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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM _______________ TO _______________
EUROGAS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 33-1381-D 87-0427676
--------------------------- ------------------ ---------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
942 East 7145 South, Suite 101A
Midvale, Utah 84047
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 255-0862
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value None
--------------------------------- ----------------------------
(Title of Class) (Name of each exchange on
which registered)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on March 31, 2000, based upon the
closing bid price for the Common Stock of $1.125 per share on March
31, 2000, was approximately $101,238,432. Common Stock held by each
officer and director and by each other person who may be deemed to be
an affiliate of the Registrant have been excluded. As of
March 31, 2000, the Registrant had 100,736,979 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the Registrants
2000 Annual Meeting of Shareholders are incorporated by reference in
Part III of this Report
INDEX TO FORM 10-K
ITEMS 1 & 2. BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . 4
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY DESCRIPTION OF CURRENT ACTIVITIES . . . . . . . . . . . . 4
ACTIVITIES IN CANADA. . . . . . . . . . . . . . . . . . . . . . . 7
Big Horn Resources Limited . . . . . . . . . . . . . . . . . . 7
Beaver River Natural Gas Field . . . . . . . . . . . . . . . . 7
ACTIVITIES IN POLAND. . . . . . . . . . . . . . . . . . . . . . . 8
Polish Methane Gas Concessions . . . . . . . . . . . . . . . . 9
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields . . . 9
Carpathian Nw Concession . . . . . . . . . . . . . . . . . . . 10
Energetyka Lubuska Power Plant . . . . . . . . . . . . . . . . 10
Zielona Gora Natural Gas Reservoirs. . . . . . . . . . . . . . 10
ACTIVITIES IN UKRAINE . . . . . . . . . . . . . . . . . . . . . . 11
Two Oil and Methane Gas Properties in Western Ukraine. . . . . 11
Kamienska Natural Gas Reservoir. . . . . . . . . . . . . . . . 11
Chemihivnaftogasgeologiya Project. . . . . . . . . . . . . . . 11
Donetsk Coal Basis Methane Gas . . . . . . . . . . . . . . . . 11
Coal-Bed methane Gas Projects. . . . . . . . . . . . . . . . . 13
ACTIVITIES IN SLOVAKIA. . . . . . . . . . . . . . . . . . . . . . 13
Slovakian Oil & Gas Joint Venture. . . . . . . . . . . . . . . 13
Maseva Natural Gas Reservoir . . . . . . . . . . . . . . . . . 14
Gemerska Talc Deposit. . . . . . . . . . . . . . . . . . . . . 15
ACTIVITIES IN THE SAKHA REPUBLIC. . . . . . . . . . . . . . . . . 15
TAKT Exploration Blocks Near Lensk . . . . . . . . . . . . . . 15
ACTIVITIES IN SLOVENIA. . . . . . . . . . . . . . . . . . . . . . 16
ACTIVITIES IN GERMANY . . . . . . . . . . . . . . . . . . . . . . 17
DISCLOSURE OF OIL AND GAS OPERATIONS. . . . . . . . . . . . . . . 17
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
EMPLOYEES AND CONSULTANTS . . . . . . . . . . . . . . . . . . . . 19
OPERATIONAL HAZARDS AND INSURANCE . . . . . . . . . . . . . . . . 19
OFFICE FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . 19
HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CERTAIN DEVELOPMENTS SINCE DECEMBER 31, 1999. . . . . . . . . . . 21
Purchase, Loan and Merger Transactions with Teton Petroleum
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Issuance of Convertible Debentures . . . . . . . . . . . . . . 23
Resignation of Chief Financial Officer . . . . . . . . . . . . 23
WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . 23
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS . . . 24
FACTORS THAT MAY AFFECT FUTURE RESULTS . . . . . . . . . . . . . . 24
Need for Significant Funds . . . . . . . . . . . . . . . . . . 24
Absence of Revenues. . . . . . . . . . . . . . . . . . . . . . 25
Existence of Default judgment. . . . . . . . . . . . . . . . . 25
Exploration Risks. . . . . . . . . . . . . . . . . . . . . . . 25
Lack of Infrastructure . . . . . . . . . . . . . . . . . . . . 26
Political, Socio-Economic, and Other Location-Related Risks. . 26
Future Licences. . . . . . . . . . . . . . . . . . . . . . . . 26
1
SEC Investigation and Other Legal Matters. . . . . . . . . . . 26
No Assurance of Commercial Production from the Company's
Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Dependence on Officers, Key Employees, and Consultants . . . . 27
Risk of Impairment of Recorded Value of Unproved Properties. . 27
Risks of Adverse Weather . . . . . . . . . . . . . . . . . . . 27
Volatility of Commodity Prices and Markets . . . . . . . . . . 28
Operating Hazards and Uninsured Risks. . . . . . . . . . . . . 28
Intense Competition in the Oil and Gas Industry. . . . . . . . 28
Environmental Regulations. . . . . . . . . . . . . . . . . . . 28
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . 29
Substantial Warrants, Options and Debentures Outstanding . . . 29
Issuance of Additional Common Stock. . . . . . . . . . . . . . 29
No Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Proposed Merger With Teton May Not Be Consummated. . . . . 30
Issuance of Shares in the Merger Will Create Substantial
Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Properties Obtained As a Result of the Merger may Prove to
Have No Value . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 33
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 33
MARKET FOR COMMON STOCK . . . . . . . . . . . . . . . . . . . . . 33
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
RECENT SALES OF UNREGISTERED SECURITIES . . . . . . . . . . . . . 34
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . 34
CERTAIN FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 35
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . 36
OUTLOO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 38
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . 39
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3
PART I
This Annual Report on Form 10-K for the year ended December 31, 199
9 (this "FORM 10-K") contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), that involve risks and uncertainties.
The reader is cautioned that the actual results of EuroGas, Inc.
and its consolidated subsidiaries( "WE," "EUROGAS" or the "COMPANY")
will differ (and may differ materially) from the results discussed in
such forward-looking statements. Factors that could cause or contribute
to such differences include those factors discussed herein under
"Factors That May Affect Future Results" and elsewhere in this Form
10-K generally. The reader is also encouraged to review other filings
made by the Company with the Securities and Exchange Commission (the
"COMMISSION" or the "SEC") describing other factors that may affect
future results of the Company.
ITEMS 1 & 2. BUSINESS AND PROPERTIES
GENERAL
EuroGas is primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, and other hydrocarbons.
Eurogas has acquired interests in several large exploration concessions
and is in various stages of identifying industry partners, farming out
exploration rights, undertaking exploration drilling, and seeking to
develop production. Eurogas is also involved in co-generation and
several mineral reclamation projects. Unless otherwise indicated in
this Report, all dollar amounts are reflected in United States dollars.
When used herein, the "Company" includes EuroGas, Inc., and its wholly
owned subsidiaries, Euro Gas (UK) Limited, Danube International
Petroleum Company ("DANUBE"), EuroGas GmbH Austria ("EG," previously
OMVJ), EuroGas Polska Sp. zo.o. ("EUROGAS POLSKA") and Energy Global
A.G. ("ENERGY GLOBAL"), and the subsidiaries of each of these
subsidiaries, including GlobeGas B.V. ("GLOBEGAS"), Pol-Tex
Methane, Sp zo.o. ("POL-TEX"), McKenzie Methane Jastrzebie Sp. zo.o.
("MMJ"), Energetyka Lubuska, Danube International Petroleum Holding
B.V. ("DANUBE NETHERLANDS"), and the NAFTA Danube Association
("DANUBE SLOVAKIA"). See "--History."
SUMMARY DESCRIPTION OF CURRENT ACTIVITIES
Canada.
The Company holds two oil and natural gas interests in Canada.
The first is a 15% interest in the "Beaver River" natural gas project
which is an attempt to reestablish commercial production in an old
Amoco field now being explored and operated by Wascana Energy, a
wholly-owned subsidiary of Canadian Occidental Petroleum Limited. The
second is an equity interest of slightly more than 50% of the capital
stock of Big Horn Resources Ltd. ("BIG HORN"), a Canadian full-service
oil and gas producer. Big Horn's business is conducted primarily in
western Canada, particularly in the provinces of Alberta and
Saskatchewan, and its stock is currently traded on the Toronto Stock
Exchange. See "--Activities in Canada."
Poland.
One of the Company's early projects was a coal bed methane gas
concession in Poland that was sold in 1997, with a retained net profits
interest, to a subsidiary of Texaco, Inc. ("TEXACO"). Texaco drilled
six wells to complete its appraisal and evaluation of the
concession and spent over $12 million, but determined not to
proceed with the project due to early gas production
figures received from the project which were considered un-economical.
On March 19, 1999, EuroGas Polska entered into a purchase agreement
providing for the acquisition of the Texaco coal-bed methane project
3
in Poland in exchange for a payment in the amount of $175,000.
The agreement is subject to approval by the Poland Ministry of
Environmental Protection, Natural Resources and Forestry. The Company
also has entered into joint venture arrangements to exploit other
concessions in Poland which are not affected by the Texaco decision.
The Company has subsequently been granted another concession in Poland
and has also entered into several letters of intent with Ukrainian
oil and gas concerns to expand potential exploration in the Ukraine.
EuroGas Polska has created a consortium with National Power Plc.,
the largest power generation company in Great Britain, and with VEW
Energie AG, a large utility company in Germany, to develop a power
project in Zielona Gora (Western Poland). As an initial step
the company "Energetyka Lubuska" was created and registered. The
Company will submit the proposal to the Polish partner EC Zielona
Gora as soon as privatization of existing plant will be completed.
It is expected that Ministry of Treasury will make final decision on
this matter in first half of 2000. The power plant is expected to
deliver 180 Mega Watts of electricity and 180 Mega Watt Thermal
(generated heat to be used for district heating system).
Separately "Energetyka Lubuska"
executed a Letter of Intent to develop
new power plant in the area of the
biggest Polish oil Field BMB. The
Company will construct the 5 MW power
plant using gas produced by BMB field
and sell electricity to de-sulfurisation
plant owned by Polish Oil and Gas
Company. It is expected that the plant
will be developed before end of 2000.
In the fall of 1997, the Company entered
into an agreement with Polish Oil and
Gas Company ("POGC") to jointly explore
1.9 million acres in which POGC holds,
or has the right to acquire, oil and
natural gas interests. The Company is
presently exploring for oil and natural
gas under this agreement in southeastern
Poland. See "--Activities in Poland."
Ukraine.
The Company has identified several
possible projects and is currently in
the process of completing a plan to
proceed in the Ukraine. See
"--Activities in Ukraine."
Slovakia.
The Company now has four projects in
Slovakia. The first is a joint venture
to develop a natural gas field with
NAFTA Gbely a.s. ("NAFTA"), an energy
concern that was formerly part of the
Czechkoslovakian national oil and gas
company. The second is the majority
ownership in an adjacent oil and gas
concession known as Maseva. The third
is a project for the exploration for oil
and gas reserves in the Carpathian
Mountains adjacent to the Polish and
Ukrainian borders. The fourth is a
minority interest in development of a
talc deposit; the majority interest
being held by Belmont Resources, Ltd, a
Vancouver British Columbia entity, which
is affiliated with a director of
EuroGas. See "--Activities in Slovakia."
Sakha Republic.
In 1997, the Company acquired EuroGas
Austrian GmbH ("EG"), formerly known as
OMV (Jakutien) Exploration GmbH, from
OMV Group ("OMV"), Austria's largest
industrial company. EJ holds a 50%
interest in a joint venture established
to explore for oil and gas in the Sakha
Republic in northeastern Siberia. See
"--Activities in the Sakha Republic."
The following table provides a brief
summary of the principal projects in
which EuroGas is presently engaged.
These projects are described in greater
detail in the pages that follow the
table.
4
SUMMARY OF EXISTING EUROGAS PROJECTS
Ownership
Country Nature/Name of Project Interest Status of Project
------- ---------------------- --------- -----------------
Canada .Big Horn Resources Ltd. 51% Subsidiary Producing 1,200 barrels
of oil equivalent per day;
proven reserves of 806,400
barrels of oil equivalent at
December 31, 1999.
.Bear River Natural Gas Field 15%-Joint Venture Drilling to Revive
Abandoned Natural Gal
Field.
Poland .Polish Methane Gas Concessions
+Pol-Tex Concession (Nr. 134/93) 100%-Subsidiary Shut-in Wells.
+One Additional Concession 70%-Joint Venture Early Exploration.
+New 112 sq. km. Concession 100%-Subsidiary Finalizing Agreement;
Pre-Exploration.
.Carpathian Flysh/Foredeep Oil 100%-Subsidiary Evaluating Seismic Data
and Gas Field Prior to Drilling.
.Carpathian New Concession Agreement tentatively
securing right to Seeking final grant of
develop concession to explore
1,100,000 acres in South-
Eastern Poland
.Energetyka Lubuska 100%-Subsidiary Government Evaluating
Proposal to Construct.
.Zielona Gora Natural Gas 12.5%-Subsidiary Negotiating Joint Venture;
Reserviors and Plant Pre-Exploration.
Ukraine .2 Oil and Methane Gas Properties 70%-Joint Venture Letter of Intent of Acquire;
in Western Ukraine Pre-exploration.
.Kamienska Natural Gas Reservoir Operation Agreement w/ Pre-exploration; Partners
State-owned Company have studied reserves.
.Chemihivnaftogasgeologiya Project Operation Agreement w/ Studying Reservoir.
Ukranian Oil Company
.Donetsk Coal Basin Methane Gas 50%-Joint Venture Testing/Drilling estimated
2000
.300 sq. km. Coal-Bed Methane Gas 50%-Joint Venture Testing/Drilling estimated
Project 2000.
Slovakia .Slovakian Oil & Gas Joint Venture 50%-Joint Venture Testing/Drilling (some
Trebisov Natural Gan Reservoir proved reserves; title
issued).
.Maseva Natural Gas Reservoir 67.5%-Joint Venture Pre-Exploration.
.Gemerska Talc Deposit 23%-2nd Tier Subsidiary Testing Complete; Seeking
Financial for Development.
5
Sakha TAKT Exploration Blocks Near 50%-Joint Venture Exploring Property Using
Republic Lensk Seismic Techniques.
Slovenia .Operating Lubricant Refinery Agreement to Purchase Negotiations in Process.
Germany .Convertible Loan to Seiler Toxic $500,000 Loan Loan due May 28, 1999;
Waste Company Ability to collect is
uncertain.
ACTIVITIES IN CANADA
Big Horn Resources
Limited
On October 5, 1998, EuroGas entered into
a stock purchase agreement with Oxbridge
Limited, Rockwell Limited, and Conquest
Financial Corporation, three individual
shareholders of Big Horn Resources
Limited ("BIG HORN") and EuroGas
referred to herein collectively as
"ORC." ORC had the right to purchase
10,000,000 shares of Big Horn common
stock at $0.42 U.S. ($0.65 Canadian) per
share. Under the terms of the stock
purchase agreement and a stock
subscription agreement, EuroGas acquired
the rights of ORC to purchase 8,500,000
shares of Big Horn common stock and paid
Big Horn $4,205,500 U.S. ($6,500,000
Canadian) on October 17, 1998. After
receiving approval of the transaction
from the Toronto Stock Exchange in
January 1999, Big Horn issued 8,500,000
Big Horn common shares to EuroGas and
issued 1,500,000 Big Horn common shares
to ORC. The 1,500,000 shares were paid
for by EuroGas but were issued directly
to ORC as a finder's fee. In addition,
EuroGas paid ORC $500,000 U.S. as a
finder's fee and for an option to
purchase an additional 3,000,000 Big
Horn common shares at $0.53 U.S. ($0.80
Canadian) per share from ORC and to
purchase warrants held by ORC to acquire
2,000,000 Big Horn common shares at
$0.97 U.S. ($1.50 Canadian) per share
from Big Horn.
ORC verbally agreed further on October
5, 1998 to sell and EuroGas agreed to
purchase 5,600,000 common shares of Big
Horn held by ORC, including the
4,500,000 common shares described above,
for $2,940,224 U.S. ($4,480,000
Canadian) or $0.53 U.S. ($0.80 Canadian)
per share. On March 31, 1999, EuroGas
completed the acquisition of the
5,600,000 shares of Big Horn common
stock by execution of promissory notes
in the aggregate amount of $1,840,224
U.S. and by the cancellation of a June
1998 note receivable from Rockwell
Limited in the amount of $1,100,000 U.S.
As a result, the Company has slightly
more than a 50% interest in Big Horn.
Big Horn currently has production
equivalent to approximately 1,200
barrels of oil equivalent per day. At
December 31, 1999, Big Horn had
estimated proven reserves of
approximated 806,400 barrels of oil and
7,772,800 mcf of natural gas. Its
estimated net future discounted cash
flows at December 31, 1999 were
approximately $12.4 million U.S. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations".
During 1999, Big Horn acquired the
assets of Edinburgh Resources, Ltd. for
approximately $1,700,000 U.S.
($2,480,000 Canadian). Edinburgh's
assets include various working interests
in producing natural gas properties
located north of Calgary, Alberta
Canada, and a gas processing facility.
Beaver River Natural Gas Field
In October 1997, the Company entered into an option agreement to
acquire an interest in the Beaver River natural gas field located in
northeastern British Columbia. The gas field was originally
discovered and developed by Amoco Canada in the 1960s and was one of
the largest producing gas fields in British Columbia, producing at a
daily rate of approximately 250 to 300 MMcf. Technical problems, due
to over production of natural gas, led to excess water production and
Amoco shut-in the field in 1978. In 1997 Wascana, a subsidiary of
6
Canadian Occidental Petroleum, entered into an agreement to
attempt to reestablish commercial natural gas production in the project
using up-to-date technology. The contracting parties amended the terms
and structure of the transaction to some degree so that the Company has
exercised a portion of its option by first purchasing 993,333 units of
United Gunn Resources, Ltd. (one share of common and one warrant), for
a total of approximately $950,000. United Gunn Resources, Ltd. holds
an approximately 12% working interest in the project. In April 1998,
the Company entered into an Asset Exchange Agreement with Beaver
River Resources, Ltd., pursuant to which the Company has subsequently
acquired all of the issued and outstanding shares of Beaver River
Resources, Ltd. Beaver River Resources, Ltd. currently owns a
direct 16% percent working interest in the project.
The operator of the Beaver River property,
Wascana, is a wholly-owned subsidiary of Canadian
Occidental Petroleum Ltd. Since April 1997,
Wascana has re-completed one of the two
extraction wells on the field and a new salt
water disposal well next to the B-2 well.
Drilling operations have moved to a second well
site to complete a work-over of that well.
However, once Wascana has spent all amounts
required to earn its interest, the parties will
be bearing their relative percentages of the
cost. The Company expects that its carrying
costs, directly and indirectly, will be
approximately $16,000 per month as Wascana has
notified the parties that it had spent
$20,000,000 CDN through the end of December 31,
1998. In early March of 1999, Wascana informed
the parties that it has begun test production on
one of the re-completed wells.
ACTIVITIES IN POLAND
The Company believes that Poland offers an
attractive environment in which to explore for
and develop methane gas. The Republic of Poland
is bordered on the north by the Baltic Sea and
Russia, on the west by Germany, on the south by
the Czech Republic and Slovakia and on the east
by Lithuania, Belarus, and Ukraine. Poland is
comprised of approximately 120,000 square miles,
with a population of approximately 40 million
people. Between 1945 and 1989, Poland's
communist political and economic systems were
directly influenced by the former Soviet Union.
In 1989, Poland peacefully asserted its
independence and adopted a new constitution,
which established a parliamentary democracy, and
began Poland's transition to a market-based economy.
In August 1991, the United States Environmental
Protection Agency (the "EPA") and the United
States Agency for International Development
("AID") published a joint study on the
possibility of economic recovery of methane gas
associated with Poland's extensive hard coal
reserves. The joint study concluded that coal
bed methane was an abundant underdeveloped
natural gas resource in Poland and that the
development and exploitation of this resource
could provide a much less environmentally harmful
source of energy for Poland than its extensive
reliance on coal. The joint study stated that
the potential methane reserves were significant,
estimating a total methane resource associated
with all coal mine concessions in Poland (both
active and inactive mines) of in excess of 1.3
trillion cubic meters. Shortly thereafter,
Poland began to solicit bids for concessions to
explore for coal bed methane gas.
Coal bed methane gas production has been
occurring for some time in the United States and
has drawn attention in Poland due in part to the
joint EPA/AID study. Methane is a component of
natural gas that is used as a fuel in various
industries and as a source of residential
heating. Before natural gas is used as a fuel,
heavy hydrocarbons such as butane, propane, and
natural gasoline are separated to meet pipeline
specifications. The "heavy hydrocarbons" are
typically sold separately. The remaining gas
constitutes "dry gas" composed of methane and
ethane. Once produced and separated, there is no
substantial difference between natural gas and
methane. The demand in Europe for both natural
and methane gas has been traditionally high and
the price generally runs significantly higher
than prices in the United States, although the
price for natural gas in Poland is generally
lower than in the rest of the European market.
Gas production typically competes with coal and
oil but is generally considered to be a preferred
product because of recent environmental concerns
expressed by governments in Europe.
The Company's Polish concessions were originally
pursued by management of GlobeGas as they
realized that there was a growing demand in
Europe for this type of gas that is a cleaner and
more efficient source of energy than coal. In
1989, the Polish government adopted the position
that production of the potential methane reserves
would not only benefit the country economically
but could also significantly reduce air pollution
and acid rain in the country. Management
believes that Poland's extensive collection
pipeline network may facilitate the transmission
and sale of any gas discovered on the Company's
concessions.
7
Polish Methane Gas Concessions
In January 1993, the Company's wholly-owned
subsidiary, Pol-Tex, was awarded exploration
rights for coal bed methane gas in a concession
located in the Upper Silesian Coal Basin in
Poland (the "POL-TEX CONCESSION"). In September
1993, the Company's wholly owned subsidiary,
GlobeGas, entered into a joint venture agreement
with Rybnicka Spolka Weglowa SA to form McKenzie
Methane Ribnik Sp. zo.o. ("MMR") to exploit a
second concession located in the Upper Silesian
Coal Basin. In March 1996, the Company's
85%-owned subsidiary, McKenzie Methane Jastrzebie
Sp. zo.o. ("MMJ"), entered into a joint venture
agreement relating to a third concession in the
same area. These three concessions (the "POLISH
CONCESSIONS") cover approximately 92,000 acres in
south central Poland.
In August 1997, the Company completed an
agreement with a Texaco subsidiary to sell the
Pol-Tex Concession, the largest of the coal bed
methane gas concessions held by the Company, to
Texaco in exchange for an initial payment of
$500,000. The transaction included the sale of
assets and equipment having a fair market value
of approximately $200,000. Subsequent to the
sale, Texaco drilled six exploratory wells on the
Pol-Tex Concession to complete its appraisal and
evaluation of the concession and spent over $12
million. However, Texaco determined not to
proceed with the project due to early gas
production figures received from the project
which were considered uneconomic for Texaco. As
a result, Texaco elected to curtail its Polish
operations. On March 19, 1999, EuroGas Polska
and Texaco executed a purchase agreement
providing for Texaco's transfer of the usufruct
agreement to EuroGas Polska in exchange for a
payment of $175,000. The agreement is subject to
approval by the Ministry of Environmental
Protection, Natural Resources and Forestry. In
addition, the Company granted Texaco a right of
first refusal to acquire control of the Company's
MMR and MMJ coal bed methane concessions in
Poland, at a price to be determined either by the
parties or a third party appraiser. For now, the
Company will continue to operate the MMR and MMJ
concessions.
EuroGas Polska currently anticipates that it will
place seven wells in test production on the
Pol-Tex Concession before the end of 2000.
Because these wells were previously drilled by
Texaco and Pol-Tex, EuroGas Polska anticipates
that the cost of putting these wells into
production will be approximately $800,000.
As of December 31, 1999, the Company re-evaluated
its estimate of net cash flows from the Pol-Tex
Concession and recognized an impairment of
$7,217,426 impairment against the Pol-Tex
concession.
On October 13, 1997, the Company received an
additional concession from the Polish Ministry of
Environmental Protection of Natural Resources and
Forestry to explore and potentially develop a 112
square kilometer coal bed methane concession
located near MMJ concessions. The Company
conducted a feasibility study to explore the
possibilities of drilling gas wells for a
combined heat and power plant project or other
uses. The agreement requires expenditure of
$40,000 per year pending completion of a
feasibility study and negotiations with third
parties for the eventual purchase of natural gas
if found. In addition the plan of development
for the drilling works was prepared. The plan
calls to drill three exploratory wells in 2000.
Carpathian Flysch and Tectonic
ForeDeep Oil & Gas Fields
On October 23, 1997, EuroGas Polska completed an
agreement with Polish Oil & Gas ("POGC") to
undertake additional appraisal and development
activities for a large area located in the
Carpathian Flysch and tectonic Foredeep areas of
Poland. The agreement contemplates a total
expenditure by the Company of $15 million over a
three-year period. The parties established a
joint team whose initial work is the
interpretation of the data generated by a $1.5
million wide-line seismic work program which was
conducted in the Rymanow-Leske area of the
Carpathian Mountains in southeastern Poland. In
the framework of the agreement, a study for the
Rymanow-Lesko block (southeastern Poland) was
prepared. The results of the study, based on the
seismic exploration and geological evaluation,
identified substantial potential for oil and gas
accumulations exceeding 50 billion cubic meters
of gas and 60 million barrels of oil. The
potential reserves estimates are those of POGC
and its engineering staff and have not been
independently verified by the Company. The
processing of wide line seismic for the area of
Rymanow-Lesko has been concluded. The final
report from POGC was received.
8
Carpathian New Concession
On December 20, 1999, the Company executed an
usufruct agreement with the Poland Ministry of
Environmental Protection, Natural Resources and
Forestry. This agreement tentatively secures the
exclusive rights to explore for and develop
hydrocarbons in the area of over 1,100,000 acres
in South-Eastern Poland. The Company expects
that the final concession will be granted in
first half of year 2000. The Company currently
anticipates that it will drill the first well in
the spring of 2001. The technical team expects
to use the interpreted data to select the site
for drilling a deep well up to the depth of 5,000
meters.
Since the Company does not currently have the
funds necessary to meet the proposed development
budget, it may seek to obtain an established
industry partner to participate in the proposed
joint venture. There can be no assurance that
the Company will be able to do so or that such
participation would be on terms favorable to the
Company.
Energetyka Lubuska Power Plant
In February of 1999, the Company formed a
consortium with National Power Plc. (the largest
power generation company in the UK) and with a
large German utility company, VEW Energie AG, to
develop a power generation project in Zielona
Gora, Western Poland. Pursuant to the agreement,
the Company has created a joint venture company
"Energetyka Lubuska." The venture submitted an
offer to regional power company EC Zielona Gora
to build a gas-fired combined heat and power
plant. The proposed power plant has been
designed to deliver up to 180 Mwe and 80MWt. The
Company currently anticipates that the total
investment required to develop the project will
be approximately $150 million. Of that amount,
it is proposed that National Power Plc. and VEW
Energie AG will pay approximately 55% and 37.5%,
respectively, of the total project costs.
Although the Company currently owns 100% of the
venture, once funding has commenced, it is expect
that National Power Plc will own 50%, VEW Energie
AG 37%, and the Company 12.5% of "Energetyka
Lubuska." It is expected that the Company will
be required to pay approximately 7.5% of the
project cost.
Separately "Energetyka Lubuska" executed a
Letter of Intent to develop a new power plant in
the area of the biggest Polish oil Field BMB.
The Company will construct the 5 MW power plant
using gas produced by BMB field and sell
electricity to de-sulfurisation plant owned by
Polish Oil and Gas Company. It is expected that
the plant will be developed before end of 2000.
Zielona Gora Natural Gas Reservoirs and Plant
The Company has executed a memorandum of
understanding with Erdol und Erdgas Gommern,
("EEG"), a unit of Gaz de France, Paris, and
Bayernwerk/VIAG of Munich, Germany, to enter into
negotiations to develop several sizable proven
gas reservoirs in Western Poland and to build gas
treatment facilities and gas transmission systems
to supply natural gas to the power plant in
Zielona Gora. The agreement calls for creation
of a 50/50 joint venture with the Polish partner.
The Company presently anticipates that the
project will need an investment of approximately
$80 million, in addition to the $40 million
already invested by Polish O&G Co.
ACTIVITIES IN UKRAINE
Two Oil and Methane Gas
Properties in Western Ukraine
EuroGas has entered into a letter of intent with
an Ukrainian state-owned company,
Zahidukrgeologia, to acquire 2 Ukrainian oil and
gas properties, which include both standard oil
and gas and coal bed methane projects located in
the western Ukraine. The Company has not yet
undertaken exploration of such properties and has
no definitive plans with respect to exploration.
Kamienska Natural Gas Reservoir
The Company has signed joint operation agreements
with each of ZahidUkrGeologyia and
Chemihivnaftogasgeologyia. The joint operation
agreement with ZahidUkrGeologyia calls for study
and development of Kamienska natural gas
reservoir with potential reserves exceeding 20
billion cubic meters. The projected reserves are
those of ZahidUkrGeologyia and its engineers, and
have not been independently verified by the
Company. The Company has not yet undertaken
exploration of such properties and has no
definitive plans with respect to exploration.
9
Chemihivnaftogasgeologiya Project
The joint operation agreement with
Chemihivnaftogasgeologiya calls for evaluation of
two potential reservoirs, the Selukivska oil
reservoir, with potential reserves exceeding 100
million barrels, and the Pivdinno-Berestivska
oil-gas-condensate reservoir. In addition, the
Company will conduct exploration works for
U-prospect in the Donetsk-Dniepr Depression.
According to Ukrainian engineering estimates,
these multiple oil and gas exploration
concessions contain potential oil reserves
exceeding 1 billion barrels, in place, and
potential total gas reserves exceeding 500
billion cubic meters, in place. The projected
reserves are those of Chemihivnaftogasgeologiya
and its engineers, and have not been
independently verified by the Company. The
Company has not yet undertaken exploration of
such properties and has no definitive plans with
respect to exploration.
Donetsk Coal Basin Methane Gas
In October 1998, the Company formed a joint
venture, EuroDonGas, with MGO (Ukrainian Mining
Company) to explore and develop coal bed methane
and natural gas reservoirs in the Donetsk Coal
Basin. MGO engineering documentation places the
potential recoverable reserves in excess of 20
billion cubic meters to a depth of 1500 meters.
Such estimates have not been independently
verified by the Company. The first exploration
well in the concession area is expected to be
drilled in the first quarter of 2000.
The Company has also executed an agreement to
create a new joint venture with a private
Ukrainian company, Vuhlegas. The project is a
coal-bed methane recovery and utilization
operation. The concession area is approximately
300 square km. Vuhlegas estimates that the area
contains 6-10 Tcf of natural gas. Such estimates
have not been independently verified by the
Company. A foundation of the a joint venture
company Eurovuglegas was created in December
1998. The joint venture will create an equal
partnership between EuroGas and Vuhlegas after
the payback of the investment. EuroGas will
receive 70% of the revenues until the payback is
complete. The joint venture will drill six coal
bed methane/gas wells in the area of Gorska mine
(Donetsk area) as a part of a program to be
financed by Global Environmental Fund of the
World Bank. This program is expected to be
completed in 2000.
Coal-Bed Methane Gas Projects
The Company also is in the process of developing
coal bed methane in Western Ukraine. The first
well was drilled to the depth of 850 meters. The
results obtained from drilling are promising and
currently the Company proceeds with further tests.
10
ACTIVITIES IN SLOVAKIA
Slovakia was until recently part of
Czechoslovakia. On January 1, 1993, the Czech
Republic and Slovakia emerged as separate
independent nations. Slovakia is bounded on the
north by Poland, on the east by Ukraine, on the
south by Hungary, and on the west by Austria and
the Czech Republic. Slovakia has an area of
approximately 19,000 square miles and a
population of approximately 5.5 million people.
Slovakia has not been as quick to adopt free
market reforms as Poland and the Czech Republic
and the former communist party, Party of the
Democratic Left, remains a major political force.
Slovakia is a member of the International
Monetary Fund and the European Bank for
reconstruction and development and an associate
member of the European Union. Bratislava is the
capital of Slovakia and its largest city.
The main economic segments of Slovakia are
agriculture and manufacturing. Various foreign
companies have located manufacturing plants in
Slovakia, taking advantage of skilled, cheap
professionals and other labor, as well as the
close proximity to "Western" Europe. A prime
example of this is Volkswagen A.G., which has
located manufacturing facilities in Slovakia.
Energy in Slovakia is primarily provided by
massive gas and oil imports from countries
formerly a part of the Soviet Union. Domestic
production of oil and gas cover only a small
percentage of Slovakia's energy needs.
Slovakian Oil & Gas Joint Venture
As part of its effort to diversify and expand its
interests in Europe, in July 1996, the Company
acquired Danube International Petroleum Company
("DANUBE"), which held rights to participate in
exploration for natural gas in Slovakia and the
Czech Republic. See "--History." Since the
acquisition, the Company has focused its efforts
on the development of the Slovakian project, and
abandoned its interest in the Czech Republic
during 1997. Danube is a partner in a joint
venture agreement (the "SLOVAKIAN OIL & GAS JOINT
VENTURE") with NAFTA Gbely A.S. ("NAFTA"). The
principal focus of the Slovakian Oil & Gas Joint
Venture is natural gas exploration and
development under a license covering 128,000
acres located in the East Slovakian Basin, a
northeastern extension of the Pannonian Basin
which covers large parts of Hungary and the
southeastern part of Slovakia
The activities of the Slovakian Oil & Gas Joint
Venture are conducted pursuant to a four-year
exploration permit granted on April 24, 1995 (the
"LICENSE"). As it continues its exploration and
development on the area subject to the License,
the Slovakian Oil & Gas Joint Venture will seek
to acquire additional permits that have not yet
been granted. The Company is presently in
discussions with officials of NAFTA and Slovakian
Governmental officials to discuss extension of or
re-issue of the present License, which has
expired. Early negotiation indicate low risk
potential for License not to be extended or
re-issued. Prior to the Company's acquisition of
its interest in the Slovakia Oil & Gas Joint
Venture, eleven wells were drilled in the area
covered by the License. All of these wells had
gas shows, although none were completed for
commercial production. The Company believes that
new wells can be drilled offsetting the old wells
and that, if the new wells have similar gas
shows, they can be completed with routine
techniques that now exist for the recovery of gas
from these types of formations.
The Slovakian Oil & Gas Joint Venture drilled its
initial well, Trebisov 5R, in what is known as
the South Cluster. In the course of such
drilling, the Company encountered a 980 meter
thick gas column subdivided into an upper
interval (appearing at 1575 meters - 2100 meters
below ground level) and a lower interval (2100
meters - 2555 meters deep). In December of 1996,
after hydrological fracturing, the upper interval
tested 1 million cubic feet of gas ("MMCF") per
day through a 10 millimeter choke with a flowing
pressure of 450 pounds per square inch ("PSI")
and the lower interval tested 0.4 MMcf per day
through a 8 millimeter choke, with a flowing
pressure of 275 psi. The preliminary testing ,
conducted by Slumberger, a well known oil and gas
service company, was conducted prior to the
cleaning up of the well and removing water from
the well.
Based upon the initial test results, the Company
has engaged Ryder Scott, a leading petroleum
engineering firm, to prepare a reserve analysis
on the Trebisov reservoir. The joint venture
also completed a 148 sq. km. Three-dimensional
seismic survey covering the South Cluster and a
prospective area to the north. A survey to map
anomalous concentrations of gas in the surface
soil samples was completed in the licensed
acreage to highlight areas for new seismic
surveys. In 1998, the Slovakian Oil & Gas Joint
Venture completed the remaining three wells of
the six wells planned for initial drilling. No
drilling is planned in the licensed area during
2000.
11
Under the terms of the joint venture agreement,
the Company was obligated to provide 75% ($4.98
million) of the projected initial test phase
funding of $6.64 million (including seismic
testing) and 60% ($4.08 million) of the projected
capital investment cost for the initial
production phase of $6.8 million All funds
required for the initial test phase have been
expended and the drilling is now being paid 60%
by the Company and 40% by NAFTA. When the cost
of development and production exceeds $6.8
million, additional funds will be paid 50% by the
Company and 50% by NAFTA. The current
projections indicate that this limit will be
exceeded during 2000.
During March 1998, the Company was informed by
NAFTA that there may be certain title problems
related to areas of mutual interest proposed to
be explored and developed by the Slovakian Oil &
Gas Joint Venture outside of the Trebisov area.
All of the wells drilled by the Company to date
are located in the Trebisov area and the Company
is not aware of any title problems in that area.
The disputed area is located in the southern
portion of the property covered by the
designations contained in the joint venture
agreement and was subject to a competing claim of
ownership by a private Slovakian company. To the
extent that the Slovakian Oil & Gas Joint Venture
does not have the right to explore certain areas
as previously contemplated, the Company's
expansion beyond the Trebisov area may be
limited. The Company has notified the former
shareholders of Danube of a claim against them by
reason of this recent problem. See "Item 3.
Legal Proceedings."
The Slovakian Oil & Gas Joint Venture has not
established the extent of any reservoir that may
have been tapped by its activities to date and
has not entered into any contracts for the sale
or transportation of any gas that might be
recovered. If the Slovakian Oil & Gas Joint
Venture is unable to obtain the necessary permits
or if it is unable to establish ongoing
production and sell the gas at a sufficiently
high price to pay the associated production
costs, provide a return on the capital
expenditures made, provide funds for ongoing
activities, and provide a profit, it may be
unable to continue its exploration and
development activities or successfully produce
any natural gas that may be discovered.
Maseva Natural Gas Reservoir
The Company recently completed an agreement with
NAFTA to acquire a majority interest in an oil
and gas concession adjacent to the Trebisov
concession. The new concession, known as Maseva,
has overlapping claims with the Company's other
concessions and the Company expects to conduct
appraisal and exploration work in the Trebisov
area during 2000. The Company completed
exploration work consisting of a survey to map
anomalous concentrations of gas in surface soil
samples to define areas for new seismic surveys.
The Company plans to conduct a three dimensional
seismic survey during 2000. The approximate cost
will be $1.5 to $2.5 million. Based upon the
survey results, the Company intends to draft a
comprehensive development plan. No drilling is
planned in the licensed area during 2000.
The Maseva agreement provides for the Company's
acquisition of the Maseva interest in exchange
for the issuance of 2,500,000 shares of the
Company's common stock and the grant of two-year
warrants enabling the holder to purchase up to
2,500,000 shares of the Company's common stock
for $2.50 per share (adjusted from an original
$5.00 per share warrant price because of the
decline of the price of the Company's common
stock.) The division of the working interest for
this territory will now be 67.5% for the Company,
rather than the 50% split which governs the
adjacent Trebisov joint venture, provided that
the Company carries the cost of drilling the
first two wells in the previously disputed area.
By the purchase of the Maseva concession, the
Company believes it will solve any title problems
it had with its original venture and acquire
additional property. The Company has notified
the former shareholders of Danube of a claim
against them by reason of the requirement to pay
additional consideration for concession interests
originally represented as owned by Danube.
In September of 1998, the Company acquired a 51%
interest in Envigeo s.r.o., a Slovakian private
company which owns a 2,300 square kilometer
appraisal and survey concession in the northeast
corner of Slovakia, referred to as the Carpathian
Flysch region, expiring in August 2001. This
region extends into Poland and Ukraine, where
extensive discoveries of oil and gas have been
found. The acquisition was made from McCallan
Oil and Gas GmbH of Austria. The total price for
the 51% participation interest was $1,500,000,
consisting of an initial payment of $500,000,
which was made in September 1998, and the balance
of $1,000,000, which was paid in December 1998.
McCallan Oil has spent over $300,000 in
exploratory activities.
12
Gemerska Talc Deposit
In March 1998, the Company acquired a 55%
interest in RimaMuran s.r.o. ("RIMAMURAN"), a
closely-held entity whose principal asset is a
43% interest in Rozmin s.r.o., the operator which
holds the Gemerska Talc Deposit located in
Roznava, Slovakia, approximately 50 kilometers
west of Kosice in eastern Slovakia. Belmont
Resources, Ltd, a Vancouver British Columbia
entity which is affiliated with a director of
EuroGas, holds the remaining ownership interest
in Rozmin s.r.o. which holds the interest in the
Gemerska Talc Deposit. Exploratory holes drilled
between 1987 and 1994 confirmed the existence of
a large talc deposit located approximately 350
meters, or 1150 feet, below the surface. The
Feasibility study was prepared by one of
Germany's leading engineering groups, Hansa
GeoMin Consult, GmbH for DEG (Deutsche
Investitions- u. Entwicklungsgesellschaft mbH).
RimaMuran has the obligation to fund 43% of the
projected $12 million of capital costs over the
next two and one-half years. RimaMuran does not
have the assets necessary to meet this
obligation, and it is anticipated that the
necessary funding will be provided by the
Company.
The Company's majority owned subsidiary,
RimaMuran, and the other joint venture
participants have continued to work on the
Gemerska Talc Deposit. The Company's believes
the exploitation of the talc deposit will be
particularly favorable due to a strong
feasibility study and, the willingness of DEG, a
wholly-owned financing subsidiary of the German
government, to participate. The joint venture
has negotiated a non-recourse financing package
which would give DEG a 10% equity participation
in the project in exchange for financing of which
9% would be contributed by RimaMuran and 1% by
Belmont.. The completion of the loan package is
subject to the receipt by DEG of a guarantee from
certain entities to purchase a portion of the
mined talc. To date, the Company has advanced a
total of $1,433,651, in the way of shareholder
loans and other forms of investment, to RimaMuran
to fund its participation in the project.
During the fourth quarter 1998, Rosmin s.r.o.
entered into discussions with Lucenac, a member
of the Rio Tinto Group, which is considered to be
the largest mining company in the world. As a
result of these discussions, Lucenac has asked
for drilling of two more core holes in order to
confirm previous test results and the data that
is contained in the feasibility study that was
done by Thyssen and Dorfner.
ACTIVITIES IN THE SAKHA REPUBLIC
The Republic of Sakha(Yakutia) (often referred to
as "Yakutia" in English and as "Jakutien" in
German) is thinly populated (just over 1,000,000
people) and covers approximately 3,100,000 square
kilometers that the United States Geological
Service has rated as extremely rich in natural
resources. There has been limited commercial
exploitation of hydrocarbons in Yakutia and
current production is generally limited to
providing fuel for heat and energy to local urban
and industrial complexes, partly because of the
general remoteness of the area and the poor
transportation network currently in existence.
Since 1991, the Yakutian government has put in
place an economic and legal system that is
designed to encourage foreign investment and the
export of hydrocarbons. The Company's interest
in acquiring EG was based in large part on the
Company's belief that EG's joint venture
operations are well-positioned to participate in
the potential international gas export project
which has been envisioned pursuant to feasibility
studies conducted by Korean, Chinese, and
Japanese consortiums.
TAKT Exploration Blocks Near Lensk
On June 11, 1997, the Company acquired all of the
issued and outstanding stock of OMV (Jakutien)
Exploration GmbH from OMV A.G., Austria's largest
industrial concern, in exchange for (a) the
payment of $6,252,754, (b) the grant of an option
to acquire up to 2,000,000 shares of the
Company's common stock at a per share exercise
price of $4.00 to $6.00 on yearly sliding scale
(c) a five percent interest in the acquired
company's net profits from identified preliminary
oil and gas licenses, and (d) a one percent
interest in the gross production of the TAKT
Joint Venture outside such licenses. In January
of 1999 the subsidiary's name was changed to
EuroGas Austria GmbH ("EG").
13
EG's primary asset is a 50% interest in the joint
venture (known as "TAKT") with Sakhaneftegas, the
national oil and gas company of Yakutia. The
conversion of TAKT to a joint stock company with
limited liability was approved by the Company and
Sakhaneftegas on December 1, 1997 and is expected
to be finalized in the first half of 2000. TAKT
was formed to appraise, explore, and develop,
and, when appropriate, export oil and gas
reserves, in two large areas of interest located
in Yakutia. Yakutia has the largest land area of
the members of the Russian Federation and is
located in the far eastern portion of what was
formerly the Soviet Union. TAKT has negotiated a
detailed agreement with Yakutia and the Russian
Federation for the exploration, production, and
development of hydrocarbons located in the areas
of interest.
TAKT currently holds two exploration blocks
located near the city of Lensk, which cover
approximately 21,300 square kilometers
(approximately 8,225 square miles) located in the
southeast section of the East Siberian platform
or East Siberian Basin. An application to extend
the two exploration licenses for an additional 20
years was submitted to the Sakha Ministry of
Justice in January 1998. TAKT also holds rights
of first refusal on Sakha oil and gas projects
offered by Sakhaneftegas to third parties. TAKT
has been conducting activities within the two
blocks for the past six years, employing modern
seismic and exploration techniques with
encouraging results. The exploration for and, if
justified, the production of, hydrocarbons, in
Yakutia is made more difficult by the climatic
conditions, the general remoteness of the area,
and the lack of infrastructure. The area is
subject to extreme arctic conditions and does not
have any facilities for transporting hydrocarbons
to existing markets. The Company's ability to
exploit any potential benefit from this project
will rely in part on the activities of other
independent entities in constructing the
necessary infrastructure and establishing markets
for hydrocarbons.
Principal work undertaken by TAKT during 1998
consisted of reprocessing 1700 kilometers of
seismic lines. The reprocessing work was
completed in January 1999 by Yakutskgeofisika,
the geophysical arm of Sakhaneftegas, in Yakutsk.
TAKT has completed a preliminary interpretation
of the first 400 kilometers of reprocessed data
in the vicinity of the 314-2 well that
successfully tested gas in a large structure in
1992. A pilot survey was conducted in the
vicinity of this well to test the applicability
of a soil sampling method for detecting anomalous
concentrations of gas in surface soils. Results
are expected in the next 90 days.
The Company presently anticipates that during
2000 TAKT will complete the interpretation and
mapping of the reprocessed seismic lines and will
select a well location. The date for commencement
of this well will depend on technical discussions
with local drilling contractors and the ability
of Sakhaneftegas to provide its 50% contribution
to the well cost. If the results of the above
mentioned soil survey are positive, a new survey
will be planned to cover an extensive part of the
license area.
ACTIVITIES IN SLOVENIA
During 1999, the Company entered into an
arrangement to purchase and interest in an
operating lubricant refinery facility in
Slovenia. At present, the company that controls
the refinery, "Mapetrol," is owned by the
Slovenian government. In order to participate,
the Company was required to fund a letter of
credit in the amount of $359,760 (which cash
bond is refundable if the transaction is not
completed). It is anticipated that the
privatization will take a number of months, after
which additional cash and stock will be required
to finance the total package, all the details of
which have yet to be negotiated. The refinery is
presently producing high quality lubricating oils
that have wide distribution potential.
ACTIVITIES IN GERMANY
The Company has provided a short term loan to
Seiler Trenn-Schmelzanlagen Betriebs GmbH of
Freiberg, Germany ("SEILER"). Seiler specializes
in toxic waste disposal using a proprietary
methodology. Seiler presently has an operating
plant in Freiberg. The Company loaned Seiler
$500,000 that was due and payable on May 28,
1999. The note has not been repaid, and its
collectibility is uncertain. The Company is
presently evaluating the possibility of
proceeding with a possible equity investment into
Seiler, which would likely consist of conversion
of the existing the loan to equity. Seiler TSB
GmbH is a subsidiary of Seiler SPCS Inc., a U.S.
corporation.
14
During 1999, the Company made an investment of
$600,000 into Hansa GeoMin Exploration Ltd. of
Duisburg, Germany. Hansa GeoMin Exploration Ltd.
is involved in numerous mineral reclamation
projects, particularly gold, on the African
continent. During the third quarter of 1999, the
Company recognized an impairment of the full
value of such investment.
DISCLOSURE OF OIL AND GAS OPERATIONS
Reserves Reported to Other Agencies. No reserves
were reported to any other Federal agency or
authority for the year ended December 31, 1998 or
for the year ended December 31, 1999.
Oil and Gas Production and Production Costs.
The following table sets forth the average sales
price per unit of oil and gas produced and the
average production cost per unit of production.
During the following periods, oil and gas
production related solely to operations in
Canada.
For the year ended For the year ended
December 31, 1999 Decembmer 31, 1998
----------------- ------------------
Average sales prices
Liquids, per barrell $13.56 $9.02
Natural Gas per thousand cubic
feet (Mcf) $ 1.55 $1.51
Average production cost, per
barrell of equivalent oil (1) $ 3.90 $3.13
(1) Natural gas converted to barrels of equivalent oil at a
rate of 10 mcf = 1 barrel of equivalent oil.
Except for the oil and gas produced by Big Horn
Resources, Ltd. in Canada and described above,
the Company has not produced any gas or oil in
any geographic area during its history.
Productive Wells. The following table sets
forth the number of gross productive wells and
net productive wells in which the Company has a
working interest.
PRODUCTIVE OIL AND GAS WELLS AT DECEMBER 31, 1999
Production Oil Wells(1) Production Gas Wells(1)
------------------------ ----------------------
Gross(2) Net(2) Gross(2) Net(2)
-------- ------ -------- ------
Canada 57 15.8 43 10.0
Eastern Europe and Russia - - - -
Total 57 15.8 43 10.0
(1) Includes wells producing or capable of
producing and injection wells temporarily
functioning as producing wells. Wells that produce
both oil and gas are classified as oil wells.
(2) Gross wells include the total number of
wells in which the Company has an interest.
Net wells are the sum of the Company's
fractional interest in gross wells.
Developed and Undeveloped Acres. -- An acre is
deemed to be developed if wells have been drilled on
such acre to a point that would permit the
production of commercial quantities of oil. The
following table sets forth the number of gross and
net developed and undeveloped acres in which the
Company has a working interest.
ACERAGE (*) AT DECEMBER 31, 1999
Undeveloped Developed Total
------------------------ --------------- --------------------
Gross Net Gross Net Gross Net
--------- --------- ------ ----- --------- ---------
Canada 18,244 6,719 22,500 8,000 40,744 14,719
Eastern Europe and Russia 6,444,506 3,586,671 - - 6,444,506 3,586,671
Total 6,462,750 3,593,390 22,500 8,000 6,485,250 3,601,390
15
(*) Gross acreage includes the total number of acres
in all tracts in which the Company has an
interest. Net acreage is the sum of the Company's
fractional interests in gross acreage.
Drilling Activities. The following
table sets forth the number of development wells
(productive and dry) and exploratory wells
(productive and dry) for which drilling was
completed during each of the four years ended
December 31, 1999, 1998, 1997 and 1996.
DRILILNG ACTIVITIES
Development Wells Drilled Exploratory Wells Drilled
------------------------ -----------------------
Productive Dry Productive Dry
Wells(2) Wells(1) Wells(2) Wells(1)
---------- -------- ----------- --------
For the Year Ended
December 31, 1999:
Canada 1.2 0.1 3.6 0.5
Eastern Europe
and Russia 0 0 0 0
Total 1.2 0.1 3.6 0.5
For the Year Ended
December 31, 1998:
Canada 0.4 0 0.9 0
Eastern Europe
and Russia 0 0 0 0
Total 0.4 0 0.9 0
For the Year Ended
December 31, 1997:
Canada 0 0 0 0
Eastern Europe
and Russia 0 0 0 12.0
Total 0 0 0 12.0
For the Year Ended
December 31, 1996:
Canada 0 0 0 0
Eastern Europe
and Russia 0 0 0 0
Total 0 0 0 0
(1) A dry well is any well found
to be incapable of producing either oil
or gas in sufficient quantities to justify
completion as an oil or gas well.
(2) A productive well is any well other than a dry well.
As of April 14, 2000, the Company and its
wholly- or partially-owned subsidiaries are
presently in the process of drilling
(including wells temporarily suspended but
not those for which drilling is planned) the
following exploratory and developed wells.
Development Wells Drilling Exploratory Wells Drilling
-------------------- --------------------
Gross Net Gross Net
As of December 31, 1999
Canada 1.0 0.5 2.0 1.1
Eastern Europe and
Russia 6.0 3.0 1.0 0.5
Total 7.0 3.5 3.0 1.6
COMPETITION
In seeking to explore for, develop, and produce
oil and gas resources, the Company competes with
some of the largest corporations in the world, in
addition to many smaller entities involved in
this area. Many of the entities that the Company
competes with have access to far greater
financial and managerial resources than the
Company. As a result of the exclusive nature of
the concessions held by the Company, to the
extent that it is able to successfully explore
for, develop, and produce hydrocarbon resources,
the Company will be able to exclude any
competitor from production of the resources
located on the concessions, but it cannot exclude
competitors from providing natural gas or other
energy sources at prices or on terms that
purchasers deem more beneficial.
16
EMPLOYEES AND CONSULTANTS
As of December 31, 1999, the Company had two
administrative employees located in Salt Lake
City, Utah; three administrative employees
located in London; and six technical and field
workers in Poland. The Company's four principal
consultants are located in Europe. None of the
Company's employees is represented by a
collective bargaining organization, and the
Company considers its relationship with its
employees to be satisfactory. In addition to its
employees, the Company regularly engages
technical and other consultants to provide
specific geological, geophysical, and other
professional services. Because the Company has
concentrated primarily on acquiring concessions
for later exploitation rather than operating them
during 1999, the Company has relied principally
on consultants who are paid one-time fees for
their work and assistance. The Company expects
to rely substantially on consultants through 2000
but expects thereafter to rely more on employees
and permanent operating personnel.
OPERATIONAL HAZARDS AND INSURANCE
The Company is engaged in the exploration for
methane and natural gas and the drilling of wells
and, as such, its operations are subject to the
usual hazards incident to the industry. These
hazards include blowouts, cratering, explosions,
uncontrollable flows of gas or well fluids,
fires, pollution, releases of toxic gas, and
other environmental hazards and risks. These
hazards can cause personal injury and loss of
life, severe damage to and destruction of
property and equipment, pollution or
environmental damage, and suspension of
activities. The Company has not obtained any
hazard insurance although it has applications
pending. The occurrence of a significant adverse
event that is not covered by insurance would
have a material adverse effect on the Company.
OFFICE FACILITIES
The Company leases the 35th floor and penthouse
of the building located at 80 Broad Street, New
York, New York, consisting of approximately 8,800
square feet, under the terms of a sublease ending
on August 31, 2000. The rent under this lease is
$11,025 per month and required an initial prepaid
rent of $481,100 on execution. The Company
received a rent allowance equal to the first four
months of the lease term commencing on September
1, 1996. The monthly lease payments are subject
to annual escalation, based on the operating
expenses of the building. The offices are also
currently occupied by the Company's public and
shareholder relations firm that currently
provides services to the Company in lieu of rent.
The offices serve as the Company's
representative location in the Financial District
of New York City. The Company is using the New
York offices periodically for its board meetings
as well as other meetings with members of the
investment community such as investment firms and
banks.
The New York office maintains the Company's
Website at http://www.eugs.com and also has
available, for interested shareholders, maps and
other material concerning the Company's activities.
On October 1, 1999, the Company extended until
September 30, 2002 its lease for property located
at 942 East 7145 South, #101A, Midvale, Utah.
Rent for such lease is currently $1,836. The
lease provides for annual increases in the lease
payment in an amount equal to the increase in
Consumer Price Index; provided that, such annual
increase shall be not less than 6% or greater
than 10%.
The Company has an oral month-to-month lease on
office with approximately 2,230 square feet in
Warsaw, Poland. The rental amount on such lease
is included in the compensation of one of the
Company's Poland-based technical employees.
The Company maintains an office (approximately
2,500 square feet) at 22 Upper Brook Street,
Mayfair, London, UK. The Company has subleased
the remaining space to two other companies. In
November 1998, the Company entered into a
ten-year lease that provides for a deposit of
approximately $500,000 and an annual payment of
$1,740,000, of which the Company's portion is
approximately $580,000.
17
The Company's subsidiary GlobeGas maintains
office space under an agreement with First
Alliance Trust, at Herengracht 466, Amsterdam,
The Netherlands. Under this agreement First
Alliance provides office space, accounting and
legal functions for GlobeGas. The agreement
calls for payment for these services on an as
needed basis.
HISTORY
The Company was incorporated in the State of Utah
under the name Northampton, Inc. ("NORTHAMPTON"),
on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange
agreement with EnergyGlobal, pursuant to which
the former owners of EnergyGlobal obtained voting
control of Northhampton and EnergyGlobal became a
wholly-owned subsidiary of Northhampton. Energy
Global had been formed as a holding company for
GlobeGas, an oil and gas operating entity in
which Energy Global held a minority interest.
The minority interest in GlobeGas was initially
reported on the equity method on Northampton's
financial statements. The agreement with
EnergyGlobal required that Northampton complete a
stock consolidation of one share for each twenty
four shares previously issued and outstanding and
deliver a sufficient number of post-consolidation
shares of the Company's common stock to the
former owners of EnergyGlobal to reduce the prior
Shareholder' interest to approximately 10%.
Thus, the former Shareholder of EnergyGlobal
became the controlling Shareholder of the
Company, which changed its name to EuroGas, Inc.
The original asset of EnergyGlobal was a 16%
minority interest in GlobeGas, a Netherlands
corporation that held, through Pol-Tex, a
concession in Poland. (GlobeGas was an 85%
partner with a formerly state-owned Polish coal
company in Pol-Tex and held additional interest
in two other concessions for the exploration and
exploitation of methane coal bed gas reserves in
the Upper Silesian region of Poland.) From
September of 1994 through May of 1995, the
Company raised $3,380,963 in cash which was used
to acquire additional interests in GlobeGas and
increased the Company's participation in GlobeGas
to 19.13%. In May 1995, the Company acquired the
remaining 80.87% interest in GlobeGas in exchange
for $1,150,000 in cash, the issuance of 2,256,560
shares of Common Stock, and the issuance of
2,391,968 shares of newly created Preferred
Stock, convertible at the rate of two shares of
Common Stock for each share of said series of
Preferred Stock. The Company originally booked
its interest in GlobeGas as an interest in a
minority-held subsidiary, but since the
acquisition of the remaining interest in GlobeGas
has restated its financial presentation to
reflect the historical cost basis of the assets
held by GlobeGas rather than the Company's
purchase price, substantially reducing the
carrying value of these assets on the Company's
balance sheets. Since the operations of
EnergyGlobal and Northampton prior to the
reorganization were immaterial, the transaction
has been accounted for as if GlobeGas were the
acquiring entity.
In 1996, the Company acquired the remaining 15%
interest in the Pol-Tex held by the Polish state
coal company. In 1997, the Company received
additional concession rights in the form of a
usufruct from the Polish ministry of
Environmental Protection of Natural Resource and
Forestry to explore and potentially develop a 111
square kilometer coal bed methane concession.
This concession was granted Pol-Tex by the
Ministry of Environmental Protection, Natural
Resources and Forestry in April of 1998 according
to Polish Government documents. In 1996, the
Company continued in its quest to acquire
additional gas interests in Eastern Europe by
acquiring Danube. Danube was a participant in
joint ventures for the exploration and production
of natural gas in Slovakia and the Czech
Republic. In connection with the transaction,
the Company also issued 12,500,000 shares of
restricted Common Stock to Chemilabco, which held
an interest in the operating subsidiaries of
Danube and held options to participate in the
Czech and Slovakian operations of Danube. The
issuance of the 12.5 million share to Chemilabco
was subject to Chemilabco providing a minimum of
$5,000,000 of financing to the Company in 1996.
In mid-1997, the Company acquired all of the
issued and outstanding stock of EG from OMV Inc.,
Austria's largest industrial concern. EG's
primary asset is a 50% interest in the TAKT joint
venture with Sakhaneftegas, the national oil and
gas company of the Sakha Republic. In late 1997,
Pol-Tex completed an agreement with Polish O&G
Co. to undertake additional appraisal and
development activities for a large area located
in the Carpathian Flysch and tectonic Foredeep
areas of Poland. In late 1997, the Company
entered into an option agreement to acquire an
interest in the Beaver River natural gas field
located in northeastern British Columbia.
18
In early 1998, the Company acquired a 55%
interest in RimaMuran, a closely-held entity
whose principal asset is a 43% interest in Rozmin
s.r.o., a joint venture which holds the Gemerska
Talc Deposit located in Roznava, Slovakia. In
early 1998, the Company entered into an
arrangement to participate in a refinery facility
in Slovenia. In mid 1998, the Company completed
an agreement to acquire a majority interest in an
adjacent oil and gas concession known as Maseva
which had overlapping claims with the Company's
other concessions and expects to conduct
appraisal and exploration work in that area
during 2000. In mid 1998, the Company acquired
a 51% interest in Envigeo, a Slovakian private
company, which owns a 2,300 square kilometer
appraisal and survey concession in the North East
corner of Slovakia, referred to as the Carpathian
Flysh region. In October 1998, the Company
entered into an agreement with Big Horn to
purchase a 31% interest in Big Horn. As part of
the transaction, three parties that arranged the
Company's participation in Big Horn granted the
Company a first right to purchase all of their
interest in Big Horn, at fair market prices, with
the intent of the Company to acquire a
controlling interest in Big Horn. Effective
October 1998, the Company gained control of the
stock and warrants held by such third parties and
now has slightly over 50% of the total interest
in Big Horn.
CERTAIN DEVELOPMENTS SINCE DECEMBER 31, 1999
Purchase, Loan and Merger
Transactions with Teton Petroleum Company
On April 5, 2000, the Company entered into a
Master Transaction Agreement (the "TETON MASTER
AGREEMENT") with Teton Petroleum Company, a
Delaware corporation ("TETON") and Goltech
Petroleum, LLC, a Texas limited liability company
and wholly-owned subsidiary of Teton ("GOLTECH").
The Teton Master Agreement and accompanying
documents describe and contemplate the following
three interrelated transactions (described in
greater detail below): (i) the merger of Teton
with and into a wholly-owned subsidiary of
EuroGas, (ii) the purchase by EuroGas of a 35%
membership interest in Goltech for $2,300,000,
and (iii) EuroGas' providing an up to $4,000,000
credit facility for Goltech. Neither Teton nor
EuroGas has completed due diligence with respect
to the Teton Master Agreement, and the Teton
Master Agreement contemplates a due diligence
period extending until at least April 21, 2000.
The Teton Master Agreement and the other
documents entered in connection therewith are all
terminable by either party without penalty (other
than a $300,000 deposit paid by EuroGas) at any
time prior to the completion of due diligence.
Teton's primary asset is its 100% ownership
interest in Goltech, and Goltech's primary asset
is its ownership of 70.59% of a Russian closed
joint stock company known as Goloil ("GOLOIL").
Teton has represented to EuroGas that Goloil is
the operator of the Eguryakhskiy License
Territory, also referred to as the Goloil
Project, a 187 square kilometer (46,200 acre)
territory centrally located in the southern half
of the West Siberian basin in Russia (the "GOLOIL
LICENSE AREA"). According to an independent
engineering report supplied by Teton, as of
December 31, 1999, the Goloil License Area had
net (to Goloil) proven reserves of 45.76 million
barrels of oil, and probable reserves estimated
at a minimum of 36 million barrels. Goltech is
in the early stages of the process of
constructing an approximately 20 mile-long
pipeline from the Goiloil License Area to an
existing pipeline in order to make efficient
delivery of the oil extracted from the Goloil
License Area feasible.
The Teton Merger. Pursuant to a Merger Agreement
dated of even date with the Teton Master
Agreement (the "TETON MERGER AGREEMENT"), Teton
has agreed to merge with and into a wholly-owned
subsidiary of EuroGas, with such wholly-owned
subsidiary surviving the merger (the "MERGER").
In the Merger, subject to adjustment as described
below, each outstanding share of Teton common
stock will be converted into the right to receive
one share of EuroGas Common Stock (and any
options, warrants and other right to purchase
Teton common stock will become rights to purchase
EuroGas Common Stock). As of the April 5, 2000,
Teton represented that it had 13,621,744 shares
of Teton common stock outstanding and 2,599,249
shares of Teton common stock subject to options
warrants and other rights to purchase Teton
common stock.
In the event that the number of shares of EuroGas
Common Stock outstanding on or before the date
180 days following the consummation of the
proposed Merger exceeds 136,000,000 shares, the
aggregate number of shares of EuroGas Common
Stock issuable with respect to each outstanding
share of Teton common stock will increased so
that the percentage of outstanding shares of
EuroGas Common Stock received by the Teton
shareholders as a group is equal to the (a) the
number of shares of Teton common stock
outstanding on the date of consummation of the
Merger, divided by (b) 136,000,000. Shares of
EuroGas Common Stock issuable upon the exercise
of outstanding options, warrants and other rights
to purchase Teton common stock will also be
adjusted proportionately.
19
Teton's obligation to close the Merger is
contingent upon the occurrence of several events,
including without limitation (i) approval of the
Merger by the shareholders of Teton and EuroGas,
(ii) EuroGas' compliance with certain loan and
purchase obligations under the Teton Master
Agreement, and (iii) neither Teton nor EuroGas
terminating the Master Agreement at the end of
the due diligence period ending approximately
April 21, 2000.
Purchase of Goltech Membership Interest.
Pursuant to the Teton Master Agreement, EuroGas
has agreed to purchase a 35% interest in Goltech
for a total purchase price of $2,300,000.
EuroGas paid $300,000 of the purchase price at
closing and (assuming the Teton Master Agreement
is not terminated at the end of the due diligence
period) is expected (subject to certain
exceptions) to complete its purchase of such
membership interest by making five monthly
installments of $400,000 beginning ten days after
the effective date of the registration statement
registering the shares EuroGas intends to sell to
fund the purchase. Goltech has agreed to apply
the proceeds from the five installment payments
toward construction of the proposed pipeline from
its Goloil License Area to an existing pipeline
and the development of the Goloil License Area.
$4,000,000 Credit Facility. Pursuant to the
Teton Master Agreement, EuroGas has agreed to
lend Goltech sums of money not to exceed
$4,000,000 in aggregate principal amount in
periodic advances of up to $1,000,000 (the "LOAN
COMMITMENT"). The aggregate principal amount
advanced pursuant to the Loan Commitment shall
bear interest at the rate of fifteen percent
(15%) per annum. Accrued interest is due at the
end of each calendar quarter, and all principal
and interest is due on April 5, 2001. Assuming
the Teton Master Agreement is not terminated at
the end of the due diligence period, EuroGas is
obligated to have made advances totaling
$1,000,000 at the end of such period, after which
(subject to certain contingencies) it is
obligated to make advances of $1,000,000 per
month beginning thirty days after the effective
date of the registration statement registering
the shares EuroGas intends to sale to fund the
Loan Commitment; provided, however, whether or
not the registration statement is effective,
EuroGas is obligated to advance $500,000 per
month beginning on June 1, 2000. Goltech has
agreed to apply the proceeds from the Loan
Commitment toward construction of the proposed
pipeline from its the Goloil License Area to an
existing pipeline and the development of the
Goloil License Area.
Each of the Teton Master Agreement and the Teton
Merger Agreement contain liquidated damages
provisions. In the event either Teton or EuroGas
breaches its obligations under either of the
Master Agreement or the Teton Merger Agreement,
the other party may terminate the Teton Master
Agreement, the Teton Merger Agreement and all
related documents require the party in default
to pay $1,000,000 in liquidated damages.
Issuance of Convertible Debentures
On or about January 12, 2000, EuroGas issued four
Convertible Debentures in the aggregate face
amount of $3,000,000 (the "Convertible
Debentures") to several individual investors in
exchange for an aggregate of $3,000,000 cash. The
Convertible Debentures accrue interest at the
rate of prime plus two percent (currently 10.2%)
per annum. Payment of the principal amount of the
Convertible Debentures is due on February 10, 2001,
and accrued interest is payable annually beginning on
January 8, 2001. Each Convertible Debenture is
convertible into (a) shares of Common Stock at
the rate of one share per $0.35 indebtedness (for
a total of 2,857,143 shares per Convertible
Debenture), and (b) warrants to purchase one
share Common Stock at the rate of two warrants
for each $0.35 in indebtedness (for a total of
5,714,286 warrants per Convertible Debenture).
Each such warrant entitles the holder to purchase
one share of Common Stock for an exercise price
of $0.35.
The private placement of the Convertible
Debentures was effected in reliance upon the
exemption for sales of securities not involving a
public offering, as set forth in Section 4(2) of
the Securities Act of 1933, as amended, based
upon the following based upon the following: (a)
the investors confirmed to the Company that they
were "accredited investors," as defined in Rule
501 of Regulation D promulgated under the
Securities Act and had such background,
education, and experience in financial and
business matters as to be able to evaluate the
merits and risks of an investment in the
securities; (b) there was no public offering or
general solicitation with respect to the
offering; (c) the investors were provided with
any and all other information requested by the
investors with respect to the Company, (d) the
investors acknowledged that all securities being
purchased were "restricted securities" for
purposes of the Securities Act, and agreed to
transfer such securities only in a transaction
registered with the SEC under the Securities Act
or exempt from registration under the Securities
Act; and (e) a legend was placed on the
Convertible Debentures and other documents
representing each such security stating that it
was restricted and could only be transferred if
subsequently registered under the Securities Act
or transferred in a transaction exempt from
registration under the Securities Act.
20
As of March 31, 2000, the holders of all four
Convertible Debentures exercised their rights to
convert the Convertible Debentures to Common
Stock. Subject to confirmation through an audit
that the original purchase price for the
Convertible Debentures has been received, the
Company is obligated to issue 8,571,428 shares of
Common Stock. (The number (100,736,979) of
outstanding shares of Common Stock as of March
31, 2000 that we have used throughout this Form
10-K assumes that all 8,571,428 of such shares
have been issued and are outstanding.). In
addition, the Company is obligated to issue
warrants to purchase 17,142,858 shares of Common
Stock at an exercise price of $0.35 per share.
Resignation of Chief Financial Officer
Hank Blankenstein, the Company's former Chief
Financial Officer and a former director,
resigned from his employment with the Company and
participation on the board of directors in March,
2000. The Company is presently seeking to hire a
qualified replacement. Because the Company has
not found a new chief financial officer as of the
date it is filing this Form 10-K, Karl Arleth,
the President of the Company, is temporarily
acting as the Company's principal financial officer.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly, and current
reports, proxy statements, and other information
with the SEC. You may read and copy any reports,
statements, or other information that the Company
files at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The
SEC also maintains an Internet site
(http://www.sec.gov) that makes available to
the public reports, proxy statements, and other
information regarding issuers, such as the
Company, that file electronically with the SEC.
In addition, the Company will provide, without
charge, to each person to whom this Form 10-K is
delivered, upon written or oral request of any
such person, a copy of any or all of the
foregoing documents (other than exhibits to such
documents which are not specifically incorporated
by reference in such documents). Please direct
written requests for such copies to the Company
at 942 East 7145 South, #101A, Midvale, Utah
84047, Attention: Principal Financial Officer.
Telephone requests may be directed to the office
of the Company at (801) 255-0862.
The Company also maintains an Internet Website at
http://www.eugs.com and also has available, for
interested shareholders, maps and other material
concerning the Company's activities.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
The information set forth as "NOTE 8 - GEOGRAPHIC
INFORMATION" of the consolidated financial
statements of the Company included in this Form
10-K contains information regarding financial
information about foreign and domestic operations
of the Company and its subsidiaries.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K contains certain forward-looking
statements and information relating to the
Company and its business that are based on the
beliefs of management of the Company and
assumptions made based on information currently
available to management. Such statements can be
identified by the use of the words "anticipate,"
"estimate," "project," "likely," "believe,"
"intend," "expect" or similar words.
Forward-looking statements reflect the current
views of management of the Company and are not
intended to be accurate descriptions of the
future. When considering such statements, the
reader should bear in mind the cautionary
information set forth in this section and other
cautionary statements throughout this Form 10-K
and set forth in the Company's other filings with
the Commission. All forward-looking statements
are based on management's existing beliefs about
present and future events outside of management's
control and on assumptions that may prove to be
incorrect. The discussion
21
of the future business
prospects of the Company is subject to a number
of risks and assumptions, including those
identified below. Should one or more of these or
other risks materialize or if the underlying
assumptions of management prove incorrect, actual
results of the Company may vary materially from
those anticipated, estimated, projected or
intended. Among the factors that may affect the
Company's results are the Company's ability to
establish benefici