<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------
TO
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COMMISSION FILE NUMBER 0-9147
-------------
FOUNTAIN OIL INCORPORATED
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1400 Broadfield, Suite 200, Houston, Texas 77084
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-492-6992
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
1023 West 23rd Street, Tulsa, Oklahoma 74107
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
The number of shares outstanding of issuer's common stock on May 31, 1995 was
10,428,731.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
Yes No X
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
May 31, 1995
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,973,407
Accounts receivable 79,967
Inventory 75,219
Prepaid expenses and deferred costs 302,593
-----------
Total current assets 9,431,186
Intangible assets, net of accumulated
amortization of $6,917,858 2,003,555
Furniture, fixtures and equipment, net of
accumulated depreciation of $705,425 581,315
Oil and gas properties, utilizing the
full cost method 1,524,965
-----------
TOTAL ASSETS $13,541,021
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 165,739
Accrued liabilities 76,076
Notes payable 37,187
------------
Total current liabilities 279,002
Accrued Liabilities - related parties 174,064
Stockholders' Equity:
Preferred stock ---
Common stock 1,042,873
Capital in excess of par value 28,506,369
Accumulated deficit since October 31, 1988 (16,449,449)
------------
13,099,793
Less: Accumulated currency translation (11,838)
------------
Total Stockholders' Equity 13,087,955
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,541,021
============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
------------------------ ------------------------
Three Months Ended Nine Months Ended
MAY 31 July 31 MAY 31 July 31
1995 1994 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues:
Power unit rentals $ 21,151 $ --- $ 35,861 $ ---
Equipment sales 49,476 --- 463,555 ---
Consulting income 7,208 --- 110,893 ---
----------- ---------- ---------- ----------
77,835 --- 610,309 ---
----------- ---------- ---------- ----------
Operating Expenses:
Cost of sales 31,342 3,244 359,294 30,980
Other direct project cost 36,569 --- 79,086 ---
General and administrative 1,211,658 79,160 2,733,802 230,725
Loss on sale of assets --- (2,000) --- 17,929
Depreciation, depletion and
amortization 234,684 260,924 865,290 781,892
Research and development --- --- 63,279 ---
----------- ---------- ---------- ----------
1,514,253 341,328 4,100,751 1,061,526
----------- ---------- ---------- ----------
OPERATING LOSS 1,436,418 341,328 3,490,442 1,061,526
----------- ---------- ---------- ----------
Other Income (Expense):
Interest, net 95,800 (15,210) 90,407 (42,905)
Other 41,076 7,542 46,374 8,707
----------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 136,876 (7,668) 136,781 (34,198)
----------- ---------- ---------- ----------
NET LOSS $ 1,299,542 $ 348,996 $3,353,661 $1,095,724
----------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 10,146,189 3,929,188 7,544,666 3,870,649
----------- ---------- ---------- ----------
NET LOSS PER COMMON SHARE $ (.13) $ (.09) $ (.44) $ (.28)
----------- ---------- ---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
----------------------------
Nine Months Ended
MAY 31, 1995 July 31, 1994
------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(3,353,661) $(1,095,724)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization 865,290 781,892
Stock issued for compensation and
contract services 1,386,138 ---
Change in accumulated currency translations 17,455 (6,508)
Loss on sale of assets --- 17,929
Decrease (increase) in accounts receivable 30,030 (173)
Decrease in inventory 20,504 2,929
Increase in prepaid expenses (283,310) (55,470)
Decrease in accounts payable (184,979) (56,395)
Increase in accrued liabilities 72,592 31,914
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,429,941) (379,606)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,776,263) (4,160)
Changes in other assets --- (384)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,776,263) (4,544)
----------- -----------
Cash Flows From Financing Activities:
Payment of notes payable (267,225) ---
Proceeds from issuance of notes payable 59,412 50,000
Proceeds from short-term borrowings --- 150,000
Cash provided by stock sales/warrant exercise 10,867,363 258,688
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,659,550 458,688
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,453,346 74,538
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,520,061 40,076
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,973,407 $ 114,614
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1995 (UNAUDITED)
(1) BASIS OF PREPARATION AND PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by Fountain Oil Incorporated (the "Company"), without audit.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, the Company believes
that the disclosures included are adequate to make the information
presented not misleading. In the opinion of management, the consolidated
condensed financial statements include all adjustments necessary to present
fairly the financial position and results of operations as at the dates and
for the periods presented. It is suggested that these consolidated
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the annual report on Form
10-KSB for the ten months ended August 31, 1994 filed by the Company's
predecessor, Electromagnetic Oil Recovery, Inc. ("EORI"), with the
Securities and Exchange Commission. See Note 5 regarding Reincorporation.
(2) CHANGE OF FISCAL YEAR
In September 1994, EORI changed its fiscal year end from October 31 to
August 31. As the Company's fiscal year will continue to be August 31, the
quarters of the current fiscal year do not coincide with the previous
fiscal year. In accordance with the rules and regulations of the
Securities and Exchange Commission, the Company is filing its quarterly
reports for the quarters of the current fiscal year without recasting data
for the prior fiscal year because recasting is not practicable and cannot
be cost justified. The results of operations for the three and nine month
periods ended July 31, 1994 have been furnished as these periods are the
most nearly comparable to the three and nine month periods ended May 31,
1995 of the newly adopted fiscal year. There are no seasonal or other
factors that would affect the comparability of information or trends of the
periods for the three and nine months ended May 31, 1995 when compared to
the three and nine months ended July 31, 1994. The results of operations
for the three and nine month periods ended May 31, 1995 are not necessarily
indicative of the results to be expected for the full year.
(3) STOCKHOLDERS' EQUITY
During February and March 1995, the Company issued and sold an aggregate of
811 Units, each consisting of 4,000 shares of its Common Stock, par value
$0.10 per share, and warrants expiring February 28, 1997 to purchase up to
4,000 shares of Common Stock at an exercise price of $6.00 per share. The
Company received gross proceeds of $11,354,000 and net proceeds of
approximately $10,321,000 from the sale of such Units. The Company also
issued warrants (the "Placement Warrants") expiring February 28, 1997 to
purchase up to 1,139,800 shares of Common Stock at an exercise price of
$5.10 per share to non-US persons who participated in the distribution of
the Units. The Units and the Placement Warrants were offered and issued to
non-US persons without registration under the Securities Act of 1933, as
amended, and may not be offered or sold
5
<PAGE>
in the United States absent registration under the Securities Act or an
applicable exemption from the registration requirements contained therein.
During the quarter ended May 31, 1995, the Company issued 28,570 shares of
its Common Stock, par value $0.10 per share, upon conversion of an
aggregate of $50,000 principal amount of convertible notes payable to
related parties and issued an aggregate of 329,731 shares upon exercise of
stock purchase warrants for an aggregate consideration of $438,168.
(4) RECOVERABILITY OF INTANGIBLE ASSETS
The recoverability of the net book value of the intangible assets is
dependent upon operating revenue being generated from existing and new
projects. The substantial equity raised by the Company in February and
March 1995 provides the resources for investment in existing and additional
projects in the Company's newly established Oil and Gas Division, as well
as providing funds for further development and marketing of the Company's
electrically enhanced oil recovery technology.
(5) REINCORPORATION
On December 16, 1994, following approval by the shareholders of EORI, a
plan of reorganization was implemented under which EORI merged with and
into its newly organized and wholly-owned Delaware subsidiary, Fountain Oil
Incorporated (the "Reincorporation"). In the Reincorporation, Fountain Oil
was the surviving corporation, and EORI ceased to exist as a separate
entity. The principal results of the Reincorporation were (i) a change in
the Company's state of incorporation from Oklahoma to Delaware, (ii) the
change in the Company's name to Fountain Oil Incorporated, (iii)
accomplishing, in effect, a 1-for-25 reverse stock split through the
automatic conversion in the merger of each previously outstanding 25 shares
of EORI Common Stock into 1 share of Fountain Oil Common Stock, and (iv)
the authorization of a class of Preferred Stock.
The authorized capital of Fountain Oil consists of 25,000,000 shares of
Common Stock, $0.10 par value, of which approximately 5,974,000 shares were
outstanding upon consummation of the Reincorporation and 10,428,731 shares
were outstanding on May 31, 1995; and 5,000,000 shares of Preferred Stock,
$0.10 par value, none of which was outstanding upon consummation of the
Reincorporation or on May 31, 1995. The consolidated condensed financial
statements have been retroactively restated to give effect to the
Reincorporation and reverse stock split.
(6) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company follows the Full Cost Method in accounting for oil and gas
operations. Under the Full Cost Method, all acquisition, exploration and
development costs, including certain related employee costs (less any
reimbursements for such costs) incurred for the purpose of acquiring and
developing oil and gas reserves are capitalized in a "full cost pool" as
incurred.
6
<PAGE>
The Company records depletion of its full cost pool using the Unit of
Production Method and uses its internal estimates of proven quantities of
oil and gas reserves for financial accounting matters.
To the extent that such capitalized costs in the full cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed
the present value (using a 10% discount rate) of estimated future net after
tax cash flow from proven oil and gas reserves, such excess costs are
charged to operations. Once made, a write-down of oil and gas properties
is not reversible.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As the
Company utilizes the full cost method of accounting for its exploration and
development costs, it is currently required to calculate impairment losses
using a cost center ceiling specified by the Securities and Exchange
Commission regulations for full cost companies. Although the Company is
currently evaluating the impact of Statement of Financial Accounting
Standards No. 121, management does not believe that this statement will
have a material impact on its financial position or results of operations.
(7) COMMITMENTS
The Company has outstanding obligations with respect to the oil and gas
projects it is pursuing that require the Company to expend funds and to
issue shares upon satisfaction of certain conditions. In general, these
conditions arise under contracts and include conditions related to the
formalization of project relationships or based on the achievement of
specified performance standards. At May 31, 1995, commitments not
conditioned on performance amounted to $1.3 million and 205,000 shares of
the Company's Common Stock. As current and future projects mature and are
developed, significant additional obligations may be incurred.
7
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity, Capital Resources and Changes in Financial Condition
During February and March 1995, the Company issued and sold an
aggregate of 811 Units, each consisting of 4,000 shares of its Common Stock, par
value $0.10 per share, and warrants expiring February 28, 1997 to purchase up to
4,000 shares of Common Stock at an exercise price of $6.00 per share. The
Company received gross proceeds of $11,354,000 and net proceeds of approximately
$10,321,000 from the sale of such Units.
The Company also issued warrants (the "Placement Warrants") expiring
February 28, 1997 to purchase up to 1,139,800 shares of Common Stock at an
exercise price of $5.10 per share to non-US persons without registration under
the Securities Act of 1933, as amended. The Units and the Placement Warrants
may not be offered or sold in the United States absent registration under the
Securities Act or an applicable exemption from the registration requirement
contained therein.
In addition, during the quarter ended May 31, 1995, the Company issued
28,570 shares of its Common Stock upon conversion of an aggregate of $50,000
principal amount of notes payable, and an aggregate of 329,731 stock purchase
warrants were exercised, for an aggregate consideration of $438,168,
representing additional capital to the Company.
The net cash proceeds described above will primarily be used in
connection with the activities of the Oil and Gas Division involving the
acquisition and development of oil and gas properties.
The equity financing described above enabled the Company to meet the
listing requirements for inclusion on the Nasdaq National Market, and on April
6, 1995, Fountain Oil began to trade on this market under the symbol "GUSH."
Also, a secondary listing of the Company's shares began in May 1995 in Norway on
the Oslo Stock Exchange. Prior to April 6, 1995, the Company's Common Stock was
traded on the Nasdaq OTC Electronic Bulletin Board.
As of May 31, 1995, the Company had a total of 5,293,312 warrants
outstanding with an average exercise price of $5.03 per share. Substantially
all of the outstanding warrants can be called at any time after June 30, 1995 if
the Company's Common Stock is then trading at prices in excess of specified
minimum prices of $7 or less. This represents a possible source of additional
equity financing for the Company. In addition, on that date the Company had
outstanding options to acquire 400,000 shares of Common Stock at a price of
$1.50 per share expiring August 16, 1999.
As of May 31, 1995, the Company had current assets of $9,431,186 of
which $8,973,407 was in the form of cash and cash equivalents. Current
liabilities amount to $279,002, leaving the Company with working capital of
$9,152,184. Total Stockholders' Equity as of May 31, 1995 was $13,087,955.
8
<PAGE>
The Company has outstanding obligations with respect to the oil and
gas projects it is pursuing that require the Company to expend funds and to
issue shares upon satisfaction of certain conditions. In general, these
conditions arise under contracts and include conditions related to the
formalization of project relationships or based on the achievement of specified
performance standards. At May 31, 1995, commitments not conditioned on
performance amounted to $1.3 million and 205,000 shares of the Company's Common
Stock. As current and future projects mature and are developed, significant
additional obligations may be incurred.
Results of Operations
The Company recorded operating revenue of $77,835 during the quarter
ended May 31, 1995, with revenue of $610,309 recorded for the nine month period
ended May 31, 1995. All revenue relates to sales and rentals of and services
related to electrically enhanced oil recovery equipment. For corresponding
periods last year there were no operating revenues recorded.
The operating loss for the quarter ended May 31, 1995 amounted to
$1,436,418, and the operating loss for the nine month period ended May 31, 1995
was $3,490,442. For the comparable periods last year, the operating loss was
$341,328 and $1,061,526, respectively. The increase in the operating loss
reflects the fact that the Company is in the process of building an organization
and infrastructure for its new and expanded activities.
Included in the general and administrative cost of $1,211,658 for the
quarter ended May 31, 1995 are $1,565,978 related to external services. For the
nine month period ended May 31, 1995, the general and administrative cost was
$2,733,802, of which external services amounted to approximately 57% of the
total general and administrative expense. A substantial portion of 1995 expense
for external services represents fees for financial public relations activities
which to a large extent are of a non-recurring nature and which have been paid
primarily by the issuance of Common Stock. General and administrative expense
for the three and nine-month comparable periods in fiscal 1994 were $79,160 and
$230,725, respectively.
Of the total depreciation, depletion and amortization costs of
$234,684 reported for the quarter ended May 31, 1995, $222,957 represents
amortization of intangible assets having a net carrying value of $2,003,555.
The intangible assets consist of patent rights for the Company's electrically
enhanced oil recovery technology initially capitalized at $8,921,413. Quarterly
amortization expense has been comparable during fiscal 1994 and 1995.
During the quarter ended May 31, 1995, the Company capitalized
$1,029,421 related to oil and gas projects, bringing the total capitalized
amount to $1,524,965 as of May 31, 1995. Of the capitalized amount,
approximately $615,000 and $519,000 are attributable to the Company's
Rocksprings, Texas and Borytslaw, West Ukraine projects, respectively.
9
<PAGE>
Petroleum development activities have commenced in the Rocksprings,
Texas gas project, which involves some 9,000 acres under lease and option. One
well has been drilled and although logs indicate the presence of gas reservoirs,
attempts to achieve sustained production from the main producing zone, the
Holman sands, have thus far been unsuccessful. No attempt has yet been made to
produce from the other gas-bearing sands in this well. A second well is
scheduled to be drilled before the fiscal year end, and results from this well
will help to determine the work program to attempt production from the first
well. The Company has a 37.5% working interest, before payout, in the
Rocksprings project.
10
<PAGE>
PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Information regarding Electromagnetic Oil Recovery, Inc. -v- Fireman's
Fund Ins. Co. et al, No. 9301-12461, filed in the Court of Queen's Bench of
Alberta, Judicial District of Calgary is reported in the Company's Form 10-QSB
for the quarter ended February 28, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index of Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
Date of Report: February 24, 1995
Item 5. Other Events
Item 6. Resignations of Registrant's Directors
Item 7. Financial Statements and Exhibits
Date of Report: May 15, 1995
Item 5. Other Events
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN OIL INCORPORATED
Date: June 29, 1995 By: /s/ Gary J. Plisga
-------------------------------------
Gary J. Plisga
Executive Vice President
Date: June 29, 1995 By: /s/ Arnfin Haavik
-------------------------------------
Arnfin Haavik
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 8,973,407
<SECURITIES> 0
<RECEIVABLES> 196,554
<ALLOWANCES> 116,587
<INVENTORY> 75,219
<CURRENT-ASSETS> 9,431,186
<PP&E> 2,811,705
<DEPRECIATION> 705,425
<TOTAL-ASSETS> 13,541,021
<CURRENT-LIABILITIES> 279,002
<BONDS> 0
<COMMON> 1,042,873
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,541,021
<SALES> 463,555
<TOTAL-REVENUES> 610,309
<CGS> 332,258
<TOTAL-COSTS> 27,036
<OTHER-EXPENSES> 3,741,457
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,287
<INCOME-PRETAX> (3,353,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,353,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,353,661)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
