_________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
on
Form 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2000.
[ ] 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 (IRS Employer
jurisdiction of No.) Identification No.)
incorporation)
942 East 7145 South, Suite 101A
Midvale, Utah 84047
---------------------------------------------
(Address of principal executive offices, 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 100,736,979
------------------------------- -----------------
(Title of Class) (Number of Shares
Outstanding at
March 31, 2000)
____________________________________________________________________
<PAGE>
Eurogas, Inc. (the "Company") is filing this Amendment No. 1
on Form 10-Q/A (this "Amendment") to its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 filed with the SEC
on May 15, 2000 (the "Form 10-Q") for the following purposes:
. to file financial statements that have been restated to
reflect an increase by $8,127,000 in recorded liabilities arising
from a default judgment against the Company, to reflect a
decrease in other liabilities in the amount of $529,384 and to
make related adjustments and to recognize the effect of expense
related to options granted during October 1999;
. to alter the discussion in the first paragraph of Part
II, Item 1 to reflect the Company's execution of an agreement
settling a default judgment entered against the Company and to alter
the remainder of Part II, Item 1 to reflect subsequent settlement
agreements; and
. to adjust Management's Discussion and Analysis of
Financial Condition and the Results of Operations to reflect the
restated financial statements and other matters.
In order to facilitate understanding of the Form 10-Q, this
Amendment restates in its entirety all information contained in
initial Form 10-Q.
1
<PAGE>
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 3
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . 1
RECENT DEVELOPMENTS. . . . . . . . . . . . . . . . . . . . . . . . 1
OUTLOOK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . 2
CAPITAL AND LIQUIDITY. . . . . . . . . . . . . . . . . . . . . . . 3
INFLATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FACTORS THAT MAY AFFECT FUTURE RESULTS . . . . . . . . . . . . . . 4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 6
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . 8
RECENT SALES OF UNREGISTERED SECURITIES. . . . . . . . . . . . . . 8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 8
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents . . . . . . . . . . . $ 1,427,564 $ 1,047,141
Investment in securities available-for-sale . . 317,084 317,084
Trade accounts receivable . . . . . . . . . . . 1,556,769 907,269
Value added tax receivables . . . . . . . . . . 1,080,017 1,057,628
Receivable from joint venture partners. . . . . 1,191,744 1,217,149
Other receivables . . . . . . . . . . . . . . . 112,208 74,696
Other current assets. . . . . . . . . . . . . . 530,140 236,044
------------ ------------
Total Current Assets . . . . . . . . . . . . 6,215,526 4,857,011
Property and Equipment - Full Cost Accounting
Oil and gas properties subject to amortization. 20,818,205 21,553,571
Oil and gas properties not subject to
amortization . . . . . . . . . . . . . . . . . 26,865,731 26,862,072
Other mineral interests . . . . . . . . . . . . 755,539 755,539
Other property and equipment. . . . . . . . . . 1,063,990 1,052,098
------------ ------------
Total Property and Equipment . . . . . . . . 49,503,465 50,223,280
Less: accumulated depletion depreciation
and amortization. . . . . . . . . . . . . . . (2,456,521) (2,060,386)
------------ ------------
Net Property and Equipment . . . . . . . . . 47,046,944 48,162,894
------------ ------------
Other Investments at Cost . . . . . . . . . . . . . 658,857 358,857
Long-Term Notes Receivable. . . . . . . . . . . . . 500,000 500,000
Other Assets. . . . . . . . . . . . . . . . . . . . 59,747 89,816
------------ ------------
Total Assets. . . . . . . . . . . . . . . . . . . . $ 54,481,074 $ 53,968,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . $ 3,997,299 $ 4,085,777
Accrued liabilities . . . . . . . . . . . . . . 3,747,983 3,554,095
Accrued income taxes . . . . . . . . . . . . . 685,817 708,931
Accrued settlement obligation . . . . . . . . . 12,527,000 12,527,000
Notes payable . . . . . . . . . . . . . . . . . 3,301,961 4,155,492
Notes payable to related parties . . . . . . . 975,463 1,329,161
------------ ------------
Total Current Liabilities. . . . . . . . . . 25,235,523 26,360,456
------------ ------------
Minority Interest . . . . . . . . . . . . . . . . . 4,093,820 3,824,903
------------ ------------
Stockholders' Equity
Preferred stock, $.001 par value; 3,661,968
shares authorized; issued and outstanding:
March 31, 2000 - 2,392,228 shares, issued and
outstanding ; December 31, 1999 - 2,394,028
shares; 1999 liquidation preference: $778,041. 350,479 2,001,949
Common stock, $.001 par value; 325,000,000
shares authorized; issued and outstanding:
March 31, 2000 - 100,736,979 shares,
December 31, 1999 - 86,835,838 shares. . . . . 100,737 86,836
Additional paid-in capital. . . . . . . . . . . 109,397,659 102,032,174
Accumulated deficit . . . . . . . . . . . . . . (80,629,495) (76,471,799)
Accumulated other comprehensive loss. . . . . . (4,067,649) (3,865,941)
------------ ------------
Total Stockholders' Equity . . . . . . . . . 25,151,731 23,783,219
------------ ------------
Total Liabilities and Stockholders' Equity. . . . . $ 54,481,074 $ 53,968,578
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
Oil and Gas Sales. . . . . . . . . . . . . . . . . . . $ 1,783,805 $ 740,894
------------ -----------
Costs and Operating Expenses
Oil and gas production. . . . . . . . . . . . . . . 656,110 172,144
Depreciation depletion and amortization . . . . . . 415,352 295,717
General and administrative. . . . . . . . . . . . . 1,837,996 2,481,064
------------ -----------
Total Costs and Operating Expenses . . . . . . . 2,909,458 2,948,925
------------ -----------
Other Income (Expense)
Other income. . . . . . . . . . . . . . . . . . . . 13,023 -
Interest income . . . . . . . . . . . . . . . . . . 26,966 69,597
Interest expense. . . . . . . . . . . . . . . . . . (2,776,095) (123,264)
Foreign exchange net gains (losses) . . . . . . . . 47,046 65,628
Realized loss on sale of securities
and equipment. . . . . . . . . . . . . . . . . . . (4,407) (82,350)
Minority interest in income consolidated
subsidiary . . . . . . . . . . . . . . . . . . . . (300,227) (92,711)
------------ -----------
Total Other Income (Expense) . . . . . . . . . . (2,993,694) (163,100)
------------ -----------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . (4,119,347) (2,371,131)
Preferred Dividends . . . . . . . . . . . . . . . . . (38,349) (42,217)
------------ -----------
Loss Applicable to Common Shares . . . . . . . . . . . $ (4,157,696) $(2,413,348)
============ ===========
Basic and Diluted Loss per Common Share. . . . . . . . $ (0.05) $ (0.03)
============ ===========
Weighted Average Number of Common Shares Used
In Per Share Calculation. . . . . . . . . . . . . . . 92,013,205 78,920,472
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . . . $ (4,119,347) $ (2,371,131)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation depletion and amortization. . . . 415,352 295,717
Minority interest in income of subsidiary. . . 300,227 92,711
Interest expense from beneficial conversion
feature of debentures issued. . . . . . . . . 771,429 -
Debentures issued for expense paid by
shareholder . . . . . . . . . . . . . . . . . 986,376 -
Compensation related to detachable warrants. . 1,898,138 -
Loss on sale of securities available-for-sale. - 37,694
Exchange gain. . . . . . . . . . . . . . . . . (47,046) (65,628)
Changes in assets and liabilities, net of assets
acquired:
Trade receivables. . . . . . . . . . . . . . . (69,581) (111,472)
Other receivables. . . . . . . . . . . . . . . (664,488) (171,615)
Other assets . . . . . . . . . . . . . . . . . (265,105) 50,891
Accounts payable . . . . . . . . . . . . . . . (56,272) 50,203
Accrued liabilities. . . . . . . . . . . . . . 327,744 (28,060)
------------ ------------
Net Cash Used In Operating Activities . . . (522,573) (2,220,690)
------------ ------------
Cash Flows From Investing Activities
Purchases of mineral interests, property and
equipment. . . . . . . . . . . . . . . . . . . . (1,469,480) (1,031,308)
Proceeds from payment of related party receivable - 200,000
Purchase of other investments at cost . . . . . . (300,000) -
Issuance of receivable to related party . . . . . - (150,000)
Proceeds from sale of securities property and
equipment. . . . . . . . . . . . . . . . . . . . 1,869,092 60,291
Investment in securities available-for-sale . . . - (56,434)
------------ ------------
Net Cash Used In Investing Activities . . . 99,612 (977,451)
------------ ------------
Cash Flows From Financing Activities
Principal payments on notes payable . . . . . . . (825,852) (2,932,004)
Proceeds from issuance of preferred stock,
net of offering costs. . . . . . . . . . . . . . - 1,850,000
Proceeds from issuance of debentures. . . . . . . 1,591,336 -
------------ ------------
Net Cash Used In Financing Activities . . . 765,484 (1,082,004)
------------ ------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents. . . . . . . . . . . . . . . . . . 37,900 (197,126)
------------ ------------
Net Decrease In Cash and Cash Equivalents. . . . . . 380,423 (4,477,271)
Cash and Equivalents at Beginning of Period. . . . . 1,047,141 7,489,510
------------ ------------
Cash and Equivalents at End of Period. . . . . . . . $ 1,427,564 $ 3,012,239
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest. . . . . . . . . . . . . . $ 35,196 $ 50,009
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
Supplemental Disclosure of Noncash Investing and Financing Activities
During the three months ended March 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.
During the three months ended March 31, 2000, EuroGas
converted accrued debt in the amount of $87,216 to
debentures. Debentures in the amount of $3,000,000
were converted into 8,571,428 shares of common stock
or $0.35 per share. Preferred shareholders converted
1,800 shares of Series C preferred stock together with
$2,599 of accrued preferred dividends into 5,329,713
common shares at a weighted-average price of $0.54 per
common share.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
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, 1999.
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.
BUSINESS CONDITION -- EuroGas and its subsidiaries have accumulated deficits
of $76,471,799 since their inception in 1995 through December 31, 1999 and
$80,629,495 as of March 31, 2000. They have had losses from operations and
negative cash flows from operating activities during each of the three years
in the period ended December 31, 1999 and the three month period ended March
31, 2000. These conditions raise substantial doubt regarding the Company's
ability to continue as a going concern. Although the Company had positive
stockholders' equity at December 31, 1999 and March 31, 2000, realization of
the investment in properties and equipment is dependent on EuroGas obtaining
financing for the exploration, development and production of those
properties. If exploration of unproved properties is unsuccessful, all or a
portion of recorded amount of those properties will be recognized as
impairment losses. Further, EuroGas is dependent on improvement in oil and
gas prices in order to establish profitable operations from oil and gas
production. As in the past, management plans to finance operations and
acquisitions through issuance of additional equity securities, the
realization of which is not assured.
NOTE 2 - RESTATEMENT
The accompanying financial statements have been restated to reflect
revisions resulting from a restatement of the December 31, 1999 financial
statements, to recognize additional liabilities at March 31, 2000 and to
restate disclosures pertaining to the exercise of stock options subsequent
to March 31, 2000. As a result of the restatement of the December 31, 1999
financial statements pursuant to the recognition of additional liabilities
and settlement obligations, accumulated deficit increased $7,158,342, or
$0.09 per share. Liabilities at March 31, 2000 increased by $168,224 for
obligations previously unrecorded by the Company. As a result of the overall
restatement, accumulated deficit increased $7,326,566 or $0.08 per share
as of March 31, 2000. On April 14, 2000, EuroGas was in the process of issuing
11,428,572 common shares in exchange for the reduction of notes payable in
the amount of $4,000,000, or $0.35 per share. Due to certain complications,
this transaction ws ot completed and the common shares were not issued.
F-5
<PAGE>
NOTE 3 - PROPERTY ACQUISITIONS
Teton Petroleum Company ("Teton"), through Goltech petroleum, LLC
("Goltech"), owns a 71% interest in Goloil, a Russian oil and gas company.
On April 5, 2000, EuroGas entered into an agreement with Teton for the
acquisition of Teton and a 35% interest in Goltech by September 1, 2000. If
the acquisition is completed under the terms of the agreement by the
required closing date, EuroGas would purchase Teton and the interest in
Goltech in exchange for $2,300,000, the issuance of 13,621,744 shares of
common stock and the issuance of options, warrants and other rights to
purchase 2,599,249 shares of common stock at $0.35 for 1 year. In addition,
EuroGas would be obligated under the terms of the agreement to lend Goltech
up to $4,000,000 under a credit facility which would bear interest at 15%
per annum on the amount loaned. EuroGas will place additional common shares
with a market value of $4,000,000 into an escrow account to ensure EuroGas'
ability to provide the cash payments and the credit facility. EuroGas has
paid a deposit of $300,000 as consideration for the agreement and made an
initial loan in the amount of $500,000 and placed a promissory note from an
individual in the amount of $500,000 and securities of the individual into
an escrow account to ensure the ability of EuroGas to provide the remainder
of the initial $1,000,000 loan. During a due diligence period expected to
end in late July 2000, the agreement can be terminated without payment by
either party except for the loss of the deposit paid by EuroGas. In the
event either Teton or EuroGas fails to perform under the terms of the
agreement after the end of the due diligence period, that party will be
obligated to pay $1,000,000 in liquidation damages.
NOTE 4 - NOTES PAYABLE
During the first quarter of 2000 EuroGas completed the issuance of two-year
10.5% convertible debentures in the amount of $3,000,000 in exchange for
cash proceeds of $1,591,336, the conversion of prior outstanding EuroGas
debt into debentures in the amount of $422,288 and proceeds in the form of
payments to creditors on behalf of EuroGas by a shareholder in the amount of
$986,376. The debentures are convertible into common shares at $0.35 per
share, which represents a discount of 20% from quoted market values on the
date of the issuance. Upon conversion the holders also receive warrants to
purchase 17,142,858 common shares at $0.35 per share. The convertibility of
the debentures at a discount, and the detachable warrants issued below
market on the date of issuance, constitute a beneficial conversion feature
of the offering. The Company will record the three instruments at their
relative fair values on the date of issuance and will amortize the resulting
debt discounts as interest expense in the amount of $2,912,109 over the
three-month life of the debentures. The debentures were subsequently
converted at the election of the holders on March 30, 2000 into 8,571,428
common shares.
Current notes payable were reduced during the three months ended March 31,
2000 by approximately $853,531 which primarily consisted of payments to
reduce notes payable to a bank in Canada.
Notes payable to related party were reduced during the three months ended
March 31, 2000 by approximately $578,904 which primarily consisted of a
conversion of notes to 10.5% convertible debentures and a reclassification
of a related party note payable to accrued liabilities pursuant to a
settlement agreement reached in satisfaction of the note with the related
party.
NOTE 5 - STOCKHOLDERS' EQUITY
As described in Note 4 - Notes Payable, during March 2000, the Company
issued 8,571,428 common shares upon conversion of debentures with a value of
$3,000,000, or $0.35 per share.
During the January 2000, all 1,800 outstanding shares of 1999 Series C
Convertible Preferred Stock were converted into 5,329,713 common shares at a
weighted-average price of $0.34 per share. In connection with the
conversion, 63,261 common shares were issued for $21,599 in accrued
dividends on the converted 1999 Series shares at a weighted-average price of
$0.54 per common share.
F-6
<PAGE>
At March 31, 2000, 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; $453,363
liquidation preference
1997 Series A Preferred shares; 260 shares outstanding; $60.00
annual dividend rate per share, $15,600 annually; $324,678
liquidation preference
NOTE 6 - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Loss Applicable to Common Shares . . . . . . . . $ (4,157,696) $ (2,413,348)
Other Comprehensive Loss . . . . . . . . . . . .
Unrealized holding losses 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. . . . . . . . . . . . . (201,708) (1,226,435)
------------ ------------
Total Other Comprehensive Loss. . . . . . . (201,708) (1,614,871)
------------ ------------
Comprehensive Loss . . . . . . . . . . . . . . . $ (4,359,404) $ (4,028,219)
============ ============
</TABLE>
Accumulated other comprehensive loss consisted of the
following at March 31, 2000:
Unrealized loss on securities available-for-sale. . . . . . $ (1,068,853)
Cumulative foreign currency translation adjustment. . . . . (2,998,796)
------------
Accumulated Other Comprehensive Loss. . . . . . . . . . . . $ (4,067,649)
============
NOTE 7 - COMMITMENTS AND CONTINGENCIES
An assertion was made against EuroGas by alleged holders of registration
rights that EuroGas failed to file a registration statement for certain
shares and warrants. On March 16, 2000, a default judgement in the amount
of $19,773,113 was entered against EuroGas by the United States District
Court District of Utah, Central Division due to lack of response by
EuroGas. At April 14, 2000, EuroGas had retained counsel and estimated
its liability to be $3,400,000. Management believed at that time that
EuroGas had mitigated the effects of the claim against it because of counter
claims and assignments. Accordingly, EuroGas and its legal counsel estimate
that after the counter claims and assignments, the remaining amount probable
of loss resulting from the claim was approximately $3,400,000. However,
EuroGas did not pursue the counter claims and planned assignments and on
June 16, 2000, the Company entered into a settlement agreement, with the
holders of the registration rights in satisfaction of the default judgement.
Under the terms of the agreement, the Company is required to issue 3,700,000
shares of its common stock and an option to purchase an additional 3,000,000
shares of common stock exercisable in one year at an exercise price of $0.65
per share. The terms of the agreement further require the Company to register
the shares of common stock issued and to pay, either in cash or additional
common stock, the difference between $3.00 per share and the market value
of the shares of common stock received by the holders of the registration
rights upon exercise of the options. The Company recognized a charge of
$11,527,000 related to the settlement agreement against its operations
during the year ended December 31, 1999.
EuroGas' subsidiary, GlobeGas BV, has applied for a reduction in an income
tax liability in the Netherlands of an amount equivalent to approximately
$692,431 at December 31, 1999. 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.
F-7
<PAGE>
During January 2000, EuroGas entered into an agreement with Slovgold GmBH, a
related party, to conduct a six-well pilot program in South Wales to test
for coaled methane gas. Under the terms of the agreement, EuroGas will cover
the costs for the pilot program and the first stage of any subsequent
development program in exchange for 40% of the cash flow until payout.
EuroGas interest will be reduced to 25% after the payout point is reached.
Slovgold GmBH is affiliated with a director of EuroGas.
A bankruptcy trustee appointed in the McKenzie Bankruptcy case has asserted
a claim to the proceeds that EuroGas would receive from an agreement with
Texaco during 1997 relating to the exploitation of the Pol-Tex methane gas
concession in Poland. The Trustee's claim is apparently based upon the
theory that EuroGas 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's, or in fact may be operating
as a nominee for the McKenzie's, and therefore, the creditors of the estate
are the true owners of the proceeds received or to be received from the
development of the Pol-Tex concession. EuroGas is vigorously defending
against the claim. EuroGas believes that the claim is 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 trustee over the estate has no
jurisdiction over Pol-Tex Methane, a Polish corporation, or its interests
held in Poland, that EuroGas paid substantial consideration for GlobeGas,
and that there is no evidence that the creditors invested any money in the
Pol-Tex concession.
In October 1999, the Trustee filed a Motion for Leave to Amend and
Supplement Pleadings and Join Additional Parties in this action and in
adversary proceeding 97-4155 (described below) in which he is seeking to add
new parties and assert additional causes of action against EuroGas and the
other defendants in this action. These new causes of action include claims
for damages based on fraud, conversion, breach of fiduciary duties,
concealment and perjury. In January 2000, that motion was approved by the
Bankruptcy Court.
In July 1999, the above mentioned trustee filed another suit in the same
bankruptcy cases seeking damages in excess of $170,000 for the defendants'
alleged violation of an agreement with the trustee which allowed the Texaco
agreement to proceed. EuroGas disputes the allegations and has filed a
motion to dismiss or alternately, to abate this suit which motion is
currently pending before the court.
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 has filed a
counterclaim against the shareholder and its parent company for breach of
contract concerning their activities with the bankruptcy trustee.
In early December 1999, EuroGas signed a settlement agreement with Kukui,
the Bishop Estate and the bankruptcy Trustee, which, if fully performed,
would resolve all claims made by Kukui and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires EuroGas to pay
$900,000 over the next 12 months and issue 100,000 shares of registered
common stock to the Bishop Estate by June 30, 2000. Subsequently, however,
the Trustee declared that certain conditions precedent set forth in the
settlement agreement have not been met and the Trustee does not intend to
seek bankruptcy court approval of the agreement. EuroGas is now evaluating
what effect this has on the agreement. In the event the settlement agreement
does not resolve the foregoing litigation, EuroGas intends to vigorously
defend the litigation. Pursuant to the settlement, EuroGas has made the
monthly payments to Kukui and has executed all pleadings required to be
submitted to the Federal District Court in Utah.
F-8
<PAGE>
In October 1999, an action was filed against EuroGas which asserts that
EuroGas breached an agreement to seek registration of certain restricted and
unregistered common shares issued to the plaintiffs in connection with
EuroGas' acquisition of its interest in Beaver River Resources, Ltd. The
action seeks rescission of the agreement, or in the alternative, damages,
and includes claims for costs, attorneys' fees and interest. EuroGas has
filed an answer denying the allegations contained in the lawsuit.
During March of 1998, EuroGas was notified there may be certain title
problems related to an area of mutual interest to be explored and developed
by the Nafta/Danube joint venture in Slovakia. The problem area is outside
of the Trebisov area where EuroGas 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
Nafta/Danube joint venture agreements and was subject to a competing claim
of ownership by a private Slovak company. EuroGas' expansion beyond the
Trebisov was limited by the extent the Nafta/Danube joint venture did not
have exploration rights as previously contemplated. During the second
quarter of 1998, EuroGas acquired a 90% interest in Maseva Gas, s.r.o.
("Maseva") which holds the rights to the exploration territory known as
"Kralovsky Chlmec"and includes the disputed area located to the south of
Trebisov. The division of the working interest for this territory is 67.5%
for EuroGas (rather than the 50% split which governs the Trebisov area),
provided that EuroGas carries the cost of drilling the first two wells in
the Maseva concession.
EuroGas has notified the former shareholders of Danube of a potential claim
against them by reason of this recent problem. EuroGas 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. 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 Gbely 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 the Slovak government may seek to resolve the dispute.
Recently, the government completed its nationalization of Nafta; although
discussions are scheduled between EuroGas and Nafta, resolution of this
matter is not assured.
During October 1997, EuroGas received additional concession rights from the
Polish Ministry of Environmental Protection of Natural Resources and
Forestry to explore and potentially develop a 111 square kilometer coal bed
methane concession. The concession agreement requires expenditure of
$40,000 per year pending completion of a feasibility study and negotiations
with third parties for the eventual purchase of natural gas.
In October 1997, EuroGas completed an agreement on a 50/50 cost basis for
appraisal and development activities for an area located in the Carpathian
Flysch and tectonic Fordeep areas of Poland. The agreement
contemplates a total expenditure by EuroGas of $15 million over a three-
year period. EuroGas does not presently have the assets necessary to meet
this obligation.
In March 1998, EuroGas acquired a 53% interest in RimaMuran s.r.o. whose
principal asset is a minority interest in a talc deposit in eastern
Slovakia. RimaMuran will have an obligation to fund 33 to 39% of the
projected $12,000,000 capital cost requirements 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 EuroGas. To date, EuroGas has invested $1,433,651 in the
RimaMuran project.
F-9
<PAGE>
During February 1998, EuroGas formed a consortium with a large United
Kingdom power producer and with a German Utility company to develop a power
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.
During 1998, EuroGas entered into six agreements which grant rights to
jointly explore prospects within the Ukraine. The agreements commit EuroGas
to form joint ventures and joint companies and use the partners' concession
agreements in exploiting the potential standard oil and gas, as well as
coal-bed methane gas reserves. The potential reserves in the Ukraine have
not been independently verified.
During April 1999, EuroGas entered into a three-year employment contract
with its new chief executive officer. The contract provides for annual
salary of $400,000 plus living and other allowances of $28,200. In addition,
options to purchase 1,000,000 shares of EuroGas common stock at $0.95 per
share were granted in connection with the employment contract. The options
vest on January 1, 2000, and expire in April 2009.
The Company leases office facilities from various lessors in the United
States, Poland, Ukraine, the Netherlands, and the United Kingdom. Rent
expenses for the years ended December 31, 1999, 1998 and 1997 were $517,354,
$290,991, and $178,733, respectively. Annual commitments for future minimum
rental payments required under the leases as of December 31, 1999 were as
follows:
Lease
Year Ending December 31: Payments
2000 $ 154,452
2001 154,452
2002 104,814
----------
Total $ 413,718
==========
F-10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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 also 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 acquired a majority interest in a full-service
oil and gas producing company in Canada-Big Horn. In addition, the
Company has entered into agreements to fund the production of a
pipeline for, and then (assuming satisfactory completion of due
diligence) acquire through merger, Teton Petroleum Company, which
has an interest in an oil field in the Western Siberian Basin.
The Company's principal assets consist of unproven and
undeveloped properties, as well as some proven and developed
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. On or about January 12, 2000, the
Company issued four Convertible Debentures in the aggregate face
amount of $3,000,000 to several individual investors in exchange
for an aggregate of $1,591,336 in cash, conversion of $422,288 in
outstanding EuroGas indebtedness, and payments made by such
investors on behalf of EuroGas to creditors of EuroGas in the
amount of $986,376. Pursuant to the conversion of the
debentures, the Company issued 8,571,429 shares of Common Stock
and warrants to purchase 17,142,858 shares of Common Stock at an
exercise price of $0.35 per share. At March 31, 2000, the
Company had approximately $1.4 million in cash and cash
equivalents and a $19 million working capital deficit.
Outlook
In the past, the Company has focused its resources on pre-
exploration or early-exploration stage natural gas, coal bed
methane gas, and other hydrocarbon projects with little short-
term revenue potential. The Company believes that its investment
in such early-stage projects will prove profitable in the long-
run and may continue to invest in additional early-stage projects
from time to time in the future. Nonetheless, present management
believes that, in order to balance out its holdings, the focus of
the Company's acquisition, investment and development strategy
should be on hydrocarbon projects that have the potential to
generate short-term revenues.
Results of Operations
The following table sets forth consolidated income statement data
and other selected operating data for the three months ended
March 31, 2000 and 1999, respectively.
-4-
<PAGE>
For the quarter
Ended March 31
--------------------------
2000 1999
----------- -----------
Revenues
Oil and Gas Sales $ 1,783,805 $ 740,894
Total Revenues 1,783,805 740,894
Operating Expenses
Oil and gas production 656,110 172,144
General and administrative 1,837,996 2,481,064
Depreciation and amortization 415,352 295,717
Total Operating Expenses 2,909,458 2,948,925
Other Income (Expense)
Interest and other income 39,989 69,597
Interest expense (2,776,095) (123,264)
Foreign currancy exchange gains
(losses), net 47,046 65,628
Realized loss on sale of securities
and equipment (4,407) (82,350)
Other Expense, Net - (70,389)
Minority interest in earnings of
subsidiary (300,227) (92,711)
Net Loss (4,119,347) (2,413,348)
Revenues. Prior to 1999, 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, 2000 reflect oil and gas sales of $1,783,805, and the
Company's results of operations for the three months ended
March 31, 1999 reflect revenues from oil and gas sales of $740,894.
Operating Expenses. Operating expenses primarily include oil and
gas production, general and administrative expenses, depreciation
and amortization, cost of mineral interests and equipment and
impairment of mineral interests and equipment. Oil and gas
production expenses increased from $172,144 during the three
months ended March 31, 1999 to $656,110 for the three months
ended March 31, 2000. Such increased costs result primarily from
an increase in the number and cost of oil wells drilled by Big
Horn. General and administrative expenses were $1,837,996 for
the three months ended March 31, 2000, compared to $2,481,064 for
the three months ended March 31, 1999. Such decrease in
administrative expenses is the result of the Company having
incurred a large one-time costs associated with the leasing of
new offices during the first quarter of 1999, and the absence of
a corresponding expense during the first quarter of 2000.
Depreciation and amortization expenses were $415,352 for the
three months ended March 31, 2000, compared to $295,717 for the
three months ended March 31, 2000. Such increase resulted
primarily from an increase in the depletion expenses associated
with Big Horn's oil reserves.
In addition, During the three months ended March 31, 2000, the
Company incurred an interest expense of $2,776,095, compared to
an interest expense of $123,264 during the three months ended
March 31, 1999. The primary reason for such increase in
interest expense was the beneficial conversion feature associated
with the issuance of $3,000,000 in Convertible Debentures on
January 12, 2000 at a conversion rate that was less than market
value on the date of issuance. When issuing convertible debt,
the Company must recognize an interest expense in an amount equal
to the number of shares of Common Stock issuable upon conversion
multiplied by the difference between the conversion rate and
market value of a share of Common Stock on the date of issuance.
The Company also recognized a loss of $300,227 from a minority
interest in a consolidated subsidiary during the three months
ended March 31, 2000 compared to a loss of $92,711 during the
three months ended March 31, 1999. The $1,783,805 oil and gas
revenue figures and other figures on the Company's Statement of
Operations represents 100% of Big Horn oil and gas revenues. The
$300,227 minority interest loss is included to account for the
interest of the minority shareholders in Big Horn, so that the
net income figures set forth on the Statement of Operations
reflect only EuroGas' approximately 51% interest in Big Horn.
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 $80 million as of March 31, 2000, to offset
profits, if and when achieved, resulting in a reduction in income
taxes payable
Net Loss. The Company incurred net losses of $4,119,347 and
$2,371,131 for the three months ended March 31, 2000 and 1999,
respectively. These losses were due in large part to the absence
of revenues, combined with continue administrative, production,
depreciation and other recurring continuing expenses and a
significant one-time expense associated with the beneficial
conversion feature in the January 12, 2000 Convertible
Debentures. The Company did generate a limited amount of revenue
(but no additional cash flow) from one of its projects during the
quarter ended March 31, 2000.
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 $47,046, and $65,628 in gains as
a result of currency transactions in the three months ended March
31, 2000 and 1999, respectively. The Company had a cumulative
foreign currency translation adjustment of $(2,998,796) at March
31, 2000. The Company does not currently employ any hedging
techniques to protect against the risk of currency fluctuations.
-5-
<PAGE>
Capital and Liquidity
The Company had an accumulated deficit of $80,629,495 at March
31, 2000, substantially all of which has been funded out of
proceeds received from the issuance of stock and the incurrence
of payables. At March 31, 2000, the Company had total current
assets of approximately $6.2 million and total current
liabilities of approximately $25.2million resulting in negative
working capital of approximately $19 million. As of March 31,
2000, the Company's balance sheet reflected approximately $26.8
million in mineral interests in properties not subject to
amortization, net of valuation allowance. These properties are
held under licenses or concessions that contain specific drilling
or other exploration commitments and that expire within one to
three years, unless the concession or license authority grants an
extension or a new concession license, of which there can be no
assurance. If 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. During the three months
ended March 31, 2000, the Company received $1,591,336 in cash
from the issuance of the January 12, 2000 Convertible Debentures
but expended $825,852 of such cash in principal payments on
outstanding notes. As a result, the Company's financing
activities provided net cash of approximately $765,484 during the
three month period ended March 31, 2000, compared to the net cash
of $(1,082,004) expended for financing activities during the
three month period ended March 31, 1999. The $765,484 in net
cash received during the three month period ended March 31, 2000
was used primarily for general and administrative expenses.
While the Company had cash of approximately $1.4 million at March
31, 2000, it has substantial short-term and long-term financial
commitments with respect to exploration and drilling obligations
related to the mineral properties in which it has an interest,
potential litigation liabilities and its commitments to Teton
Petroleum Company under the Teton Master Agreement. Excluding
potential litigation costs and liabilities, the Company estimates
its financial commitments for the remaining nine months of 2000
will be approximately $ 7 million. 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.
The Company does not have sufficient cash to meet its short-term
or long-term needs and it will require additional cash, either
from financing transactions or operating activities, to meet its
immediate and long term obligations. 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 income would be lower than reported
if the effects of inflation were reflected either by charging
operations with amounts that represent replacement costs or by
using other inflation adjustments. Due to inflationary problems
in Eastern Europe that is seen in currency exchange losses, the
Company has seen losses on its assets values in those countries.
-6-
<PAGE>
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 consummate its proposed merger with Teton Petroleum Company,
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 in some cases 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.
-7-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On December 30, 1999, Finance & Credit Development Corporation
Ltd., an Ireland corporation ("FCDC"), commenced an action
against EuroGas in a case styled Finance & Credit Development
Corporation Ltd., an Ireland Corporation vs. EuroGas, Inc., a
Utah corporation, Case No. 2:00VC-1024K. EuroGas did not file an
answer or other responsive motion to such complaint.
Accordingly, following the filing of a Motion for Default
Judgment and supportive papers by the plaintiff, on March 16,
2000, the federal district court issued a default judgment
against EuroGas in the amount of $19,773,113. On or about June
16, 2000, we entered into a memorandum of understanding, with
FCDC in satisfaction of default judgment. In consideration for
FCDC's stipulation to vacate the default judgment, we agreed,
among other things, to issue to FCDC 3,700,000 shares of common
stock, to grant FCDC an option exercisable for the 30-day period
following June 30, 2001 to purchase an additional 3,000,000
shares of common stock at an exercise price of $.65, and to pay
to FCDC in cash or shares of common stock the difference between
$3.00 per share and the market value of the shares of common
stock received upon exercise of the option. We are in the process
of implementing the memorandum of understanding.
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 believes that the litigation is without merit based
on its belief that the prior settlement with KUKUI bars any such
claim, that 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. In October 1999,
the Trustee filed a Motion for Leave to Amend and Supplement
Pleadings and Join Additional Parties in this action and in
adversary proceeding 97-4155 (described below) in which he is
seeking to add new parties and additional causes of action
including claims for damages based on fraud, conversion, breach
of fiduciary duties, concealment and perjury. In January, 2000,
such motion was approved by the bankruptcy court.
-8-
<PAGE>
In June 1999, the Trustee filed another suit in the same
bankruptcy cases styled "Steve Smith, Trustee, Plaintiff vs.
EuroGas , Inc., Globegas, B.V., Pol-Tex Methane, Sp. z.o.o., et
al." Adversary #99-3287. That suit sought sanctions against
the Defendants for actions allegedly taken by the Defendants
during the bankruptcy cases which the Trustee considered
improper. The Defendants filed a motion to dismiss the lawsuit,
which was granted in August 1999. In July 1999, the Trustee also
filed a suit in the same bankruptcy cases styled "Steve Smith,
Trustee, Plaintiff, vs. EuroGas, Inc., Globegas, B.V., Pol-Tex
Methane, Sp. z.o.o." Adversary #99-3444. This suit seeks
damages in excess of $170,000 for the Defendants alleged
violation of an agreement with the Trustee executed in March
1997, which agreement, in part, allowed the Texaco Agreement to
proceed. EuroGas disputes the allegations and has filed a motion
to dismiss or alternatively, to abate this suit which motion is
currently pending before the court. Nonetheless, in order to
avoid additional costs associated with extended litigation, the
Company is engaged in settlement discussions in an attempt to
reach a negotiated resolution of the dispute.
On August 21, 1997, KUKUI 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 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 and has filed a counterclaim
against KUKUI and Bishop's Estate for breach of contract. This
action has been settled under a settlement agreement described in
the paragraph below.
In early December, 1999, EuroGas signed a settlement agreement
with Kukui, the Bishop Estate and the bankruptcy Trustee in the
aforementioned litigation. That settlement, in part, requires
EuroGas to pay $900,000 over the next 12 months and issue 100,000
shares of registered common stock to the Bishop Estate by June
30, 2000. Recently, the Trustee declared that certain conditions
precedent set forth in the settlement agreement have not been
met, and the Trustee does not intend to seek bankruptcy court
approval of the agreement. EuroGas is now evaluating what effect
this has on the agreement. If the settlement agreement does not
resolve the foregoing litigation, EuroGas intends to vigorously
defend the litigation. Pursuant to the settlement, EuroGas has
made monthly payments to Kukui and has executed all pleadings
required to be submitted to the United States District Court,
District of Utah. As of the date of this document, EuroGas has not
yet issued the shares to Kukui, Inc.
In July 1999, an action was commenced by Randy Crawford styled
"Randy Crawford, PhD. P.E., Plaintiff, v. EuroGas, Inc., Danube
International Petroleum company, Ltd., Danube Acquisition Corp.,
and Martin Schuepback, Defendant," in the State District Court,
Dallas, Texas, Cause # DV 9805298. In this litigation, Crawford
asserts that the Defendants breached a service agreement under
which he was employed to provide consulting and engineering
services and that he is now owed $159,500 and the right to
purchase 284,000 shares of common stock at the price of $1.50.
EuroGas recently settled this action pursuant to an agreement
requiring (i) Crawford to dismiss his claims against EuroGas, (ii)
Schuepback to pay $300,000 to EuroGas, and (iii) EuroGas to issue
250,000 shares of restricted common stock.
On October 11, 1999, an action was filed against EuroGas entitled
"Fred L. Oliver. Petroleum Ventures of Texas, Inc. R.A. Morse
and R.A. Morse, Trustee, Plaintiffs vs. EuroGas, Inc. and Beaver
River Resources, Ltd., Defendants" in the State District Court of
Dallas County, Texas, Cause #DV99-08032-A. In this action,
Plaintiffs assert that EuroGas breached an agreement by failing
to seek registration of certain restricted and unregistered
shares issued to Plaintiffs in connection with EuroGas'
acquisition of its interest in Beaver River Resources, Ltd. The
action seeks rescission of the agreement, or in the alternative,
damages, and includes claims for costs, attorneys fees and
interest. EuroGas has filed an answer denying the allegations
contained in the lawsuit and is currently involved in settlement
discussions.
On or about November 1, 1999, a settlement was reached with
Stephen Jeu and Susanna Calvo resolving their claims in a suit
filed in the District Court, Harris County, Texas, 55th Judicial
District. EuroGas has not fully performed the terms of the
settlement agreement and is seeking to amend the settlement. If
the amendment is not obtained, an Agreed Judgment for $550,000
may be presented by the plaintiffs for entry by the district
court.
For the 1992 year, the Kingdom of the Netherlands assessed a tax
against GlobeGas, a subsidiary of the Company, in the amount of
approximately $911,000 even though it had significant operating
losses. The amount fluctuates on the financial statements of the
Company due to adjustments in exchange ratios. At March 31,
2000, the income tax liability recorded in the Company's
financial statements was $657,385. 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.
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<PAGE>
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On or about January 12, 2000, EuroGas issued four Convertible
Debentures in the aggregate face amount of $3,000,000 (the
"Convertible Debentures") to several individual investors in
exchange for an aggregate of of $1,591,336 in cash, conversion of
$422,288 in outstanding EuroGas indebtedness, and payments may
be such investors on behalf of EuroGas to creditors of EuroGas in
the amount of $986,376. The Convertible Debentures accrue
interest at the rate of prime plus two percent (currently 10.2%)
per annum. Payment of the principal amount of the Convertible
Debentures is due on February 10, 2001, and accrued interest is
payable annually beginning on January 8, 2001. Each
Convertible Debenture is convertible into (a) shares of Common
Stock at the rate of one share per $0.35 indebtedness (for a
total of 2,857,143 shares per $1,000,000 of Convertible
Debenture), and (b) warrants to purchase one share Common Stock
at the rate of two warrants for each $0.35 in indebtedness (for a
total of 5,714,286 warrants per $1,000,000 of Convertible
Debenture). Each such warrant entitles the holder to purchase
one share of Common Stock for an exercise price of $0.35 at any
time on or before March 31, 2000.
The private placement of the Convertible Debentures 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 following
based upon the following: (a) the investors confirmed to the
Company that they were "accredited investors," as defined in Rule
501 of Regulation D promulgated under the Securities Act and had
such background, education, and experience in financial and
business matters as to be able to evaluate the merits and risks
of an investment in the securities; (b) there was no public
offering or general solicitation with respect to the offering;
(c) the investors were provided with any and all other
information requested by the investors with respect to the
Company, (d) the investors acknowledged that all securities being
purchased were "restricted securities" for purposes of the
Securities Act, and agreed to transfer such securities only in a
transaction registered with the SEC under the Securities Act or
exempt from registration under the Securities Act; and (e) a
legend was placed on the Convertible Debentures and other
documents representing each such security stating that it was
restricted and could only be transferred if subsequently
registered under the Securities Act or transferred in a
transaction exempt from registration under the Securities Act.
As of March 31, 2000, the holders of all four Convertible
Debentures exercised their rights to convert the Convertible
Debentures to Common Stock. Pursuant to the conversion of the
debentures, the Company issued 8,571,428 shares of Common Stock
and warrants to purchase 17,142,858 shares of Common Stock at an
exercise price of $0.35 per share.
During January 2000, all 1,800 outstanding shares of Series C
Convertible Preferred Stock were converted into 5,329,713 shares
of Common Stock. In connection with such conversion, 63,261
shares of Common Stock were issued for accrued dividends of
$21,599.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -See Exhibit Index following the signature page.
(b) Reports on Form 8-K - none.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to
Quarterly Report on Form 10-Q/A to be signed on its behalf by the
undersigned thereunto duly authorized.
EUROGAS, INC.
Dated: July 31, 2000 By /s/ Karl Arleth
------------------------------------------
(Karl Arleth, President and Temporary
Principal Financial and Accounting Officer)
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<PAGE>
Exhibit Index
Exhibit
Number Title of Document Location
------- ---------------------------------- --------------------
3.1 Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D*
3.2 Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990*
3.3 Designation of Rights, Quarterly Report on
Privileges, and Preferences Form 10-QSB Form dated
of 1995 Series Preferred Stock March 31, 1995*
3.4 Designation of Rights, Report on Form 8-K
Privileges, and Preferences dated July 12, 1996*
of 1996 Series Preferred Stock
3.5 Designation of Rights, Privileges Report on Form 8-K
and Preferences of 1997 Series A dated May 30, 1997*
Convertible Preferred Stock
3.6 Designation of Rights, Privileges, Registration Statement
and Preferences of 1998 Series B on Form S-1 dated
Convertible Preferred Stock July 23, 1998*
3.7 Articles of Share Exchange Report on Form 8-K
dated August 3, 1994*
3.8 Designation of Rights, Privileges Registration Statement
and Preferences of 1999 Series C on Form S-1, File No.
6% Convertible Preferred Stock 333-92009, filed on
December 2, 1999*
4.1 Form of Convertible Debenture Annual Report on
issued on January 12, 2000. Form 10-K for the
fiscal year ended
December 31, 1999.*
4.2 Form of Series 2000A Warrant Filed herewith
27.1 Financial Data Schedule Filed herewith.
*Incorporated by reference
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<PAGE>
