein Dr. Gregory P. Fontana Dr. Hans Fischer
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative shareholder return for the Common Stock for the period beginning August 3, 1994 (the date the Common Stock was first quoted in the over-the-counter market) and ending December 31, 1998, as well as the cumulative total return for the NASDAQ Composite Index and the Howard Weil, Blumberg Oilfield Service and Manufacturing Index (the "Peer Group Index") for the same period.
The Peer Group Index is a price-weighted composite index comprised of the cumulative shareholder return for forty seven companies involved in oilfield services. .
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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, information with respect to Common Stock owned beneficially by each Director, by the Named Officers, by all Offices and Directors as a group and by each person known by the Company to be a beneficial owner of more than 5% of the outstanding Common Stock. Except as otherwise indicated below, each person named has sole voting and investment power with respect to the shares indicated.
- --------------- * less than one percent
(1) Except as otherwise indicated, to the best knowledge of the Company, all stock is owned beneficially and of record by the listed shareholder, and each shareholder has sole voting and investment power.
(2) Represents options to acquire shares of Common Stock at an exercise price of $1.50 per share except for the option held by Finance Credit & Development Corporation which is exercisable at $3.00 per share, all currently exercisable.
(3) The percentage indicated represents the number of shares of Common Stock held by the indicated shareholder divided by the 79,402,925 shares of Common Stock issued and outstanding as of March 31, 1999.
(4) These shares are held in the name of the spouse and children of Wolfgang Rauball. Wolfgang Rauball disclaims a direct economic interest in these shares, but may be deemed to beneficially own such shares under the guidelines of the Exchange Act.
(5) These shares are held in the name of the spouse of Mr. Hinterthur. Mr. Hinterthur disclaims a direct economic interest in these shares, but may be deemed to beneficially own them under the guidelines of the Exchange Act.
TERMS OF PREFERRED STOCK
There are 2,391,968 shares of the Company's 1995 Preferred Stock issued and outstanding. The holders of the 1995 Preferred Stock are entitled to dividends in the amount of $0.05 per share per annum, payable 30 days after the end of each calendar year, with the first payment to be made on January 31, 1996. Each share of 1995 Preferred Stock is convertible into two shares of Common Stock at the election of the holder on lawful presentation. The Company has the right to redeem the 1995 Preferred Stock on not less than 30 days written notice at a price of $36.84 per share, plus any accrued but unpaid dividends.
In connection with the acquisition of Danube, the Company authorized the 1996 Series Preferred Stock consisting of 1,250,000 shares, all of which were converted to 2,500,000 shares of Common Stock in 1997. On May 29, 1997, the company authorized the 1997 Series A Convertible Preferred Stock. This series of preferred
stock is nonvoting and accrues dividends at six percent annually. The preferred stock has a liquidation of preference of $1,000 per share plus unpaid dividends before liquidation payments applicable to Common Stock but after liquidation payments to other previously issued and outstanding preferred stock series. The 1997 Series Preferred Stock along with unpaid dividends thereon is convertible into Common Stock at the rate of $1,000 dividend by the lessor of 125 percent of the average closing bid price for five trading days prior to issuance or 82 percent of the average closing bid price for five trading days prior to conversion. All of the 1997 Series A Convertible Preferred Stock has been converted.
On May 29, 1998, the company authorized the 1998 Series B Convertible Preferred Stock. This series of preferred stock is nonvoting and accrues dividends at six percent annually. The preferred stock has a liquidation of preference of $1,000 per share plus unpaid dividends before liquidation payments applicable to Common Stock but after liquidation payments to other previously issued and outstanding preferred stock series. The 1998 Series Preferred Stock along with unpaid dividends thereon is convertible into Common Stock at the rate of $1,000 dividend by the lessor of 125 percent of the average closing bid price for five trading days prior to issuance or 82 percent of the average closing bid price for five trading days prior to conversion. At December 31, 1998, 17,000 of the 1998 Preferred Stock, together with accrued dividends, had been converted into 8,890,601 shares of Common Stock.
During 1998, 1997 and 1996, the Company accrued dividends of $423,153 and $150,592, respectively, with respect to the Preferred Stock outstanding. The Company is prohibited from paying dividends with respect to any other class of security until such time as all accrued dividends on Preferred Stock have been paid. Of this amount, $305,325 was paid in 1997 by the issuance of common stock and $120,000 was paid in 1996 in cash. The cash payment may have been inappropriate under Utah law due to the existence of a stockholders' deficit, which could create a right to recover the payment.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Reinhard Rauball, formerly the chairman of the Board of Directors, and Wolfgang Rauball, the Company's chief consultant, are brothers. Both gentlemen have been key figures in arranging the original transaction with Energy Global. The brother, Wolfgang Rauball, was instrumental the acquisition of the concessions in Poland, the later acquisition of Danube, which holds concessions in Slovakia, the acquisition of EG and the Yakutia Concession, Ukrainian joint ventures, the acquisition of control of Big Horn Resources, the participation in the British Columbia project, the participation of RWE-DEA in the Ukraine, and the negotiations regarding the participation of National Power, VEW, EEG, Polish Oil and Gas in the matter relating to the proposed power plant in western Poland. From time to time, the Rauballs, principally Wolfgang Rauball, have also arranged for equity and debt financing for the Company through parties with whom they have previous business and personal relationships and have directly loaned some of their own funds to the Company.
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 public accountants, for the years ended December 31, 1998, 1997 and 1996
B. Consolidated Balance Sheets at December 31, 1998 and 1997
C. Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996
D. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996
E. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
F. Notes to Consolidated Financial Statements
2. Exhibits.
- --------------- * Incorporated by reference
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1998, the Company did not file any reports on Form 8-K.
(c) EXHIBITS
Exhibits to this Report are attached following Page 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 Company has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
EUROGAS, INC.
Dated: March 31, 1999 By: /s/ PAUL HINTERTHUR ------------------------------------ Paul Hinterthur, President (Principal Executive Officer)
Dated: March 31, 1999 By: /s/ HANK BLANKENSTEIN ------------------------------------ Hank Blankenstein, Vice-President and Treasurer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
Dated: March 31, 1999 By: /s/ PAUL HINTERTHUR ------------------------------------ Paul Hinterthur, Director
Dated: March 31, 1999 By: /s/ DR. GREGORY P. FONTANA ------------------------------------ Dr. Gregory P. Fontana, Director
Dated: March 31, 1999 By: /s/ DR. HANS FISCHER ------------------------------------ Dr. Hans Fischer, Director
Dated: March 31, 1999 By: /s/ HANK BLANKENSTEIN ------------------------------------ Hank Blankenstein, Director
EUROGAS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS INDEX
-------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders EuroGas, Inc.
We have audited the accompanying consolidated balance sheets of EuroGas, Inc., a Utah corporation, and Subsidiaries, referred to herein as "EuroGas," as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the EuroGas' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EuroGas, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
/s/ HANSEN, BARNETT & MAXWELL
HANSEN, BARNETT & MAXWELL Salt Lake City, Utah March 31, 1999
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--EuroGas, Inc. and its subsidiaries ("EuroGas") are engaged primarily in the evaluation, acquisition, exploration and disposition of interests, and rights to exploit oil, natural gas, coal bed methane gas and to pursue mineral mining. Recently, EuroGas has also begun efforts to participate in the development of co-generation (power and heat) projects. EuroGas is in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. During the current year EuroGas acquired a controlling interest in Big Horn Resources Ltd., an exploration and production company operating in Western Canada. EuroGas also entered into a joint venture to reclaim a natural gas field in Western Canada. EuroGas holds and is developing properties in Eastern Europe including coal bed methane gas properties in Poland, proved natural gas properties and unproved oil and gas concessions in Slovakia, unproved natural gas properties in Eastern Russia and an interest in a talc deposit in Slovakia. EuroGas has entered into and is in the process of entering into, joint ventures in the Ukraine to explore for and develop oil, natural gas and coal bed methane gas with various Ukrainian State and private companies.
BUSINESS CONDITION--Through the activities explained above, EuroGas and its subsidiaries have accumulated deficits of $43,532,787 since their inception in 1995. They have had losses from operations and negative cash flows from operating activities during each of the three years in the period ended December 31,1998. The Company has positive working capital and stockholders' equity at December 31, 1998. Realization of the investment in properties is dependent on EuroGas financing the exploration, development and production of those properties. If exploration of unproved properties are unsuccessful, all or a portion of recorded amount of those properties will be recognized as impairment losses. Further, EuroGas is dependent on improvement in oil and gas prices in order to establish profitable operations from oil and gas production. As in the past, management plans to finance operations and acquisitions through issuance of additional equity securities, realization of which is not assured.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of all majority-owned subsidiaries and EuroGas' share of properties held through joint ventures from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
MINERAL INTEREST PROPERTIES -- The full cost method of accounting is used for oil and gas properties. Under this method, all costs associated with acquisition, exploration, and development of oil and gas properties are capitalized on a country by country basis. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. Proceeds from disposal of properties are applied as a reduction of cost without recognition of a gain or loss except where such disposal would result in a major change in the depletion rate. Capitalized costs are categorized either as being subject to amortization ("proved properties") or not subject to amortization ("unproved properties"). The cost of unproved properties are not subject to amortization but instead are assessed periodically and any resulting provision for impairment which may be required is charged to operations. The assessment for impairment is based upon estimated fair value of the unproved properties.
Capitalized costs of properties subject to amortization and estimated future costs to develop proved reserves are amortized and depreciated using the unit-of-production method based on the estimated proven oil and natural gas reserves as determined by independent engineers. Units of natural gas are converted into barrels of equivalent oil on the relative energy content basis.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized costs, net of accumulated amortization and depreciation, are limited to estimated future discounted net cash flows from proven reserves, based upon year-end prices.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment are stated at cost. Minor repairs, enhancements and maintenance costs are expensed when incurred; major improvements are capitalized. Depreciation of other property and equipment is provided on a straight-line basis over the estimated useful lives, as follows: buildings-- 40 years; equipment--3 to 5 years. Upon retirement, sale, or other disposition of other property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in operations. Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $78,765, $83,885, and $196,232, respectively, of which $19,229 and $65,639 were capitalized in mineral interests and equipment in 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS --EuroGas considers all highly-liquid debt instruments purchased with maturities of three months or less to be cash equivalents. The amounts reported as cash and cash equivalents, trade and other receivables, notes receivable, accounts payable and notes payable are considered to be reasonable approximations of their fair values. The fair value estimates presented herein were based on estimated future cash flows. The amounts reported as investments in securities available-for-sale are based upon quoted market prices.
EuroGas had cash in Polish banks in the amount of approximately $1,570,000 at December 31, 1998 for which EuroGas would incur certain taxes if the cash were transferred out of Poland.
DERIVATIVE FINANCIAL INSTRUMENTS -- EuroGas and its international subsidiaries occasionally incur obligations payable in currencies other than their functional currencies. This subjects EuroGas to the risks associated with fluctuations in foreign currency exchange rates. EuroGas does not reduce this risk by utilizing hedging. The amount of risk is not material to EuroGas' financial position or results of operations.
LOSS PER SHARE -- Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share during periods of income reflect potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and options or convertible notes payable and preferred stock resulted in the issuance of common stock. In the present position, diluted loss per share is the same as basic loss per share because 17,004,647 and 13,450,000 potentially issuable common shares at December 31, 1998 and 1997, respectively, would have decreased the loss per share and have been excluded from the calculation.
FOREIGN CURRENCY TRANSLATION--Effective January 1, 1998, the functional currencies of the subsidiaries operating in Poland and Slovakia were changed from the U.S. dollar to the local currencies due to those economies ceasing to be considered highly inflationary. The change had no effect on consolidated financial position at the date of the change or on the consolidated results of operations for periods prior to the change. The effect of changes in exchange rates during the year ended December 31, 1998, and in the future with respect to those subsidiaries has been and will be recognized as a separate component of comprehensive loss whereas those changes were previously recognized in the results of operations. Where the functional currencies of foreign subsidiaries continue to be the U.S. dollar, financial statements are translated into U.S. dollars using historical exchange rates and net foreign exchange gains and losses from those subsidiaries are reflected in the results of operations. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of operations.
INCOME TAXES--Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences in the balances of existing assets and liabilities on the Company's financial statements and their respective tax bases and attributable to operating loss carry forwards. Deferred taxes are computed at the enacted tax rates for the periods when such amounts are expected to be realized or settled.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK BASED COMPENSATION--Prior to 1998, EuroGas accounted for stock-based compensation from stock options granted to employees and consultants based on the intrinsic value of the options on the date granted. Since January 1, 1998, EuroGas has accounted for stock options granted to employees based on the intrinsic value of the options on the date granted and has accounted for options granted to consultants and other non-employees based on the fair value of the options as determined by the Black-Scholes option pricing model.
NEW ACCOUNTING STANDARDS--During 1998, EuroGas adopted Statements of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in 1997. SFAS No. 131 requires certain information to be reported about operating segments on a basis consistent with management's decision making process and requires the presentation of revenue and total assets by country. These statements expanded or modified disclosures and had no impact on consolidated financial position, results of operations or cash flows when adopted.
In June 1998, SFAS No.133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.133 was issued and establishes accounting and reporting standards requiring that derivative instruments be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 is effective for year beginning January 1, 2000 and, is not expected to have a material impact on the financial condition or results of operations of EuroGas.
NOTE 2--PROPERTY ACQUISITIONS
ACQUISITION OF BIG HORN RESOURCES, LTD. -- Effective October 5, 1998, EuroGas acquired a 52% interest in Big Horn Resources Ltd. ("Big Horn"), an oil and gas exploration and production company operating in Western Canada. EuroGas acquired the majority interest by cash payments of $4,723,498 on October 17, 1998, by executing promissory notes on March 30, 1999 in the aggregate amount of $1,840,224, and by EuroGas' cancellation of a note receivable from one of Big Horn shareholders in the amount of $1,100,000. These payments, and the face amounts of the notes, were discounted $70,238 to October 5, 1998 using a 10% discount rate.
The acquisition was accounted for under the purchase method of accounting; the total purchase price of $7,593,484 was determined based upon the fair value of the consideration paid. The purchase price was allocated to the acquired net assets of Big Horn based upon their fair values on the effective date of the acquisition. The fair value of the acquired properties were determined by independent engineers. The purchase price exceeded the fair value of the net assets acquired by $3,512,792 which was recognized as an impairment expense at the date of the acquisition. The operations of Big Horn have been included in the consolidated results of operations of EuroGas since acquisition.
Summary unaudited pro forma results of operations for the years ended December 31, 1998 and 1997, assuming the acquisition of Big Horn had occurred on January 1, 1997, excluding non-recurring items, are as follows:
ACQUISITION OF MASEVA GAS S.R.O. -- During October 1998, EuroGas acquired a 90% interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company which holds a 850 square kilometer concession to explore for oil and natural gas. The concession is adjacent to the southern boarder of the Trebisov concession held by the EuroGas through the Nafta/Danube joint venture in Slovakia. EuroGas purchased Maseva by issuing 2,500,000 common shares and warrants to purchase an additional 2,500,000 shares at $2.50 per share within two years. The purchase price was $6,527,462 based upon the $2.00 per share quoted market value of the
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EuroGas common shares issued, and the fair value of the warrants on the acquisition date. The fair value of the options was determined by using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0.0%, expected volatility of 63.2%, risk-free interest rate of 5.0% and an expected life of 2 years. The unproved oil and gas concession is the primary asset acquired. Maseva has had no operations. The acquisition is considered to be the purchase of properties. Accordingly, pro forma amounts are not presented. The cost of the acquisition was allocated to oil and gas properties not subject to amortization.
ACQUISITION OF BEAVER RIVER PROJECT--In March 1998, EuroGas exercised its option to acquire a 16% carried interest in the Beaver River Project in British Columbia, Canada in exchange for $300,000 and the issuance of 2,400,000 common shares which were valued at $3.16 per share. The acquisition has been valued at $7,875,000. The interest in the Beaver River Project has been classified as oil and gas properties not subject to amortization. EuroGas retains the right to purchase back 1,900,000 of the 2,400,000 common shares issued any time prior to April 15, 1999 by returning the carried interest if EuroGas determines that the results produced do not warrant the continued holding of the carried interest.
ACQUISITION OF OIL REFINERY--During the third quarter of 1998, EuroGas posted a refundable cash bond of $337,723 which will allow EuroGas to purchase an interest in an operating oil refinery in Slovenia. If purchased, EuroGas will be required to pay cash and issue common shares to complete the acquisition. The refundable bond has been included as a long-term other asset in the accompanying financial statements.
ACQUISITION OF MAJORITY INTEREST IN ENVIGEO TRADE s.r.o.--During September 1998, EuroGas acquired a 51% interest in Envigeo Trade s.r.o. ("Envigeo"), a private Slovakian company which owns a 2,300 square kilometer oil and gas concession in Northeast Slovakia. The concession expires in August 2001. EuroGas paid $500,000 at the date of the acquisition, and the balance of $1,000,000 during November 1998. The unproved oil and gas concession is the primary asset acquired and Envigeo has had no operations of any significance. The acquisition is considered to be the purchase of properties. Accordingly, pro forma amounts are not presented. The cost of the acquisition was allocated to oil and gas properties not subject to amortization. To date, EuroGas has invested $1,620,000 in the Envigeo properties.
ACQUISITION OF OMV (JAKUTIEN) EXPLORATION GASELLSCHAFT m.b.H. -- On June 11, 1997 EuroGas acquired all the issued and outstanding stock of OMV (Jakutien) Exploration Gasellschaft m.b.H. (OMVJ), in exchange for $6,252,724 in cash, options to purchase 2,000,000 common shares valued at $1,150,000, and a 5% interest in OMVJ's net profits. OMVJ's primary asset is a 50% interest in a joint venture in the Republic of Sakha (commonly known as Yakutia) of the Russian Federation. Expenses relating to the purchase were $75,580.
The acquisition was accounted for under the purchase method of accounting with the total purchase price of $7,478,304 determined based upon the consideration paid and the fair value of the options granted. The purchase price was allocated to the acquired assets and liabilities of OMVJ based upon their fair values on the date of the acquisition. The operations of OMVJ have been included in the consolidated results of operations of EuroGas since the acquisition date.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--RECEIVABLE FROM RELATED PARTY AND OTHER RECEIVABLES
On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a promissory note with an officer and member of management in the amount of $200,000. The note, due on March 31, 1999, was repaid in full on January 7, 1999.
On October 28, 1998, EuroGas executed a promissory note in the amount of $500,000 to an independent third party. Terms of the note dictate that interest accrues at 5% with the balance due on May 28, 1999.
NOTE 4--INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE
EuroGas acquired 993,333 units of United Gunn Resources, Ltd. (each unit consisting of one share of common stock and one warrant) through a private placement subscription agreement for $962,398 during the first quarter of 1998. United Gunn Resources, Ltd. holds an approximate 12% working interest in the Beaver River Project. Through December 31, 1998, EuroGas acquired an additional 613,500 shares of United Gunn through market purchases at a cost of $491,460. Through the purchase of equity securities EuroGas holds approximately 9% of the outstanding United Gunn shares as of December 31, 1998. The United Gunn Resources, Ltd. shares have been accounted for as investment in securities available-for-sale and are carried at market value. During the year ended December 31, 1998, an unrealized loss in the amount of $379,266 on securities available-for-sale resulted from the decline in the trading value of the securities and is presented in the financial statements as a component of accumulated other comprehensive loss.
NOTE 5--MINERAL INTERESTS IN PROPERTIES AND EQUIPMENT
Prior to 1998, EuroGas had no property subject to amortization. Through the acquisition of Big Horn, EuroGas acquired both proved and unproved reserves. The Big Horn reserves are in production and are being amortized. In addition to the Canadian property, the extent of reserves relating to Company's interests in the Slovak Trebisov oil and gas properties was established in May 1998 when an independent reserve report relating to those properties was obtained and which reported proved reserves of oil and gas. Accordingly, the cost of that property were reclassified in 1998 as oil and gas properties subject to amortization. The wells drilled on the property have been completed and a gas gathering system is being constructed. As described more fully in Note 13 - Commitments and Contingencies below, a dispute arose as a result of a conflicting property claim, and work to bring the wells to production was temporarily suspended. Amortization will begin when and if production begins from wells on that property.
In August 1997, EuroGas closed a transaction with a subsidiary of Texaco for the exploration and potential development of EuroGas' coal bed methane gas interests held by a concession in Poland. EuroGas retained a 14% to 20% carried interest in the net profits from the property, and transferred the remaining interest in the property to Texaco in exchange for an initial payment of $500,000 and two subsequent payments of $2,500,000 each if Texaco elected to continue phase 2 and 3 of the project. The payment received during 1997 was applied as a reduction of the cost of the properties without recognition of a gain or loss.
In the fourth quarter of 1998, Texaco informed EuroGas that it has elected not to proceed with phase 2 or 3 of the agreement between the companies. Texaco stated that the testing results from the exploration wells it drilled do not meet the financial criteria of Texaco. EuroGas' management determined that gas production from the concession may still meet the economic requirements for EuroGas and, therefore, decided to buy back the concession rights from Texaco. On March 19, 1999, EuroGas Polska, a wholly-owned subsidiary, and Texaco executed a purchase agreement providing for Texaco's transfer of the usufruct agreement to
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EuroGas Polska in exchange for cash in the amount of $172,000. The agreement is subject to approval by the Polish government. During January 1999 Texaco made formal application to the Ministry of Environmental Protection Natural Resources and Forestry to return the concession back to EuroGas through its subsidiary, EuroGas Polska. The Ministry has given EuroGas verbal notification it will comply with the request and grant the concession to EuroGas Polska.
The following is a summary of changes to oil and gas properties for the years ended December 31:
Oil and gas sales were derived from production and sale of crude oil and natural gas in Canada. Property and equipment and other assets were located in the following geographic areas at December 31:
NOTE 6--OTHER PROPERTY AND EQUIPMENT
Other property and equipment consisted of the following at December 31:
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties at December 31, 1998 and 1997 were as follows:
NOTE 8--NOTES PAYABLE
Other loans and notes payable at December 31, 1998 and 1997 were as follows:
Annual maturities of notes payable to related parties and others are as follows:
NOTE 9--INCOME TAXES
Deferred tax assets are comprised of the following:
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the amount of tax (benefit) that would result from applying the federal statutory rate to pretax loss with the provision for income taxes for the years ended December 31:
EuroGas has operating loss carry forwards of approximately $13,760,047 in various countries which expire from 1999 through 2013.
EuroGas' subsidiary, Globegas BV, has applied for a reduction in an income tax liability of $806,429 in the Netherlands. The tax arose from the sale of equipment at a profit by the former owner of Globegas to a EuroGas Polish subsidiary. EuroGas' position is that the gain on the sale should not have been taxable to Globegas. The liability will continue to be reflected in EuroGas' financial statements until the proposed reduction is accepted by the Netherlands' taxing authorities.
NOTE 10--RELATED PARTY TRANSACTIONS
Related party loans are described in Notes Payable To Related Parties and loans to related parties are described in Receivable From Related Party.
During 1997, a shareholder advanced $2,023,306 as a short-term loan to EuroGas. In connection with this loan, the shareholder retained control of the proceeds from an issuance of common shares during 1997 by EuroGas and paid Company obligations from those proceeds. The shareholder received $104,493 for management services from these funds.
NOTE 11--STOCKHOLDERS' EQUITY
PREFERRED STOCK--There were 2,391,968 shares of 1995 Series Preferred Stock (the "1995 Series") issued on April 12, 1995. The 1995 Series is non-voting, non-participating , and has a liquidation preference of $0.10 per share plus unpaid dividends. The 1995 Series stockholders are entitled to an annual dividend of $0.05 per share. Each share of the 1995 Series shall be converted into two shares of EuroGas' common stock upon lawful presentation and shall pay dividends until converted. EuroGas has the right to redeem the 1995 Series, on not less than 30 days written notice, at a price of $36.84 per share, plus any accrued but unpaid dividends. Annual dividend requirements of the 1995 Series are $119,598.
EuroGas issued 1,250,000shares of 1996 Series Preferred Stock (the "1996 Series") on July 12, 1996. All of the shares of 1996 Series Preferred Stock were converted into 2,500,001 common shares, at the rate of two common shares per 1996 Series Preferred share, on July 3, 1997, along with accrued but unpaid dividends.
On May 29, 1997, EuroGas authorized the 1997 Series A Convertible Preferred Stock (the "1997 Series"). This series of preferred stock is non-voting and accrues dividends at $60.00 per share, or six percent annually. The 1997 Series has a liquidation preference of $1,000 per share, plus unpaid dividends before liquidation payments applicable to common shares but after liquidation payments to other previously issued
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and outstanding preferred stock series. The 1997 Series, along with unpaid dividends thereon, is convertible into common shares at the rate of $1,000 divided by the lessor of 125% of the average closing bid price for five trading days prior to issuance or 82% of the average closing bid price for five trading days prior to conversion. At December 31, 1997, 14,740 of the 15,000 shares of 1997 Series along with related accrued dividends had been converted into 2,763,165 common shares.
From May through November 1998, EuroGas issued 17,000 shares of 1998 Series B Convertible Preferred Stock (the "1998 Series") in an ongoing private placement offering. Of the total authorized preferred shares, 30,000 shares have been designated as the 1998 Series with a par value of $0.001 per share and a liquidation preference of $1,000 per share plus all accrued but unpaid dividends. The 1998 Series shares are non-voting and bear a dividend rate of 6% per annum. Dividends may be paid in shares of EuroGas common stock at its option. The 1998 Series stock was issued for proceeds in the amount of $15,224,995 and a $500,000 note receivable to an unrelated third party. The proceeds were net of $1,275,005 in commissions.
These 1998 Series preferred shares are convertible into that number of shares of common stock at the rate of $1,000, plus any accrued but unpaid dividends through the conversion date, divided by the lesser of 125% of the average closing price five trading days prior to issuance of the Series B shares, or 85% of the average closing price five trading days prior to conversion.
During 1998, 15,500 share of 1998 Series preferred stock were converted, according to the conversion factors mentioned, into 8,860,196 common shares at a weighted-average price of $1.77 per share. In connection with the conversion, 88,914 common shares were issued for $165,007 in accrued dividends on the converted 1998 Series shares at a weighted average of $1.86 per common share. The dividend requirement for the 1,500 shares of 1998 Series shares outstanding at December 31, 1998 was $11,096.
EuroGas retains the rights to issue an additional 4,000 shares of 1998 Series preferred stock at $1,000 per share less commissions of 7.5% every 30 days beginning January 1, 1999, to a maximum 13,000 shares, if the common stock of EuroGas is trading in excess of $3.00 per share or if the subscribers otherwise consent. EuroGas filed a registration statement with the U.S. Securities and Exchange Commission relating to the common stock underlying the 1998 Series shares. The registration statement became effective on August 7, 1998. EuroGas is required to maintain the effective status of the registration statement for the period the 1998 Series shares remain outstanding.
COMMON STOCK - During February 1998 EuroGas issued 13,000 common shares valued at $61,737, or $4.75 per share in connection with an earlier private placement. EuroGas also issued 7,500 common shares valued at $24,375, or $3.25 per share, on August 19, 1998, to compensate a former employee, and 40,000 shares valued at $140,000, or $3.50 per share, were issued during August 1998 to compensate for services relating to unsuccessful acquisitions. The services provided were valued at the market price at which EuroGas' common shares were trading on the date of the issuance of shares.
On April 1, 1998, EuroGas issued 2,400,000 common shares valued at $7,575,000, or $3.16 per share, in connection with the acquisition of an interest in the Beaver River Project. In addition, 2,500,000 shares valued at $5,000,000, or $2.00 per share, together with warrants to purchase 2,500,000 common shares, were issued on October 9, 1998 to acquire an interest in the Maseva property. The fair value of the warrants issued of $1,527,462 was determined by the Black-Scholes option pricing model. The portion of the purchase prices relating to the common stock issued was based upon the market value of the common shares issued as consideration.
EuroGas issued 100,000 common shares during 1998 upon the exercise of stock options for $150,000 or $1.50 per share.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--STOCK OPTIONS AND WARRANTS
On October 9, 1998, warrants to purchase 2,500,000 common shares were issued in connection with the acquisition of the Maseva property. The warrants are exercisable at $2.50 per share until October 8, 2000 at which time they expire if not exercised.
During 1997, options to purchase 2,000,000 common shares were issued in connection with the acquisition of OMVJ. The options are exercisable at $4.00 per share until April 1, 1998, at $5.00 per share until March 31, 1999 and then at $6.00 per share until March 31, 2000 at which time they expire if not exercised. Options to purchase 2,200,000 common shares were granted in conjunction with the issuance of 2,999,999 common shares for $7,500,000 (less $75,000 in offering costs). The options were exercisable at $3.00 per share through December 31, 1998 when they expired. Options to purchase 250,000 common shares were granted in connection with an investment firm contract. The options are exercisable at $11.79 per share through August 9, 2002.
EuroGas granted options to its employees and consultants during 1996 under the Stock Option and Award Plan which was adopted in January 1996. Options for 2,000,000 common shares were authorized and granted in January 1996. The options granted to employees and consultants are exercisable at $1.50 over a period of five years beginning July 18, 1996 and expire January 18, 2001. The market value of the underlying common shares was equal to the exercise price on the date granted and, therefore, no compensation relating to the options was recognized when granted.
EuroGas has accounted for stock-based compensation from stock options granted to employees and consultants (prior to 1998) are based on the intrinsic value of the options on the date granted. Had compensation cost for EuroGas' Stock Option and Award Plan been determined based on the fair value at the grant dates for options under that plan consistent with the alternative method of SFAS No. 123, Accounting for Stock-Based Compensation, EuroGas' loss applicable to common shares and loss per common share for the years ended December 31, 1998, 1997 and 1996 would have been increased to the pro forma amounts shown below.
The fair value of the warrants and option granted during 1998, 1997 and 1996 were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively: average risk-free interest rate - 5%, 5.7% and 5.7%; expected volatility - 63.5%, 95.5% and 82.6%; expected life - 2.0 years, 1.4 years and 5.0 years.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of stock warrants and options as of December 31, 1998, 1997 and 1996 and changes during the years then are presented below:
Options and warrants outstanding at December 31, 1998 were exercisable at prices ranging from $1.50 to $11.79 with remaining contractual lives from 2.0 to 3.6 years and an average contractual life of 1.8 years.
NOTE 13--COMMITMENTS AND CONTINGENCIES
As discussed further in Note 9 - Income Taxes, EuroGas has proposed a settlement of its tax liability in the Kingdom of the Netherlands.
A bankruptcy trustee appointed for certain former shareholders of Globegas has asserted a claim to the proceeds that EuroGas has received from the Texaco agreement discussed in Note 5 - Mineral Interests in Properties and Equipment and exploitation of the Pol-Tex Concession. The Trustee's claim is apparently based upon the theory that EuroGas may have paid inadequate consideration for its acquisition of Globegas (which indirectly controlled the Pol-Tex Methane concession in Poland) from persons who were acting as nominees for the former shareholders, or in fact may be operating as a nominee for the former shareholder, and therefore, they are the true owners of the proceeds from the development of the Pol-Tex Concession in Poland. EuroGas is vigorously defending against the claim. EuroGas believes that the claim is totally without merit based on the fact that a condition of a prior settlement with the principal creditor of the estate bars any such claim, that the court has no jurisdiction over Pol-Tex Methane or its interests held in Poland, and that EuroGas paid substantial consideration for Globegas. EuroGas also believes continued pursuit of the claim might give rise to a separate cause of action against third parties EuroGas will pursue if necessary.
During 1997, a shareholder, who is also the principal creditor in the above claim, asserted a claim against EuroGas based upon an alleged breach of the settlement agreement between the shareholder and EuroGas as a result of EuroGas' failure to file and obtain the effectiveness of a registration statement for the resale by the shareholder of 100,000 shares delivered to the shareholder in connection with the settlement. In addition, the shareholder's parent company entered a claim for failure to register the resale of the shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas has denied any liability and intends to vigorously defend the claims. EuroGas has filed a counterclaim against the shareholder for breach of contract concerning its joint activities with the bankruptcy trustee appointed for certain former shareholders of Globegas.
EuroGas has engaged technical and business consultants for its various projects under terms which will require a minimum payment of $1,200,000 during the year ending December 31, 1999.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During March of 1998, EuroGas was notified there may be certain title problems related to an area of mutual interest to be explored and developed by the Nafta/Danube joint venture in Slovakia. The problem area is outside of the Trebisov area where EuroGas has drilled six wells and which is unaffected by the claim. The disputed area is located in the southern portion of the property covered by the designations contained in the Nafta/Danube joint venture agreements and was subject to a competing claim of ownership by a private Slovak company. EuroGas' expansion beyond the Trebisov was limited by the extent the Nafta/Danube joint venture did not have exploration rights as previously contemplated. During the second quarter of 1998, EuroGas acquired a 90% interest Maseva Gas Spol, s.r.o. ("Maseva") which holds the rights to the exploration territory known as "Kralovsky Chlmec" and includes the disputed area located to the south of Trebisov. The division of the working interest for this territory is 67.5% for EuroGas (rather than the 50% split which governs the Trebisov area), provided that EuroGas carries the cost of drilling the first two wells in the Maseva concession.
EuroGas has notified the former shareholders of Danube of a potential claim against them by reason of this recent problem. EuroGas believes the owners of Danube knew, or should have known, about the problem prior to the acquisition of Danube and made no disclosure concerning the problem. EuroGas has made a claim against the former Danube shareholders for indemnity to the extent EuroGas suffers any damage by reason of the potential title claim. It is uncertain whether EuroGas will be able to recover from the former Danube shareholders.
As a result of the title problems with the Nafta/Danube property, a dispute has arisen with the joint venture partner, Nafta a.s. ("Nafta"). EuroGas has asserted a claim for misrepresentation of the property asset at the time of its acquisition and has made demand on Nafta in an amount equal to EuroGas' investment in the property. Efforts to bring the property to production were suspended pending resolution of the claims. Very recently, the Slovak government has begun taking the first legal steps to re-nationalize Nafta, and EuroGas has received indications the Slovak government will quickly resolve the dispute and EuroGas expects the project to move forward.
During 1997, EuroGas accrued a $1,000,000 obligation to a lender. During 1998 following resolution of the contingency, management revised its estimate to zero and reversed the accrual. The reversal is accounted for as change in an accounting estimate.
An assertion has been made against EuroGas by holders of registration rights that EuroGas failed to file a Registration Statement for certain shares and warrants held. EuroGas has not completed settlement negotiations; no amount has been estimated or provided with respect to this claim.
In March 1998, EuroGas acquired a 53% interest in RimaMuran s.r.o. whose principal asset is a minority interest in a talc deposit in eastern Slovakia. RimaMuran will have an obligation to fund 33 to 39% of the projected $12,000,000 capital cost requirements over the next two and one-half years. RimaMuran does not have the assets necessary to meet this obligation, and it is anticipated that the necessary funding will need to be provided by EuroGas. To date, EuroGas has invested $1,387,682 in the RimaMuran project.
During February 1999, EuroGas formed a consortium with a large United Kingdom power producer and with a German Utility company to develop a power generation project in Zielona Gora, Western Poland. EuroGas anticipates the total investment required to develop the project will approximate $150 Million. EuroGas will hold a 12.5% share interest in the joint venture created by the consortium and will be required to pay approximately 7.5%, or $11,250,000 of the estimated project cost. EuroGas does not presently have the assets necessary to meet this obligation.
EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the EuroGas entered into six agreements which grant rights to jointly explore prospects within the Ukraine. The agreements commit EuroGas to form joint ventures and joint companies and use the partners' concession agreements in exploiting the potential standard oil and gas, as well as coal-bed methane gas reserves. The potential reserves in the Ukraine have not been independently verified.
NOTE 14--SUBSEQUENT EVENTS
During January 1999 EuroGas converted 1,500 Series B preferred shares into 1,144,116 common shares at a weighted-average price of $1.31 per share. In connection with the conversion,13,726 common shares were issued for $11,096 in accrued dividends on the converted Series B shares at a weighted-average $1.31 per common share.
During February 1999, EuroGas purchased options for $120,000 to acquire mineral property interests in the Western United States. EuroGas is waiting for the results from production analysis and feasibility studies before exercising its options.
During March, 1998 EuroGas issued 1,000 shares of its 1998 Series preferred stock for proceeds of $1,850,000 net of $150,000 commissions.
EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1998
RESERVE INFORMATION - The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of EuroGas' reserves. EuroGas emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. EuroGas' proved reserves are located in Canada and the Slovak Republic. Unproved reserve properties are located in the Slovak Republic, Sakha Republic (Russian Federation), Canada, Poland, and the Ukraine.
Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells equipment and operating methods.
EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1998
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.
EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1998