SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 33-1381-D
EUROGAS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 87-0427676
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
942 EAST 7145 SOUTH, #101A
MIDVALE, UTAH 84047
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(Address of principal executive offices) (Zip Code)
(801) 255-0862
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(Registrant's telephone number, including area code)
N/A
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(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 CORPORATE ISSUERS
As of August 11, 1998, the Issuer had 64,845,811 shares of its common
stock, par value $0.001 per share, issued and outstanding.
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL
EuroGas, Inc. (the "Company"), files herewith unaudited condensed
consolidated balance sheets as of June 30, 1998, and December 31, 1997 (the
Company's most recent year end), and unaudited condensed consolidated statements
of operations for the three and six month periods ended June 30, 1998 and 1997,
and unaudited condensed consolidated statements of cash flows for the six month
periods ended June 30, 1998 and 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-K for the year ended December
31, 1997.
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
completing 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, the success of the operating
entities on the projects in which the Company has an interest but does not
control, 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.
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $11,157,986 $17,247,667
Other receivables 444,355 173,691
Receivable from related party 1,100,000 -
Other current assets 17,691 29,370
----------- -----------
Total Current Assets 12,720,032 17,450,728
----------- -----------
Investment in securities
available-for-sale 953,413 -
----------- -----------
Property and Equipment
Oil and gas properties subject
to amortization 8,503,935 -
Oil and gas properties not
subject to amortization 24,405,418 22,723,660
Other property and equipment 1,037,800 1,010,772
----------- -----------
33,947,153 23,734,432
Less: accumulated depreciation (779,668) (767,177)
----------- -----------
Net Property and Equipment 33,167,485 22,967,255
----------- -----------
Other Assets 303,432 336,560
----------- -----------
Total Assets $47,144,362 $40,754,543
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,459,738 $ 1,532,949
Accrued liabilities 3,378,713 3,420,042
Accrued income taxes 773,329 753,306
Notes payable - current portion 349,284 1,107,944
Notes payable to related parties
- current portion 839,397 1,270,547
---------- ----------
Total Current Liabilities 6,800,460 8,084,788
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Long-Term Debt
Notes payable 496,584 2,246,773
Notes payable to related parties - 911,016
----------- ----------
Total Long-Term Debt 496,584 3,157,789
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Stockholders' Equity
Preferred stock, $.001 par value;
3,661,968 shares authorized;
2,400,228 shares issued
and outstanding; $8,499,197 liquidation
preference 2,400 2,392
Common stock, $.001 par value;
325,000,000 shares authorized; issued
and outstanding 64,746,934 shares
in 1998 and 55,309,825 shares in 1997 64,747 62,284
Additional paid-in capital 76,956,124 61,659,345
Other comprehensive income (612,706) (14,749)
Accumulated deficit (36,563,247) (32,197,306)
----------- -----------
Total Stockholders' Equity 39,847,318 29,511,966
----------- -----------
Total Liabilities and
Stockholders' Equity $47,144,362 $40,754,543
=========== ===========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ -----------------------
1998 1997 1998 1997
----------- ----------- ----------- ---------
Revenues $ - $ - $ - $ -
----------- ----------- ----------- ---------
Operating Expenses
Depreciation and
valuation allowance 6,980 2,207 11,750 42,536
General and
administrative expense 2,523,718 2,118,558 4,252,509 3,058,889
----------- ---------- ----------- ----------
Total Operating
Expenses 2,530,698 2,120,765 4,264,259 3,101,425
----------- ---------- ----------- ----------
Other Income (Expense)
Interest income 143,406 12,250 313,962 12,250
Interest expense (186,875) (278,360) (322,839) (520,508)
Exchange gains
(losses), net 47,247 47,157 (10,414) 47,157
----------- ----------- ----------- ----------
Other Income
(Expense), Net 3,778 (218,953) (19,291) (461,101)
----------- ----------- ----------- ---------
Loss Before Income
Taxes (2,526,921) (2,339,718) (4,283,550) (3,562,526)
Provision for
Income taxes - (122,281) - -
----------- ---------- ----------- ----------
Net Loss (2,526,921) (2,461,999) (4,283,550) (3,562,526)
Dividends Applicable
to Preferred Shares 25,181 (7,962) 67,643 174,136
----------- ----------- ----------- ----------
Loss Applicable to
Common Shares $(2,552,102) $(2,454,037) $(4,351,193) $(3,736,662)
Basic and Diluted
Loss Per Common
Share $ (0.04) $ (0.05) $ (0.07) $ (0.07)
========== =========== ========== ===========
Weighted Average
Number of Common
Shares Used in
Per Share
Calculation 64,688,142 50,531,925 63,496,056 49,892,495
=========== ============ ============ ==========
Net Loss Applicable
to Common Shares $(2,552,102) $ (2,454,037)$(4,351,193) $(3,736,662)
Other Comprehensive Income
Net change in unrealized
loss on securities
available for sale (454,787) - (454,787) -
Net change in cumulative
foreign currency
translation adjustment (27,078) - (157,919) -
----------- ------------ ---------- -----------
Comprehensive Loss $(3,033,967) $(2,454,037) $(4,963,899)$(3,736,662)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial
statements.
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
For the Six Months
Ended June 30,
-------------------------
1997 1998
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Cash Flows From Operating Activities
Net loss $(4,283,550) $(3,562,526)
Adjustments to reconcile
net loss to cash
provided by operating activities:
Depreciation and amortization 11,750 42,536
Exchange loss 10,414 -
Issuance of stock as financing
and finders fees 324,250 -
Changes in assets and
liabilities, net of
assets acquired:
Receivables (270,664) (235,515)
Accounts payable (73,211) 302,108
Accrued liabilities (104,537) 2,956,755
Accrued income taxes 20,023 27,256
Other (26,203) 5,392
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Net Cash Used in Operating
Activities (4,391,728) (463,994)
----------- ----------
Cash Flows From Investing Activities
Acquisition of subsidiaries, net of
cash acquired - (6,252,724)
Purchases of mineral interests,
property and equipment (2,637,721) (1,918,050)
Decrease in deposits and prepayments - 38,752
Receivable from related party (1,100,000) -
Investment in securities
available-for-sale (1,411,292) -
----------- -----------
Net Cash Used In Investing
Activities (5,149,013) (8,132,022)
=========== ===========
Cash Flows From Financing Activities
Principal payments on notes payable
to related parties (1,342,166) -
Principal payments on notes payable (2,508,848) (1,802,498)
Proceeds from issuance of
common stock, net of
offering costs 7,400,000 15,202,150
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Net Cash Provided By Financing
Activities 3,548,986 13,399,652
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Effect of Exchange Rate Changes on Cash
and Cash Equivalents (97,926) -
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Net Increase (Decrease)
In Cash and Cash Equivalents (6,089,681) 4,803,636
Cash and Equivalents at
Beginning of Period 17,247,667 642,605
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Cash and Equivalents at
End of Period $11,157,986 $ 5,446,241
=========== ===========
For the Six Months
Ended June 30,
-------------------
1998 1997
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Supplemental Disclosure of
Cash Flow Information
Cash paid for interest $ 300,557 $ -
========== ======
Supplemental Schedule of Noncash Investing and Financing Activities
During March 1998, the Company exercised its option to acquire a 16%
carried interest in the Beaver River oil and gas project in British
Columbia, Canada for $300,000 and 2,400,000 shares of common stock.
The acquisition was recorded at $7,875,000.
During June 1997 the Company acquired all of the outstanding common
stock of OMV (Jakutien) Exploration Gesellschaft m.b.H., (OMVJ) for
$6,252,724 cash, expenses related to the acquisition of $75,580, 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 fair value of the OMVJ net assets was $7,478,304.
During June 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
50,000 shares of the Company's common stock.
During June 1997 an option was exercised and a subscription received
for the issuance of 2,999,999 shares of the Company's common stock
at $2.50 per share. Subsequently, during July 1997, $7,500,000 in
cash was received for the subscription.
During June 1997, 1,430,000 shares of common stock were issued at
$7.00 per share for a subscription received. Subsequently, during
August 1997, $10,010,000 in cash was received for the subscription.
The accompanying notes are an integral part of these financial
statements.
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING PRINCIPLES
Condensed 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-K for the
period ended December 31, 1997. 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,
1998.
Loss Per Share - In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Prior
periods have been restated to conform to the requirements of SFAS No. 128. 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 loss per share reflects potential dilution which could
occur if all potentially issuable common shares from stock purchase warrants and
options or convertible notes payable resulted in the issuance of common stock.
In the Company's present position, diluted loss per share is the same as basic
loss per share because potentially issuable common shares would decrease the
loss per share and have been excluded from the calculation.
New Accounting Standards - The Financial Accounting Standards Board issued SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information in 1997. These statements,
which are effective for fiscal years beginning after December 15, 1997, expand
or modify disclosures and have no impact on the Company's consolidated financial
position, results of operations or cash flows. The Company adopted SFAS No.
129, Disclosures of Information about Capital Structure, in 1997. In accordance
with SFAS No. 129, rights and liquidation preferences of debt and equity
securities have been presented in the accompanying condensed consolidated
financial statements.
NOTE 2 - STOCKHOLDERS' EQUITY
During May, 1998 the Company issued 8,000 shares of a newly-created 1998 Series
B Convertible Preferred Stock (Series B) in a private placement. The Company
has designated 30,000 shares of the Series B shares with a par value of $0.001
per share and a liquidation preference of $1,000 per share, plus all accrued but
unpaid dividends. The Series B shares are non-voting and bear a dividend rate
of 6% per annum, which dividend may be paid in shares of the Company's common
stock at its option.
The Series B shares issued during May 1998 were issued for proceeds of
$7,400,000 net of finders fees of $600,000 and the issuance of 50,000 common
shares, valued at $262,500. Each of the currently issued Series B shares are
convertible into that number of shares of Common Stock determined by taking the
sum of $1,000, plus any accrued but unpaid dividends through the conversion
date, and dividing it by the lesser of 125% of the average closing price five
trading days prior to issuance of the Series B shares, or 80% of the average
closing price five trading days prior to conversion. New issuances of Series B
shares are similarly convertible into that number of shares of Common Stock
determined by taking the sum of $1,000, plus any accrued but unpaid dividends
through the conversion date, and dividing it by the lesser of 125% of the
average closing price five trading days prior to issuance of the Series B
shares, or 85% of the average closing price five trading days prior to
conversion.
The current Series B shareholders have committed to purchase the remaining
22,000 Series B shares in additional traunches of 4,000 shares with gross
proceeds of $1,000 per share and commissions of 71/2%. The Company filed a
registration statement with the U.S. Securities and Exchange Commission relating
to the common stock underlying the Series B shares. The registration statement
became effective on August 7, 1997. The Company is required to maintain the
effective status of the registration statement for the period the B Series
shares remain outstanding.
The Company issued 13,000 common shares valued at $61,750 as financing fees, and
issued 2,400,000 shares in connection with the acquisition of an interest in the
Beaver River Project described in Note 3.
NOTE 3 - ACQUISITIONS
In March 1998, the Company 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 shares of its common stock. The Company
will retain the right to purchase back 1,900,000 of the 2,400,000 common shares
any time prior toApril 15, 1999 by returning the carried interest, if the
Company determines that the results produced do not warrant the continued
holding of the carried interest. The acquisition has been valued at $7,875,000.
The interest in the Beaver River Project has been classified as oil and gas
properties not subject to amortization in the accompanying condensed
consolidated balance sheet as of June 30, 1998.
The Company acquired 993,333 units of United Gunn Resources, Ltd. (each unit
consisting of one share of common stock and one warrant) through a private
placement subscription agreement for $962,398 during the quarter ended March 31,
1998. United Gunn Resources, Ltd. holds an approximate 12% working interest in
the Beaver River Project. During the 2nd quarter of 1998 the Company acquired an
additional 528,500 shares of equity securities of United Gunn through market
purchases at a cost of $448,894. Through the purchase of equity securities the
Company holds 8.7% of the outstanding United Gunn Shares as of June 30, 1998.
The investment in United Gunn Resources, Ltd. has been accounted for as a
noncurrent investment in securities available-for-sale and is carried at market
value. During the 2nd quarter an unrealized loss in the amount of $454,894 on
securities available for sale, resulted from the decline in the trading value of
the United Gunn Investment and is presented in the financial statements as a
component of other comprehensive loss.
NOTE 4 - OIL AND GAS PROPERTIES
An oil and gas reserve report was prepared for the Company's interests in the
Trebisov oil and gas properties in Slovakia, dated May 1, 1998, which determined
that proved reserves of oil and gas exist. Costs incurred with respect to that
project have been reclassified as oil and gas properties subject to amortization
during the quarter ended March 31, 1998. Amortization will begin when and if
production begins from wells on that property.
During the six months ended June 30, 1998, $2,637,721 of cash was invested in
oil and gas properties, of which $2,337,7211 related to drilling and developing
the Trebisov Project in Slovakia and $300,000 related to the acquisition of
Beaver River Project.
NOTE 5 - CHANGE IN FUNCTIONAL CURRENCY OF FOREIGN SUBSIDIARIES
Effective January 1, 1998, the Company changed the functional currencies of the
subsidiaries operating in Poland and Slovakia from the U.S. dollar to the local
currencies due to those economies ceasing to be considered highly inflationary.
The change had no effect on consolidated financial position at the date of the
change. The effect of changes in exchange rates during the six months ended
June 30, 1998, and in the future with respect to those subsidiaries has been and
will be recognized as a separate component of comprehensive loss whereas those
changes were previously recognized in the results of operations. The effect of
the change in functional currency of foreign subsidiaries was not material.
Where the functional currencies of foreign subsidiaries are considered to be the
U.S. dollar, financial statements are translated into US dollars using
historical exchange rates and net foreign exchange gains and losses have been
reflected in the results of operations.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the six months ended June 30, 1998, notes payable to related parties were
reduced $1,342,166 by cash payments. In addition, the Company is currently
negotiating repayment terms (which may be cash, stock or combination thereof).
Of $1,100,000 which was paid to a related party lender in error. The payment has
been accounted for as a receivable from the related party at June 30, 1998.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company's subsidiary, GlobeGas BV, has applied for a reduction in an income
tax liability of $738,450 in the Netherlands. The tax arose from the sale of
equipment at a profit by the former owner of GlobeGas to the Company's Poland
subsidiary. The Company's position is that the gain on the sale should not have
been taxable to GlobeGas. The liability will continue to be reflected in the
Company's financial statements until the proposed reduction is accepted by the
Netherlands' tax authorities.
A bankruptcy trustee appointed for certain former shareholders of GlobeGas has
asserted a claim to the proceeds that the Company has and may receive from the
sale of assets to Texaco. 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 Methane
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 is vigorously defending against the claim. The Company
believes that the claim is totally without merit based on the fact that a
condition of a prior settlement with the principal creditor of the estate bars
any such claim, that the court has no jurisdiction over Pol-Tex Methane or its
interests held in Poland, and that the Company paid substantial consideration
for GlobeGas.
During 1997, a shareholder asserted a claim against the Company based upon an
alleged breach of the settlement agreement between the shareholder and the
Company as a result of the Company's failure to file and obtain the
effectiveness of a registration statement for the resale by the shareholder of
100,000 shares delivered to the shareholder in connection with the settlement.
In addition, the shareholder has informed the Company and the court that it
would be entering a claim for failure to register the resale of the shares
subject to its option to purchase up to 2,000,000 shares of the Company's common
stock. The Company had denied any liability and intends to vigorously defend the
claims. The Company has filed a counterclaim against the shareholder for breach
of contract concerning its joint activities with the bankruptcy trustee
appointed for certain former shareholders of GlobeGas.
The holders of certain registration rights have requested the Company provide it
with information concerning the delay in filing a required registration
statement. While the shareholders have not asserted a specific legal claim
against the Company to date, it may elect to do so if the Company is unable to
resolve this matter.
On January 28, 1998, the Company entered into an agreement with a public
relations firm in Europe. The firm agreed to provide for dissemination of
information regarding the Company in Germany and other European countries for a
period of one year. The Company is obligated to pay the firm $9,315 per month
and granted the firm an option to purchase up to 100,000 restricted shares of
common stock at $6.50 per share through January 28, 2000.
Eurogas has engaged technical and business consultants for its various projects
under terms which will require minimum payments of $1,632,000 and $1,200,000
during the years ending December 31, 1998 and 1999, respectively.
During March of 1998, the Company was notified there may be certain title
problems related to an area of mutual interest to be explored and developed by
the Slovakian joint venture. The problem area is outside of the Trebisov area
where the Company has drilled six wells and which is unaffected by the claim.
The disputed area is located in the southern portion of the property covered by
the designations contained in the Slovakian joint venture agreements and is
subject to a competing claim of ownership by a private Slovakian company. To the
extent the Slovakian joint venture may not have exploration rights as previously
contemplated, the Company's expansion beyond the Trebisov area may be limited.
During the 2nd quarter the Company entered into an agreement to acquire a
controlling interest in the disputed area which is located to the south of
Trebisov. The terms of the letter of intent provide for the acquisition of the
competing interest in exchange for 2,500,000 shares of restricted common stock
and two year warrants providing for the purchase of 2,500,000 shares for $5.00
per share. The division of the working interest for this territory will then be
67 1/2% for the Company (rather than the 50% split which governs the Trebisov
area) provided that the Company carries the cost of drilling the first two wells
in the disputed area. The Company has notified the former shareholders of Danube
of a claim against them by reason of this recent problem. The cost of the
acquisition of the property will be based on the fair value ofthe common stock
and warrants on the date the transaction is completed less any amounts recovered
or recoverable from the former shareholders of Danube.
The Company believes the owners of Danube knew or should have known about the
problem prior to the acquisition of Danube and made no disclosure concerning the
problem. The Company has made a claim against the former Danube shareholders for
indemnity to the extent the Company suffers any damage by reason of the
potential title claim. As the matter is in its initial stages, the Company
cannot predict whether impairment of the Slovakian mineral interests will be
warranted, or if impaired, whether the Company will be able to recover from the
former Danube shareholders.
The Company has determined that it has an obligation to a lender in connection
with loans made principally to a subsidiary from 1995 through 1997. Management
is in the process of negotiating a final agreement with the lender to settle and
determine all amounts owing, but no agreement has yet been reached. Management
has estimated that the obligation will not exceed $1 million, which amount has
been included in accrued liabilities. Because the amount of the actual
obligation has not been finally established with the lender, it could ultimately
be determined to be in excess of the amount accrued.
In March 1998, the Company acquired a controlling interest in RimaMuran S.r.o.
whose principal asset is a minority interest in a talc deposit in eastern
Slovakia. RimaMuran has the obligation to fund 43% of the projected $12,000,000
of capital costs over the next two and one-half years. RimaMuran does not have
the assets necessary to meet this obligation, and it is anticipated that the
necessary funding will need to be provided by the Company.
NOTE 8 - SUBSEQUENT EVENTS
During July and August 1998, holders of Series B shares converted1000 Series B
shares into 481,805 common shares at a weighted-average price of $3.36 per
share.
During July 1998, the Company entered into agreements which grant the right to
explore prospects within the Ukraine with two Ukrainian companies. The
agreements require the Company to fund the exploration using the licenses of the
joint venture partners for a net 70% interest in the profits until costs are
recovered, then a 50% profits interest in the projects.
During July 1998, the Company acquired directors and officers liability
insurance for a term of one year with a commitment of $67,500.
The Company has very recently entered into a joint venture with RWE-DEA
Aktiengesellschaft for Mineraloel and Chemie AG ("RWE-DEA") that gives RWE-DEA
the right to select the Ukrainian properties that RWE-DEA will be equal owners,
although RWE-DEA will maintain administrative control and will be the operator
of any proposed activities.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
EuroGas, Inc. (the "Company"), is primarily engaged in the acquisition of
rights to explore for and exploit natural gas, coal bed methane gas, and other
hydrocarbons. The Company has acquired interests in several large concessions
and is in various stages of identifying industry partners, farming out
exploration rights, undertaking exploration drilling, and seeking to develop
production. One of the Company's early projects was a coal bed methane gas
concession in Poland that was sold, with a retained interest, to a subsidiary of
Texaco, Inc. ("Texaco"). In connection with this transaction, the Company gave
Texaco a right of first refusal to acquire a controlling interest in two other
coal bed methane concessions the Company holds in Poland. The Company has
subsequently been granted another concession in Poland and has entered into an
agreement with Polish Oil and Gas Company ("POGC") to jointly explore 1.9
million acres in which POGC holds, or has the right to acquire, interests. The
Company has also recently entered into an agreement with Zahidukrgeologia, an
Ukrainian state geological enterprise, and a joint venture agreement with
Makyivs'ke Girs'ke Tovarystvo ("MGT"), both to expand the Company's potential
exploration into Ukraine.
The Company also holds an interest in a potential natural gas field located
in Slovakia (the "Trebisov Area"). It is a joint venture partner there with
NAFTA Gbely a.s. ("NAFTA"), an energy concern that was formerly part of the
national oil and gas company. The Company has drilled five wells on this
location and is currently drilling a sixth. On completion of all six wells, the
installation of a production gathering system, and the construction of a
pipeline to an existing transmission facility, the Company anticipates
commencing natural gas production from this area. Recently, the Company entered
into an agreement to acquire an interest in a concession located close to the
Trebisov Area.
The Company recently acquired EuroGas Jakutien Exploration GmbH ("EJ"),
formerly known as OMV (Jakutien) Exploration GmbH, from OMV Group ("OMV"). EJ
holds a 50% interest in a joint venture established to explore for oil and gas
in the Sakha Republic in northeastern Siberia. The Company also holds an
interest in an oil and gas project in Canada and, in March 1998, purchased an
interest in a talc deposit located in Slovakia. During 1997, the Company
terminated an earlier interest it held in the Czech Republic.
The Company is in the early stages with respect to its exploration
interests and has not yet established production or a source of revenues. The
Company has been dependent to date on equity financing to meet its funding needs
and anticipates that it will continue to be so for the foreseeable future.
RECENT DEVELOPMENTS
SLOVAKIAN PROJECT
The Company has drilled six wells on its Slovakian Concession. In
consultation with its technical consultant, Schlumberger, the joint venture has
decided to complete all the wells drilled, construct a processing plant, and tie
production to a nearby gas pipeline by the end of the year. The Company
recently engaged Ryder Scott Company, a petroleum engineering firm, to prepare a
reserve analysis on the Trebisov reservoir. The reserve report concluded the
that the Company had total proved reserves of 94,880 barrels of oil condensate
and 5,487 million cubic feet of natural gas on its Slovakian Concession. Of
this amount, 15,824 barrels of oil condensate and 868 million cubic feet of
natural gas are undeveloped proven reserves. Based on this report, the proven
reserves have a net present value, discounted at 10%, of approximately $7.3
million.
The joint venture is also completing 3D seismic surveys in the northern
Trebisov area and if the results warrant, will drill an exploration well in that
area. The Company has recently reduced its projected budget for this area as a
result of perceived cost savings and a revised development plan and currently
expects to spend approximately $5 million during the remainder of the year for
its share of the costs in Slovakia. These expenditures should permit the
Company to meet all its contractual commitments in this area.
During March of 1998, the Company was informed by NAFTA that a third-party
held rights to exploit a portion of the areas of mutual interest proposed to be
explored and developed by the Slovakian joint venture outside of the Trebisov
area. The Company recently entered into an agreement to acquire a controlling
interest in the disputed area. The terms of the Letter of Intent provide for
the acquisition of the competing interests in exchange for 2,500,000 shares of
restricted common stock and two year warrants providing for the purchase of
2,500,000 shares for $5.00 per share. The division of the working interest for
this territory will now be 67.5% for the Company, rather than the 50% split
which governs the Trebisov area, provided that the Company carries the cost of
drilling the first two wells in the previously disputed area. The Company has
notified the former shareholders of Danube of a claim against them by reason of
this recent problem.
ACTIVITIES IN THE UKRAINE
The Company has entered into an Agreement on Joint Investment and
Production Activities with an Ukrainian state-owned company, Zahidukrgeologia,
to explore and, if justified, develop a license area currently held by
Zahidukrgeologia. The agreement also provides for the potential expansion of
its scope to cover an additional nine prospects on the joint agreement of the
parties and the approval of the State Committee of Geology. Zahidukrgeologia
contributed its existing license, existing geological data, and its experience
in facilitating the approval of the proposed projects. The Company will be
responsible for all of the future costs associated with exploration, drilling,
completing, and equipping wells. Any profits of the joint venture will be split
70% to the Company and 30% to Zahidukrgeologia until the Company has received an
amount equal to the amount it has spent and 50% to each of the parties
thereafter.
The Company has also entered into a Statutory Agreement of Association of
Limited Liability Company with Foreign Investments with MGT to form a limited
liability company under the name "Eurodongas." The limited liability company
will be formed for the purpose of exploring for and, if justified, developing
three methane gas prospects. The Company will hold a 50% interest in this
limited liability company with administrative control and will be obligated to
fund the operations. The Company is entitled to receive 70% of the
distributions until its contributions have been returned and then profits will
be split 50% to each participant.
Finally, the Company has an agreement with Ukrnafta, a joint stock company,
to explore and, if justified, develop a concession located in the Ukraine which
is, in part, a continuation of the geological formation underlying the Company's
interests in Poland. This concession is in the very early stages of
exploration.
The Company has very recently entered into a joint venture with RWE-DEA
Aktiengesellschaft for Mineraloel and Chemie AG ("RWE-DEA") that gives RWE-DEA
the right to select the Ukrainian properties that the joint venture will explore
and, if justified, develop. Under the terms of the joint venture, the Company
and RWE-DEA will be equal owners, although RWE-DEA will maintain administrative
control and will be the operator of any proposed activities.
ACTIVITIES IN CANADA
The Company has acquired an interest in the Beaver River natural gas field
located in northeastern British Columbia. The gas field was originally
developed by Amoco Canada in the 1960s and was one of the largest producing gas
fields in British Columbia. Technical problems led to excess water production
and Amoco shut-in the field in 1978. However, a subsidiary of Canadian
Occidental Petroleum has entered into an agreement and is working on the field
in an attempt to reestablish commercial natural gas production in the project
using up-to-date technology. It will, if warranted, spend up to $13 million
(US) on the project before requiring any participation from the other working
interests. The Company first purchased 993,333 units of United Gunn Resources,
Ltd. (one share of common and one warrant), for approximately $950,000 (US).
Subsequently, the Company acquired an additional 528,500 shares of United Gunn
through open market purchases at a cost of $454,894 and now holds 8.7% of United
Gunn. United Gunn holds an approximately 12% working interest in the project.
The Company then acquired an entity with a direct 16% working interest in the
project in exchange for $300,000 and the issuance of 2,400,000 shares of
restricted common stock. The Company retains the right to purchase back
1,900,000 of the 2,400,000 shares of restricted common stock, for return of the
interest, any time prior to April 15, 1999 if the Company determines that the
results produced do not warrant the continued holding of the 16% interest.
RECENT FINANCING
The Company recently entered into an agreement to sell all of a newly
authorized 30,000 shares of 1998 Series B Convertible Preferred Stock for $1,000
per share or $30,000,000 (US). In connection with the sale, investors have
initially purchased 8,000 Preferred shares for gross proceeds of $8 million and
net proceeds of $7,137,500 after payment of commissions and expenses. The
Company may also require the investors to purchase 4,000 shares of Preferred
Stock ($4 million) every thirty (30) days as the Company has now completed an
effective Registration Statement covering the resale of common shares issuable
upon conversion of the Preferred shares August 7, 1998. Pursuant to the
agreement, the Company expects to receive net proceeds of approximately $20
million over the next six months.
The shares have a par value of $0.001 per share and a liquidation
preference of $1,000 per share, plus all accrued but unpaid dividends. The
shares of 1998 Series B Convertible Preferred Stock bear a dividend of 6% per
annum, pro rated to the date of conversion. The Company has the option to pay
such dividend in cash or by delivery of shares of Common Stock at the time of
conversion. The Company is prohibited from paying dividends or making other
distributions on any stock ranking, as to dividends or liquidation, junior to
the 1998 Series B Convertible Preferred Stock.
Each share of 1998 Series B Convertible Preferred Stock currently
outstanding is convertible into that number of shares of Common Stock determined
by taking the sum of $1,000 plus, at the election of the Company to pay
dividends by the issuance of Common Stock, the amount of any accrued but unpaid
dividends through the conversion date and dividing it by the lesser of (i) 125%
of the average closing bid price of the Common Stock, as reported by Bloomberg,
for the five trading days preceding the issuance of the shares of 1998 Series B
Preferred Stock then being converted; or (ii) 80% of the average closing bid
price, as reported by Bloomberg, for the five trading days preceding the
conversion date. After the initial 8,000 shares are converted, the remaining
22,000 shares of 1998 Series B Convertible Preferred Stock shall, if and when
issued and converted, be converted into that number of shares of Common Stock
determined by taking the sum of $1,000 plus any accrued but unpaid dividends to
be paid in Common Stock and dividing it by the lesser of (i) 125% of the average
closing bid price of the Common Stock, as reported by Bloomberg, for the five
trading days preceding the issuance of each respective block of 1998 Series B
Convertible Preferred Stock; or (ii) 85% of the average closing bid price of the
Common Stock, as reported by Bloomberg, for the five trading days preceding the
conversion date.
The 1998 Series B Convertible Preferred Stock does not have voting rights,
except to the extent that the consent of the holders is specifically required by
the governing provisions of the corporate law of the state of Utah as now
existing or as they may hereafter be amended.
To date, investors have converted 1,000 Preferred Shares into 481,805
common shares at a weighted average price of $3.36 per share.
FINANCIAL POSITION
The Company had an accumulated deficit of $36,563,247 at June 30, 1998,
most of which has been funded out of proceeds received from the issuance of
stock or debt instruments (substantial portions of which were issued to related
parties), loan proceeds, and incurring payables. The Company's financing
activities provided net cash of approximately $31 million, $8.2 million, and
$2.9 million during the years ended 1997, 1996, and 1995, respectively, and used
net cash of approximately $3.9 million for the six months ended June 30, 1998,
for the repayment of long-term debt. During this same period, operating
activities used net cash of $3.2 million, $4.0 million, and $2.4 million for the
years ended December 31, 1997, 1996, and 1995, respectively, and $5.5 million
for the six months ended June 30, 1998. The Company has also used cash to
acquire mineral interests, property and equipment, either directly or indirectly
through the acquisition of subsidiaries, with $11.7 million, $3.7 million, and
$1.3 million used in investing activities for the years ended December 31, 1997,
1996, and 1995, respectively, and $2.6 million for the six months ended June 30,
1998.
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 not 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. The Company periodically evaluates its 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.
RESULTS OF OPERATIONS
The Company has not received any revenues since inception, except for the
$500,000 received from Texaco during the quarter ended September 30, 1997. The
Company does not currently have a source of ongoing revenues.
The Company had a net loss applicable to common shares for the three months
ended June 30, 1998 and 1997, of $2,552,102 and $2,454,037, respectively. The
Company had a net loss applicable to the six months ended June 30, 1998 and 1997
of $4,351,193 and $3,736,662 respectively.
Due to changes in exchange rates between the U.S. dollar and currencies in
the Eastern European countries in which the Company operates, the Company is
subject to fluctuations in currency exchange rates that can result in the
recognition of significant gains or losses during any period. An exchange loss
in the amount of $47,247 for the three months ended June 30, 1998 is offset by a
net exchange gain of $10,414 for the six months ended June 30, 1998. A loss of
$27,078 related to this currency conversion from the translation and
consolidation of foreign subsidiaries' financial statements was recognized in
the three months ended June 30, 1998 and $157,919 for the six months ended June
30, 1998 . The Company does not currently employ any hedging techniques to
protect against the risk of currency fluctuations.
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 would normally be charged to the
proved property base, if any. If there is not a proved property base, the
impairment is charged to operations. The impact of such reassessment and
resulting impairment charge could be significant during any particular period.
As a result, the results of operations for any particular period may not be
indicative of the results that could be expected for the remainder of the year.
As of June 30, 1998, the Company reported approximately $33,000,000 in oil
and gas properties. 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 or 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 debt and
equity financing to provide the funds required for acquisitions and operating
activities. The completion of the recent financing by the Company has greatly
strengthened its capital and liquidity position.
During the six months ending June 30, 1998 and 1997, operations required
cash of approximately $4,091,728 and $463,194 respectively. Cash used in
operations during the first six months of 1998 were used primarily to fund the
Company's operational loss of $4,264,259.
Investing activities used net cash of approximately $5,149,013 for the six
months ended June 30, 1998, the largest component of which was the purchase of
mineral interests, property and equipment of approximately $2,630,000.
Approximately $1,400,000 was used to purchase securities.
Of the $7.4 million provided by financing activities, approximately $3.8
million was used for principal payments on notes.
Net increase and decrease in cash or cash equivalents for the six months
ended June 30, 1998 was approximately $6 million.
On June 30, 1998, the Company had total current assets of $12,720,032 and
total current liabilities of approximately $6.8 million resulting in a working
capital of approximately $5.9 million or a working capital ratio of 1.8:1.
As noted above, the Company has relied principally on financing activities
to meet its cash requirements. While the Company currently has sufficient cash
to meet its short-term needs particularly with the recent financing, it may be
required to obtain additional cash either from financing activities or
operations to meet its longer term needs. 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 held 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.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The holder of certain registration rights, Finance Credit & Development
Corporation, Ltd., has requested that the Company provide it with information
concerning the delay in filing a required registration statement. While Finance
Credit & Development Corporation, Ltd., has not asserted a specific legal claim
against the Company to date, it may elect to do so if the Company is unable to
resolve this matter with it.
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
- ------ ------- -----------------
1 (23) Consent of Ryder Scott Company, Petroleum Engineers
2 (27) Financial Data Schedule
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
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 12, 1998 By /S/ Hank Blankenstein
Hank Blankenstein, Vice-President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,157,986
<SECURITIES> 953,413
<RECEIVABLES> 444,355
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,720,032
<PP&E> 38,947,153
<DEPRECIATION> (799,668)
<TOTAL-ASSETS> 47,144,362
<CURRENT-LIABILITIES> 6,800,000
<BONDS> 796,584
<COMMON> 64,747
0
2,400
<OTHER-SE> 39,780,171
<TOTAL-LIABILITY-AND-EQUITY> 47,144,362
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,264,259
<OTHER-EXPENSES> (303,548)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322,839
<INCOME-PRETAX> (4,283,550)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,351,193)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
600 SEVENTEENTH STREET
SUITE 900N
DENVER, COLORADO 80202
TELEPHONE (303) 623-9147
FAX: (303) 623-4258
CONSENT OF RYDER SCOTT COMPANY
We consent to the use of our report dated April 20, 1998, respecting
EuroGas, Inc.'s (the "Company"), properties and the discussion of such report as
contained in the Company's quarterly report of Form 10-Q for the quarter ended
June 30, 1998.
Very truly yours,
/s/ Ryder Scott Company
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Denver, Colorado
August 11, 1998
