SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-1381-D
EuroGas, Inc.
(Exact name of registrant as specified in its charter)
Utah 87-0427676
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
942 East 7145 South, #101A
Midvale, Utah 84047
(Address of principal executive offices) (Zip Code)
(801) 255-0862
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal
year, if changed since last report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 11, 1997, the Issuer had 58,294,730 shares of its common
stock, par value $0.001 per share, issued and outstanding.
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL
EuroGas, Inc. (the "Company"), files herewith unaudited condensed
consolidated balance sheets as of June 30, 1997 and December 31, 1996 (the
Company's most recent year end), and unaudited condensed consolidated statements
of operations for the three and six month periods ended June 30, 1997 and 1996,
unaudited condensed consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996, and statements of operations and cash flows from
inception on June 7, 1991, through June 30, 1997, together with the unaudited
condensed notes thereto. In the opinion of management of the Company, such
financial statements reflect all adjustments necessary to fairly present the
financial condition, results of operations, and cash flows 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, 1996.
FORWARD LOOKING INFORMATION MAY PROVE INACCURATE
This report on Form 10-Q 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 establishing beneficial
relationships with industry partners to provide funding and expertise to the
projects of the Company, 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,
1997 1996
-------------- --------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,446,241 $ 642,605
Receivables from shareholders 17,510,000 --
Other receivables 357,561 122,047
Other current assets 2,322 4,942
-------------- --------------
Total Current Assets 23,316,124 769,594
-------------- --------------
Property and Equipment
Mineral interests in unproved properties,
net of valuation allowance 23,426,674 14,252,754
Other property and equipment 2,425,078 2,423,039
-------------- --------------
25,851,752 16,675,793
Less: Accumulated depreciation (2,186,676) (2,144,113)
-------------- --------------
Net Property and Equipment 23,665,076 14,531,680
-------------- --------------
Other Assets
Goodwill, net 11,548 14,319
Deposits and long-term prepayments 547,794 586,546
-------------- --------------
Total Other Assets 559,342 600,865
-------------- --------------
Total Assets $ 47,540,542 $ 15,902,139
============== ==============
</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 BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 1,691,967 $ 1,389,859
Accrued expenses 5,614,263 2,659,721
Accrued taxes 938,307 911,051
Notes payable-current portion 1,886,289 3,688,788
Notes payable to related parties-current portion 1,062,092 1,062,092
-------------- --------------
Total Current Liabilities 11,192,918 9,711,511
-------------- --------------
Long-Term Debt
Notes payable 3,983,701 5,733,702
Notes payable to related parties 2,697,844 4,897,844
-------------- --------------
Total Long-Term Debt 6,681,545 10,631,546
-------------- --------------
Minority Interest 950,000 950,000
-------------- --------------
Stockholders' Equity (Deficit)
Preferred stock, $0.001 par value, 3,656,965 shares
and 3,641,968 shares issued and outstanding,
respectively 3,657 3,642
Common stock, $0.001 par value, 325,000,000
shares authorized, 55,309,825 shares issued and
outstanding 55,610 49,144
Additional paid-in capital 52,648,592 14,842,922
Cumulative foreign currency translation adjustment (14,749) (14,749)
Deficit accumulated during the development stage (23,977,031) (20,271,877)
-------------- --------------
Total Stockholders' Equity (Deficit) 28,716,079 (5,390,918)
-------------- --------------
Total Liabilities and Stockholders' Equity (Deficit) $ 47,540,542 $ 15,902,139
============== ==============
</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
For the Three Months For the Six Months (Date of
Ended June 30, Ended June 30, Inception)
-------------------------- -------------------------- Through
1997 1996 1997 1996 June 30, 1997
----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ -- $ --
Operating Expenses
Impairment of mineral interests -- -- -- -- 969,101
in Property
Depreciation and valuation 2,207 206 42,536 413 2,138,415
allowance
General and administrative 2,118,558 1,420,158 3,058,889 1,791,792 16,713,495
----------- ----------- ----------- ----------- ------------
Total Operating Expenses 2,120,765 1,420,364 3,101,425 1,792,205 19,821,011
----------- ----------- ----------- ----------- ------------
Other Income (Expenses)
Interest income 12,250 563 12,250 565 311,092
Interest expense (278,360) (31,219) (520,508) (73,900) (2,854,150)
Exchange losses, net 47,157 -- 47,157 -- (503,141)
Other income -- -- -- -- 65,024
----------- ----------- ----------- ----------- ------------
Total Other Income (Expenses) (218,953) (30,656) (461,101) (73,335) (2,981,175)
----------- ----------- ----------- ----------- ------------
Loss Before Income Taxes (2,339,718) (1,451,020) (3,562,526) (1,865,540) (22,802,186)
Benefit from (Provision for) Income
Taxes (122,281) 186,554 -- 186,554 (763,941)
----------- ----------- ----------- ----------- ------------
Net Loss (2,461,999) (1,264,466) (3,562,526) (1,678,986) (23,566,127)
Dividends Applicable to Preferred
Shares (7,962) 29,900 174,136 59,800 410,904
----------- ---------- ----------- ----------- ------------
Net Loss Applicable to Common
Shares $(2,454,037) $(1,294,366) $(3,736,662) $(1,738,786) $(23,977,031)
=========== =========== =========== =========== ============
Net Loss Per Common Share $ (0.05) $ (0.04) $ (0.07) $ (0.05) $ (0.86)
=========== =========== =========== =========== ============
Weighted Average Number of
Common Shares Used in Per
Share Calculation 50,531,925 33,174,033 49,892,495 33,174,033 27,955,250
=========== =========== =========== =========== ============
</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>
For the Cumulative
Period from
For the Six Months June 7, 1991
Ended June 30, (date of inception)
-------------------------------- throuth
1997 1996 June 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (3,562,526) $ (1,678,986) $ (23,566,127)
Adjustments to reconcile net loss to cash
provided by operating activities:
Impairment of mineral interest in
Properties -- -- 969,101
Depreciation and amortization 42,563 302,096 2,138,441
Compensation paid with issuance of
common stock -- -- 605,592
Exchange (loss) -- -- (550,298)
Changes in operating assets and liabilities,
net of assets acquired:
Receivables (235,515) (484,319) (211,117)
Accounts payable 302,108 (78,939) 486,788
Accrued liabilities 2,811,912 1,046,014 7,367,621
Income tax payable 27,256 (186,554) 789,931
Other 5,392 (119,138) (87,152)
------------- ------------- --------------
Net Cash Used in Operating Activities (608,810) (1,199,826) (12,057,220)
Cash Flows from Investing Activities
Purchases of mineral interests in properties (1,916,011) (667,353) (13,257,972)
Purchases of property and equipment (2,039) 2,080 (2,428,376)
Acquisitions of subsidiaries, net of cash
Acquired (6,107,908) -- (5,922,815)
Increase in deposits and prepayments 38,752 -- (501,248)
------------- ------------- --------------
Net Cash Used in Investing Activities (7,987206) (665,273) (22,110,411)
Cash Flows from Financing Activities
Proceeds from issuance of debt-related parties -- -- 14,874,010
Repayment of debt-related parties -- -- (4,927,441)
Proceeds from issuance of debt -- 2,206,841 7,837,526
Principal payments on debt (1,802,498) -- (3,192,927)
Proceeds from issuance of common stock 15,202,150 -- 25,318,687
Dividends paid on preferred stock -- -- (120,000)
------------- ------------- --------------
Net Cash Provided by Financing Activities 13,399,652 2,206,841 39,789,855
Effect of Exchange Rate Changes on
Cash and Cash Equivalents -- -- (175,983)
------------- ------------- --------------
Net Increase in Cash and Cash Equivalents 4,803,636 341,742 5,446,241
Cash and Cash Equivalents at Beginning
of Period 642,605 72,212 --
------------- ------------- --------------
Cash and Cash Equivalents at End of Period $ 5,446,241 $ 413,954 $ 5,446,241
============= ============= ==============
</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 (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Cumulative
Period from
For the Six Months June 7, 1991
Ended June 30, (date of inception)
-------------------------------- throuth
1997 1996 June 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow
Information
Cash paid for interest $ -- $ 46,638 $ 77,361
Cash paid for income taxes -- -- --
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
During June 1997, the Company acquired all of the outstanding common stock of
OMV (Jakutien) Exploration Gesellschaft m.b.H. (OMVJ) for $6,107,908 cash, a
stock option to purchase 2,000,000 shares of common stock exercisable at $4.00
to $6.00 per share, and a 5% interest in OMVJ's net profits. The fair value of
the stock option on the date granted was $1,150,000. The acquisition is
reflected in the financial statements of the Company at $7,257,908, the cash
amount paid plus the fair value of the option, etimated to be the fair market
value of OMVJ's net assets.
During the six months ended June 30, 1997, long-term notes payable of
$3,950,000, and accrued interest of $102,101 were converted into 1,485,964
shares of common stock at an average conversion rate of $2.67 per share.
During May 1997, 15,000 shares of the Company's 1997 Series A Preferred Stock
were issued for net cash of $13,500,000. In conjunction with the issuance,
commissions were paid in the form of $1,500,000 and 50,000 shares of the
Company's common stock.
During June 1997, the holder of one of the debentures described above in
the principal amount of $1,000,000 elected to convert the debenture into
333,334 shares of common stock and to exercise an option by delivery of a
subscription receivable for the issuance of 2,999,999 shares of the Company's
common stock at $2.50 per share. Subsequently, on August 4, 1997,
$7,500,000 in cash was received for the subscription and the $1,000,000
debenture cancelled.
During June 1997, 1,430,000 shares of common stock were issued at $7.00 per
share for a subscription received. Subsequently, during July 1997, $10,010,000
in cash was received for the subscription.
EuroGas, Inc. and Subsidiaries
(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. In the opinion of management, all
adjustments necessary for a 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 report on Form 10-KSB for the period ending December 31, 1996. The
financial position and results of operations presented in the accompanying
financial statements are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
NOTE 2 -- RECEIVABLES FROM SHAREHOLDERS
On June 30, 1997, the Company entered into an agreement for the sale of
1,430,000 shares of its restricted common stock at $7.00 per share or aggregate
gross proceeds of $10,010,000 U.S. with a greater than 10% shareholder of the
Company. Payment was due on August 10, 1997. Payment was received July 22,
1997.
On June 30, 1997, the Company also entered into an agreement with an
unrelated party (amending its financing agreement of two years ago) which
provided for the payment of $7,500,000 and the tender of a $1,000,000
outstanding debenture in exchange for an aggregate of 3,333,333 shares of
restricted common stock and the granting of a warrant for acquisition of up to
2,200,000 shares at an exercise price of $3.00 per share. Payment was received
August 4, 1997.
NOTE 3 -- MAJOR TRANSACTIONS
On April 28, 1997, the Company entered into a letter of intent with Polish
Oil and Gas Company ("POGC") to form a joint technical team to evaluate
concessions for methane gas exploration in the Carpathian Flysch and Tectonic
Foredeep areas of Poland for which POGC currently holds concessions or is in the
process of obtaining concessions. The joint team will identify the areas to be
subject to a joint venture between the Company and POGC and the timing and
extent of the obligations of the two parties. The joint team has had several
meetings exploring the possible development of the proposed project. The letter
of intent specifies an exploration budget of $15 million over a three year
period and grants the Company the exclusive right to negotiate with POGC through
September 30, 1997.
On June 11, 1997, the Company acquired all the issued and outstanding stock
of OMV (Jakutien) Exploration GmbH ("OMVJ") from the OMV Group, Austria's
largest industrial concern, in exchange for $6,107,908 U.S. and a 5% interest
in OMVJ's net profits. OMVJ's primary asset is a 50% interest in a joint
venture in the Republic of Sakha (often referred to as Yakutia) and the largest
member of the Russian Federation with Sahaneftegas, the Yakutian national oil
and gas company. Prior to the agreement of acquisition, the Company also
granted a stock option to OMV Group for 2,000,000 shares of common stock
exercisable at $4.00 per share until April 1, 1998, $5.00 per share until March
31, 1999, and $6.00 per share through March 31, 2000, when it will expire if not
exercised. The stock option was treated as a non-refundable deposit towards
obtaining an interest in properties which was completed by the acquisition of
OMVJ. The amount of the deposit was approximately $1,150,000 based on the fair
value of the stock option on the date the parties agreed that it would be
granted.
In May of 1997, the Company entered into a letter of intent with a Canadian
corporation providing for the farm-out of a small portion of the Company's
Slovakian concession in exchange for a substantial interest in the Canadian
corporation. The letter allows until September 30, 1997 to complete the
transaction.
NOTE 4 -- FINANCING TRANSACTIONS
On May 30, 1997, the Company sold 15,000 shares of a newly and specifically
created 1997 Series A Convertible Preferred Stock (the "1997 Preferred Stock")
to 17 offshore investors for aggregate gross proceeds of $15,000,000 ($1,000 per
share) and net cash proceeds of $13,500,000. The newly created 1997 Preferred
Stock pays a dividend of 6% per annum and may be converted into that number of
common shares calculated by dividing $1,000 by the lesser of $13.20, or 82% of
the average closing bid price as reported by Bloomberg with respect to the
Frankfurt and Nasdaq Bulletin Board Exchanges for the five trading days
preceding the conversion date, and multiplying the result by the number of
shares of 1997 Preferred Stock to be converted. The holders of the 1997
Preferred Stock may only convert 25% of the 1997 Preferred Stock to common
after July 14, 1997, an additional 25% (50% cumulative) after August 13, 1997,
another 25% (75% cumulative) after September 12, 1997, and all the 1997
Preferred Stock after October 12, 1997. All the 1997 Preferred Stock must be
converted by May 30, 2000. The Company paid a commission of $1,500,000 and
50,000 shares of the Company's restricted common stock in connection with the
placement.
On June 30, 1997, the Company entered into an agreement for the sale of
1,430,000 shares of its restricted common stock at $7.00 per share or a gross
purchase price of $10,010,000 U.S. with a greater than 10% shareholder of the
Company. Payment was received July 22, 1997. See Note 2 - Receivables from
Shareholders.
On June 30, 1997, the Company also entered into an agreement with an
unrelated party (amending its financing agreement of two years ago) which
provided for the payment of $7,500,000 and the tender of a $1,000,000
outstanding debenture in exchange for an aggregate of 3,333,333 shares of
restricted common stock and the granting of a warrant for acquisition of
2,200,000 at $3.00 per share. Payment was received August 4, 1997.
See Note 2-Receivable from Shareholders.
On June 20, 1997, the holder of a $750,000 convertible debenture
exchanged it for 300,000 shares of restricted common stock.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company has entered into employment contracts for consulting services
with certain individuals, which include a former director and members of his
immediate family. The contracts had original terms that ranged from six months
to three years. The contracts were terminated during 1997. Commitments under
these terminated contracts are approximately $225,000 at June 30, 1997.
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 assessed 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. The Company accrued liabilities in prior periods relating to this
assessment in the amount of $788,770.
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 the Company. 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 its reorganization
with the Company. In November 1996, the Company entered into an agreement which
settled the claim. The Company 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 March of 1997, a bankruptcy trustee appointed for certain former
shareholders of GlobeGas asserted a claim to the proceeds that the Company would
receive from the Texaco agreement. The Trustee's claim is apparently based upon
the theory that the Company may have paid inadequate consideration for its
acquisition of GlobeGas (which indirectly controlled the Pol-Tex Concession in
Poland) from former shareholders and therefore they are the true owners of the
proceeds received from the development of the Pol-Tex Concession in Poland. The
Company has filed a motion to dismiss the complaint. The Company believes that
the claim is totally without merit based on its belief that a prior settlement
with the principal creditor of the estate bars any such claim, that the court
has no jurisdiction over Pol-Tex or its interests held in Poland, and that the
Company paid substantial consideration for GlobeGas.
In July of 1996, Dr. Martin A. Schuepbach, the president of Danube, was
added to the board of directors of the Company and 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 had 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 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 the Company,
the financial consultant filed a complaint asserting a claim of $435,000 for
commissions, interest, and legal fees. Prior to the acquisition of Danube, the
financial consulting firm was successful in raising a limited amount of money
and the Company has offered a settlement of $50,000, the approximate amount it
believes is due (which amount is included in accrued expenses in the
accompanying financial statements), plus additional commissions for future
financing received as a result of the consulting firm's efforts.
The Company paid $120,000 of dividends on its 1995 Series Preferred Stock
during 1996, and approximately $175,000 during 1997. The dividends may have
been inappropriately paid under Utah law due to the existence of a stockholders'
deficit throughout most of the periods involved. As a result, the Company may
have a claim against the preferred shareholders who received the dividends for
their repayment.
NOTE 6 -- SUBSEQUENT EVENTS
On August 13, 1997, Texaco closed the acquisition of its agreement to
appraise, operate, and develop the Company's Pol-Tex Commission No. 134-93 and
delivered to the Company's subsidiary $500,000 (U.S.).
On August 11, 1997, the Company announced that it had retained a leading
investment bank on an exclusive basis to render certain financial advisory and
investment banking services to the Company.
Subsequent to June 30, 1997, holders of 3,497.5 shares of the Company's
1997 Preferred Stock, that were acquired for an aggregate of $3,497,500,
elected to convert such shares into an aggregate of 484,905 shares of the
Company's common stock.
The 1,250,000 shares of 1996 Preferred Stock was automatically converted
into 2,500,000 shares of common stock on July 3, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the acquisition of rights to explore for and
exploit natural gas and coal bed methane gas in various parts of the world. The
Company currently has several projects in various stages of development,
including a coal bed methane gas project in Poland that has been farmed out to a
subsidiary of Texaco, Inc. ("Texaco"), a natural gas project in Slovakia, a
natural gas project in the Czech Republic and, as a result of a recent
acquisition of a subsidiary of OMV Group, a natural gas project in the Sakha
Republic, a member of the Russian Federation located in eastern Siberia. In
addition, the Company has an exclusive right to negotiate the terms of a joint
venture arrangement with the Polish Oil & Gas Company ("POGC") concerning a
separate natural gas project in Poland and is currently seeking industry
partners to develop and exploit a third Polish project.
During the last 120 days, the Company's financial position has dramatically
improved and the scope of its activities has significantly expanded.
RECENT DEVELOPMENTS
Funding Activities
The Company has historically suffered from a lack of capital. The
Company's activities to date have not generated revenues, so it has been unable
to meet its funding needs from operations. The Company has been dependent
exclusively on equity and debt transactions in order to obtain the funds
necessary to acquire and advance its projects. Through March 31, 1997, the
Company had negative working capital and a stockholders' deficit. Since March
31, 1997, the Company has completed a number of financing transactions,
significantly improving its working capital position and providing it with funds
to complete its recent acquisition and to meet its contractual commitments in
the near term.
The Company had a working capital deficit in excess of $7,500,000 at March
31, 1997. At June 30, 1997, the Company's working capital surplus was in excess
of $12,000,000. Included in the Company's current assets at June 30, 1997,
under the line item of " Receivables from Shareholders" were subscription
receivables of $10,010,000 and $7,500,000. Both of those subscription
receivables were received by the Company subsequent to June 30, 1997.
In addition, the Company has very recently entered into an agreement with
Oppenheimer & Co., Inc., a leading investment bank, granting Oppenheimer the
exclusive right to render certain financial advisory and investment banking
services to the Company.
OMVJ Acquisition
The Company completed the acquisition of OMV (Jakutian) Exploration GmbH
("OMVJ"), a subsidiary of OMV Group ("OMV") on June 11, 1997. OMV is Austria's
largest industrial company and it explores and develops oil and gas projects in
Europe, the Mediterranean, and Asia, owns a number of oil refineries, and
operates an extensive pipeline network. OMV holds an option to purchase
2,000,000 shares of the Company's restricted common shares.
OMVJ's primary asset is a 50% interest in a joint venture (known as "TAKT")
which holds gas exploration interests located in the Sakha Republic. OMVJ's
joint venture partner is Sahaneftegas (the national oil and gas company of the
Sakha Republic). The Sakha Republic is geographically the largest member of
the Russian Federation and is located in Eastern Siberia. TAKT was formed to
appraise, explore, and, if justified, develop and export oil and gas reserves
that may be discovered on the areas subject to the joint venture. TAKT
currently holds two large exploration blocks located near the city of Lensk,
covering approximately 21,300 square kilometers (approximately 9,650 square
miles) located in the southeast area of the East Siberian Platform or East
Siberian Basin. These areas have both been approved for exploration by the
Sakha Republic government and the USSR State Committee for Geology. TAKT also
holds the right of first refusal on adjoining exploration blocks. TAKT has been
conducting activities within its two blocks for the past six years, employing
modern seismic and exploration techniques. The exploration phase is expected to
last for another three to five years and is estimated to cost in its entirety
approximately $28,000,000 (U.S.) of which OMVJ's share would be $14,000,000
(U.S.). It was reported to the Company that OMVJ had spent approximately
$6,000,000 (U.S.) on the project to date.
The Sakha Republic is thinly populated, with a population of just over
1,000,000 people. Over 40% of its territory lies within the Arctic Circle and
the entire Republic is subject to severe climatic conditions. The ultimate
successful development of any hydrocarbons that may be found in this area will
depend on the construction of gathering and transportation systems over vast
distances, probably into Asia. The Company does not have the resources to
construct such pipelines.
The acquisition of OMVJ has been reflected in the June 30, 1997, balance
sheets based on the cash purchase price of $6,107,908, the value of an option
previously granted to OMV, and the Company's costs in completing the
acquisition. The Company will file historical financial information concerning
OMVJ and pro forma information concerning the combined companies in an amendment
to its report on Form 8-K dated June 11, 1997. Readers are referred to that
report for additional information.
POGC Agreement
On April 28, 1997, Pol-Tex entered into a letter of intent with Polish Oil
and Gas Company ("POGC") to form a joint technical team to evaluate concessions
for natural gas exploration currently held by POGC or in which it is in the
process of obtaining rights located in the Carpathian Flysch and Tectonic
Foredeep areas of Poland. The joint team will identify the areas to be subject
to a joint venture between the Company and POGC and the timing and extent of the
obligations of the two parties. The joint team has held several meetings,
exploring the possible development of the proposed project. The letter of
intent specifies an exploration budget of $15 million over a three year period
and grants the Company the exclusive right to negotiate with POGC concerning the
concessions through September 30, 1997.
Texaco Transaction
On March 24, 1997, The Company entered into an agreement with a subsidiary
of Texaco Incorporated ("Texaco") to sell the Pol-Tex Concession, the largest of
the coal bed methane gas concessions held by the Company in Poland, to Texaco.
The agreement also grants a first right of refusal to Texaco to obtain a
controlling interest in two other Polish Concessions (the MMR and MMJ
concessions) for methane gas exploration held by the Company. This transaction
was completed subsequent to June 30, 1997.
Slovakian Farm-Out
In May of 1997, the Company entered into a letter of intent with Belmont
Resources, a publicly held Canadian corporation, providing for the farm-out of a
small portion of the Company's Slovakian concession in exchange for a
substantial interest in Belmont Resources. The agreement is subject to the
approval of the Vancouver Stock Exchange and Nafta Gbely, the Company's joint
venture partner. The letter allows until September 30, 1997 to complete the
transaction.
Financial Position
The Company had accumulated losses of approximately $23,977,000 through
June 30, 1997, most of which have been paid by the issuance of stock or debt
instruments (substantial portions of which were issued to related parties), loan
proceeds, and incurring payables. The Company's stock and debt transactions
provided net cash of approximately $8,194,000, $2,927,000, and $4,989,000 during
the years ended 1996, 1995, and 1994, respectively. Since December 31, 1996,
the Company has sold 15,000 shares of its 1997 Preferred Stock for gross
proceeds of $15,000,000, sold 4,930,000 shares of common stock for gross
proceeds of $19,260,000, and converted an additional $3,950,000 in debentures
into 1,485,964 shares of common stock.
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. Since June 30,
1997, the Company has received $500,000 from Texaco in connection with the
closing of the transfer of the Pol-Tex Concession. The Company does not
currently have a source of ongoing revenues.
The Company had a net loss applicable to common shares for the three and
six months ended June 30, 1997, of approximately $2,450,000 and $3,740,000,
respectively, as compared to a net loss of approximately $1,290,000 and
$1,740,000 for the comparative periods ended June 30, 1996. The difference is
due in large part to the expansion of the Company's activities, primarily as a
result of acquisitions and the growth of the Company's administrative expenses.
A substantial portion of the general and administrative expenses consist of
payments to a limited number of officers, directors, and consultants.
From inception on June 7, 1991, through June 30, 1997, the Company had
accumulated losses of $23,977,041 of which $23,566,127 was a net loss from
operations and $410,904 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. No such gains or losses were recognized in the six
months ended June 30, 1997, or 1996. The Company does not currently employ any
hedging techniques to protect against the risk of currency fluctuations.
The Company has recently received a preliminary report on the second test
well drilled and completed on its Slovakian concessions. The reservoir
intersected by the wells drilled appears to be a tight formation with relatively
low permeability. Both wells have been the subject of extensive testing and
while the second well drilled has not been fraced (which may improve its
performance), the Company believes that these reports already indicate that the
Slovakian Concession represents a viable property and wells drilled should
produce in the neighborhood of 30,000 cubic meters of gas per day. Such a
result would be substantial enough to justify the drilling and completion of a
number of additional wells, albeit not at the production levels the Company had
originally hoped for.
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.
As of June 30, 1997, the Company reported approximately $23,430,000 in
mineral interests in unproved mineral properties, 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 the Company is
unable to obtain any necessary future licenses or extensions, it could be forced
to write off the carrying value of the related property.
CAPITAL AND LIQUIDITY
Throughout its existence, the Company has relied on cash from financing
activities to provided the funds required for acquisitions and operating
activities. During the six months ending June 30, 1997 and 1996, operations
required cash of approximately $610,000 and $1,200,000, respectively. Since
inception on June 7, 1991, the Company has used net cash in operations of
approximately $12,000,000. Such net cash has been used principally to fund
cumulative net losses of approximately $24,000,000.
Investing activities used net cash of approximately $8,000,000 for the six
months ended June 30, 1997, the largest component of which was the approximately
$6,100,000 cash payment booked in connection with the acquisition of OMVJ, as
compared to approximately $665,000 in the prior six month period. Since
inception, the Company's investment activities have used cash of
approximately $22,100,000.
Financing activities provided net cash of approximately $13,400,000 during
the six month period ending June 30, 1997, as compared to $2,200,000 in the
prior year comparative period. As stated above, the Company has received
additional gross proceeds of approximately $17,510,000 since June 30, 1997, from
equity transactions. From inception through June 30, 1997, the proceeds from
financing activities are approximately $39,800,000 of which approximately
$9,947,000 is net proceeds from prior borrowings and payments to related
parties.
At June 30, 1997, the Company had total current assets of approximately
$23,315,000 and total current liabilities of approximately $11,200,000,
resulting in working capital of approximately $12,115,000 or a working capital
ratio 2:1. Current assets include $17,510,000 of subscription receivables, all
of which was received by the Company subsequent to June 30, 1997. The current
debt includes a $2,500,000 obligation to former Danube shareholders who are now
principal stockholders of the Company.
As noted above, the Company has relied principally on cash provided from
financing activities to meet its cash requirements. While the Company
currently has sufficient cash to meet its short-term needs, it will be
required to obtain additional cash either from financing activities or
operations to meet its longer term needs. The Company believes that the
engagement of Oppenheimer & Co. will provide assistance in meeting the
Company's future financial requirements, but there can be no assurance that
funds will be available to the Company as and when needed by its business
activities, or at all. Obtaining additional equity financing or structuring
strategic relationships will continue to result in dilution of the percentage
ownership of the Company by the current shareholders.
If the Company is unable to establish production or 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.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are included as part of this report:
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- ------- --------- ----------------- --------
<S> <C> <C> <C>
1 (27) Financial Data Schedule This Filing
</TABLE>
REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K during the quarter ended June 30,
1997, one dated May 30, 1997, reporting the filing of the Company's Designation
of Rights, Privileges, and Preferences 1997 Series A Convertible Preferred Stock
and the sale of shares of 1997 Series A Convertible Preferred Stock and the
second dated June 11, 1997, reporting the acquisition of all of the issued and
outstanding stock of OMV (Jakutien) Exploration GmbH from OMV Group.
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: August 15, 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, 1997, AND STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,446,241
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,322
<CURRENT-ASSETS> 23,316,124
<PP&E> 25,851,752
<DEPRECIATION> 2,186,676
<TOTAL-ASSETS> 47,540,542
<CURRENT-LIABILITIES> 11,192,918
<BONDS> 0
<COMMON> 55,610
0
3,657
<OTHER-SE> 28,656,812
<TOTAL-LIABILITY-AND-EQUITY> 47,540,542
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,120,765
<OTHER-EXPENSES> 218,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,360
<INCOME-PRETAX> (2,339,718)
<INCOME-TAX> 122,281
<INCOME-CONTINUING> (2,454,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,454,037)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
