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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, 2001
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 000-24781 87-0427676
- -------------- ----------- ----------
(State or (Commission (IRS
other File No.) Employer
jurisdiction Identifica
of tion No.)
incorporation)
1006-100 Park Royal South
West Vancouver B.C. Canada V7T 1A2
----------------------------------
(Address of principal executive
offices, including zip code)
Registrant's telephone number, including area code: 604-913-1462
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 April 15, 2002, based upon the closing bid price for the common
stock of $0.14 per share on April 15, 2002, was approximately $20,571,504.
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 April
15, 2002, the Registrant had 144,796,460 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
TABLE OF CONTENTS TO FORM 10-K
------------------------------
PAGE
----
PART I
Item 1. Business 1
Item 2. Property 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 Market for the Registrant's Common Stock and Related
Shareholder Matters 25
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A.Quantitative and Qualitative Disclosures About
Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42
Item 13. Certain Relationships and Related
Transactions 44
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 44
Documents Filed
1. Financial Statements
2. Financial Statement Schedule
3. Exhibit List
Reports on Form 8-K
Exhibits
Financial Statement Schedules
SIGNATURES 51
2
PART I
This Annual Report on Form 10-K for the year ended December 31, 2001 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 these forward-looking statements. Statements considered to be
forward-looking by the Company include statements in which the Company discloses
its beliefs, expectations or anticipations, and statements using the words
"may," "should," "might," "could," "might," "would," "expect," "believe" and
"anticipate." 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.
Item 1. Business
- ------------------
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
-----------------------------------------
The following summary is not complete. Additional details about the
transactions and relationships summarized in this section are included elsewhere
in this report.
Activities in Slovakia. The Company is pursuing two projects in Slovakia,
including the development of the Gemerska-Poloma Talc Deposit located near
Roznava. At December 31, 2000, EuroGas owned a 55% interest in Rima Muran
s.r.o., which in turn owned a 43% interest in this talc deposit. The remaining
57% interest was owned by Belmont Resources, Inc. ("Belmont"), a Vancouver,
British Columbia, entity. In March 2001, EuroGas entered into an agreement to
acquire Belmont's 57% interest, in exchange for 12 million shares of EuroGas
common stock, with registration rights, and a two percent royalty interest in
the project. On May 14, 2001, a conditional approval from the Canadian Venture
Exchange (CDNX) was given to Belmont. The final exchange approval of the
transaction was received following the vote of the shareholders at Belmont's
Annual General Meeting, held July 16, 2001. During April 2002, EuroGas exchanged
its 55% interest in Rima Muren for Rima Muren's 43% interest in the talc
deposit, giving Eurogas a potential direct interest in 100% of the talc deposit
once the Belmont purchase is completed. The construction of the talc mine is
scheduled for completion in 2002.
During September 1998, EuroGas acquired a 51% interest in Envigeo Trade
s.r.o. ("Envigeo"), a private Slovakian company which owns a 2,300 square
kilometer oil and gas concession in Northeast Slovakia. This project is at an
exploratory or appraisal stage and will require significant financing to proceed
to the drilling stage.
The Company has decided to withdraw from the Nafta Danube association in
exchange for which Nafta Gbely a.s. agreed to pay all outstanding obligations
and liabilities totaling approximately $750,000 owing to Geophysical Services
Ltd. of Hungary. As a result, the Company will not participate in further
exploration in the Trebisov gas field in eastern Slovakia.
3
Activities in Canada. At December 30, 2000, EuroGas owned a 15% interest in
the Beaver River natural gas project, through a wholly owned subsidiary, Beaver
River Resources Ltd. ("BRRL"). The Beaver River project is an attempt to re-
establish commercial production in an abandoned natural gas field in the
northeast corner of British Columbia, Canada. During 2001, this interest was
reduced to 7.5% in settlement of a lawsuit with the former owners of the Beaver
River project, who returned to EuroGas 1,200,000 common shares of EuroGas
previously issued to them.
At December 31, 2000, EuroGas owned 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 was conducted primarily in western Canada, particularly in the
provinces of Alberta and Saskatchewan. Through June 2001, the Company sold
4,278,233 shares of Big Horn for approximately $0.54 per share. On May 29, 2001,
EuroGas entered into an agreement with Westlinks Resources, Ltd. ("Westlinks")
and sold 8,275,500 Big Horn shares to Westlinks in exchange for cash of
$1,198,936 and 6,123,870 shares of Westlinks preferred stock. Under the terms of
the preferred stock designation and the agreement, Westlinks must redeem all of
the preferred shares by August 16, 2002 at $0.56 per share. As a result of these
transactions, EuroGas' interest in Big Horn was reduced from 50.1% to less than
5%. On May 29, 2001, Westlinks and EuroGas entered into an exchange of shares
in which EuroGas exchanged 446,267 Big Horn shares for Westlinks common shares
at the rate of 0.1905 Westlinks common shares for one Big Horn share. As a
result of this exchange transaction, EuroGas no longer owns any Big Horn shares.
Activities in Poland. On May 19, 1999, EuroGas Polska Sp.zo.o., a wholly
owned subsidiary of the Company, 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-sulfurization plant owned by
Polish Oil. The project is at a conceptual stage, and EuroGas must enter into a
final agreement with Polish Oil, complete design of the plant, and obtain
financing before the 12 to -24-month construction process can commence. The
parties mutually agreed to delay the project for one year due to increases in
gas prices and static prices of electricity. EuroGas Polska has several oil and
gas concessions and projects in Poland, including:
* a 112 sq. kilometer coal bed methane concession located in the Upper
Silesian Coal Basin,
* a project with Polish Oil and Gas to undertake appraisal and
development activities for a large area located in the Carpathian
Flysch and Tectonic ForeDeep areas of Poland,
* exclusive rights to explore for and develop hydrocarbons in an area
of over 1,100,000 acres in Southeastern Poland, and
* a concession to explore and develop oil and gas on over 1,000,000
acres in the Carpathian oil fairway.
Activities in the United Kingdom. In 1999, EuroGas entered into an
agreement with Slovgold GmbH, 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. Slovgold is an affiliate of the Company, controlled by the
Chairman and CEO of EuroGas. To minimize the amount of capital EuroGas was
required to contribute to the pilot program, the Company entered into
discussions with UK Gas to permit it to participate in the pilot program by
utilizing drilling equipment owned by its Polish subsidiary. EuroGas was unable
to reach a final agreement with UK Gas, however, and has discontinued further
involvement with this project.
Activities in Ukraine. In September 2000, EuroGas 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 to reevaluate the
Company's Ukrainian projects and possibly operate existing and additional joint
ventures in the Ukraine for the Company.
In May 2001, the Company signed a memorandum of understanding ("MOU") with
Epic Energy, Inc. ("Epic") for participation in oil and gas projects in the
Ukraine owned by a subsidiary of Epic. The Company defaulted its obligations to
make a payment under the MOU and the agreement has been terminated. Should both
parties desire to continue a future relationship all terms and agreements would
have to be renegotiated.
4
Activities in Kazakhstan. By an amended agreement dated November 22, 2001,
EuroGas agreed to acquire all of the issued and outstanding shares of Falcon
Energy Overseas Inc., a subsidiary of Falcon Energy Holding Corp. ("Falcon").
Falcon is a 50% Joint Venture Partner with Houston based First International
Oil Corporation ("FIOC"). The Joint Venture holds the license to explore and
develop proven shallow oil fields in Kazakhstan on an area of approximately 3.2
million acres known as the Sagiski Block. Falcon also holds other oil and gas
interests in Kazakhstan outside the Joint Venture with FIOC. Under the agreement
EuroGas was to issue 30,000,000 shares of EuroGas common stock and pay staged
cash commitments of $10,000,000. EuroGas expected to obtain funding for this
project through Oxbridge Ltd., but terms of that funding were never finalized
due to the company's delisting from the NASD OTC Bulletin Board on December 28,
2001 and Falcon's inability to provide Financial Statements to the company. On
February 12, 2002, Falcon notified EuroGas that all agreements between Falcon
and EuroGas, both written or verbal were null and void as of February 6, 2002.
The company and Falcon are currently in discussions tonegotiate a new agreement;
however, any new agreement will contemplate other potential properties rather
than the Sagiski Block.
Proposed Merger with Teton Petroleum Company. On April 5, 2000, EuroGas
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 a
EuroGas 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 in exchange for a
convertible debenture from Teton.
On December 27, 2000, EuroGas terminated merger talks with Teton. Through
exercise of the convertible debenture, EuroGas now holds 1.7 million Teton
shares, along with 1.0 million shares previously issued to EuroGas as a result
of an August 2000, standstill agreement with Teton. After December 21, 2001,
the Company began selling the 1.700.000 Teton common shares in the public
market, while the Company still holds 1.000.000 shares of Teton.
Activities in Canada
--------------------
Big Horn Resources Ltd. (Enterra Energy Corp.)
- ---------------------------------------------
As of December 2000, we held 14,000,000 shares of Big Horn common stock,
representing a 50.1 % interest in Big Horn. During 2001, EuroGas sold the
majority of its investment in Big Horn.
Beaver River Natural Gas Field
- ------------------------------
EuroGas owns a 7.5% interest in the Beaver River natural gas project. The
objective of this project is 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. The prior
owners shut down the project because of heavy water influx. Before shutting
down the project, the prior owner produced substantial amounts of natural gas
and reported that peak production reached 350 million cubic feet 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.
EuroGas originally held a 15% interest in the Beaver River natural gas
project, through a wholly owned subsidiary, Beaver River Resources Ltd.
("BRRL"). This interest was reduced to 7.5% in the settlement of a lawsuit with
the former owners. In the settlement, the former owners returned 1,200,000
shares of EuroGas common stock to EuroGas in exchange for one-half of BRRL's
interest in the Bear River project.
According to the current operator of the Beaver River project, Questerre
Energy ("Questerre"), the A5 re-entry well was reaching gas production levels as
high as 17 million cubic feet per day in March of 2001. The well was in
production from March through April 2001, when it was shut in. Due to drilling
of a new well and lower pressure in the field pipeline, production was shut down
since August of 2001, pending enhancement of the field pipeline pressure through
installation of additional compressor pumping and gas lift systems.
Preparations for the compressor pumping and gas lift systems have been
finalized waiting for freeze up to allow installation. The compressor pumping
and gas lift systems are due to be installed and operational in early 2002,
after which sustained gas production from the field is expected.
5
Since mid-March of 2001, BRRL received one-sixth of a 4% overriding royalty
from gas production, under its agreement with Questerre. The property owners
including BRRL are receiving an overriding royalty of 4% until Questerre has
recovered its investment. The total royalties received are expected to
substantially increase until Questerre has received up to 600% of its
investment. Thereafter the ownership interest will change to a 6.7% working
interest.
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-
sulfurizaation 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. In 2001, the parties mutually decided to delay the start of the
project 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 2002.
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, EuroGas 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 concession located
in the 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. Although the property
is carried in the books at zero value there is a possibility for success if a
proper funding of the project can be obtained.
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-Lesko area of the
Carpathian Mountains in southeastern Poland. Polish Oil has produced a report
based on this program, which suggests the potential for substantial oil and gas
reserves in the Rymanow-Lesko 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 EuroGas the exclusive rights to
explore for and develop hydrocarbons in an area of over 1,100,000 acres in
Southeastern Poland.
6
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 more than 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 million 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 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. Oxbridge Ltd.,
a related party, paid $879,000 on behalf of the Company in 1998 as part of the
purchase of the 24% interest in the talc deposit. 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 2000, Oxbridge Ltd. made a demand for payment of the promissory note.
EuroGas reclassified the payment to Oxbridge Ltd. as an increase in the cost of
the 24% interest in the talc deposit and recorded the principal and $272,490 of
accrued interest due under the promissory note payable to Oxbridge Ltd. In
November 2000, EuroGas issued 2,391,162 shares of common stock, valued at
$1,151,490, or $0.48 per share, to Oxbridge Ltd. in satisfaction of the
principal and accrued interest due on the promissory note. Through December 31,
2000 and 1999, EuroGas had invested $2,376,682 (including the $879,000 paid to
Oxbridge Ltd.) and $915,913 (excluding the payment to Oxbridge Ltd.),
respectively, in the acquisition and development of the talc deposit and related
equipment.
On March 27, 2001, we entered into an agreement to purchase an additional
57% interest in Rozmin s.r.o. from Belmont Resources Inc. ("Belmont"), in
exchange for 12,000,000 shares of EuroGas common stock, which carry registration
rights. We have the right to repurchase up to 6,000,000 of these 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 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. The
registration of the 12,000,000 common shares is expected to be filed during
April 2002 and the Company may be required to issue an additional maximum of
4.17 million shares as a result of the decline in share price of the common
stock since the agreement was signed.
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. was recorded at $3,664,000 during 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
EuroGas common stock, no additional cost will be recognized.
7
We acquired the original 24% mineral interest in the Gemerska Talc Deposit
through the acquisition of a 55% interest in RimaMuran s.r.o. ("RimaMuran"),
whose principal asset is the 43% investment in Rozmin s.r.o. ("Rozmin"). During
April 2002, we entered into an agreement with the minority owners of RimaMuran
to swap all of our interests in Rimamuran in exchange for RimaMuran's interst in
Rozmin. In addition, we agreed to pay approximately $107,000 to the minority
owners and to pay RimaMuran liabilities. RimaMuran agreed to transfer title in
two pieces of heavy mining equipment into Rozmin in connection with the swap
agreement. As a result of the agreement, we now have a direct ownership of a
43% interest in Rozmin, and a 53% direct interest that is subject to
finalization of the Belmont agreement described in the preceding paragraphs.
As a result of acquiring the interest in Rozmin, we are required to cover
development costs to bring the talc mine into commercial production.
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 strong global demand for talc.
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 & 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.
Under the terms of the joint venture agreement, EuroGas was 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 were expended. However,
the Company has decided to withdraw from the NAFTA-Danube association and
discontinue our involvement in any further exploration in the Trebisov gas field
in eastern Slovakia. We agreed to withdraw and NAFTA agreed to pay of all
outstanding obligations and liabilities totaling approximately $750,000 owing to
Geophysical Services Ltd. of Hungary.
Envigeo-Carpathian Flysch Concession
- ------------------------------------
In September 1998, we acquired a 51% interest in Envigeo s.r.o., a
Slovakian private company that owns a 2,300 square kilometer appraisal and
survey concession, known as 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. Since 1998 we have undertaken geological reconnaissance work on the
Medzilaborce concession 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.
Activities in Ukraine
---------------------
In September 2000, EuroGas 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
production in the Ukraine to reevaluate the Company's Ukrainian projects and
possibly operate existing and additional joint ventures in the Ukraine for the
Company. In May 2001, we signed the MOU with Epic for participation in oil and
gas projects in the Ukraine owned by a subsidiary of Epic. However, we
defaulted under the MOU in late 2001 and the agreement has been terminated.
Should both parties desire to continue a future relationship all terms and
agreements will have to be renegotiated.
8
Activities in the Kazakhstan
----------------------------
On November 23, 2001, EuroGas finalized an agreement with Falcon Energy
Holding Corp., a Delaware corporation "Falcon Holding" for the acquisition of
100% of the issued and outstanding shares of its subsidiary, Falcon Energy
Overseas Inc. "Falcon", also a Delaware corporation. The November agreement was
an amendment to a former agreement entered into on September 17, 2001. Falcon
has entered in a joint venture with First International Oil Corporation "FIOC"
called First Falcon LLP that holds the license to explore and develop proven
shallow oil fields of the Pre Caspian Basin 3.2 million acres Sagiski Block in
Kazakhstan. In payment of the purchase price for the Falcon shares, EuroGas
agreed to transfer 10,000,000 of its common shares to Falcon Holding and to
provide $10,000,000 funding to Falcon by December 31, 2001. EuroGas also agreed
to transfer an additional 500,000 shares to Falcon Holding for each 200 barrels
per day of proven production, issued on a quarterly basis, up to a total of
20,000,000 common shares. All shares were to have been earned when proven
production by the joint venture is 8,000 barrels per day.
Under the terms of the agreement, Falcon Holding was to retain managerial
control over Falcon for the period of three years, and EuroGas agreed to provide
all the further funds required by Falcon to fund its 50% interest in the joint
venture. Funding for this project was to be provided through Oxbridge Ltd.,
however the terms of that were never finalized. On February 17, 2002, Falcon
notified EuroGas that all agreements between Falcon and EuroGas were
terminated effective February 6, 2002. Falcon and the company are currently
in discussions to revive the agreement.
Activities in the United Kingdom
--------------------------------
In 1999, EuroGas entered into an agreement with Slovgold 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. To
minimize the amount of capital EuroGas was required to contribute to the pilot
program, the Company entered into discussions with UK Gas, to permit it to
participate in the pilot program by utilizing drilling equipment owned by its
Polish subsidiary. EuroGas was unable to reach a final agreement with UK Gas,
however, and has discontinued further involvement with 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, 2001 or
December 31, 2000.
Oil and Gas Production and Production Costs. Effective with the sale of
our interest in Big Horn Resources, Ltd. in January 2001, we have no proven oil
and gas reserves. Accordingly, we are no longer required to present disclosure
of oil and gas operations.
Competition
-----------
In the business of exploration, development, and production of oil and gas
resources, we compete with some of the largest corporations in the world, in
addition to many smaller entities. Many of the entities that we compete with
have access to far greater financial and managerial resources than those
available to EuroGas. As a result of the exclusive nature of certain
concessions that we hold, to the extent that we are able to successfully find,
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, 2001, we had two administrative employees. Our two
principal consultants (Mr. Wolfgang Rauball and Mr. Andrew Andraczke) work out
of 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.
9
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 do not have any hazard insurance. The occurrence of a
significant adverse event that is not covered by insurance would have a material
adverse effect on EuroGas.
Certain Developments Since December 31, 2001
--------------------------------------------
In January 2002, the Company sold 1.7 million shares of Teton Petroleum
common stock. The Company intends to liquidate the remaining 1.0 million shares
of Teton common stock owned by it through an arrangement to settle the
outstanding obligations of the Company to its former legal counsel.
In March 2002, the Company agreed to sell approximately 6,123,870 shares of
Westlinks preferred stock to Enterra Energy Corp. (formerly Westlinks Resources
Ltd.) for a price of $2.3 million Canadian dollars.
Financial Information About Foreign and Domestic Operations
The information set forth as "NOTE 8 - 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 report on Form 10-K contains forward-looking statements. You can
identify forward-looking statements by their 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 the forward-
looking statements made in this report, you should keep in mind the risks noted
in "Factors That May Affect Future Results" below and other cautionary
statements throughout this report. 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 report
or other filing 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 to meet our obligations and to pursue our business plan.
EuroGas has historically been undercapitalized. We had a working capital
deficit of approximately $9,421,196 on December 31, 2001, and most of our
partially- or wholly-owned projects require significantly more capital than we
currently have 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 significantly divested
in 2001 and intend to fully divest), we had not earned any significant cash
revenues since our incorporation. Because we divested our interest in Big Horn,
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.
10
Our projects are highly speculative and generally only at the exploration
stage.
Our assets and interests are primarily in methane gas, natural gas, and
crude oil exploration and development projects. These 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. In most of these areas 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, and other parts of Eastern Europe 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, these
countries continue to be subject to the risks of political instability, a change
of government, unilateral renegotiation of concessions or contracts,
nationalization, foreign exchange restrictions, and other uncertainties. 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.
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 may be
subject to the discretion of government authorities and we cannot therefore
predict with certainty whether they will be continued or renewed or whether we
will be successful in obtaining all permits and licenses required to fully
exploit our interests in those countries.
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 a 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.
EuroGas has been the subject of an inactive SEC investigation, which could
cause the Company to incur significant expense and expose it to the risks
associated with an adverse judgment.
We are presently subject to a formal order of investigation issued by the
SEC on August 1, 1995, to investigate whether violations of securities laws may
have occurred. In connection with that investigation, EuroGas produced numerous
documents for the SEC, and the SEC has questioned 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.
11
If the SEC concludes that we, or our representatives, have violated the
securities laws, it has available a large range of civil, administrative, and
criminal remedies. Those remedies could 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 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, in which we have divested or are in the process
of divesting ourselves of ownership, 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, the
loss of which would adversely affect our ability to continue in business.
- -------------------------------------------------------------------------------
We are dependent on the services of Wolfgang Rauball (Chairman and Chief
Executive Officer) and Andrew K. Andraczke, the Chief Operating Officer 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, and do not maintain key-man
life insurance on any EuroGas officers or employees.
We are thinly staffed.
---------------------
We have numerous projects throughout the world, which we attempt to direct
and manage with only a few employees, the Chief Executive Officer and a director
who also serves as Managing Director of Rozmin s.r.o. 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 those
properties, which would adversely affect our financial condition.
We capitalize costs related to unproved gas properties under the full cost
method. 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$6,186,606. 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 proportionally 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. Even if
recoverable reserves are discovered in 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 prices of the various hydrocarbons we produce or may produce are
volatile and unstable.
12
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:
* changes in the supply and demand for such fuels;
* political conditions in oil, natural gas, and other fuel-producing
and fuel- consuming areas;
* the extent of domestic production and importation of such fuels and
substitute fuels in relevant markets;
* weather conditions;
* the competitive position of each such fuel as a source of energy as
compared to other energy sources;
* the refining capacity of crude purchasers;
* the effect of governmental regulation on the production,
transportation,and sale of oil, natural gas, and other fuels.
Low prices 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, if 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:
* fire,
* explosions,
* blowouts,
* pipe failures,
* casing collapses,
* unusual or unexpected formations and pressures, and
* environmental hazards such as spills, leaks, ruptures, and discharges
of toxic substances.
If any of these events were to occur we might be forced to cease any or all
of our exploration, drilling, or production activities on a temporary or
permanent basis. In addition, these events might 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 were to
obtain insurance, we might not be insured against all losses or liabilities that
might arise from these hazards because the insurance may be unavailable at
economic rates, due to limitations in the insurance policies, or other factors.
Any uninsured loss would likely have a material adverse impact on our business
and operations.
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. These 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, 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 violate 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.
13
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 144,796,460 shares of common stock issued and
outstanding as of April 15, 2002 are free trading or are eligible for resale
under Rule 144 under the Securities Act. In addition, we have agreed to file a
registration statement to register a significant number of shares for resale.
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 our common
stock.
We have a substantial number of warrants, options and debentures
outstanding, the exercise of which would result in substantial dilution to
existing shareholders and the existence of which adversely affects the public
market price of our common stock.
As of December 31, 2001, there are outstanding warrants and options to
purchase up to 18,150,000 shares of common stock at exercise prices ranging from
$0.40 to $11.79 per share. The existence of these outstanding warrants and
options may hinder our future equity offerings, and the exercise of these
warrants and options would further dilute the interests of all of our
shareholders. Future resale of the shares of common stock issuable on the
exercise of 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, 2001, there were 144,796,460 shares of
common stock and 2,394,028 shares of preferred stock issued and outstanding At
December 31, 2001, there were 18,439,594 shares of common stock reserved for
issuance upon the exercise or conversion of outstanding warrants, options, and
similar rights to acquire common stock. The Company may also be obligated to
issue approximately 3,830,000 shares of common stock under litigation settlement
agreements. The timing of the exercise of conversion rights or the purchase
rights under options, warrants or similar agreements is outside the control of
the Company. 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 issuance of shares described in this paragraph 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 2. Properties
- -------------------
The Company has a month-to-month lease for approximately 2,230 square feet
of office space in Warsaw and Prszczyna, 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.
That office has now been closed. We sublease office space in Vienna, Austria
and West Vancouver, Canada, for use by our administrative officers. 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.
Item 3. Legal Proceedings
- --------------------------
McKenzie Bankruptcy Claim. As reported in reports filed in previous
periods with the SEC, the Company is involved in litigation regarding the
consolidated claims of creditors and others in the matter of the bankruptcy of
the McKenzie Estates, and a related action filed by the Trustee against EuroGas
in July 1999. On March 18, 2002, the court considered motions to dismiss the
claim filed by EuroGas and by Wolfgang Rauball, and Reinhard Rauball (two of the
other named defendants). These motions are currently pending before the court.
No trial date has been set.
14
On February 9, 2001, James Holbrook filed suit against Steve Smith,
Trustee, Kukui Inc., EuroGas, Inc. and Kruse Landa & Maycock, L.L.C. in the
McKenzie Bankruptcy cases. Holbrook was a documents escrow agent under the
December settlement agreement described below with EuroGas, Kruse Landa, Kukui,
the Bishop Estate and the trustee as to the EuroGas files held by Kruse Landa.
In his lawsuit, Holbrook, in part, sought clarification of his obligations under
the settlement as to the release of the Kruse Landa files. The Trustee answered
the suit, requesting turnover of the files under the settlement agreement.
EuroGas has answered and cross claimed against the Trustee, asserting, in part,
that a determination of the parties' rights under the settlement must be made
before the Kruse Landa files are released, that EuroGas has fully performed
under the settlement agreement and, therefore, EuroGas is entitled to
enforcement of the release given by the Trustee under the settlement agreement.
The Trustee counterclaimed asserting that EuroGas has not performed its
obligations under the settlement agreement. Both the Trustee and EuroGas filed
motions for summary judgment in support of their respective positions. On
December 17, 2001, the Court entered its Order granting the Trustee's Motion for
Summary Judgment. EuroGas intends to appeal this Order.
The Kukui Litigation. This litigation involved matters relating Kukui
Inc. and the Company's acquisition of GlobeGas (which indirectly controlled the
Pol-Tex Concession in Poland). In 1996, 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 alleged lending activities between McKenzie Methane Corporation and the
management of GlobeGas prior to its acquisition by the Company. This Litigation
was settled between Kukui and the Company and Kukui has released the Company.
Details of the proceedings since 1996 have been disclosed in previous filings
made by the Company with the Securities and Exchange Commission.
In October 2000, a mediation was held involving the Trustee, Kukui, the
McKenzies, and Wolfgang and Reinhard Rauball to address resolution of all
disputes and issues arising out of the McKenzie bankruptcy cases. A mediation
settlement agreement was reached, but was subject to execution of a final
settlement agreement and Bankruptcy Court approval, neither of which occurred.
Since the final settlement agreement was never drafted and no further action was
taken in connection with the mediated settlement agreement, a global settlement
was never achieved. Trial on the Trustee's claims is currently scheduled for
March 18, 2002.
The FCDC Settlement. Details of this matter have been reported previously
in reports filed with the SEC and in Note 3 of the Notes to Financial Statements
included elsewhere in this report. In a letter dated July 5, 2001, FCDC
requested a six-month extension of the option period from EuroGas without
offering any additional consideration. EuroGas denied this request, and FCDC
failed to exercise its option by July 31, 2001. As a result, the option expired
according to its terms. EuroGas does not intend to issue additional shares or
options to FCDC. The lien on the Company's 55% interest in Rima Muran s.r.o.
pledged as security for the price guarantee under the agreement with FCDC has
been released.
Netherlands Tax Appeal. For the 1992 tax year, the Kingdom of the
Netherlands assessed a tax against GlobeGas in the amount of approximately
$911,000, even though Globe Gas had significant operating losses. On December
17, 2001, the Netherlands issued its final tax assessment, including interest
charged from 1998, in the amount of approximately $753,000. The Company had
until December 19, 2001 to make payment of this amount or face possible
additional proceedings against the assets of GlobeGas in satisfaction of the
assessment. To date no formal proceedings have been brought to execute against
the assets of GlobeGas or to otherwise collect the amount of the final
assessment. EuroGas recognized an additional $49,621 as a charge to currency
exchange loss for the excess in the liability over what had been previously
accrued. The tax assessment fluctuates on the Company's financial statements
due to adjustments in exchange rates.
Geocon Litigation. On April 13, 2001, Geocon Group Services, Ltd. filed
suit against EuroGas in an action styled "Geocon Group Services, Ltd. v.
EuroGas, Inc.," (Civil No. 010404108), in the Salt Lake County Court, Sandy
Department, Third District Court, State of Utah. The suit seeks $45,163.44 for
services allegedly performed by Geocon. The Company and Geocon are considering
a settlement of the case.Parr Waddoups et.al. On October 3, 2001, Parr Waddoups
et. al ("Parr"), a Utah professional corporation, filed a claim against EuroGas,
(Civil No. 010908739), in the Salt Lake County Court seeking $135,124.45 for
legal services performed from approximately March 1999 to October 2000. The
accrued liability to Parr was secured by 1,000,000 shares of Teton Petroleum
Company common stock. EuroGas and Parr reached a settlement with Parr on
October 26, 2001, whereby EuroGas agreed to pay Parr three installments of
$40,000 and Parr agreed to return the Teton shares to EuroGas as it received the
payments. In March 2002, EuroGas paid the amount owing to Parr and Parr
returned the 1,000,000 shares of Teton common stock to EuroGas.
15
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------------
None
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 on the Frankfurt and Berlin stock exchanges under the symbols EUG.F and
EUG.B respectively. As of April 15, 2002, there were 144,796,460 shares of
common stock issued and outstanding, held by approximately 317 holders of
record.
The following table sets forth the approximate range of high and low bids
for the common stock during the periods indicated. These 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, 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 Ended 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
Year Ended December 31, 2001
-----------------------------
Quarter ended March 31, 2001 $0.48 $0.27
Quarter ended June 30, 2001 0.33 0.22
Quarter ended September 30, 2001 0.23 0.11
Quarter ended December 31, 2001 0.29 0.14
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 April 15, 2002, the high and low bids for our common stock on
the OTC Bulletin Board were $0.150 and $0.135 respectively.
Dividends
---------
We have not paid dividends on our common stock, and we do not have retained
earnings from which to pay dividends. We have accrued cumulative preferred
dividends of $135,198, $139,932 and $1,442,345 in 2001, 2000 and 1999,
respectively. Of this amount, zero was paid in 2001, $21,599 was paid in 2000,
$1,301,376 was paid in 1999, by the issuance of shares of common stock in
connection with the conversion of a portion of the preferred stock. We must pay
cumulative dividends with respect to our preferred stock before we can declare
or pay 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.
16
Recent Sales of Unregistered Securities
---------------------------------------
During the year ended December 31, 2001, the Company issued the following
securities without registration under the Securities Act of 1933, as amended.
On November 14, 2000, we issued 2,000,000 shares of common stock to
Arkledun Drive LLC ("Arkledun") under the terms of a Stock Purchase Agreement
dated October 2, 2000, which required the Company to issue additional shares if
Arkledun did not realize an agreed upon price from the resale of the shares
purchased under the agreement. The shares have piggy-back registration rights
to be included in any future public offering conducted by the Company. The
Company expects that the holder of these shares may seek to sell them under Rule
144 of the Securities Act.
On April 20, 2001, we issued 100,000 shares of common stock to Asentech
Ltd. of Zurich, Switzerland for professional services provided to the Company.
These shares were valued at $48,440 or $0.48 per share.
On May 15, 2001, we issued 3,800,000 common shares to Roland Winzer &
Hermann Maurer under an agreement dated October 27, 2000, relating to a dispute
involving the issuance of common shares upon conversion of notes payable. Under
the terms of this agreement, the Company agreed to issue 3,800,000 common shares
and to file a registration statement covering the shares no later than January
15, 2001. No registration statement was filed. The Company expects that the
holder of these shares may seek to sell them under Rule 144.
On May 1, 2001, we issued 12,000,000 shares of common stock to Belmont
Resources Inc. under a March 27, 2001 agreement to acquire Belmont's 57% equity
interest in Rozmin s.r.o.
On September 17, 2001, we agreed to issue 3,000,000 shares of common stock
to Falcon Energy Group as part of a penalty for not providing the required
funding for an agreement dated September 17, 2001. The shares are considered
issuable during 2001, and are valued at $450,000 or $0.15 per share based upon
the measurement date of September 17, 2001.
These private issuances of securities were affected in reliance upon the
exemption for sales of securities not involving a public offering, under Section
4(2) of the Securities Act of 1933, as amended. In each transaction, the
Company observed the following practice:
* the investors confirmed that they were "accredited investors,"
as defined in Rule 501 of Regulation D under the Securities Act,
* each investor had the 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,
* there was no public offering or general solicitation with respect to
the offering,
* the investors were provided with any and all other information
requested by them with respect to the Company,
* the investors acknowledged that all securities being purchased were
"restricted securities" for purposes of the Securities Act, and the
investors also agreed to transfer the securities only in a
transaction registered with the SEC under the Securities Act or
exempt from registration under the Securities Act, and
* legend was placed on the certificates and other documents representing
each 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.
17
Item 6. Selected Financial Data
- --------------------------------------
The following statement of operations and balance sheet data were derived
from our audited 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
report and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Statement of Operations Data
- ----------------------------
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
Net Sales $ 88,937 $ 6,395,037 $ 4,973,58 $ 879,404 $ 0
Loss from Operations $5,475,654 $52,433,869 $28,946,667 $11,024,180 $11,501,180
Loss per Common Share $ 0.04 $ 0.50 $ 0.36 $ 0.22 $ 0.22
Balance Sheet Data
- ------------------
At December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
Total Assets $16,110,130 $30,337,006 $53,968,578 $65,334,387 $40,754,543
Long-Term
Obligations $ 0 $ 0 $ 0 $ 1,788,294 $ 3,157,789
Cash Dividends
per Common
Share $ 0 $ 0 $ 0 $ 0
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 talc, 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
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. Because we have limited
proven reserves and established production, most of our holdings have not been
amortized. If 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
- -------------------
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 these early-stage projects will prove profitable in the long run,
and we may invest in additional early-stage projects from time to time in the
18
future. Nonetheless, management believes that, in order to balance our
holdings, the focus of our acquisition, investment and development strategy
should be on hydrocarbon projects that have the potential to generate revenues
within one to five years of the date of investment. We are actively seeking
investments of that type. Specifically, we intend to take the following actions
over the coming months:
* Divest our shareholdings in Teton and Westlinks, in order to raise
capital to finance core projects without further diluting our
existing shareholders. Proceeds from the sales of our Teton and
Westlinks shares will be re-deployed into projects that have the
potential to yield substantial and near-term cash flow.
* Focus our efforts on projects in Central Europe and Canada. We will
concentrate our financial and management resources on Central
Europe (Poland and Slovakia), as well as Canada, where the Company
has a carried interest in the Beaver River gas project;
* Bring the Gemerska Poloma Talc Deposit into production.
* Begin an exploration program on our 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.
* Enter into a joint venture with large international oil and gas
companies on our oil and gas concession in Slovakia.
* Continue our efforts to reduce corporate overhead, as demonstrated
by the closing of our London office, effective March 31, 2001.
We will continue to manage the Company from our West Vancouver,
North American Headquarter and 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 Teton and Westlinks divestiture and possibly
the sale of other non-core assets to fund development of the Gemerska Poloma
Talc project and oil and gas projects in Central and Eastern Europe. Further,
we will closely monitor the Beaver River gas project in British Columbia. The
ultimate goal is to transform the company from an asset-rich exploration concern
to a significant cash flow-producing resource company.
Results of Operations-2001, 2000 and 1999, Fiscal Years
The following table sets forth consolidated income statement data and other
selected operating data for the years ended December 31, 2001 and 1999.
For the Years Ended December 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Oil and Gas Sales $ 88,937 $ 6,395,037 $ 4,973,508
Oil and gas production - 1,521,471 1,330,526
Impairment of mineral
interests and equipment 794,444 26,783,790 7,217,426
Depreciation, depletion
and amortization 25,511 2,023,425 1,810,176
Settlement costs 1,690,947 7,200,205 12,527,000
General and
administrative 1,675,746 8,801,706 8,485,939
------------ ----------- -----------
Total Costs and 4,186,648 46,330,597 31,371,067
Operating Expenses ------------ ----------- -----------
Other Income (Expenses)
Interest Income 59,961 89,698 179,538
Other Income 272,324 455,938 103,878
Interest expense (240,115) (8,122,205) (567,195)
Loss on sale and
impairment of securities (1,409,729) (2,029,916) (1,682,045)
Foreign exchange net
gains (losses) (402,227) (263,523) 170,315
Equity income 341,843 - -
Minority interest in
income of subsidiary - (103,022) (753,599)
------------- ----------- -----------
19
Total Other Income
(Expense) (1,377,943) (9,973,030) (2,549,108)
Provision for Income - (2,528,279) -
------------- ------------ ------------
Net Loss $ (5,475,654) $(52,436,869) $(28,946,667)
------------- ------------ ------------
Basic and Diluted Loss
Per Commom Share $ (0.04) $ (0.50) $ (0.36)
------------- ------------ ------------
Weighted Average Number
of Common Shares Used in
Per Share Calculation 134,732,687 106,145,361 83,368,053
------------- ------------ ------------
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. As a result of the
Company's sale of its controlling interest in Big Horn, and the non-
consolidation of Big Horn thereafter, the Company had $33,787 of oil and gas
sales 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, and
$1,330,526 in 1999. All of our oil and gas production expenses are from our Big
Horn subsidiary. In 2001, we had operating expenses of $4,186,648.
General and administrative expenses were $1,675,746for 2001, compared with
$8,801,706 for 2000, representing a decrease of81%. Depreciation, depletion and
amortization expenses were $25,511 for 2001, compared to $2,023,425 for 2000.
Impairment of mineral interests and expenses were $794,444 for 2001,
$26,783,790 in 2000, and $7,217,426 in 1999. The principal factor that
contributed to the increase in impairment expenses from 1999 to 2000 was the
recognition of a $7,701,362 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 decreased from
$12,527,000 in 1999 and $7,200,205 in 2000 to $1,690,947 in 2001. The
settlement costs in 2001 resulted from a change in estimate. 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
$134,659,453 at December 31, 2001, to offset profits, if and when achieved,
resulting in a reduction in income taxes payable at such time.
Net Loss. We incurred net losses from operations of approximately $5.5
million, $52.4 million, and $28.9 million for the years ended December 31, 2001,
2000 and 1999, respectively. After preferred dividends, the loss applicable to
common shares was approximately $5.6 million, $52.6 million and $30.4 million
for the years ended December 31, 2001, 2000 and 1999, 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 $7,701,362 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. In 2001 we recognized a loss of $402,227 because of currency
transactions. In 2000, the loss was $263,523. In 1999, we had a gain of
$170,315 as a result of currency transactions. We had a cumulative foreign
currency translation adjustment of $1,309,610 as of December 31, 2001. 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 134,659,453 as of December 31, 2001,
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, 2001, we
had total current assets of approximately $3,093,810 and total current
liabilities of approximately $12,515,006 resulting in negative working capital
of approximately$9,421,196. As of December 31, 2001, our balance sheet
reflected approximately $6.2 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, obtain any necessary future licenses or
extensions, or meet our financial commitments with respect to these properties,
we could be forced to write off the carrying value of the applicable property.
20
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 (used) net cash of approximately ($1.2) million,
$5.7 million, and $6.5 million during the years ended December 31, 2001, 2000
and 1999, respectively. This net cash has been used principally to fund net
operating losses of approximately $5.5 million, $52 million and $29 million
during the years ended December 31, 2001, 2000 and December 31, 1999,
respectively. Our operating activities provided $0.6 million of net cash during
the year ended December 31, 2001, and used net cash of approximately $3.8
million and $8.3 million during the years ended December 31, 2000 and 1999,
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, $3.7 million, $(7.3) million, and ($8.9)
million provided by (used) in investing activities for the years ended December
31, 2001, 2000 and 1999, respectively, of which approximately $0.1 million, $8.5
million and $7.0 million, respectively, was used in acquiring mineral interests.
While we had cash on hand of as of December 31, 2001, 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. 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 experienced losses on the values of our assets in those countries in
prior periods.
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.
21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Certain Information Regarding Executive Officers, Directors and Control Persons
-------------------------------------------------------------------------------
The following table contains information about each individual who was a
director or executive officer of EuroGas as of December 31, 2001, together with
all positions and offices of the Company held by each and the term of office and
the period during which each has served.
Name Age Positions with Term of Office
the Company
---------------------- --- -------------- --------------------
Dr. Gregory P. Fontana 42 Director January 1996 - Present
Andrew Andraczke 59 Chief Operating March 2002 - Present
Officer
Wolfgang Rauball 56 Director, President November 2000 - Present
and Chief Executive
Vojtech Agyagos 57 Director May 2001 - Present
Biographical Information
- ------------------------
The following paragraphs set forth brief biographical information for each
of the aforementioned directors and executive officers:
Dr. Gregory P. Fontana. Dr. Fontana has been a director of EuroGas since
May 2001. He is an attending cardio thoracic surgeon at Cedars-Sinai Medical
Center in California. He received his M.D. in 1984 at the University of
California, followed by ten years of postgraduate training at Duke University,
Harvard University and UCLA. Some of his academic appointments include Clinical
Fellow in Pediatric Cardiac Surgery at Harvard Medical School and Clinical
Assistant Professor of Surgery at UCLA School of Medicine. Dr. Fontana has
received several research grants, including a National Research Service Award
and Minimally-Invasive Cardiac Surgery Grant. He belongs to several
professional organizations, including the American Heart Association, and has
authored numerous scientific presentations and papers. Dr. Fontana is also a
consultant to Edwards Life Science and Venpro Inc. and a member of the
Scientific Advisory Board for Genzyme Biosurgery and BioHeart, Inc.
Andrew K. Andraczke. Mr. Andraczke was appointed a director of the Company
in March 2000 and Chief Executive Officer in November 2000. Mr. Andraczke
resigned from these potions in July 2001. Mr. Andraczke has been Vice
President, Secretary, and a member of the management committee of Pol-Tex since
1992, and is responsible for business development and coordination of
administrative, legal, and political aspects of the Pol-Tex venture. Mr.
Andraczke also directs computer operations and system support for the venture's
exploration and production activities. Mr. Andraczke holds B.Sc., M.Sc., and
Ph.D. degrees in computer science and applications from the Computer Science
Institute of Polytechnical University in Warsaw where he also was an Associate
Professor. He served as the General Manager of the Computing Center of the
Center for Geological Research in the Central Office of Geology (Ministry of
Geology) from 1972 to 1976, where he developed and implemented Poland's first
general database of geological and mineral resources of Poland. He also
implemented computer mapping systems, oil and gas reservoir simulations, and
production control for mining operations. From 1976 to 1982, he worked for
several oil and gas and mining firms, including OTC Oklahoma Production in
Tulsa, Oklahoma, Kansas Oil Consolidated in Tulsa, Oklahoma, John W. Mecom
Company in Houston, Texas, InteResources Group, Inc. in Houston, Texas, and
British Sulphur Corporation in London, U.K., performing reservoir modeling of
secondary and tertiary oil reservoirs, inorganic polymer floods, and underground
coal gasification projects. During this time, he also developed data
acquisition and reserve balance systems for mines in the U.S., Mexico, and
Egypt. Mr. Andraczke joined Tenneco Oil Exploration and Production Company in
Houston in 1982 and served as an internal consultant and management advisor on
computer applications and emerging technologies until 1987. Mr. Andraczke was
appointed Chief Operating Officer in March 2002.
Wolfgang Rauball Mr. Rauball was appointed director of the Company in
November 2000 and President/Chairman in July 2001. He is also Managing
Director of EuroGas Austria GesmbH and Globegas BV. Mr. Rauball has worked for
the Company in various functions since 1994. Mr. Rauball attended Darmstadt
Technical University in Germany from 1967 through 1971. During the period 1976
through 1986, his consulting activities were primarily for companies conducting
exploration for gold ore bodies in Canada, the United States and South America.
Wolfgang Rauball arranges financing for business enterprises, primarily public
companies engaged in the resource industry.
23
Vojtech Agyagos. Mr. Agyagos was appointed director of the Company in May
2001 as the nominee of Belmont. Vojtech Agyagos has served as the President and
a director of Belmont since December 1996, and is also a Managing Director of
Rozmin s.r.o. Mr. Agyagos has been self-employed as a consultant and manager to
companies involved in the acquisition and development of resource properties
since July 1991. From 1982 to 1985 and from 1985 to 1991 he served as the
President and a Director of Inter-Globe Resources and Stanholm Resources
respectively. From May 1993 to January 1995, Mr. Agyagos served as President
and a director of Stina Resources Ltd.
Compliance With Section 16 of the Securities Exchange Act of 1934
-----------------------------------------------------------------
Section 16(a) of the Exchange Act requires our officers, directors and
certain shareholders to file reports concerning their ownership of our common
stock with the SEC and to furnish to us copies of such reports. Based solely
upon our review of the reports required by Section 16 and amendments thereto
furnished to us, we believe that all reports required to be filed pursuant to
Section 16(a) of the Exchange Act were filed with the SEC on a timely basis.
Item 11. Executive Compensation
The following table sets forth information relating to the compensation of
all persons who served as the Chief Executive Officer of EuroGas during the year
ended December 31, 2001, and other persons serving as executive officers of
EuroGas as of December 31, 2001, whose total cash compensation for the 2001
fiscal year exceeded $100,000 (collectively, the "Named Officers").
Summary Compensation Table
The following table sets forth, for our three most recent fiscal years, the
Long-Term Compensation
-----------------------------
Annual Compensation Awards Payouts
------------------------------------------- --------------------- -------
Other Securities
Name and Annual Restricted Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensa- Stock Options/ LTIP Compensa-
tion ($) Awards ($) SARs(#) Payouts ($) tion ($)
- ------------------ ---- ---------- --------- --------- --------- -------- ---------- ---------
Andrew Andraczke 2001 $240,000 Nil Nil -
President, CEO (1) 2000 $322,900 Nil Nil 150,000
Wolfgang Rauball
President, CEO (2) 2001 $120,000 Nil Nil -
2000 $120,000 50,000
(1) Mr. Andraczke commenced serving as a director of EuroGas in March 2000
and Chief Executive Officer ("CEO") in November 2000. He resigned
from the Company in July 2001.
(2) Mr. Rauball was appointed as President and CEO and interim CFO on
July 6, 2001. He also serves as Managing Director of EuroGas Austria
GmbH.
Option Grants in Last Fiscal Year
- ---------------------------------
No options were granted to the Named Officers during 2001.
Executive Employment and Consulting Arrangements
- ------------------------------------------------
No employee of EuroGas is employed pursuant to a written agreement.
We have relied heavily on consultants to identify potential projects, to
negotiate the terms of acquisitions, to develop relationships with governmental
regulators and industry partners, and to complete business and financing
transactions. As a result of services in these areas, we paid $120,000 in 2001,
$150,000 in 2000, $200,000 in 1999, and $600,000 in 1998 (including payments in
24
arrears related to services for previous years) to Wolfgang Rauball, the brother
of Reinhard Rauball, our former Chairman of the Board. Wolfgang Rauball now
serves as the CEO and President of the Company and asits interim CFO. We also
paid $240,000 in 2001, $322,900 in 2000, $320,000 in 1999, and $240,000 in 1998
(including payments in arrears related to services for previous years) to Andrew
K. Andraczke, a key employee in Poland and our former director, President and
CEO. If we do not continue to make significant acquisitions, and as we develop
revenues, we anticipate relying more on the services of employees and amounts
paid to consultants will decrease.
Compensation of Directors
- -------------------------
We compensate our outside directors for their services with a monthly fee
of $5,000 and reimbursement of expenses incurred in attending board meetings.
We do not separately compensate our board members who are also our employees for
their service on the board.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
- ----------------------------------------------------------------------------
As of December 31, 2001, the Compensation Committee consisted of the Board
of Directors. The Board of Directors as of December 31, 2001, included:
* Gregory Fontana, who is not an employee of the Company;
* Wolfgang Rauball, who since July 2001 has served as President and
CEO andinterim CFO of EuroGas, and who also serves as Managing
Director of EuroGas Austria GesmbH since 1998 and as Managing
Director of GlobeGas B.V. Amsterdam since 1996; and
* Vojtech Agyagos who has served as a Director since May 2001.
Compensation Committee Report
- -----------------------------
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act or the Exchange Act that incorporates
by reference, in whole or in part, subsequent filings, including, without
limitation, this Annual Report on Form 10-K, the Compensation Committee Report
and the Performance Graph set forth below shall not be deemed to be incorporated
by reference in any such filings.
As required by rules promulgated by the SEC, this Compensation Committee
Report describes the overall compensation goal and policies applicable to our
executive officers, including the basis for determining the compensation of
executive officers for the 2001 fiscal year.
General. Management compensation is overseen by the Board of Directors
(the "Board"). In July 1999, the Board established a Compensation Committee
comprised of Dr. Gregory P. Fontana, Dr. Hans Fischer and Rudolph Heinz, who
also constituted the Compensation Committee on December 31, 1999. However, Mr.
Fischer and Mr. Heinz have subsequently resigned, and the Compensation Committee
has been dissolved. Accordingly, the following compensation report was prepared
by Board members serving as of December 31, 2001.
Compensation Objectives. In determining the amount of compensation for our
executive officers, the Board is guided by several factors. Because we have
very few employees, compensation practices are flexible in response to the needs
and talents of the individual officer and are geared toward rewarding
contributions that enhance stockholder value. Historically, we have compensated
senior management based on the perceived contribution to the development of our
operations, consisting principally of salaries believed to reflect their
contributions. In addition, because we have only recently begun to generate
revenues from operations and have attempted to preserve capital for development
of our business and operations, we have used stock options as a form of
compensation for executive officers. The use of stock options is designed to
align the interests of the executive officers with the long-term interests of
EuroGas and to attract and retain talented employees who can enhance our value.
Although certain members of the Board are also executive officers, none
participates in the determination of his own compensation.
Compensation Components. The compensation of our executive officers
consists of three components: base salary, bonuses and long-term incentive
awards in the form of stock options. The Board establishes base salaries based
primarily on its objective judgment, taking into consideration both qualitative
and quantitative factors. Among the factors considered by the Board are:
25
(i) the qualifications and performance of each executive officer;
(ii) the performance of EuroGas as measured by such factors as development
activities and increased shareholder value;
(iii) salaries provided by other companies inside and outside the industry
that are of comparable size and at a similar stage of development,
to the extent known; and
(iv) our capital position and needs. The Board does not assign any specific
weight to these factors in determining salaries.
From time to time, we also compensate our executive officers in the form of
bonuses. Because we are presently in an early stage of development and do not
have a history of earnings per share, net income, or other conventional data to
use as a benchmark for determining the amount or existence of bonus awards, any
bonuses granted by the Board in the near term will be based upon its subjective
evaluation of each individual's contribution to EuroGas. In some cases,
however, bonuses payable to executive officers may be tied to specific criteria
identified at the time of engagement. For the years ended December 31, 1999,
2000 and 2001, the Board did not pay bonuses to any executive officers. The
Board's action was based on its conclusion that, despite the superior personal
performance of the executive officers, no cash incentive bonuses should be
awarded, due to the Board's desire to preserve capital for future growth and
development.
The third component of our compensation structure consists of the grant of
stock options to compensate executive officers and other key employees. Having
granted all options available under the 1996 Stock Option and Award Plan, on
November 20, 1999, the Board determined to grant options outside of any option
plan (but on terms and conditions identical to those contained in our 1996 Stock
Option and Award Plan), to certain officers, directors and outside consultants.
The purpose of such options is to give each option recipient an interest in
preserving and maximizing shareholder value in the long term, to reward option
recipients for past performance and to give option recipients the incentive to
remain with EuroGas over an extended period. The right to determine the amount
of such grants was delegated to the Compensation Committee based on its
assessment of the proposed recipients' current and expected future performance,
level of responsibilities, and the importance of his or her position with, and
contribution to, EuroGas.
Chief Executive Compensation. Mr. Andraczke had a salary of $240,000 per
year as President and CEO. He resigned during 2001. Mr. Rauball's salary is $
60.000 per year in the form of Director's Fees received from EuroGas GmbH
Austria.. Consistent with the Board's desire to preserve capital for future
growth and development, the Board elected not to pay a bonus to any executive
officer for the 2000 and 2001 fiscal years.
Use of Consultants. We anticipate continuing to rely on executive
management and outside consultants in connection with the acquisition of
additional projects and the initial development of existing projects. However,
we anticipate that, if able to establish ongoing revenues from production, we
will retain management personnel as employees of EuroGas and compensate them on
a salary basis, based on comparable compensation packages offered by employers
within our general industry and geographical area.
Respectfully submitted,
Gregory Fontana
Wolfgang Rauball
Vojtech Agyagos
Performance Graph
-----------------
The following graph shows a comparison of cumulative shareholder return for
our common stock for the period beginning December 31, 1996 (the date the
common stock was first quoted in the over-the-counter market) and ending
December 31, 2001, as well as the cumulative total return for the NASDAQ
Composite Index and the Howard Weil, Bloomberg Oilfield Service and
Manufacturing Index. The Peer Group Index is a price-weighted composite index
comprised of the cumulative shareholder return for forty-seven companies
involved in oilfield services.
The performance graph assumes that $100 was invested at the market close on
December 31, 1996 and that dividends, if any, were reinvested for all companies,
including those on the NASDAQ Composite Index and the Peer Group Index.
[Graph]
26
Total Return Analysis
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------
EuroGas $100.00 $385.71 $ 89.29 $ 29.46 $ 14.29 $ 12.28
Dow Jones US
Oil $100.00 $ 97.41 $ 75.42 $ 77.46 $121.92 $ 92.03
Companies
Secondary
Index (symbol:
OIS)
NASDAQ
Composite $100.00 $149.25 $208.40 $386.77 $234.81 $ 78.33
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following beneficial ownership table sets forth information regarding
beneficial ownership of our common stock as of April 15, 2002 by:
* each person or entity that is known by us to own beneficially 5% or
more of The outstanding shares of our common stock;
* each of our directors;
* each of the Named Executive Officers; and
* all of our executive officers and directors as a group.
Under relevant provisions of the Exchange Act, a person is deemed to be a
"beneficial owner" of a security if he or she has or shares the power to vote or
direct the voting of the security or the power to dispose or direct the
disposition of the security. A person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership in 60 days. More than one person may be deemed to be a beneficial
owner of the same securities. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of our common stock
as of March 31, 2002, plus those shares of our common stock that the stockholder
has the right to acquire within 60 days. Consequently, the denominator for
calculating the percentage ownership may be different for each stockholder.
Unless otherwise indicated, the address of these individuals is the same as the
Company's principal executive offices.
The table is based upon information provided by our directors and executive
officers.
27
Amount and Nature of Beneficial
Ownership as of April 15, 2002(1)
---------------------------------------------------
Name and Common Exercisable Total
Address of Shares Options & Ownership Percent(3)
Beneficial (1) Warrants(2)
Owner
--------------- --------- ----------- ---------- ----------
Wolfgang Rauball(4)
CEO, Chairman & 9,671