______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] 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 000-24781 87-0427676
---- --------- ----------
(State or other (Commission File No.) (IRS Employer
jurisdiction Identification
of incorporation or No.)
organization)
1006-100 Park Royal South
West Vancouver, B.C. Canada V7T 1A2
-----------------------------------
(Address of principal executive offices, Zip Code)
(604) 913-1462
--------------
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 19, 2003, the registrant had 171,212,635 shares of common stock
outstanding.
1
EUROGAS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of June 30,
2003 and June 30, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Managements Discussion and Analysis of Financial Condition
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 140,572 $ 187,922
Investment in securities available for sale 960 1,490,058
Other receivables 135,500 98,176
Other current assets 16,229 16,416
- --------------------------------------------------------------------------------------------------
Total Current Assets 293,261 1,792,572
- --------------------------------------------------------------------------------------------------
Property and Equipment - full cost method
Talc mineral properties and mining equipment 6,677,685 6,507,736
Oil and gas properties not subject to amortization 843,265 841,427
Furniture and office equipment 342,136 371,188
Total Property and Equipment 7,863,086 7,720,351
Less: Accumulated depletion, depreciation and amortization (198,691) (196,259)
Net Property and Equipment 7,664,395 7,524,092
Investment in Securities Held as Collateral under Settlement 3,176,778 -
Receivable from a Related Party 149,593 101,084
- --------------------------------------------------------------------------------------------------
Total Assets $ 11,284,027 $ 9,417,748
==================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accrued liabilities $ 6,015,638 $ 5,150,443
Accrued settlement obligations 13,285,766 13,145,766
Accrued income taxes 882,999 815,053
Notes payable to related parties 265,818 253,365
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 20,450,221 19,364,627
- --------------------------------------------------------------------------------------------------
Asset Retirement Obligation 340,347 -
- --------------------------------------------------------------------------------------------------
Stockholders' Deficiency
Preferred stock, $0.001 par value; 3,661,968 shares authorized;
2,392,228 shares outstanding; liquidation preference: $499,197 350,479 350,479
Common stock, $0.001 par value; 325,000,000 shares authorized;
171,212,635 shares and 168,212,635 shares issued, respectively 171,213 168,213
Additional paid-in capital 143,892,223 143,595,224
Accumulated deficit (155,231,148) (153,346,645)
Accumulated other comprehensive income (loss) 1,312,054 (264,363)
Receivable from shareholder - (448,425)
Treasury stock, at cost; 5,028 shares (1,362) (1,362)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (9,506,541) (9,946,879)
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 11,284,027 $ 9,417,748
==================================================================================================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Oil and Gas Sales $ - $ 2,612 $ - $ 2,612
- ----------------------------------------------------------------------------------------------------------
Costs and Operating Expenses
Depreciation 1,185 518 3,269 22,355
Impairment of mineral interests
and equipment - 3,937,500 - 3,937,500
Litigation settlement expense - 1,690,893 - 1,690,893
General and administrative 979,100 1,358,253 1,436,072 1,810,085
- ----------------------------------------------------------------------------------------------------------
Total Costs and Operating Expenses 980,285 6,987,164 1,439,341 7,460,833
- ----------------------------------------------------------------------------------------------------------
Other Income (Expenses)
Interest expense (21,987) (84,360) (32,352) (88,279)
Foreign exchange net gain (loss) (54,173) 240,405 (102,665) 215,184
Equipment rental income 65,082 - 82,099 -
Interest income 11 20,085 790 21,087
Gain on sale of securities available
for sale - 104,788 - 118,112
Other expense - (33,390) - (33,390)
- ----------------------------------------------------------------------------------------------------------
Net Other Expenses (11,067) 247,528 (52,128) 232,714
- ----------------------------------------------------------------------------------------------------------
Loss Before Accounting Change (991,352) (6,737,024) (1,491,469) (7,225,507)
Cumulative Effect of Accounting Change (185,990) - (185,990) -
- ----------------------------------------------------------------------------------------------------------
Net Loss (1,177,342) (6,737,024) (1,677,459) (7,225,507)
Preferred Dividends 33,708 33,707 67,044 67,044
- ----------------------------------------------------------------------------------------------------------
Loss Applicable to Common Shares $(1,211,050) $ (6,770,731) $(1,744,503) $ (7,292,551)
==========================================================================================================
Basic and Diluted Loss Per Common Share
Loss before accounting change $ (0.01) $ (0.05) $ (0.01) $ (0.05)
Net Loss $ (0.01) $ (0.05) $ (0.01) $ (0.05)
==========================================================================================================
Basic and Diluted Weighted-Average
Common Shares Outstanding 168,212,635 143,761,965 168,212,635 143,761,965
==========================================================================================================
Comprehensive Income (Loss)
Net loss $(1,177,342) $ (6,737,024) $(1,677,459) $ (7,225,507)
Foreign currency translation adjustments 20,306 129 (39,938) 99,499
Unrealized gain on investment
in securities available for sale 1,280,671 (341,484) 1,616,355 105,057
- ----------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 123,635 $ (7,078,379) $ (101,042) $ (7,020,951)
==========================================================================================================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
EUROGAS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
June 30,
--------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (1,677,459) $ (7,225,507)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation 3,269 22,355
Gain on sale of property and equipment (5,986) -
Foreign exchange net (gain) loss 102,665 (14,075)
Cumulative effect of accounting change 185,990 -
Accretion of accrued settlement obligation 14,170 -
Compensation on write-down of receivable from related party 448,425 -
Impairment of mineral interests and equipment - 3,937,500
Gain on sale of securities available for sale - (118,112)
Warrants issued for settlement cost - 1,690,893
Changes in operating assets and liabilities:
Other receivables (37,324) 279,549
Accrued liabilities 715,256 522,094
Accrued liabilities payable to related parties - (535,574)
- -------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (250,994) (1,440,877)
- -------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of mineral interests, property and equipment (30,000) (220,172)
Proceeds from sale of interest in gas property and equipment 5,986 5,642
Proceeds from sale of investment in fixed-maturity securities - 1,100,156
Proceeds from sale of securities available for sale - 503,723
Purchase of securities available for sale - (5,230)
- -------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (24,014) 1,598,649
- -------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock 300,000 -
Receivable from related party (48,509) -
Proceeds from sale of treasury stock - 1,850
Acquisition of treasury stock - (81,596)
- -------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 251,491 (79,746)
- -------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (23,833) 9,877
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash (47,350) 87,903
Cash at Beginning of Period 187,922 257,831
- -------------------------------------------------------------------------------------------------
Cash at End of Period $ 140,572 $ 345,734
=================================================================================================
Supplemental Disclosure of Cash Flow Information - Note 9
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Interim Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of EuroGas, Inc. and its
subsidiaries ("EuroGas" or the "Company"). These financial statements are
condensed and, therefore, do not include all disclosures normally required by
accounting principles generally accepted in the United States of America. 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, 2002. 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 consolidated
financial statements and consist of only normal recurring adjustments. The
results of operations presented in the accompanying condensed consolidated
financial statements are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2003.
Business Condition - EuroGas has accumulated a deficit of $155,231,148 through
June 30, 2003. EuroGas has had no revenue, losses from operations and negative
cash flows from operating activities during the years ended December 31, 2002
and 2001 and during the six months ended June 30, 2003. At June 30, 2003, the
Company had a working capital deficiency of $20,156,930 and a capital deficiency
of $9,506,541. The Company has impaired most of its oil and gas properties.
These conditions raise substantial doubt regarding the Company's ability to
continue as a going concern. Realization of the investment in properties and
equipment is dependent upon management obtaining financing for exploration,
development and production of its properties. In addition, if exploration or
evaluation of property and equipment is unsuccessful, all or a portion of the
remaining recorded amount of those properties will be recognized as impairment
losses. Payment of current liabilities will require substantial additional
financing. Management of the Company plans to finance operations, explore and
develop its properties and pay its liabilities through borrowing, through sale
of interests in its properties, through advances received against future talc
sales and through the issuance of additional equity securities. Realization of
any of these planned transactions is not assured.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of EuroGas, Inc., its majority-owned subsidiaries and
EuroGas' share of properties held through joint ventures. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Stock-Based Compensation - At June 30, 2003, the Company had options outstanding
that had been previously granted to employees and consultants. The Company
accounts for stock options granted to employees under APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations and
accounts for options granted to non-employees at their fair value under SFAS No.
123, Accounting for Stock-Based Compensation. No stock-based employee
compensation expense is reflected in net loss during the periods presented in
the accompanying financial statements as all options had an exercise price equal
to the market value of the underlying common stock on the date of grant or the
related compensation was recognized in earlier periods. There would not have
been any effect to net loss or to basic and diluted loss per common share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation as the related compensation was recognized in
earlier periods.
Loss Per Share - Basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share during periods of
income reflect potential dilution which could occur if all potentially issuable
common shares from stock purchase warrants and options, convertible notes
payable and preferred shares resulted in the issuance of common shares. The
weighted-average common shares outstanding was not increased from 39,342,858
potentially issuable common shares at June 30, 2003 and 36,392,858 potential
shares at June 30, 2002, because to do so would have decreased the loss per
share.
6
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reclassifications - Certain reclassifications have been made to the accompanying
December 31, 2002 and June 30, 2002 financial statements to conform to the
current period presentation.
Cumulative Effect of Accounting Change - The Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, effectively on January 1, 2003. In
accordance with the transition provisions of SFAS No. 143, the Company recorded
asset retirement costs of $140,187, liabilities of $326,177, and recognized the
cumulative effect on prior years of $185,990 as an expense during the six months
ended June 30, 2003, which had no effect on basic and diluted loss per common
share.
Recent Accounting Pronouncements - The Company adopted SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of January 1, 2003. Among other provisions, this
statement modifies the criteria for classification of gains or losses on debt
extinguishment such that they are not required to be classified as extraordinary
items if they do not meet the criteria for classification as extraordinary items
in APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The adoption of this standard
did not have any effect on the Company's financial position or results of
operations.
The Company also adopted SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities as of January 1, 2003. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
did not have any effect on the Company's financial position or results of
operations.
NOTE 2 - INVESTMENT IN SECURITIES
The Company's primary investment in securities consists of 209,550 shares of
Enterra Energy Ltd. The Enterra shares are held as collateral by Oxbridge
Limited under a claim, as discussed in Note 3. At June 30, 2003, the Company
changed its expectation of realizing proceeds from sale of the Enterra shares to
more than one year and reclassified the investment in the Enterra shares as a
long-term asset. The Company's investments in equity securities, including the
Enterra shares, are accounted for as available for sale, as defined by SFAS No.
115, as they have readily determinable fair values and are not restricted other
than in connection with being pledged as collateral. Accordingly, the
investments in securities available for sale are carried at market value with
unrealized gains and losses included in accumulated other comprehensive income
(loss). The cost of securities sold is determined by the average-cost method.
The investments in securities consisted of the following:
June 30, 2003 December 31, 2002
- -------------------------------------------------------------------------------------------
Cost $ 484,217 $ 412,892
Gross unrealized gains 2,693,521 1,077,166
- -------------------------------------------------------------------------------------------
Estimated Fair Value $ 3,177,738 $ 1,490,058
===========================================================================================
Presented in the accompanying balance sheets as follows:
Investment in securities available for sale $ 960 $ 1,490,058
Investment in securities held as collateral
under settlement obligation 3,176,778 -
- -------------------------------------------------------------------------------------------
Estimated Fair Value $ 3,177,738 $ 1,490,058
===========================================================================================
7
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the six months ended June 30, 2003, the Company made no sales or
purchases of investment securities.
NOTE 3 - ACCRUED SETTLEMENT OBLIGATIONS
Oxbridge Settlement - During 1997, Oxbridge Limited requested EuroGas convert
2,391,968 Series 1995 Preferred Stock into EuroGas common shares but was
effectively prevented in doing so by an agreed order with the Trustee in the
McKenzie bankruptcy case described below. As a result, Oxbridge was unable to
receive proceeds from the sale of the conversion shares when the average market
prices and trading volume would have resulted in substantial proceeds and has
made a claim against EuroGas for its losses. During 2002, EuroGas estimated the
cost to settle the Oxbridge claim to be approximately $6,800,000. That amount is
included in the accrued settlement obligation as of June 30, 2003.
McKenzie Bankruptcy Claim - This litigation is being brought by Steve Smith,
Chapter 7 Trustee (the "Trustee") for the bankruptcy estates of 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), pending in the United
States Bankruptcy Court for the Southern District of Texas, Houston Division.
In March 1997, the Trustee commenced the following cause of action: W. Steve
Smith, Trustee, v. McKenzie Methane Poland Co., Francis Wood McKenzie, EuroGas,
Inc. GlobeGas, B.V. and Pol-Tex Methane, (Adv. No. 97-4114 in the United States
Bankruptcy Court for the Southern District of Texas, Houston Division)
(hereafter "97-4114"). The Trustee's initial claim appears to allege that the
Company may have paid inadequate consideration for its acquisition of GlobeGas
from persons or entities acting as nominees for the McKenzies, and therefore
McKenzies' creditors are the true owners of the proceeds received from the
development of the Pol-Tex Concession in Poland. The Company has contested the
jurisdiction of the Court, and the Trustee's claim against a Polish corporation
(Pol-Tex), and the ownership of Polish mining rights. The Company further
contends that it paid substantial consideration for GlobeGas (Pol-Tex's parent),
and that there is no evidence that the creditors of the McKenzies invested any
money in the Pol-Tex Concession.
In March of 1997, the Trustee brought a related suit W. Steve Smith, Trustee v.
Bertil Nordling, Rolf Schlegal, MCK Development B.V. Claron N.V., Jeffrey Ltd.,
Okibi N.V., McKenzie Methane Poland Co., Harven Michael McKenzie, Timothy
Stewart McKenzie, Steven Darryl McKenzie and EuroGas, Inc., (Adv. No. 97-4155)
in each of the three McKenzie individual bankruptcy cases. In general, the
action asserts that the defendants, other than the Company, who acquired an
interest in the Polish Project, received a fraudulent transfer of assets
belonging to the individual McKenzie bankruptcy estates, or are alter egos or
the strawmen for the McKenzies. As a result, the Trustee asserts that any
EuroGas stock or cash received by these defendants should be accounted for and
turned over to the Trustee. As to the Company, the Trustee asserts that as
transfer agent, the Company should turn over the preferred stock presently
outstanding to the defendants or reserve such shares in the name of the Trustee
and that any special considerations afforded these defendants should be
canceled. It appears the Company was named to this litigation only because of
its relationship as transfer agent to the stock in question. This suit has been
administratively consolidated with 97-4114, and is currently pending before the
Houston bankruptcy court.
In October 1999, the Trustee filed a Motion for Leave to Amend and Supplement
Pleadings and Join Additional Parties in the consolidated adversary proceedings,
seeking to add new parties, including Wolfgang and Reinhard Rauball 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,
8
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
conversion, breach of fiduciary duties, concealment and perjury. These causes
of action claim that the Company and certain of its officers, directors or
consultants cooperated or conspired with the McKenzies to secret or conceal the
proceeds from the sale of the Polish Concession from the Trustee. In January
2000, this motion was granted by the bankruptcy court. The Company is
vigorously defending this suit. On March 18, 2002, the court considered motions
to dismiss filed by EuroGas and the Rauballs (other named defendants). These
motions are currently pending before the Court. No trial date has been set.
In June 1999, the Trustee filed another suit in the same bankruptcy cases styled
Steve Smith, Trustee, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP.
Z.O.O., et al (Adv. No. 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, vs. EuroGas, Inc., GlobeGas, B.V., Pol-Tex Methane, SP. Z.O.O. (Adv.
No. 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.
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.
On March 18, 2002, the court considered motions to dismiss filed by EuroGas and
the Rauballs (other named defendants). On September 10, 2002, the Court entered
an Order which required the Trustee to specify the causes of action asserted
against each Defendant. A few days prior to this Order, the Trustee filed his
Second Motion for Leave to Amend and Supplement Pleadings and to Drop Certain
Defendants (the "Second Motion"). On October 21, 2002, EuroGas and other
Defendants filed their Response to the Second Motion. On November 11, 2002, the
Trustee filed his Motion and Reply to this Response under which, in part,
Trustee sought court approval to file a Third Amended Complaint. On March 13,
2003 the Court entered and Order Granting Trustee's Motion for Leave to Amend.
On March 13, 2003 the Trustee filed his Third Amended Complaint, which is now
styled Steve Smith, Trustee v. Harven Michael McKenzie, McKenzie Methane Poland,
Inc., EuroGas, Inc., Wolfgang Rauball, Reinhard Rauball, MCK Development, B.V.,
Claron, N.V., Jeffrey, Ltd. and Okibi N.V. (Adv. No. 97-4114 and 97-4115). As to
EuroGas, the Third Amended Complaint asserts claims for breach of contract,
fraud in the inducement, conspiracy, aiding and abetting civil conspiracy,
fraudulent transfer and punitive damages. As to Wolfgang and Reinhard Rauball,
the Complaint asserts claims for turnover under Section 542 and 543 (Reinhard
Rauball only) of the Bankruptcy Code, conversion, post-petition avoidable
transfers, civil conspiracy, aiding and abetting civil conspiracy and punitive
damages. The Company has filed a Motion to Dismiss the Third Amended Complaint.
A trial date has been set for December 2003.
Management's estimate of the amounts due under the claims made by the Trustee
and his attorneys have been adequately accrued in the accompanying financial
statements.
Kukui, Inc. Claim - In November 1996, the Company entered into a settlement
agreement with Kukui, Inc. ("Kukui"), a principal creditor in the McKenzie
bankruptcy case, whereby the Company issued 100,000 common shares and an option
to purchase 2,000,000 additional common shares, which option expired on December
31, 1998. The Company granted registration rights with respect to the 100,000
common shares issued. On August 21, 1997, Kukui asserted a claim against
EuroGas, which was based upon an alleged breach of the 1996 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 the 100,000 shares delivered
to Kukui in connection with the 1996 settlement. In addition, the Estate of
Bernice Pauahi Bishop (the "Bishop Estate"), Kukui's parent company, entered a
claim for failure to register the resale of common shares subject to its option
to purchase up to 2,000,000 common shares of EuroGas. EuroGas denied any
9
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
liability and filed a counterclaim against Kukui and the Bishop Estate for
breach of contract concerning their activities with the McKenzie Bankruptcy
Trustee.
In December 1999, EuroGas signed a settlement agreement with the bankruptcy
Trustee, and other parties, including Kukui, Inc., and the Trustees of the
Bishop Estate, which had pursued separate claims against EuroGas (the
"Settlement Agreement"). The Settlement Agreement, in part, required EuroGas to
pay $900,000 over 12 months and issue 100,000 shares of registered common stock
to the Bishop Estate by June 30, 2000. The bankruptcy court approved the
Settlement Agreement on May 23, 2000. The claims of Kukui, Inc. and the
Trustees of the Bishop Estate have been dismissed pursuant to the terms of the
Settlement Agreement. Under the terms of the Settlement Agreement, EuroGas
recorded an accrued settlement obligation and litigation settlement expense of
$1,000,000 during 1999, paid Kukui $782,232 of the settlement obligation in 2000
and accrued an additional settlement obligation liability and expense of
$251,741 during 2000. During 2000, EuroGas issued the Bishop Estate 100,000
registered common shares, which were valued at $100,000, or $1.00 per share. The
resulting accrued settlement obligation of $369,509 for the estimated cost of
settling the claim included an estimated default penalty and interest. The
Company contends that it has fully performed under the Settlement Agreement and
that the Settlement Agreement additionally entitles the Company to a complete
release and dismissal of all suits filed by the Bankruptcy Trustee. The
Bankruptcy Trustee contends that EuroGas defaulted under the Settlement
Agreement and is not entitled to a release or dismissal.
Holbrook Claim - On February 9, 2001, James R. Holbrook, a documents escrow
agent appointed under the Settlement Agreement, filed his Complaint of Escrow
Agent for Interpleader and for Declaratory Relief against EuroGas, the Trustee
and the other parties to the settlement in an action styled James R. Holbrook v.
W. Steve Smith, Trustee, Kukui, Inc., EuroGas, Inc. and Kruse Landa & Maycock,
L.L.C., (Adv. No. 01-3064) in the McKenzie bankruptcy cases. Under this
complaint, Holbrook sought a determination of the defendants' rights in certain
EuroGas files that he had received from Kruse Landa and Maycock, former
attorneys for EuroGas. Through this litigation, the Trustee sought turnover of
all these files pursuit to the Settlement Agreement. EuroGas has opposed
turnover of privileged materials and filed a cross-claim in the suit asking for
a declaratory judgment that the Settlement Agreement is enforceable and that the
Trustee be ordered to specifically perform his obligations under the Settlement
Agreement. The Trustee filed a counterclaim requesting specific performance by
EuroGas and other relief. At the direction of the court, both parties filed
motions for summary judgment. On December 17, 2001, the court entered an order
granting Trustee's Motion for Summary Judgment and denying a related Motion to
Strike Affidavit, which EuroGas had filed. EuroGas has appealed this order to
the United States District Court for the Southern District of Texas. On
September 25, 2002 the District Court entered its Opinion and Order affirming
the Bankruptcy Court's orders. On October 25, 2002 EuroGas filed a notice of
appeal of the District Court's order to the Fifth Circuit Court of Appeals. The
appeal is currently pending before this Court. EuroGas cannot predict the
outcome of these appeals, but intends to vigorously pursue the appeals to
completion.
10
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are considered current and consist of:
June 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------
Loans from a key employee, due in 2002, with
interest at 10%, unsecured $ 218,285 $ 218,285
Loans from an officer and from companies
associated with a director, due in 2002 and
2003, with interest at 7.5% to 10%, unsecured. 38,234 35,080
- ------------------------------------------------------------------------------------------------------
Total Notes Payable to Related Parties 256,519 253,365
======================================================================================================
NOTE 5 - RELATED PARTY TRANSACTIONS
Receivable from a Related Party - The Chief Executive Officer and principal
shareholder of EuroGas, together with various other companies under his control,
have paid miscellaneous business expenses on behalf of EuroGas, and EuroGas has
paid certain expenses on their behalf. The resulting receivables and payables
are combined and presented in the accompanying financial statements as
receivable from related parties of $37,716 and $101,084 as of March 31, 2003 and
December 31, 2002, respectively.
Related party loans are described in Note 4, Notes Payable to Related Parties.
NOTE 6 - ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations, which requires entities to record the fair value
of a liability for an asset retirement obligation when it is incurred, which,
for the Company, is typically when an oil or gas well is drilled or purchased or
the talc mine was opened. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development or normal use of the asset. The Company's asset
retirement obligations relate primarily to the obligation to plug and abandon
oil and gas wells, support wells and the obligation to reclaim property in
connection with the talc mine, at the conclusion of their useful lives.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is normally capitalized by increasing the carrying amount of
the related property. However, for assets that have previously been impaired,
the related cost is charged to expense. Over time, the liability is accreted
upward for the change in its present value each period until the obligation is
settled. The initial capitalized cost, if any, is amortized by the unit-of-
production method. At January 1, 2003, the implementation of SFAS No. 143
resulted in a net increase in property and equipment of $148,187. Liabilities
increased by $326,177, which represents the establishment of an asset retirement
obligation liability. The cumulative effect on prior years of the change in
accounting principle of $185,990, or $0.00 per share, was recorded in 2003 as an
expense. The effect of adopting this accounting principle was an increase to
the loss during the six months ended June 30, 2003 of $14,170.
11
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following present pro forma net loss and basic and diluted loss per common
share information as if SFAS No. 143 had been applied retroactively for all
periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,177,342) $ (6,744,248) $ (1,677,459) $ (7,239,627)
Basic and Diluted Loss Per Common Share $ (0.01) $ (0.05) $ (0.01) $ (0.05)
====================================================================================================================
The pro forma amount of the liability for the asset retirement obligation was
$296,525 at December 31, 2001, $303,420 at March 31, 2002 and $310,645 at June
30, 2002. The asset retirement obligation is adjusted each quarter for any
liabilities incurred or settled during the period, accretion expense and any
revisions made to the estimated cash flows. The reconciliation of the asset
retirement obligation for the six months ended June 30, 2003 is as follows:
----------------------------------------------------
Balance, January 1, 2003 $ 326,177
Accretion expense 14,170
----------------------------------------------------
Balance, June 30, 2003 $ 340,347
====================================================
NOTE 7 - PREFERRED AND COMMON STOCK
During the three months ended June 30, 2003, the Company issued 3,000,000 shares
of common stock for $300,000 in cash, of $0.10 per share.
There are 2,391,968 shares of 1995 Series Preferred Stock (the "1995 Series
preferred stock") issued and outstanding. The 1995 Series preferred stock is
non-voting, non-participating and has a liquidation preference of $0.10 per
share plus unpaid dividends. The 1995 Series preferred shareholders are entitled
to annual dividends of $0.05 per share. Each share of the 1995 Series preferred
stock is convertible into two common shares upon lawful presentation of the
share certificates. Dividends are payable until converted. EuroGas has the right
to redeem the 1995 Series preferred stock on not less than 30 days written
notice, at a price of $36.84 per share, plus any accrued but unpaid dividends.
Annual dividend requirements of the 1995 Series preferred stock are $119,598.
There are 260 shares of the 1997 Series A Convertible Preferred Stock (the "1997
Series preferred stock"). The 1997 Series preferred stock is non-voting and
accrues dividends at $60.00 per share, or six percent annually. The 1997 Series
preferred stock has a liquidation preference of $1,000 per share, plus unpaid
dividends before liquidation payments applicable to common shares but after
liquidation payments to the 1995 Series preferred stock outstanding. The 1997
Series preferred stock, along with unpaid dividends thereon, are convertible
into common shares at the rate of $1,000 divided by the lesser of 125% of the
average closing bid price for five trading days prior to issuance or 82% of the
average closing bid price for five trading days prior to conversion. The 1997
Series preferred stock has a liquidation preference of $260,000. Annual dividend
requirements of the 1997 Series preferred stock are $15,600. The following is a
summary of the preferred stock outstanding at June 30, 2003:
12
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Liquidation Preference Annual Dividend Requirement
------------------------- -------------------------------
Designation Shares Outstanding Per Share Total Per Share Total
- ------------------------------------------------------------------------------------------------------------
1995 Series 2,391,968 $ 0.10 $ 239,197 $ 0.05 $ 119,598
1997 Series A Convertib 260 1,000.00 260,000 60.00 15,600
- ------------------------------------------------------------------------------------------------------------
Total 2,392,228 $ 499,197 $ 135,198
============================================================================================================
Aggregate accrued dividends on preferred stock were $684,160 and $650,824 at
June 30, 2003 and December 31, 2002, respectively.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following:
June 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (1,381,467) $ (1,341,529)
Unrealized gain on investments in
securities available for sale 2,693,521 1,077,166
- ------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss) $ 1,312,054 $ (264,363)
================================================================================================
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
For the Six Months
Ended June 30,
---------------------------
Supplemental Disclosure of Cash Flow Information 2003 2002
- -------------------------------------------------------------------------------------------------
Cash paid for interest $ - $ -
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------------------------------------
Accrual of preferred dividends $ 33,336 $ 67,044
Asset retirement obligation incurred in property acquisition 140,187 -
Conversion of fixed-maturity securities to note receivable - 345,345
Issuance of 10,000,000 common shares for:
Receivable from shareholder - 329,709
Conversion of note payable - 170,291
Conversion of accrued liability for salaries to officers - 500,000
=================================================================================================
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Purchase of Rozmin - EuroGas acquired a direct 43% interest in Rozmin s.r.o.
through a series of transactions from 1998 through April 2002. Rozmin s.r.o.
holds a talc deposit in Eastern Slovakia. On April 17, 2001, EuroGas entered
into an agreement to purchase an additional 57% interest in Rozmin s.r.o. from
Belmont Resources, Inc. ("Belmont"), in exchange for EuroGas issuing 12,000,000
common shares, paying Belmont $100,000 in advance royalties, and modifying the
exercise price of existing stock options. EuroGas further agreed to issue an
additional 1,000,000 common shares for each $0.05 decrease in the ten-day
average OTC Bulletin Board quoted trading price of the Company's common shares
below $0.30 per share through April 17, 2002. During 2002 EuroGas issued
3,830,000 common shares to Belmont under the stock price guarantee. In
connection with the purchase by EuroGas, Rozmin s.r.o. granted an overriding
royalty to Belmont of two percent of gross revenues from any talc sold.
13
EUROGAS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additionally, EuroGas agreed to issue additional common shares to Belmont if
Belmont did not realize approximately $1,218,000 from the resale of the original
12,000,000 common shares by April 17, 2002, and provide notice of such
deficiency to EuroGas, to compensate Belmont for the shortfall based on the ten-
day average trading price on the date of the notice of shortfall from Belmont.
Because Belmont has not provided notice of the sale of the shares and the
resulting deficiency, EuroGas is not able to calculate the shares that may be
issuable, but estimates it may be obligated to issue approximately 12,000,000
additional common shares, based on recent market prices for the Company's common
stock, to Belmont under this provision of the agreement.
EuroGas also agreed to arrange the necessary financing to place the talc deposit
into commercial production by April 17, 2002 and agreed that if the talc deposit
was not in commercial production by then, EuroGas agreed to pay Belmont
additional advanced royalties of $10,000 per month for each month of delay in
achieving commercial production. As of June 30, 2003 EuroGas has accrued
$115,000 in advance royalty due to Belmont because the talc deposit is not in
commercial production.
Litigation - The principal portion of the Company's active litigation involves
matters relating to the Company's acquisition of GlobeGas (which indirectly
controlled the Pol-Tex Concession in Poland) and is described in Note 3.
Netherlands Tax Liability - EuroGas' subsidiary, GlobeGas BV, lost its appeal
for a reduction of a 1992 income tax liability in the Netherlands of $882,999 at
June 30, 2003. The tax arose from the sale of equipment at a profit by the
former owner of GlobeGas to its Polish subsidiary. The liability is reflected in
EuroGas' financial statements; however, GlobeGas does not have the ability to
pay the assessed obligation and as a result may face forced liquidation and
dissolution by the Netherlands tax authority.
Employment commitments and contingencies - During April 1999, EuroGas entered
into a three-year employment contract with a former chief executive officer. The
contract provided for an annual salary of $400,000 plus living and other
allowances of $28,200. In addition, options to purchase 1,000,000 common shares
at $0.95 per share were granted in connection with the employment contract. The
officer resigned in January 2001. The options vested on January 1, 2000, and
were considered to have expired during 2002 due to the termination of the
officer's employment. EuroGas has accrued salary obligations to the officer in
the amount of $230,000, plus certain expenses, which are included in accrued
liabilities. EuroGas believes there may be offsets to this amount but has not
reduced the accrued amount.
Former officers have made claims for compensation and for reimbursement of
expenses against EuroGas, which amounts have been included as accrued
liabilities.
On February 5, 2002 EuroGas entered into an employment agreement with its new
President. The three-year agreement provides for annual compensation of $400,000
to be paid in monthly installments. The agreement provides for all terms of the
agreement to continue for the unexpired term of the agreement should the Company
be involved in a winding-up or merger transaction. The agreement may be
terminated if either party fails to meet its obligations under the terms of the
agreement. In June 2002, the Company agreed to compensate its Chief Executive
Officer and principal shareholder $25,000 per month.
Lease commitments - The Company leases office facilities from various lessors in
Poland, Vienna, and Vancouver. Except for Vancouver, the office leases are on
month-to-month agreements. EuroGas entered into a lease agreement for its
Vancouver office space that required monthly payments of $6,851 through January
2003. Thereafter, the lease is on a month-to-month basis.
14
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, talc and
other minerals. 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 a planning-stage co-generation and
mineral reclamation project. Unless otherwise indicated, all dollar amounts in
this Form 10-Q are reflected in United States dollars.
When used herein, the terms the "Company," and "EuroGas," include EuroGas,
Inc. and its wholly owned subsidiaries.
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, 2003 and 2002, respectively.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Oil and Gas Sales $ - $ 2,612 $ - $ 2,612
- ----------------------------------------------------------------------------------------------------------
Costs and Operating Expenses
Depreciation 1,185 518 3,269 22,355
Impairment of mineral interests
and equipment - 3,937,500 - 3,937,500
Litigation settlement expense - 1,690,893 - 1,690,893
General and administrative 979,100 1,358,253 1,436,072 1,810,085
- ----------------------------------------------------------------------------------------------------------
Total Costs and Operating Expenses 980,285 6,987,164 1,439,341 7,460,833
- ----------------------------------------------------------------------------------------------------------
Other Income (Expenses)
Interest expense (21,987) (84,360) (32,352) (88,279)
Foreign exchange net gain (loss) (54,173) 240,405 (102,665) 215,184
Equipment rental income 65,082 - 82,099 -
Interest income 11 20,085 790 21,087
Gain on sale of securities available
for sale - 104,788 - 118,112
Other expense - (33,390) - (33,390)
- ----------------------------------------------------------------------------------------------------------
Net Other Expenses (11,067) 247,528 (52,128) 232,714
- ----------------------------------------------------------------------------------------------------------
Loss Before Accounting Change (991,352) (6,737,024) (1,491,469) (7,225,507)
Cumulative Effect of Accounting Change (185,990) - (185,990) -
- ----------------------------------------------------------------------------------------------------------
Net Loss (1,177,342) (6,737,024) (1,677,459) (7,225,507)
Preferred Dividends 33,708 33,707 67,044 67,044
- ----------------------------------------------------------------------------------------------------------
Loss Applicable to Common Shares $(1,211,050) $ (6,770,731) $(1,744,503) $ (7,292,551)
==========================================================================================================
Basic and Diluted Loss Per Common Share
Loss before accounting change $ (0.01) $ (0.05) $ (0.01) $ (0.05)
Net Loss $ (0.01) $ (0.05) $ (0.01) $ (0.05)
==========================================================================================================
15
Three months ended June 30, 2003, compared with three months ended June 30, 2002
Revenues. The Company had no oil and gas sales for the three months ended
June 30, 2003 and $2,612 for the three months ended June 30, 2002.
Operating Expenses. Operating expenses primarily include general and
administrative expenses, depreciation, impairment of mineral interests and
equipment and litigation settlement expense. General and administrative
expenses were $979,100 for the three months ended June 30, 2003, compared to
$1,358,253 for the three months ended June 30, 2002. The decrease in
administrative expenses is the result of reduced expenditures relating to
administrative items. Depreciation expense was $1,185 for the three months ended
June 30, 2003, compared to $518 for the three months ended June 30, 2002.
Other Income and Expense. Interest expense was $21,987 for the three
months ended June 30, 2003, compared to $84,360 during the three months ended
June 30, 2002. The Company received rental income from the use of its oil and
gas drilling equipment of $65,082 during the three months ended June 30, 2003,
with no similar income during the three months ended June 30, 2002.
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 operating loss carry
forwards in the United States of America of approximately $17,800,000 as of June
30, 2003, to offset profits, if and when achieved, resulting in a reduction in
income taxes payable. However, to the extent accumulated deficits have not been
incurred in countries where income is earned, such offsets will not be
available.
Cumulative Effect of Accounting Change. Effective January 1, 2003, the
Company adopted Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations, which required the Company to recognize the
fair value of legal and contractual asset retirement obligations when incurred.
The Company recognized the cumulative effect of this accounting change on prior
years of $185,990 during the three months ended June 30, 2003.
Net Loss. The Company incurred a net loss of $1,177,342 for the three
months ended June 30, 2003, compared to a net loss of $6,737,024 for the three
months ended June 30, 2002. The losses were due in large part to the absence of
revenues, combined with continued administrative, interest, foreign exchange
loss and other recurring continuing expenses and the one time cumulative effect
of the change in the method of accounting for asset retirement obligations.
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 a loss of $54,173 in the three months
ended June 30, 2003, compared to a gain of $240,405 in the three months ended
June 30, 2002, as a result of exchange rate changes and currency transactions
during these periods. The Company does not currently employ any hedging
techniques to protect against the risk of currency fluctuations.
Six months ended June 30, 2003, compared with Six months ended June 30, 2002
Revenues. The Company had no oil and gas sales for the six months ended
June 30, 2003 and $2,612 for the six months ended June 30, 2002.
Operating Expenses. Operating expenses primarily include general and
administrative expenses, depreciation, impairment of mineral interests and
equipment and litigation settlement expense. General and administrative expenses
16
were $1,436,072 for the six months ended June 30, 2003, compared to $1,810,085
for the six months ended June 30, 2002. The decrease in administrative expenses
is the result of reduced expenditures. Depreciation expense was $3,269 for the
six months ended June 30, 2003, compared to $22,355 for the six months ended
June 30, 2002. This decrease is primarily attributable to the lower amount of
properties in service. The Company incurred no impairment or litigation
settlement expenses during the six months ended June 30, 2003 but incurred
$3,937,500 of impairment of mineral interests and equipment and $1,690,893 of
litigation settlement expense during the six months ended June 30, 2002.
Other Income and Expense. Interest expense was $32,352 for the six months
ended June 30, 2003, compared to $88,279 during the six months ended June 30,
2002. Foreign exchange net loss was $102,665 during the six months ended June
30, 2003 compared to a net gain of $215,184 during the six months ended June 30,
2002. The Company realized equipment rental income of $82,099 during the six
months ended June 30, 2003 with no comparable amount during the six months ended
June 30, 2002.
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 operating loss carry
forwards in the United States of America of approximately $17,800,000 as of June
30, 2003, to offset profits, if and when achieved, resulting in a reduction in
income taxes payable. However, to the extent accumulated deficits have not been
incurred in countries where income is earned, such offsets will not be
available.
Cumulative Effect of Accounting Change. Effective January 1, 2003, the
Company adopted Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations, which required the Company to recognize the
fair value of legal and contractual asset retirement obligations when incurred.
The Company recognized the cumulative effect of this accounting change on prior
years of $185,990 during the six months ended June 30, 2003.
Net Loss. The Company incurred a net loss of $1,677,459 for the six months
ended June 30, 2003, compared to a net loss of $7,225,507 for the six months
ended June 30, 2002. The losses were due in large part to the absence of
revenues, combined with continued administrative, depreciation, and other
recurring continuing expenses and the one time cumulative effect of the change
in the method of accounting for asset retirement obligations.
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 a loss of $102,665 in the six months
ended June 30, 2003, and a gain of $215,184 in the six months ended June 30,
2002, as a result of currency transactions during these periods. The Company
does not currently employ any hedging techniques to protect against the risk of
currency fluctuations.
Capital and Liquidity
The Company had an accumulated deficit of $155,231,148 at June 30, 2003,
substantially all of which has been funded out of proceeds received from the
issuance of stock and the incurrence of liabilities. At June 30, 2003, the
Company had total current assets of $293,261 and total current liabilities of
$20,450,221 resulting in a working capital deficiency of $20,156,960. As of
June 30, 2003, the Company's balance sheet reflected $843,265 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.
17
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, 2003, the Company received
$300,000 from the issuance of 3,000,000 shares of common stock. During the six
months ended June 30, 2003, the Company received $5,986 and expended $30,000 in
the purchase of property and equipment and development of mineral interests,
$250,994 was used in operating activities. As a result, the Company used net
cash of $47,350 during the six months ended June 30, 2003.
While the Company had cash of $140,572 at June 30, 2003, it has substantial
short-term and long-term financial commitments. 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, 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 are
seen in currency exchange losses, the Company has seen losses on its asset
values in those countries.
Warning Regarding Forward-looking Statements, and Factors that may affect Future
Results
This Quarterly Report on Form 10-Q contains forward-looking statements and
information relating to the Company and its business, which are based on the
beliefs of management of the Company and assumptions made based on information
currently available to management. These statements can be identified by the use
of the words "will," "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 these 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 for the year ended December 31, 2002, 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.
18
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 its ability to establish
beneficial relationships with industry partners to provide funding and expertise
to the Company's projects; its 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 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 success of
marketing efforts; the ability to obtain the necessary financing to successfully
pursue the Company's 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 are subject to 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 seeking
to obtain concessions is 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 or in 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 these
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.
Future terrorist activity or government action against perceived
terrorist threats in the United States or in areas of the world in which the
Company does business or owns property may, however, adversely affect the
Company's business operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in many foreign currencies. As a result of
the 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 is subject to foreign exchange rate risks. 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 US dollars, in interest-bearing accounts,
until payments in foreign currency are required, but the Company does not reduce
this risk by utilizing hedging activities.
Item 4. Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing date
of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule 13a-
14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are
19
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no unreported developments in any material litigation that
were not reported in reports previously filed by the Company with the Securities
and Exchange Commission on Form 10-K or Form 10-Q for periods ended prior to the
period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report.
Exhibit
Number Title of Document Location
2.1 Exchange Agreement between Northampton, Inc., Report on Form 8-K
and Energy Global, A.G. dated August 3, 1994,
Exhibit No. 1*
2.2 Agreement and Plan of Merger between EuroGas, Inc., Report on Form 8-K
and Danube International Petroleum Company, Inc., dated July 12, 1996,
dated July 3, 1996, as amended Exhibit No. 5*
2.3 English translation of Transfer Agreement between Report on Form 8-K
EuroGas and OMV, Inc. for the Acquisition of dated June 11, 1997
OMV (Yakut) Exploration GmbH dated June 11, 1997 Exhibit No. 1*
2.4 Asset Exchange Agreement between EuroGas, Inc., Report on Form S-1
and Beaver River Resources, Ltd., dated April 1, 1988 dated July, 23, 1998
Exhibit No. 2.03*
3.1 Articles of Incorporation Registration Statement
on Form S-18, File
No. 33-1381-D
Exhibit No. 1*
3.2 Amended Bylaws Annual Report on
Form 10-K for the
fiscal year ended
September 30, 1990,
Exhibit No. 1*
3.3 Designation of Rights, Privileges, and Preferences Quarterly Report on
of 1995 Series Preferred Stock Form 10-QSB dated
March 31, 1995,
Exhibit No. 1*
3.4 Designation of Rights, Privileges, and Preferences Report on Form 8-K
of 1996 Series Preferred Stock dated July 12, 1996,
Exhibit No. 1*
20
3.5 Designation of Rights, Privileges, and Preferences Report on Form 8-K
1997 Series A Convertible Preferred Stock dated May 30, 1997
Exhibit No. 1*
3.6 Designation of Rights, Privileges, and Preferences Report on Form S-1
of 1998 Series B Convertible Preferred Stock Dated July 23, 1998
Exhibit No. 3.06*
3.7 Articles of Share Exchange Report on Form 8-K
dated August 3, 1994,
Exhibit No. 6*
3.8 Designation of Rights, Privileges, and Preferences of Registration Statement
1999 Series C 6% Convertible Preferred Stock on Form S-1, File No.
333-92009, filed on
December 2, 1999
4.1 Subscription Agreement between EuroGas, Inc., and Report on Form S-1
Thomson Kernaghan & Co., Ltd., dated May 29, 1998 dated July 23, 1998
Exhibit No. 4.01*
4.2 Warrant Agreement dated July 12, 1996, with Report on Form 8-K
Danube Shareholder dated July 12, 1996,
Exhibit No. 2*
4.3 Registration Rights Agreement Between EuroGas, Inc., Report on Form S-1
and Thomson Kernaghan & Co., Ltd., dated May 29, 1998 dated July 23, 1998
Exhibit No. 4.02*
4.4 Registration Rights Agreement dated July 12, 1996, Report on Form 8-K
with Danube Shareholder dated July 12, 1996
Exhibit No. 3*
4.5 Registration Rights Agreement by and among EuroGas, Report on Form S-1
Inc., and Finance Credit & Development Corporation, dated July 23, 1998
Ltd., dated June 30, 1997 Exhibit No. 4.06*
4.6 Option granted to the Trustees of the Estate of Annual Report on
Bernice Pauahi Bishop Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 10*
4.7 Registration Rights Agreement by and among Annual Report on
EuroGas, Inc., and Kukui, Inc., and the Trustees of Form 10-KSB for the
the Estate of Bernice Pauahi Bishop fiscal year ended
December 31, 1995,
Exhibit No. 11*
4.8 Option issued to OMV Aktiengesellschaft to acquire up Annual Report on
to 2,000,000 shares of restricted common stock Form 10-KSB for the
fiscal year ended
December 31, 1996,
Exhibit No. 13*
4.9 Form of Convertible Debenture issued on January 12, Quarterly report on
2000. Form 10-Q dated March
31, 2000.
10.1 English translation of Mining Usufruct Contract Quarterly Report on
between The Minister of Environmental Protection, Form 10-Q dated
Natural Resources and Forestry of the Republic of September 30, 1997
Poland and Pol-Tex Methane, dated October 3, 1997 Exhibit No. 1*
21
10.2 Agreement between Polish Oil and Gas Mining Joint Quarterly Report on
Stock Company and EuroGas, Inc., dated October 23, Form 10-Q dated
1997 September 30, 1997
Exhibit No. 2*
10.3 1996 Stock Option and Award Plan Annual Report on
Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 14*
10.4 Settlement Agreement by and among Kukui, Inc., and Annual Report on
Pol-Tex Methane, Sp. zo.o., McKenzie Methane Form 10-KSB for the
Rybnik, McKenzie Methane Jastrzebie, GlobeGas, fiscal year ended
B.V. (formerly known as McKenzie Methane Poland, December 31, 1995,
B.V.), and the Unsecured Creditors' Trust of the Exhibit No. 15*
Bankruptcy Estate of McKenzie Methane Corporation
10.5 Acquisition Agreement between EuroGas, Inc., and Report on Form S-1
Belmont Resources, Inc., dated July 22, 1998 dated July 23, 1998
Exhibit No. 10.20*
10.6 General Agreement governing the operation of Report on Form 8-K
McKenzie Methane Poland, B.V. dated August 3, 1994,
Exhibit No. 2*
10.7 Concession Agreement between Ministry of Annual Report on
Environmental Protection, Natural Resources, and Form 10-KSB for the
Forestry and Pol-Tex Methane Ltd. fiscal year ended
December 31, 1995,
Exhibit No. 18*
10.8 Association Agreement between NAFTA a.s. Gbely Annual Report on
and Danube International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 19*
10.9 Agreement between Moravske' Naftove' Doly a.s. Annual Report on
and Danube International Petroleum Company Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 20*
10.10 Form of Convertible Debenture Report on Form 8-K
dated August 3, 1994,
Exhibit No. 7*
10.11 Form of Promissory Note, as amended, with attached Annual Report on
list of shareholders Form 10-KSB for the
fiscal year ended
December 31, 1995,
Exhibit No. 23*
10.12 Amendment #1 to the Association Agreement Entered Annual Report on
on 13th July 1995, between NAFTA a.s. Gbely and Form 10-KSB for the
Danube International Petroleum Company Fiscal year ended
December 31, 1996,
Exhibit No. 25*
22
10.13 Acquisition Agreement by and among Belmont Resources, Form 10-Q
Inc., EuroGas Incorporated, dated October 9, 1998 Dated September 30,
1998
Exhibit No. 1*
10.14 Letter of Intent by and between Polish Oil and Gas Annual Report on
Company and Pol-Tex Methane, dated April 28, 1997 Form 10-KSB for the
Fiscal year ended
December 31, 1996,
Exhibit No. 27*
10.15 Purchase and Sale Agreement between Texaco Slask Report on Form 8-K
Sp. zo.o., Pol-Tex Methane Sp. zo.o. and Dated March 24, 1997
GlobeGas B.V. Exhibit No. 1*
10.16 English translation of Articles of Association of the Report on Form 8-K/A
TAKT Joint Venture dated June 7, 1991, as amended Dated June 11, 1997
April 4, 1993 Exhibit No. 3*
10.17 English translation of Proposed Exploration and Report on Form 8-K/A
Production Sharing Contract for Hydrocarbons Dated June 11, 1997
between the Republic of Sakha (Yakutia) and the Exhibit No. 4*
Russian Federation and the TAKT Joint Venture
10.18 English translation of Agreement on Joint Investment Registration Statement
and Production Activities between EuroGas, Inc., and on Form S-1 dated July
Zahidukrgeologia, dated May 14, 1998 23, 1998 Exhibit No.
10.21*
10.19 English translation of Statutory Agreement of Registration Statement
Association of Limited Liability Company with Foreign on Form S-1 dated July
Investments between EuroGas, Inc., and Makyivs'ke 23, 1998 Exhibit No.
Girs'ke Tovarystvo, dated June 17, 1998 10.22*
10.20 Partnership Agreement between EuroGas, Inc., and RWE- Amendment No. 1 to
DEA Aktiengesellschaft for Mineraloel and Chemie AG, Registration Statement
date July 22, 1998 on Form S-1 dated
August 3, 1998 Exhibit
No. 10.23
10.21 Mining Usufruct Contract between The Minister of Quarterly Report on
Environmental Protection, Natural Resources and Form 10-Q dated
Forestry of the Republic of Poland and Pol-Tex September 30, 1997
Methane, dated October 3, 1997 Exhibit No. 1*
10.22 Agreement between Polish Oil and Gas Mining Joint Quarterly Report on
Stock Company and EuroGas, Inc., dated Form 10-Q dated
October 23, 1997 September 30, 1997
Exhibit No. 2*
10.23 Agreement for Acquisition of 5% Interest in a Quarterly Report on
Subsidiary by and between EuroGas, Inc., B. Grohe, Form 10-Q dated
and T. Koerfer, dated November 11, 1997 September 30, 1997
Exhibit No. 3*
10.24 Option Agreement by and between EuroGas, Inc., Quarterly Report on
and Beaver River Resources, Ltd., dated Form 10-Q dated
October 31, 1997 September 30, 1997
Exhibit No. 4*
23
10.25 Lease Agreement dated September 3, 1996, between Registration Statement
Potomac Corporation and the Company; Letter of on Form S-1, File No.
Amendment dated September 30, 1999. 333-92009, filed on
December 2, 1999
10.26 Sublease dated November 2, 1999, between Scotdean Registration Statement
Limited and the Company on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.27 Securities Purchase Agreement dated November 4, 1999, Registration Statement
between the Company and Arkledun Drive LLC on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.28 Registration Rights Agreement dated November 4, 1999, Registration Statement
between the Company and Arkledun Drive LLC on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.29 Supplemental Agreement dated November 4, 1999, Registration Statement
between the Company and Arkledun Drive LLC on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.30 Executive Employment Agreement dated April 20, 1999 Registration Statement
between the Company and Karl Arleth on Form S-1, File No.
333-92009, filed on
December 2, 1999
10.31 Settlement Agreement dated June 16, 2000, between the Form 10-K for year
Company and FCOC ended December 31,
2000
Securities Purchase Agreement dated October 2, 2000, Form 10-K for year
10.32 between the Company and Arkledun Drive LLC ended December 31,
2000
10.33 Registration Rights Agreement dated October 2, 2000, Form 10-K for year
between the Company and Arkledun Drive LLC ended December 31,
2000
10.34 Settlement Agreement dated November 14, 2000, between Form 10-K for year
the Company and Arkledun Drive LLC ended December 31,
2000
10.35 Consulting Agreement dated September 18, 2000, Form 10-K for year
between the Company and Spinneret Financial Systems, ended December 31,
Ltd. 2000
10.36 Securities Purchase Agreement dated March 27, 2001 Form 10-K for year
between the Company and Belmont Resources Inc. ended December 31,
2000
10.37 Agreement dated April 9, 2001 between the Company and Form 10-K for year
Belmont Resources Inc. ended December 31,
2000
10.38 Warrant Agreement dated September 8, 2000 with Form 10-K for year
Oxbridge Limited ended December 31,
2000
24
10.39 Warrant Agreement dated September 8, 2000 with Form 10-K for year
Rockwell International Ltd. ended December 31,
2000
10.40 Warrant Agreement dated September 8, 2000 with Form 10-K for year
Conquest Financial Corporation ended December 31,
2000
10.41 Termination and Transfer Agreement dated June 23, Form 10-K for year
2000 between the Company and Belmont Resources, Inc. ended December 31,
2000
10.42 Loan Agreement dated March 3, 1999 between the Form 10-K for year
Company and Pan Asia Mining Corp. ended December 31,
2000
10.43 Agreement dated July 14, 2000 between the Company and Form 10-K for year
Oxbridge Limited ended December 31,
2000
10.44 Amended Agreement dated July 25, 2000 between the Form 10-K for year
Company, Pan Asia Mining Corp., and Oxbridge Limited ended December 31,
2000
10.45 Settlement Agreement dated November 20, 2000 between Form 10-K for year
the Company and Beaver River Resources, Ltd. ended December 31,
2000
21.1 Subsidiaries Annual Report on
Form 10-KSB for the
Fiscal year ended
December 31, 1995,
Exhibit No. 24*
31.1 Certification of Principal Executive Officer Filed herewith
31.2 Certification of Principal Executive Officer Filed herewith
32 Certification Pursuant to Section 906 of the Filed herewith
Sarbanes-Oxley Act of 2002
* Incorporated by reference
(b) No current reports on Form 8-K were filed during the reporting quarter.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EUROGAS, INC.
(Registrant)
Date: August 19, 2003 By /s/ Wolfgang Rauball
---------------------------------
Wolfgang Rauball
Chief Executive Officer
Date: August 19, 2003 By /s/ Hank Blankenstein
---------------------------------
Hank Blankenstein
Principal Accounting and Financial
Officer
26