___________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH
31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________ TO _______________.
EUROGAS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
UTAH 33-1381-D 87-0427676
------------ --------------------- ----------------
(State or other (Commission File No.) (IRS Employer
or other Identification No.)
jurisdiction of
incorporation)
942 EAST 7145 SOUTH, SUITE 101A
MIDVALE, UTAH 84047
---------------------------------
(Address of principal executive including zip code)
Registrant's telephone number, including area code: (801) 255-0862
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable date.
Common Stock, $0.001 par value 79,402,925
------------------------------- --------------------------------
(Title of Class) (Number of Shares Outstanding at
March 31, 1999)
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets as of December 31, 1998
and March 31, 1999
Statements of Operations for the three months
ended March 31, 1998 and 1999
Statements of Cash Flows for the three months
ended March 31, 1998 and 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Events
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . $ 3,012,239 $ 7,489,510
Investment in securities available-for-sale . . . 658,501 1,088,488
Trade accounts receivable . . . . . . . . . . . . 1,392,807 1,107,508
Value added tax receivable. . . . . . . . . . . . 431,235 431,235
Receivable from joint venture partners. . . . . . 2,293,048 2,293,048
Receivable from related party . . . . . . . . . . 150,000 200,000
Other receivables . . . . . . . . . . . . . . . . 765,038 788,291
Other current assets. . . . . . . . . . . . . . . 115,444 120,176
----------- -----------
Total Current Assets . . . . . . . . . . . . . . 8,818,312 13,518,256
----------- -----------
PROPERTY AND EQUIPMENT - FULL COST ACCOUNTING
Oil and gas properties subject to amortization. . 17,475,336 17,034,461
Oil and gas properties not subject to
amortization . . . . . . . . . . . . . . . . . . 33,089,611 33,817,752
Other mineral interest property . . . . . . . . . 167,814 167,814
Other property and equipment. . . . . . . . . . . 995,632 580,868
----------- -----------
Total Property and Equipment . . . . . . . . . . 51,728,393 51,600,895
Less: Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . (610,655) (332,579)
----------- -----------
Net Property and Equipment . . . . . . . . . . . 51,117,738 51,268,316
----------- -----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 547,815 547,815
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $60,483,865 $65,334,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . $ 4,130,502 $ 4,060,125
Accrued liabilities . . . . . . . . . . . . . . . 2,634,863 2,618,014
Accrued income taxes . . . . . . . . . . . . . . 829,688 870,836
Notes payable - current portion . . . . . . . . . 1,370,917 4,226,739
Notes payable to related parties -
current portion. . . . . . . . . . . . . . . . . 1,185,260 1,182,124
----------- -----------
Total Current Liabilities. . . . . . . . . . . . 10,151,230 12,957,838
----------- -----------
LONG-TERM NOTES PAYABLE. . . . . . . . . . . . . . 1,788,294 1,788,294
----------- -----------
MINORITY INTEREST. . . . . . . . . . . . . . . . . 3,010,647 2,865,376
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 3,661,968
shares authorized; issued and outstanding:
March 31, 1999 - 2,392,558 shares, December
31, 1998 - 2,393,728 shares; 1999 liquidation
preference: $829,197 . . . . . . . . . . . . . . 2,393 2,394
Common stock, $.001 par value; 325,000,000
shares authorized; issued and outstanding:
March 31, 1999 - 79,110,889 shares,
December 31, 1998 - 76,254,630 shares. . . . . . 79,111 76,255
Additional paid-in capital. . . . . . . . . . . . 93,850,140 92,013,961
Accumulated deficit . . . . . . . . . . . . . . . (45,946,135) (43,532,787)
Accumulated other comprehensive loss. . . . . . . (2,451,815) (836,944)
----------- -----------
Total Stockholders' Equity . . . . . . . . . . . 45,533,694 47,722,879
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . $60,483,865 $65,334,387
=========== ===========
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
-------------------------
1999 1998
----------- -----------
REVENUE AND INCOME
Oil and gas sales . . . . . . . . . . . . . . . . $ 740,894 $ -
Interest income . . . . . . . . . . . . . . . . . 69,597 170,556
----------- -----------
Total Revenue and Income . . . . . . . . . . . . 810,491 170,556
----------- -----------
COSTS AND EXPENSES
Oil and gas production. . . . . . . . . . . . . . 172,144 -
Depreciation and amortization . . . . . . . . . . 295,717 2,923
General and administrative. . . . . . . . . . . . 2,481,064 1,730,638
Interest. . . . . . . . . . . . . . . . . . . . . 123,264 135,964
Foreign exchange net (gains) losses . . . . . . . (65,628) 57,661
Realized loss on sale of securities . . . . . . . 82,350 -
----------- -----------
Total Costs and Expenses . . . . . . . . . . . . 3,181,622 1,927,186
----------- -----------
LOSS BEFORE MINORITY INTEREST. . . . . . . . . . . (2,278,420) (1,756,630)
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY. . . . . . . . . . . . . . . . . . . . (92,711) -
----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . (2,371,131) (1,756,630)
PREFERRED DIVIDENDS . . . . . . . . . . . . . . . (42,217) (42,462)
----------- -----------
LOSS APPLICABLE TO COMMON SHARES . . . . . . . . . $(2,413,348) $(1,799,092)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE. . . . . . $ (0.03) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATION . . . . . . 78,920,472 63,483,934
=========== ===========
The accompanying notes are an integral part of these financial statements.
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
-------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . $(2,413,348) $ (1,756,629)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization . . . . . . . . 295,717 4,770
Minority interest in loss of subsidiary . . . 92,711 -
Loss on sale of securities available-for-sale 37,694 -
Exchange gain . . . . . . . . . . . . . . . . (65,628) -
Changes in assets and liabilities, net of
assets acquired:
Trade receivables . . . . . . . . . . . . . (111,472) 18,589
Other receivables . . . . . . . . . . . . . (171,615) -
Accounts payable. . . . . . . . . . . . . . 50,203 (836,351)
Accrued liabilities . . . . . . . . . . . . 12,817 (55,106)
Accrued income taxes. . . . . . . . . . . . 1,340 14,856
Other . . . . . . . . . . . . . . . . . . . (5,961) 62,812
----------- ------------
Net Cash Used In Operating Activities . . . . (2,277,542) (2,547,059)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mineral interests, property
and equipment. . . . . . . . . . . . . . . . . (1,031,308) (1,105,137)
Increase in deposits and prepayments. . . . . . 56,852 (220,000)
Proceeds from payment of related party
receivable . . . . . . . . . . . . . . . . . . 200,000 -
Issuance of receivable to related party . . . . (150,000) -
Proceeds from sale of securities available-
for-sale . . . . . . . . . . . . . . . . . . . 60,291 -
Investment in securities available-for-sale . . (56,434) (962,398)
----------- ------------
Net Cash Used In Investing Activities . . . . (920,599) (2,287,535)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . (2,932,004) (1,442,656)
Proceeds from issuance of preferred stock,
net of offering costs. . . . . . . . . . . . . 1,850,000 -
Proceeds from issuance of common stock
by subsidiary. . . . . . . . . . . . . . . . . - (1,442,656)
----------- ------------
Net Cash Used In Financing Activities. . . . . (1,082,004) (1,442,656)
----------- ------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents. . . . . . . . . . . . . . (197,126) (160,562)
----------- ------------
Net Decrease In Cash and Cash Equivalents. . . . (4,477,271) (6,437,812)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD. . . 7,489,510 17,247,667
----------- ------------
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . $ 3,012,239 $ 10,809,855
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 50,009 $ 226,429
=========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended December 31, 1999, EuroGas accrued
preferred dividends of $42,216. Preferred shareholders converted
3,170 shares of 1998 Series B Preferred stock together with
$18,049 of accrued preferred dividends into 2,856,259 common
shares at approximately $1.12 per common share.
The accompanying notes are an integral part of these financial
statements .
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
CONDENSED FINANCIAL STATEMENTS - The accompanying unaudited condensed
consolidated financial statements include the accounts of EuroGas,
Inc. and its subsidiaries ("EuroGas"). 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 EuroGas' most recent
annual financial statements included in the Company's report on Form
10-K for the year ended December 31, 1998. In particular, EuroGas'
significant accounting principles were presented as Note 1 to the
Consolidated Financial Statements in that Report. In the opinion of
management, all adjustments necessary for a fair presentation have
been included in the accompanying condensed financial statements and
consist of only normal recurring adjustments. The results of
operations presented in the accompanying condensed financial
statements are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1999.
NOTE 2--NOTES PAYABLE
Current notes payable were reduced during the three months ended
March 31, 1999 by approximately $2,850,000 which primarily consisted
of payments to reduce notes payable to a bank in Canada.
NOTE 3--STOCKHOLDERS' EQUITY
During the three months ended March 31, 1999, the Company issued
2,000 shares of Series B 1998 preferred stock for $2,000,000 less
$150,000 of offering costs. In addition, 3,170 shares of Series B
1998 preferred stock and $18,049 of accrued but unpaid preferred
dividends were converted into 2,856,259 common shares.
At March 31, 1999, the following preferred shares were outstanding:
Series 1995 Preferred shares; 2,391,968 shares outstanding; $0.05
annual dividend rate per share, $119,598 annually; $239,197
liquidation preference
1997 Series A Preferred shares; 260 shares outstanding; $60.00
annual dividend rate per share, $15,600 annually; $260,000
liquidation preference
1998 Series B Convertible Preferred Shares; 330 shares
outstanding; $60.00 annual dividend rate per share, $19,800
annually; $330,000 liquidation preference; convertible into common
stock at 80% of the five-day average trading price of common stock
prior to conversion
NOTE 4--COMPREHENSIVE LOSS
For the Three Months
Ended March 31,
-------------------------
1999 1998
----------- -----------
LOSS APPLICABLE TO COMMON SHARES . . . . . .$(2,413,348) $(1,799,092)
----------- -----------
OTHER COMPREHENSIVE LOSS
Unrealized holding losess on securities
available-for-sale . . . . . . . . . . . (470,786) -
Less: Reclassification adjustment for
losses realized in net loss. . . . . . . 82,350 -
Net change in cumulative foreign currency
translation adjustment . . . . . . . . . (1,226,435) (130,841)
----------- -----------
Total Other Comprehensive Loss. . . . . (1,614,871) (130,841
----------- -----------
COMPREHENSIVE LOSS. . . . . . . . . . . . . $(4,028,219) $(1,929,933)
=========== ===========
Accumulated other comprehensive loss consisted of the following at
March 31, 1999:
Unrealized loss on securities available
-for-sale. . . . . . . . . . . . . $ (767,702)
Cumulative foreign currency
translation adjustment. . . . . . . . (1,684,113)
-----------
ACCUMULATED OTHER COMPREHENSIVE LOSS $(2,451,815)
===========
NOTE 5--COMMITMENTS AND CONTINGENCIES
EuroGas' subsidiary, GlobeGas BV, has applied for a reduction in an
income tax liability of $829,688 in the Netherlands. The tax arose
from the sale of equipment at a profit by the former owner of
GlobeGas to a EuroGas Polish subsidiary. EuroGas' position is that
the gain on the sale should not have been taxable to GlobeGas. The
liability will continue to be reflected in EuroGas' financial
statements until the proposed reduction is accepted by the
Netherlands' taxing authorities.
A bankruptcy trustee appointed for certain former shareholders of
GlobeGas has asserted a claim to the proceeds that EuroGas has
received from the agreement with Texaco and exploitation of the
Pol-Tex Concession. The Trustee's claim is apparently based upon the
theory that EuroGas may have paid inadequate consideration for its
acquisition of GlobeGas (which indirectly controlled the Pol-Tex
Methane concession in Poland) from persons who were acting as
nominees for the former shareholders, or in fact may be operating as
a nominee for the former shareholder, and are, therefore, the true
owners of the proceeds from the development of the Pol-Tex Concession
in Poland. EuroGas is vigorously defending against the claim. EuroGas
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
EuroGas paid substantial consideration for GlobeGas. EuroGas also
believes continued pursuit of the claim might give rise to a separate
cause of action against third parties which EuroGas will pursue if
necessary.
During 1997, a shareholder, who is also the principal creditor in the
above claim, asserted a claim against EuroGas based upon an alleged
breach of the settlement agreement between the shareholder and
EuroGas as a result of EuroGas' 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's parent
company entered a claim for failure to register the resale of the
shares subject to its option to purchase up to 2,000,000 common
shares of EuroGas. EuroGas has denied any liability and intends to
vigorously defend the claims. EuroGas 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.
EuroGas has engaged officers, and technical and business consultants
for its various projects, under terms which will require minimum
payments of approximately $1,600,000 during the year ending December
31, 1999.
EuroGas has notified the former shareholders of Danube of a
potential claim against them relating to title problems for property
interests in Slovakia lost to and reacquired from Maseva Gas Spol.
s.r.o. EuroGas believes the former shareholders of Danube knew, or
should have known, about the problems prior to the acquisition of
Danube and made no disclosure concerning the problems. EuroGas has
made a claim against the former Danube shareholders for indemnity to
the extent EuroGas suffers any damage by reason of the potential
title claim. It is uncertain whether EuroGas will be able to recover
from the former Danube shareholders.
As a result of the title problems with the Nafta/Danube property, a
dispute has arisen with the joint venture partner, Nafta a.s.
("Nafta"). EuroGas has asserted a claim for misrepresentation of the
property asset at the time of its acquisition and has made demand on
Nafta in an amount equal to EuroGas' investment in the property.
Efforts to bring the property to production were suspended pending
resolution of the claims. EuroGas has received indications that the
Slovak government, Nafta's largest shareholder, may seek to resolve
the dispute, although resolution is not assured.
An assertion has been made against EuroGas by holders of registration
rights that EuroGas failed to file a registration statement for
certain shares and warrants held. EuroGas has not completed
settlement negotiations; no amount has been estimated or provided
with respect to this claim.
In connection with a 53% interest in RimaMuran s.r.o. whose principal
asset is a minority interest in a talc deposit in eastern Slovakia,
EuroGas, through RimaMuran, will have an obligation to fund 33% to
39% of the projected $12,000,000 capital cost requirements. RimaMuran
does not have the assets necessary to meet this obligation and
anticipates that the necessary funding will need to be provided by
EuroGas.
During February 1999, EuroGas formed a consortium with a large United
Kingdom power producer and with a German Utility company to develop a
power co-generation project in Zielona Gora, Western Poland. EuroGas
anticipates the total investment required to develop the project will
approximate $150 million. EuroGas will hold a 12.5% share interest
in the joint venture created by the consortium and will be required
to pay approximately 7.5%, or $11,250,000 of the estimated project
cost. EuroGas does not presently have the assets necessary to meet
this obligation.
EuroGas has entered into agreements which grant rights to jointly
explore prospects within certain areas of the Ukraine. The agreements
commit EuroGas to form joint ventures and joint companies and use the
partners' concession agreements in exploiting the potential oil and
gas, as well as coal-bed methane gas reserves. The potential reserves
in the Ukraine have not been independently verified.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is engaged primarily in the acquisition of rights to explore
for and exploit oil, natural gas, coal bed methane gas and mineral mining.
The Company has also extended its business into co-generation (power and
heat) projects. The Company has acquired interests in a number of large
exploration concessions, for oil, natural gas and coal bed methane gas, and
is in various stages of identifying industry partners, farming out
exploration rights, undertaking exploration drilling, and seeking to
develop production. The Company currently has several projects in various
stages of development, including a coal bed methane gas project in Poland,
a natural gas project and several additional undeveloped concession areas
in Slovakia, a natural gas project in the Sakha Republic (a member of the
Russian Federation located in eastern Siberia) and an interest in a talc
deposit in Slovakia. The Company has at least seven joint venture projects
in the Ukraine to explore for and exploit oil, natural gas and coal bed
methane gas with various Ukrainian State and private companies. The Company
has entered into an agreement with a large German integrated oil and natural
gas concern, to undertake the development of projects with various Ukranian
state and private companies. The Company recently created a consortium
with the largest power generation company in Great Britain, and with a
large utility company in Germany, to develop a co-generation power
project in Western Poland.
The Company has also acquired holdings in two oil and natural gas
projects in Canada. One acquisition has given the Company a majority
interest in a full-service oil and gas producing company. The other project
is a joint venture with a major oil and gas company to reclaim one of
Canada's largest natural gas fields.
The Company's principal assets consist of both proven and developed
properties, as well as unproven and undeveloped properties. All costs
incidental to the acquisition, exploration, and development of such
properties are capitalized, including costs of drilling and equipping wells
and directly-related overhead costs, which include the costs of
Company-owned equipment. Since the Company has limited proven reserves and
established production, most of its holdings have not been amortized. In
the event that the Company is ultimately unable to establish production or
sufficient reserves on some of these properties to justify the carrying
costs, the value of the assets will need to be written down and the related
costs charged to operations, resulting in additional losses. 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.
RECENT DEVELOPMENTS
FUNDING ACTIVITIES. During the quarter ended March 31, 1999, the Company
completed a private placement financing with a single investor, whereby
the Company issued 2,000 shares of Series B Convertible Preferred Stock,
resulting in net proceeds to the Company of approximately $1,850,000.
At March 31, 1999, the Company had approximately $3 million in cash and
cash equivalents $(1.3) million in negative working capital.
CAPITAL EXPENDITURES. During the quarter ended March 31, 1999, the Company
increased its investment in a Canadian oil and gas development and production
company. In October, the Company purchased31% of the outstanding shares of
capital stock of Big Horn Resources Ltd., of Calgary, Alberta, Canada ("Big
Horn"). In addition, the Company committed to acquire an additional 20%
of Big Horn at that date. Big Horn is a full-service producer of oil and
natural gas, producing the equivalent of approximately 1,000 barrels of oil
a day, with proven reserves of approximately 1.9 million barrels of
equvalent oil and wih a net present value of approximately $6.4 million,
based on a 10% discount rate. In March 1999, the Company acquired the
additional interest in shares of Big Horn common stock from certain related
third parties, giving the Company an ownership interest in excess of 50% of
the outstanding shares of Big Horn's capital stock. The total cost of the
acquisition of Big Horn by the Company was $7,593,913. Because of the
temporary decline in oil prices, the acquisition price paid by the Company
reflects a premium over the Company's proportionate share of the book value
of Big Horn.
RESULTS OF OPERATIONS
The following table sets forth consolidated income statement data and other
selected operating data for the three months ended March 31, 1999 and 1998,
respectively.
For the Three Months
Ended March 31,
------------------------
1999 1998
----------- -----------
REVENUES
Oil and Gas Sales $ 740,894 $ -
TOTAL REVENUES 740,894 -
OPERATING EXPENSES
Oil and gas production 172,144 -
General and administrative 2,481,064 1,730,638
Depreciation and amortization 295,717 2,923
Impairment of mineral interests
and equipment - -
TOTAL OPERATING EXPENSES 2,948,925 1,733,561
OTHER INCOME (EXPENSE)
Interest Income 69,597 170,556
Interest Expense (123,264) (135,964)
Foreign currency exchange gains
(losses), net 65,628 (57,661)
Realized loss on sale of securities (82,350) -
OTHER EXPENSE, NET (70,389) (23,069)
Minority interest in earnings of subsidiary (92,711) -
Preferred dividends (42,217) (42,462)
NET LOSS APPLICABLE TO COMMON SHARES (2,413,348) (1,799,092)
REVENUES. Prior to 1998, the Company had not generated any revenues
from oil and gas sales. As a result of the Company's acquisition of
the controlling interest in Big Horn, the Company's results of
operations for the three months ended March 31, 1999 reflect oil and
gas sales of $740,984. For the three months ended March 31, 1998,
the Company had no revenues.
OPERATING EXPENSES. Operating expenses include general and
administrative expenses, depreciation and amortization, cost of
mineral interests and equipment and impairment of mineral interests
and equipment. General and administrative expenses were $2,481,064
for the three months ended March 31, 1999, compared to $1,730,638
for the three months ended March 31, 1998, an increase of 44%. The
principal factors that contributed to the increase from 1998 to 1999
were additional offices opened, increased consulting fees and
expenses related to additional financing. Depreciation and
amortization expenses were $295,717 for the three months ended March
31, 1999, compared to $2,923 for the three months ended March 31,
1998. During the three months ended March 31, 1999, there was a
significant increase in properties that were amortized as compared
to the three months ended March 31, 1998. Under the full-cost method by
which the Company accounts for its mineral interests in properties, costs
of unproven properties are assessed periodically and any resulting provision
for impairment would normally be charged to the proven property base.
Because of ceiling limitations to proven properties, if impairment charges
are required, a portion of those charges may be charged to operations.
The impact of such reassessment and resulting impairment charges
could be significant during any particular period. Based primarily upon
oil and gas prices during the period.
INCOME TAXES. Historically, the Company has not been required to
pay income taxes, due to the Company's absence of net profits. For
future years, the Company anticipates that it will be able to
utilize a substantial portion of its accumulated deficit, which was
approximately $46 million as of March 31, 1999, to offset profits,
if and when achieved, resulting in a reduction in income taxes payable.
However, utilization of net operation loss carry overs for tax purposes
are generally limited to income earned within the same country and entity.
NET LOSS. The Company incurred net losses applicable to common shares
of approximately $2,413,348 and $1,799,092 for the three months ended
March 31, 1999 and 1998, respectively. These losses were due in large
part to the absence of revenues, combined with continued expansion of
the Company's activities, primarily as a result of acquisitions and growth
of the Company's administrative expenses, which included additional offices
opened, increased consulting and legal fees and expenses related to
additional financing. The Company did generate a limited amount of
revenue from one of its projects during the quarter ended March 31,
1999.
Due to the fluctuating economies of 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. The
Company recognized $65,628, and $(57,661) in gains (losses) as a
result of currency transactions in the three months ended March 31,
1999 and 1998, respectively. The Company had a cumulative foreign
currency translation adjustment of $(1,684,113) at March 31, 1999. The
Company does not currently employ any hedging techniques to protect
against the risk of currency fluctuations.
COMPREHENSIVE LOSS. The Company had a cumulative foreign currency
translation adjustment of $(1,684,113) at March 31, 1999. Unrealized loss
on investment in securities available-for-sale was $(767,702) at March
31, 1999. The unrealized loss relates to a decline in market value over
cost of the Company's investment in United Gunn Ltd. Changes in these
items along with the loss applicable to common shares caused comprehensive
loss for the three months ended March 31, 1999 to be $(4,028,219) compared
to $(1,929,923) for the same period in 1998.
CAPITAL AND LIQUIDITY
The Company had an accumulated deficit of $45,946,135 at March 31,
1999, substantially all of which has been funded out of proceeds
received from the issuance of stock and the incurrence of
payables. At March 31, 1999, the Company had total current assets
of approximately $9 million and total current liabilities of
approximately $10 million, resulting in negative working capital
of approximately $1 million. As of March 31, 1999, the Company's
balance sheet reflected approximately $33 million in mineral
interests in unproven 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 establish production or resources on these
properties, is unable to obtain any necessary future licenses or
extensions, or is unable to meet its financial commitments with
respect to these properties, it could be forced to write off the
carrying value of the applicable property.
Throughout its existence, the Company has relied on cash from
financing activities to provide the funds required for
acquisitions and operating activities. However, the Company's financing
activities used net cash of approximately $1.1 million and $1.4 million
during the three months ended March 31, 1999 and 1998, respectively.
Beginning cash balances and proceeds from issuance of preferred stock
have been used principally to fund net losses of approximately
$2,413,348. During the three months ended March 31, 1999 and
1998, the Company's operating activities used net cash of
approximately $2.3 million and $2.5 million, respectively. A
portion of the Company's cash was used in acquiring mineral
interests, property and equipment, either directly or indirectly
through subsidiaries, with approximately $0.9 million and $2.3 million
used in investing activities for the three months ended March 31, 1999
and 1998, respectively.
While the Company had cash of approximately $3 million at March
31, 1999, it has substantial financial commitments with respect to
exploration and drilling obligations related to the mineral
properties in which it has an interest. Many of the Company's
projects are long-term and will require the expenditure of
substantial amounts over a number of years before the
establishment, if ever, of production and ongoing revenues. As
noted above, the Company has relied principally on cash provided
from equity and debt transactions to meet its cash requirements.
While the Company currently has sufficient cash to meet its
short-term needs, it will require additional cash, either from
financing transactions or operating activities, to meet its
longer-term needs. There can be no assurance that the Company
will be able to obtain additional financing, either in the form of
debt or equity, or that, if such financing is obtained, it will be
available to the Company on reasonable terms. If the Company is
able to obtain additional financing or structure strategic
relationships in order to fund existing or future projects,
existing shareholders will likely continue to experience further
dilution of their percentage ownership of the Company.
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 unproven properties
will be charged to operations, leading to significant additional
losses.
INFLATION
The amounts presented in the Company's consolidated financial
statements do not provide for the effect of inflation on the
Company's operations or its financial position. Amounts shown for
property, plant and equipment and for costs and expenses reflect
historical costs and do not necessarily represent replacement
costs or charges to operations based on replacement costs. The
Company's operations, together with other sources, are intended to
provide funds to replace property, plant and equipment as
necessary. Net loss would be higher than reported if the effects
of inflation were reflected either by charging operations with
amounts that represent replacement costs or by using other
inflation adjustments. Due to inflationary problems in Eastern
Europe that is seen in currency exchange losses, the Company has
seen losses on its assets values in those countries.
YEAR 2000 ISSUES
GENERAL. The Company is actively engaged in assessing and
correcting potential year 2000 ("Y2K") information system
problems. In short, the Y2K problem is a result of information
technology systems being designed to recognize the year portion of
a date as two rather then four digits, which means that years
coded "00" may be recognized as the year 1900, rather than the
year 2000. As a result, certain hardware and software products
may not properly function or may fail beginning in year 2000.
During 1998, the Company initiated an information system
implementation project (the "Project"), which affects nearly every
aspect of the Company's U.S. operations. In an effort to address
compliance issues, the scope of the Project was expanded to ensure
Y2K compliance for newly acquired software and hardware. The
Project has two significant phases that are designed to improve
both operating processes and information systems capabilities.
The first phase of the Project included hardware and software for
the Company's U.S. financial reporting operations. During 1998,
phase one was completed with hardware and software that has been
tested and certified as Y2K compliant. Phase two focuses on the
Company's offshore financial reporting systems and is expected to
be operational in June 1999.
STATE OF READINESS. The Company's information systems consist
principally of it financial system. The Company's financial
system includes general ledger, accounts payable, sales and use
tax calculations, payroll and human resources applications. Phase
one of the Project provided systems that are Y2K compliant for the
general ledger, accounts payable and payroll.
The Company's office support system includes network hardware and
operating systems, desktop and laptop computers and servers. The
Company is in the process of evaluating Y2K compliance for these
systems and has identified potential compliance issues primarily
related to imbedded time clocks. However, since the majority of
the Company's hardware has been replaced or upgraded over the past
two years, critical systems compliance is not expected to be a
major issue.
COSTS TO ADDRESS Y2K ISSUES. As of March 31, 1999, the Company
had spent $50,000 on hardware and $25,000 for software in
connection with the Project.
RISKS OF THE COMPANY'S Y2K ISSUES. The Company anticipates that
the risks related to its information and non-information systems
will be mitigated by current efforts being made in conjunction
with the Project, as well as ongoing assessment and correction
programs. However, the primary Y2K risk to the Company's
operations is service disruption from third-party providers that
supply telephone, electrical, banking, and financial reporting
services. Any disruption of these critical services would hinder
the Company's ability to operate. Therefore, efforts are
currently under way to obtain Y2K compliance certification from
the Company's major service providers. Most of the Company's
third-party joint venture organizations are outside of the U.S.,
particularly in eastern Europe. The Company has very little
control, other than awareness, over these organizations. Concern
about potential problems has been raised, but commitment to
compliance is beyond the Company's control.
CONTINGENCY PLANS. The Company has not yet approved a formal
contingency plan for Y2K issues. However, the Company is
preparing manual processes, to be completed by July 1, 1999, that
could be used in the event of system and service disruption. A
formal contingency plan is expected to be completed and approved
during 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly 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 can be identified by the
use of the words "anticipate," "estimate," "project," "likely,"
"believe," "intend," "expect" or similar words. Forward-looking
statements reflect the current views of management of the Company
and are not intended to be accurate descriptions of the future.
When considering such statements, the reader should bear in mind
the cautionary information set forth in this section and other
cautionary statements throughout this Report and the Company's
Annual Report on Form 10-K and in the Company's other filings with
the Securities and Exchange Commission. All forward-looking
statements are based on management's existing beliefs about
present and future events outside of management's control and on
assumptions that may prove to be incorrect. The discussion of the
future business prospects of the Company is subject to a number of
risks and assumptions, including those identified below. 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 anticipated,
estimated, projected or intended. Among the factors that may
affect the Company's results are the Company's ability to
establish beneficial relationships with industry partners to
provide funding and expertise to the Company's projects, the
Company's efforts to locate commercial deposits of hydrocarbons on
the Company's concessions and licenses, the negotiation of
additional licenses and permits for the exploitation of any
reserves located, the success of the Company's exploratory
activities, the completion of wells drilled by the Company, its
joint venture partners and other parties allied with the Company's
efforts, the economic recoverability of in-place reservoirs of
hydrocarbons, technical problems in completing wells and producing
gas, the Company's marketing efforts, the ability of the Company
to obtain the necessary financing to successfully pursue its
business strategy, operating hazards and uninsured risks, the
intense competition and price volatility associated with the oil
and gas industry and international and domestic economic conditions.
The Company's activities also carry with them certain risks in
addition to the risks normally associated with the exploration and
development of hydrocarbons. Each of the eastern European
countries in which the Company has obtained or is obtaining
concessions (Poland, Slovakia, Yakutia, and Ukraine) are in the
process of developing capitalistic economies. As a result, many of
their laws, regulations, and practices with respect to the
exploration and development of hydrocarbons have not been time
tested or yet adopted. The Company's operations are subject to
significant risks that any change in the government itself,
government personnel, or the development of new policies and
practices may adversely effect the Company's operations and
financial results at some future date. Furthermore, the Company's
concessions and licenses are often subject, either explicitly or
implicitly, to ongoing review by governmental ministries. In the
event that any of the countries elects to change its regulatory
system, it is possible that the government might seek to annul or
amend the governing agreements in a manner unfavorable to the
Company or impose additional taxes or other duties on the
activities of the Company. As a result of the potential for
political risks in these countries, it remains possible that the
governments might seek to nationalize or otherwise cause the
interest of the Company in the various concessions and licenses to
be forfeited. Many of the areas in which the Company's prospects
are located lack the necessary infrastructure for transporting,
delivering, and marketing the products which the Company seeks to
identify and exploit. Consequently, even if the Company is able to
locate hydrocarbons in commercial quantities, it may be required
to invest significant amounts in developing the infrastructure
necessary to carry out its business plan. The Company does not
presently have a source of funding available to meet these costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business in many foreign currencies. As a
result, it is subject to foreign currency exchange rate risk due
to effects that foreign exchange rate movements of those
currencies have on the Company's costs and on the cash flows which
it receives from its foreign operations. The Company believes that
it currently has no other material market risk exposure. To date,
the Company has addressed its foreign currency exchange rate risks
principally by maintaining its liquid assets in U.S. dollars, in
interest-bearing accounts, until payments in foreign currency are
required, but does not reduce this risk by utilizing hedging
activities.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In 1996, KUKUI, Inc. ("KUKUI"), acting separately and on behalf of
the Unsecured Creditors Trust of the Bankruptcy Estate of McKenzie
Methane Corporation (McKenzie Methane Corporation was an affiliate
of the former owner of Pol-Tex), asserted certain claims against
Pol-Tex and GlobeGas in connection with lending activities between
McKenzie Methane Corporation and the management of GlobeGas prior
to its acquisition by the Company. The claim asserted that funds
that were loaned to prior GlobeGas management may have been
invested in GlobeGas and, therefore, McKenzie Methane Corporation
might have had an interest in GlobeGas at the time of the
acquisition of GlobeGas by the Company. These claims were
resolved pursuant to a settlement agreement entered into in
November 1996 (the "KUKUI Settlement Agreement"). Under the terms
of the settlement agreement, the Company issued to the Bishop's
Estate (KUKUI's parent) 100,000 shares of Common Stock and an
option to purchase up to 2,000,000 shares of Common Stock at any
time prior to December 31, 1998. The option exercise price was
$3.50 per share if exercised within 90 days of the execution of
the Company's 1997 agreement with Texaco (the "Texaco Agreement");
$4.50 per share if exercised prior to December 31, 1997; and $6.00
per share if exercised prior to December 31, 1998. The Company
also granted registration rights with respect to the securities.
In March 1997, a trustee over certain of the McKenzie parties and
other related entities asserted a claim to the proceeds that the
Company would receive from the Texaco Agreement and exploitation
of the Pol-Tex Concession in an action entitled: "Harven Michael
McKenzie, debtor; Timothy Stewart McKenzie, debtor; Steven Darryl
McKenzie, debtor (case no. 95-48397-H2-7, Chapter 7; case no.
95-48474-H2-7, Chapter 7; and case no. 95-50153-H2-7, Chapter 7,
respectively) W. Steve Smith, trustee, plaintiff v. McKenzie
Methane Poland Co., Francis Wood McKenzie, EuroGas, Inc.,
GlobeGas, B.V. and Pol-Tex Methane, Sp. zo.o., defendants (Adv.
No. 97-4114 in the United States Bankruptcy Court for the Southern
District of Texas Houston Division)." The trustee's claim alleges
that the Company paid inadequate consideration for its acquisition
of GlobeGas (which indirectly controlled the Pol-Tex Concession)
from persons who were acting as nominees for the McKenzie parties
or in fact may be operating as a nominee for the McKenzie parties
and therefore the creditors of the McKenzie parties are the true
owners of the proceeds received from the development of the
Pol-Tex Concession (KUKUI is also the principal creditor of the
McKenzie parties in these other cases.). The Company plans to
vigorously defend against such claims. The Company believes that
the litigation is without merit based on its belief that the prior
settlement with KUKUI bars any such claim, the trustee over the
McKenzie parties has no jurisdiction to bring such claim against a
Polish corporation (Pol-Tex) and the ownership of Polish mining
rights, that the Company paid substantial consideration for
GlobeGas, and that there is no evidence that the creditors of the
McKenzie parties invested any money in the Pol-Tex Concession.
The Company also believes that continued pursuit of the claim may
give rise to a separate cause of action against third parties that
the Company will pursue if necessary.
On August 21, 1997, KUKUI, Inc. asserted a claim against the
Company in an action entitled "KUKUI, Inc. v. EuroGas, Inc., Case
No. H-972864 United States District for the Southern District of
Texas, Houston Division." KUKUI's claim is based upon an alleged
breach of the KUKUI Settlement Agreement as a result of the
Company's failure to file and obtain the effectiveness of a
registration statement for the resale by KUKUI of 100,000 shares
of Common Stock delivered to KUKUI in connection with the
settlement. In addition, Bishop's Estate, KUKUI's parent, has
entered a claim for failure to register the resale of shares of
Common Stock subject to its option to purchase up to 2,000,000
shares of Common Stock. The Company has denied any liability,
intends to vigorously defend the claim and recently filed a
counterclaim against KUKUI and Bishop's Estate for breach of
contract, in particular concerning its joint activities with the
Trustee over the McKenzie parties.
For the 1992 year, the Kingdom of the Netherlands assessed a tax
against the Company's operating subsidiary, GlobeGas in the amount
of $829,688, adjust for current exchange rates, even though it had
significant operating losses. The Company has appealed the assessment
and has proposed a settlement which would result in a reduction in
the tax to $42,000. Pending final resolution, a liability for the
total amount assessed will continue to be reflected in the Company's
financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On March 4, 1999, the Company completed a private placement of
preferred stock to an existing shareholder of the Company. The
Company sold 2,000 shares of Series B Convertible Preferred Stock,
resulting in net proceeds to the Company of approximately
$1,850,000. The private placement of the Series B Convertible
Preferred Stock was effected in reliance upon the exemption for
sales of securities not involving a public offering, as set forth
in Section 4(2) of the Securities Act of 1933, as amended, based
upon the Company's pre-existing relationship with the purchaser
and representations and warranties provided by the purchaser.
ITEM 5. OTHER EVENTS.
On April 20, 1999 Mr. Karl Arleth was named President and CEO of
EuroGas, Inc. He was also appointed to serve as a director of
the Company. Mr. Arleth has extensive experience in the oil and
gas industry most recently serving as Director of Azerbaijan
International Operating Company (AIOC) Shareholding for the newly
formed BP Amoco p.l.c. In this role, Mr. Arleth chaired the
shareholder board of AIOC, and international consortium of 11
companies engaged in the development and transportation of oil
from the Azeri-Chirag-Gunashli offshore field complex in
Azerbaijan. Previously, Mr. Arleth was President of Amoco Caspian
Se Petroleum Limited in Baku, Azerbaijan. Prior, in 1997, he was
Director of Strategic Planning for Amoco Corporation Worldwide
Exploration and Production Sector in Chicago. From 1992 until
1997, Mr. Arleth was President Amoco Poland Limited in Warsaw,
Poland, where he was responsible for oil and gas exploration and
production projects as well as business development activities
that focused on natural gas transmission, distribution, storage
and electric power generation.
It is with sadness that the Company reports the passing of Mr.
Paul Hinterthur on May 1, 1999. Mr. Hinterthur had served the
Company as its President and a director. He contributed greatly
to the ongoing efforts of the Company. His contribution and
presence will be missed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits [To be determined]
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K - none.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EUROGAS, INC.
Dated: May 14, 1999 By /s/ Hank Blankenstein
-----------------------
Hank Blankenstein, Vice-President
(Principal Financial and Accounting
Officer)
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This schedule contains summary financial information extracted from the balance
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ended March 31, 1999, and is qualified in its entirety by reference to such
financial statements.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,012,239
<SECURITIES> 658,501
<RECEIVABLES> 5,032,128
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<CURRENT-ASSETS> 8,818,312
<PP&E> 51,728,393
<DEPRECIATION> (610,655)
<TOTAL-ASSETS> 60,483,865
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<COMMON> 79,111
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<TOTAL-LIABILITY-AND-EQUITY> 60,483,865
<SALES> 740,894
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<CGS> 172,144
<TOTAL-COSTS> 172,144
<OTHER-EXPENSES> 2,793,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,264
<INCOME-PRETAX> (2,278,420)
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