10KSB 1 ksb1001.txt ______________________________________________________________________________ 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 & 9,671,429 0 9,671,429 6.68% Director Dr. Gregory P. Fontana, Nil 250,000 250,000 * Director 2269 Worthing Lane Los Angeles, California 90077 Andrew Andraczke, Nil 350,000 350,000 * Chief Operating Officer Warsaw:str. Lektykarska 18 01-687 Warszawa, Poland Vojtech Nil Nil Nil * Agyagos, Director 1365 Dempsey Road North Vancouver, B.C. V7K 1S7 All officers and directors 9,671,429 600,000 10,271,429 7.09% as a group (4 persons) * Less than one percent. _________________________ (1) Unless otherwise indicated, to our best knowledge, all stock is owned beneficially and of record by the listed shareholder, and each shareholder has sole voting and investment power with respect to our common stock beneficially owned by such person. (2) Represents options or warrants exercisable within 60 days of April 15, 2002, held by the individual or entity. (3) The percentage indicated represents the number of shares of our common stock, warrants and options exercisable within 60 days held by the indicated stockholder divided by the sum of (a) the number of shares subject to options exercisable by this shareholder within 60 days and (b) 144,796,460, which is the number of shares of our common stock issued and outstanding as of December 31, 2001. (4) Includes shares in which Mr. Rauball disclaims beneficial ownership and which he temporarily holds as a nominee for other persons. Item 13. Certain Relationships and Related Transactions Wolfgang Rauball Mr. Rauball currently serves as our CEO, President and interim CFO and is a director and a significant shareholder of the Company. Over the past three years, we have entered into several transactions with Mr. Rauball or with entities controlled by him, as outlined in this Item 13. 28 * In 2000, we issued four convertible debentures in the aggregate face amount of $3,000,000 in exchange for $3,000,000 in cash to Mr. Rauball and some of his affiliates. As of April 15, 2000, Mr. Rauball and his affiliates had converted all $3,000,000 in principal amount of convertible debentures in exchange for 8,571,429 shares of common stock and 17,142,858 warrants to purchase common stock. $ [Others? What about Oxbridge and other related parties?] Oxbridge is not an affiliate. There are no other related parties anymore. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K -------------------------------------------------------------------------- (a) Documents Filed 1. Financial Statements. The following Consolidated Financial Statements of the Company and report of independent accountants are included immediately following the signature page of this Report. A. Report of Hansen, Barnett & Maxwell, independent certified public accountants, for the years ended December 31, 2001, 2000, and 1999 B. Consolidated Balance Sheets at December 31, 2001 and 2000 C. Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999 D. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 2000 and 2001 E. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 F. Notes to Consolidated Financial Statements 2. Exhibits. Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 2.1 Exchange Agreement between Report on Form Northampton, Inc., 8-K and Energy Global, A.G. dated August 3, 1994, Exhibit No. 1* 2.2 Agreement and Plan of Merger Report on Form between EuroGas, Inc., 8-K and Danube International dated July 12, Petroleum Company, Inc., 1996, dated July 3, 1996, as amended Exhibit No. 5* 2.3 English translation of Transfer Report on Form Agreement between 8-K EuroGas and OMV, Inc. for the dated June 11, Acquisition of 1997 OMV (Yakut) Exploration GmbH Exhibit No. 1* dated June 11, 1997 2.4 Asset Exchange Agreement between Report on Form EuroGas, Inc., S-1 and Beaver River Resources, Ltd., dated July, dated April 1, 1988 23, 1998 Exhibit No. 2.03* 3.1 Articles of Incorporation Registration Statement on Form S-18, File No. 33-1381-D Exhibit No. 1* 3.2 Amended Bylaws Annual Report on Form 10-K for the fiscal year ended September 30, 1990, Exhibit No. 1* 29 Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 3.3 Designation of Rights, Quarterly Privileges, and Preferences Report on of 1995 Series Preferred Stock Form 10-QSB dated March 31, 1995, Exhibit No. 1* 3.4 Designation of Rights, Report on Form Privileges, and Preferences 8-K of 1996 Series Preferred Stock dated July 12, 1996, Exhibit No. 1* 3.5 Designation of Rights, Report on Form Privileges, and Preferences 8-K 1997 Series A Convertible dated May 30, Preferred Stock 1997 Exhibit No. 1* 3.6 Designation of Rights, Report on Form Privileges, and Preferences S-1 of 1998 Series B Convertible Dated July 23, Preferred Stock 1998 Exhibit No. 3.06* 3.7 Articles of Share Exchange Report on Form 8-K dated August 3, 1994, Exhibit No. 6* 3.8 Designation of Rights, Registration Privileges, and Preferences of Statement on 1999 Series C 6% Convertible Form S-1, File Preferred Stock No. 333-92009, filed on December 2, 1999 4.1 Subscription Agreement between Report on Form EuroGas, Inc., and S-1 Thomson Kernaghan & Co., Ltd., dated July 23, dated May 29, 1998 1998 Exhibit No. 4.01* 4.2 Warrant Agreement dated July 12, Report on Form 1996, with 8-K Danube Shareholder dated July 12, 1996, Exhibit No. 2* 4.3 Registration Rights Agreement Report on Form Between EuroGas, Inc., S-1 dated July and Thomson Kernaghan & Co., 23, 1998 Ltd., dated May 29, 1998 Exhibit No. 4.02* 4.4 Registration Rights Agreement Report on Form dated July 12, 1996, 8-K with Danube Shareholder dated July 12, 1996 Exhibit No. 3* 4.5 Registration Rights Agreement by Report on Form and among EuroGas, Inc., and S-1 Finance Credit & Development dated July 23, Corporation, Ltd., dated June 30, 1998 1997 Exhibit No. 4.06* 4.6 Option granted to the Trustees of Annual Report the Estate of on Bernice Pauahi Bishop Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 10* 4.7 Registration Rights Agreement by Annual Report and among on EuroGas, Inc., and Kukui, Inc., Form 10-KSB and the Trustees of for the the Estate of Bernice Pauahi fiscal year Bishop ended December 31, 1995, Exhibit No. 11* 30 Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 4.8 Option issued to OMV Annual Report Aktiengesellschaft to acquire up on to 2,000,000 shares of restricted Form 10-KSB common stock for the fiscal year ended December 31, 1996, Exhibit No. 13* 4.9 Form of Convertible Debenture Quarterly issued on January 12, 2000. report on Form 10-Q dated March 31, 2000. 10.1 English translation of Mining Quarterly Usufruct Contract between The Report on Form Minister of Environmental 10-Q dated Protection, Natural Resources and September 30, Forestry of the Republic of 1997 Exhibit Poland and Pol-Tex Methane, dated No. 1* October 3, 1997 10.2 Agreement between Polish Oil and Quarterly Gas Mining Joint Stock Company Report on Form and EuroGas, Inc., dated October 10-Q dated 23, 1997 September 30, 1997 Exhibit No. 2* 10.3 1996 Stock Option and Award Plan Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 14* 10.4 Settlement Agreement by and among Annual Report Kukui, Inc., and on Pol-Tex Methane, Sp. zo.o., Form 10-KSB McKenzie Methane for the Rybnik, McKenzie Methane fiscal year Jastrzebie, GlobeGas, ended B.V. (formerly known as McKenzie December 31, Methane Poland, 1995, B.V.), and the Unsecured Exhibit No. Creditors' Trust of the 15* Bankruptcy Estate of McKenzie Methane Corporation 10.5 Acquisition Agreement between Report on Form EuroGas, Inc., and Belmont S-1 dated Resources, Inc., dated July 22, July 23, 1998 1998 Exhibit No. 10.20* 10.6 General Agreement governing the Report on Form operation of 8-K McKenzie Methane Poland, B.V. dated August 3, 1994, Exhibit No. 2* 10.7 Concession Agreement between Annual Report Ministry of on Environmental Protection, Natural Form 10-KSB Resources, and for the Forestry and Pol-Tex Methane Ltd. fiscal year ended December 31, 1995, Exhibit No. 18* 10.8 Association Agreement between Annual Report NAFTA a.s. Gbely on and Danube International Form 10-KSB Petroleum Company for the fiscal year ended December 31, 1995, Exhibit No. 19* 10.9 Agreement between Moravske' Annual Report Naftove' Doly a.s. on and Danube International Form 10-KSB Petroleum Company for the fiscal year ended December 31, 1995, Exhibit No. 20* 31 Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 10.10 Form of Convertible Debenture Report on Form 8-K dated August 3, 1994, Exhibit No. 7* 10.11 Form of Promissory Note, as Annual Report amended, with attached on list of shareholders Form 10-KSB for the fiscal year ended December 31, 1995, Exhibit No. 23* 10.12 Amendment #1 to the Association Annual Report Agreement Entered on on 13th July 1995, between NAFTA Form 10-KSB a.s. Gbely and for the Danube International Petroleum Fiscal year Company ended December 31, 1996, Exhibit No. 25* 10.13 Acquisition Agreement by and Form 10-Q among Belmont Resources, Inc., Dated EuroGas Incorporated, dated September 30, October 9, 1998 1998 Exhibit No. 1* 10.14 Letter of Intent by and between Annual Report Polish Oil and Gas on Company and Pol-Tex Methane, Form 10-KSB dated April 28, 1997 for the Fiscal year ended December 31, 1996, Exhibit No. 27* 10.15 Purchase and Sale Agreement Report on Form between Texaco Slask 8-K Sp. zo.o., Pol-Tex Methane Sp. Dated March zo.o. and 24, 1997 GlobeGas B.V. Exhibit No. 1* 10.16 English translation of Articles Report on Form of Association of the 8-K/A TAKT Joint Venture dated June 7, Dated June 11, 1991, as amended 1997 April 4, 1993 Exhibit No. 3* 10.17 English translation of Proposed Report on Form Exploration and 8-K/A Production Sharing Contract for Dated June 11, Hydrocarbons 1997 between the Republic of Sakha Exhibit No. 4* (Yakutia) and the Russian Federation and the TAKT Joint Venture 10.18 English translation of Agreement Registration on Joint Investment and Statement on Production Activities between Form S-1 dated EuroGas, Inc., and July 23, 1998 Zahidukrgeologia, dated May 14, Exhibit No. 1998 10.21* 10.19 English translation of Statutory Registration Agreement of Association of Statement on Limited Liability Company with Form S-1 dated Foreign Investments between July 23, 1998 EuroGas, Inc., and Makyivs'ke Exhibit No. Girs'ke Tovarystvo, dated June 10.22* 17, 1998 10.20 Partnership Agreement between Amendment No. EuroGas, Inc., and RWE-DEA 1 to Altiengesellschaft for Mineraloel Registration and Chemie AG, date July 22, 1998 Statement on Form S-1 dated August 3, 1998 Exhibit No. 10.23 10.21 Mining Usufruct Contract between Quarterly The Minister of Report on Environmental Protection, Natural Form 10-Q Resources and dated Forestry of the Republic of September 30, Poland and Pol-Tex 1997 Methane, dated October 3, 1997 Exhibit No. 1* 32 Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 10.22 Agreement between Polish Oil and Quarterly Gas Mining Joint Report on Stock Company and EuroGas, Inc., Form 10-Q dated dated October 23, 1997 September 30, 1997 Exhibit No. 2* 10.23 Agreement for Acquisition of 5% Quarterly Interest in a Report on Subsidiary by and between Form 10-Q EuroGas, Inc., B. Grohe, dated and T. Koerfer, dated November September 30, 11, 1997 1997 Exhibit No. 3* 10.24 Option Agreement by and between Quarterly EuroGas, Inc., Report on and Beaver River Resources, Ltd., Form 10-Q dated dated October 31, 1997 September 30, 1997 Exhibit No. 4* 10.25 Lease Agreement dated September Registration 3, 1996, between Potomac Statement Corporation and the Company; on Form S-1, Letter of Amendment dated File No. September 30, 1999. 333-92009, filed on December 2, 1999 10.26 Sublease dated November 2, 1999, Registration between Scotdean Limited and the Statement on Company Form S-1, File No. 333-92009, filed on December 2, 1999 10.27 Securities Purchase Agreement Registration dated November 4, 1999, between Statement on the Company and Arkledun Drive Form S-1, File LLC No. 333-92009, filed on December 2, 1999 10.28 Registration Rights Agreement Registration dated November 4, 1999, between Statement on the Company and Arkledun Drive Form S-1, File LLC No. 333-92009, filed on December 2, 1999 10.29 Supplemental Agreement dated Registration November 4, 1999, between the Statement on Company and Arkledun Drive LLC Form S-1, File No. 333-92009, filed on December 2, 1999 10.30 Executive Employment Agreement Registration dated April 20, 1999 between the Statement on Company and Karl Arleth Form S-1, File No. 333-92009, filed on 10.31 December 2, Settlement Agreement dated June 1999 16, 2000, between the Company and FCOC Form 10-K for year ended December 31, 2000 Securities Purchase Agreement Form 10-K for 10.32 dated October 2, 2000, between year ended the Company and Arkledun Drive December 31, LLC 2000 10.33 Registration Rights Agreement Form 10-K for dated October 2, 2000, between year ended the Company and Arkledun Drive December 31, LLC 2000 10.34 Settlement Agreement dated Form 10-K for November 14, 2000, between the year ended Company and Arkledun Drive LLC December 31, 2000 33 Exhibit Title of Document Location Number -------- ---------------------------------- ----------------- 10.35 Consulting Agreement dated Form 10-K for September 18, 2000, between the year ended Company and Spinneret Financial December 31, Systems, Ltd. 2000 10.36 Securities Purchase Agreement Form 10-K for dated March 27, 2001 between the year ended Company and Belmont Resources December 31, Inc. 2000 10.37 Agreement dated April 9, 2001 Form 10-K for between the Company and Belmont year ended Resources Inc. December 31, 2000 10.38 Warrant Agreement dated September Form 10-K for 8, 2000 with Oxbridge Limited year ended December 31, 2000 10.39 Warrant Agreement dated September Form 10-K for 8, 2000 with Rockwell year ended International Ltd. December 31, 2000 10.40 Warrant Agreement dated September Form 10-K for 8, 2000 with Conquest Financial year ended Corporation December 31, 2000 10.41 Termination and Transfer Form 10-K for Agreement dated June 23, 2000 year ended between the Company and Belmont December 31, Resources, Inc. 2000 10.42 Loan Agreement dated March 3, Form 10-K for 1999 between the Company and Pan year ended Asia Mining Corp. December 31, 2000 10.43 Agreement dated July 14, 2000 Form 10-K for between the Company and Oxbridge year ended Limited December 31, 2000 10.44 Amended Agreement dated July 25, Form 10-K for 2000 between the Company, Pan year ended Asia Mining Corp., and Oxbridge December 31, Limited 2000 10.45 Settlement Agreement dated Form 10-K for November 20, 2000 between the year ended Company and Beaver River December 31, Resources, Ltd. 2000 21.1 Subsidiaries Annual Report on Form 10-KSB for the Fiscal year ended December 31, 1995, Exhibit No. 24* ------------------------------------------------------------ * Incorporated by reference (b) Reports on Form 8-K During the last quarter of the fiscal year ended December 31, 2001, we did not file any reports on Form 8K. (c) Exhibits Exhibits to this Report are attached following Page F-1 hereof. (d) Financial Statement Schedules None 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EUROGAS, INC. (Registrant) By: /s/ Wolfgang Rauball ------------------------------------ Wolfgang Rauball President, Chief Executive Officer and Interim CFO (Principal Accounting and Financial Officer) DATE: April 15, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date ------------------- ---- /s/ Wolfgang Rauball April 15, 2002 -------------------------------- Wolfgang Rauball, Director /s/ Gregory P. Fontana April 15, 2002 -------------------------------- Dr. Gregory P. Fontana, Director /s/ Vojtech Agyagos April 15, 2002 -------------------------------- Vojtech Agyagos, Director 35 EUROGAS, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 2000 and 2001 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-8 Notes to Consolidated Financial Statements F-10 Supplemental Information Regarding Oil and Gas Producing Activities (unaudited) F-34 F-1 HANSEN, BARNETT & MAXWELL A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS (801) 532-2200 Member of AICPA Division of Firms Fax (801) 532-7944 Member of SECPS 5 Triad Center, Suite 750 An Independent Member of Salt Lake City, Utah 84180 Baker Tilly International REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Shareholders EuroGas, Inc. We have audited the accompanying consolidated balance sheets of EuroGas, Inc. and Subsidiaries, as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EuroGas, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 in the financial statements, the Company has suffered recurring losses from operations and has had negative cash flows from operating activities. At December 31, 2001, the Company has negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. HANSEN, BARNETT & MAXWELL Salt Lake City, Utah April 11, 2002 F-2 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, -------------------------- 2001 2000 ------------ ------------ ASSETS Current Assets Cash $ 257,831 $ 57,745 Investment in securities available-for-sale 782,908 137,948 Investment in fixed-maturity securities 1,445,501 - Trade accounts receivables, no allowance provided - 2,715,089 Value added tax receivables 23,656 111,033 Other receivables 562,864 139,025 Other current assets 21,050 228,420 ------------ ------------ Total Current Assets 3,093,810 3,389,260 ------------ ------------ Drilling Advances - 321,240 ------------ ------------ Property and Equipment - full cost method Talc mineral properties and mining equipment 6,300,993 2,216,308 Oil and gas properties subject to amortization - 16,499,982 Oil and gas properties not subject to amortization 6,186,606 9,461,039 Furniture and office equipment 353,142 1,006,517 ------------ ------------ Total Property and Equipment 12,840,741 29,183,846 Less: accumulated depletion, depreciation and amortization (183,278) (3,979,057) ------------ ------------ Total Property and Equipment 12,657,463 25,204,789 ------------ ------------ Investments, at cost 358,857 877,014 Other Assets - 544,703 ------------ ------------ Total Assets $ 16,110,130 $ 30,337,006 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ - $ 7,481,288 Accrued liabilities 4,525,467 3,064,699 Accrued liabilities payable to related parties 416,858 - Accrued settlement obligations 6,345,766 6,619,691 Accrued income taxes 802,621 646,993 Notes payable 35,718 3,234,011 Notes payable to related parties 388,576 1,850,389 ------------ ------------ Total Current Liabilities 12,515,006 22,897,071 ------------ ------------ Deferred Income Tax Liability - 2,442,081 ------------ ------------ Minority Interest - 3,787,343 ------------ ------------ Stockholders' Equity Preferred stock, $.001 par value; 3,661,968 shares authorized; 2,392,228 shares outstanding; liquidation preference: $980,469 350,479 350,479 Common stock, $.001 par value; 325,000,000 shares authorized; 144,796,460 shares and 126,996,460 shares issued, respectively 144,797 126,997 Additional paid-in capital 139,314,283 133,447,684 Accumulated deficit (134,659,453) (129,048,600) Accumulated other comprehensive loss (1,336,314) (3,666,049) Treasury stock, at cost; 725,327 and 518,328 shares, respectively (218,668) - ------------ ------------ Total Stockholders' Equity 3,595,124 1,210,511 ------------ ------------ Total Liabilities and Stockholders' Equity $ 16,110,130 $ 30,337,006 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Oil and Gas Sales $ 88,937 $ 6,395,037 $ 4,973,508 Costs and Operating expenses Oil and gas production - 1,521,471 1,330,526 Impairment of mineral interests 794,444 26,783,790 7,217,426 Depreciation, depletion, and amortization 25,511 2,023,425 1,810,176 Litigation settlement expense 1,690,947 7,200,205 12,527,000 General and administrative 1,675,746 8,801,706 8,485,939 ------------ ------------ ------------ Total Costs and Operating Expenses 4,186,648 46,330,597 31,371,067 ------------ ------------ ------------ Loss from Operations (4,097,711) (39,935,560) (26,397,559) Net loss on sale of investments (1,409,729) (2,029,916) (1,682,045) Equity income 341,843 - - Interest income 59,961 89,698 179,538 Interest expense (240,115) (8,122,205) (567,195) Foreign exchange net gains (losses) (402,227) (263,523) 170,315 Gain on sale of equipment 272,324 455,938 103,878 Minority interest in income of subsidiary - (103,022) (753,599) ------------ ------------ ------------ Loss Before Provision for Income Taxes (5,475,654) (49,908,590) (28,946,667) Provision for Income Taxes - 2,528,279 - ------------ ------------ ------------ Net Loss (5,475,654) (52,436,869) (28,946,667) Preferred Dividends 135,199 139,932 1,442,345 ------------ ------------ ------------ Loss Applicable to Common Shares $ (5,610,853) $(52,576,801) $(30,389,012) ============ ============ ============ Basic and Diluted Loss Per Common Share $ (0.04) $ (0.50) $ (0.36) ============ ============ ============ Weighted-Average Number of Common Shares Used In Per Share Calculations 134,732,687 106,145,361 83,368,053 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Preferred Stock Common Stock Additional Comprehensive Total ---------------------- -------------------- Paid-in Accumulated Income Treasury Stockholders' Shares Amount Shares Amount Capital Deficit (Loss) Stock Equity ---------- ---------- ---------- -------- ----------- ------------ ---------- ---------- ----------- Balance - December 31, 1998 2,393,728 $1,733,027 76,254,630 $ 76,255 $92,833,328 $(46,082,787) $ (836,944) $ - $47,722,879 ----------- Net loss - - - - - (28,946,667) - - (28,946,667) Net change in unrealized losses on securities available for sale - - - - - - (2,360,980) - (2,360,980) Reclassification adjustment for realized losses on securities included in net loss - - - - - - 1,671,393 - 1,671,393 Translation adjustments - - - - - - (2,339,410) - (2,339,410) ----------- Comprehensive loss (31,975,664) ----------- Dividends on preferred shares - - - - - (1,442,345) - - (1,442,345) Issuance of 1998 Series preferred stock, net of $487,500 issuance costs 6,500 6,012,500 - - - - - - 6,012,500 1998 Series preferred shares beneficial conversion feature - - - - 901,875 - - - 901,875 Conversion of 1998 Series preferred stock and accrued dividends (8,000)(7,395,048) 10,576,208 10,576 7,423,973 - - - 39,501 Issuance of Series C preferred stock, net of $148,530 issuance costs 1,800 1,651,470 - - - - - - 1,651,470 Series C preferred shares beneficial conversion feature - - - - 360,000 - - - 360,000 Compensation related to grant of stock options - - - - 487,553 - - - 487,553 Issuance as payment of interest - - 5,000 5 25,445 - - - 25,450 ---------- ---------- ---------- -------- ----------- ------------ ---------- ---------- ----------- Balance - December 31, 1999 2,394,028 2,001,949 86,835,838 86,836 102,032,174 (76,471,799) (3,865,941) - 23,783,219 ----------- Net loss - - - - - (52,436,869) - - (52,436,869) Net change in unrealized losses on securities available for sale - - - - - - (179,136) - (179,136) Reclassification adjustment on unrealized loss on securities- available-for-sale - - - - - - 1,248,073 - 1,248,073 Translation adjustments - - - - - - (869,045) - (869,045) ----------- Comprehensive loss (52,236,977) ----------- Dividends on preferred shares - - - - - (139,932) - - (139,932) Conversion of Series C preferred stock and accrued dividends (1,800) (1,651,470) 5,329,713 5,330 1,667,739 - - - 21,599 Issuance for cash, net of $169,500 offering costs - - 9,400,000 9,400 2,195,600 - - - 2,205,000 Issuance of common shares and 3,000,000 options under settlement agreement with FCDC - - 3,700,000 3,700 11,609,300 - - - 11,613,000 Issuance for settlement agreements - - 1,842,983 1,843 1,031,671 - - - 1,033,514 Issuance for assumption of lending commitment - - 500,000 500 364,500 - - - 365,000 Repricing of warrants - - - - 1,246,718 - - - 1,246,718 Warrants and beneficial conversion feature issued with notes payable, net of $360,212 offering costs - - - - 2,669,567 - - - 2,669,567 Warrants issued in connection with default on notes payable - - - - 2,639,038 - - - 2,639,038 Beneficial conversion feature of notes payable - - - - 918,000 - - - 918,000 Conversion of $1,173,896 of notes payable to related parties and $502,871 of accrued interest - - 3,891,954 3,892 1,672,875 - - - 1,676,767 Conversion of notes payable - - 14,331,540 14,331 5,001,705 - - - 5,016,036 Issuance for services - - 1,164,432 1,165 398,797 - - - 399,962 ---------- ---------- ---------- -------- ----------- ------------ ---------- ---------- ----------- Balance - December 31, 2000 2,392,228 350,479 126,996,460 126,997 133,447,684 (129,048,600) (3,666,049) - 1,210,511 ----------- Net loss - - - - - (5,475,654) - - (5,475,654) Net change in unrealized losses on securities available for sale - - - - - - (26,620) - (26,620) Translation adjustments - - - - - - 2,356,355 - 2,356,355 ----------- Comprehensive loss (3,145,919) ----------- Dividends on preferred shares - - - - - (135,199) - - (135,199) Modification warrants - - - - 143,560 - - - 143,560 Issued for cash - - 100,000 100 44,210 - - - 44,310 Issuance for services - - 100,000 100 48,300 - - - 48,400 Issuance for additional interest in Rozmin s.r.o. - - 12,000,000 12,000 3,588,000 - - - 3,600,000 Issuance of shares and 5,200,000 warrants as settlement expense - - 3,800,000 3,800 1,861,072 - - - 1,864,872 Purchase of treasury stock - - - - - - - (218,668) (218,668) Cancellation of shares in settlement - - (1,200,000) (1,200) (358,800) - - - (360,000) Issuance of shares as contract penalty - - 3,000,000 3,000 447,000 - - - 450,000 Sale of treasury stock - - - - 93,257 - - - 93,257 ---------- ---------- ----------- -------- ----------- ------------ ---------- ---------- ----------- Balance - December 31, 2001 2,392,228 $ 350,479 144,796,460 $144,797 $139,314,283 $(134,659,453)$(1,336,314)$ (218,668) $ 3,595,124 ========== ========== =========== ======== ============ ============= =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Cash Flows From Operating Activities Net loss $ (5,475,654) $(52,436,869) $(28,946,667) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation, depletion and amortization 25,511 2,023,425 1,810,176 Impairment of mineral interests and equipment 794,444 26,783,790 7,217,426 Equity income (341,842) - - Minority interest in income of subsidiary - 103,022 753,599 Bad debt allowance provided against note receivable - 500,000 - Interest expense related to grant or repricing of warrants and beneficial conversion features - 7,473,323 - Interest paid by issuance of common shares - 272,490 25,450 Amortization of discount on notes payable - 12,983 39,074 Expenses paid by issuance of notes payable to shareholder 110,000 986,376 - Common shares issued for services 48,400 399,962 - Shares issued for relief of funding obligation - 365,000 - Compensation paid by reduction of note receivable - - 200,000 Compensation from stock options - 487,553 Net gain on sale of subsidiaries (219,997) - - Loss on sale and impairment of securities 109,480 2,029,916 1,671,393 Exchange (gain) loss 402,227 263,523 (170,315) Changes in assets and liabilities, net of acquisitions: Trade receivables (1,204,539) (68,235) Other receivables (336,462) (67,505) (238,945) Other current assets - 92,657 (125,475) Accounts payable - 4,489,571 669,777 Accrued liabilities (171,858) 486,080 346,193 Deferred income taxes - 2,442,081 - Accrued settlement obligations 1,675,747 6,104,205 12,527,000 Other (544,703) - ------------ ------------ ------------ Net Cash Provided by (Used in) Operating Activities (3,380,004) 574,788 (3,801,996) ------------ ------------ ------------ Cash Flows From Investing Activities Proceeds from sale of Big Horn, net of cash disposed 3,447,521 - - Purchases of mineral interests, property and equipment (391,714) (8,524,839) (7,004,275) Drilling advances - (324,142) - Proceeds from sale of interest in gas property and equipment 326,582 2,773,959 207,509 Acquisition of subsidiaries, net of cash acquired - - - Net change in deposits and long-term prepayments - - 408,391 Investment in securities available- for-sale - - (1,656,434) Proceeds from sale of securities available-for-sale 299,489 - 66,858 Expenditure for other investments - (1,200,000) (358,857) Payments for notes receivable - - (600,000) ------------ ------------ ------------ Net Cash Used In Investing Activities 3,681,878 (7,275,022) (8,936,808) ------------ ------------ ------------ Cash Flows From Financing Activities Proceeds from issuance of common shares, net of offering costs 44,310 2,400,000 - Proceeds from issuance of notes payable to related parties - 3,327,892 57,506 Proceeds from issuance of notes payable - 67,363 - Principal payments on notes payable to related parties - (65,974) (218,355) Principal payments on notes payable - - (981,611) Proceeds from issuance of preferred shares, net of offering costs - - 7,663,970 Proceeds from sale of treasury stock 93,257 - - Acquisition of treaury stock (218,668) - - ------------ ------------ ------------ Net Cash Provided by (used in) Financing Activities (81,101) 5,729,281 6,521,510 ------------ ------------ ------------ Effect of Exchange Rate Changes on Cash (20,687) (18,443) (225,510) ------------ ------------ ------------ Net Decrease in Cash 200,086 (989,396) (6,442,369) Cash at Beginning of Year 57,745 1,047,141 7,489,510 ------------ ------------ ------------ Cash at End of Year $ 257,831 $ 57,745 $ 1,047,141 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Supplemental Disclosure of Cash Flow Information Cash paid for interest $ - $ 146,222 $ 376,700 Supplemental Schedule of Noncash Investing and Financing Activities Common shares and stock options issued to acquire property $ 3,843,560 $ - $ - Common shares issued upon conversion of notes payable and accrued interest - 6,415,816 25,450 Common shares issued as payment of preferred dividends - 21,599 39,502 Common shares and warrants issued in satisfaction of accrued settlement obligations - 12,451,514 - Beneficial conversion feature granted in connection with preferred shares - - 1,261,875 Note receivable in satisfaction of note payable - - 600,000 Common Stock issued in payment of accrued settlement obligation 1,864,872 - - Cash received from sale of subsidiaries: Assets sold $ 18,356,857 $ - $ - Less liabilites relieved (14,909,336) - - ------------ ------------ ------------ Cash Proceeds $ 3,447,521 $ - $ - ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 EUROGAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - EuroGas, Inc. and its subsidiaries ("EuroGas" or the "Company") are engaged primarily in the evaluation, acquisition, exploration and disposition of mineral interests, and rights to exploit oil, natural gas, coal bed methane gas, talc, and other minerals. EuroGas is in various stages of identifying industry partners, farming out exploration rights, undertaking exploration drilling, and seeking to develop production. During 1998, EuroGas acquired a controlling interest in Big Horn Resources Ltd., an exploration and production company operating in Western Canada. During 2001, EuroGas sold that interest. EuroGas' primary mineral property interests are an interest in a joint venture to reclaim a natural gas field in Western Canada, exploration properties in Poland, unproved oil and gas concessions in Slovakia, and an interest in a talc mineral deposit in Slovakia. Other interests in properties acquired prior to 2000 have either been impaired or abandoned. Business Condition - EuroGas has accumulated a deficit of $134,595,227 through December 31, 2001. EuroGas has had very limited revenue, losses from operations and negative cash flows from operating activities during the years ended December 31, 2001, 2000 and 1999. At December 31, 2001, the Company had a working capital deficiency of $9,324,230. These conditions raise substantial doubt regarding the Company's ability to continue as a going concern. Realization of the investment in properties and equipment is dependent upon management obtaining financing for exploration, development and production of its properties. In addition, if exploration or evaluation of oil and gas properties not subject to amortization is unsuccessful, all or a portion of the recorded amount of those properties will be recognized as impairment losses. Management plans to finance operations and acquisitions through borrowing and possibly through the issuance of additional equity securities, the realization of which is not assured. Principles of Consolidation - The accompanying consolidated financial statements include the accounts of EuroGas, Inc., its majority-owned subsidiaries and EuroGas' share of properties held through joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. From January 1, 2001 through May 29, 2001, the investment in Big Horn Resources Ltd. was accounted for by the equity method of accounting, based upon the weighted-average ownership percentage that was held by EuroGas during that period. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The critical accounting policies that require management's most significant estimates and judgments include the assessment of recoverability of property and equipment. The actual results experienced by the Company may differ materially from management's estimates. Mineral Interests in Oil and Gas Properties - The full cost method of accounting is used for oil and gas properties. Under this method, all costs associated with acquisition, exploration, and development of oil and gas properties are capitalized on a country-by-country basis. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. Proceeds from disposal of properties are applied as a reduction of cost without recognition of a gain or loss except where such disposal would result in a major change in the depletion rate. Capitalized costs are categorized either as being subject to amortization or not subject to amortization. The costs of properties not subject to amortization are assessed periodically and any resulting provision for impairment required is charged to operations. The assessment for impairment is based upon estimated fair value of the properties. Fair value is determined based upon estimated future discounted net cash flows. F-10 Capitalized costs of properties subject to amortization and estimated future costs to develop proved reserves are amortized and depreciated using the unit- of-production method based on the estimated proven oil and natural gas reserves as determined by independent engineers. Units of natural gas are converted into barrels of equivalent oil based on the relative energy content basis. Capitalized costs of properties subject to amortization, net of accumulated amortization and depreciation, are limited to estimated future discounted net cash flows from proven reserves, based upon year-end prices, and any resulting impairment is charged to operations. Talc Mineral Properties and Mining Equipment - Costs incurred to acquire and develop talc mineral properties and to acquire related mining equipment are capitalized. Once production begins, depreciation and depletion of total estimated cost and estimated restoration costs will be computed using the units- of-production method based on estimated minerals likely to be recovered. Furniture and Office Equipment - Furniture and office equipment are stated at cost. Minor repairs, enhancements and maintenance costs are expensed when incurred and major improvements are capitalized. Depreciation is provided on a straight-line basis over the estimated useful lives of the equipment of three to five years. Upon retirement, sale, or other disposition, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in operations. Depreciation expense for each of the three years in the period ended December 31, 2001, was $25,511, $117,875, and $238,658, respectively. Political Risk - EuroGas has mineral interest property and interests in Eastern Europe, which are subject to political instability, changes in governments, unilateral renegotiation of concessions and contracts, nationalization, foreign exchange restrictions, or other uncertainties. Financial Instruments - The amounts reported as cash, investment in securities available-for-sale, trade and other receivables, accounts payable and notes payable are considered to be reasonable approximations of their fair values. The fair value estimates presented herein were based on estimated future cash flows. The amounts reported as investment in securities available-for-sale are based upon quoted market prices. Derivative Financial Instruments - EuroGas and its international subsidiaries occasionally incur obligations payable in currencies other than their functional currencies. This subjects EuroGas to the risks associated with fluctuations in foreign currency exchange rates. EuroGas does not reduce this risk by utilizing hedging. The amount of risk is not material to EuroGas' financial position or results of operations. Loss Per Share - Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share during periods of income reflect potential dilution which could occur if all potentially issuable common shares from stock purchase warrants and options, convertible notes payable and preferred shares resulted in the issuance of common shares the weighted-average common shares outstanding was not increased from 18,439,594, 49,876,792, and 19,079,713 potentially issuable common shares at December 31, 2001, 2000, and 1999, respectively, would have decreased the loss per share and have been excluded from the calculation. Foreign Currency Translation - The functional currencies of the subsidiaries operating in Poland and Slovakia are the local currencies. The effect of changes in exchange rates with respect to those subsidiaries is recognized as a separate component of accumulated other comprehensive loss. Where the functional currencies of foreign subsidiaries is the U.S. dollar, financial statements of the foreign subsidiaries are translated into U.S. F-11 dollars using historical exchange rates and net foreign exchange gains and losses from those subsidiaries are reflected in the results of operations. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of operations. Income Taxes-Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences in the balances of existing assets and liabilities on the Company's financial statements and their respective tax bases and attributable to operating loss carry forwards. Deferred taxes are computed at the enacted tax rates for the periods when such amounts are expected to be realized or settled. Stock-Based Compensation - EuroGas accounts for stock options granted to employees based on the intrinsic value of the options on the date granted and has accounted for options granted to consultants and other non-employees based on the fair value. Long-Lived Assets -In the event that facts and circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment is measured based on the excess of cost over an estimate of future discounted cash flows. New Accounting Standards - In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations be accounted for by the purchase method of accounting after June 2001. SFAS No. 141 also establishes criteria for the recognition of intangible assets apart from goodwill. The Company does not believe these new accounting standards will have any significant effect on its financial condition or results of operations in the future. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The asset retirement obligations will be capitalized as part of the carrying amount of the long-lived asset. The Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation long-lived assets. The Company has adopted SFAS No. 143 with no material effect on its financial condition. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes Accounting Principles Board Opinion (APB) No. 30, provisions related to the accounting and reporting for the disposal of a segment of a business. This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long- lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long- lived assets to be held and used. The Statement is effective for fiscal years beginning after December 2001 and will not have a material effect on the Company's financial condition or results of operations. NOTE 2 - SALE OF INVESTMENTS IN SUBSIDIARIES Big Horn Resources Ltd. - Through December 31, 2000, EuroGas owned 14,100,000 common shares, or 50.1%, of Big Horn Resources Ltd. ("Big Horn"). From February through June 2001, EuroGas sold 4,278,233 of its Big Horn shares for $2,319,081, at an average price of $0.54 per share. In addition, on May 29, 2001, EuroGas entered into an agreement with Enterra Energy Corp. ("Enterra") whereby EuroGas sold Enterra 8,275,500 Big Horn shares in exchange for $1,198,936 paid in cash and for 6,123,870 shares of Enterra's preferred stock. Under the terms of the preferred stock designation and the agreement, Enterra agreed to redeem all of F-12 the preferred shares by May 29, 2002 at $0.56 per share. EuroGas transferred $2,279,579 of the cost of the Big Horn common stock to the Enterra preferred stock but did not recognize a gain on the exchange. EuroGas recognized a $932,248 gain from the sale of the investment in Big Horn. As a result of the sale, EuroGas' interest in Big Horn was reduced from 50.1% to 42.5% at March 31, 2001 and to less than 5% after May 29, 2001. These decreases in ownership resulted in the investment in Big Horn being accounted for by the equity method from January 1, 2001 through May 29, 2001 and as an investment in securities available for sale thereafter. EuroGas' equity in the income from Big Horn through May 29, 2001 was $341,843. Nafta-Danube Association - An agreement was reached to resolve the dispute with the Slovakian joint venture partner Nafta Gbely a.s. ("Nafta") regarding the Trebisov property. On July 4, 2001, EuroGas informed Nafta that EuroGas would agree to withdraw from the Nafta-Danube Association, in exchange for Nafta making full payment of all obligations to Geophysical Services Ltd., Hungary. EuroGas will not have any further legal or financial obligations connected with the Nafta-Danube Association. Nafta agreed to assume and pay all other liabilities owed by the Association. As a result of the agreement, EuroGas evaluated the carrying value of the gas properties and equipment in the Association, determined they were impaired and recognized an impairment loss of $1,154,444 at June 30, 2001. EuroGas recorded the sale of the Nafta-Danube Association as of June 30, 2001 and recognized a loss on the sale of $703,251. NOTE 3 - SIGNIFICANT ACQUISITIONS Falcon Energy Holding Corp. - On November 23, 2001, EuroGas entered into 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. As the purchase price for the Falcon shares, EuroGas agreed to issue 10,000,000 common shares to Falcon Holding and to provide $10,000,000 of funding to Falcon by December 31, 2001. The agreement included a penalty provision that if the Companies did not complete the contract, EuroGas would be required to issue Falcon 3,000,000 shares of common stock. On February 12, 2002 Falcon terminated the agreement due to EuroGas not providing the required funding . As a result, the 3,000,000 penalty shares are issuable to Falcon and are included as outstanding at December 31, 2001 in accompanying financial statements. The shares were valued at $450,000 or $0.15 per share based upon the fair value of the stock on the date of the agreement. EuroGas and Falcon have continued to negotiate a suitable replacement program for future investment. Rozmin s.r.o. - During 1998, EuroGas acquired a 23.65% interest in a talc deposit in Eastern Slovakia through an indirect investment in Rozmin s.r.o. On March 27, 2001, EuroGas entered into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from Belmont Resources, Inc. ("Belmont") in exchange for EuroGas issuing 12,000,000 common shares, paying Belmont $100,000 in cash and modifying the exercise price of existing stock options, as explained below. EuroGas also agreed to register the common shares issued. EuroGas has the right to repurchase up to 6,000,000 common shares at $2.00 per share for up to one year, upon thirty days written notice to Belmont. EuroGas agreed to issue additional common shares if the ten-day average NASD OTC quoted trading price of the Company's common shares was less than $0.30 per share for any ten-trading- day period through March 27, 2002. Under the terms of the guarantee, EuroGas agreed to issue an additional 1,000,000 common shares to Belmont for each $0.05 decrease in the ten-day average quoted market price below $0.30 per share. Additionally, if Belmont is unable to realize $1,911,700 from the resale of the original 12,000,000 common shares by March 27, 2002, EuroGas has agreed to issue additional common shares to compensate for any shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. EuroGas currently estimates that 3,830,000 additional shares may be issuable under the terms of the guarantee. F-13 In connection with the purchase by EuroGas, Rozmin s.r.o. granted an overriding royalty to Belmont of two percent of gross revenues from any talc sold. EuroGas agreed to pay Belmont a $100,000 non-refundable advanced royalty and agreed to arrange the necessary financing to place the talc deposit into commercial production by March 27, 2002. If not in commercial production within one year, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. EuroGas granted Belmont the right to appoint one member of the EuroGas, Inc. board of directors for not less than one year. In connection with the acquisition, EuroGas further modified the options held by Belmont for the purchase of 2,500,000 common shares at $0.82 per share to being exercisable at $0.40 per share. The modification to the options increased their fair value on January 4, 2001, the date modified, by $143,560, which amount was included in the cost of the purchase of Roxmin s.r.o. The fair value of the options was determined using the Black-Scholes option-pricing model with the following weighted average assumptions: risk free interest rate of 5.0%; expected dividend yield of 0%; volatility of 111% and an expected life of 1.5 years. The purchase was recorded at $3,843,560, based on the market value of the common shares issued (including the guarantee of the future stock value), the increase in the fair value from the modification of the stock options and the cash advance royalty to be paid. The issuance of additional common shares under the guarantee of the future market value of the Company's common shares will not result in additional cost when issued. EuroGas accounted for the acquisition as a purchase and allocated the purchase price to the assets acquired, primarily the interest in talc mineral properties. No goodwill was recognized in the purchase transaction. The operations of Rozmin s.r.o. have been included in the consolidated results of operations from March 27, 2001. EuroGas acquired the original 23.65% mineral interest through the acquisition of a 55% interest in Rima Muran s.r.o. whose principal asset is a 43% investment in Rozmin s.r.o. On April 2, 2002 EuroGas exchanged its 55% interest in Rima Muran s.r.o. for the 43% investment in Rozmin s.r.o. held by Rima Muran. As part of the exchange, EuroGas paid approximately $107,500 to the former minority owners of Rima Murah to pay liabilities of Rima Muran and to compensate the former minority owners. Rima Muran agreed to transfer title to two pieces of heavy equipment, which EuroGas had previously financed, to Rozmin. As a result of the exchange EuroGas has a direct 43% ownership in Rozmin S.r.o. free of encumbrances, and another 57% interest in Rozmin once the afore described transaction with Belmont is complete. By virtue of its 100% ownership of Rozmin s.r.o. and the talc deposit, EuroGas bears the full responsibility to fund the development costs necessary to bring the deposit to commercial production. NOTE 4 - INVESTMENT IN EQUITY SECURITIES Investment in Securities Available-for-Sale - The Company's investment in equity securities are accounted for as available for sale. The investments in securities available for sale are carried at market value with unrealized gains and losses included in other comprehensive income (loss). The cost of securities sold was determined by the average-cost method. The investment in securities consisted of the following at December 31, 2001 and 2000: 2001 2000 ---------- ---------- Cost $ 809,612 $ 137,864 Gross unrealized gains - 84 Gross unrealized losses (26,704) - ---------- ---------- Estimated fair value $ 782,908 $ 137,948 ========== ========== F-14 The Company sold available-for-sale securities for gross proceeds, gross unrealized gains and gross realized losses as shown in the following table. In addition, the Company recognized impairment losses from other-than-temporary declines in the fair value of available-for-sale securities as follows: 2001 2000 1999 ---------- ---------- ---------- Gross proceeds from sales $ 299,489 $ - $ 100,557 Gross realized gains 5,002 - - Gross realized losses (10,880) - (71,801) Impairment losses recognized (103,602) (1,248,073) - Investment in Fixed-Maturity Securities - On May 29, 2001, EuroGas exchanged Big Horn common stock for 6,123,870 shares of Enterra Energy Corp. preferred stock. Under the terms of the preferred stock designation and the agreement, Enterra agreed to redeem all of the preferred shares by May 29, 2002 at $0.56 per share. EuroGas valued the Enterra preferred stock at $2,297,579 on the date received. On March 26, 2002, the Company entered into an agreement to sell the Enterra preferred stock to Enterra for $1,445,501, of which $1,100,156 was received on March 26, 2002 and $345,345 is due in December 2002 under the terms of a promissory note. During 2001, the Company recognized a foreign currency transaction loss of $107,203 on the investment in the preferred stock and recognized an impairment loss of $744,875 as a result of the agreement. Investment in Other Equity Securities at Cost - EuroGas paid a deposit of $300,000 towards a potential acquisition of an interest in a Russian oil and gas company owned by Teton Petroleum Company ("Teton"), and made loans to Teton in the amount of $1,000,000. During October 2000, EuroGas and Teton terminated their merger agreement. EuroGas received 2,700,000 shares of Teton common stock in consideration of its advances to Teton under the termination agreement. Since there were no regular and active market for the Teton common stock and the fair value was not readily determinable it was recorded at its historical cost of $1,300,000 as a long-term investment. During December 2000, management evaluated the investment and determined it to be impaired and recorded an impairment charge of $781,843 against the Teton stock. The investment in Teton stock was carried at $518,157 at December 31, 2000. Due to a market becoming available for the Teton stock, the investment was transferred to available-for-sale securities during 2001. Other equity securities purchased during 1999 were recorded at cost because their resale was restricted and their fair value was not readily determinable. The investments consisted of $1,000,000 of 20% cumulative convertible preferred stock of Intergold Corporation and $600,000 in share capital of Hansageomyn GmbH, both of which are mining companies. During 1999, EuroGas determined not to further invest in the two companies. The value of the common shares underlying the preferred stock had dropped substantially and management determined there had been an other-than-temporary decline in the fair value of both investments. Accordingly, EuroGas recognized a $1,600,000 impairment of the investments during 1999 NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE During 1999, the Company executed a promissory note in the amount of $600,000 to an independent third party. During the fourth quarter of 1999 this note was assigned in satisfaction of notes payable. On October 28, 1998, EuroGas executed a promissory note in the amount of $500,000 to an independent third party. Terms of the note dictate that interest accrues at 7.5%. The balance was due on May 28, 1999. During the second quarter of 2000 EuroGas determined that the note receivable was unrecoverable. Accordingly, the Company provided an allowance against the note and recorded a bad debt charge of $500,000 to its operations for the year ended December 31, 2000. On December 7, 1998, a wholly-owned subsidiary of EuroGas executed a promissory note with an officer and member of management in the amount of $200,000. During March 1999, the note was forgiven in exchange for services performed by the director. The Company recognized $200,000 as consulting expense related to this transaction. F-15 Polish Tax Refund Receivable - During the year ended December 31, 2001, a wholly owned subsidiary Pol-Tex Methane Sp.zo.o., was assessed a tax obligation of $186,031 by a Polish tax agency. The tax assessed was paid with the proceeds for the sale of drilling equipment. The Company appealed the decision to the Polish tax court. Subsequent to December 31, 2001 the tax court found in favor of the Company and reversed the total obligation. As of December 31, 2001, the Company has recorded a receivable for $190,357, the amount expected to be refunded. NOTE 6 - MINERAL INTERESTS IN PROPERTIES Beaver River Project - In March 1998, EuroGas exercised its option to acquire a 16% carried interest in the Beaver River Project in British Columbia, Canada in exchange for $300,000 and the issuance of 2,400,000 common shares which were valued at $3.16 per share. The acquisition was valued at $7,875,000. The interest in the Beaver River Project has been classified as oil and gas properties not subject to amortization. During 2000, EuroGas received 1,200,000 shares, of its common stock in return for one-half of its interest in the Beaver River project. An impairment loss of $3,937,500 was recognized on the return Oil Refinery - During 1999, EuroGas made a $358,857 payment towards the purchase of a 40% interest in an operating oil refinery in Slovenia. Upon governmental approval, EuroGas is obligated to make an additional investment of approximately $500,000 for the interest. Maseva Gas s.r.o. - During October 1998, EuroGas acquired a 90% interest in Maseva Gas s.r.o. ("Maseva"), a Slovak company, from Belmont Resources Inc. ("Belmont"). Maseva holds an 850 square kilometer concession to explore for oil and natural gas. EuroGas purchased Maseva by issuing 2,500,000 common shares and warrants purchasing an additional 2,500,000 shares at $2.50 per share within two years. The purchase price was $6,527,462 based upon the $2.00 per share quoted market value of the EuroGas common shares issued, and the fair value of the warrants on the acquisition date. The fair value of the options was determined by using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0.0%, expected volatility of 63.2%, risk-free interest rate of 5.0% and an expected life of 2 years. The unproved oil and gas concession is the primary asset acquired. Maseva had no operations prior to the acquisition. The acquisition was considered to be the purchase of properties and the cost of the acquisition was allocated to oil and gas properties not subject to amortization. EuroGas and Belmont are related parties as a result of a common individual serving on the board of directors and is a significant shareholder of both companies. Although the transfer of Meseva back to Belmont was not an arms-length transaction, it resulted in the recognition of a loss on the disposition of $6,527,462. On June 14, 2000, EuroGas agreed to transfer its 90% interest in Maseva back to Belmont, a related party as explained above, and to modify the warrants to purchase 2,500,000 common shares held by Belmont to reduce the exercise price from $2.50 to $0.82 per share and to extend their expiration date from October 8, 2000 to June 14, 2002. In exchange, Belmont agreed to provide $1,000,000 of debt financing to Rozmin s.r.o. and Belmont agreed to waive its right of first refusal to acquire the shares in Rima Muran s.r.o. from EuroGas. The modification to the options increased their fair value by $1,246,718. The fair value of the options was determined using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6.5%; expected dividend yield of 0%; volatility of 110% and an expected life of 2.0 years. The modification to the warrants was accounted for as a prepaid financing fee. Belmont did not provide the $1,000,000 financing as required under the related agreement. EuroGas did not pursue its rights to require Belmont to meet its obligation and, therefore, charged the prepaid financing fee to interest expense during 2000. F-16 Talc Mineral Interest - During 1998, EuroGas acquired a 24% interest in an undeveloped talc deposit in Eastern Slovakia through an indirect investment in Rozmin s.r.o. During the third quarter of 2000, EuroGas determined that Oxbridge Ltd., a related party, had paid $879,000 on behalf of EuroGas in 1998 as part of the purchase of the 24% interest in the talc deposit. On March 19, 1998, EuroGas reimbursed Oxbridge Ltd. for their payment and accounted for the payment to Oxbridge Ltd. as a reduction of a separate promissory note payable to Oxbridge Ltd. In light of a demand in 2000 by Oxbridge Ltd. for payment of the promissory note, EuroGas reclassified the payment to Oxbridge Ltd. as an increase in the cost of the 24% interest in the talc deposit and recorded the principal and $272,490 of accrued interest due under the promissory note payable to Oxbridge Ltd. In November 2000, EuroGas issued 2,391,162 shares of common 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. As described in Note 3, EuroGas has increased its investment in Rozmin s.r.o. to a 100% direct interest, subject to completion of the Belmont transaction, by exchanging interests with the former minority interest holders. Impairment of Properties - The Company periodically assesses the capitalized costs of properties for impairment based on estimated future discounted net cash flows. As a result of the assessments, impairment loss of $6,775,114 was recognized during 1999 relating to properties held by Pol-Tex Methane in Poland, and the following losses were recognized during 2000: Trebisov property in Slovakia of $7,306,943, Maseva property in Slovakia of $6,558,230, Beaver River property in Canada of $3,937,500, Ukraine properties of $1,200,310, TAKT properties in Russia of $7,701,362, and other of $79,445. During 2001, impairment loss of $1,154,444 was recognized from the Nafta-Danube Association in Slovakia less $360,000 of recovery from Beaver River in Canada. The following is a summary of changes to oil and gas properties: 2001 2000 1999 ----------- ----------- ----------- Properties Subject to Amortization Cost at beginning of year $16,499,982 $21,553,571 $18,064,186 Net reclassification from (to) properties not subject to amortization - (1,560,841) 333,465 Acquisition costs - 154,842 1,752,245 Exploration and development costs - 6,518,896 2,830,308 Sale of properties subject to amortization (16,499,982) (2,357,901) (167,371) Less ceiling test and valuation adjustments - (7,306,943) - Translation adjustments - (501,642) (1,259,262) ----------- ----------- ----------- Cost at end of year - 16,499,982 21,553,571 Less depreciation, depletion and amortization - (3,619,329) (1,817,371) ----------- ----------- ----------- Net Properties Subject to Amortization $ - $12,880,653 $19,736,200 =========== =========== =========== Properties Not Subject To Amortization Cost at beginning of year $ 9,461,039 $26,862,072 $32,763,353 Acquisition costs 5,773 1,593,776 1,259,696 Exploration costs 34,186 139,722 1,327,737 Net reclassification from (to) properties subject to amortization - 1,560,841 (333,465) Disposal of properties not subject to amortization (2,501,926) (303,684) (53,232) Less accumulated valuation and adjustments (794,444) (19,476,847) (6,775,114) Translation adjustment (18,022) (914,841) (1,326,903) ----------- ----------- ----------- Net Property Not Subject to Amortization $ 6,186,606 $ 9,461,039 $26,862,072 =========== =========== =========== Talc Mineral Property Cost at beginning of year $ 2,216,308 $ 755,539 $ 709,570 Property costs - - 45,969 Acquisition costs 408,685 1,460,769 - ----------- ----------- ----------- Net Other Mineral Interest Property $ 6,300,993 $ 2,216,308 $ 755,539 =========== =========== =========== F-17 NOTE 7 - FURNITURE AND OFFICE EQUIPMENT Other property and equipment consisted of the following at December 31: 2001 2000 1999 ----------- ----------- ----------- Buildings $ - $ - $ - Equipment 353,142 1,006,517 1,052,098 ----------- ----------- ----------- 353,142 1,006,517 1,052,098 Less: Accumulated depreciation (183,278) (359,728) (243,015) ----------- ----------- ----------- Net Other Property and Equipment $ 169,864 $ 646,789 $ 809,083 =========== =========== =========== NOTE 8 - GEOGRAPHIC INFORMATION EuroGas and its subsidiaries operate primarily in the oil and gas exploration and production industry. Accordingly, segment information is not presented separately from the accompanying balance sheets and statements of operations. Property and equipment and other non-current assets were located in the following geographic areas at December 31: 2001 2000 1999 ----------- ----------- ----------- Canada $ 3,975,000 $18,861,163 $20,039,572 Europe and Russia 9,041,320 6,702,483 28,571,995 ----------- ----------- ----------- Total Property and Equipment and Other Assets $13,016,320 $25,563,646 $48,611,567 =========== =========== =========== During the first quarter of 2000, EuroGas moved its corporate and administrative services outside of the United Sates to three European area offices. Sales and net loss were in the following geographic areas during the years ended December 31: 2001 2000 1999 ------------ ------------ ------------ Oil and Gas Sales - Canada $ 88,937 $ 6,395,037 $ 4,973,508 ============ ============= =========== Net Loss United States (Corporate) $ (3,573,468) $ - $(17,687,833) Canada (618,949) (3,833,909) 757,781 Europe and Russia (1,283,237) (45,711,413) (12,016,615) ------------ ------------ ------------ Net Loss $ $(49,545,322) $(28,946,667) ============ ============ ============ NOTE 9 - OTHER ASSETS Other assets at December 31, 2000 consisted of a lease deposit in the amount of $544,703 on an office in the United Kingdom. The lease was terminated on March 31, 2001, and the lease deposit was forfeited in exchange for an elimination of the future lease commitment. Operations were charged during March 2001 for the amount of the lease deposit lost. F-18 NOTE 10 - ACCRUED SETTLEMENT OBLIGATIONS FCDC Settlement Agreement and Contingently Issuable Common Shares - On March 16, 2000, the United States District Court, District of Utah, Central Division entered a default judgment against EuroGas, and in favor of Finance & Credit Development Corporation, Ltd., an Ireland Corporation ("FCDC"), in the amount of $19,773,113. On June 16, 2000, EuroGas entered into a memorandum of understanding with FCDC in satisfaction of its default judgment. In consideration for FCDC's stipulation to vacate its default judgment, EuroGas agreed in a memorandum of understanding to do the following: . issue to FCDC 3,700,000 common shares, . grant FCDC options to purchase 3,000,000 common shares at an exercise price of $0.65 per share during the 30 day period commencing June 30, 2001, . guarantee that the market value of the common shares issuable upon exercise of the options would be $3.00 per share on the date of exercise by compensating FCDC in cash or common shares in an amount equal to the difference between $3.00 and the market price per share on the date of exercise, . guarantee that the common shares issuable upon exercise of the options will retain a value of $3.00 per share throughout the period during which FCDC is permitted to liquidate the shares by compensating FCDC in cash or common shares, with respect to 400,000 shares FCDC would be permitted to sell every month, in an amount equal to the difference between $3.00 per share and 90% of the highest quoted market price per share during each month, . cause EuroGas GmbH, a wholly-owned, Austrian subsidiary of EuroGas, to back up the guarantee by pledging its stock in Rima Muran s.r.o., which indirectly holds a 23.65% interest in a talc deposit in Slovakia, . consider nominating a designee of FCDC to serve on the board of directors of EuroGas, and . register for resale all of the common shares issued to FCDC pursuant to the settlement agreement. Pursuant to the memorandum of understanding, in June 2000, the Company issued to FCDC 3,700,000 common shares and options to purchase 3,000,000 common shares exercisable at $0.65 per share from June 30, 2001 through July 29, 2001. The Company obtained effectiveness of a registration statement in September 2000 relating to the resale by FCDC of the common shares issued and the common shares underlying the options granted. FCDC did not exercise any of the options to purchase up to 3,000,000 shares of common stock by July 30, 2001; accordingly, the options expired on July 30, 2001. As a result, the cash or common shares that would have been payable or issuable under the guarantee of the stock price underlying the options will no longer be payable or issuable. Management of EuroGas believes that the settlement with FCDC has been fully performed and that the Rima Muran lien is no longer enforceable. The value of the contingently issuable common shares was recognized as a litigation settlement expense and as additional paid-in capital during the year ended December 31, 2000. No amount remains accrued at December 31, 2001 relating to the FCDC settlement obligation. McKenzie Bankruptcy Claim - A bankruptcy trustee (the "Trustee") appointed in the bankruptcy cases of the shareholders of McKenzie Methane Corporation Bankruptcy (the "McKenzie Estates") (McKenzie Methane Corporation was an affiliate of the former owner of a EuroGas subsidiary, Pol-Tex Methane, a Polish corporation) has asserted claims based upon their alleged lending activities with the former owner, and to the proceeds that EuroGas was to have received from an agreement with Texaco during 1997 relating to the exploitation of the Pol-Tex Methane gas concession in Poland, which agreement was subsequently terminated. The Trustee's claim was apparently based upon the theory that EuroGas paid inadequate consideration for its acquisition of GlobeGas (which indirectly controlled the Pol-Tex Methane concession) from persons who were acting as nominees for the McKenzie Estates, or in fact may be operating as a nominee for the McKenzie Estates, and therefore, the creditors of the McKenzie Estate are the true owners of the proceeds received or to have been received from the sale of the subsidiary to EuroGas and from the exploration and development of the Pol-Tex Methane concession. In addition, the McKenzie Estates F-19 claims that the stock or cash received by other defendants arising out of the Pol-Tex transactions, including outstanding preferred stock, should be turned over to the McKenzie Estates. EuroGas had denied the allegations and believes that the claims against it are without merit. In October 1999, the Trustee filed a motion seeking to add new parties and assert additional causes of action against EuroGas and the other defendants in this action. These new causes of action included claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury. In January 2000, the Bankruptcy Court approved that motion. This suit was administratively consolidated with the above claims. The Court considered motions to dismiss filed by EuroGas and an officer and a shareholder (other named defendants). These motions are currently pending before the court. No trial date has been set. In July 1999, the Trustee filed another suit in the same bankruptcy cases seeking damages in excess of $170,000 for the defendants' alleged violation of an agreement with the Trustee, which allowed the Texaco agreement to proceed. EuroGas disputed the allegations and filed a motion to dismiss or alternately, to abate this suit. This suit is currently proceeding before the court. 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. Through the suit 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. Management's estimate of the amount due under the claims made by the Trustee have been accrued in the accompanying condensed consolidated financial statements. Kukui, Inc. Claim - In November 1996, the Company entered into a settlement agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie bankruptcy case, whereby the Company issued 100,000 common shares and an option to purchase 2,000,000 common shares, which option expired on December 31, 1998. The Company granted registration rights with respect to the 100,000 common shares issued. On August 21, 1997, Kukui asserted a claim against EuroGas, which was based upon an alleged breach of the 1996 settlement agreement as a result of the Company's failure to file and obtain the effectiveness of a registration statement for the resale by Kukui of the 100,000 shares delivered to Kukui in connection with the 1996 settlement. In addition, the Bishop Estate, Kukui's parent company, entered a claim for failure to register the resale of common shares subject to its option to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any liability and filed a counterclaim against Kukui and the Bishop Estate for breach of contract concerning their activities with the McKenzie Bankruptcy Trustee. In December 1999, EuroGas entered into a settlement agreement with Kukui, the Bishop Estate and the McKenzie Bankruptcy Trustee, which was intended to resolve all claims made by Kukui, the Trustee, and the Bishop Estate against EuroGas. Under the terms of the settlement agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during F-20 1999, paid Kukui $782,232 of the settlement obligation in 2000 and accrued an additional settlement obligation liability and expense of $251,741 during 2000. During 2000, EuroGas issued the Bishop Estate 100,000 registered common shares, which were valued at $100,000, or $1.00 per share. The resulting accrued settlement obligation of $369,509 at December 31, 2000 for the estimated cost of settling the claim includes an estimated default penalty and interest. In June 2001, EuroGas completed its settlement payments and the lawsuit filed by Kukui in Utah Federal District Court was dismissed. In addition, EuroGas is seeking enforcement of a release from the Trustee through the Holbrook litigation described above. Winzer-Maurer Settlement - On October 27, 2000, the Company reached an agreement in principal related to a dispute involving the issuance of common shares upon conversion of notes payable and completed the agreement by issuance of 3,800,000 common shares on May 15, 2001. Those shares were required to be registered with the Securities and Exchange Commission by the submission of a Form S-3 no later than January 15, 2001, which did not occur. However, the Company is of the opinion that Winzer-Maurer may be able to sell its common shares under rule 144. The Company also agreed to issue warrants to purchase 5,200,000 common shares at $1.00 per share. The warrants, issued, expired on January 15, 2002. The Company recorded a litigation settlement expense and related accrued settlement obligation in the amount of $1,864,872 during the fourth quarter of 2000 relating to the settlement agreement. The value of the settlement was based upon the fair value of the financial instruments to be issued as of the settlement date. The 3,800,000 common shares issued were valued at $1,292,000, or $0.34 per share, based on the closing market price of the common shares on October 27, 2000. The warrants to be issued to purchase 5,200,000 common shares were valued at their fair value of $572,872, or $0.11 per warrant, computed utilizing the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.84%, expected dividend yield of 0%, expected volatility of 136%, and expected life of 1.2 years. The accrued settlement obligation satisfied with the issuance of shares on May 15, 2001. NOTE 11 - CONTINGENCIES AND COMMITMENTS EuroGas' subsidiary, GlobeGas BV, lost its appeal for a reduction of a income tax liability in the Netherlands of an amount equivalent to approximately $803,000 at December 31, 2001. The tax arose from the sale of equipment at a profit by the former owner of GlobeGas to a EuroGas Polish subsidiary. The liability is reflected in EuroGas' financial statements. However, GlobeGas does not have the ability to pay the assessed obligation and as a result may face forced liquidation and disolvement by the Netherlands tax authority. During 2002 the Company's Leichtenstein Subsidiary, Energy Global A.G., was statutorily liquidated and dissolved by the Principality of Leichtenstein. As a result, the Company has lost its $ in net assets of that subsidiary and may be subject to additional losses in net assets of Energy Global's subsidiaries. During April 1999, EuroGas entered into a three-year employment contract with a former chief executive officer. The contract provides for annual salary of $400,000 plus living and other allowances of $28,200. In addition, options to purchase 1,000,000 common shares at $0.95 per share were granted in connection with the employment contract. The options vested on January 1, 2000, and expire in April 2009. The officer resigned in January 2001. EuroGas has accrued salary obligations to the officer in the amount of $230,000, plus certain expenses, which are included in accrued liabilities. EuroGas believes there may be offsets to this amount but has not reduced the accrued amount. The Company leases office facilities from various lessors in Poland, Vienna, and Vancouver. Rent expenses for the years ended December 31, 2001, 2000 and 1999 were $513,690, and $517,354, respectively. All of the office leases are on month-to-month agreements. F-21 Crawford Settlement - During July 1999, an action was commenced by Crawford, a former consultant, asserting breach of a service agreement related to consulting and engineering services provided to the Company in a prior year. Crawford made an assertion for $159,500 and the right to purchase 284,000 common shares at $1.50 per share as compensation for services provided to the Company. During 2000, the Company reached a settlement agreement in satisfaction of this action. Pursuant to the agreement, the Company received $300,000 from a former officer of EuroGas and issued 250,000 common shares to Crawford. The Company recorded the issuance of the common shares at the fair value of $195,000, or $0.78 per share and settlement income in the amount of $105,000 during the year ended December 31, 2000. The former officer also made payments to Crawford in full satisfaction of his claims. Jeu-Calvo Settlement - In January 1999, Stephen Jeu and Susanna Calvo initiated an action in District Court, Harris County, Texas, 55th Judicial District, asserting claims against EuroGas stemming from an alleged breach of contract. On or about November 1, 1999, EuroGas entered into a settlement agreement with Mr. Jeu and Ms. Calvo pursuant to which EuroGas was required to make specified cash payments to Mr. Jeu and Ms. Calvo and to issue to Mr. Jeu and Ms. Calvo common shares having a market value of $440,000 on the date of issue. During August 2000, EuroGas issued 615,000 common shares to Mr. Jeu and Ms. Calvo in full satisfaction and settlement of the asserted claims. The common shares issued were valued at $440,000, or $0.72 per share, based on the market value of the common shares on the date issued. At December 31, 1999, the Company had recognized obligations relating to the settlement, in accrued liabilities, notes payable and accrued interest, of $570,000. During 2000, the estimated obligation was adjusted to $440,000 for the value of the common shares issued. Petroleum Ventures Settlement - On October 11, 1999, an action was filed against EuroGas asserting that EuroGas breached an agreement by failing to seek registration of certain restricted and unregistered shares issued to certain investors in connection with the acquisition of an interest in Beaver River Resources, Ltd. A settlement was reached on January 4, 2001 whereby half of the interest in the Beaver River project was returned in exchange for 1,200,000 shares, representing half of the shares that were issued originally. In addition, other former officers have made claims for compensation and for reimbursement of expenses against EuroGas, which amounts have been accrued as accrued liabilities. NOTE 12 - NOTES PAYABLE TO RELATED PARTIES 2000 Convertible Debentures - During the first quarter of 2000 EuroGas completed the issuance of two-year 10.5% convertible debentures in the amount of $3,000,000 to related parties in exchange for cash proceeds of $1,591,336, the conversion of prior outstanding EuroGas debt into debentures in the amount of $422,288 and proceeds in the form of payments to creditors on behalf of EuroGas by a debenture holder in the amount of $986,376. The debentures are convertible into common shares at $0.35 per share, which represents a discount of 20% from quoted market values on the date of the issuance. Upon conversion, the debenture holders also received warrants to purchase 17,142,858 common shares at $0.35 per share. The convertibility of the debentures at a discount, and the detachable warrants issued below market on the date of issuance, constitute a beneficial conversion feature of the debentures. The Company recorded the three instruments at their relative fair values on the date of issuance with $1,898,138 allocated to warrants, $330,439 allocated to the debentures and $771,429 allocated to the beneficial conversion feature with the remaining $2,669,567 recorded as a debt discount. Since the debentures were immediately convertible, the Company recognized the resulting debt discount of $2,669,567 as interest expense. The value of the options was determined using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.2%, volatility of 126% and an expected life of two years. The debentures were subsequently converted, at the election of the holders, on March 30, 2000, into 8,571,428 common shares and warrants to purchase 17,142,858 common shares at $0.35 per share were issued as units of two warrants per common share issued concurrent with the conversion. F-22 During September and November 2000, the Company issued 3,870,960 common shares upon conversion of notes payable to related parties in the amount of $1,345,701, or $0.35 per share, including conversion of principal on related party notes payable in the amount of $909,907 and related accrued and unpaid interest in the amount of $437,794. The grant of convertibility of the notes payable and notes payable to related parties, at a discount below market during the September, constitutes the grant of a beneficial conversion feature of $0.31 per share for the difference between market and the conversion price of the debt. The Company recognized $459,242 as interest expense related to the beneficial conversion feature. There was no beneficial conversion feature related to the November conversion. Apart from the first quarter debentures, during 2000 the Company issued notes payable to shareholders totaling $448,093 for payments made to or on behalf of the Company. Included in the payments an advance by an officer of $100,000 to Teton Petroleum Company as a note receivable. During September 2000, the Company reached a settlement agreement pursuant to the default on repayment of notes payable and notes payable to related parties. Under the terms of the agreement, the Company issued 4,999,998 warrants. The warrants vest immediately, are exercisable at $0.55 per share and expire on December 31, 2003. The Company recorded interest expense in the amount $2,639,038 related to the warrants. The warrants were valued utilizing the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 5.8%, volatility of 137.3%, and expected life of 3.3 years. During October 1999, the Company reached a settlement agreement on a defaulted loan from a former director with principal owed of $225,206 and accrued interest of $163,071. Pursuant to the terms of the agreement, the Company paid $130,000 in cash and issued 615,000 common shares during August 2000 with a market value of $440,000 or $0.71 per share. The excess in the value of the settlement and the previously accrued amount was charged to operations during 2000. Notes payable to related parties were as follows: December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Loans from companies associated with a director, due in 1999 and 2000 with interest at 7% to 10%, unsecured 388,576 452,051 600,983 Loan from a director, due in 1999 and 2000, and 2001, interest: 7.5% to 10%, unsecured 5,549 5,549 613,221 Non-interest bearing loans from significant shareholder and director, due on demand, unsecured - 1,392,789 - Loans from a former director and his affiliates, interest at 7.5% to 10%, due on demand, unsecured - - 119,284 Less: discount on note - - (4,327) ----------- ----------- ----------- Total Notes Payable to Related Parties 394,125 1,850,389 1,329,161 Less: Current Portion (1,850,389) (1,329,161) ----------- ----------- ----------- Notes Payable to Related Parties - Long-Term $ - $ - $ - =========== =========== =========== NOTE 13 - NOTES PAYABLE Current notes payable sustained an increase during 2000 by $8,856, which primarily consisted of a net increase in a line of credit to a bank in Canada. During September and November 2000, the Company issued 3,389,944 common shares upon conversion of notes payable in the amount of $1,191,115, or $0.35 per share, including principal on notes payable of $813,277 and related accrued and unpaid interest in the amount of $377,838. The grant of convertibility of the notes payable and notes payable to related parties, at a discount below market during the September conversion, constitutes the grant of a beneficial conversion feature of $0.31 per share for the difference between market and the conversion price of the debt. The Company recognized $458,758 as interest expense related to the beneficial conversion feature. There was no beneficial conversion feature related to the November conversion. F-23 Other loans and notes payable were as follows: December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Loans due 1999 and 2000, interest at 10%, unsecured $ 29,531 $ 29,531 $ 329,907 Line of credit with a bank, payable by Big Horn on demand with interest at 1% above the bank's prime, and secured by all of the subsidiary's assets - 3,204,480 3,314,136 7.5% Notes due in 2000, unsecured - - 520,105 Less: Discount on note - - (8,656) Total Notes Payable 29,531 3,234,011 4,155,492 Less: Current Portion (29,531) (3,234,011) (4,155,492) ----------- ----------- ----------- Note Payable - Long-Term $ - $ - $ - =========== =========== =========== NOTE 14 - INCOME TAXES Deferred tax assets and liabilities are comprised of the following: December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Tax loss carry forwards $ 2,445,695 $19,884,518 $ 7,424,514 Property and equipment 133,071 (2,309,010) (4,298,723) Impairment losses 5,823,506 5,823,506 2,997,925 Impairment of investment in securities 1,723,363 1,353,959 - Accrued settlement obligations 4,326,876 4,326,876 1,496,000 Valuation allowance (14,452,511) (31,521,930) (7,619,716) ----------- ----------- ----------- Net Deferred Tax Liability $ - $(2,442,081) $ - =========== =========== =========== The following is a reconciliation of the amount of tax (benefit) that would result from applying the federal statutory rate to pretax loss with the provision for income taxes: 2001 2000 1999 ----------- ------------ ------------ Tax at statutory rate (34%) $(1,861,722) $(17,675,717) $ (9,788,074) Non-deductible expenses 98,198 77,177 6,794,233 State taxes, net of federal benefit (180,696) - (227,710) Deferred tax asset valuation change 1,944,220 20,126,819 2,318,643 Effect of lower tax rates and foreign losses with no federal benefit - - 902,908 ----------- ----------- ----------- Total Income Tax (Benefit) $ - $ 2,528,279 $ - ========== =========== =========== As of December 31, 2001 EuroGas has operating loss carry forwards of approximately $26,891,435 in various countries which expire from 2001 through 2020. F-24 NOTE 15 - RELATED PARTY TRANSACTIONS As described in Note 3, EuroGas purchased a 57% interest in Rozmin, s.r.o. from Belmont Resources, Ltd. Effective October 21, 1999, the Company transferred all its shares of EuroGas Deutschland GmbH to a related party for its fair value of $0. The Company was required to fund EuroGas Deutschland GmbH's deficit of $98,898 before the transfer could be made. A significant shareholder and director of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas and EuroGas has paid certain business expenses on their behalf. The resulting receivables and payables are combined and presented in the accompanying financial statements as notes payable to related parties in the amount of $388,576 as of December 31, 2001, $1,392,789 as of December 31, 2000. Related party loans are described in Note 12, Notes Payable To Related Parties. NOTE 16 - STOCKHOLDERS' EQUITY Preferred Stock There are 2,391,968 shares of 1995 Series Preferred Stock (the "1995 Series preferred stock") issued and outstanding. The 1995 Series preferred stock is non-voting, non-participating and has a liquidation preference of $0.10 per share plus unpaid dividends. The 1995 Series preferred shareholders are entitled to annual dividends of $0.05 per share. Each share of the 1995 Series preferred shares are convertible into two common shares upon lawful presentation of the share certificates. Dividends are payable until converted. EuroGas has the right to redeem the 1995 Series preferred stock on not less than 30 days written notice, at a price of $36.84 per share, plus any accrued but unpaid dividends. Annual dividend requirements of the 1995 Series preferred stock are $119,598. There are 260 shares of the 1997 Series A Convertible Preferred Stock (the "1997 Series preferred stock"). The 1997 Series preferred stock is non-voting and accrues dividends at $60.00 per share, or six percent annually. The 1997 Series preferred stock has a liquidation preference of $1,000 per share, plus unpaid dividends before liquidation payments applicable to common shares but after liquidation payments to the 1995 Series preferred stock outstanding. The 1997 Series preferred stock, along with unpaid dividends thereon, are convertible into common shares at the rate of $1,000 divided by the lessor of 125% of the average closing bid price for five trading days prior to issuance or 82% of the average closing bid price for five trading days prior to conversion. The 1997 Series preferred stock has a liquidation preference of $260,000. During November 1999, the Company designated a Series C 6% convertible preferred stock (the "Series C preferred stock"). The Series C preferred stock has a par value of $0.001 per share and a liquidation preference of $1,000 per share plus all accrued but unpaid dividends. The Series C preferred stock is non-voting and carries a 6% dividend rate per annum, or $60.00 per share. The Series C preferred stock is convertible into common shares of EuroGas at the rate of $1,000 divided by 85.0% of the average closing bid price for five trading days preceding the date of issuance or the conversion date. EuroGas issued 1,800 shares of Series C Preferred Stock for $1,800,000 or $1,000 per share, less $148,530 of offering costs during 1999. During the year ended December 31, 1999, EuroGas issued 6,500 shares of 1998 Series preferred stock for $6,500,000 at $1,000 per share before $487,500 of offering costs. The 1998 Series preferred stock and the Series C preferred stock issued during 1999 were immediately convertible into common shares at a 15% and 20% discount, respectively. Therefore, EuroGas recognized a beneficial conversion feature as preferred dividends on the dates the preferred shares were issued. During 1999, $901,875 and $360,000 in preferred dividends were recognized relating to the beneficial conversion feature from the 1998 Series preferred stock and the Series C preferred stock, respectively. During 2000, shareholders converted 1,800 shares of Series C preferred stock and $21,599 of accrued dividends thereon into 5,329,713 common shares at a weighted- average price of $0.34 per common share. F-25 The following is a summary of the preferred stock outstanding at December 31, 2001: Annual Liquidation Preference Dividend Requirement Shares --------------------- ---------------------- Designation Outstanding Per Share Total Per Share Total ----------- ----------- --------- --------- --------- ---------- 1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598 1997 Series A Convertible 260 1,000.00 260,000 60.00 15,600 Total ----------- --------- ---------- 2,392,228 $ 499,197 $ 135,198 =========== ========= ========== Common Stock During February 2001, the Company issued 100,000 shares of common stock for cash in the amount of $44,310. During April 2001, EuroGas issued 100,000 shares of stock for professional services provided to the Company. The issuance was valued at $48,400, or $0.48 per share. During May 2001, EuroGas issued 3,800,000 shares to Winzer-Maurer under a settlement obligation. The shares were valued at $1,864,872. 2000 Common Stock Offering - On October 2, 2000, EuroGas entered into a Common Stock Purchase Agreement (the "Agreement") with Arkledun Drive LLC (the "Purchaser") whereby EuroGas issued 7,000,000 common shares to the Purchaser for resale under a public offering of common shares. The Purchaser agreed to purchase 5,500,000 common shares for $2,165,000. If the Purchaser did not realize $2,489,750 from the resale of the 5,500,000 shares, after the deduction of customary broker's fees, any resulting shortfall would be made up by the Purchaser selling as many of the additional 1,500,000 common shares issued as required. If there still was a shortfall after selling the 1,500,000 common shares, EuroGas agreed to issue additional common shares or pay the Purchaser the remaining shortfall. On November 14, 2000, the Purchaser notified EuroGas of a remaining shortfall after the 7,000,000 shares had been sold. To resolve the shortfall and to settle all claims and demand rights of the Purchaser under the Agreement, EuroGas issued an additional 2,000,000 common shares to the Purchaser. The additional 2,000,000 common shares have piggy-back registration rights to be included in any future public offering conducted by EuroGas. The additional 3,500,000 common shares issued over the 5,500,000 common shares the Purchaser originally agreed to purchase were accounted for as contingently issuable shares based on the market price of the common shares. Accordingly, the proceeds received were allocated to all 9,000,000 common shares issued. The Company also issued 400,000 common shares under the public offering for cash proceeds of $208,500, or an average of $0.52 per share. The Company incurred offering costs for the overall public offering of $168,500. The public offering resulted in the Company issuing 9,400,000 common shares for net proceeds of $2,205,000. Oxbridge Ltd. Purchase of Note Receivable and Lending Commitment - During March and May 1999, EuroGas loaned Pan Asia Mining Corp., a Canadian company, $600,000 under the terms of an unsecured note receivable and made a commitment to provide Pan Asia Mining Corp. an additional $2,025,000 of financing by March 2000. The note receivable bore interest at the prime rate of a Canadian bank plus three percent and was due in four installments through March 2002. During 1999, EuroGas sold the note receivable to Oxbridge Ltd., a related party, in exchange F-26 for $600,000 of reductions in three notes payable to Oxbridge Ltd. and two other shareholders. During July 2000, Oxbridge Ltd. assumed EuroGas' commitment to provide the additional financing to Pan Asia Mining Corp. in exchange for EuroGas issuing 500,000 common shares to Oxbridge Ltd. The 500,000 common shares were valued at $365,000, or $0.73 per share based upon the market value of EuroGas' common shares on the date issued, and recognized as a general and administrative expense for Oxbridge Ltd. assuming the financing commitment. Other Common Stock Issuances - During 2000, the Company issued 3,700,000 common shares and 3,000,000 options to purchase common stock to FCDC under the terms of a settlement agreement. The Company issued 1,842,983 common shares as payment of accrued settlement obligations. The common shares issued were valued at $1,033,514, or an average of $0.56 per share. In November, 832,760 common shares were issued to SlovGold GmbH, a related party, for services valued at $291,466, or $0.35 per share, based on the market value of the common shares on the date issued. The Company issued 331,672 common shares for services valued at $108,496, or an average of $0.33 per share, based on the market value of the common shares on the dates issued. During 2000, notes payable to related parties totaling $1,173,896 and $502,871 of accrued interest were converted into 3,891,954 common shares at an average of $0.43 per share. The Company issued 8,571,428 common shares upon conversion of debentures with a carrying value of $3,000,000, or $0.35 per share, and issued 5,760,112 common shares upon conversion of $2,016,036 of notes payable at $0.35 per share. NOTE 17 - EMPLOYEE STOCK OPTIONS On July 1, 2000, five-year options to purchase 200,000 common shares at $0.73 per share were granted in connection with an employment agreement. The options vest on July 1, 2001. No compensation expense was recognized in connection with the grant because the exercise price was equal to the fair value of the underlying shares on the date of grant. During October 1999, the Company granted 250,000 options related to a settlement agreement. The options granted vest immediately and are exercisable at $1.00 per share for a period of five years. The Company recognized expense in the amount of $140,509 when granted. EuroGas granted options to employees and consultants during 1999. Options for 950,000 shares were authorized and granted on October 22, 1999. The options granted vested immediately and are exercisable at $0.45 for a period of ten years. Compensation in the amount of $347,044 was recognized on the grant date. On April 20, 1999, ten-year options to purchase 1,000,000 common shares at $0.95 per share were issued in connection with an employment agreement. The options vest on January 1, 2000. No compensation was recognized in connection with the grant because the exercise price was equal to the fair value of the underlying shares on the date of the grant. A summary of the status of stock options as of December 31, 2000, 1999 and 1998 and changes during the years then ended are presented below:
2001 2000 1999 -------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- -------- ---------- -------- ---------- -------- Outstanding at beginning of year 4,200,000 $ 1.07 2,000,000 $ 1.50 2,000,000 $ 1.50 Granted - 0.73 2,400,000 0.74 - - Exercised - - - - - - Expired 1,800,000 - (200,000) 1.50 - - ---------- ---------- Outstanding at end of year 2,400,000 1.08 4,200,000 1.08 2,000,000 1.50 ========== ========== ========== Exercisable at end of year 2,400,000 1.08 2,950,000 1.12 1,900,000 1.50 ========== ========== ========== Weighted-average fair value of options granted during the year $ - $ 0.71 $ -
F-27 The following table summarizes information about stock options outstanding at December 31, 2001: Outstanding Exercisable -------------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ----------- ----------- ----------- ----------- ----------- ---------- $ 0.45-1.00 2,400,000 5.79 years $ 0.74 2,400,000 $ 0.68 =========== =========== EuroGas has accounted for stock-based compensation from stock options granted to employees and consultants prior to 1998 based on the intrinsic value of the options on the date granted. Since 1999, EuroGas has accounted for options granted to consultants according to their fair value as prescribed in SFAS No. 123, Accounting for Stock Based Compensation. Had compensation cost for stock options been determined based on the fair value at the grant dates for options under that plan consistent with the alternative method of SFAS No. 123, EuroGas' loss applicable to common shares and loss per common share for the year ended December 31, 2001, 2000 and 1999 would have been increased to the pro forma amounts shown below. December 31, ------------------------------------- 2001 2000 1999 ----------- ------------ ----------- Net loss applicable to common shares: As reported $(5,610,853) $(52,576,801) $(30,389,012) Pro forma (5,676,666) (52,676,371) (31,447,876) Basic and diluted net loss per common share: As reported $ (0.04) $ ( 0.51) $ (0.36) Pro forma (0.04) ( 0.50) (0.38) The fair value of options granted during 2000 and 1999, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2000 and 1999 respectively: average risk-free interest rate of 6.18% and 6.0% and expected volatility of 138.4%, and 126.2% and expected life of 5 years and 5 years. NOTE 18 - STOCK WARRANTS A finance company and holder of EuroGas warrants is holding as security 750,000 EuroGas common shares, for which certificates have been delivered and which management and legal counsel assert have not been legally issued, pending resolution of a dispute. Accordingly, the EuroGas common shares are not considered issued for financial reporting purposes. The financing company claims EuroGas should issue additional warrants under the anti-dilution clause of a 5,000,000 share warrant agreement issued in September 2000. No shares are currently due under the anti-dilution clause. At such time that EuroGas sells common stock to an affiliate for less than $0.55 per share or other actions occur which would trigger an increase in the number of warrants or a decrease in the exercise price under the anti-dilution clause, the Company will record the modifications or additional warrants. At December 31, 2001 and 2000, the Company had warrants outstanding to purchase 15,750,000 40,892,856 common shares, respectively. F-28 NOTE 19 - ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss consisted of the following at December 31, 2001 and 2000: 2001 2000 ----------- ----------- Foreign currency translation adjustments $(1,309,610) $(3,666,133) Unrealized gain (loss) on investments in securities available-for-sale (26,704) 84 ----------- ----------- Accumulated Other Comprehensive Loss $(1,336,314) $(3,666,049) =========== =========== NOTE 20 - SUBSEQUENT EVENTS The Company purchased 531,000 shares of treasury stock during January 2002 for $93,086, or $0.22 per share. On March 12, 2002 EuroGas entered into an employment agreement with a new President of EuroGas. The agreement provides for annual compensation of $400,000, or $33,333 per month. On April 2, EuroGas entered into an agreement to exchange its interest in RinaMuran s.r.o. for an interest in Rozmin s.r.o. as described in Note 3 to the financial statements. F-29 EUROGAS, INC. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depreciation, depletion, and amortization as of December 31, 2001, 2000 and 1999 by geographic area, were as follows: Europe Total Canada and Russia ------------ ------------ ------------ At December 31, 2001 Unproved oil and gas properties $ 28,006,150 $ 7,875,000 $ 20,131,150 Proved oil and gas properties - - - Gross capitalized costs 28,000,150 78,750,000 20,131,150 Less: Ceiling test adjustment and impairments (21,819,544) (3,987,500) (17,882,044) Less: Accumulated depreciation, depletion, and amortization - - - Future abandonment and restoration - - - ------------ ------------ ------------ Net capitalized costs $ 6,186,606 $ 3,937,500 $ 2,249,106 ============ ============ ============ At December 31, 2000 Unproved oil and gas properties $ 42,921,154 $ 5,738,804 $ 37,182,350 Proved oil and gas properties 16,499,982 16,499,982 - Gross capitalized costs 59,421,136 22,238,786 37,182,350 Less: Ceiling test adjustment and impairments (33,460,115) (3,512,792) (29,947,323) Less: Accumulated depreciation, depletion, and amortization (3,619,329) (3,619,329) - Future abandonment and restoration (183,002) (183,002) - ------------ ------------ ------------ Net capitalized costs $ 22,158,690 $ 14,923,663 $ 7,235,027 ============ ============ ============ At December 31, 1999 Unproved oil and gas properties $ 36,583,835 $ 8,875,353 $ 27,708,482 Proved oil and gas properties 25,066,363 16,198,578 8,867,785 Gross capitalized costs 61,650,198 25,073,931 36,576,267 Less: Ceiling test adjustment and impairments (13,234,555) (3,512,792) (9,721,763) Less: Accumulated depreciation, depletion, and amortization (1,817,371) (1,817,371) - Future abandonment and restoration (140,517) (140,517) - ------------ ------------ ------------ Net capitalized costs $ 46,457,755 $ 19,603,251 $ 26,854,504 ============ ============ ============ Costs incurred in oil and gas producing activities, both capitalized and expensed, during the years ended December 31, 2001, 2000, 1999 were as follows: Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2001 Property acquisition costs Proved $ - $ - $ - Unproved 5,773 - 5,773 Exploration costs 4,582,695 - 34,186 Development costs 2,075,923 - - ------------ ------------ ------------ Total Costs Incurred $ 39,959 $ - $ 39,959 ============ ============ ============ Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2000 Property acquisition costs Proved $ - $ - $ - Unproved 1,748,618 1,683,266 65,352 Exploration costs 4,582,695 4,307,116 275,579 Development costs 2,075,923 2,075,923 - ------------ ------------ ------------ Total Costs Incurred $ 8,407,236 $ 8,066,305 $ 340,931 ============ ============ ============ For the Year Ended December 31, 1999 Property acquisition costs Proved $ 1,752,246 $ 1,752,246 $ - Unproved 1,259,696 469,249 790,447 Exploration costs 1,327,737 - 1,327,737 Development costs 2,830,308 2,705,268 125,040 ------------ ------------ ------------ Total Costs Incurred $ 7,169,987 $ 4,926,763 $ 2,243,224 ============ ============ ============ The results of operations from oil and gas producing activities for the years ended December 31, 2000, 1999 and 1998 were as follows: Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2001 Oil and gas sales $ 88,937 $ 88,937 $ - Production costs - - - Impairment of mineral interests (794,444) 360,000 (1,154,444) Depreciation, depletion, and amortization - - - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ (705,507) $ 448,037 $ (1,154,444) ============ ============ ============ For the Year Ended December 31, 2000 Oil and gas sales $ 6,395,037 $ 6,395,037 $ - Production costs (1,521,471) (1,521,471) - Impairment of mineral interests (26,783,790) (2,661,585) (24,122,205) Depreciation, depletion, and amortization (1,885,107) (1,885,107) - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $(23,795,331) $ 326,874 $(24,122,205) ============ ============ ============ For the Year Ended December 31, 1999 Oil and gas sales $ 4,973,508 $ 4,973,508 $ - Production costs (1,330,526) (1,330,526) - Impairment of mineral interests (7,217,426) - (7,217,426) Depreciation, depletion, and amortization (1,810,176) (1,810,176) - ------------ ------------ ------------ Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) $ (5,384,620) $ 1,832,806 $ (7,217,426) ============ ============ ============ Reserve Information - The following estimates of proved and unproved developed reserve quantities, presented in barrels and thousand cubic feet (MCF), and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of EuroGas' reserves. EuroGas emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. EuroGas' proved reserves are located in Canada and the Slovak Republic. Unproved reserve properties are located in the Slovak Republic, Sakha Republic (Russian Federation), Canada, Poland, and the Ukraine. Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods.
Total Canada Slovak Republic ---------------------- ---------------------- ---------------------- Oil Gas Oil Gas Oil Gas (Barrels) (MCF) (Barrels) (MCF) (Barrels) (MCF) ---------- ---------- ---------- ---------- ---------- ---------- Proved Developed and Undeveloped Reserves Balance - January 1, 1999 569,730 9,487,435 474,850 3,999,650 94,880 5,487,785 Purchases of minerals in place - 2,365,023 - 2,365,023 - - Extensions and discoveries 569,149 2,683,741 569,149 2,683,741 - - Production (94,299) (1,049,114) (94,299) (1,049,114) - - ---------- ---------- ---------- ---------- ---------- ---------- Balance - December 31, 1999 1,044,580 13,487,085 949,700 7,999,300 94,880 5,487,785 Purchases of minerals in place - 146,000 - 146,000 - - Extensions and discoveries 46,134 504,080 46,134 504,080 - - Production (113,100) (916,089) (113,100) (916,089) - - Sales of minerals in place (52,819) (104,891) (52,819) (104,891) - - Revision of estimates (269,995) 5,549,785 (175,115) (62,000) (94,880) (5,487,785) ---------- ---------- ---------- ---------- ---------- ---------- Balance - December 31, 2000 654,800 18,665,970 654,800 7,566,400 - - Sale of minerals in place (654,800)(18,665,970) (654,800) (7,566,400) - - ---------- ---------- ---------- ---------- ---------- ---------- Balance - December 31, 2001 - - - - - - ========== ========== ========== ========== ========== ========== Proved Developed Reserves - December 31, 1999 806,400 7,566,400 806,400 7,772,800 - - December 31, 2000 631,400 6,546,900 631,400 654,900 - - December 31, 2001 - - - - - - ========== ========== ========== ========== ========== ==========
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less the tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows.The standardized measure of discounted estimated net cash flows related to proved oil and gas reserves at December 31, 2000, 1999 and 1998 were as follows. There were no proved oil and gas reserves at December 31, 1997: Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2001 Future cash inflows $ - $ - $ - ============ ============ ============ For the Year Ended December 31, 2000 Future cash inflows $ 61,049,083 $ 61,049,083 $ - Future production costs and development costs (10,028,153) (10,028,153) - Future income tax expenses (15,219,536) (15,219,536) - ------------ ------------ ------------ Future net cash flows 35,801,394 35,801,394 - 10% annual discount for estimated timing of cash flows (12,293,103) (12,293,103) - ------------ ------------ ------------ Standardized measures of discounted future net of cash flows relating to proved oil and gas reserves $ 23,508,291 $ 23,508,291 $ - ============ ============ ============ For the Year Ended December 31, 1999 Future cash inflows $ 58,352,415 $ 42,466,594 $ 15,885,821 Future production costs and development costs (14,451,638) (12,946,144) (1,505,494) Future income tax expenses (10,760,417) (9,478,107) (1,282,310) ------------ ------------ ------------ Future net cash flows 33,140,360 20,042,343 13,098,017 10% annual discount for estimated timing of cash flows (13,388,091) (7,552,584) (5,835,507) ------------ ------------ ------------ Standardized measures of discounted future net of cash flows relating to proved oil and gas reserves $ 19,752,269 $ 12,489,759 $ 7,262,510 ============ ============ ============ The primary changes in the standardized measure of discounted estimated future net cash flows for the year ended December 31, 2000, 1999 and 1998 were as follows: Europe Total Canada and Russia ------------ ------------ ------------ For the Year Ended December 31, 2001 Beginning of year $ 23,508,291 $ 23,508,291 $ - Sale of minerals in place (36,780,948) (36,780,948) - Accretion of discount 979,554 979,554 - Net change in income taxes 12,293,103 12,293,103 - ------------ ------------ ------------ End of year $ - $ - $ - ============ ============ ============ For the Year Ended December 31, 2000 Beginning of year $ 15,534,137 $ 8,271,627 $ 7,262,510 Purchase of minerals in place 473,849 473,849 - Extensions and discoveries 2,077,190 2,077,190 - Development 1,398,342 1,398,342 - Production 4,927,526) (4,927,526) - Sale of minerals in place (682,295) (682,295) - Revisions of estimates: Sales prices 18,299,745 18,299,745 - Development costs (1,024,521) (1,024,521) - Production costs 1,160,734 1,160,734 - Quantities (9,148,314) (1,885,804) (7,262,510) Accretion of discount 743,112 743,112 - Net change in income taxes (120,755) (120,755) - Change in exchange rate (275,407) (275,407) - ------------ ------------ ------------ End of year $ 23,508,291 $ 23,508,291 $ - For the Year Ended December 31, 1999 Beginning of year $ 13,662,990 $ 6,400,480 $ 7,262,510 Purchase of minerals in place 6,498,276 6,498,276 - Extensions and discoveries - - - Development 1,120,835 1,120,835 - Production (598,055) (598,055) - Revisions of estimates: Sales prices - - - Development costs - - - Accretion of discount 188,021 188,021 - Net change in income taxes (5,753,022) (5,753,022) - Change in exchange rate 415,092 415,092 - ------------ ------------ ------------ End of year $ 15,534,137 $ 8,271,627 $ 7,262,510 ============ ============ ============