10-K 1 euro10k.txt ______________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 [ ] 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 other (Commission File (IRS Employer jurisdiction No.) Identification No.) of incorporation or organization) 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 Name of each exchange on which registered: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of Class) 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 voting and non-voting common equity held by non-affiliates of the registrant based upon the last sale price of the common stock as of the last business day of the registrant's most recently completed second quarter was approximately $13,500,000, or $0.115 per share. As of April 30, 2003, the registrant had 168,212,635 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None i TABLE OF CONTENTS TO FORM 10-K PAGE PART I Item 1. Business 1 Item 2. Property 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 21 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 25 Item 13. Certain Relationships and Related Transactions 26 Item 14. Controls and Procedures 27 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27 Documents Filed 1. Financial Statements 2. Financial Statement Schedule 3. Exhibit List Reports on Form 8-K Exhibits Financial Statement Schedules SIGNATURES 34 CERTIFICATIONS. 35 i PART I This Annual Report on Form 10-K for the year ended December 31, 2002 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 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. 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 and Danube International Petroleum Holding B.V. 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 located near Roznava 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 April 17, 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. EuroGas further agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in the ten-day average OTC Bulletin Board quoted trading 1 price of the Company's common shares below $0.30 per share through April 17, 2002. During April 2002, EuroGas was obligated to issue 3,830,000 common shares to Belmont under the terms of the agreement. Additionally, EuroGas agreed to issue additional common shares to Belmont if Belmont did not realize approximately $1,218,000 from the resale of the original 12,000,000 common shares by April 17, 2002, and provided notice of the deficiency, to compensate Belmont for the shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. Because Belmont has not provided notice of the sale of the shares and the resulting deficiency, EuroGas is not able to calculate the shares that may be issuable, but estimates it may be obligated to issue approximately 12,000,000 additional common shares, based on recent market prices for the Company's common stock, to Belmont under this provision of the agreement. 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 payment and agreed to arrange the necessary financing to place the talc deposit into commercial production by April 17, 2002. If the talc deposit was not in commercial production by then, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. As of December 31, 2002 EuroGas has accrued $85,000 in advance royalty due to Belmont because the talc deposit was not in commercial production. EuroGas granted Belmont the right to appoint one member of the EuroGas, Inc., board of directors for not less than one year. The purchase of the interest in Rozmin s.r.o. 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 its purchase. On April 2, 2002, EuroGas exchanged its 55% interest in RimaMuran for the 43% investment in Rozmin held by RimaMuran. As part of the exchange, EuroGas paid approximately $105,000 to the former minority owners of RimaMuran to pay liabilities of RimaMuran and to compensate the former minority owners. RimaMuran 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 free of encumbrances, and will acquire direct ownership of the remaining 57% interest in Rozmin if the contingency for additional stock issuances to Belmont is resolved. By virtue of its ownership of Rozmin and the talc deposit, EuroGas bears the full responsibility to fund the development costs necessary to bring the deposit to commercial production. The Company is currently in negotiations with several interested parties to sell a minority interest in Rozmin s.r.o to raise these development funds. In addition the Company is also negotiating a long-term delivery contract for talc from Rozmin. There is no assurance that these negotiations will be successful. 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 2003, 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. Envigeo-Carpathian Flysch Concession. In September 1998, we acquired a 51% interest in Evigeo 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, is in good standing.Subsequently the Company sold some of its interest and now EuroGas presently holds a 45% interest in Envigeo, McCallan owns 45% and the Envigeio s.r.o. owns the other 10% There are three concessions, all held by Envigeo. 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. As we have evaluated the investment we have determined that there is no potential for returns in the near future. Therefore we have decided to impair this project. Accordingly, the Company recognized a $1,703,000 charge for impairment, which was the carrying value of the Company's investment in the project, during the fourth quarter of 2002. 2 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 was 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. In exchange for the Company's withdrawal, Nafta Gbely a.s. agreed to pay all outstanding obligations and liabilities totaling approximately $750,000 owing to Geophysical Services Ltd. of Hungary. Activities in Poland 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. 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. 3 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. 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 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 The 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. The Company issued 10,000,000 shares and the parties terminated the relationship as the acquisition was unwound. 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 to negotiate a new agreement; however, any new agreement will contemplate potential properties other than the Sagiski Block. Activities in Canada 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 4 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, enhancement of the field pipeline pressure through installation of additional compressor pumping and gas lift systems was necessary. The compressor pumping and gas lift systems were installed and operational in early 2002 after which extensive testing of the experimental process upon which the recovery effort is based. 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. During the second quarter of 2002, the Company evaluated its investment in the Beaver River Gas project in British Columbia, Canada. The terms of the related farmout agreement provide that the operator of the project will receive payout of all of its investment prior to any payments to the other interest holders and then the Company would receive 3.33% of the net cash flows, if any. The operator has invested in excess of $16,000,000 in the project at September 30, 2002. Due to the low production from the Beaver River Project and gas prices currently being paid for the production, management has determined that it is unlikely that the Company will receive any cash flows from the project, except for nominal overriding royalty payments. Accordingly, the Company recognized a $3,937,500 charge for impairment, which was equal to the carrying value of the Company's investment in the 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, 2002 or December 31, 2001. 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 not 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 As of December 31, 2002, we had four administrative employees. In addition, we use the services of consultants to the Company, who also serve as officers of the Company and its subsidiaries. These consultants include Wolfgang Rauball, Hank Blankenstein, Michael J. Slater, and Mr. Andrew Andraczke. Messrs. Rauball, Slater and Andraczke work out of Europe, and Mr. 5 Blankenstein works out of the United States. 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 on an as- needed basis. 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. 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. Our consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have incurred significant losses since inception, which have resulted in an accumulated deficit of $153,346,645 at December 31, 2002. These losses and this significant deficit raise substantial doubt about our ability to continue as a going concern. The accompanying audited consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. We are dependent upon financing activities to fund our operations and will continue to require significant funds to meet our obligations and to pursue our business plan. EuroGas has historically been undercapitalized. Prior to our acquisition of an approximately 50% interest in a Canadian gas production entity (Big Horn) in 1998 (which was fully divested in 2002), 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. 6 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. 7 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. 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. 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), Hank Blankenstein (Chief Financial Officer), Michael Slater (President), and Andrew K. Andraczke (Vice President and Treasurer of EuroGas Polska). 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. 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, 2002, we had capitalized costs related to the acquisition of oil and gas properties not subject to amortization in the amount of approximately $841,000. Should future events, such as the drilling of dry holes, evidence that an impairment of recorded value has taken place, we will be obligated to 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. 8 The prices of the various hydrocarbons we produce or may produce are volatile and unstable. The prices of oil, natural gas, methane gas and other fuels have been, and are likely to continue to be, volatile and subject to wide fluctuations in response to numerous factors, including the following: . 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 9 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. 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 168,212,635 shares of common stock issued and outstanding as of April 30, 2003 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, 2002, there are outstanding warrants and options to purchase up to 39,342,858 shares of common stock at exercise prices ranging from $0.15 to $0.55 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, 2002, there were 168,212,635 shares of common stock and 2,392,228 shares of preferred stock issued and outstanding. Also at December 31, 2002, there were 39,342,858 shares of common stock reserved for issuance upon the exercise or conversion of outstanding warrants, options, and similar rights to acquire common stock. 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 existing shareholders and may dilute the book value of the common stock. We have not paid any dividends on our common stock and do not expect to pay dividends with respect to the common stock 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. You should consider this cautionary warning concerning forward-looking statements in this report Certain statements in this report constitute "forward-looking statements" within the meaning of the rules and regulations promulgated by the SEC. Those forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed above, that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or 10 implied by the forward-looking statements. These risks, uncertainties and other factors include, among other things, our lack of revenue and our substantial net losses and accumulated deficit, as well as the continuing uncertainty of profitability, the highly competitive industry in which we operate, changes in or failure to comply with governmental regulation, the uncertainty of third party reimbursement for our products, general economic and business conditions and other factors referenced above. 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. 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 The principal portion of the Company's active litigation, as described in the following six paragraphs, involves matters relating to the Company's acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland). This litigation is being brought by Steve Smith, Chapter 7 Trustee (the "Trustee") for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95- 48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153- H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court, for the Southern District of Texas, Houston Division. McKenzie Bankruptcy Claim. This litigation is being brought by Steve Smith, Chapter 7 Trustee (the "Trustee") for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. In March 1997, the Trustee commenced the following cause of action: W. Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division) (hereafter "97-4114"). The Trustee's initial claim appears to allege that the Company may have paid inadequate consideration for its acquisition of GlobeGas from persons or entities acting as nominees for the McKenzies, and therefore McKenzies' creditors are the true owners of the proceeds received from the development of the Pol-Tex Concession in Poland. The Company has contested the jurisdiction of the Court, and the Trustee's claim against a Polish corporation (Pol-Tex), and the ownership of Polish mining rights. The Company further contends that it paid substantial consideration for GlobeGas (Pol-Tex's parent), and that there is no evidence that the creditors of the McKenzies invested any money in the Pol-Tex Concession. In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc., (Adv. No. 97-4155) in each of the three McKenzie individual bankruptcy cases. In general, the action asserts that the defendants, other than the Company, who acquired an interest in the Polish Project, received a fraudulent transfer of assets belonging to the individual McKenzie bankruptcy estates, or are alter egos or the strawmen for the McKenzies. As a result, the Trustee asserts that any EuroGas stock or cash received by these defendants should be accounted for and turned over to the Trustee. As to the Company, the Trustee asserts that as transfer agent, the Company should turn over the preferred stock presently outstanding to the defendants or reserve such shares in the name of the Trustee and that any special considerations afforded these defendants should be canceled. It appears the Company was named to this litigation only because of its relationship as transfer agent to the stock in question. This suit has been administratively consolidated with 97-4114, and is currently pending before the Houston bankruptcy court. In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in the consolidated adversary proceedings, seeking to add new parties, including Wolfgang and Reinhard Rauball and assert additional causes of action against EuroGas and the other defendants in this action. These new causes of action include claims for damages based on fraud, 11 conversion, breach of fiduciary duties, concealment and perjury. These causes of action claim that the Company and certain of its officers, directors or consultants cooperated or conspired with the McKenzies to secret or conceal the proceeds from the sale of the Polish Concession from the Trustee. In January 2000, this motion was granted by the bankruptcy court. The Company is vigorously defending this suit. On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants). These motions are currently pending before the Court. No trial date has been set. In June 1999, the Trustee filed another suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O., et al (Adv. No. 99-3287). That suit sought sanctions against the defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper. The defendants filed a motion to dismiss the lawsuit, which was granted in August 1999. In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv. No. 99-3444). This suit seeks damages in excess of $170,000 for the defendants' alleged violation of an agreement with the Trustee executed in March 1997. EuroGas disputes the allegations and has filed a motion to dismiss or alternatively, to abate this suit, which motion is currently pending before the court. On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants). On September 10, 2002, the Court entered an Order which required the Trustee to specify the causes of action asserted against each Defendant. A few days prior to this Order, the Trustee filed his Second Motion for Leave to Amend and Supplement Pleadings and to Drop Certain Defendants (the "Second Motion"). On October 21, 2002, EuroGas and other Defendants filed their Response to the Second Motion. On November 11, 2002, the Trustee filed his Motion and Reply to this Response under which, in part, Trustee sought court approval to file a Third Amended Complaint. On March 13, 2003 the Court entered and Order Granting Trustee's Motion for Leave to Amend. On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now styled Steve Smith, Turstee v. Harven Michael McKenzie, McKenzie Methane Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Rienhard Rauball, MCK Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to EuroGas, the Third Amended Copmplain asserts claims for breach of contract, fraud in the inducement, conspiracy, aiding and abetting civil conspiracy, fraudulent transfer and punitive dmanges. As to Wolfgang and Rienhard Rauball, the Complaint asserts claims for turnover under Section 542 and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post- petition avoidable transfers, civil conspiracy, aiding and abetting civil conspiracy and punitive damages. The Company has recently filed a Motion to Dismiss the third Amended Complaint. At present, no trial date has been set. 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 additional 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 Estate of Bernice Pauahi Bishop (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 signed a settlement agreement with the bankruptcy Trustee, and other parties, including Kukui, Inc., and the Trustees of the Bishop Estate , which had pursued separate claims against EuroGas (the "Settlement Agreement"). The Settlement Agreement, in part, required EuroGas to pay $900,000 over 12 months and issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000. The bankruptcy court approved the Settlement Agreement on May 23, 2000. The claims of Kukui, Inc. and the Trustees of the Bishop Estate have been dismissed pursuant to the terms of the Settlement Agreement. Under the terms of the Settlement Agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 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 for the estimated cost of settling the claim included an estimated default penalty and interest. The Company contends that it has fully performed under the Settlement Agreement and that the Settlement Agreement additionally entitles the Company to a complete release and dismissal of all suits filed by the Bankruptcy Trustee. The Bankruptcy Trustee contends that EuroGas defaulted under the Settlement Agreement and is not entitled to a release or dismissal. 12 Holbrook Claim On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee and the other parties to the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee, Kukui, Inc., Eurogas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases. Under this complaint, Holbrook sought a determination of the defendants' rights in certain EuroGas files that he had received from Kruse Landa and Maycock, former attorneys for EuroGas. Through this litigation, the Trustee sought turnover of all these files pursuit to the Settlement Agreement. EuroGas has opposed turnover of privileged materials and filed a cross-claim in the suit asking for a declaratory judgment that the Settlement Agreement is enforceable and that the Trustee be ordered to specifically perform his obligations under the Settlement Agreement. The Trustee filed a counterclaim requesting specific performance by EuroGas and other relief. At the direction of the court, both parties filed motions for summary judgment. On December 17, 2001, the court entered an order granting Trustee's Motion for Summary Judgment and denying a related Motion to Strike Affidavit, which EuroGas had filed. EuroGas has appealed this order to the United States District Court for the Southern District of Texas. On September 25, 2002 the District Court entered its Opinion and Order affirming the Bankruptcy Court's orders. On October 25, 2002 Eurogas filed a notice of appeal of the District Court's order to the Fifth Circuit Court of Appeals. The appeal is currently pending before this Court. EuroGas cannot predict the outcome of these appeals, but intends to vigorously pursue the appeals to completion. Netherlands Tax Assessment. 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. The tax assessment is payable in Euro, and as a result fluctuates on the Company's financial statements due to adjustments in exchange rates. However, GlobeGas does not have the ability to pay the assessed obligation and as a result may face forced liquidation and dissolution by the Netherlands tax authority. Dissolution of Energy Global A.G. During 2002, the Company's Liechtenstein Subsidiary, Energy Global A.G., was statutorily liquidated and dissolved by the Principality of Liechtenstein. As a result, the Company lost $615,904 in net assets of that subsidiary and may be subject to additional losses in net assets of Energy Global's subsidiaries. In November 2001, Borre Dahl, a former employee of the Company, filed a complaint against the Company and Wolfgang Rauball, the Company's Chairman and Chief Executive Officer, claiming breach of contract, breach of employment contract, and misrepresentation. Both Mr. Rauball and the Company have filed answers to the complaint, and intend to defend vigorously the suit. No trial date has been set. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the security holders of the Company during the forth quarter of 2002. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market for Common Stock Market Information and Holders 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 30, 2003, there were 168,212,635 shares of common stock issued and outstanding, held by approximately 317 holders of record and an estimated 2,100 beneficial owners, including shares of common stock held in street name. 13 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, 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 Year Ended December 31, 2002 ---------------------------- Quarter Ended March 31, 2002 0.26 0.03 Quarter Ended June 30, 2002 0.20 0.10 Quarter Ended September 30, 2002 0.19 0.07 Quarter Ended December 31, 2002 0.10 0.06 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 30, 2003, the high and low bids for our common stock on the OTC Bulletin Board were $0.12 and $0.12 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, $135,199 and $139,932 in 2002, 2001 and 2000, respectively. Of this amount, zero was paid in 2002, zero was paid in 2001, $21,599 was paid in 2000, 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. Recent Sales of Unregistered Securities During the year ended December 31, 2002, the Company issued the following securities without registration under the Securities Act of 1933, as amended, not previously reported on the quarterly reports on Form 10-Q filed by the Company during 2002. During July 2002 EuroGas reached a verbal settlement with a group of stockholders and agreed to issue 1,417,847 common shares and warrants to purchase 6,000,000 common shares within two years at $0.25 per share. The value of the common stock to be issued was estimated to be $141,785, or $0.10 per share, based upon quoted market prices of the Company's common stock on the day of the verbal agreement. The value of the warrants to be issued were estimated to be $388,939 using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.5%; expected volatility of 166%; dividend yield of 0%; and expected life of two years. The value of the estimated settlement of $530,724 and was included in accrued settlement obligations and was charged against operations during the current quarter. 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, 14 . 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 . a 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. 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, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ----------- ------------ ------------ ------------ M Net Sales $ 5,074 $ 88,937 $ 6,395,037 $ 4,973,508 $ 879,404 Loss from $ 18,551,994 $ 5,475,654 $ 52,436,869 $ 28,946,667 $ 11,024,180 Operations Loss per $ 0.12 $ 0.04 $ 0.50 $ 0.36 $ 0.22 Common Share
Balance Sheet Data
Year Ended December 31, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ----------- ------------ ------------ ------------ Total Assets $ 9,417,748 $16,110,130 $ 30,337,006 $ 53,968,578 $ 65,334,387 Long-Term $ 0 $ 0 $ 0 $ 0 $ 1,788,294 Obligations Cash Dividends per Common $ 0 $ 0 $ 0 $ 0 $ 0 Share
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 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. 15 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 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: . 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. We will continue to manage the Company from our West Vancouver, North American Headquarter and our 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-Fiscal Years 2002, 2001 and 2000 The following table sets forth consolidated income statement data and other selected operating data for the years ended December 31, 2002, 2001 and 2000. For the Years Ended December 31, ------------------------------------------ 2002 2001 2000 ------------ ----------- ----------- Oil and Gas Sales $ 5,074 $ 88,937 $ 6,395,037 Oil and gas production - - 1,521,471 Impairment of mineral interests and equipment 5,999,357 794,444 26,783,790 Depreciation, depletion and amortization 11,896 25,511 2,023,425 Settlement costs 10,219,117 1,690,947 7,200,205 General and administrative 2,536,843 1,675,746 8,801,706 ------------ ----------- ----------- Total Costs and Operating Expenses 18,767,213 4,186,648 46,330,597 ------------ ----------- ----------- 16 Other Income (Expenses) Interest Income 103,729 59,961 89,698 Other Income 72,816 272,324 455,938 Interest expense (12,191) (240,115) (8,122,205) Net Gain (loss) on sale and impairment of 132,153 (1,409,729) (2,029,916) securities and equipment Foreign exchange net gains (losses) (86,362) (402,227) (263,523) Equity income - 341,843 - Minority interest in income of subsidiary - - (103,022) ------------ ----------- ------------ Total Other Income (Expense) 210,145 (1,377,943) (9,973,030) - Provision for Income Taxes - - (2,528,279) ------------ ----------- ------------ Net Loss $(18,551,994) $(5,475,654) $(52,436,869) ============ =========== ============= Basic and Diluted Loss $ (0.12) $ (0.04) $ (0.50) Per Common Share ============ =========== ============ Weighted Average Number of Common Shares Used in Per Share Calculation 154,419,143 134,732,687 106,145,361 ============ =========== =========== 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 2001 and 2000 reflect oil and gas sales of approximately $88,937 and $6,395,037, 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 no oil and gas sales in 2002. 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 $0 in 2001, and $1,521,471 in 2000. All of our oil and gas production expenses are from our Big Horn subsidiary. In 2002, we had no oil and gas operating expenses. General and administrative expenses were $2,536,843 for 2002, compared with $1,675,746 for 2001 and $8,801,706 in 2000. The increase of 51% in 2002 from the level of expense in 2001 was due primarily to the addition of several new employees and additional expenses related to those employees. Depreciation, depletion and amortization expenses were $11,896 for 2002, compared to $25,511 for 2001 and $2,023,425 during 2000. The decline in depreciation, depletion and amortization expense is attributable to limited assets subject to depreciation, depletion and amortization. Impairment of mineral interests and expenses totaled $5,999,357 for 2002, $794,444 in 2001, and $26,783,790 in 2000. The principal factor that contributed to the increase in impairment expenses from 2001 through 2002 was the impairment during the year of the Beaver River Project and the Envigeo Project. Settlement costs for financial statement purposes decreased from $7,200,205 in 2000 and $1,690,947 in 2001 to $10,219,117 in 2002. The settlement costs in 2002 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 $153,346,645 at December 31, 2002, 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 $18.5 million, $5.5 million, and $52.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. After preferred dividends, the loss applicable to common shares was approximately $18.7 million, $5.6 million and $52.6 million for the years ended December 31, 2002, 2001 and 2000, 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. 17 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 2002 we recognized a loss of $86,362 because of currency transactions. In 2001, the loss was $402,227. In 2000, we had a loss of $263,523 as a result of currency transactions. We had a cumulative foreign currency translation adjustment of $1,341,529 as of December 31, 2002. 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 $153,346,645 as of December 31, 2002, 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, 2002, we had total current assets of approximately $1.8 million and total current liabilities of approximately $19.4 million resulting in negative working capital of approximately $17.6 million. As of December 31, 2002, our balance sheet reflected approximately $800,000 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. Throughout our existence, we have relied on cash from financing activities to provide the funds required for acquisitions and operating activities. Our financing activities used net cash of approximately $100,000 and $80,000, during the years ended December 31, 2002 and 2001, respectively, and provided $5.7 million during the year ended December 31, 2000. This net cash has been used principally to fund net operating losses of approximately $18.5 million, $5.5 million and $52.4 million during those three years. Our operating activities used $1.5 million of net cash during the year ended December 31, 2002 and $3.4 million in the year ended December 31, 2001, and provided net cash of approximately $0.6 million during the year ended December 31, 2000. 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, $1.6 million, $3.7 million, and ($7.3) million provided by (used) in investing activities for the years ended December 31, 2002, 2001 and 2000, respectively, of which approximately $0.5 million, $0.1 million and $8.5 million, respectively, was used in acquiring mineral interests. While we had cash on hand of as of December 31, 2002, 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 18 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 19 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, 2002, 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 the Company Term of Office Dr. Gregory P. 43 Director January 1996 - Present Fontana Wolfgang Rauball 57 Director, Chief Executive November 2000 - Present Officer Vojtech Agyagos 59 Director May 2001 - Present Hank Blankenstein 61 Director, Chief Financial May 2002 - Present officer Michael Slater 50 President February 2002 - 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 January 1996. 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. 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. 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. Hank Blankenstein. Mr. Blankenstein was appointed a director and chief financial officer of the Company in May of 2002. Mr. Blankenstein, age 60, served as a director and financial vice president of the Company from 1995 until 2000. Mr. Blankenstein has more than 30 years experience at various levels of management. From April 2000 until his appointment to the board and CFO, Mr. Blankenstein was involved in several real estate development projects. Mr. Blankenstein holds a Bachelor of Science degree in Finance and Banking from Brigham Young University. Michael J. Slater. Mr. Slater was appointed as president of the Company in February of 2002. Mr. Slater has spent the last 25 years working for Texaco in various technical positions. His most recent responsibility was as Vice- President, Negotiations, Texaco Exploration. He worked on and developed exploration projects in Europe, the former Soviet Union ("FSU"), the North Sea and Africa with emphasis on Eastern Europe and the FSU. He held that position from October 1995 until joining the Company. Mr. Slater holds a BS in Geology from Kings College, London and a PhD in geology from Cambridge University. 20 Key Employees Andrew K. Andraczke. 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. Section 16(a) Beneficial Ownership Reporting Compliance 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. Audit Committee and Code of Ethics Disclosure The Company's Board of Directors has not yet appointed an audit committee. The Company expects to form an audit committee and to establish a written code of ethics for its executive officers and directors during 2003. 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, 2002, and other persons serving as executive officers of EuroGas as of December 31, 2002, whose total cash compensation for the 2002 fiscal year exceeded $100,000 (collectively, the "Named Officers"). Summary Compensation Table
Long-Term Compensation ------------------------------ Annual Compensation Awards Payouts ------------------------------------ --------------------- ------- Securities Other Restricted Underlying Annual Stock Options/ LTIP All Other Name and Salary Bonus Compensation Awards SARs Payouts Compensation Principal Year ($) ($) ($) ($) (#) ($) ($) Position --------------------------------------------------------------------------------------------- Wolfgang 2002 $300,000 Nil Nil - Rauball 2001 $120,000 50,000 President, 2000 $120,000 CEO (1) Michael 2002 $400,000 Nil Nil Slater President (2) Hank 2002 $180,000 Nil Nil Blankenstein Chief Financial Officer (3)
21 (1) 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. (2) Mr. Slater became an officer of the Company in February 2002. (3) Mr. Blankenstein became an officer of the Company in May 2002. Option Grants in Last Fiscal Year No options were granted to the Named Officers during 2002. Executive Employment and Consulting Arrangements On February 5, 2002, EuroGas entered into an employment agreement with its new President. The three-year agreement provides for annual compensation of $400,000 to be paid in monthly installments. The agreement provides for all terms of the agreement to continue for the unexpired term of the agreement should the Company be involved in winding-up or merger transaction. The agreement may be terminated if either party fails to meet its obligations under the terms of the agreement. Option Exercises and Fiscal Year-End Option Value The following table sets forth information with respect to the aggregate number and value of unexercised options held by all Named Officers at December 28, 2002. No options were exercised by the Named Officers during the year ended December 31, 2002. In accordance with SEC rules, the value of unexercised options is calculated by subtracting the exercise price from $0.73, the closing price of the common stock on the last business day of the year ended December 31, 2002. The closing sale price of the Company's stock on April 30, 2003, was $0.115. Aggregated Option Exercises in Last Fiscal Year And Fiscal Year-End Option Values
Name Shares Value Number of Securities Value of Unexercised Acquired Realized Underlying Unexercised In-the- on Options at 12/28/2002 Money Options at Exercise Exercisable / 12/28/2002 Unexercisable Exercisable/Unexercisable Andrew Andraczke 350,000 - 350,000 - Greg Fontana 250,000 - 250,000 -
22 Compensation Plans The following table sets forth information as of December 31, 2002 with respect to shares of common stock to be issued upon the exercise, and the weighted-average exercise price, of all outstanding options and rights granted under our equity compensation plans, as well as the number of shares available for future issuance under those plans. Plan category Number of Weighted Number of securities to average securities be issued exercise remaining upon exercise price of available for of outstanding future outstanding options, issuance options, warrants and warrants and rights rights (a) (b) (c) Equity compensation 600,000 $0.73 1,400,000 plans approved by security holders Equity compensation 0 N/A N/A plans not approved by security holders Total 600,000 N/A 1,400,000 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, 2002, the Compensation Committee consisted of the Board of Directors. The Board of Directors as of December 31, 2002, included: . Gregory Fontana, who is not an employee of the Company; . Wolfgang Rauball, who since July 2001 has served as President and CEO and interim 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 2002 fiscal year. General. Management compensation is overseen by the Board of Directors. 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 23 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, 2002. 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: (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, 2000, 2001 and 2002, 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. Rauball had a salary of $300,000 as a director and CEO. 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 2001 and 2002 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 24 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, 1997 (the date the common stock was first quoted in the over-the-counter market) and ending December 31, 2002, 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, 1997 and that dividends, if any, were reinvested for all companies, including those on the NASDAQ Composite Index and the Peer Group Index. [Graph] Total Return Analysis 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 EuroGas $ 100.00 $ 89.29 $ 29.46 $ 14.29 $ 12.28 $ 7.00 Dow Jones US $ 100.00 $ 75.24 $ 77.46 $121.92 $ 92.03 $ 129.20 Oil Companies Secondary Index (symbol: OIS) NASDAQ $ 100.00 $ 208.40 $ 386.77 $ 234.81 $ 78.33 $134.00 Composite
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 30, 2003 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 April 30, 2003, 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. 25 The table is based upon information provided by our directors and executive officers. Amount and Nature of Beneficial Ownership as of April 30, 2003(1) Name and Address of Common Exercisable Total Beneficial Owner Shares (1) Options & Ownership Percent(3) Warrants(2) Wolfgang Rauball 19,671,429 21,428,572 41,100,001 26% (4) CEO, Chairman & Director Dr. Gregory P. Nil 250,000 250,000 * Fontana, Director 2269 Worthing Lane Los Angeles, California 90077 Andrew Andraczke, Nil 350,000 350,000 * Vice President, EuroGas Polska Warsaw str. Lektykarska 18 01-687 Warszawa, Poland Vojtech Agyagos, Nil Nil Nil * Director 1365 Dempsey Road North Vancouver, B.C. V7K 1S7 Hank Blankenstein, Nil Nil Nil 0 Director 3477 Melody Creek Circle Riverton, Ut, 84065 Michael J. Slater Nil Nil Nil 0 2 Manor Park Tunbridge Wells, Kent U.K. TN4 8XP All officers and 19,671,429 22,028,572 41,700,001 26% directors as a group (6 persons) * Less than one percent. _________________________ (1) Unless otherwise indicated, to our best knowledge, all stock is owned beneficially 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 30, 2003, 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) which is the number of shares of our common stock issued and outstanding as of December 31, 2002. (4) Includes shares in which Mr. Rauball disclaims beneficial ownership and which he temporarily holds as a nominee for other persons. 26 Item 13. Certain Relationships and Related Transactions Wolfgang Rauball currently serves as our CEO 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. During June of 2002 the Company issued Mr. Rauball 10,000,000 shares of its common stock and warrants for an additional 10,000,000 shares in a subscription on a private placement. The 10,000,000 shares of common stock were issued at a price of $0.10 per share, the warrants were issued at an exercise price of $0.125 per share if converted before June 10, 2003 and an exercise price of $0.15 after that but before June 10, 2004. The Chief Executive Officer and principal shareholder of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their behalf. The resulting receivables and payables were combined and presented in the accompanying financial statements as notes payable to related parties of $416,858 as of December 31, 2001. During the six months ended June 30, 2002 EuroGas made additional payments of $535,574 on behalf of the officer. During June 2002, EuroGas entered into a compensation agreement with Mr. Rauball that provides the officer with $300,000 of compensation for his prior services. The compensation was charged to operations during June 2002. The resulting $381,284 payable to the officer was converted into common stock as further described above. Additionally, Hank Blankenstein, our Chief Financial Officer, assigned $200,000 of accrued salary, which accrual arose during his service to the Company during 2000, to the Chief Executive Officer. Item 14. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. (a) Evaluation of Disclosure Controls and Procedures. Within 90 days prior to the date of this report, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. (b) Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. PART IV Item 15. 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, 2002, 2001, and 2000 27 B. Consolidated Balance Sheets at December 31, 2002 and 2001 C. Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 D. Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001and 2000 E. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 F. Notes to Consolidated Financial Statements 2. Exhibits. Exhibit Number Title of Document Location -------------------------------------------------------------------------- 2.1 Exchange Agreement between Report on Form 8-K Northampton, Inc., dated August 3, 1994, and Energy Global, A.G. Exhibit No. 1* 2.2 Agreement and Plan of Merger Report on Form 8-K between EuroGas, Inc., dated July 12, 1996, and Danube International Petroleum Exhibit No. 5* Company, Inc., dated July 3, 1996, as amended 2.3 English translation of Transfer Report on Form 8-K Agreement between dated June 11, 1997 EuroGas and OMV, Inc. for the Exhibit No. 1* Acquisition of OMV (Yakut) Exploration GmbH dated June 11, 1997 2.4 Asset Exchange Agreement between Report on Form S-1 EuroGas, Inc., dated July, 23, 1998 and Beaver River Resources, Ltd., Exhibit No. 2.03* dated April 1, 1988 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* 3.3 Designation of Rights, Privileges, Quarterly Report on and Preferences Form 10-QSB dated of 1995 Series Preferred Stock March 31, 1995, Exhibit No. 1* 3.4 Designation of Rights, Privileges, Report on Form 8-K and Preferences dated July 12, 1996, of 1996 Series Preferred Stock Exhibit No. 1* 3.5 Designation of Rights, Privileges, Report on Form 8-K and Preferences dated May 30, 1997 1997 Series A Convertible Preferred Exhibit No. 1* Stock 3.6 Designation of Rights, Privileges, Report on Form S-1 and Preferences Dated July 23, 1998 of 1998 Series B Convertible Exhibit No. 3.06* Preferred Stock 28
Exhibit Number Title of Document Location -------------------------------------------------------------------------- 3.7 Articles of Share Exchange Report on Form 8-K dated August 3, 1994, Exhibit No. 6* 3.8 Designation of Rights, Privileges, Registration Statement on Form S-1, File No. and Preferences of 1999 Series C 6% 333-92009, filed on December 2, 1999 Convertible Preferred Stock 4.1 Subscription Agreement between Report on Form S-1 EuroGas, Inc., and dated July 23, 1998 Thomson Kernaghan & Co., Ltd., Exhibit No. 4.01* dated May 29, 1998 4.2 Warrant Agreement dated July 12, Report on Form 8-K 1996, with dated July 12, 1996, Danube Shareholder Exhibit No. 2* 4.3 Registration Rights Agreement Report on Form S-1 dated July 23, 1998 Exhibit Between EuroGas, Inc., No. 4.02* and Thomson Kernaghan & Co., Ltd., dated May 29, 1998 4.4 Registration Rights Agreement dated Report on Form 8-K July 12, 1996, dated July 12, 1996 with Danube Shareholder Exhibit No. 3* 4.5 Registration Rights Agreement by Report on Form S-1 and among EuroGas, Inc., and dated July 23, 1998 Finance Credit & Development Exhibit No. 4.06* Corporation, Ltd., dated June 30, 1997 4.6 Option granted to the Trustees of Annual Report on the Estate of Form 10-KSB for the Bernice Pauahi Bishop fiscal year ended December 31, 1995, Exhibit No. 10* 4.7 Registration Rights Agreement by Annual Report on and among Form 10-KSB for the EuroGas, Inc., and Kukui, Inc., and fiscal year ended the Trustees of December 31, 1995, the Estate of Bernice Pauahi Bishop Exhibit No. 11* 4.8 Option issued to OMV Annual Report on Aktiengesellschaft to acquire up Form 10-KSB for the to 2,000,000 shares of restricted fiscal year ended common stock December 31, 1996, Exhibit No. 13* 4.9 Form of Convertible Debenture Quarterly report on Form 10-Q dated March 31, issued on January 12, 2000. 2000. 10.1 English translation of Mining Quarterly Report on Form 10-Q dated September Usufruct Contract between The 30, 1997 Exhibit No. 1* Minister of Environmental Protection, Natural Resources and Forestry of the Republic of Poland and Pol-Tex Methane, dated October 3, 1997 10.2 Agreement between Polish Oil and Quarterly Report on Form 10-Q dated September Gas Mining Joint Stock Company and 30, 1997 Exhibit No. 2* EuroGas, Inc., dated October 23, 1997 29 Exhibit Number Title of Document Location -------------------------------------------------------------------------- 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 on Kukui, Inc., and Form 10-KSB for the Pol-Tex Methane, Sp. zo.o., fiscal year ended McKenzie Methane December 31, 1995, Rybnik, McKenzie Methane Exhibit No. 15* Jastrzebie, GlobeGas, B.V. (formerly known as McKenzie Methane Poland, B.V.), and the Unsecured Creditors' Trust of the Bankruptcy Estate of McKenzie Methane Corporation 10.5 Acquisition Agreement between Report on Form S-1 dated July 23, 1998 EuroGas, Inc., and Belmont Exhibit No. 10.20* Resources, Inc., dated July 22, 1998 10.6 General Agreement governing the Report on Form 8-K operation of dated August 3, 1994, McKenzie Methane Poland, B.V. Exhibit No. 2* 10.7 Concession Agreement between Annual Report on Ministry of Form 10-KSB for the Environmental Protection, Natural fiscal year ended Resources, and December 31, 1995, Forestry and Pol-Tex Methane Ltd. Exhibit No. 18* 10.8 Association Agreement between NAFTA Annual Report on a.s. Gbely Form 10-KSB for the and Danube International Petroleum fiscal year ended Company December 31, 1995, Exhibit No. 19* 10.9 Agreement between Moravske' Annual Report on Naftove' Doly a.s. Form 10-KSB for the and Danube International Petroleum Fiscal year Ended December 31, 1995, Company Exhibit No. 20* 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 on amended, with attached Form 10-KSB for the list of shareholders fiscal year ended December 31, 1995, Exhibit No. 23* 10.12 Amendment #1 to the Association Annual Report on Agreement Entered Form 10-KSB for the on 13th July 1995, between NAFTA Fiscal year ended a.s. Gbely and December 31, 1996, Danube International Petroleum Exhibit No. 25* Company 30 Exhibit Number Title of Document Location -------------------------------------------------------------------------- 10.13 Acquisition Agreement by and among Form 10-Q Belmont Resources, Inc., EuroGas Dated September 30, 1998 Incorporated, dated October 9, 1998 Exhibit No. 1* 10.14 Letter of Intent by and between Annual Report on Polish Oil and Gas Form 10-KSB for the Company and Pol-Tex Methane, dated Fiscal year ended April 28, 1997 December 31, 1996, Exhibit No. 27* 10.15 Purchase and Sale Agreement between Report on Form 8-K Texaco Slask Dated March 24, 1997 Sp. zo.o., Pol-Tex Methane Sp. Exhibit No. 1* zo.o. and GlobeGas B.V. 10.16 English translation of Articles of Report on Form 8-K/A Association of the Dated June 11, 1997 TAKT Joint Venture dated June 7, Exhibit No. 3* 1991, as amended April 4, 1993 10.17 English translation of Proposed Report on Form 8-K/A Exploration and Dated June 11, 1997 Production Sharing Contract for Exhibit No. 4* Hydrocarbons between the Republic of Sakha (Yakutia) and the Russian Federation and the TAKT Joint Venture 10.18 English translation of Agreement on Registration Statement on Form S-1 dated July Joint Investment and Production 23, 1998 Exhibit No. 10.21* Activities between EuroGas, Inc., and Zahidukrgeologia, dated May 14, 1998 10.19 English translation of Statutory Registration Statement on Form S-1 dated July Agreement of Association of Limited 23, 1998 Exhibit No. 10.22* Liability Company with Foreign Investments between EuroGas, Inc., and Makyivs'ke Girs'ke Tovarystvo, dated June 17, 1998 10.20 Partnership Agreement between Amendment No. 1 to Registration Statement on EuroGas, Inc., and RWE-DEA Form S-1 dated August 3, 1998 Exhibit No. Aktiengesellschaft for Mineraloel 10.23 and Chemie AG, date July 22, 1998 10.21 Mining Usufruct Contract between Quarterly Report on The Minister of Form 10-Q dated Environmental Protection, Natural September 30, 1997 Resources and Exhibit No. 1* Forestry of the Republic of Poland and Pol-Tex Methane, dated October 3, 1997 10.22 Agreement between Polish Oil and Quarterly Report on Gas Mining Joint Form 10-Q dated Stock Company and EuroGas, Inc., September 30, 1997 dated Exhibit No. 2* October 23, 1997 10.23 Agreement for Acquisition of 5% Quarterly Report on Interest in a Form 10-Q dated Subsidiary by and between EuroGas, September 30, 1997 Inc., B. Grohe, Exhibit No. 3* and T. Koerfer, dated November 11, 1997 10.24 Option Agreement by and between Quarterly Report on EuroGas, Inc., Form 10-Q dated and Beaver River Resources, Ltd., September 30, 1997 dated Exhibit No. 4* October 31, 1997 31 Exhibit Number Title of Document Location -------------------------------------------------------------------------- 10.25 Lease Agreement dated September 3, Registration Statement 1996, between Potomac Corporation on Form S-1, File No. and the Company; Letter of 333-92009, filed on Amendment dated September 30, 1999. December 2, 1999 10.26 Sublease dated November 2, 1999, Registration Statement on Form S-1, File No. between Scotdean Limited and the 333-92009, filed on December 2, 1999 Company 10.27 Securities Purchase Agreement dated Registration Statement on Form S-1, File No. November 4, 1999, between the 333-92009, filed on December 2, 1999 Company and Arkledun Drive LLC 10.28 Registration Rights Agreement dated Registration Statement on Form S-1, File No. November 4, 1999, between the 333-92009, filed on December 2, 1999 Company and Arkledun Drive LLC 10.29 Supplemental Agreement dated Registration Statement on Form S-1, File No. November 4, 1999, between the 333-92009, filed on December 2, 1999 Company and Arkledun Drive LLC 10.30 Executive Employment Agreement Registration Statement on Form S-1, File No. dated April 20, 1999 between the 333-92009, filed on December 2, 1999 Company and Karl Arleth Form 10-K for year ended December 31, 2000 10.31 Settlement Agreement dated June 16, 2000, between the Company and FCOC Securities Purchase Agreement dated Form 10-K for year ended December 31, 2000 10.32 October 2, 2000, between the Company and Arkledun Drive LLC 10.33 Registration Rights Agreement dated Form 10-K for year ended December 31, 2000 October 2, 2000, between the Company and Arkledun Drive LLC 10.34 Settlement Agreement dated November Form 10-K for year ended December 31, 2000 14, 2000, between the Company and Arkledun Drive LLC 10.35 Consulting Agreement dated Form 10-K for year ended December 31, 2000 September 18, 2000, between the Company and Spinneret Financial Systems, Ltd. 10.36 Securities Purchase Agreement dated Form 10-K for year ended December 31, 2000 March 27, 2001 between the Company and Belmont Resources Inc. 10.37 Agreement dated April 9, 2001 Form 10-K for year ended December 31, 2000 between the Company and Belmont Resources Inc. 10.38 Warrant Agreement dated September Form 10-K for year ended December 31, 2000 8, 2000 with Oxbridge Limited 10.39 Warrant Agreement dated September Form 10-K for year ended December 31, 2000 8, 2000 with Rockwell International Ltd. 10.40 Warrant Agreement dated September Form 10-K for year ended December 31, 2000 8, 2000 with Conquest Financial Corporation 32 Exhibit Number Title of Document Location -------------------------------------------------------------------------- 10.41 Termination and Transfer Agreement Form 10-K for year ended December 31, 2000 dated June 23, 2000 between the Company and Belmont Resources, Inc. 10.42 Loan Agreement dated March 3, 1999 Form 10-K for year ended December 31, 2000 between the Company and Pan Asia Mining Corp. 10.43 Agreement dated July 14, 2000 Form 10-K for year ended December 31, 2000 between the Company and Oxbridge Limited 10.44 Amended Agreement dated July 25, Form 10-K for year ended December 31, 2000 2000 between the Company, Pan Asia Mining Corp., and Oxbridge Limited 10.45 Settlement Agreement dated November Form 10-K for year ended December 31, 2000 20, 2000 between the Company and Beaver River Resources, Ltd. 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 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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 Chief Executive Officer By /s/ Hank Blankenstein ------------------------ Hank Blankenstein Principal Accounting and Financial Officer DATE: May 15, 2003 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 May 15, 2003 --------------------------- Wolfgang Rauball, Director /s/ Gregory P. Fontana May 15, 2003 --------------------------- Dr. Gregory P. Fontana, Director /s/ Vojtech Agyagos May 15, 2003 --------------------------- Vojtech Agyagos, Director /s/ Hank Blankenstein May 15, 2003 --------------------------- Hank Blankenstein, Director 34 EUROGAS, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 F-4 Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31, 2000, 2001 and 2002 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000 F-9 Notes to Consolidated Financial Statements F-9 Supplemental Information Regarding Oil and Gas Producing Activities (Unaudited) F-29 F-1 HANSEN, BARNETT & MAXWELL (801) 532-2200 A Professional Corporation Fax (801) 532-7944 CERTIFIED PUBLIC ACCOUNTANTS 5 Triad Center, Suite 750 Salt Lake City, Utah 84180 www.hbmcpas.com 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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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, 2002, the Company had negative working capital and a capital deficiency. 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 May 14, 2003 F-2 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 2002 2001 ----------------------------------------------------------------------------------------------- ASSETS Current Assets Cash $ 187,922 $ 257,831 Investment in securities available-for-sale 1,490,058 782,908 Investment in fixed maturity securities - 1,445,501 Other receivables 98,176 586,520 Other current assets 16,416 21,050 ----------------------------------------------------------------------------------------------- Total Current Assets 1,792,572 3,093,810 ----------------------------------------------------------------------------------------------- Property and Equipment - full cost method Talc mineral properties and mining equipment 6,507,736 6,300,993 Oil and gas properties not subject to amortization 841,427 6,186,606 Furniture and office equipment 371,188 353,142 ----------------------------------------------------------------------------------------------- Total Property and Equipment 7,720,351 12,840,741 Less: Accumulated depletion, depreciation and amortization (196,259) (183,278) ----------------------------------------------------------------------------------------------- Net Property and Equipment 7,524,092 12,657,463 Receivable from a related party 101,084 - Investments, at cost - 358,857 ----------------------------------------------------------------------------------------------- Total Assets $ 9,417,748 $ 16,110,130 =============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities Accrued liabilities $ 5,150,443 $ 4,525,467 Accrued liabilities payable to related parties - 416,858 Accrued settlement obligations 13,145,766 6,345,766 Accrued income taxes 815,053 802,621 Notes payable to related parties 253,365 424,294 ----------------------------------------------------------------------------------------------- Total Current Liabilities 19,364,627 12,515,006 ----------------------------------------------------------------------------------------------- Stockholders' Equity (Deficiency) Preferred stock, $0.001 par value; 3,661,968 shares authorized; 2,392,228 shares outstanding; liquidation preference: $1,150, 350,479 350,479 Common stock, $0.001 par value; 325,000,000 shares authorized; 168,212,635 shares and 144,796,460 shares issued, respectivel 168,213 144,797 Additional paid-in capital 143,595,224 139,314,283 Accumulated deficit (153,346,645) (134,659,453) Accumulated other comprehensive loss (264,363) (1,336,314) Receivable from shareholder (448,425) - Treasury stock, at cost; 5,028 and 307,000 shares, respective (1,362) (218,668) ----------------------------------------------------------------------------------------------- Total Stockholders' Equity (Deficiency) (9,946,879) 3,595,124 ----------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity (Deficiency) $ 9,417,748 $ 16,110,130 ===============================================================================================
The accompanying notes are an integral part of these financial statements. F-3 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31 2002 2001 2000 --------------------------------------------------------------------------------------------------- Oil and Gas Sales $ 5,074 $ 88,937 $ 6,395,037 --------------------------------------------------------------------------------------------------- Costs and Operating Expenses Oil and gas production - - 1,521,471 Impairment of mineral interests and other assets 5,999,357 794,444 26,783,790 Depreciation, depletion and amortization 11,896 25,511 2,023,425 Settlement expense 10,219,117 1,690,947 7,200,205 General and administrative 2,536,843 1,675,746 8,801,706 --------------------------------------------------------------------------------------------------- Total Costs and Operating Expenses 18,767,213 4,186,648 46,330,597 --------------------------------------------------------------------------------------------------- Other Income (Expenses) Net gain (loss) on sale of investments 132,153 (1,409,729) (2,029,916) Equity income - 341,843 - Interest income 103,729 59,961 89,698 Interest expense (12,191) (240,115) (8,122,205) Foreign exchange net gains (losses) (86,362) (402,227) (263,523) Gain on sale of equipment 72,816 272,324 455,938 Minority interest in income of subsidiary - - (103,022) --------------------------------------------------------------------------------------------------- Total Other Income (Expenses) 210,145 (1,377,943) (9,973,030) --------------------------------------------------------------------------------------------------- Loss Before Income Taxes (18,551,994) (5,475,654) (49,908,590) Provision for Income Taxes - - 2,528,279 --------------------------------------------------------------------------------------------------- Net Loss (18,551,994) (5,475,654) (52,436,869) Preferred Dividends 135,198 135,199 139,932 --------------------------------------------------------------------------------------------------- Loss Applicable to Common Shares $ (18,687,192) $ (5,610,853) $(52,576,801) =================================================================================================== Basic and Diluted Loss Per Common Share $ (0.12) $ (0.04) $ (0.50) =================================================================================================== Basic and Diluted Weighted-Average Common Shares Outstanding 154,419,143 134,732,687 106,145,361 ===================================================================================================
The accompanying notes are an integral part of these financial statements. F-4 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Treasury Accumulated Stock and Total Preferred Stock Common Stock Additional Other Receivable Stockholders' --------------------- ------------------- Paid-In Accumulated Comprehensive from Equity Shares Amount Shares Amount Capital Deficit Income (Loss) Shareholder (Deficiency) ---------------------------------------------------------------------------------------------------------------------------------- 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 shares and 3,000,000 options under settlement agreement with FCD - - 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 option of debt, 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) $ - $(51,026,466) ================================================================================================================================== (CONTINUED)
The accompanying notes are an integral part of these financial statements. F-5 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Treasury Accumulated Stock and Total Preferred Stock Common Stock Additional Other Receivable Stockholders' --------------------- ------------------- Paid-In Accumulated Comprehensive from Equity Shares Amount Shares Amount Capital Deficit Income (Loss) Shareholder (Deficiency) ----------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2000 2,392,228 $ 350,479 126,996,460 $126,997 $133,447,684 $(129,048,600) $(3,666,049) $ - $(51,026,466) ------------ 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 ------------ Net loss - - - - - (18,551,994) - - (18,551,994) Net change in unrealized losses on securities available for sale, net of $401,783 tax - - - - - - 702,087 - 702,087 Translation adjustments, net of $401,783 tax benefit - - - - - - 369,864 - 369,864 ------------ Comprehensive loss (17,480,043) Issued for cash - - 418,328 418 33,048 - - - 33,466 Purchase of treasury stock - - - - - - - (81,596) (81,596) Conversion of notes payable from related parties and receivable from shareh - - 10,000,000 10,000 990,000 - - (448,425) 551,575 Issued for stock price guarantee - - 3,830,000 3,830 (3,830) - - - - Issuance of shares and warrants issued for settlements - - 9,167,847 9,168 1,819,056 - - - 1,828,224 Warrants issued for settlement - - - - 1,690,893 - - - 1,690,893 Dividends on preferred shares - - - - - (135,198) - - (135,198) Sale of treasury stock - - - - (248,227) - - 298,903 50,676 ----------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 2002 2,392,228 $ 350,479 168,212,635 $168,213 $143,595,223 $(153,346,645) $ (264,363) $ (449,786) $(9,946,879) ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. F-6 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net loss $(18,551,994) $(5,475,654) $(52,436,869) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation, depletion and amortization 11,896 25,511 2,023,425 Impairment of mineral interests and equipment, net of gain of sale 5,929,910 794,444 26,783,790 Loss on settlement of notes receivable 144,148 - 500,000 Minority interest in income of subsidiary (equity income) - (341,842) 103,022 Interest expense related to grant or repricing of warrants and beneficial conversion features - - 7,486,306 Expenses paid with common shares, warrants and notes payable 3,519,117 158,400 2,023,828 Net gain on sale of subsidiaries - (219,997) - (Gain) loss on sale and impairment of securities (276,301) 109,480 2,029,916 Exchange loss 86,362 402,227 263,523 Changes in assets and liabilities, net of acquisitions: Trade receivables - (336,462) (1,204,539) Other receivables 499,121 - (67,505) Accounts payable - - 4,489,571 Accrued liabilities 275,307 (171,858) 486,080 Deferred income taxes - - 2,442,081 Accrued settlement obligations 6,800,000 1,675,747 6,104,205 Other - - (452,046) ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Operating Activities (1,562,434) (3,380,004) 574,788 ------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Proceeds from sale of investment in fixed-maturity securities 1,100,156 - - Proceeds from sale of securities available for sale 661,912 299,489 - Purchase of securities available for sale (5,230) - - Purchases of mineral interests, property and equipment (518,116) (391,714) (8,848,981) Proceeds from sale of Big Horn, net of cash disposed - 3,447,521 - Proceeds from sale of interest in gas property and equipment 158,227 326,582 2,773,959 Collection of principal of note receivable 208,213 - - Expenditure for other investments - - (1,200,000) ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Investing Activities 1,605,162 3,681,878 (7,275,022) ------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Proceeds from issuance of common shares, net of offering costs 33,466 44,310 2,400,000 Proceeds from issuance of notes payable to related parties - - 3,327,892 Proceeds from issuance of notes payable - - 67,363 Change in receivable from related parties (101,084) - - Principal payments on notes payable to related parties - - (65,974) Proceeds from sale of treasury stock 50,676 93,257 - Acquisition of treasury stock (81,596) (218,668) - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Financing Activities (98,538) (81,101) 5,729,281 ------------------------------------------------------------------------------------------------------------------ Effect of Exchange Rate Changes on Cash (14,099) (20,687) (18,443) ------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash (69,909) 200,086 (989,396) Cash at Beginning of Year 257,831 57,745 1,047,141 ------------------------------------------------------------------------------------------------------------------ Cash at End of Year $ 187,922 $ 257,831 $ 57,745 ================================================================================================================== (CONTINUED)
F-7 EUROGAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------ Supplemental Disclosure of Cash Flow Information Cash paid for interest $ - $ - $ 146,222 ------------------------------------------------------------------------------------------------------------------ Supplemental Schedule of Noncash Investing and Financing Activities Accrual of preferred dividends $ 135,198 $ 135,199 $ 139,932 Exchange of investment in preferred stock for note receivable 362,082 - - Conversion of note payable to common stock 170,291 - - Conversion of accrued liabilities to common stock 500,000 - - Conversion of accrued receivables due from related parties to common stock 118,716 - - Difference between cost and proceeds on sale of treasury stock 248,226 - - Common shares issued upon conversion of notes payable and accrued interest - - 6,415,816 Common shares issued as payment of preferred dividends - - 21,599 Common shares and warrants issued in satisfaction of accrued settlement obligations - - 12,451,514 Purchase of majority interest in Rozmin in exchange for: Modification of warrants - 143,560 - Issuance of common shares - 3,600,000 - Accrual of royalties payable and cash paid - 100,000 - Common stock issued in payment of accrued settlement obligation - 1,864,872 - ------------------------------------------------------------------------------------------------------------------ Cash Received From Sale of Subsidiaries Assets sold $ - $ 18,356,857 $ - Less liabilities relieved - (14,909,336) - ------------------------------------------------------------------------------------------------------------------ Cash Proceeds $ - $ 3,447,521 $ - ------------------------------------------------------------------------------------------------------------------
F-8 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, and seeking to develop production. EuroGas' primary mineral property interests are an interest in a talc mineral deposit in Slovakia, an interest in a joint venture to reclaim a natural gas field in Western Canada, and oil and gas exploration properties in Poland and Slovakia. Business Condition - EuroGas has accumulated a deficit of $153,346,645 through December 31, 2002. EuroGas has had very limited revenue, losses from operations and negative cash flows from operating activities during the years ended December 31, 2002 and 2001. At December 31, 2002, the Company had a working capital deficiency of $17,572,054 and a capital deficiency of $9,946,879. 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 property and equipment is unsuccessful, all or a portion of the recorded amount of those properties will be recognized as impairment losses. Payment of $19,364,627 of current liabilities will require substantial additional financing. Management plans to finance operations, development of its properties and payment of its liabilities through borrowing, through sale of interests in its properties 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-9 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, 2002, was $11,896, $25,511, and $117,875, 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 39,342,858, 18,439,594, and 49,876,792 potentially issuable common shares at December 31, 2002, 2001, and 2000, respectively, because to do so 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 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. 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. F-10 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 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, 2002, 2001 and 2000 would have been increased to the pro forma amounts shown below.
December 31, 2002 2001 2000 ---------------------------------------------------------------------------------------------- Net loss applicable to common shares: As reported $(18,551,994) $(5,610,853) $(52,576,801) Add: Stock-based employer compensation expense included in reported net loss 1,127,262 - - Less: Total stock-based employer compensation expense determined under fair value based method for all awards (1,881,710) (65,813) (99,570) ---------------------------------------------------------------------------------------------- Pro forma $(19,306,442 $(5,676,666) $(52,676,371) Basic and diluted net loss per common share: As reported $ (0.12) $ (0.04) $ (0.51) Pro forma (0.12) (0.04) (0.50)
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 estimated future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized. The impairment is measured based on the excess of cost over estimated future discounted cash flows. Recent Accounting Pronouncements - In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," under which a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement establishes financial accounting and reporting standards for the impairment or disposal of long-lived assets. The adoption of this statement on January 1, 2002, did not have a material effect on the Company's financial position or results of operations. F-11 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, this statement modifies the criteria for classification of gains or losses on debt extinguishment such that they are not required to be classified as extraordinary items if they do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company will be required to apply the provisions of this standard to transactions occurring after December 31, 2002. The adoption of this standard in 2003 is not expected to have a material effect on the Company's financial position or results of operations. Reclassifications - Certain reclassifications have been made in the prior-period financial statements to conform to the 2002 presentation. NOTE 2 - IMPAIRMENT OF MINERAL INTERESTS AND EQUIPMENT AND OTHER ASSETS The Company periodically assesses the capitalized costs of properties for impairment based on estimated future discounted net cash flows. During the second quarter of 2002, the Company evaluated its investment in the Beaver River gas project in British Columbia, Canada. The terms of the related farmout agreement provide that the operator of the project will receive payout of all of its investment prior to any payments to the other interest holders and then the Company would receive 3.33% of the net cash flows, if any. Through the date of the evaluation, the operator has invested in excess of $16,000,000 in the project. Due to the low production from the Beaver River Project and gas prices paid for the production, management determined that it was unlikely that the Company will receive any cash flows from the project, except for nominal overriding royalty payments. Accordingly, the Company recognized a $3,937,500 impairment charge during 2002, which was equal to the carrying value of the Company's investment in the project. During 2002 the Company evaluated its investments in the Envigeo project in Slovakia and its investment in a lube oil refinery in Slovenia. Management determined the estimated undiscounted future cash flows were less than the carrying value of the investments and recognized impairment charges during 2002 of $1,703,000 and $358,857, respectively. As a result of assessments of the recovery of investments, 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 (See Note 3) less $360,000 of recovery from Beaver River in Canada. F-12 NOTE 3 - 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 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 4 - 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 became issuable to Falcon and were included as outstanding at December 31, 2001 in the 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 continued to negotiate a suitable replacement program for future investment; however, none was found. Falcon continued to hold the balance of the 7,000,000 shares as a deposit toward completion of a new acquisition agreement. As of December 31, 2002 the Company considers the shares issued, the deposit forfeited and recognized a charge to settlement expense during 2002. The issuance of the 7,000,000 shares was valued at $1,050,000, or $0.15 per share based upon the valuation of the original shares and the fair value on the date the contingency originated. F-13 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 April 17, 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. EuroGas further agreed to issue an additional 1,000,000 common shares for each $0.05 decrease in the ten-day average OTC Bulletin Board quoted trading price of the Company's common shares below $0.30 per share through April 17, 2002. EuroGas is obligated to issue 3,830,000 common shares to Belmont under the terms of the agreement. The 3,830,000 common shares were included in common shares outstanding at December 31, 2002. Additionally, EuroGas agreed to issue additional common shares to Belmont if Belmont did not realize approximately $1,218,000 from the resale of the original 12,000,000 common shares by April 17, 2002, and provided notice of the deficiency, to compensate Belmont for the shortfall based on the ten-day average trading price on the date of the notice of shortfall from Belmont. Because Belmont has not provided notice of the sale of the shares and the resulting deficiency, EuroGas is not able to calculate the shares that may be issuable, but estimates it may be obligated to issue approximately 12,000,000 additional common shares, based on recent market prices for the Company's common stock, to Belmont under this provision of the agreement. 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 also agreed to pay Belmont a $100,000 non-refundable advanced royalty payment and agreed to arrange the necessary financing to place the talc deposit into commercial production by April 17, 2002. If the talc deposit was not in commercial production by then, EuroGas agreed to pay Belmont additional advanced royalties of $10,000 per month for each month of delay in achieving commercial production. As of December 31, 2002 EuroGas has accrued $55,000 in advance royalty due to Belmont because the talc deposit was not in commercial production. EuroGas granted Belmont the right to appoint one member of the EuroGas, Inc., board of directors for not less than one year. The purchase of the interest in Rozmin s.r.o. 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 April 17, 2001. EuroGas acquired the original 23.65% mineral interest through the acquisition of a 55% interest in RimaMuran s.r.o., whose principal asset was a 43% investment in Rozmin s.r.o. On April 2, 2002, EuroGas exchanged its 55% interest in RimaMuran s.r.o. for the 43% investment in Rozmin s.r.o. held by RimaMuran. As part of the exchange, EuroGas paid approximately $105,000 to the former minority owners of RimaMuran to pay liabilities of RimaMuran and to compensate the former minority owners. RimaMuran agreed to transfer title to two pieces of heavy equipment, which EuroGas had previously financed, to Rozmin. As a result of the exchange, EuroGas owns a 100% interest in Rozmin s.r.o subject to the contingency for issuance of the additional common shares to Belmont. By virtue of its potential ownership of Rozmin s.r.o. and the talc deposit, EuroGas bears the full responsibility to fund the development costs necessary to bring the talc deposit to commercial production. F-14 NOTE 5 - 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 accumulated other comprehensive loss. The cost of securities sold was determined by the average-cost method. The investment in securities consisted of the following:
December 31, 2002 2001 --------------------------------------------------------------------------------------- Cost $ 412,892 $ 809,612 Gross unrealized gains 1,077,166 - Gross unrealized losses - (26,704) --------------------------------------------------------------------------------------- Estimated fair value $ 1,490,058 $ 782,908 ======================================================================================
During 2002, the Company sold available-for-sale securities for $661,912 gross proceeds that resulted in gross realized gains of $276,301 and no gross realized losses. Investment in Fixed-Maturity Securities -On March 26, 2002, the Company sold its investment in Enterra preferred stock to Enterra for $1,445,501, of which $1,100,156 was received on March 26, 2002 and $345,345 was due in December 2002 under the terms of a promissory note denominated in Canadian dollars. Due to the recognition of an impairment loss during 2001, no additional gain or loss was recognized from the sale during 2002. On August 15, 2002 EuroGas received $208,213 in full satisfaction of the promissory note. As adjusted for changes in foreign currency exchange rates, the carrying value of the note was $352,360 immediately prior to the settlement. The difference of $144,148 between the carrying value and the cash received in settlement was charged to operations as a loss on the settlement of the note. Investment in Other Equity Securities at Cost - During 2000, 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 was 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. NOTE 6 - ACCOUNTS AND NOTES RECEIVABLE On October 28, 1998, EuroGas received an executed promissory note in the amount of $500,000 from 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 during the year ended December 31, 2000. F-15 NOTE 7 - 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. 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 were 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 Maseva back to Belmont was not an arms- length transaction, it resulted in the recognition of a loss on the disposition of $6,528,230. 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 RimaMuran 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. 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 F-16 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 4, 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. The following is a summary of changes to properties:
2002 2001 2000 -------------------------------------------------------------------------------------------- Talc Mineral Properties Cost at beginning of year $ 6,300,993 $ 2,216,308 $ 755,539 Development costs 206,743 - - Acquisition costs - 4,084,685 1,460,769 -------------------------------------------------------------------------------------------- Net Other Mineral Interest Proper $ 6,507,736 $ 6,300,993 $ 2,216,308 -------------------------------------------------------------------------------------------- Oil and Gas Properties Subject to Amortization Cost at beginning of year - 16,499,982 21,553,571 Net reclassificiation to properties not subject to amortization - - (1,560,841) Acquisition costs - - 154,842 Exploration and development costs - - 6,518,896 Sale of properties - - (2,357,901) Less ceiling test and valuation a - (16,499,982) (7,306,943) Translation adjustments - - (501,642) --------------------------------------------------------------------------------------------- Cost at year end - - 16,499,982 Less depreciation, depletion and - - (3,619,329) -------------------------------------------------------------------------------------------- Net Properties Subject to amortization $ - $ - $ 12,880,653 ============================================================================================= Oil and Gas Properties Not Subject to Amortization Cost at beginning of year $ 6,186,606 9,461,039 26,862,072 Acquisition costs - 5,773 1,593,776 Exploration costs 310,570 34,186 139,722 Net reclassificiation from properties subject to amortization - - 1,560,841 Disposal (17,658) (2,501,926) (303,684) Impairment and valuation adjustme (5,711,335) (794,444) (19,476,847) Translation adjustments 73,244 (18,022) (914,841) ---------------------------------------------------------------------------------------------- Net Property Not Subject to Amortization $ 841,427 $ 6,186,606 $ 9,461,039 ============================================================================================== Furniture and Office Equipment Equipment $ 371,188 $ 353,142 $ 1,006,517 Less: Accumulated depreication (196,259) (183,278) (359,728) ---------------------------------------------------------------------------------------------- Net Furniture and Equipment $ 174,929 $ 169,864 $ 646,789 ===============================================================================================
F-17 NOTE 8 - GEOGRAPHIC INFORMATION EuroGas and its subsidiaries operate primarily in the talc and 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 were located in the following geographic areas at December 31:
December 31, 2002 2001 2000 ---------------------------------------------------------------------------------- Canada $ - $ 3,975,000 $ 18,861,163 Europe $ 7,524,092 $ 9,041,320 6,702,483 --------------------------------------------------------------------------------------- Net Loss $ 7,524,092 $ 13,016,320 $ 25,563,646 ==================================================================================
Sales and net loss were in the following geographic areas during the years ended December 31:
December 31, 2002 2001 2000 ---------------------------------------------------------------------------------- Oil and Gas Sales - Canada $ 5,074 $ 88,937 $ 6,395,037 Canada $ - $ (618,949) $ (3,833,909) Europe (18,551,994) (4,856,705) (45,711,413) --------------------------------------------------------------------------------------- Total Property and Equipment $(18,551,994) $ (5,475,654) $(49,545,322) ==================================================================================
NOTE 9 - ACCRUED SETTLEMENT OBLIGATIONS Oxbridge Settlement - During 1997 Oxbridge Limited attempted to convert 2,391,968 Series 1995 Preferred Stock into EuroGas common shares but was effectively prevented in doing so by an agreed order with the Trustee in the McKenzie bankruptcy case described below. As a result, Oxbridge was unable to receive proceeds from the sale of the conversion shares when the average market prices and trading volume would have resulted in substantial proceeds and has made a claim against EuroGas for its losses. During 2002 EuroGas estimated the cost to settle the Oxbridge claim to be approximately $6,800,000 and recognized settlement expense and an accrued settlement obligation during 2002. McKenzie Bankruptcy Claim - This litigation is being brought by Steve Smith, Chapter 7 Trustee (the "Trustee") for the bankruptcy estates of Harven Michael McKenzie, Debtor; Timothy Stewart McKenzie, Debtor; Steven Darryl McKenzie, Debtor (case no. 95-48397-H2-7, Chapter 7; case no. 95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7, respectively), pending in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. In March 1997, the Trustee commenced the following cause of action: W. Steve Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division) (hereafter "97-4114"). The Trustee's initial claim appears to allege that the Company may have paid inadequate consideration for its acquisition of GlobeGas from persons or entities acting as nominees for the McKenzies, and therefore McKenzies' creditors are the true owners of the proceeds received from the development of the Pol-Tex Concession in Poland. The Company has contested the jurisdiction of the Court, and the Trustee's claim against a Polish corporation (Pol-Tex), and the ownership of Polish mining rights. The Company further contends that it paid substantial consideration for GlobeGas (Pol-Tex's parent), and that there is no evidence that the creditors of the McKenzies invested any money in the Pol-Tex Concession. F-18 In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v. Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd., Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc., (Adv. No. 97-4155) in each of the three McKenzie individual bankruptcy cases. In general, the action asserts that the defendants, other than the Company, who acquired an interest in the Polish Project, received a fraudulent transfer of assets belonging to the individual McKenzie bankruptcy estates, or are alter egos or the strawmen for the McKenzies. As a result, the Trustee asserts that any EuroGas stock or cash received by these defendants should be accounted for and turned over to the Trustee. As to the Company, the Trustee asserts that as transfer agent, the Company should turn over the preferred stock presently outstanding to the defendants or reserve such shares in the name of the Trustee and that any special considerations afforded these defendants should be canceled. It appears the Company was named to this litigation only because of its relationship as transfer agent to the stock in question. This suit has been administratively consolidated with 97-4114, and is currently pending before the Houston bankruptcy court. In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement Pleadings and Join Additional Parties in the consolidated adversary proceedings, seeking to add new parties, including Wolfgang and Reinhard Rauball and assert additional causes of action against EuroGas and the other defendants in this action. These new causes of action include claims for damages based on fraud, conversion, breach of fiduciary duties, concealment and perjury. These causes of action claim that the Company and certain of its officers, directors or consultants cooperated or conspired with the McKenzies to secret or conceal the proceeds from the sale of the Polish Concession from the Trustee. In January 2000, this motion was granted by the bankruptcy court. The Company is vigorously defending this suit. On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants). These motions are currently pending before the Court. No trial date has been set. In June 1999, the Trustee filed another suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O., et al (Adv. No. 99-3287). That suit sought sanctions against the defendants for actions allegedly taken by the defendants during the bankruptcy cases which the Trustee considered improper. The defendants filed a motion to dismiss the lawsuit, which was granted in August 1999. In July 1999, the Trustee also filed a suit in the same bankruptcy cases styled Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv. No. 99-3444). This suit seeks damages in excess of $170,000 for the defendants' alleged violation of an agreement with the Trustee executed in March 1997. EuroGas disputes the allegations and has filed a motion to dismiss or alternatively, to abate this suit, which motion is currently pending before the court. On March 18, 2002, the court considered motions to dismiss filed by EuroGas and the Rauballs (other named defendants). On September 10, 2002, the Court entered an Order which required the Trustee to specify the causes of action asserted against each Defendant. A few days prior to this Order, the Trustee filed his Second Motion for Leave to Amend and Supplement Pleadings and to Drop Certain Defendants (the "Second Motion"). On October 21, 2002, EuroGas and other Defendants filed their Response to the Second Motion. On November 11, 2002, the Trustee filed his Motion and Reply to this Response under which, in part, Trustee sought court approval to file a Third Amended Complaint. On March 13, 2003 the Court entered and Order Granting Trustee's Motion for Leave to Amend. On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane Poland, Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK Development, B.V., Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to EuroGas, the Third Amended Complaint asserts claims for breach of contract, fraud in the inducement, conspiracy, aiding and abetting civil conspiracy, fraudulent transfer and punitive damages. As to Wolfgang and Rienhard Rauball, the Complaint asserts claims for turnover under Section 542 and 543 (Reinhard Rauball only) of the Bankruptcy Code, conversion, post- petition avoidable transfers, civil conspiracy, aiding and abetting civil F-19 conspiracy and punitive damages. The Company has recently filed a Motion to Dismiss the Third Amended Complaint. At present, no trial date has been set. Management's estimate of the amount due under the claims made by the Trustee has been accrued in the accompanying consolidated financial statements as of December 31, 2002. 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 additional 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 Estate of Bernice Pauahi Bishop (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 signed a settlement agreement with the bankruptcy Trustee, and other parties, including Kukui, Inc., and the Trustees of the Bishop Estate , which had pursued separate claims against EuroGas (the "Settlement Agreement"). The Settlement Agreement, in part, required EuroGas to pay $900,000 over 12 months and issue 100,000 shares of registered common stock to the Bishop Estate by June 30, 2000. The bankruptcy court approved the Settlement Agreement on May 23, 2000. The claims of Kukui, Inc. and the Trustees of the Bishop Estate have been dismissed pursuant to the terms of the Settlement Agreement. Under the terms of the Settlement Agreement, EuroGas recorded an accrued settlement obligation and litigation settlement expense of $1,000,000 during 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 for the estimated cost of settling the claim included an estimated default penalty and interest. The Company contends that it has fully performed under the Settlement Agreement and that the Settlement Agreement additionally entitles the Company to a complete release and dismissal of all suits filed by the Bankruptcy Trustee. The Bankruptcy Trustee contends that EuroGas defaulted under the Settlement Agreement and is not entitled to a release or dismissal. Holbrook Claim - On February 9, 2001, James R. Holbrook, a documents escrow agent appointed under the Settlement Agreement, filed his Complaint of Escrow Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee and the other parties to the settlement in an action styled James R. Holbrook v. W. Steve Smith, Trustee, Kukui, Inc., EuroGas, Inc. and Kruse Landa & Maycock, L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases. Under this complaint, Holbrook sought a determination of the defendants' rights in certain EuroGas files that he had received from Kruse Landa and Maycock, former attorneys for EuroGas. Through this litigation, the Trustee sought turnover of all these files pursuit to the Settlement Agreement. EuroGas has opposed turnover of privileged materials and filed a cross-claim in the suit asking for a declaratory judgment that the Settlement Agreement is enforceable and that the Trustee be ordered to specifically perform his obligations under the Settlement Agreement. The Trustee filed a counterclaim requesting specific performance by EuroGas and other relief. At the direction of the court, both parties filed motions for summary judgment. On December 17, 2001, the court entered an order granting Trustee's Motion for Summary Judgment and denying a related Motion to Strike Affidavit, which EuroGas had filed. EuroGas has appealed this order to the United States District Court for the Southern District of Texas. On September 25, 2002 the District Court entered its Opinion and Order affirming F-20 the Bankruptcy Court's orders. On October 25, 2002 EuroGas filed a notice of appeal of the District Court's order to the Fifth Circuit Court of Appeals. The appeal is currently pending before this Court. EuroGas cannot predict the outcome of these appeals, but intends to vigorously pursue the appeals to completion. NOTE 10 - NOTES PAYABLE TO RELATED PARTIES Notes payable to related parties consist of:
December 31, 2002 2001 -------------------------------------------------------------------------------------- Loans from companies associated with a director due in 2001 and 2002 with interest at 7% to 10% unsecured $ 247,816 $ 418,107 Loan from a director, due in 2001, and 2002, interest: 7.5% to 10% unsecured 5,549 5,549 -------------------------------------------------------------------------------------- Total Notes Payable to Related Parties 253,365 423,656 Less: Current Portion Payable to Related Pa (253,365) (423,656) -------------------------------------------------------------------------------------- Notes Payable to Related Parties - Long Ter $ - $ - =======================================================================================
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 were 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 in 2000, 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. 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 is an advance by an officer of $100,000 F-21 to Teton Petroleum Company as a note receivable. 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. NOTE 11 - NOTES PAYABLE 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 during 2000 related to the beneficial conversion feature. There was no beneficial conversion feature related to the November conversion. NOTE 12 - INCOME TAXES Deferred tax assets were comprised of the following:
December 31 2002 2001 2000 ---------------------------------------------------------------------------------- Tax loss carry forwards $ 6,656,461 $ 2,445,695 $ 19,884,518 Property and equipment 133,071 133,071 (2,309,010) Impairment losses on oil and gas 8,061,266 5,823,506 5,823,506 Impairment of investment in secur 1,021,436 1,723,363 1,353,959 Accrued settlement obligations 4,903,371 4,326,876 4,326,876 Unralized gain on investment in securities (401,783) - - Foreign currency translation adjustment 500,390 - - Valuation allowance (20,874,212) (14,452,511) (31,521,930) ---------------------------------------------------------------------------------- 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:
December 31 2002 2001 2000 ---------------------------------------------------------------------------------- Tax at statutory rate (34%) $ (6,307,678) $ (1,861,722) $(17,675,717) Non-deductible expenses 596,799 98,198 77,177 State taxes, net of federal benef (612,215) (180,696) - Change in deferred tax valuation 6,323,094 1,944,220 20,126,819 ---------------------------------------------------------------------------------- Total Income Tax (Benefit) $ - $ - $ 2,528,279 ==================================================================================
As of December 31, 2002, EuroGas has operating loss carry forwards of approximately $17,800,000 in various countries which expire from 2010 through 2022. F-22 NOTE 13 - RELATED PARTY TRANSACTIONS Receivable from a Related Party - The Chief Executive Officer and principal shareholder of EuroGas, together with various other companies under his control, have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has paid certain expenses on their behalf. The resulting receivables and payables were combined and presented in the accompanying financial statements as notes payable to related parties of $424,294 as of December 31, 2001. During the six months ended June 30, 2002 EuroGas made additional payments of $535,574 on behalf of the officer. Additionally, the Chief Financial Officer assigned $200,000 of accrued salary, which accrual arose during his service to the Company during 2000, to the Chief Executive Officer. During June 2002, EuroGas entered into a compensation agreement with its Chief Executive Officer and principal shareholder that provides the officer with $300,000 of compensation for his prior services. The compensation was charged to operations during 2002. The resulting $381,284 payable to the officer was converted into common stock as further described in Note 4 to the financial statements. During the remaining months of 2002, EuroGas paid $101,084 in additional expense on behalf of EuroGas resulting in a receivable from the officer. As described in Note 4, 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 receivable from related party of $101,084 as of December 31, 2002, and as accrued liabilities payable to related parties in the amount of $416,8589 as of December 31, 2001. Related party loans are described in Note 10, Notes Payable to Related Parties. NOTE 14 - 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 F-23 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 lesser 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. Annual dividend requirements of the 1997 Series preferred stock are $15,600. The following is a summary of the preferred stock outstanding at December 31, 2002:
Liquidation Preference Annual Divided 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 Conve 60 1,000.00 260,000 60.00 15,600 -------------------------------------------------------------------------------------------- Total 2,392,228 $ 499,197 $ 135,198 ============================================================================================
Common Stock On October 31, 2002 the Company recognized as issued 750,000 shares to Conquest Financial, who had held the stock in trust. The stock was originally delivered to Conquest during 2000 as advance collateral for a proposed financing loan from Conquest. The loan was never funded by Conquest. During 2000, EuroGas vacated its office lease in London it shared with Conquest; as a result Conquest paid certain exit costs on behalf of EuroGas for closing the office and continued to hold the unissued shares as collateral for the costs advanced. The shares issued were valued at $247,500, or $0.33 per share, based upon the fair value of the shares on December 20, 2000, the date the collateral was originally delivered to Conquest and the date the shares were contingently issuable. During 2001 EuroGas accrued a $100,000 liability for exit costs from the London office. During 2002 EuroGas recognized $147,500 as settlement costs and relieved the $100,000 liability. On June 10, 2002 the Company issued to its Chief Executive Officer and principal shareholder 10,000,000 common shares and warrants to purchase 10,000,000 additional common shares at $0.125 per share through June 9, 2003 and at $0.15 per share through June 10, 2004. The common shares were valued at $0.10 per share based upon the quoted market price of $0.12 per share on the date of the issuance, less a discount for restrictions on the resale of the common stock issued. The common shares and warrants were issued in exchange for the conversion of $170,291 of notes payable to related parties, $381,284 of accrued liabilities to a related party and for a note receivable from its Chief Executive Officer in the amount of $448,425. The note receivable is secured by the common shares issued and is due within one year. The note receivable is reflected in the accompanying financial statements as an offset to stockholders' equity (deficiency). The warrants had no intrinsic value on the date of the issuance; accordingly, no compensation was recognized from the issuance of the warrants. The fair value of the warrants granted was $754,448, estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.15%; expected volatility of 171%; dividend yield of 0%; and expected life of 2 years. During October 2002 the Company issued 418,328 common shares for $33,466 cash, or $0.08 per share. 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. F-24 During May 2001, EuroGas issued 3,800,000 shares to Winzer-Maurer under a settlement obligation. The shares were valued at $1,864,872 and charged to settlement expense during 2001. During 2000, the Company issued 3,700,000 common shares and 3,000,000 warrants 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 2000, 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. 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 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. Warrants On May 9, 2002 the Company issued warrants to purchase 17,142,858 common shares at $0.15 per share, principally to the Chief Executive Officer and also to others. The warrants were issued to holders of warrants originally issued in January 2000 in connection with the issuance of $3,000,000 in debentures. Those original warrants expired on March 31, 2002. The new warrants are exercisable through March 31, 2004. The warrants granted have been recorded at their fair value of $1,690,893 and the related settlement expense has been charged to operations in the accompanying condensed consolidated financial statements. The fair value of the warrants was estimated on the date of grant using the Black- Scholes option pricing model with the following assumptions: risk-free interest rate of 3.27%; expected volatility of 174%; dividend yield of 0%; and expected life of 2 years. At December 31, 2002 and 2001, the Company had warrants outstanding to purchase 38,142,858 and 15,750,000 common shares, respectively. Treasury The Company purchased 381,000 shares of treasury stock during the year ended December 31, 2002 for $81,596, or $0.21 per share, and sold 682,972 shares for $50,676, or $0.07 per share. F-25 NOTE 16 - 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. A summary of the status of stock options as of December 31, 2002, 2001 and 2000 and changes during the years then ended are presented below:
2002 2001 2000 ----------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,400,000 $ 1.08 4,200,000 $ 1.07 2,000,000 $ 1.50 Granted - - - 0.73 2,400,000 0.74 Expired (1,200,000) - (1,800,000) - (200,000) 1.50 ----------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,200,000 0.74 2,400,000 1.08 4,200,000 1.08 ============================================================================================================ Exercisable at end of year 1,200,000 0.74 2,400,000 1.08 2,950,000 1.12 ============================================================================================================ Weighted-average fair value of options granted during the year - - $ 0.71
The fair value of options granted during 2000 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rate of 6.18%, expected volatility of 138.4% and expected life of 5 years. The following table summarizes information about stock options outstanding at December 31, 2002:
Outstanding Exercisable ------------------------------------------------------------------------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------------------------------------------------------------------------------- $ 0.45-$11.79 1,200,000 1.91 years $ 0.74 1,200,000 $ 0.74 =================================================================================================
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss consisted of the following:
December 31, 2002 2001 ------------------------------------------------------------------------------------- Foreign currency translation adjustments, after tax $ (939,746) $ (1,309,610) Unrealized gain (loss) on investments in securities available-for-sale, after tax 675,383 (26,704) ------------------------------------------------------------------------------------- Accumulated Other Comprehensive Loss $ (264,363) $ (1,336,314) =====================================================================================
F-26 NOTE 18 - CONTINGENCIES AND COMMITMENTS The principal portion of the Company's active litigation involves matters relating to the Company's acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in Poland) and is described in Note 9. EuroGas' subsidiary, GlobeGas BV, lost its appeal for a reduction of a 1992 income tax liability in the Netherlands of $815,053 at December 31, 2002. The tax arose from the sale of equipment at a profit by the former owner of GlobeGas to its 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 dissolution by the Netherlands tax authority. During 2002, the Company's Liechtenstein Subsidiary, Energy Global A.G., was statutorily liquidated and dissolved by the Principality of Liechtenstein. As a result, the Company has lost its $615,904 in net assets of that subsidiary and may be subject to additional losses in net assets of Energy Global's subsidiaries. The subsidiaries have been recognized as owned directly by EuroGas, Inc. subsequent to the liquidation. During April 1999, EuroGas entered into a three-year employment contract with a former chief executive officer. The contract provided for an 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 officer resigned in January 2001. The options vested on January 1, 2000, and were considered to have expired during 2002 due to the termination of the officer's employment. 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. Former officers have made claims for compensation and for reimbursement of expenses against EuroGas, which amounts have been included as accrued liabilities. On February 5, 2002 EuroGas entered into an employment agreement with its new President. The three-year agreement provides for annual compensation of $400,000 to be paid in monthly installments. The agreement provides for all terms of the agreement to continue for the unexpired term of the agreement should the Company be involved in a winding-up or merger transaction. The agreement may be terminated if either party fails to meet its obligations under the terms of the agreement. In June 2002, the Company agreed to compensate its Chief Executive Officer and principal shareholder $25,000 per month. The Company leases office facilities from various lessors in Poland, Vienna, and Vancouver. Rent expenses for the years ended December 31, 2002, 2001 and 2000 were $116,765, $64,674 and $513,690, respectively. Except for Vancouver, the office leases are on month-to-month agreements. EuroGas entered into a lease agreement for its Vancouver office space that requires monthly payments of $6,851 through January 2003. Future minimum payments under the lease are $89,063. 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. The Company also agreed to issue warrants to purchase 5,200,000 common shares at $1.00 per share. The warrants 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 F-27 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 was satisfied with the issuance of shares on May 15, 2001. As a result of the Company's failure to register 3,800,000 shares by January 15, 2001, on September 23, 2002 the Company agreed to issue an additional 1,417,847 common shares and warrants to purchase 6,000,000 additional common shares at $0.25 per share before June 30, 2004. The aggregate value of the settlement, reflected on the accompanying financial statements as settlement expense, was $530,724, based upon $141,785, or $0.10 per share for the common shares and $388,939 fair value of the warrants issued. The fair value of the warrants was computed utilizing the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 3.5%, expected dividend yield of 0%, expected volatility of 166%, and expected life of 2 years. 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. F-28 There was $841,427 of unproved oil and gas properties as of December 31, 2002. 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, and 2000 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 28,006,150 7,875,000 20,131,150 Less: Impairments (21,819,544) (3,937,500) (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: 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 ============ ============ ============
F-29 There was $310,570 of exploration costs incurred during 2002 relating to oil and gas properties in Europe. Costs incurred in oil and gas producing activities, both capitalized and expensed, during the years ended December 31, 2001, and 2000 were as follows:
Total Canada Europe ---------- ---------- -------- For the Year Ended December 31, 2001 Property acquisition costs Proved $ - $ - $ - Unproved 5,773 - 5,773 Exploration costs 34,186 - 34,186 Development costs - - - ---------- ---------- -------- Total Costs Incurred $ 39,959 $ - $ 39,959 ========== ========== ======== 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 ========== ========== ========
F-30 There were no material operations from oil and gas producing activities during 2002 except for impairment in the amount of $5,711,335 relating to properties in Europe. The results of operations from oil and gas producing activities for the years ended December 31, 2001, and 2000 were as follows:
Total Canada Europe ------------ ----------- ------------ 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) $ 448,937 $(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) ============ =========== ============
F-31 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 - 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. There were no estimated net cash flows related to proved oil and gas reserves at December 31, 2002 or 2001. The standardized measure of discounted estimated net cash flows related to proved oil and gas reserves at December 31, 2000 were as follows. There were no proved oil and gas reserves at December 31, 2001:
Total Canada Europe ------------ ------------ ----------- 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 $ - ============ ============ ===========
F-33 The primary changes in the standardized measure of discounted estimated future net cash flows for the year ended December 31, 2001, and 2000 were as follows: For the Year Ended December 31, 2001
Total Canada Europe ------------ ------------ ----------- 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 plac (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 $ - ============ ============ ===========
F-34 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Wolfgang Rauball, Chief Executive Officer of EuroGas, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K of EuroGas, Inc. (the "Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Wolfgang Rauball ----------------------------- Wolfgang Rauball Chief Executive Officer (Principal Executive Officer) 35 CHIEF FINANCIAL OFFICER CERTIFICATION I, Hank Blankenstein, Chief Financial Officer of EuroGas, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K of EuroGas, Inc. (the "Registrant"); 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/Hank Blankenstein ------------------------- Hank Blankenstein Chief Financial Officer (Principal Financial and Accounting Officer) 36 EXHIBIT 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify that the Annual Report on Form 10-K of EuroGas, Inc. for the year ended December 31, 2002, as filed May __, 2003 with the Securities and Exchange Commission, to the best of our knowledge fully complies with the requirements of Section 13(a) or 15(d) of The Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the annual report fairly presents, in all material respects, the financial condition and results of operations of EuroGas, Inc. Date: May 15, 2003 /s/ Wolfgang Rauball Wolfgang Rauball Chairman and Chief Executive Officer (Principal Executive Officer) Date: May 15, 2003 /s/Hank Blankenstein Hank Blankenstein Chief Financial Officer (Principal Financial and Accounting Officer) 37