_________________________________________________________________
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 JUNE 30, 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 No. IRS Employer Identification No.
jurisdiction
of 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 104,786,979
------------------------------ ------------------------------
(Title of Class) (Number of Shares Outstanding at
June 30, 2000)
<PAGE>
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements F-1
Balance Sheets as of June 30, 2000
and December 31, 1999
Statements of Operations for the three and six
months ended June 30, 1999 and 2000
Statements of Cash Flows for the six months
ended June 30, 1999 and 2000
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
Exhibit Index 14
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2000 1999
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 904,284 $ 1,047,141
Investment in securities
available-for-sale 176,169 317,084
Trade accounts receivable 809,420 907,269
Value added tax receivables 1,099,695 1,057,628
Receivable from joint venture
partners 1,145,61 1,217,149
Other receivables 131,475 74,696
Other current assets 462,046 236,044
---------- -----------
TOTAL CURRENT ASSETS 4,728,703 4,857,011
---------- -----------
PROPERTY AND EQUIPMENT - FULL COST ACCOUNTING
Oil and gas properties subject
to amortization 21,017,640 21,553,571
Oil and gas properties not subject
to amortization 26,844,845 26,862,072
Other mineral interests 755,539 755,539
Other property and equipment 1,035,269 1,052,098
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 49,653,293 50,223,280
Less: accumulated depletion
depreciation and amortization (2,719,361) (2,060,386)
----------- -----------
NET PROPERTY AND EQUIPMENT 46,933,932 48,162,894
----------- -----------
OTHER INVESTMENTS AT COST 658,857 358,857
LONG-TERM NOTES RECEIVABLE 500,000 500,000
OTHER ASSETS 29,678 89,816
----------- ------------
TOTAL ASSETS $52,851,170 $ 53,968,578
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,522,380 $ 4,085,777
Accrued liabilities 4,103,477 3,554,095
Accrued income taxes 686,688 708,931
Accrued settlement obligation 699,000 12,527,000
Notes payable 2,493,268 4,155,492
Notes payable to related parties 1,124,730 1,329,161
----------- ------------
TOTAL CURRENT LIABILITIES 13,629,543 26,360,456
----------- ------------
MINORITY INTEREST 4,199,097 3,824,903
----------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
3,661,968 shares authorized;
issued and outstanding: June 30,
2000 - 2,392,228 shares,
December 31, 1999 - 2,394,028
shares; 1999 liquidation preference:
$811,655 350,479 2,001,949
Common stock, $.001 par value;
325,000,000 shares authorized;
issued and outstanding: June 30,
2000 - 104,786,979 shares,
December 31, 1999 - 86,835,838 shares 104,787 86,836
Additional paid-in capital 121,083,859 102,032,174
Accumulated deficit (81,761,108) (76,471,799)
Accumulated other comprehensive
loss (4,755,487) (3,865,941)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 35,022,530 23,783,219
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $52,851,170 $53,968,578
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE> F-1
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
OIL AND GAS SALES $ 1,290,460 $ 1,240,698 $ 2,673,065 $ 1,981,592
COSTS AND OPERATING EXPENSES
Oil and gas production 369,110 433,743 624,020 605,887
Depreciation depletion and
amortization 315,372 510,228 730,724 805,945
General and administrative 1,371,278 1,814,994 3,209,274 4,340,712
------------ ------------ ------------ -----------
TOTAL COSTS AND OPERATING
EXPENSES 2,055,760 2,758,965 4,564,018 5,752,544
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE)
Interest income 10,653 12,239 50,642 81,836
Interest expense (189,367) (132,582) (2,965,462) (255,847)
Foreign exchange net gains
(losses) 2,038 45,431 49,084 111,059
Realized loss on sale of
securities and equipment 2,551 - (1,856) (37,695)
Minority interest in income of
consolidated subsidiary (180,172) (76,352) (480,399) (169,063)
------------ ------------ ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (354,297) (151,264) (3,347,991) (269,710)
------------ ------------ ------------ ------------
NET LOSS (1,119,597) (1,669,531) (5,238,944) (4,040,662)
PREFERRED DIVIDENDS (12,016) (687,060) (50,365) (1,006,777)
----------- ------------ ------------ -----------
LOSS APPLICABLE TO COMMON SHARES $(1,131,613) $ (2,356,591) $ (5,188,579) $(5,047,439)
=========== ============ ============= ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.01) $ (0.03) $ (0.05) $ 0.06
=========== ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE
CALCULATION 100,868,847 80,839,795 96,449,570 79,885,435
=========== =========== ============ ============
</TABLE>
The accompany notes are an integral part of these financial statements.
<PAGE> F-2
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,238,944) $ (4,040,662)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation depletion and amortization 730,724 805,945
Minority interest in income (loss) of subsidiary 480,399 169,063
Write off of note receivable as bad debt 500,000 -
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 equipment and securities available-
for-sale 1,856 37,695
Exchange gain (49,084) (111,059)
Changes in assets and liabilities, net of assets acquired:
Trade receivables 54,552 (853,197)
Other receivables (128,829) (548,863)
Other assets (174,702) (339,516)
Accounts payable 606,065 -
Accrued liabilities 127,064 568,458
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES 565,044 (4,312,136)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of mineral interests, property and equipment (2,285,679) (1,829,527)
Proceeds from payment of related party receivable - 200,000
Issuance of note receivable to Teton Petroleum Company (400,000) -
Purchase of other investments at cost (300,000) -
Issuance of receivable to related party - (150,000)
Proceeds from sale of securities property and equipment 1,848,292 60,329
Investment in securities available-for-sale - (1,656,474)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,137,387) (3,375,672)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 300,000 -
Principal payments on notes payable to related parties (65,974) -
Principal payments on notes payable (1,572,924) (2,010,409)
Proceeds from issuance of preferred stock, net
of offering costs - 6,012,500
Proceeds from issuance of debentures 1,591,336 -
Proceeds from notes payable to related parties 100,000 184,742
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES 352,438 4,186,833
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 77,048 (99,213)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (142,857) (3,600,188)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,047,141 7,489,510
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 904,284 $ 3,889,322
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 71,986 $ 255,847
============ ============
</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 six months ended June 30,1999, EuroGas accrued preferred
dividends of $1,006,777. Preferred shareholders converted 6,710 shares of
1998 Series B Preferred stock together with $34,758 of accrued preferred
dividends into 8,650,569 common shares at approximately $1.12 per common share.
During the six months ended June 30, 2000, accrued liabilities in the amount
of $87,216 were converted to debentures. Debentures in the amount of
$3,000,000 were converted into 8,571,428 shares of common stock at $0.35 per
share. The Company issued 3,800,000 shares of common stock pursuant to
accrued settlement obligations which were valued at $3,097,000 or $0.82 per
share. Preferred shareholders converted 1,800 shares of Series C preferred
stock together with $21,599 of accrued preferred dividends into 5,329,713
common shares at a weighted-average price of $0.54 per common share. An
option to purchase 3,000,000 shares of the company's common stock was
granted pursuant to an accrued settlement obligation which were valued at
$1,560,000. The options granted vest in one year and are exercisable at
$0.65 per share for a period of thirty days. The Company issued a note
payable to a shareholder who advanced, on behalf of EuroGas, $100,000 to
Teton Petroleum Company as a note receivable.
The accompanying notes are an integral part of these financial statements.
<PAGE> F-4
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, 2000.
BUSINESS CONDITION- EuroGas and its subsidiaries have accumulated deficits
of $76,471,799 since their inception in 1995 through December 31, 1999 and
$81,761,108 as of June 30, 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. 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 June 30, 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 - PROPERTY ACQUISITIONS
EuroGas has paid a deposit of $300,000 towards a potential acquisition of an
interest in a Russian oil and gas company owned by Teton Petroleum Company
("Teton"), made a loan to Teton in the amount of $500,000 and placed a
promissory note from an individual in the amount of $500,000 to Teton and
securities of the individual into an escrow account to ensure the ability of
EuroGas to provide the remainder of a $1,000,000 loan to Teton. The deposit
paid by EuroGas will be forfeited if the acquisition is terminated. If the
acquisition is terminated, the parties have agreed that the $500,000 loan will
be converted into 1,000,000 shares of Teton Common stock.
NOTE 3 - NOTE RECEIVABLE
As described in Note 2, Property Acquisitions, EuroGas made a loan in the
amount of $500,000 to Teton Petroleum Company of which $100,000 was paid by
a shareholder on behalf of the Company.
During the second quarter of 2000 EuroGas determined that a note receivable
in the amount of $500,000 was unrecoverable. Accordingly, the Company
removed the note and recorded a bad debt charge of $500,000 to its
operations for the period ended June 30, 2000.
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 debenture holder 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 debenture holders
were to 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
<PAGE> F-5
detachable warrants issued below market on the date of issuance, constitute
a beneficial conversion feature of the debentures. The Company recorded the
three instruments at their relative fair values on the date of issuance with
$1,898,138 allocated to warrants, $330,439 allocated to the debentures and
$771,429 allocated to the beneficial conversion feature with the remaining
$2,669,567 recorded as a debt discount. Since the debenture were
immediately convertible, the Company recognized the resulting debt discount
of $2,669,567 as interest expense. The values of the options was determined
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 6.2%, expected dividend yield of 0%, volatility
of 126% and an expected life of two years. The debentures were subsequently
converted, at the election of the holders, on March 30, 2000, into 8,571,428
common shares and warrants to purchase 17,142,858 common shares at $0.35
were issued.
Current notes payable were reduced during the six months ended June 30, 2000
by approximately $1,662,224 which primarily consisted of payments to reduce
notes payable to a bank in Canada.
Notes payable to related party were reduced during the six months ended June
30, 2000 by approximately $204,431 which primarily consisted of a
conversion of notes to 10.5% convertible debentures and the issuance of
notes payable to employees and shareholders in the amount of $200,000.
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.
During the three months ended June 30, 2000, the Company issued 3,800,000
shares of common stock pursuant to accrued settlement obligations in the
amount of $3,097,000 or $0.82 per share and granted an option to purchase
3,000,000 shares of the Company's common stock pursuant to an accrued
settlement obligation in the amount of $1,560,000 in addition to a charge
of $6,770,000 related to a guaranteed market value of the underlying stock
price of $3.00 when the options are exercised. The options granted vest
in one year and are exercisable at $0.65 in one year and are exercisable
at $0.65 per share for a period of thirty days.
At June 30, 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; $483,099
liquidation preference
1997 Series A Preferred shares; 260 shares outstanding; $60.00 annual
dividend rate per share, $15,600 annually; $328,557 liquidation
preference
NOTE 6 - COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------- -----------------------------
2000 1999 2000 1999
--------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
LOSS APPLICABLE TO COMMON SHARES $ (1,131,613) $ (2,356,591) $ (5,188,579) $ (5,047,439)
--------------- -------------- ------------ --------------
OTHER COMPREHENSIVE LOSS
Unrealized holding losses on
securities available-for-sale (140,915) (15,026) (140,915) (441,157)
Less: Reclassification adjustment
for losses realized in net loss - - - 37,695
Net change in cumulative foreign
currency translation adjustment (546,922) 333,910 (748,630) (892,525)
----------------- --------------- ------------ --------------
TOTAL OTHER COMPREHENSIVE LOSS (687,837) 318,884 (889,545) (1,295,987)
----------------- ------------- ------------ --------------
COMPREHENSIVE LOSS $ (1,819,450) $ (2,037,707) $ (6,078,124) $ (6,343,426)
================= ============== ============ ===============
Accumulated other comprehensive loss consisted of the following at June 30,
2000:
Unrealized loss on securities
available-for-sale $ (1,209,768)
Cumulative foreign currency
translation adjustment (3,545,719)
-----------------
ACCUMULATED OTHER COMPREHENSIVE LOSS $ (4,755,487)
=================
</TABLE>
<PAGE> F-6
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. 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 was 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.
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
<PAGE> F-7
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.
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.
<PAGE> F-8
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.
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
=========
<PAGE> F-9
<PAGE> 3
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The Company is primarily engaged in the acquisition of rights to
explore for and exploit natural gas, coal bed methane gas, crude
oil and other hydrocarbons. The Company has acquired interests
in several large exploration concessions and is in various stages
of identifying industry partners, farming out exploration rights,
undertaking exploration drilling, and seeking to develop
production. The Company is also involved in co-generation and
mineral reclamation projects.
Activities in Canada. The Company holds an equity interest
of slightly more than 50% of the capital stock of Big Horn
Resources Ltd., a Canadian full-service oil and gas producer.
Big Horn's business is conducted primarily in western Canada,
particularly in the provinces of Alberta and Saskatchewan, and
its stock is currently traded on the Toronto Stock Exchange.
Although the Company currently holds one seat on Big Horn's board
of directors, the Company is not involved in the day-to-day
management or operations of Big Horn.
Activities in Poland. EuroGas Polska, a wholly-owned
subsidiary of the Company, has created a consortium with two
European utility companies to develop a power project in Zielona
Gora (Western Poland). As an initial step, the Company created
and registered "Energetyka Lubuska." Energetyka Lubuska intends
to submit a proposal to the Ministry of Treasury of Poland to
acquire the existing EC Zielona Gora power plant through
privatization. The Company expects the Ministry of Treasury to
make a final decision on this matter sometime during 2000. If
privatization is approved, the multi-year process of obtaining
financing for and updating the proposed power plant can commence.
If acquired, the power plant is expected to deliver 180 Mega
Watts of electricity and 180 Mega Watt of thermal energy
(generated heat to be used for district heating system).
Separately, Energetyka Lubuska executed a letter of intent
with the Polish Oil and Gas Company to develop a new power plant
near Gorzow in north-western Poland. The proposed project
involves the construction of a 5 Megawatt power plant that uses
gas produced by a nearby oilfield to produce electricity that
will be marketed to a nearby de-sulfurisation plant owned by
Polish Oil and Gas Company. The project is at a conceptual
stage, and we must enter into a final agreement with the Polish
Oil and Gas Company, complete design of the plant and obtain
financing before the 12-24 month construction process can
commence. The Company expects to enter into a final agreement
by the end of 2000.
In addition, EuroGas Polska has executed a mining usufruct
agreement over an area covering over 1 million acres of
conventional oil and gas exploration acreage in the Carpathian
oil fairway. In May 2000, a report conducted by independent
Polish oil and gas experts highlighted potential in 12
exploration leads within this area.
Activities in Slovakia. The Company is pursuing three
projects in Slovakia, including the development of the Gemerska-
Poloma talc deposit located near Roznava. The Company owns a
24.5% indirect interest in this talc deposit, operated by Rozmin
s.r.o., with the remaining interest being held by Belmont
Resources, Ltd, a Vancouver British Columbia entity and an
affiliate of a significant shareholder of EuroGas. The Company's
work schedule for the talc mine calls for an accelerated drive to
commercial production in 2001. Belmont has agreed to finance the
first $1.0 million of the Company's expenditure liabilities on
the Gemerska-Poloma deposit.
The Company's remaining two Slovakian projects involve the
exploration for oil or natural gas in the Trebisov, gas field in
eastern Slovakia and the Evigeo (Medzilaborce) concession in the
northeastern corner of Slovakia. Each of these projects is at an
early exploratory or appraisal stage.
Activities in Sakha Republic. In 1997, the Company acquired
OMV (Jakutien) GmbH, which holds a 50% interest in the TAKT Joint
Venture, an entity based in Yakutsk, Sakha Republic, Russia.
The TAKT Joint Venture held two oil and gas exploration licenses.
The Company participated in a work program of seismic
reprocessing of over 1,700km of data and its interpretation prior
to the expiry of the licenses in October 1998. Recently, the
Company has been negotiating to have the licenses renewed to
allow the Company to move forward towards choosing a drilling
location for a future well. The Company is also negotiating with
a third party for a potential farm-out of a portion of the
Company's interest in TAKT.
<PAGE> 4
Activities in the United Kingdom. UK Gas Limited, a United
Kingdom company, and Slovgold GesmbH, an Austrian company, are
negotiating a 50/50 joint venture to engage in coalbed methane
gas exploration activities in South Wales. On January 20, 2000,
the Company entered into an agreement with Slovgold pursuant to
which the Company purchased 50% of Slovgold's 50% interest in
this joint venture if and when Slovgold finalizes its agreement
with UK Gas. If the joint venture agreement between UK Gas and
Slovgold is finalized, the Company anticipates conducting a six-
well pilot program on a 500 sq. kilometer (125,000 sq. acre)
concession in South Wales held by UK Gas to test for coalbed
methane gas. The Company's agreement with Slovgold calls for the
Company to cover the costs for the six-well pilot program
(estimated at $700,000) and the first stage of any subsequent
development program in exchange for 40% of the cash flow until
payout, after which our contribution obligation and cash flow
interest will be reduced to 25%. In order to minimize the amount
of capital the Company needs to contribute to conduct the pilot
program, the Company has entered into discussions with UK Gas in
order to permit the Company to participate in the pilot program
by utilizing drilling equipment owned by its Polish subsidiary.
In light of the absence of a binding agreement between Slovgold
and UK Gas (or any approval by UK Gas of the Company's
participation), the Company remains uncertain about the prospect
of pursuing the pilot program in any form.
Proposed Merger with Teton Petroleum Company. On April 5,
2000, the Company entered into a Master Transaction Agreement
(and related merger agreement) with Teton Petroleum Company, a
Delaware corporation, and Goltech Petroleum, LLC, a Texas limited
liability company and wholly-owned subsidiary of Teton. Due to
the delay of both Teton and EuroGas in completing related due
diligence, and to liabilities associated with a default judgment
entered against the Company, such Master Transaction Agreement
has been amended pursuant to various side letters, is presently
being renegotiated and, if not successfully renegotiated, will
likely be terminated in the near future. Until the end of an
indefinite due diligence period, the Master Transaction Agreement
(and related merger agreement) are terminable at will and without
penalty by either party.
As of August 14, 2000, the Master Transaction Agreement and
accompanying agreements describe and contemplate the following
three interrelated transactions:
Teton has agreed to merge with and into a wholly-owned
subsidiary of EuroGas in exchange for shares of EuroGas
common stock. The initial merger agreement provided that
Teton would receive approximately 14,981,744 shares of
common stock and warrants to purchase an additional
2,599,249 shares of common stock in the merger. If the
parties are able to reach agreement on revised terms for the
proposed merger, we expect that the number of shares
issuable to Teton will increase substantially.
EuroGas has agreed to purchase, and Goltech has agreed to
sell, a 35% membership interest in Goltech for $2,300,000.
To date, EuroGas, has paid a deposit of $700,000 toward its
purchase of an interest in Goltech, which deposit will be
forfeited if the Master Transaction Agreement is terminated
prior to completion of due diligence.
EuroGas has agreed to provide an up to $4,000,000 credit
facility for Teton. To date, the Company has loaned Teton
$500,000 under the credit facility. In anticipation of a
possible termination of the Master Transaction Agreement,
the Company has agreed that, if the Master Transaction
Agreement is terminated, the Company will cancel such
$500,000 in indebtedness in exchange for 1,000,000 shares of
Teton common stock.
Teton's primary asset is its 100% ownership interest in
Goltech, and Goltech's primary asset is its ownership of 70.59%
of a Russian closed joint stock company known as Goloil. Teton
has represented to EuroGas that Goloil is the operator of the
Eguryakhskiy License Territory, also referred to as the Goloil
Project, a 187 sq. kilometer (46,200 acre) oil field centrally
located in the southern half of the West Siberian basin in
Russia. Goltech is in the early stages of constructing an
approximately 20 mile-long pipeline from the Eguryakhskiy license
area to an existing pipeline in order to increase the volume of
oil extracted from the Eguryakhskiy license area.
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.
<PAGE> 5
Results of Operations
The following table sets forth consolidated income statement data
and other selected operating data for the three- month and six-
month periods ended June 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Oil and Gas Sales $ 1,290,460 $ 1,240,698 $ 2,673,065 $ 1,981,592
Operating Expenses
Oil and gas production 369,110 433,743 624,020 605,887
Depreciation and
amortization 315,372 510,228 730,724 805,945
General and administrative 1,371,278 1,814,994 3,209,274 4,340,712
Total Operating Expenses 2,055,760 2,758,965 4,564,018 5,752,544
Other Income (Expense)
Interest Income 10,653 12,239 50,642 81,836
Interest Expense (189,367) (132,582) (2,965,462) (255,847)
Foreign currency
exchange gains (losses),
net 2,038 45,431 49,084 111,059
Realized loss on sale of
securities and equipment 2,551 - (1,856) (37,695)
Minority interest in
income of consolidated
subsidiary (180,172) (76,352) (480,399) (169,063)
Other Expense, Net (354,297) (151,264) (3,347,991) (269,710)
Net Loss (1,119,597) (1,669,531) (5,238,944) (4,040,662)
</TABLE>
<PAGE> 6
Three Months Ended June 30, 2000 Compared with Three Months Ended
June 30, 1999
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 June
30, 2000 and 1999 reflect oil and gas sales of $1,290,460 and
$1,240,698, respectively, all of which is attributable to Big
Horn.
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 decreased from $433,743 for the three months
ended June 30, 1999 to $369,110 for the three months ended June
30, 2000. Such decreased costs result primarily from a
stabilization of production. General and administrative expenses
were $1,371,278 for the three months ended June 30, 2000,
compared to $1,814,994 for the three months ended June 30, 1999.
Such decrease in administrative expenses is the result of the
resignation of several employees who have not been replaced and
the use of fewer consultants. Depreciation and amortization
expenses were $315,372 for the three months ended June 30, 2000,
compared to $510,228 for the three months ended June 30, 1999.
Such decrease is primarily attributable to lower capital spending
during late 1999 and early 2000.
During the three months ended June 30, 2000, the Company incurred
an interest expense of $189,367, compared to an interest expense
of $132,582 during the three months ended June 30, 1999. The
primary reason for such increase in interest expense was the need
for the Company to increase its reliance on loans instead of
equity financings during the three months ended June 30, 2000.
The Company also recognized a loss of $180,172 from a minority
interest in a consolidated subsidiary during the three months
ended June 30, 2000 compared to a loss of $76,352 during the
three months ended June 30, 1999. The $1,290,460 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
$180,172 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 $81,761,108 as of June 30, 2000, to offset
profits, if and when achieved, resulting in a reduction in income
taxes payable
Net Loss. The Company incurred net losses of $1,119,597 for the
three months ended June 30, 2000 and $1,669,531 for the three
months ended June 30, 1999. These losses were due in large part
to the absence of revenues, combined with continued
administrative, production, depreciation and other recurring
continuing expenses and increases in accruals for litigation
activities. The decrease in net losses for the three months
ended June 30, 2000, as compared to the three months ended June
30, 1999, is primarily attributable to some cost cutting
activities.
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 $2,038 in the three months ended June 30,
2000 and $45,431 in the three months ended June 30, 1999 in gains
as a result of currency transactions during such periods. The
Company does not currently employ any hedging techniques to
protect against the risk of currency fluctuations.
Six Months Ended June 30, 2000 Compared with Six Months Ended
June 30, 1999
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 six months ended June 30,
2000 and 1999 reflect oil and gas sales of $2,673,065 and
$1,981,592, respectively, all of which is attributable to Big
Horn.
Operating Expenses. General and administrative expenses were
$3,209,274 for the six months ended June 30, 2000, compared to
$4,340,712 for the six months ended June 30, 1999, a decrease of
26 percent. The decrease was primarily attributable to a
reduction of consulting fees. Depreciation and amortization
expenses were $730,724 for the six months ended June 30, 2000,
compared to $805,945 for the six months ended June 30, 1999.
Such decrease is the result of lower capital spending during late
1999 and early 2000. Oil and gas production expenses remained
relatively stable between the first six months of 1999 and the
first six months of 2000.
<PAGE> 7
Income Taxes. As indicated above, as a result of the Company's
absence of net profits, the Company has not historically been
required to pay income taxes. For future years, the Company
anticipates that it will be able to utilize a substantial portion
of its accumulated deficit, which was $81,761,108 as of June 30,
2000, to offset profits, if and when achieved, resulting in a
reduction in income taxes payable.
Net Loss. The Company incurred a net loss of $5,238,944 for the
six months ended June 30, 2000, compared to a net loss of
$4,040,662 for the six months ended June 30, 1999. The losses
for both periods resulted primarily from the absence of revenues,
together with the Company's ongoing operating expenses. The
increase in net loss for the six month period ended June 30,
2000, as compared to the six month period ended June 30, 1999, is
primarily attributable to extraordinary interest expenses
incurred in three months ended March 31, 2000 in connection with
the issuance of convertible debentures on January 12, 2000. As
indicated above, the Company is subject to fluctuations in
currency exchange rates which may result in recognition in
significant gains or losses during any period. The Company
recognized $49,084 during the six months ended June 30, 2000 and
$111,059 during the six months ended June 30, 1999 in gains as a
result of currency transactions.
Capital and Liquidity
The Company had an accumulated deficit of $81,761,108 at June 30,
2000, substantially all of which has been funded out of proceeds
received from the issuance of stock and the incurrence of
payables. At June 30, 2000, the Company had total current assets
of $4,728,703 and total current liabilities of $13,629,543
resulting in negative working capital of $8,900,840. As of June
30, 2000, the Company's balance sheet reflected $26,844,845 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 six months
ended June 30, 2000, the Company received $1,591,336 in cash from
the issuance of the January 12, 2000 Convertible Debentures but
expended $1,638,898 of such cash in principal payments on
outstanding notes. The Company received $300,000 in proceeds from
the issuing of common stock and $100,000 from the issuing of
notes payable to a related party. As a result, the Company's
financing activities provided net cash of $352,438 during the six
month period ended June 30, 2000, compared to the net cash of
$4,186,832 from financing activities during the six month period
ended June 30, 1999. The net cash received during the six month
period ended June 30, 2000 was used primarily for general and
administrative expenses.
While the Company had cash of $904,284 at June 30, 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 contingent commitments to Teton
Petroleum Company under the Teton Master Agreement (which is
presently being renegotiated). Excluding potential litigation
liabilities and contingent commitments to Teton Petroleum Company
(for which we cannot reasonable estimate capital needs), the
Company estimates its financial commitments for the remaining six
months of 2000 will be approximately $2 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.
<PAGE> 8
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 and
the cumulative transaction adjustment, the Company has seen
losses on its assets values in those countries.
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
following:
. the Company's ability to renegotiate its agreements 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 ability of the Company to obtain the necessary financing to
successfully pursue its business strategy; operating hazards and
uninsured risks; and
. the intense competition and price volatility associated with
the oil and gas industry.
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
<PAGE> 9
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. 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.
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, the Company entered into a memorandum of understanding,
with FCDC in satisfaction of default judgment. In consideration
for FCDC's stipulation to vacate the default judgment, the
Company 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. The
Company is in the process of consummating the transactions
contemplated by 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. 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.
<PAGE> 10
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.
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, has executed all pleadings
required to be submitted to the United States District Court,
District of Utah, and has issued to Kukui, Inc. 100,000 shares of
restricted common stock.
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 to Schuepback.
<PAGE> 11
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. Pursuant to the settlement agreement, EuroGas agreed to
issue on or before June 1, 2000 to Mr. Jeu and Ms. Calvo shares
of common stockwith a market value of $440,000 on the date of
issuance and to reprice certain outstanding options. 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 $570,000 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 June 30, 2000,
the income tax liability recorded in the Company's financial
statements was $659,322. 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
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 June 30, 2000.
As of June 30, 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.
The private placement of the Convertible Debentures (and the
warrants and shares of common stock issuable upon the conversion
thereof) 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.
<PAGE> 12
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.
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned thereunto
duly authorized.
EUROGAS, INC.
Dated: August 16, 2000 By: /s/ Karl Arleth
------------------------------
(Karl Arleth, President and
Temporary Principal
Financial and Accounting
Officer)
<PAGE> 14
Exhibit Index
Exhibit Title of Document Location
Number
---------- ----------------------------- ----------------------
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
Privileges, and Preferences on form 10-QSB dated
of 1995 Series Preferred June 30, 1995*
Stock
3.4 Designation of Rights, Report on Form 8-K
Privileges, and Preferences dated July 12,
of 1996 Series Preferred 1996*
Stock
3.5 Designation of Rights, Report on Form 8-K
Privileges, and Preferences dated May 30, 1997*
1997 Series A Convertible
Preferred Stock
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 Quarterly Report
on Form 10-Q for
the quarter
ended March 31,
2000.*
10.1 Settlement Agreement dated Filed herewith.
June 16, 2000
27.1 Financial Data Schedule Filed herewith.
*Incorporated by reference
<PAGE> 15
