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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, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
EUROGAS, INC.
(Exact name of registrant as
specified in its charter)
Utah 33-1381-D 87-0427676
- --------------- ------------------- -------------------
(State or other (Commission File No. (IRS Employer
jurisdiction of Identification No.)
incorporation)
Kaertnerring 5-7
Top 3D
A-1015 Vienna, Austria
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: 43-1-513-9404
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, 2001, based upon the
closing bid price for the common stock of $0.266 per share on
March 29, 2001, was approximately $31,545,833. Common stock
held by each officer and director and by each other person who may be
deemed to be an affiliate of the Registrant has been excluded. As of
March 31, 2001, the Registrant had 128,264,788 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
EuroGas, Inc. (the "Company") is filing its Annual Report on Form
10-K for the year ended December 31, 2000.
2
PART I
This Annual Report on Form 10-K for the year ended December 31, 2000
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 (collectively, "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 "SEC") describing other factors that may
affect future results of the Company.
Items 1 & 2. Business and Properties
General
We are primarily engaged in the acquisition of rights to explore
for and exploit natural gas, coal bed methane gas, crude oil, talc and other
minerals. We have acquired interests in several large exploration
concessions and are in various stages of identifying industry
partners, farming out exploration rights, undertaking exploration
drilling, and seeking to develop production. We are also involved in
several planning-stage co-generation and mineral reclamation projects.
Unless otherwise indicated, all dollar amounts in this Form 10-K are
reflected in United States dollars.
When used herein, "we", the "Company" and "EuroGas" includes
EuroGas, Inc., and its wholly owned subsidiaries, EuroGas (UK)
Limited, Danube International Petroleum Company, EuroGas GmbH Austria,
EuroGas Polska Sp. zo.o., and Energy Global A.G., and the subsidiaries
of each of these subsidiaries, including GlobeGas B.V., Pol-Tex
Methane, Sp zo.o., McKenzie Methane Jastrzebie SP. zo.o., Energetyka
Lubuska, Danube International Petroleum Holding B.V., and the NAFTA
Danube Association.
Summary Description of Current Activities
ACTIVITIES IN SLOVAKIA. We are pursuing three projects in
Slovakia, including the development of the Gemerska-Poloma Talc
Deposit located near Roznava. As of December 31, 2000, we owned a 55%
interest in Rima Muran s.r.o., which in turn owned a 43% interest in
this talc deposit, with the remaining 57% interest being held by
Belmont Resources, Ltd, a Vancouver, British Columbia entity and an
affiliate of a significant shareholder of EuroGas. In February 2001,
we entered into an agreement to acquire Belmont Resources' 57%
interest, in exchange for 12 million shares of our common stock, with
registration rights, and a two percent royalty interest in the
project. The construction of the talc mine is scheduled for
completion in late 2001.
Our remaining two Slovakian projects involve the exploration for
oil or natural gas in the Trebisov gas field in eastern Slovakia and
the 2000 square kilometer Medzilaborce concession in the northeastern
corner of Slovakia. Each of the projects is at an early exploratory or
appraisal stage.
ACTIVITIES IN CANADA. We hold a 7.5% interest in the Beaver
River natural gas project, which is an attempt to reestablish
commercial production in an abandoned natural gas field in the
northeast corner of British Columbia, Canada. According to the
operator of the Beaver River project, Questerre Beaver River, Inc.
("Questerre"), the A5 re-entry well has been in production since March
20, 2001, and Questerre is planning the next re-entry well.
As of December 31, 2000, we held an equity interest of 50.1% of
the capital stock of Big Horn Resources Ltd., a Canadian full-service
oil and gas producer ("Big Horn"). Big Horn's business is conducted
primarily in western Canada, particularly in the provinces of Alberta
3
and Saskatchewan, and its stock is currently traded on the Toronto
Stock Exchange. Although we have one seat on Big Horn's board of
directors, we are not involved in the day-to-day management or
operations of Big Horn. In February 2001, we divested a portion of our
holdings in Big Horn, and we intend to sell a portion of our remaining
investment as well, in order to focus on the Gemerska Poloma Talc
Deposit, Beaver River, and our projects in Central Europe.
ACTIVITIES IN POLAND. On May 19, 1999, EuroGas Polska, our wholly
owned subsidiary entered into the Energetyka Lubuska joint venture
("Energetyka"). Energetyka executed a letter of intent with the
Polish Oil and Gas Company ("Polish Oil") to develop a new power plant
near Gorzow in northwestern Poland. The proposed project involves the
construction of a five-Megawatt power plant that uses gas produced by
a nearby oilfield to produce electricity that will be marketed to a
nearby de-sulfurisation plant owned by Polish Oil. The project is at
a conceptual stage, and we must enter into a final agreement with
Polish Oil, complete design of the plant, and obtain financing before
the 12-24 month construction process can commence. The decision to
start the project was delayed by one year due to increased gas
prices and static prices of electricity. If the ratio between the
price of gas and electricity improves, then we may enter into a final
agreement by the end of 2001.
ACTIVITIES IN SAKHA REPUBLIC. In 1997, we acquired OMV
(Jakutien) GmbH, which holds a 50% interest in the TAKT Joint Venture,
an entity based in Yakutsk, Sakha Republic, Russia. The TAKT Joint
Venture held two oil and gas exploration licenses in Yakutsk. We
participated in a program of seismic reprocessing of over 1,700 km of
data and its interpretation prior to the expiration of the licenses in
October 1998. Recently, we have entered into negotiations to renew
the licenses to allow us to drill a test well. However, the delay in
the construction of the pipeline may greatly diminish the value of the
Sakha project, and the Company may eventually be forced to abandon the
project.
ACTIVITIES IN THE UNITED KINGDOM. In 1999, we entered into an
agreement with Slovgold GesmbH, an Austrian company with headquarters
in Vienna, to conduct a six-well pilot program on a 500 sq. kilometer
(125,000 sq. acre) concession in South Wales held by UK Gas Limited,
in order to test for coal bed methane gas. In order to minimize the
amount of capital we were required to contribute to the pilot program,
we entered into discussions with UK Gas, to permit us to participate
in the pilot program by utilizing drilling equipment owned by our
Polish subsidiary. We were unable to reach a final agreement with UK
Gas, however, and the Company has halted further involvement with this
project.
ACTIVITIES IN UKRAINE. In September 2000, the Company decided to
suspend all projects in Ukraine, due to uncertain political and
economic conditions. The Company is currently in negotiations with an
established North American oil and gas company with oil and gas-
production in the Ukraine for such company to reevaluate the Company's
Ukrainian projects, and possibly operate existing and additional joint
ventures in the Ukraine for the Company.
PROPOSED MERGER WITH TETON PETROLEUM COMPANY. On April 5, 2000,
we entered into a Master Transaction Agreement with Teton Petroleum
Company, a Delaware corporation ("Teton"), and Goltech Petroleum, LLC
("Goltech"), a Texas limited liability company and wholly owned
subsidiary of Teton. The Master Transaction Agreement and
accompanying documents contemplated a merger with Teton, the purchase
by EuroGas of a 35% membership interest in Goltech, and our providing
a credit facility to Goltech. During the first half of 2000, we paid
a $300,000 deposit toward the purchase of Goltech, and loaned $500,000
to Goltech under the credit facility, which was convertible into
equity of Goltech. During the second half of 2000, we advanced Teton
$500,000 and received a convertible debenture from Teton therefor.
On December 27, 2000 we ended merger talks with Teton. Teton's
divestiture of its working interest in the Goloil project, along with
its ceding of control of its Russian operations, decreased Teton's
intrinsic value to EuroGas. These developments by Teton, along with
high oil prices, which would have increased the overall cost of the
proposed merger to EuroGas, substantially reduced the expected value
of the Teton transactions for EuroGas' shareholders. Accordingly,
after careful analysis and deliberation, we determined that it would
not be in the best long-term interests of the Company to proceed with
the merger.
Through exercise of a convertible debenture, EuroGas now holds
1.7 million Teton shares, along with 1.0 million shares previously
issued to EuroGas as a result of a August 2000, standstill agreement
with Teton. EuroGas' 2.7 million shares of Teton comprise 12.1% of
Teton's total issued and outstanding shares.
4
The following table provides a brief summary of the principal
projects in which we are presently engaged. These projects are
described in greater detail in the pages that follow the table.
Summary of Existing EuroGas Projects
Ownership
Interest
Country Nature/Name of Project (% Interest-Form) Status of Project
- --------- ---------------------- ---------------- ------------------
Canada . Big Horn Resources 50.1% interest Producing 1,000
Ltd. (reduced to barrels of oil
42.5% in equivalent per
February 2001) day; Company
plans on
divesting
investment
. Beaver River Natural 7.5%-Joint Production has
Gas Field Venture commenced in
2001 from the
A5 re-entry
well
Poland . Polish Methane Gas
Concessions
. 112 sq. km. 100%-Subsidiary Pre-exploration
Concession
. Carpathian 100%-Subsidiary Evaluating
Flysch/ForeDeep Oil seismic data
& Gas Field prior to
drilling
. Carpathian New 100%-Subsidiary Final
Concession (1,100,000 concession
acres in southeastern granted in
Poland) September 2000
. Energetyka Lubuska 100%-Subsidiary Negotiating
joint venture;
Pre-exploration; on
hold pending
improvement in
prices of
electricity
Slovakia . Slovakian Oil & Gas 50%-Joint Testing/drilling
Joint Venture-Trebisov Venture (some proven
Natural Gas Reservoir reserves; title
issues)
. Envigeo Oil and Gas 51%_Joint Pre-exploration
Venture
. Gemerska Talc Deposit 23%_2nd Tier Testing
Subsidiary complete;
seeking
financing for
development;
production
expected in
late 2001
Slovenia . Operating Lubricant Agreement to Negotiations in
Refinery Purchase From process
Government
Activities in Canada
Big Horn Resources Limited
As of December 31, 2000, we held 14,000,000 shares of Big Horn common
stock, representing a 50.1 % interest in Big Horn. Big Horn currently
produces approximately 1,000 barrels of oil equivalent per day.
5
We are not engaged in the day-to-day management of Big Horn and
its operations. As previously discussed, we have
divested a portion of our investment in Big Horn, and we intend to
divest our remaining investment.
Beaver River Natural Gas Field
We hold a 7.5% interest in the Beaver River natural gas project,
which is an attempt to reestablish commercial production in an
abandoned natural gas field in the northeast corner of British
Columbia, Canada. Beaver River is the largest existing gas pool in
British Columbia. It was shut down by its prior owner due to heavy
water influx. Its prior owner produced substantial amounts of natural
gas with peak production reaching 350 million cubic feet ("MMCF)
per day from five wells. Independent reservoir studies and government
reports show substantial natural gas reserves at Beaver River, ranging
between 1.5 and 3 Trillion Cubic feet.
The majority interest holder and operator, Questerre, has
indicated that the A5 re-entry well commenced production of 18 MMcf
of natural gas per day on March 20, 2001. Questerre is
currently conducting a technical review to plan the next re-entry
well. The Company is being carried during the reworking period, and
does not have to provide additional capital until Questerre has
recovered the total investment.
Activities in Poland
Energetyka Lubuska Power Plant
Energetyka executed a letter of intent with Polish Oil to develop
a new power plant near Gorzow in northwestern Poland. The proposed
project involves the construction of a five-Megawatt power plant that
uses gas produced by a nearby oilfield to produce electricity that
will be marketed to a nearby de-sulfurisation plant owned by Polish
Oil. The project is at a conceptual stage, and we must enter into a
final agreement with Polish Oil, complete design of the plant, and
obtain financing before the 12-24 month construction process can
commence. The decision to start the project was delayed by one year
due to a rise in gas prices, and the fact that the rise in the price
of electricity did not match the price of gas. If the ratio between
the price of gas and electricity improves, we expect to enter into a
final agreement by the end of 2001.
Polish Methane Gas Concessions
Coal bed methane gas production has taken place in the United
States for some time, and has drawn attention in Poland due to a study
funded by the United States Government. 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.
On October 13, 1997, we received a 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 gas concession located in Upper Silesian Coal Basin. We conducted
a feasibility study to explore the possibilities of drilling gas wells
for a combined heat and power plant project or other uses. The
results of the study suggest that the volume of gas in place can
exceed 30 billion cubic meters. Additional work connected with
evaluation of the productivity of the wells is under way.
6
Carpathian Flysch and Tectonic ForeDeep Oil & Gas Fields
On October 23, 1997, EuroGas Polska completed an agreement with
Polish Oil to undertake appraisal and development activities for a
large area located in the Carpathian Flysch and Tectonic ForeDeep
areas of Poland. The agreement contemplates total expenditures by
EuroGas of $15 million. To date, EuroGas Polska and Polish Oil have
conducted and interpreted a $1.5 million, wide-line seismic work and
geological exploration program in the Rymanow-Leskoe area of the
Carpathian Mountains in southeastern Poland. Polish Oil has produced
a report based on such program, which suggests the potential for
substantial oil and gas reserves in the Rymanow-Leske area. If
subsequent feasibility studies indicate that oil or gas can
economically be recovered from this concession, of which there is no
assurance, further testing, regulatory approvals and construction will
be required before commercial production can commence, which would
take at least two years, and cost at least $2,000,000. We do not
currently have the funds necessary to complete a feasibility study,
drill test wells, or develop this concession and will need to bring in
a joint venture partner or raise additional capital before such
process can commence.
Carpathian New Concession
On December 20, 1999, we executed a usufruct agreement with the
Ministry of Environmental Protection, Natural Resources and Forestry
of the Republic of Poland. This agreement tentatively secured for us
the exclusive rights to explore for and develop hydrocarbons in an
area of over 1,100,000 acres in Southeastern Poland.
On September 7, 2000, the Ministry of Environmental Protection,
Natural Resources and Forestry of the Republic of Poland granted
EuroGas Polska a concession to explore and develop oil and gas on over
one million acres in the Carpathian oil fairway. In May 2000, a report
conducted by independent Polish oil and gas experts indicated
potentially producing deposits in 12 exploration leads within this
area, with the largest one potentially containing 300 millions barrels
of oil equivalent. On October 27, 2000, EuroGas Polska entered into a
Joint Operation Agreement with Polish Oil. The agreement calls for
Polish Oil to become the operator in the Carpathian Project.
Separately, Polish Oil and the Company have entered into a tentative
agreement whereby Polish Oil will acquire 30% of EuroGas Polska.
Our work on the Carpathian Project is at an early exploratory
stage. If subsequent exploration and testing indicates that oil or
gas can economically be recovered from this concession, of which there
is no assurance, an estimated two years of further testing, obtaining
regulatory approvals and construction will be required before
commercial production could commence, at an estimated minimum cost of
$3,000,000. We are currently negotiating concerning the possibility
of forming partnerships with a few major international oil- and gas
companies.
Activities in Slovakia
On January 1, 1993, the Czech Republic and Slovakia emerged as
separate independent nations. Slovakia is bordered 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 remains a major political force. Slovakia is a member
of the International Monetary Fund, 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.
Gemerska Talc Deposit
During 1998, we acquired a 24% interest in an undeveloped talc
deposit in Eastern Slovakia through an indirect investment in Rozmin
s.r.o. During the third quarter of 2000, we determined that Oxbridge
Ltd., a related party, had paid $879,000 on behalf of the Company in
1998 as part of the purchase of the 24% interest in the talc deposit.
7
On March 19, 1998, we reimbursed Oxbridge Ltd. for its payment and
accounted for the payment to Oxbridge Ltd. as a reduction of a
separate promissory note payable to Oxbridge Ltd. In light of a
demand in 2000 by Oxbridge Ltd. for payment of the promissory note, we
reclassified the payment to Oxbridge Ltd. as an increase in the cost
of the 24% interest in the talc deposit and recorded the principal and
$272,490 of accrued interest due under the promissory note payable to
Oxbridge Ltd. In November 2000, we issued 2,391,162 shares of common,
valued at $1,151,490, or $0.48 per share, to Oxbridge Ltd. in
satisfaction of the principal and accrued interest due on the
promissory note. Through December 31, 2000 and 1999, we had invested
$2,376,682 (including the $879,000 paid to Oxbridge Ltd.) and $915,913
(excluding the payment to Oxbridge Ltd.), respectively, in the
acquisition and development of the talc deposit and related equipment.
On March 27, 2001, we entered into an agreement to purchase an
additional 57% interest in Rozmin s.r.o. from Belmont Resources Inc.
("Belmont"), a related party, in exchange for issuing 12,000,000
common shares of the Company, which carry registration rights. We
have the right to repurchase up to 6,000,000 common shares at $2.00
per share for up to one year, upon thirty days written notice to
Belmont. We agreed to issue additional common shares if the ten-day
average NASD OTC quoted trading price of the Company's common shares
is less than $0.30 per share for any ten-trading-day period through
March 27, 2002. Under the terms of the guarantee, We agreed to issue
an additional 1,000,000 common shares to Belmont for each $0.05
decrease in the ten-day average quoted market price below $0.30 per
share. Additionally, if Belmont is unable to realize $1,911,700 from
the resale of the 12,000,000 common shares by March 27, 2002, we have
agreed to issue additional common shares to compensate for any
shortfall based on the ten-day average trading price on the date of
the notice of shortfall from Belmont.
We also agreed to pay Belmont a $100,000 non-refundable advanced
royalty, and Rozmin s.r.o. granted Belmont a two percent royalty on
the gross revenues from any talc sold. We agreed to arrange the
necessary financing to place the talc deposit into commercial
production by March 27, 2002, and if not in commercial production
within one year, we agreed to pay Belmont additional advanced
royalties of $10,000 per month for each month of delay in achieving
commercial production. We also granted Belmont the right to appoint
one member of our Board of Directors for not less than one year.The
purchase of the additional 57% interest in Rozmin s.r.o. will be
recorded at $3,664,000 during the first quarter 2001, based on the
market value of the common shares issued (including the guarantee of
the future stock value) and the cash to be paid. If additional common
shares are issued in the future under the guarantee of the future
market value of the Company's common shares, no additional cost will
be recognized.
We acquired the original 24% mineral interest in the Gemerska
Talc Deposit through the acquisition of a 53% interest in RimaMuran
s.r.o., whose principal asset is the 24% investment in Rozmin s.r.o.
RimaMuran s.r.o. has an obligation to fund 33% to 39% of the projected
$12,000,000 capital cost requirements over the next year. RimaMuran
s.r.o. does not have the assets necessary to meet this obligation, and
it is anticipated that the necessary funding will need to be provided
by the Company. In addition, we have the obligation to provide 57% of
the capital cost requirements as a result of the purchase of the 57%
interest from Belmont in March 2001.
The Gemerska Talc Deposit is considered to be one of the richest
and largest talc deposits in the world. The deposit, according to the
Ministry of Environment of the Slovak Republic, contains 146.6 million
tons of high-purity talc reserves. Mine construction, which began in
August 2000, is scheduled for completion in the fall 2001, at which
time talc production is scheduled to commence. Production is expected
to reach 130,000 tons of talc annually. This would represent
approximately 12% of the annual European talc consumption. We believe
the exploitation of the Gemerska Talc Deposit will be particularly
favorable due to very strong talc prices in the world.
Rozmin s.r.o. has signed a Letter of Intent with Gebruder Dorfner
GmbH & Co. ("Dorfner"), regarding the future sale and marketing of the
talc industrial mineral from the Gemerska Talc Deposit. Over the past
one hundred years, Dorfner has been engaged in the development and
production of talc, kaolin, quartz and feldspar. Dorfner now processes
and markets over 240 industrial minerals and other products throughout
38 countries.
Slovakian Oil & Gas Joint Venture
In July 1996, as part of our effort to diversify and expand our
interests in Europe, we acquired Danube International Petroleum
Company ("Danube"), which held participation rights for natural gas
exploration in Slovakia and the Czech Republic. Since the
acquisition, we have focused our efforts on the development of the
Slovakian project and abandoned our interest in the Czech Republic.
Danube is a partner in a joint venture agreement (the "Slovakian Oil &
8
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 that 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 license that was granted
on April 24, 1995, and expired in April, 1999. We are presently in
discussions with officials of NAFTA and Slovakian Governmental
officials regarding an extension or re-issue of the expired license,
which we believe we can obtain.
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, 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) was encountered.
In December 1996, after hydrological fracturing, the upper interval
tested 1 MMcf of gas 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 was conducted
by Schlumberger, a well-known oil and gas service company, prior to
the cleaning and removal of water from the well.
Based upon the initial test results, we 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. In 1998, the Slovakian Oil & Gas Joint
Venture completed the remaining three wells of the six wells planned
for initial drilling.
The Trebisov natural gas field is known for large pay zones of up
to 3,000 feet thick. NAFTA has estimated the potential natural gas
reserves in Trebisov to be in the range of one trillion cubic feet.
These reserves, however, can only be tapped by applying modern
fracturing techniques, because the natural gas is trapped in very
tight gas formations. Over the last 4 1/2 years, EuroGas and NAFTA
have drilled a total of 6 wells to a depth of up to 9,000 feet and
invested a total of approximately $22,000,000 in exploration and
development of the Trebisov gas field. The wells will have to be
fractured in order to achieve commercial production. In addition, the
joint venture conducted a comprehensive 3-D seismic program that
suggests the presence of previously undetected potential gas reserves.
If subsequent tests to indicate that oil or gas can economically be
recovered from this concession, of which there is no assurance, an
estimated two years of further testing, seeking regulatory approvals
and construction will be required before commercial production can
commence, at an estimated minimum cost of $4,000,000.
Under the terms of the joint venture agreement, we were obligated
to provide 75% ($4.98 million) of the projected initial test phase
(including seismic testing) funding of $6.64 million and 60% ($4.08
million) of the projected capital investment cost for the initial
production phase of $6.8 million. All funds required for the initial
test phase have been expended and expenses associated with drilling
are being paid 60% by us and 40% by NAFTA. When the cost of
development and production exceeds $6.8 million, we will pay 50% of
additional funds and NAFTA will pay the remaining 50%. This limit was
exceeded during 2000.
During March 1998, NAFTA informed us 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 we have drilled to
date are located in the Trebisov area, where we are not aware of any
title problems. The disputed title 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, our expansion beyond the
Trebisov area may be limited. We have notified the former
shareholders of Danube of a claim against them because of this
problem.
Envigeo-Carpathian Flysch Concession
In September 1998, we acquired a 51% interest in Envigeo s.r.o.,
a Slovakian private company which owns a 2,300 square kilometer
appraisal and survey concession, the Medzilaborce 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 and is geologically on trend with extensive major discoveries
of oil and gas found in the neighboring countries. During the year
2000 we have undertaken substantial geological reconnaissance work on
the Medzilaborce concession in order to meet the concession
requirements. We are currently negotiating for the participation of a
major international independent oil company as our partner in this
project.
9
Activities in Ukraine
In September 2000, we decided to temporarily suspend all projects
in the Ukraine, due to uncertain political and economic conditions.
Prior to such suspension of activities, we were involved in numerous
projects in Ukraine, each of which was at an early exploratory stage.
Such projects included the following:
(i) We entered into a non-binding letter of intent with a
Ukrainian state-owned company, ZahidUkrGeologyia, to acquire two
Ukrainian oil and gas concessions totaling approximately 150 sq.
kilometers (60 sq. miles). The agreement called for EuroGas to fund
the project with future revenue divided in the following proportions:
EuroGas 70% and ZahidUkrGeologyia 30%. We have no definitive plans
with respect to consummation of such acquisition or exploration of
such properties.
(ii) We signed a joint operation agreement with
ZahidUkrGeologyia, calling for study and development of Kamienska
natural gas reservoir in Western Ukraine. The agreement called for
EuroGas to fund the project with future revenue divided in the
following proportions: EuroGas 70% and ZahidUkrGeologyia 30%. We have
no definitive plans with respect to exploration of such properties.
With respect to each of these projects, our joint venture
partners or other sources have indicated that the respective
concession contains substantial potential reserves of recoverable
hydrocarbons. Neither EuroGas, nor any independent engineering firm,
has confirmed any such estimates or performed studies to evaluate
whether such hydrocarbons can be economically recovered. Our
exploratory work on each such concession is at an early exploratory
stage. If subsequent exploration and testing indicates that oil or
gas can economically be recovered, of which there is no assurance, an
extensive period of additional testing, seeking regulatory approvals,
and construction will be required before commercial production could
commence. We do not currently have the funds necessary to complete
the exploration or development of such concessions and we will need to
bring in a joint venture partner or raise additional capital before
such process can commence.
Activities in the Sakha Republic
The Republic of Sakha (often referred to as "Yakutia" in English)
has the largest land area of the members of the Russian Federation and
is located in the far eastern portion of the former Soviet Union.
Yakutia is thinly populated (just over 1,000,000 people) and covers
approximately 3,100,000 square kilometers, which 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 in and the export of
hydrocarbons. Our interest in acquiring EG (explained below) was based
in large part on our 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, we acquired all of the issued and outstanding
stock of EuroGas Austria GmbH ("EG") (formerly known as OMV (Jakutien)
Exploration GmbH). 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 EuroGas and Sakhaneftegas on
December 1, 1997. TAKT was formed to appraise, explore, develop, and
export oil and gas reserves in two large areas in Yakutia. 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. The Company
10
participated in program of seismic reprocessing of over 1,700 km of
data and its interpretation prior to the expiration of the licenses in
October 1998. Recently, the Company has been negotiating to have the
licenses renewed to allow the Company to move forward with choosing a
drilling location for a future well. The negotiations, however, have
been unsuccessful so far, and the Company is attempting to renegotiate
with Sakhaneftegas to further develop this project.
Activities in the United Kingdom
We have entered into an agreement with Slovgold GesmbH, an
Austrian company with headquarters in Vienna, to conduct a six-well
pilot program on a 500 sq. kilometer (125,000 sq. acre) concession in
South Wales held by UK Gas Limited, to test for coal bed methane gas.
In order to minimize the amount of capital we need to contribute to
conduct the pilot program, we have entered into discussions with UK
Gas in order to permit us to participate in the pilot program by
utilizing drilling equipment owned by our Polish subsidiary. We were
unable however to reach a final agreement with UK Gas, however, so we
decided to stop any further involvement in this project.
Disclosure of Oil and Gas Operations
RESERVES REPORTED TO OTHER AGENCIES. No reserves were reported
to any other federal agency or authority for the years ended December
31, 2000 or 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, which
relate solely to the Company's operations in Canada:
For the year ended For the year ended
December 31, 2000 December 31, 1999
------------------ ------------------
Average sales prices:
Liquids, per barrel $34.58 $13.56
Natural Gas per thousand
cubic feet (Mcf) $ 3.70 $ 1.55
Average production cost,
per barrel of equivalent oil(1) $ 7.43 $ 3.90
(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, we have not
produced any gas or oil in any geographic area during our history.
PRODUCTIVE WELLS. - The following table sets forth the number of
gross productive wells and net productive wells in which we have a
working interest.
Productive Oil and Gas Wells at December 31, 2000
-------------------------------------------------
Productive Oil Wells (1) Productive Gas Wells(1)
------------------------ -----------------------
Gross(2) Net(2) Gross(2) Net(2)
-------- ------ -------- ------
Canada 19 7.8 29 8.7
Eastern Europe
and Russia - - - -
Total 19 7.8 29 8.7
(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 we
have an interest. Net wells are the sum of our fractional
interest in gross wells.
11
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 we have a working interest.
Acreage (*) At December 31, 2000
Undeveloped Developed Total
Gross Net Gross Net Gross Net
--------- --------- ------ ----- --------- ---------
Canada 72,360 38,346 34,119 11,826 106,479 50,172
Eastern Europe
and Russia 6,444,506 3,586,671 - - 6,444,506 3,586,671
--------- ---------- ------ ------ --------- ---------
Total 6,516,866 3,625,017 34,119 11,826 6,550,985 3,636,843
(*) Gross acreage includes the total number of acres in all
tracts in which we have an interest. Net acreage is the sum
of our fractional interests in gross acreage.
DRILLING ACTIVITIES. The following table sets forth the net number
of development wells (productive and dry) and exploratory wells
(productive and dry) for which drilling was completed during each of
the five years ended December 31, 2000, 1999, 1998, 1997 and 1996.
Drilling Activities
-------------------------------------------------------------------------
Development Wells Drilled Exploratory Wells Drilled
---------------------------------- ----------------------------------
Productive Wells(2) Dry Wells(1) Productive Wells(2) Dry Wells(1)
------------------ ----------- ------------------ -----------
For the year ended
December 31, 2000:
Canada 2.1 1.0 6.6 3.8
Eastern Europe and
Russia - - - -
Total 2.1 1.0 6.6 3.8
For the year ended
December 31, 1999:
Canada 1.2 0.1 3.6 0.5
Eastern Europe and
Russia - - - -
Total 1.2 0.1 3.6 0.5
For the year ended
December 31, 1998:
Canada 0.4 _ 0.9 _
Eastern Europe and -
Russia -
Total 0.4 _ 0.9 _
For the year ended
December 31, 1997:
Canada _ _ _ _
Eastern Europe and
Russia - - - 12.0
Total _ _ _ 12.0
For the year ended
December 31, 1996:
Canada _ _ _ _
Eastern Europe and
Russia - - - -
Total - - - -
(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.
12
Development Wells Exploratory Wells
Drilling Drilling
Gross Net Gross Net
------------------ ---------------
As of December 31, 2000
Canada 6.0 3.1 19.0 10.4
Eastern Europe and
Russia 6.0 3.0 1.0 0.5
------- ----- ----- -----
Total 12.0 6.1 20.0 10.9
Competition
In seeking to explore for, develop, and produce oil and gas
resources, we compete with some of the largest corporations in the
world, in addition to many smaller entities involved in this area.
Many of the entities that we compete with have access to far greater
financial and managerial resources than we do. As a result of the
exclusive nature of certain concessions that we hold, to the extent
that we are able to successfully explore for, develop, and produce
hydrocarbon resources, we will be able to exclude any competitor from
production of the resources located on the concessions, but we cannot
exclude competitors from providing natural gas or other energy sources
at prices or on terms that purchasers deem more beneficial.
Employees and Consultants
As of December 31, 2000, we had two administrative employees
located in London, and six technical and field workers in Poland. Our
four principal consultants are located in Europe. None of our
employees are represented by a collective bargaining organization, and
we consider our relationship with our employees to be satisfactory.
In addition to our employees, we regularly engage technical and other
consultants to provide specific geological, geophysical, and other
professional services.
Operational Hazards and Insurance
We are engaged in the exploration for methane and natural gas and
the drilling of wells and, as such, our 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. We have not obtained any hazard insurance. The occurrence
of a significant adverse event that is not covered by insurance would
have a material adverse effect on EuroGas.
Office Facilities
We have a month-to-month lease for approximately 2,230 square
feet of office space in Warsaw, Poland. The rental amount is
approximately $800 per month.
Until March 30, 2001, we maintained an office (approximately
2,500 square feet) at 22 Upper Brook Street, Mayfair, London, UK.
We are in the process of renting an office in Vienna, Austria
Our 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
EuroGas, Inc., was incorporated in the State of Utah under the
name Northampton, Inc. on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with EnergyGlobal,
pursuant to which the former owners of EnergyGlobal obtained voting
control of Northampton, and EnergyGlobal became a wholly-owned
13
subsidiary of Northampton. Energy Global had been formed as a holding
company for a 16% 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 interests in two other concessions for the
exploration and exploitation of methane coal bed gas reserves in the
Upper Silesian region of Poland. In May 1995, we acquired the
remaining 80.87% interest in GlobeGas. In 1996, we acquired the
remaining 15% interest in Pol-Tex held by the Polish state coal
company. Pol-Tex has acquired exploration or development rights in
various parts of Poland.
Beginning in 1996, we began directly or indirectly acquiring oil
exploration or development rights throughout Eastern Europe and
Canada, including the following:
(i) In 1996, we acquired Danube International Petroleum Company,
a participant in a joint venture for the exploration and production of
natural gas in Slovakia.
(ii) In 1997, we acquired all of the issued and outstanding stock
of EG, whose primary asset is the 50% interest in the TAKT joint
venture with the national oil and gas company of the Sakha Republic.
(iii) In early 1998, we acquired the 55% interest in Rima
Muran, 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 mid-1998, we acquired a 51% interest in Envigeo, a Slovakian
private company, which owns a 2,300 square kilometer appraisal and
survey concession in the North East corner of Slovakia, referred to as
the Carpathian Flysch region.
In 2000, we entered into an agreement with Slovgold GesmbH to
conduct a six-well pilot program on a 500 sq. kilometer (125,000 sq.
acre) concession in South Wales held by UK Gas Limited, in order to
test for coal bed methane gas. This agreement was later cancelled.
On April 5, 2000, we entered into a master transaction agreement
and merger agreement with Teton and related entities pursuant to which
we agreed to fund Teton's construction of a pipeline in Russia and to
acquire Teton through a merger.
On December 27, 2000 we ended merger talks with Teton. EuroGas
has exercised early conversion of a two million share Teton
convertible debenture. As a result, EuroGas now holds 1.7 million
Teton shares from the conversion. Along with the 1.0 million Teton
shares previously issued to EuroGas pursuant to a standstill agreement
with Teton, EuroGas now holds a total of 2.7 million Teton shares, or
12.1% of the total issued and outstanding shares of Teton (22,174,851
shares).
On October 27, 2000, EuroGas Polska entered into a Joint
Operation Agreement with Polish Oil. The agreement calls for Polish
Oil to become the operator in the Carpathian project. Separately,
Polish Oil and the Company have entered into a tentative agreement
whereby Polish Oil will acquire 30% of EuroGas Polska.
Certain Developments Since December 31, 2000
In February the Company sold 2,087,000 shares of Big Horn at Cdn.
$0.80 per share. The Company also intends to sell the remaining
6,000,000 shares that it owns of Big Horn. The proceeds will be used to
finance the Company's projects in Poland, and developing the
Gemerska-Poloma Talc Deposit in Slovakia. The Company has agreed to
buy 57% of Rozmin, which owns the Gemerska-Poloma Talc Deposit. Under
the terms of the agreement, EuroGas will issue 12 million shares of
its common stock, with registration rights, and grant a 2% royalty
interest in the project. EuroGas, via its 55% interest in Rima Muran
s.r.o., controls the remaining 43% interest in Rozmin. The agreement
is subject to any necessary regulatory and shareholders' approvals.
14
Where You Can Find More Information
We file 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 we file 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 us, that
file electronically with the SEC.
In addition, we will provide, without charge, to each person to
whom this Form 10-K is delivered, upon written or oral request, 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 01-687 Warsaw, Poland ul. Lektykarska 18, Attention: Chief
Financial Officer. Telephone requests may be directed to the office
of the Company at (011) (48) 22 8330468.
We maintain an Internet Website at http://www.eugs.com and have
available, for interested shareholders, maps and other material
concerning our activities.
Financial Information About Foreign and Domestic Operations
The information set forth as "NOTE 6 - GEOGRAPHIC INFORMATION" of
our consolidated financial statements 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 various forward-looking statements. Such
statements can be identified by the use of the forward-looking words
"anticipate," "estimate," "project," "likely," "believe," "intend,"
"expect," or similar words. These statements discuss future
expectations, contain projections regarding future developments,
operations, or financial conditions, or state other forward-looking
information. When considering such forward-looking statements, you
should keep in mind the risk noted in "Factors That May Affect Future
Results" below and other cautionary statements throughout this Form 10-
K and our other periodic filings with the SEC that are incorporated
herein by reference. You should also keep in mind that 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. If one or more risks
identified in this prospectus, a prospectus supplement, or any
applicable filings materializes, or any other underlying assumptions
prove incorrect, our actual results may vary materially from those
anticipated, estimated, projected, or intended.
Risks Related To General Activities
We Have A Working Capital Deficit And Will Continue To Need
Significant Funds
EuroGas has historically been undercapitalized. We had a working
capital deficit of approximately $17,318,000 million on December 31,
2000, and most of our partially- or wholly-owned projects require
significantly more capital than is currently available to us.
Although we are unable to determine at this time the additional amount
of outside capital we will need or be able to raise in the future, the
interest of our shareholders will continue to be diluted as we seek
funding through the sale of additional securities or through joint
ventures or industry partnering arrangements.
We Are Dependent Upon Financing Activities to Fund Our Operations
Prior to our acquisition of an approximately 50% interest in a
Canadian gas production entity (Big Horn) in 1998 (which we have
partially divested in 2001 and intend to fully divest), we had not
earned any cash revenues since our incorporation, other than a one-
time $500,000 payment received in 1997 in connection with transferring
certain interests to Texaco. Because revenues earned by Big Horn will
15
probably not be distributed to EuroGas in the immediate future, we do
not currently have a source of revenues, do not anticipate any
revenues in the near term and expect to continue to incur operating
losses in the foreseeable future. As a result, we are entirely
dependent on financing from the sale of securities or loans in the
future and/or amounts made available by industry partners in the
future. We expect to continue to incur significant costs as part of
our ongoing and planned projects and do not anticipate that these
costs will be offset fully, if at all, by revenues for the foreseeable
future. If we are unable to raise capital from the sale of
securities, loans, or industry partnerships in the future, we will
have to scale back our operations and may, at some point, become
insolvent.
We Have Significant Future Obligations Under a Settlement Agreement
On March 16, 2000, the United States District Court, District of
Utah, Central Division entered a default judgment against EuroGas in
the amount of $19,773,113 in a case styled Finance & Credit
Development Corporation, Ltd., an Ireland Corporation vs. EuroGas,
Inc., a Utah corporation, Case No. 2:00VC-1024K. We entered into a
memorandum of understanding with Finance & Credit Development
Corporation, Ltd. settling the default judgment on June 16, 2000. We
agreed, among other things, to issue to FCDC 3,700,000 shares of
common stock, to grant FCDC an option exercisable for the 30-day
period following June 30, 2001, to purchase an additional 3,000,000
shares of common stock at an exercise price of $.65, and to pay to
FCDC in cash or shares of common stock the difference between $3.00
per share and the market value of the shares of common stock received
upon exercise of the option. If the option had been exercised on
[December 31, 2001], we would have been obligated to issue [3,000,000]
shares of common stock, and to pay FCDC an aggregate of [$6,700,000]
in cash or additional shares of common stock. This settlement and the
consideration given to FCDC in the Settlement Agreement are more fully
described under ITEM 3. Legal Proceedings.
Our Projects Are Highly Speculative And Generally Only At the
Exploration Stage
Our assets and interests are primarily in talc, methane gas, natural
gas, and crude oil exploration and development projects. All such
projects are highly speculative, whether we are still at the
exploratory stage or have commenced development. We can provide no
assurance that any drilling, testing, or other exploration project
will locate recoverable gases or other fuels in sufficient quantities
to be economically extracted. Several test wells are typically
required to explore each concession or field. We may continue to
incur significant exploration costs in specific fields, even if
initial test wells are plugged and abandoned or, if completed for
production, do not result in production of commercial quantities of
natural gas or other fuel.
Many of Our Projects Are In Locations Where The Infrastructure is
Inadequate to Support Our Needs
Many of the projects in which we have invested are located in
areas of the world, primarily eastern Europe and the former Soviet
Union, in which the necessary infrastructure for transporting,
delivering, and marketing any natural gas, methane gas or other fuels
that may be recovered is significantly underdeveloped or, in some
cases, nonexistent. Even if we are able to locate natural gas,
methane gas, or other valuable fuels in commercial quantities, we may
be required to invest significant amounts in developing the
infrastructure necessary to support the transportation and delivery of
such fuels. We do not currently have a source of funding available to
meet these costs.
Many Of Our Projects Are In Countries That Have Fragile and
Unpredictable Political and Socio-Economic Systems
Our operations in Poland, Slovakia, Ukraine, and the Sakha
Republic carry with them certain risks in addition to the risks
normally associated with the exploration for, and development of,
natural gas and other fuels. Although recent political and socio-
economic trends in these countries have been toward the development of
market economies that encourage foreign investment, the risks of
political instability, a change of government, unilateral
renegotiation of concessions or contracts, nationalization, foreign
exchange restrictions, and other uncertainties must be taken into
account when operating in these areas of the world. The terms of the
agreements governing our projects are subject to administration by the
various governments and are, therefore, subject to changes in the
government itself, changes in government personnel, the development of
new administrative policies or practices, the adoption of new laws,
and many other factors.
16
Moreover, we may be required to obtain and renew licenses and
permits on an ongoing basis in connection with further exploration,
the drilling of wells, the construction of transportation facilities
and pipelines, the marketing of any fuel that may be produced, and
financial transactions necessary for all of the foregoing. The rules,
regulations, and laws governing all such matters are subject to change
by the various governmental agencies involved. We can provide no
assurance that the laws, regulations, and policies applicable to our
interests in various countries in which our projects are located will
not be radically and adversely altered at some future date.
The Continuance, Completion Or Renewal of Many of Our Licenses
Are Subject to the Discretion of Government Authorities
In general, we have the right to conduct basic exploration on all
concessions or fields in which we have an interest. However, in
order to drill for, recover, transport or sell any gas or other
hydrocarbons, we will generally be required to obtain additional
licenses and permits and enter into agreements with various landowners
and/or government authorities. The issuance of most such permits and
licenses will be contingent upon the consent of national and local
governments having jurisdiction over the production area, which
entities have broad discretion in determining whether or not to grant
permits and licenses. Moreover, even if obtained, such licenses,
permits, and agreements will generally contain numerous restrictions
and require payment by us of a development/exploration fee, typically
based on the market value of the economically recoverable reserves.
The amount of any such fee and other terms of any such license,
permit, or agreement will affect the commercial viability of any
extraction project. We can provide no assurance that we will be able
to obtain the necessary licenses, permits, and agreements. Even if we
do obtain such items, the associated costs, delays and restrictions
may significantly affect our ability to develop the affected project.
We Are The Subject Of An Inactive SEC Investigation and A
Defendant In Various Other Lawsuits
We are presently subject to a formal order of investigation
issued by the SEC on August 1, 1995, to investigate whether violations
of applicable law may have occurred. In connection with such
investigation, we have produced numerous documents for the SEC, and
the SEC has questioned our current and past officers, directors,
former accountants, and other agents. We have not been contacted by
the SEC with respect to this matter for several years; however, we
cannot currently predict the duration or outcome of this investigation.
If the SEC concludes that we, or our representatives, have
violated the securities laws, it has available a large range of civil
and criminal remedies. Such remedies include the suspension of
trading in the common stock, the levying of substantial fines, and the
exclusion of our current officers and directors from participating in
a public company. In addition, we are subject to certain other
pending or threatened legal claims. The adverse resolution of the SEC
investigation or any pending litigation affecting us would have a
material adverse effect on our operations and proposed business.
Our Projects May Never Begin Producing Valuable Hydrocarbons
Other than the production of an average of approximately 560
barrels of oil equivalent per day by Big Horn net production after
royalties, in which we are planning to divest our current 42% ownership
interest, none of the projects in which we own an interest is presently
producing gas or other hydrocarbons. Texaco drilled and abandoned test
wells on the concession in Poland in which we own an interest, and we have
drilled test wells on our Slovakia concessions. None of these wells has
been developed or commenced production, and we can provide no assurance
that any of our projects will at any time commence production of any
valuable resource.
We are Dependent Upon Certain Officers, Key Employees, and
Consultants
We are dependent on the services of Andrew K. Andraczke, the
President of EuroGas, Inc. We are also dependent on certain key
employees in connection with our business activities. The loss of one
or more of these individuals could materially and adversely impact our
operations. We have not entered into employment agreements with any
of these individuals other than Mr. Dahl, our Chief Financial Officer,
and do not maintain key-man life insurance on any EuroGas officers or
employees.
17
We Are Thinly Staffed
We have numerous projects throughout the world, which we attempt
to direct and manage with only a few employees. In addition to our
President and our Chief Financial Officer we have eight full-time
equivalent employees, three significant consultants, and a contract
with a geo-engineering firm. Unless and until additional employees
are hired, our attempt to manage our numerous projects and obligations
with such a limited staff could have serious adverse consequences,
including without limitation, a possible failure to meet a material
contractual, court, or SEC deadline, or a possible failure to
consummate investment or acquisition opportunities.
Subsequent Evaluation May Reveal That Our Unproved Properties Are
Not Valuable, and We May Need to Record an Impairment of the Value of
Such Properties
We capitalize costs related to unproved gas properties and
recognize the expenses for drilling and other exploration costs that
do not result in proved reserves at the time the well is plugged and
abandoned. We review our unproved properties periodically to assess
whether an impairment allowance should be recorded. On December 31,
2001, we had capitalized costs related to the acquisition of oil and
gas properties not subject to amortization in the amount of
approximately $9,461,000. Should future events, such as the drilling
of dry holes, evidence that an impairment of recorded value has taken
place, we will be obligated to proportionate reduce the recorded value
of the respective asset on our balance sheet.
Severe Weather Will Interrupt, and May Adversely Affect, Our
Activities In Various Parts of the World
Severe weather conditions frequently interrupt much of our
exploratory and testing work. Heavy precipitation sometimes makes
travel to exploration sites or drilling locations difficult or
impossible. Extremely cold temperatures may delay or interrupt
drilling, well servicing, and production (if commenced, of which we
can give no assurance). The temperatures in all of the regions in
which we have exploratory or other operations are extremely cold, and
the temperatures in the Sakha Republic are especially extreme and
include some of the coldest areas in the northern hemisphere. The
average temperature of the entire region from October to April is
below freezing with winter temperatures dipping to minus 70 to 80
degrees Fahrenheit. Even if recoverable reserves are discovered in the
Sakha Republic or other regions prone to severe weather, the above-
described adverse weather conditions may limit production volumes,
increase production costs, or otherwise prohibit production during
extended portions of the year.
Risk Factors Related To The Oil And Gas Industry
The Price Of The Various Hydrocarbons We Produce or May Produce
Are Volatile and Unstable
The prices of oil, natural gas, methane gas and other fuels have
been, and are likely to continue to be, volatile and subject to wide
fluctuations in response to numerous factors, including the following:
(i) changes in the supply and demand for such fuels;
(ii) political conditions in oil, natural gas, and other fuel-
producing and fuel-consuming areas;
(iii) the extent of domestic production and importation of
such fuels and substitute fuels in relevant markets;
(iv) weather conditions;
(v) the competitive position of each such fuel as a source of
energy as compared to other energy sources;
(vi) the refining capacity of crude purchasers;
(vii) the effect of governmental regulation on the
production, transportation, and sale of oil, natural gas, and other
fuels.
18
Low prices, and/or highly volatile prices, for any fuel being
explored or produced at one of our projects will adversely affect our
ability to secure financing or enter into suitable joint ventures or
other arrangements with industry participants. In addition, in the
event we commence recovery of fuel at any of our projects, a low or
volatile price for the fuel being recovered will adversely affect
revenue and other operations.
Our Operations Involve Numerous Hazards, and We Maintain No
Insurance Against Such Risks
Exploring for fuel, drilling wells, and producing fuel involves
numerous hazards, including the following:
(i) fire,
(ii) explosions,
(iii) blowouts,
(iv) pipe failures,
(v) casing collapses,
(vi) unusual or unexpected formations and pressures, and
(vii) environmental hazards such as spills, leaks, ruptures,
and discharges of toxic substances.
If any such event occurs, we may be forced to cease any or all of
our exploration, drilling, or production activities on a temporary or
permanent basis. In addition, such events may lead to environmental
damage, personal injury, and other harm resulting in substantial
liabilities to third parties. We do not maintain insurance against
these risks. Even if we obtain insurance, we may not be insured
against all losses or liabilities that may arise from such hazards
because such insurance may be unavailable at economic rates, due to
limitations in the insurance policies, or other factors. Any
uninsured loss may have a material adverse impact on our business and
operations.
The Oil and Gas Industry Is Highly Competitive, and We Are At a
Competitive Disadvantage
The oil and gas industry is highly competitive. Most of our
current and potential competitors have far greater financial resources
and a greater number of experienced and trained managerial and
technical personnel than we do. We can provide no assurance that we
will be able to compete with, or enter into cooperative relationships
with, any such firms.
Our Operations Are Subject to Numerous Environmental Laws,
Compliance With Which May be Extremely Costly
Our operations are subject to environmental laws and regulations
in the various countries in which they are conducted. Such laws and
regulations frequently require completion of a costly environmental
impact assessment and government review process prior to commencing
exploratory and/or development activities. In addition, such
environmental laws and regulations may restrict, prohibit, or impose
significant liability in connection with spills, releases, or
emissions of various substances produced in association with fuel
exploration and development.
We can provide no assurance that we will be able to comply with
applicable environmental laws and regulations or that those laws,
regulations or administrative policies or practices will not be
changed by the various governmental entities. The cost of compliance
with current laws and regulations or changes in environmental laws and
regulations could require significant expenditures. Moreover, if we
breach any governing laws or regulations, we may be compelled to pay
significant fines, penalties, or other payments. Costs associated
with environmental compliance or noncompliance may have a material
adverse impact on our financial condition or results of operations in
the future.
19
Other Risks Relating To The Common Stock
Most of Our Outstanding Shares Are Free Trading And, If Sold In
Large Quantities, May Adversely Affect the Market Price For Our Common
Stock
Most of the approximately 138,996,460 shares of common stock
issued and outstanding as of March 31, 2001; (i) are free-trading;
(ii) have been held for in excess of one year and are eligible for
resale under Rule 144 promulgated under the Securities Act; or (iii)
will be registered for resale in a registration statement that we are
contractually obligated to file. Although the resale of certain of
these shares may be subject to the volume limitations and other
restrictions under Rule 144, the possible resale of the remaining
shares may have an adverse effect on the market price for the common
stock.
We Have A Substantial Number of Warrants, Options and Debentures
Outstanding
As of December 31, 2000, there are outstanding warrants and
options to purchase up to 45,092,856 shares of common stock at
exercise prices ranging from $0.45 to $11.79. This is in addition to
the estimated 8,622,017 shares of our common stock we are obligated to
issue to certain persons pursuant to litigation settlements. The
existence of such warrants and options may hinder our future equity
offerings, and the exercise of such warrants and options may further
dilute the interests of all our shareholders. Future resale of the
shares of common stock issuable on the exercise of such warrants and
options may have an adverse effect on the prevailing market price of
our common stock. Furthermore, the holders of warrants and options
may exercise them at a time when we would otherwise be able to obtain
additional equity capital on terms more favorable to us.
We Have The Right To, and Expect to, Issue Additional Shares of
Common Stock Without Shareholder Approval
EuroGas has authorized capital of 325,000,000 shares of common
stock, par value $0.001 per share, and 3,661,968 shares of preferred
stock, par value $0.001 per share. As of December 31, 2000, 126,996,460
shares of common stock and 2,394,028 shares of preferred stock were issued
and outstanding. Subsequent to December 31, 2000, EuroGas issued 12,000,000
shares of common stock for talc property interests. In addition, there are
45,092,856 shares of common stock reserved for issuance on the exercise or
conversion of outstanding warrants, options, and similar rights to
acquire common stock and 8,622,017 shares of stock issuable to certain
persons pursuant to litigation settlement agreements. We have no
means to control the timing of the conversion of convertible
securities. Our board of directors has authority, without action or
vote of our shareholders, to issue all or part of the authorized but
unissued shares. Any such issuance will dilute the percentage
ownership of our shareholders and may dilute the book value of the
common stock.
We Have Not Paid Any Dividends and Do Not Expect To Pay Dividends
In the Near Future
We have not paid, and do not plan to pay, dividends on our common
stock in the foreseeable future, even if we become profitable.
Earnings, if any, are expected to be used to advance our activities
and for general corporate purposes, rather than to make distributions
to shareholders.
ITEM 3. Legal Proceedings
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf
of the Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie
Methane Corporation (McKenzie Methane Corporation was an affiliate of
the former owner of Pol-Tex), asserted certain claims against Pol-Tex
and GlobeGas in connection with lending activities between McKenzie
Methane Corporation and the management of GlobeGas prior to its
acquisition by the Company. The claim asserted that funds that were
loaned to prior GlobeGas management may have been invested in GlobeGas
and, therefore, McKenzie Methane Corporation might have had an
interest in GlobeGas at the time of our acquisition of GlobeGas.
These claims were resolved pursuant to a settlement agreement entered
into in November 1996 (the "KUKUI Settlement Agreement"). Under the
terms of the settlement agreement, we issued to the Bishop's Estate
(KUKUI's parent) 100,000 shares of common stock and an option to
purchase up to 2,000,000 shares of common stock at any time prior to
December 31, 1998. The option exercise price was $3.50 per share if
exercised within 90 days of the execution of the Company's 1997
agreement with Texaco (the "Texaco Agreement"); $4.50 per share if
exercised prior to December 31, 1997; and $6.00 per share if exercised
prior to December 31, 1998. We also granted registration rights with
respect to the securities.
20
In March 1997, a trustee over certain of the McKenzie parties and
other related entities asserted a claim to the proceeds that we would
receive from the Texaco Agreement and exploitation of the Pol-Tex
Concession in an action entitled: Harven Michael McKenzie, debtor;
Timothy Stewart McKenzie, debtor; Steven Darryl McKenzie, debtor (case
no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and
case no. 95-50153-H2-7, Chapter 7, respectively) W. Steve Smith,
trustee, plaintiff v. McKenzie Methane Poland Co., Francis Wood
McKenzie, EuroGas, Inc., GlobeGas, B.V. and Pol-Tex Methane, Sp.
zo.o., defendants (Adv. No. 97-4114 in the United States Bankruptcy
Court for the Southern District of Texas Houston Division). The
trustee's claim alleges that we paid inadequate consideration for our
acquisition of GlobeGas (which indirectly controlled the Pol-Tex
Concession) from persons who were acting as nominees for the McKenzie
parties or in fact may be operating as a nominee for the McKenzie
parties, and, therefore, the creditors of the McKenzie parties are the
true owners of the proceeds received from the development of the Pol-
Tex Concession. (KUKUI is also the principal creditor of the McKenzie
parties in these other cases.) We believe that the litigation is
without merit based on our belief that the prior settlement with KUKUI
bars any such claim, that the trustee over the McKenzie parties has no
jurisdiction to bring such claim against a Polish corporation (Pol-
Tex) and the ownership of Polish mining rights, that we paid
substantial consideration for GlobeGas, and that there is no evidence
that the creditors of the McKenzie parties invested any money in the
Pol-Tex Concession. In October 1999, the Trustee filed a Motion for
Leave to Amend and Supplement Pleadings and Join Additional Parties in
this action and in adversary proceeding 97-4155 (described below) in
which he is seeking to add new parties and additional causes of action
including claims for damages based on fraud, conversion, breach of
fiduciary duties, concealment and perjury. In January 2000, that
motion was approved by the bankruptcy court. Currently a trial is set
on this action for July 2001. We have initiated settlement
discussions with the Trustee.
In June 1999, the Trustee filed another suit in the same
bankruptcy cases styled "Steve Smith, Trustee, Plaintiff vs. EuroGas,
Inc., GlobeGas, B.V., Pol-Tex Methane, Sp. z.o.o., et al." Adversary
#99-3287. That suit sought sanctions against the Defendants for
actions allegedly taken by the defendants during the bankruptcy cases
which the Trustee considered improper. The Defendants filed a motion
to dismiss the lawsuit, which was granted in August 1999. In July
1999, the Trustee also filed a suit in the same bankruptcy cases
styled "Steve Smith, Trustee, Plaintiff, vs. EuroGas, Inc., GlobeGas,
B.V., Pol-Tex Methane, Sp. z.o.o." Adversary #99-3444. This suit
seeks damages in excess of $170,000 for the defendants' alleged
violation of an agreement with the Trustee executed in March 1997,
which agreement, in part, allowed the Texaco Agreement to proceed. We
dispute the allegations and have filed a motion to dismiss or
alternatively, to abate this suit which motion is currently pending
before the court. Nonetheless, in order to avoid additional costs
associated with extended litigation, we have engaged in settlement
discussions in an attempt to reach a negotiated resolution of the
dispute.
On August 21, 1997, KUKUI asserted a claim against us in an
action entitled KUKUI, Inc. v. EuroGas, Inc., Case No. H-972864 United
States District for the Southern District of Texas, Houston Division.
KUKUI's claim is based upon an alleged breach of the KUKUI Settlement
Agreement as a result of our failure to file and obtain the
effectiveness of a registration statement for the resale by KUKUI of
100,000 shares of common stock delivered to KUKUI in connection with
the settlement. In addition, Bishop Estate, KUKUI's parent, has
entered a claim for failure to register the resale of shares of common
stock subject to its option to purchase up to 2,000,000 shares of
common stock. We have denied any liability and have filed a
counterclaim against KUKUI and Bishop's Estate for breach of contract.
In early December 1999, we signed a settlement agreement with
KUKUI, the Bishop Estate and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires us to
pay $900,000 over the 12 months beginning in January 2000 and to issue
100,000 shares of registered common stock to the Bishop Estate by June
30, 2000. Although a substantial amount of this payment was made, we
failed to pay the full amount. We are currently engaged in
negotiations to reinstate this settlement. The bankruptcy court
approved the settlement, but it is unclear whether the Trustee
considers the settlement to be enforceable. If the settlement
agreement does not resolve the foregoing litigation, we will
vigorously defend such litigation.
21
On October 11, 1999, an action was filed against EuroGas entitled
"Fred L. Oliver. Petroleum Ventures of Texas, Inc. R.A. Morse and
R.A. Morse, Trustee, Plaintiffs vs. EuroGas, Inc. and Beaver River
Resources, Ltd., Defendants" in the State District Court of Dallas
County, Texas, Cause #DV99-08032-A. In this action, Plaintiffs assert
that we breached an agreement by failing to seek registration of
certain restricted and unregistered shares issued to Plaintiffs in
connection with our acquisition of its interest in Beaver River
Resources, Ltd. The action sought rescission of the agreement, or in
the alternative, damages, and includes claims for costs, attorney's
fees and interest. We filed an answer denying the allegations
contained in the lawsuit. A settlement was reached whereby half of
our interest in the Beaver River project was returned in exchange of
half of the shares that were issued.
For the 1992 year, the Kingdom of the Netherlands assessed a tax
against GlobeGas in the amount of approximately $911,000, even though
it had significant operating losses. The amount fluctuates on our
financial statements due to adjustments in exchange ratios. As of
December 31, 2000, the income tax liability recorded in our financial
statements was $692,431. We have appealed the assessment and proposed a
settlement which would result in a reduction in the tax to $42,000.
Pending final resolution, a liability for the total amount assessed
will continue to be reflected in our financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Market for Common Stock
Our common stock is quoted on the OTC Bulletin Board market
maintained by the National Association of Securities Dealers under the
symbol "EUGS" and is traded under the symbol "EUGS.F" on the Frankfurt
Stock Exchange. As of March 31, 2001, there were 138,996,460 shares of
common stock issued and outstanding, held by approximately 270
holders of record (300 estimated beneficial owners).
The following table sets forth the approximate range of high and
low bids for the common stock during the periods indicated. Such
quotations reflect interdealer prices, without retail markup,
markdown, commissions, or other adjustments and may not necessarily
represent actual transactions in the common stock.
High Bid Low Bid
-------- -------
Year Ended December 31, 1998
----------------------------
Quarter ended March 31, 1998 $ 6.81 $ 3.94
Quarter ended June 30, 1998 5.75 3.63
Quarter ended September 30, 1998 4.97 2.06
Quarter ended December 31, 1998 2.25 1.19
Year Ended December 31, 1999
----------------------------
Quarter ended March 31, 1999 $ 2.50 $ 1.03
Quarter ended June 30, 1999 1.09 0.55
Quarter ended September 30, 1999 0.94 0.55
Quarter ended December 31, 1999 0.80 0.45
Year Ending December 31, 2000
Quarter ended March 31, 2000 $ 1.88 $ 0.42
Quarter ended June 30, 2000 1.09 0.75
Quarter ended September 30, 2000 0.91 0.47
Quarter ended December 31, 2000 0.48 0.25
The liquidity of our common stock may be limited, and the
reported price quotes may not be indicative of prices that could be
obtained in actual transactions. On March 30, 2001, the high and low
bids for our common stock on the OTC Bulletin Board were $.297 and
$.266 respectively.
Dividends
No dividends have been paid on our common stock, and we do not
have retained earnings from which to pay dividends. We have accrued
cumulative preferred dividends of $139,932, $1,442,345 and
$2,861,301 in 2000, 1999 and 1998, respectively. Of this amount,
$21,599 was paid in 2000, $1,301,376 was paid in 1999 and $165,008
was paid in 1998 by the issuance of shares of our common stock in
connection with the conversion of a portion of the preferred stock.
All cumulative dividends with respect to our preferred stock would be
required to be paid prior to our declaring or paying any dividend on
our common stock. Even if we were able to generate the necessary
earnings, it is not anticipated that dividends will be paid in the
foreseeable future, except to the extent required by the terms of the
cumulative preferred stock currently issued and outstanding.
23
Recent Sales of Unregistered Securities
On or about January 12, 2000, the Company issued four Convertible
Debentures in the aggregate face amount of $3,000,000 (the
"Convertible Debentures") to several individual investors in exchange
for an aggregate of $3,000,000 cash. As of March 31, 2000, the
holders of all four Convertible Debentures exercised their conversion
rights under the Convertible Debentures, and we issued 8,571,428
shares of common stock and warrants to purchase 17,142,858 shares of
common stock at an exercise price of $0.35 per share on or before
June 1, 2001.
During 2000, 1,800 shares of Series C Preferred Stock were
converted, according to their terms, into 5,266,452 common shares at a
weighted-average price of $0.34 per share. In connection with the
conversion, 63,261 common shares were issued for $21,599 in accrued
dividends on the converted Series C Preferred Stock, at a weighted
average price of $0.34 per common share.
In May 2000, the Company issued 250,000 common shares for cash in
the amount of $195,000, or $0.78 per share. During September 2000,
the Company issued 500,000 common shares to a shareholder as
compensation for services valued at $365,000, or $0.73 per share.
During July 2000, the Company issued 500,000 common shares to
Oxbridge Ltd., a related party, in exchange for the assumption by
Oxbridge Ltd. of the Company's commitment to provide additional
financing to Pan Asia Mining Corp. The 500,000 common shares were
valued at $365,000, or $0.73 per share.
During 2000, the Company issued 3,700,000 common shares and
3,700,000 options under the terms of a settlement obligation. The
Company also issued 1,842,983 common shares as payment of accrued
settlement obligations. The common shares issued were valued at
$1,033,514, or an average of $0.56 per share.
During 2000, notes payable to related parties totaling $1,173,896
and $502,871 of accrued interest were converted into 3,891,954 common
shares at an average of $0.43 per share.
During September 2000, the Company entered into an agreement
with a broker/dealer for the resale of 2,000,000 common shares that
had been registered for resale by a recent Form S-3 Registration
Statement filed with the Securities and Exchange Commission. Under
the agreement, the broker/dealer was issued 2,000,000 common shares.
As of December 31, 2000, 400,000 shares were resold for proceeds
totaling $209,500, or $0.52 per share. Total proceeds received by the
Company were $205,000, net of offering costs. The Company expects to
receive either proceeds from the sale of the remaining 1,600,000
shares or the return of those shares.
On October 2, 2000, the Company entered into a Common Stock
Purchase Agreement with Arkledun Drive LLC ("Arkledun") whereby the
Company issued 7,000,000 common shares to Arkledun for resale under a
public offering of common shares. Arkledun agreed to purchase
5,500,000 common shares for $2,165,000. If Arkledun did not realize
$2,489,750 from the resale of the 5,500,000 shares, after the
deduction of customary broker's fees, any resulting shortfall would be
made up by Arkledun selling as many of the additional 1,500,000 common
shares issued as required. If there still was a shortfall after
selling the 1,500,000 common shares, the Company agreed to issue
additional common shares or pay Arkledun the remaining shortfall.
On November 14, 2000, Arkledun notified the Company of a
remaining shortfall after the 7,000,000 shares had been sold. To
resolve the shortfall and to settle all claims and demand rights of
Arkledun under the Agreement, the Company issued an additional
2,000,000 common shares to Arkledun. The additional 2,000,000 common
shares have piggy-back registration rights to be included in any
future public offering conducted by the Company.
In November, 832,760 common shares were issued to SlovGold GmbH,
a related party, for payments made on behalf of the Company. The
common shares were recorded at $291,466, or $0.35 per share, based on
the market value of the common shares on the date issued.
The Company also issued 400,000 common shares under the
registration statement for Form S-3 that it filed with the SEC on June
28, 2000, and amended on August 17, 2000, for cash proceeds of
$208,500, or an average of $0.52 per share. The Company incurred
offering costs for the overall public offering of $168,500. The public
offering resulted in the Company issuing 9,400,000 common shares for
net proceeds of $2,205,000.
24
The private issuances of securities discussed above were effected
in reliance upon the exemption for sales of securities not involving a
public offering, as set forth in Section 4(2) of the Securities Act of
1933, as amended, based upon the following: (a) the investors
confirmed to us that they were "accredited investors," as defined in
Rule 501 of Regulation D promulgated under the Securities Act and had
such background, education, and experience in financial and business
matters as to be able to evaluate the merits and risks of an
investment in the securities; (b) there was no public offering or
general solicitation with respect to the offering; (c) the investors
were provided with any and all other information requested by the
investors with respect to the Company, (d) the investors acknowledged
that all securities being purchased were "restricted securities" for
purposes of the Securities Act, and agreed to transfer such securities
only in a transaction registered with the SEC under the Securities Act
or exempt from registration under the Securities Act; and (e) a
legend was placed on the certificates and other documents representing
each such security stating that it was restricted and could only be
transferred if subsequently registered under the Securities Act or
transferred in a transaction exempt from registration under the
Securities Act.
Item 6. Selected Financial Data
Certain Financial Data
The following statement of operations and balance sheet data were
derived from our consolidated financial statements. Our consolidated
financial statements have been audited by our independent certified
public accountants. The selected financial data below should be read
in conjunction with our consolidated financial statements and the
notes thereto included with this filing and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" set forth in this Report.
Statement of Operations Data
- ----------------------------
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ----------- ----------- ----------- ----------
Net Sales $ 6,395,037 $ 4,973,508 $ 879,404 $ 0 $ 0
Loss from $47,017,043 $28,946,667 $11,024,899 $11,501,899 $6,413,183
Operations
Loss per
Common Share $ 0.47 $ 0.36 $ 0.22 $ 0.22 $ 0.16
Balance Sheet Data
- ------------------
At December 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Total Assets $30,779,287 $53,968,578 $65,334,543 $ 40,754,139 $15,902,139
Long-Term
Obligations $ - $ - $ 1,788,294 $ 3,157,789 $10,631,547
Cash Dividends
per Common
Share $ - $ - $ - $ - $ -
25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
We are engaged primarily in the acquisition of rights to explore
for and exploit oil, natural gas, coal bed methane gas, and mineral
mining. We have also extended our business into co-generation (power
and heat) projects. We have acquired interests in a number of large
exploration concessions, for oil, natural gas, and coal bed methane
gas, and are in various stages of identifying industry partners,
farming out exploration rights, undertaking exploration drilling, and
seeking to develop production. We currently have several projects in
various stages of development, including a coal bed methane gas
project in Poland, a natural gas project and several additional
undeveloped concession areas in Slovakia, and an interest in a talc
deposit in Slovakia. We have at least seven joint venture projects in
the Ukraine to explore for and exploit oil, natural gas and coal bed
methane gas with various Ukrainian government and private companies.
We also have holdings in oil and natural gas projects in Canada.
Our principal assets consist both of proven and developed
properties, as well as unproven and undeveloped properties. All costs
incidental to the acquisition, exploration, and development of such
properties are capitalized, including costs of drilling and equipping
wells and directly-related overhead costs, which include the costs of
equipment we own. Since we have limited proven reserves and
established production, most of our holdings have not been amortized.
In the event that we are ultimately unable to establish production or
sufficient reserves on some of these properties to justify the
carrying costs, the value of the assets will need to be written down
and the related costs charged to operations, resulting in additional
losses. We periodically evaluate our properties for impairment and if
a property is determined to be impaired, the carrying value of the
property is reduced to its net realizable amount.
Recent Developments
In February 2001, the Company sold 2,087,000 shares of Big Horn
for Cdn. $ 0.80 per share. The Company intends to sell 6,000,000
additional shares, which would constitute the complete divestiture of
its investment in Big Horn. The proceeds shall go towards financing
projects in Poland and developing the talc mine in Slovakia, in which
the Company has increased its investment, as discussed previously. In
addition to our normal private issuances of common stock, the Company
registered 12,000,000 of its shares for sale on Form S-3 in August
2000, along with 9,000,000 shares registered on behalf of selling
shareholders, pursuant to contractual registration rights.
Outlook
In the past, we have focused our resources on pre-exploration or
early-exploration stage natural gas, coal bed methane gas, and other
hydrocarbon projects with little short-term revenue potential. We
believe that our investment in such early-stage projects will prove
profitable in the long run, and may continue to invest in additional
early-stage projects from time to time in the future. Nonetheless,
present management believes that, in order to balance out our
holdings, the focus of our acquisition, investment and development
strategy should be on hydrocarbon projects that have the potential to
generate revenues within 1-5 years of the date of investment and we
are actively seeking investments of that type. Specifically, we
intend to take the following actions over the coming months:
(i) Divest some of our shareholdings in Big Horn, in order to
raise capital to finance core projects without further diluting our
existing shareholders. Proceeds from the sales of our Big Horn shares
will be re-deployed into projects that have the potential to yield
substantial and near-term cash flow;
(ii) Determine whether to retain or divest the 12% interest that
we hold in Teton. Our management team is currently evaluating this
investment, and will make a formal recommendation to our Board of
Directors regarding its retention or divestiture;
26
(iii) Focus our efforts on projects in Central Europe and
Canada. We will concentrate our financial and management resources on
Central Europe (Poland, Slovakia, Ukraine and possibly Hungary), as
well as Canada, where the Company has a carried interest in the Beaver
River gas project;
(iv) Bring the Gemerska Poloma Talc Deposit into production;
(v) Begin an exploration program on our ten oil and gas
concessions covering approximately 4,300 km2 in southeast Poland; POGC
is the operator of this venture. EuroGas, in conjunction with POGC, is
currently in discussions with a number of international oil and gas
companies who are interested in a possible participation in this
project;
(vi) Enter into a joint venture with large international oil and
gas companies on our oil and gas concession in Slovakia;
(vii) Continue our efforts to reduce corporate overhead, as
we recently demonstrated by closing our London office, effective as of
March 31, 2001. We will continue to manage the Company from our
Warsaw and Vienna Central European headquarters.
In summary, the outlook, based on our strategic approach, is
simple--we intend to use the proceeds from the Big Horn divestiture
and possibly the sale of other non-core assets to fund production of
the Gemerska Poloma Talc project and oil and gas projects in Central
and Eastern Europe. Further, we will closely monitor the Beaver River
gas project in British Columbia. The ultimate goal is to transform
the company from an asset-rich exploration concern to a significant
cash flow-producing resource company.
27
Results of Operations-1999, 1998, and 1997 Fiscal Years
The following table sets forth consolidated income statement data
and other selected operating data for the years ended December 31,
2000, 1999 and 1998.
For the Years Ended December 31,
2000 1999 1998
------------ ------------ ------------
Oil and Gas Sales $ 6,395,037 $ 4,973,508 $ 879,404
Oil and gas production 1,521,471 1,330,526 305,009
Impairment of mineral
interests and equipment 26,783,790 7,217,426 3,512,792
Depreciation, depletion
and amortization 2,023,425 1,810,176 293,955
Settlement costs 7,200,205 12,527,000 -
General and
administrative 6,854,636 8,485,939 7,804,401
------------ ------------ -------------
Total Costs and
Operating Expenses 36,735,793 31,371,067 11,916,115
Other Income (Expenses)
Interest Income 89,698 179,538 593,570
Other Income 455,938 103,878 152,776
Interest expense (7,123,750) (567,195) (465,371)
Loss on sale and
impairment of securities
and equipment (2,731,628) (1,682,045) -
Foreign exchange net
gains (losses) (263,523) 170,315 (130,419)
Minority interest in
income of subsidiary (103,022) (753,599) (137,983)
------------ ------------ -------------
Total Other Income
Expense (16,676,628) (2,549,108) 12,573
------------ ------------ -------------
Net Loss $(49,545,322) $(28,946,667) $(11,024,180)
------------ ------------ ------------
Basic and Diluted Loss
Per Common Share $ (0.47) $ (0.36) $ (0.22)
------------- ------------ ------------
Weighted Average Number
of Common Shares Used in
Per Share Calculation 106,145,361 83,368,053 64,129,062
------------- ------------ ------------
REVENUES. Prior to 1998, we had not generated any revenues from
oil and gas sales. As a result of our acquisition of the controlling
interest in Big Horn, our results of operations for 2000 and 1999
reflect oil and gas sales of approximately $6,395,037 and $4,973,508,
respectively. We intend to divest our holdings in Big Horn in 2001.
OPERATING EXPENSES. Operating expenses include general and
administrative expenses, depreciation, depletion and amortization,
settlement costs, cost of mineral interests and equipment and
impairment of mineral interests and equipment. Oil and gas production
expenses were $1,521,471 in 2000, $1,330,526 in 1999, and $305,009 in
1998. All of our oil and gas production expenses are from our Big
Horn subsidiary. The increase in oil and gas production expenses from
1998 through 2000 reflects the acquisition of our interest in Big Horn
effective October 1998; accordingly, we only recognized a fraction for
1998, and our full 51% of such expenses for 1999 and 2000.
General and administrative expenses were $7,037,165 for 2000,
compared with $8,485,939 for 1999, representing a decrease of 22%. The
principal factors that contributed to the decrease from 1999 to 2000
were reductions in (i) legal expenses incurred in connection with
sales of registered and unregistered securities, ongoing securities
compliance, and litigation; (ii) consulting fees; (iii) payroll,
caused by a reduction in the number of staff members; and (iv) rent
and other office expenses, which we reduced by closing several
offices.
28
Depreciation, depletion and amortization expenses were
$ 2,023,425 for 2000, compared to $1,810,176 for 1999.
Impairment of mineral interests and expenses were $26,783,790 for
2000, $7,217,426 in 1999, and $3,512,792 in 1998. The principal
factor that contributed to the increase in impairment expenses from
1999 to 2000 was the recognition of a $7,672,511 impairment against
the TAKT joint venture as of December 31, 2000, based upon our
reassessment of estimated future net cash flows. Settlement costs
for financial statement purposes increased from 0 in 1998 to
$12,527,000 in 1999 and $7,200,205 in 2000. The primary cause of this
increase in settlement costs was the issuance of a default judgment
against the Company on March 16, 2000 in the amount of $19,773,113 in
a case styled Finance & Credit Development Corporation Ltd., an
Ireland Corporation vs. EuroGas, Inc., a Utah corporation, Case No.
2:00VC-1024K. As discussed in "Item 3. Litigation," such judgment was
entered based on our failure to comply with procedural rules, not
based on any hearing on the merits, and we have entered into a
settlement agreement concerning the suit and the default judgment.
INCOME TAXES. Historically, we have not been required to pay
income taxes, due to our absence of net profits. For future years, we
anticipate being able to utilize a substantial portion of our
accumulated deficit, which was approximately $126.4 million as of
December 31, 2000, to offset profits, if and when achieved, resulting
in a reduction in income taxes payable at such time.
NET LOSS. We incurred net losses of approximately $49.7 million,
$30.4 million, and $13.9 million for the years ended December 31,
2000, 1999, and 1998, respectively. These losses were due in part to
the absence of revenues, combined with continued expansion of our
activities, primarily as a result of acquisition and the growth of our
administrative expenses. In addition, a portion of the recognized net
losses in 2000 resulted from the $7,672,511 impairment of mineral
interests recognized against the TAKT joint venture and the default
judgment entered against us on March 16, 2000.
Due to the highly inflationary economies of the Eastern European
countries in which we operate, we are subject to extreme fluctuations
in currency exchange rates that can result in the recognition of
significant gains or losses during any period. Approximately
$(263,523) $170,315 and ($130,419) in gains (losses) were recognized
as a result of currency transactions in eacg if the three years ended
December 31, 2000, 1999 and 1998, respectively. We had a cumulative
foreign currency translation adjustment of ($3,916,641) as of
December 31, 2000. We do not currently employ any hedging techniques
to protect against the risk of currency fluctuations.
Capital and Liquidity
We had an accumulated deficit of $125,863,803 as of December 31,
2000, substantially all of which has been funded out of proceeds
received from the issuance of stock and the incurrence of payables. As
of December 31, 2000, we had total current assets of approximately
$4.8 million and total current liabilities of approximately $21.7
million (which number includes our estimated obligation with respect
to the default judgment entered against us on March 16, 2000)
resulting in negative working capital of approximately $16.9 million.
As of December 31, 2000, our balance sheet reflected approximately
$7.4 million in mineral interests in properties not subject to
amortization, net of valuation allowance. These properties are held
under licenses or concessions that contain specific drilling or other
exploration commitments and that expire within one to three years,
unless the concession or license authority grants an extension or a
new concession license, of which there can be no assurance. If we are
unable to establish production or resources on these properties, are
unable to obtain any necessary future licenses or extensions, or are
unable to meet our financial commitments with respect to these
properties, we could be forced to write off the carrying value of the
applicable property.
Throughout our existence, we have relied on cash from financing
activities to provide the funds required for acquisitions and
operating activities. Our financing activities provided net cash of
approximately $4.4 million, $6.5 million and $12 million during the years
ended December 31, 2000, 1999 and 1998, respectively. Such net cash
has been used principally to fund net losses of approximately $50
million, $29 million and $11 million during the years ended December
31, 2000, 1999 and December 31, 1998, respectively. Our operating
activities provided $2.9 million of net cast during the year ended December
31, 2000 and used net cash of approximately $3.8 million and $8.3
million during the years ended December 31, 1999 and 1998, respectively.
A portion of our cash was used in acquiring mineral interests, property
and equipment, either directly or indirectly through the acquisition of
subsidiaries, with approximately, $7.7 million, $8.9 million and $13.6
million used in investing activities for the years ended December 31, 2000,
1999 and 1998, respectively, of which approximately $4.4 million, $7.0
million and $9.3 million, respectively, was used in acquiring mineral
interests.
29
While we had cash on hand of approximately $0.6 million as of
December 31, 2000, we have short-term and long-term financial
commitments with respect to exploration and drilling obligations
related to our interests in mineral properties and potential litigation
liabilities We estimate our financial commitments for the first nine
months of 2001 to be approximately $4 million. Many of our projects
are long-term and will require the expenditure of substantial amounts
over a number of years before the establishment, if ever, of
production and ongoing revenues. As noted above, we have relied
principally on cash provided from equity and debt transactions to meet
our cash requirements. We do not have sufficient cash to meet our
short-term or long-term needs and we will require additional cash,
either from financing transactions or operating activities, to meet
our immediate and long-term obligations. There can be no assurance
that we will be able to obtain additional financing, either in the
form of debt or equity, or that, if such financing is obtained, it
will be available to us on reasonable terms. If we are able to obtain
additional financing or structure strategic relationships in order to
fund existing or future projects, existing shareholders will likely
experience further dilution of their percentage ownership of the
Company.
If we are unable to establish production or reserves sufficient
to justify the carrying value of our assets or to obtain the necessary
funding to meet our short and long-term obligations or to fund our
exploration and development program, all or a portion of the mineral
interests in unproven properties will be charged to operations,
leading to significant additional losses.
Inflation
The amounts presented in our consolidated financial statements do
not provide for the effect of inflation on our operations or our
financial position. Amounts shown for property, plant and equipment
and for costs and expenses reflect historical costs and do not
necessarily represent replacement costs or charges to operations based
on replacement costs. Our operations, together with other sources,
are intended to provide funds to replace property, plant and equipment
as necessary. Net income would be lower than reported if the effects
of inflation were reflected either by charging operations with amounts
that represent replacement costs or by using other inflation
adjustments. Due to inflationary problems in Eastern Europe reflected
in currency exchange losses, we have seen losses on the values of our
assets in those countries.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We conduct business in many foreign currencies. As a result, we
are subject to foreign currency exchange rate risk due to effects that
foreign exchange rate movements of those currencies have on our costs
and on the cash flows that we receive from foreign operations. We
believe that we currently have no other material market risk exposure.
To date, we have addressed our foreign currency exchange rate risks
principally by maintaining our liquid assets in interest-bearing
accounts in U.S. Dollars, until payments in foreign currency are
required, but we do not reduce this risk by hedging. For further
discussion of our policies regarding derivative financial instruments
and foreign currency translation, see Note 1 to our Consolidated
Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data."
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company and its
subsidiaries, together with note and supplementary data related
thereto, are set forth following pages F-1 of this Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
30
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain Information Regarding Executive Officers, Directors and
Control Persons
Set forth below is the name and age of each individual who was a
director or executive officer of EuroGas as of December 31, 2000 or as
of March 31, 2001,