U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------
Commission file number 33-1381-D
-----------------------
EuroGas, Inc.
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(Exact name of small business issuer as specified in its charter)
Utah 87-0427676
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
942 East 7145 South, #101A, Midvale Utah 84047
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(Address of principal executive offices)
(801) 255-0862
------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 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 No X
-- -
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 49,043,862 shares of its
common stock, par value $0.01 per share, issued and outstanding as of January
27,1997.
Transitional Small Business Disclosure Format: (Check one):
Yes No X
-- --
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
EuroGas, Inc. (the "Company"), files herewith unaudited condensed
consolidated balance sheets as of June 30, 1996, and December 31, 1995, and the
unaudited condensed consolidated statements of operations for the three and six
month periods ended June 30, 1995 and 1996, and from inception on June 7, 1991,
through June 30, 1996, and the unaudited condensed consolidated statements of
cash flows for the six month periods ended June 30, 1995, and 1996, and from
inception on June 7, 1991, through June 30, 1996. In the opinion of management
of the Company, such financial statements reflect all adjustments necessary to
fairly present the financial condition of the Company for the interim periods
presented. These financial statements should be read in conjunction with the
audited financial statements of the Company and the notes thereto included in
the Company's annual report on Form 10-KSB for the year ended December 31, 1995.
TIMING OF REPORT
This report on Form 10-QSB is being filed by the Company in February 1997
for its fiscal quarter ended June 30, 1996, which is not timely. The
Company also just filed its report on Form 10-KSB for its fiscal year ended
December 31, 1995, and its report Form 10-QSB for the period ended March 31,
1996. Consequently, it is particularly important to read this report in
conjunction with the annual report in Form 10-KSB for the period ended
December 31, 1995, and the quarterly report on Form 10-QSB for the period
ended March 31, 1996.
This report includes an unaudited condensed consolidated balance sheet as
of June 30, 1996, and unaudited consolidated statements of operations and
cash flows for the periods ended June 30, 1996 and 1995, and the discussion of
financial matters herein is primarily based on such unaudited financial
statements. This report also contains certain information about the subsequent
development of the business of the Company and its current activities through
January 1997, although this subsequent information is not based on audited
financial statements since such financial statements for the periods subsequent
to December 31, 1995, have not been completed.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-QSB contains certain forward looking statements and
information relating to the Company and its business that are based on the
beliefs of management of the Company and assumptions made based on information
currently available to management. Such statements reflect the current views of
management of the Company and are not intended to be accurate descriptions of
the future. The discussion of the future business prospects of the Company is
subject to a number of risks and assumptions, including locating commercial
deposits of methane and natural gas on the Company's concessions and licenses,
the successful negotiation of additional licenses and permits for the
exploitation of any reserves located, the successful completion of wells, the
economic recoverability of in place reservoirs of hydrocarbons, the successful
addressing of technical problems in competing wells and producing gas, the
success of the marketing efforts of the Company, the ability of the Company to
establish required facilities to gather and transport hydrocarbons that may be
produced, and the ability of the Company to obtain the necessary financing to
successfully complete its goals. Should one or more of these or other risks
materialize or if the underlying assumptions of management prove incorrect,
actual results of the Company may vary materially from those described. The
Company does not intend to update the forward looking statements contained in
this report.
EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
-------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 413,954 $ 72,212
Other receivables 504,010 19,691
Inventory 5,656 8,251
Prepaid expenses 2,499 3,559
----------- -----------
Total Current Assets 926,119 103,713
----------- -----------
Property and Equipment
Mineral interests in unproved
properties, net of valuation
allowance 7,704,597 7,037,244
Other property and equipment 2,391,531 2,393,611
----------- -----------
10,096,128 9,430,855
Less: accumulated depreciation (2,257,170) (1,955,074)
----------- -----------
Net Property and Equipment 7,838,958 7,475,781
----------- -----------
Other Assets
Goodwill, net of amortization of
$10,162 and $5,542, respectively 15,242 19,862
Deposits 208,424 81,011
----------- -----------
Total Other Assets 223,666 100,873
----------- -----------
Total Assets $ 8,988,743 $ 7,680,367
=========== ===========
</TABLE>
(Continued)
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, December 31,
1996 1995
--------- -----------
<S> <C> <C>
Current Liabilities
Accounts payable $ 248,254 $ 327,193
Accrued expenses 3,144,970 2,039,155
Accrued income taxes 576,121 762,675
Notes payable - current portion 2,270,593 2,270,593
Notes payable to related parties -
current portion 1,212,007 1,212,007
----------- -----------
Total Current Liabilities 7,451,945 6,611,623
----------- -----------
Long-Term Debt
Notes payable 2,206,841 1,000,000
Notes payable to related parties 3,011,750 3,011,750
----------- -----------
Total Long-Term Debt 5,218,591 4,011,750
----------- -----------
Stockholders' Deficit
Preferred stock, $.001 par value,
2,391,968 shares authorized,
issued and outstanding 2,392 2,392
Common stock, $.001 par value,
325,000,000 shares authorized,
33,174,033 shares issued and
outstanding 33,174 32,974
Additional paid-in capital 11,894,871 10,895,071
Cumulative foreign currency
translation adjustment (14,749) (14,749)
Deficit accumulated during the
development stage (15,597,481) (13,858,694)
----------- -----------
Total Stockholders' Deficit (3,681,793) (2,943,006)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 8,988,743 $ 7,680,367
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
June 7, 1991
(Date of
For the Three Months For the Six Months Inception)
Ended June 30, Ended June 30, Through
1991 1995 1996 1995 June 30, 1996
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
------------- ------------- ------------- ------------- --------------
Operating Expenses
Impairment of mineral interests
in property - - - - 969,101
Depreciation and valuation
allowance 206 120,250 413 240,500 1,963,833
General and administrative 1,420,158 902,332 1,791,792 1,804,662 10,887,683
------------- ------------- ------------- ------------- --------------
Total Operating Expenses 1,420,364 1,022,582 1,792,205 2,045,163 13,820,617
------------- ------------- ------------- ------------- --------------
Other Income (Expenses)
Interest income 563 2,395 564 4,790 280,819
Interest expense (31,219) (161,248) (73,900) (322,496) (1,350,503)
Exchange losses, net - - - - (149,157)
Other income - 4,047 - 8,092 16,184
------------- ------------- ------------- ------------- --------------
Total Other Expenses (30,656) (154,806) (73,335) (309,614) (1,202,657)
------------- ------------- ------------- ------------- --------------
Loss Before Income Taxes (1,451,020) (1,177,388) (1,865,540) (2,354,776) (14,874,117)
Benefit from (Provision For)
Income Taxes 186,554 117,037 186,554 234,074 (577,387)
------------- ------------- ------------- ------------- --------------
Net Loss (1,264,466) (1,060,351) (1,678,986) (2,120,702) (15,451,504)
Dividends Applicable to
Preferred Shares 29,900 - 59,800 - 145,977
------------- ------------- ------------- ------------- --------------
Net Loss Applicable to
Common Shares $ (1,294,366) $ (1,060,351) $ (1,738,786) $ (2,120,702) $ (15,597,481)
============= ============= ============= ============= ==============
Net Loss Per Common Share $ (0.04) $ (0.03) $ (0.05) $ (0.07) $ (0.66)
============= ============= ============= ============= ==============
Weighted Average Number
of Common Shares Used In
Per Share Calculation 33,174,033 31,932,314 33,174,033 31,932,314 23,689,158
============= ============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
(An Exploration Enterprise in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
June 7, 1991
(Date of
Inception)
Ended June 30, Through
1996 1995 June 30, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Operating Activities
Net loss for the period $ (1,678,986) $ (2,120,702) $ (15,451,504)
Add non-cash items
Impairment of mineral interests in properties - - 969,101
Depreciation 302,096 245,253 2,265,022
Compensation paid with issuance of
common stock - - 495,762
Decrease (increase):
Other receivables (484,319) 5,578 (362,326)
Inventory 2,595 18 (4,887)
Prepaid expenses 1,060 10,338 (36,894)
Other assets (122,793) (5,755) (203,804)
Increase (decrease) in:
Accounts payable (78,939) 89,001 317,226
Accrued expenses 1,046,014 832,867 2,773,419
Taxes payable (186,554) (234,469) 576,121
------------- ------------- ------------
Net Cash Provided by (Used in)
Operating Activities (1,199,826) (1,177,871) (8,662,764)
------------- ------------- ------------
Investing Activities
Development of mineral rights (667,353) (630,648) (8,673,698)
Purchases of equipment 2,080 (16,515) (2,391,531)
Cash received in acquisition of subsidiaries - - 3,350
------------- ------------- ------------
Net Cash Used in Investing Activities (665,273) (647,163) (11,061,879)
------------- ------------- ------------
Financing Activities
Proceeds from related party borrowings - - 10,331,523
Repayments of related party borrowings - - (3,925,415)
Proceeds from issuance of debt 2,206,841 1,700,776 5,197,372
Principal payments on debt - (724,449) (1,310,306)
Proceeds from issuance of common stock - 487,030 10,109,729
------------- ------------- ------------
Net Cash from Financing Activities 2,206,841 1,463,357 20,402,903
------------- ------------- ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents - (565) (264,306)
------------- ------------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 341,742 (362,242) 413,954
Cash and Cash Equivalents at Beginning of Period 72,212 797,825 -
------------- ------------- ------------
Cash and Equivalents at End of Period $ 413,954 $ 435,583 $ 413,954
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC.
(An Exploration Enterprise in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been prepared
by the Company and are not audited. All adjustments necessary for fair
presentation have been included, and consist only of normal recurring
adjustments. These financial statements are condensed and, therefore, do not
include all disclosures normally required by generally accepted accounting
principles. These statements should be read in conjunction with the Company's
most recent annual financial statements included in the Company's Annual Report
on Form 10-KSB. The financial position and results of operations presented in
the accompanying financial statements are not necessarily indicative of the
results to be generated for the remainder of 1996.
The annual consolidated financial statements of the Company at December 31,
1995, are included in the Annual Report on Form 10-KSB for the year ended
December 31, 1995. The notes to those annual consolidated financial statements
describe the reorganization of Globegas B.V., Energy Global A.G. and Eurogas,
Inc. The reorganization resulted in Globegas B.V. being treated as the
acquiring entity for accounting purposes and all financial information
for periods prior to the reorganization is that of Globegas B.V. The
operations of Energy Global A.G. and Eurogas, Inc. have been included
from August 2, 1994, the date of the reorganization.
The accompanying condensed consolidated financial statements reflect numerous
transactions with related parties which are described in the annual Report on
Form 10-KSB and the annual consolidated financial statements included therein.
The Company issued Notes Payable totaling $2,206,841 during the second quarter.
The Notes are denominated in U.S. dollars, are unsecured and are due in 2001.
The Notes carry an interest rate of 7.5% per annum.
NOTE 2--COMMITMENTS AND CONTINGENCIES
The concession agreement between a subsidiary of the Company and Poland's
Ministry of Environmental Protection of Natural Resources and Forestry
stipulates once commercial production begins the Company is to make a one time
payment of $287,900 to the Ministry, as well as a yearly payment equal to 9% of
sales during the following twenty years.
The Company has not entered into agreements with the owners of the land where
drilling has taken place or where proposed drilling is to take place as to the
price for the land once commercial production commences.
The Company has been informed that it is the subject of an investigation by the
United States Securities and Exchange Commission (SEC), involving the financial
and other information set forth in the Company's periodic filings and press
releases. The Company has produced numerous documents and the oral testimony of
its officers and directors pursuant to extensive subpoenas from the SEC. The SEC
has obtained similar information from the Company's prior independent public
accountants. The Company cannot currently predict the duration or outcome of
this investigation.
The Kingdom of the Netherlands has indicated it will assess a tax against the
Company's operating subsidiary, Globegas, even though it has significant
operating losses. The tax is the result of imputed earnings calculated on
interest-free loans made by Globegas. At such time as the Company receives the
assessment from the Netherlands, it intends to contest the tax. However, the
Company may be required to post a bond to contest the matter.
An unrelated entity filed a claim against the Company in connection with lending
activities between that entity and the management of Globegas prior to the
reorganization with Eurogas. The claim asserted that funds which were loaned to
management may have been invested into Globegas and therefore the entity might
have had an interest in Globegas at the date of the reorganization. In November
1996, Eurogas entered into an agreement which settled the claims. Eurogas issued
100,000 shares of common stock to the entity and granted the entity options to
purchase 2,000,000 shares of common stock at $3.50 to $6.00 per share based upon
when the options are exercised. The options were exercisable upon issuance and
are exercisable through December 1998.
In July of 1996 Dr. Martin A. Schuepbach, the President of Danube, was added to
the Board of Directors of the Company and he was appointed as the Company's
president and chief executive officer for a term of three years. On January 14,
1997, Mr. Schuepbach resigned as a director and officer of the Company and
asserted that a breach of his employment contract occurred, and that he is
entitled to monthly compensation for the remainder of the term of the contract.
The Company plans to deny any breach; to date the Company is not aware of any
litigation having been filed in this matter and cannot estimate a possible
contingent liability.
On January 17, 1997 the Company's joint venture partner in the Czech Republic
notified the Company it is delinquent in the payment of certain obligations of
the joint venture agreement and threatened to terminate the association. The
Company disagrees with the assertion and has invoked its right to arbitrate this
dispute. Pending resolution, the Company has suspended any further work in the
Czech Republic. The Company is currently unable to predict the outcome or make
any estimates regarding the related loss contingency.
A regulatory agency of the Polish government requires the Company to invest
$2,918,000 by March 31, 1997 in accordance with a specific investment schedule
set out by the agency. The Company had met approximately 80% of its obligations
towards the 1997 deadline.
NOTE 3--SUBSEQUENT EVENTS
Acquisition of Danube-Effective on July 3, 1996, the Company completed an
acquisition of Danube International Petroleum Company, Inc. and Subsidiaries
(Danube). Danube is a joint venture partner in agreements for the exploration
and production of natural gas in Slovakia and the Czech Republic. All of the
issued and outstanding common stock of Danube was acquired for $500,000 paid at
closing, an obligation to pay $2,500,000 on or before December 31, 1996,
15,000,000 shares of the Company's common stock, 1,250,000 shares of a newly
created 1996 Series preferred stock which is convertible into an aggregate of
2,500,000 shares of common stock, and the issuance of warrants to purchase up to
5,000,000 shares of common stock at $3.00 per share during the five years
subsequent to the closing. The promissory notes are in default. The acquisition
of Danube was accomplished by Eurogas forming a wholly-owned subsidiary
incorporated in Texas and Danube was merged into the subsidiary. Additionally,
the Company borrowed $2,000,000 from an unrelated third party of which
$1,085,000 was paid directly to the joint venture for Danube's share of drilling
costs. The acquisition was accounted for by the purchase method of accounting
with the total purchase price being $4,101,250. The preferred stock issued was
assigned a value of $1,250, which is equal to its par value, and the common
stock was assigned a value of $15,000, which is also its par value. The purchase
price was allocated to the net assets acquired based on their fair value. No
goodwill was recognized from the acquisition. The operations of Danube will be
included in the consolidated results of operations of the Company from July 3,
1996.
A financial consulting firm was retained by Danube prior to its acquisition by
the Company to assist in raising capital in exchange for commissions based on
the capital obtained. Upon completion of the Danube acquisition by Eurogas, the
financial consultant filed a complaint asserting a claim of $435,000 in
commissions plus interest and legal fees. Prior to the acquisition of Danube the
financial consulting firm was successful in raising a limited amount of money
and Eurogas has offered a settlement of $50,000, the approximate amount it
believes is due, plus additional commissions for future financing received as a
result of the consulting firm's efforts.
Acquisition of Remaining Interest in Pol-Tex Methane-On May 17, 1996 the Company
acquired the remaining 15% interest in the Company's subsidiary, Pol-Tex
Methane, from the Polish Government for a cash payment of $25,000 and the
release of the obligation of the Polish Government to fund development costs of
the Concession.
Agreement to Negotiate on Sale of Pol-Tex Methane's Assets-On June 7, 1996 the
Company entered into an agreement with a major oil and gas entity which provided
that the Company would only negotiate with such major oil and gas entity
concerning the sale of Pol-Tex Methane or the joint development of the
concessions held by Pol-Tex Methane until January 31, 1997. The agreement has
been extended until February 14, 1997.
Debentures Converted-On August 8, 1996, an additional $3,011,750 of debentures
were converted into 1,003,917 shares of the Company's common stock.
Issuance of Additional Debt-During 1996 the Company has issued debt securities
and notes payable to various sources, including related parties and private
investors in exchange for approximately $7,064,000 in cash.
Lease and Purchase Commitments-During September 1996, the Company entered into a
four year lease agreement for an 8,800 square foot office facility in New York
City, New York. Lease payments for the term of the lease of $10,023 per month
were prepaid on execution of the lease agreement. Additional payments may be
required based on an annual escalation clause in the lease agreement. The
Company sub-leases a major portion of the office space to a third party. During
September 1996, the Company entered into a lease agreement for office space in
Salt Lake City, Utah. The lease payments are $1,631 per month with a minimum
escalation of six percent per year over the three year term of the lease. The
Company leases office space in Jastrzebie, Poland. Lease payments are $1,500 per
month through expiration of the lease on December 31, 1996. Since the date of
the financial statements the Company has exercised an option to purchase the
facility. The purchase required a $100,000 down payment and monthly payments of
$3,000 toward the purchase price of $900,000.
NOTE 4--PREFERRED AND COMMON STOCK
The 1995 Series Preferred Stock of the Company, issued on April 12, 1995, is
non-voting and non-participating. The 1995 Series Preferred stockholders are
entitled to an annual dividend of $0.05 per share. Each share of the 1995
series preferred stock will be converted automatically into two shares of the
Company's common stock two years from the date of its issuance.
The 1996 Series Preferred Stock of the Company, issued on July 12, 1996, is non-
voting, and junior to the 1995 Series. Stockholders of the 1996 Series stock are
entitled to an annual cumulative dividend of $0.05 per share. Each share of the
1996 Series preferred stock will be converted automatically into two shares of
the Company's common stock on July 3, 1997.
On March 11, 1996, $1,000,000 of convertible debentures were converted into
200,000 shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in exploration for coal bed methane gas in
Poland and natural gas in Slovakia and the Czech Republic. The Company holds
hydrocarbon concessions or is a joint venturer with entities that hold
hydrocarbon licenses granted by governmental agencies in Poland, Slovakia, and
the Czech Republic. The Company's interest in Eastern Europe is based on the
encouragement provided by the national governments for the development of these
resources and the fact that natural gas generally sells in Europe at
substantially higher prices than in the United States.
In January 1993, the Company's wholly-owned subsidiary, Pol-Tex Methane,
Sp. z.o.o. ("Pol-Tex"), was awarded exploration rights for coal bed methane gas
in the Upper Silesian Coal Basin in Poland (the "Pol-Tex Concession"). In
September 1993, the Company's wholly-owned subsidiary, GlobeGas, entered into a
joint venture agreement with Rybnicka Spolka Weglowa SA to form McKenzie Methane
Ribnik Sp. z.o.o. ("MMR") to exploit a second concession located in the Upper
Silesian Coal Basin. In March 1996, the Company's 85%-owned subsidiary,
McKenzie Methane Jastrzebie Sp. z.o.o. ("MMJ"), entered into a joint venture
agreement for a third concession in the same area. These three concessions (the
"Polish Concessions") cover approximately 92,000 acres in south central Poland.
As a result of the significant costs associated with establishing commercial
production, transmission, and marketing of methane gas from the Polish coal beds
and the limited financial resources available to the Company, management decided
to seek a relationship with a significant industry partner. Pursuant to this
decision, the Company is currently involved in negotiations with Texaco
Sp. z o.o. ("Texaco") regarding its coal bed methane gas interests in Poland.
Texaco is the Polish subsidiary of Texaco, Inc. The Company granted Texaco
the exclusive right to negotiate with it concerning the Poland interests
through January 31, 1997, and has recently granted an extension through
February 14, 1997. Over the past few months, Texaco has performed a
considerable amount of work concerning the concessions held by Pol-Tex,
including a legal review of all documents related to Pol-Tex, a third-party
commercial audit of Pol-Tex, an environmental base line study of well
locations drilled by Pol-Tex, and extensive technical, geological,
and engineering studies. In addition, Texaco has reviewed Pol-Tex's 1996
and 1997 drilling and testing program and is preparing cost estimates for
rig refitting and upgrading. The parties have had preliminary meetings with the
Ministry of Environmental Protection of Natural Resources and Forestry of Poland
to explore the possibility of a transfer of the concession rights to Texaco.
While no agreement with Texaco has been reached, detailed negotiations are
continuing. Under the proposed terms of the agreement, Texaco would acquire
substantially all of the assets of Pol-Tex, in exchange for a cash payment,
exploration and drilling commitments, and a net profits interest payable to the
Company on production from the Pol-Tex Concession. Texaco would become the
owner and operator of the Pol-Tex Concession and would hold a first right of
refusal to acquire the Company's other Polish concessions, in the event that the
parties are able to complete this transaction.
As part of its intent to diversify and expand its interests in Europe, in
July 1996, the Company acquired Danube International Petroleum Company
("Danube") which held rights to participate in exploration for natural gas in
Slovakia and the Czech Republic. The Company is primarily interested in
developing the Slovakian project but has also proceeded with work in the Czech
Republic. Danube is a partner in a joint venture agreement (the "Slovakian
Joint Venture") with NAFTA Gbely a.s. ("NAFTA") organized for natural gas
exploration and development under a license covering 128,000 acres located in
the East Slovakian Basin a northeastern extension of the Pannonian Basin which
covers large parts of Hungary and the southeastern part of Slovakia. The joint
venture now operates pursuant to an exploration permit which expires April 24,
1999. The Slovakian Joint Venture recently completed one test well and has
commenced a second test well. Danube also holds the right to earn a 25% to 50%
interest in a joint venture (the "Czech Joint Venture") with Moravske Naftove
Doly a.s. ("MND") which holds two licenses to explore for, develop, and produce
natural gas from an approximately 40,180 acre area located in the Zdanice area
about 40 kilometers southeast of the city of Brno in the Czech Republic.
Recently, certain disputes have arisen over the operation of the Czech Joint
Venture with MND and operations in the Czech Republic have been temporarily
suspended. The unaudited financial statements included herein do not contain
any operating results of Danube.
The Company has not had any production and is classified as an
exploration enterprise in the development stage for financial reporting
purposes. The Company was incorporated in the state of Utah under the name
Northampton, Inc. ("Northampton"), on October 7, 1985. On August 3, 1994,
Northampton entered into a share exchange agreement with Energy Global, the
initial step in the Company becoming an oil and gas development stage entity,
which turned control of the Company over to the former owners of Energy Global.
Energy Global had been formed as a holding company for GlobeGas, an operating
entity in which it held a minority interest. The minority interest in GlobeGas
was initially reported on the equity method on Northampton's financial
statements. The Company subsequently acquired a 100% interest in GlobeGas, and
since the operations of Energy Global and Northampton prior to the
reorganization were immaterial, the transaction has been accounted for as if
GlobeGas were the acquiring entity and the historical financial statements
included in this report prior to the reorganization are those of GlobeGas. (See
Note 1 to the Financial Statements.)
The Company accumulated a deficit of approximately $15,597,481 through June
30, 1996, most of which has been paid by the issuance of stock or debt
instruments, substantial portions of which were issued to related parties.
The Company's principal assets consist of unproved and undeveloped gas
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
Company owned equipment. Since the Company has no proved reserves or
established production, these properties have not been amortized. In the event
that the Company is ultimately unable to establish production or sufficient
reserves on 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.
RESULTS OF OPERATIONS
The Company has not received any revenues since inception.
The Company had a net loss applicable to common shares for the three months
ended June 30, 1996, of $1,294,366 as compared to $1,060,351 for the three
months ended June 30, 1995. The difference occurred primarily due to increases
in general and administrative costs.
For the six months ended June 30, 1996, the Company had a net loss of
$1,738,786 as compared to $2,170,702 of 1995. General and administrative costs
decreased in the first three months of the year primarily because the Company
was renegotiating its Pol-Tex Concession agreements with the Polish government
and was not actively pursuing its drilling program in Poland. As previously
reported, the Company did receive more favorable concession terms in
March 1996, and immediately resumed substantial activities which is reflected
in the increased costs for the three months ending June 30, 1996.
From inception June 7, 1991, through June 30, 1996, the Company had
accumulated losses of $15,597,481 of which $15,451,504 was a net loss from
operations and $145,977 was a charge for dividends applicable to preferred
shares.
Due to the highly inflationary economies of the Eastern European countries
in which the Company operates, the Company is subject to extreme fluctuations in
currency exchange rates that can result in the recognition of significant gains
or losses during any period.
As of June 30, 1996, the Company reported $7,704,597 in mineral interests
in unproved mineral properties, net of valuation allowance. The Company's
mineral properties increased approximately $380,085 during the 90 day period as
a result of the capitalized expenditures on the Pol-Tex Concession. 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.
Under the full cost method by which the Company accounts for its mineral
interests in properties, costs of unproved properties are assessed periodically
and any resulting provision for impairment which is required is charged to
operations. The impact of such reassessment and resulting impairment charge
could be significant during any particular period. As a result of the
foregoing, the results of operations for any particular period may not be
indicative of the results that could be expected.
CAPITAL AND LIQUIDITY
Throughout its existence, the Company has relied on cash from financing
activities to provided cash required for operating and investing activities.
Since inception, operating activities have used net cash of $8,662,764,
principally to fund cumulative net losses of $15,451,504.
During the six months ended June 30, 1996, the Company did receive
$2,206,841 of additional financing which it used primarily to fund general and
administrative operations and work on the Pol-Tex Concession.
At June 30, 1996, the Company had total current assets of approximately
$926,119 and total current liabilities of approximately $7,451,945, resulting in
a negative working capital ratio of 1:8. The dramatic improvement in the
Company's current ratio was temporary and occurred as a result of a significant
balance of unspent loan proceeds which were subsequently used in the Company's
operations and to acquire Danube. Included in current liabilities at such date,
is the current portion of the long-term debt owned to OMV Aktiengescellschaft
("OMV"), an unaffiliated Austrian gas transmission company. As of January 27,
1997, OMV had not sought to collect the amount of the promissory note due to it.
The Company is currently seeking to negotiate a conversion of this note to
equity in connection with the proposed agreement with Texaco.
The stockholders' deficit increased to $3,681,793 as a result of losses
incurred.
Since June 30, 1996, the Company has received approximately $4,400,000 from
the proceeds of additional unsecured loans. On December 31, 1996, the Company
received extensions on the unsecured loans until December 31, 1999, on the
condition that the Company collateralizes the loans with mutually agreeable
collateral within the foreseeable future. The Company also has a $2,500,000
obligation to the former Danube shareholders who are now principal
stockholders of the Company that was due December 31, 1996. While the
Company is attempting to negotiate for an extension of the due date on
the Danube debt, it has not been successful to date.
As of January 27, 1997, the Company had estimated current assets of
$100,000 and liabilities of approximately $7,000,000, including approximately
$4,400,000 on loans due December 31, 1999, $2,500,000 due the former Danube
stockholders who are now affiliates of the Company, and $1,800,000 due OMV, all
as discussed above. In addition, the Company is required to spend approximately
$584,000 by March 31, 1997, to satisfy its exploration obligation under the Pol-
Tex Concession, unless an agreement with Texaco is completed under which Texaco
would assume such obligation. The Company estimates that it will require cash
of approximately $550,000 per quarter for operating expenses, excluding
compensation to executive employees, consultants and their affiliates. The
Company is also required to fund drilling commitments of the Slovakian and Czech
Republic Joint Ventures.
The Company anticipates that if the proposed transaction with Texaco can be
completed, it will improve the Company's liquidity. The principal terms
now being negotiated with Texaco include a cash payment to the Company at
closing of $500,000 plus Texaco's assumption of all Pol-Tex concession
obligations, including the obligation to spend approximately $584,000 by March
31, 1997, for exploration. In addition, the Company believes that the
completion of an agreement with Texaco consistent with the principal terms now
being negotiated will enhance the Company's ability to attract third party debt
and equity capital. There can be no assurance, of course, that an agreement
with Texaco will actually be reached, that any agreement that is reached will be
on terms favorable to the Company, or that any financing from other sources will
be available. If the necessary funding is not available, the Company may be
unable to continue and it is unlikely that it would be able to sell its
interests for an amount sufficient to satisfy its obligations. Consequently, if
the Company is unable to continue, there will not be any value for its
shareholders.
The Company has relied principally on cash provided from financing
activities to provide its cash requirements, particularly cash provided from
related parties. The Company anticipates that it will be able to continue to
obtain cash from such sources in the foreseeable future, however, there can
be no assurance that it will be able to do so.
If the Company is unable to establish production on reserves sufficient to
justify the carrying value of its assets or to obtain the necessary funding to
meet its short and long-term obligations or to fund its exploration and
development program, all or a portion of the mineral interests in unproved
properties will be charged to operations, leading to significant additional
losses and the Company may be unable to continue as a going concern.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
1 (27) Financial Data Schedule This Filing
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the quarter ended
June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Issuer has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EUROGAS, INC.
Dated: February 5, 1997 By /s/ Hank Blankenstein
--------------------------------------
Hank Blankenstein, Secretary/Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AS OF JUNE 30, 1996, AND STATEMENTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 413,954
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 5,656
<CURRENT-ASSETS> 926,119
<PP&E> 10,096,128
<DEPRECIATION> 2,257,170
<TOTAL-ASSETS> 8,988,743
<CURRENT-LIABILITIES> 7,451,945
<BONDS> 0
<COMMON> 33,174
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<OTHER-SE> (3,717,359)
<TOTAL-LIABILITY-AND-EQUITY> 8,988,743
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,792,205
<OTHER-EXPENSES> (6,442)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,248
<INCOME-PRETAX> (1,177,388)
<INCOME-TAX> (117,037)
<INCOME-CONTINUING> (1,060,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,060,351)
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