<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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________
______ TO _______________
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)
- --------------------------------------------------------------------------------
(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, 1996 was
11,697,994 and on June 30, 1996 was 17,345,040.
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, 1996
-------------
<S> <C>
ASSETS
------
Cash and cash equivalents $ 4,993,818
Stock subscription receivable 22,500,000
Accounts receivable - affiliated 1,919,661
entities
Other current assets 495,504
------------
Total current assets 29,908,983
Property and equipment, net 4,175,357
Oil and gas properties, net, full cost
method (including $235,221 unevaluated) 535,869
Investment in and advances to oil and 5,054,401
gas ventures
Other assets 269,257
------------
TOTAL ASSETS $ 39,943,867
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------
Accounts payable $ 1,407,485
Account payable - related party 242,927
Accrued liabilities 2,310,009
Note payable - bank 4,734,733
Notes payable 76,806
------------
Total current liabilities 8,771,960
Minority interest in subsidiaries 223,350
8% Convertible subordinated debentures 1,550,000
Commitments and contingencies (Notes 2
and 10) ---
Stockholders' Equity:
Preferred stock, par value $0.10 per
share, 5,000,000 shares authorized: no
shares issued or outstanding ---
Common stock, par value $0.10 per
share,
50,000,000 shares authorized:
11,697,994 shares issued and outstanding;
5,000,000 shares subscribed 1,669,800
Capital in excess of par value 52,145,337
Accumulated deficit since October 31, 1988
when a deficit of $39,952,292 was eliminated (24,416,580)
------------
Total stockholders equity 29,398,557
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,943,867
------------
</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 May 31 MAY 31 May 31
1996 1995 1996 1995
---------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Power unit rentals $ --- $ 21,151 $ 1,913 $ 35,861
Equipment sales --- 49,476 --- 463,555
Consulting income --- 7,208 2,943 110,893
Oil and gas production 49,703 --- 125,105 ---
----------------- ------------------- ------------------ ----------------
49,703 77,835 129,961 610,309
----------------- ------------------- ------------------ ---------------
Operating Expenses:
Cost of sales --- 31,342 --- 359,294
Lease operating expense 40,178 --- 95,699 ---
Other direct project cost --- 36,569 --- 79,086
General and administrative 805,560 1,211,658 3,114,732 2,733,802
Depreciation, depletion
and amortization 100,717 234,684 256,400 865,290
Impairment of oil and
gas properties 35,790 --- 268,790 ---
Research and development --- --- --- 63,279
----------------- ------------------- ----------------- --------------
982,245 1,514,253 3,735,621 4,100,751
----------------- ------------------- ------------------ ---------------
Operating Loss 932,542 1,436,418 3,605,660 3,490,442
----------------- ------------------- ------------------ ---------------
Other Income (Expense):
Interest, net (109,816) 95,800 (119,803) 90,407
Other 18,564 41,076 33,574 46,374
----------------- ------------------- ------------------ ---------------
Total other income (expense) (91,252) 136,876 (86,229) 136,781
----------------- ------------------- ------------------ ---------------
Net Loss $ 1,023,794 $ 1,299,542 $ 3,691,889 $ 3,353,661
----------------- ------------------- ------------------ ---------------
Weighted average number of
common shares outstanding 11,185,164 10,146,189 10,953,177 7,544,666
----------------- ------------------- ------------------ ---------------
Net Loss Per Common Share $ (0.09) $ (0.13) $ (0.34) $ (0.44)
----------------- ------------------- ------------------ ---------------
See accompanying notes to unaudited consolidated condensed financial statements.
</TABLE>
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, 1996 May 31, 1995
----------------------------------------
<S> <C> <C>
Cash Flows From Operating
Activities:
Net loss $(3,691,889) $(3,353,661)
Depreciation,
depletion and
amortization 56,128 865,290
Impairment of oil
and gas properties 268,790 ---
Amortization of
financing cost 66,674 ---
Stock issued for
compensation and
contract services --- 1,386,138
Accumulated
currency
translations --- 17,455
Changes in assets and
liabilities:
Decrease
(increase) in
accounts
receivable (123,109) 30,030
Decrease
(increase) in
other current
assets 63,593 (262,806)
Decrease in
accounts payable (999,757) (184,979)
Increase in accrued liabilities 31,962 72,592
----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (4,327,608) (1,429,941)
----------- -----------
Investing Activities:
Purchase of property and
equipment (969,836) (1,776,263)
Investment in oil and
gas ventures and
properties (2,648,108) ---
----------- ----------
NET CASH USED IN INVESTING
ACTIVITIES (3,617,944) (1,776,263)
----------- -----------
Financing Activities:
Cash provided from
issuance of stock, net 18,000 10,867,363
Cash provided from
issuance of
debentures, net 3,346,714 ---
Payments of
short-term borrowings (92,998) ---
Payments of notes
payable --- (267,225)
Payments on account
payable-related party (10,867) ---
Proceeds from issuance
of note payable 4,700,000 59,412
Proceeds from
short-term borrowings 148,551 ---
Proceeds from issuance
of account payable-
related party 38,325 ---
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,147,725 10,659,550
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 202,173 7,453,346
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,791,645 1,520,061
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,993,818 $ 8,973,407
=========== ===========
</TABLE>
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, 1996 (UNAUDITED)
(1) Nature of Business and Basis of Preparation and Presentation
The Company's primary business focus is the acquisition of ownership
interests in, and the production of oil and gas from, existing oil and gas
fields that indicate a potential for increased production through
rehabilitation, with particular emphasis on oil and gas fields in Eastern
Europe and Russia. In addition, the Company intends to use its proprietary
technology as a strategic tool to obtain interests in, and to exploit,
underdeveloped heavy oil fields.
The consolidated condensed financial statements of Fountain Oil
Incorporated and subsidiaries (collectively the "Company") included herein
have been prepared by the Company, without audit. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted, since 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 consisting of normal recurring adjustments
necessary to present fairly the financial position, results of operations,
and cash flows as of the dates and for the periods presented. These
consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included
in the Annual Report on Form 10-KSB for the fiscal year ended August 31,
1995 and the Quarterly Reports on Form 10-QSB for the quarters ended
November 30, 1995 and February 29, 1996 filed with the Securities and
Exchange Commission.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which sets forth accounting
and disclosure requirements for stock-based compensation arrangements. The
new statement encourages, but does not require, companies to measure stock-
based compensation cost using a fair-value method, rather that the
intrinsic-value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Companies choosing to continue to measure stock-based
compensation using the intrinsic-value method must disclose on a pro forma
basis net income and net income per share using the fair-value method.
Prior to the effective date of SFAS No. 123 in fiscal 1997, the Company
will select the method under which it will measure stock-based compensation
cost.
(2) Stock Subscription Receivable
On May 29, 1996, the Company received subscriptions for an aggregate of
5,000,000 shares of its Common Stock in a private placement to
institutional and other qualified investors in Norway and other European
countries. The placement was made at $4.50 per share, which was the
closing bid price for the Company's Common Stock on the Nasdaq National
Market System on May 21, 1996, the trading day that preceded the pricing of
the
5
<PAGE>
offering. The shares were offered and issued to non-U.S. persons
without registration under of the Securities Act of 1933, as amended, and
may not be offered or sold in the United States or to, or for the account
or benefit of, U.S. persons absent registration or an applicable exemption
from the registration requirements under that Act. Payment for and
issuance of the shares took place on June 5, 1996. Accordingly, the
Company recorded subscriptions receivable for the gross proceeds of
$22,500,000 and an increase in equity for the net proceeds of approximately
$21,000,000, after reduction for accrued commissions and other expenses.
(3) Use of Estimates
The preparation of the consolidated condensed financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(4) Accounts Receivable - Affiliated Entities
Upon the acquisition of Gastron International Limited ("Gastron") in
October 1995, the Company recorded a receivable in the amount of $1,800,000
from Mostransgas Gas Transmission and Supply Enterprise, a Russian joint
stock company ("Mostransgas"). This receivable represents amounts due from
Mostransgas to reimburse the Company for costs incurred in connection with
the acquisition of two drilling rigs and related equipment which will
represent a joint capital contribution by the Company and Mostransgas to
another Russian joint stock company (Intergas JSC) in which the Company
acquired an interest through its acquisition of Gastron and in which
Mostransgas has an interest. The Company's management believes Mostransgas
will repay to the Company through the equipment supplier the amounts
advanced by the Company on behalf of Mostransgas following the delivery in
Russia of the drilling rigs and equipment to be shipped from the United
States. According to present plans, the Company expects the equipment to
arrive in Russia by the last quarter of calendar 1996. Intergas JSC holds
the rights to develop the Maykop Field in the Republic of Adygea, Russian
Federation. (See Notes 5 and 6.)
(5) Property and Equipment
Approximately $3,518,000 of the approximately $4,175,000 recorded for
property and equipment, net, as of May 31, 1996 represents drilling rigs
and related equipment which the Company expects to ship to the Republic of
Adygea, Russian Federation, as part of its capital contribution to Intergas
JSC. Such equipment is not being depreciated. (See Notes 4 and 6.)
6
<PAGE>
(6) Investment in and Advances to Oil and Gas Ventures
The Company capitalized certain costs associated with its proposed or
completed acquisition of interests in foreign joint ventures, corporations
and similar associations which are the entities through which the
development of oil and gas projects will be implemented. The remaining
proposed acquisition requires negotiation and consummation of both
governmental concessions and a joint venture agreement. The Company's
policy is to capitalize the direct costs of these acquisitions, including
the portion of management salaries, consulting fees and expenses relating
directly to the acquisition of interests in these oil and gas projects. The
total amounts capitalized at May 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capitalized
Venture Cost
- --------------------------------------- -----------
<S> <C>
Maykop Field, Republic of Adygea $1,042,625
Gorischt-Kocul Field, Albania 514,980
Boryslaw Field, Western Region, Ukraine 1,266,100
Lelyaki Field, Pryluki Region, Ukraine 2,230,696
----------
$5,054,401
----------
</TABLE>
During the quarter ended May 31, 1996, the Company acquired 90% of the
outstanding stock of UK-RAN Oil Corporation ("UK-RAN"). UK-RAN owns 45% of
Kashtan Petroleum, Ltd., a Ukrainian joint venture formed to work over and
develop the Lelyaki Field in the Pryluki region of Central Ukraine. The
joint venture has been registered, and the production license was issued
May 8, 1996.
The maximum consideration payable by the Company for the 90% interest in
UK-RAN is $611,000 in cash and the issuance of 1,150,000 shares of Common
Stock. As of May 31, 1996, the Company had paid the $611,000 in cash and
had issued 150,000 shares of Common Stock. These shares have been valued
at the current market price on the date of issue, or $684,375, which is
included in the capitalized cost for the Lelyaki Field project shown above.
Conditions for the issuance of an additional 250,000 shares were satisfied
subsequent to May 31, 1996. The issuance of the remaining 750,000 shares
remains subject to the satisfaction of various conditions related to the
performance of the Lelyaki Field project.
On June 12, 1996, the Company increased its ownership in Intergas JSC, a
Russian joint stock company ("Intergas") from 31% to 37%. Intergas has
development rights in the Maykop gas condensate field located in the
Republic of Adygea, Russian Federation. The increase in ownership interest
was accompanied by the renegotiation of the terms for the acquisition of
the initial 31% interest and did not involve any increase in the maximum
consideration to be paid for the Company's interests in Intergas, which is
an aggregate of $800,000 in cash and 1,000,000 shares of Common Stock. Of
this consideration, 300,000 shares of Common Stock with a fair market value
of $1,668,750 were issued in June 1996, and the payment of the balance of
the consideration is subject to the satisfaction of various conditions
related to the Maykop Field project. A subsidiary of the Company has been
appointed operator for the development of the Maykop field and will be
responsible for all technical operations and financing arrangements. (See
Notes 4 and 5.)
7
<PAGE>
The development of all the present projects through 1997 according to the
present plan assumes additional funds from external sources. Less than
projected funding from external sources will result in a slower phasing of
the various projects, reducing the early investment requirements but
delaying the production build up. The Company's management believes that it
will be able to access external sources of funds through debt financing by
the Company or the joint ventures or other entities that are developing the
projects, or otherwise, so that no delays will be experienced as a result
of a shortage of financial resources.
Because the Company has incurred recurring operating losses and because
current operations are not generating positive cashflow, the ability of the
Company to pursue its growth strategy successfully and continue as going
concern depends upon generating funds from external sources. In addition,
the Company ultimately must achieve profitable operations in order to
realize its investments.
The consolidated condensed financial statements do not give effect to any
impairment of its investments in oil and gas ventures or other adjustments
which would be necessary should the Company be unable to achieve profitable
operations.
(7) Note Payable - Bank
In late March, 1996, the Company borrowed $4,700,000 as a short term loan
with interest at 1% above the London Interbank Offered Rate. This loan was
repaid in full on July 3, 1996 utilizing the blocked interest-bearing cash
account which was pledged as collateral for the loan.
(8) Convertible Subordinated Debentures
During the quarter ended February 29, 1996, the Company completed an
offering of its 8% Convertible Subordinated Debentures (the "Debentures")
due December 31, 1997. The Company issued $3,750,000 principal amount of
Debentures at par and received net proceeds of approximately $3,350,000
after commissions and expenses. The Debentures, which are subordinated to
indebtedness for borrowed money, are convertible into shares of the
Company's Common Stock at a price equal to 82 1/2% of the average closing
price of such shares on the five trading days preceding the date of
conversion. A maximum of 309,500 shares of the Companys Common Stock is
issuable upon conversion of each $1,000,000 principal amount of the
Debentures. No more than two-thirds of the Debentures could have been
converted prior to June 5, 1996. At May 31, 1996, $2,200,000 principal
amount of the Debentures had been converted into 701,931 shares of Common
Stock, leaving $1,550,000 principal amount of the Debentures outstanding
and 458,694 shares of Common Stock reserved for possible issuance upon
conversion of Debentures as of that date.
(9) Net Loss Per Common Share
Net loss per common share for the periods presented is based on the
weighted average number of common shares outstanding.
8
<PAGE>
(10) Commitments and Contingencies
The Company has outstanding obligations with respect to the acquisition and
development of oil and gas projects it is pursuing that require or may
require the Company to expend funds and to issue shares of its Common
Stock. A significant portion of these obligations are subject to the
satisfaction of various conditions related to, among other things, the
formalization of project relationships and achievement of specified project
performance standards. At May 31, 1996, the Company had unconditional
obligations regarding the development of oil and gas projects amounting to
approximately $5,700,000 and 550,000 shares of Common Stock. Commitments
relating to acquisitions conditioned on the formalization of project
relationships, project performance and other matters were $1,300,000 in
cash and 2,000,000 shares of Common Stock. As the Company develops current
projects and undertakes additional projects, significant additional
obligations are expected to be incurred.
9
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity, Capital Resources, and Changes in Financial Condition
On May 29, 1996, the Company received subscriptions for an aggregate
of 5,000,000 shares of its Common Stock in a private placement to institutional
and other qualified investors in Norway and other European countries. The
placement was made at $4.50 per share, which was the closing bid price for the
Company's Common Stock on the Nasdaq National Market System on May 21, 1996, the
trading day that preceded the pricing of the offering. The shares were offered
and issued to non-U.S. persons without registration under of the Securities Act
of 1933, as amended, and may not be offered or sold in the United States or to,
or for the account or benefit of, U.S. persons absent registration or an
applicable exemption from the registration requirements under that Act. Payment
for and issuance of the shares took place on June 5, 1996. Accordingly, the
Company recorded subscriptions receivable for the gross proceeds of $22,500,000
and an increase in equity for the net proceeds of approximately $21,000,000,
after reduction for accrued commissions and other expenses.
During the quarter ended February 29, 1996, the Company completed an
offering of its 8% Convertible Subordinated Debentures (the "Debentures") due
December 31, 1997. The Company issued $3,750,000 principal amount of Debentures
and received net proceeds of approximately $3,350,000 after commissions and
expenses. The Debentures, which are subordinated to indebtedness for borrowed
money, are convertible into shares of the Companys Common Stock at a price equal
to 82 1/2% of the average closing price of such shares on the five trading days
preceding the date of conversion. A maximum of 309,500 shares of the Company's
Common Stock is issuable upon conversion of each $1,000,000 principal amount of
the Debentures. No more than two-thirds of the Debentures could have been
converted prior to June 5, 1996. At May 31, 1996, $2,200,000 principal amount of
the Debentures had been converted into 701,931 shares of Common Stock, leaving
$1,550,000 principal amount of the Debentures outstanding.
In late March, 1996, the Company borrowed $4,700,000 as a short term
loan with interest at 1% above the London Interbank Offered Rate. This loan was
repaid in full on July 3, 1996 utilizing the blocked interest-bearing cash
account which was pledged as collateral for the loan.
The Company had current assets at May 31, 1996 of approximately
$29,900,000, as compared to current assets of approximately $5,290,000 at August
31, 1995. The increase is primarily due to a receivable of $22,500,000
outstanding on May 31, 1996 from those who subscribed for 5,000,000 shares of
the Company's Common Stock in a private placement.
The increase in cash and cash equivalents during the nine month
period ended May 31, 1996 from approximately $4,791,000 at August 31, 1995 to
approximately $4,994,000 at May 31, 1996 reflects primarily (a) the cash
received from a short term bank loan of $4,700,000, (b) net cash proceeds of
approximately $3,365,000 from the issuance of convertible subordinated
debentures and the issuance of shares of Common Stock upon exercise of options,
largely offset by (c) a net loss for the nine months of approximately
$3,692,000, most of which reflects cash items relating to general and
administrative expenses and (d) investments and advances related to oil and gas
ventures and properties totaling approximately $2,648,000.
10
<PAGE>
The Company's current liabilities increased from approximately
$1,102,000 at August 31, 1995 to approximately $8,772,000 at May 31, 1996. This
increase reflects primarily (i) the short term bank loan of $4,700,000, (ii)
$1,500,000 in estimated placement fees and other costs primarily associated with
the $22,500,000 subscription receivable, and (iii) the payment of liabilities
approximating $924,000 of an entity acquired in the first quarter.
The Company's working capital increased during the nine month period
ended May 31, 1996 from approximately $4,188,000 at August 31, 1995 to
approximately $21,137,000 at May 31, 1996. The increase reflects primarily the
net stock subscription receivable at May 31, 1996. Certain components of working
capital, principally the $1,800,000 account receivable from an affiliated
entity, are not expected to be monetized as early as the current liabilities
become due. (The preceding sentence constitutes a forward looking statement
[hereinafter identified as FLS]. Each of the forward looking statements herein
is subject to various factors that could cause actual results to differ
materially from the results anticipated in such forward looking statement, as
more fully discussed in this Item 2 under Forward Looking Statements.)
For the nine months ended May 31, 1995 versus May 31, 1996, cash used
in operating activities increased from approximately $1,430,000 to approximately
$4,328,000. The change resulted principally from reductions in accounts payable
and the substantially increased expense to which cash items entered into the net
loss for the 1996 period.
For the nine month period ended May 31, 1996, the Company increased
its investment in oil and gas ventures as follows:
<TABLE>
<CAPTION>
Venture Cash Stock Total
- -------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
Maykop Field, Republic of Adygea $ 868,061 $ --- $ 868,061
Gorischt-Kocul Field, Albania 318,035 --- 318,035
Boryslaw Field, Western Region, Ukraine 323,920 --- 323,920
Lelyaki Field, Pryluki Region, Ukraine 1,138,092 684,375 1,822,467
------------- -------- ----------
$2,648,108 $684,375 $3,332,483
- -----------------------------------------------------------------------------
</TABLE>
During the quarter ended May 31, 1996, the Company acquired 90% of the
outstanding stock of UK-RAN Oil Corporation ("UK-RAN"). UK-RAN owns 45% of
Kashtan Petroleum, Ltd., a Ukrainian joint venture formed to work over and
develop the Lelyaki Field in the Pryluki region of Central Ukraine, with
Ukrnafta (the Ukraine national oil company) holding the other 55%. The joint
venture agreement forming Kashtan Petroleum Ltd. has been concluded and the
license was issued May 8, 1996. The license will last for a period of 20 years,
with an initial organization period of three years.
The present development plan for the rehabilitation of the Lelyaki
Field is primarily based on recompletion of existing wells using Western
completion techniques. Infill drilling to produce by-passed oil will be
considered at a later stage. (FLS) The initial workover development program
will target early cashflow and data collection by workover and recompletion of
existing wells. (FLS) The Company expects to commence the rehabilitation efforts
at the Lelyaki Field before the end of calendar 1996. (FLS)
On June 12, 1996, the Company increased its ownership in Intergas JSC,
a Russian joint stock company ("Intergas"), from 31% to 37%. The increase in
ownership interest was accompanied by the renegotiation of the terms for the
acquisition of the initial 31% interest and
11
<PAGE>
did not involve any increase in the maximum consideration to be paid for the
Company's interests in Intergas, which is an aggregate of $800,000 in cash and
1,000,000 shares of Common Stock. Intergas has development rights in the Maykop
gas condensate field located in the Republic of Adygea, Russian Federation. As
the field operator designated by Intergas, the Company has executed a gas sales
agreement with Mostransgas Gas Transmission and Supply Enterprise, a Russian
joint stock company ("Mostransgas"), under which Mostransgas would purchase all
of Intergas' gas production from the Maykop Field for a ten year period. Under
the agreement, Intergas would receive $1.03 per thousand cubic feet ($36 per
thousand cubic meters) through the end of the second full calendar year after
production commences, and the price for subsequent periods would be adjusted
based upon then current Russian gas prices. (FLS) Pricing is net for gas
delivered at the field, with no additional transportation or transportation tax
charges. The agreement with Mostransgas is subject to ratification by the
Intergas Board of Directors, which is expected to act on the matter prior to the
end of fiscal 1996. (FLS) Mostransgas, which also has an equity interest in
Intergas, is a subsidiary of Gasprom, the largest gas distribution company in
Russia. Intergas expects also to produce condensate from the Maykop Field, and
the Company is exploring opportunities related to the sale of that condensate.
(FLS)
Production from the Maykop Field is expected to commence four to six
months after the Company ships to the Republic of Adygea drilling rigs and
related equipment that it is presently assembling and testing in Texas. (FLS)
The field development program will initially involve the drilling of two new
wells to assess the flow of primary gas production. (FLS) Two sites have been
selected and prepared for the drilling of the new wells. The results of this
initial phase of the development program will determine the future program for
the total field development. (FLS)
A joint venture agreement with Albpetrol, the Albanian national oil
company, to develop the Gorischt-Kocul Field in Albania has been negotiated, and
a production license has been issued by the Minister of Mines and Energy. The
joint venture agreement and license was approved by the Council of Ministers of
Albania on June 10, 1996. All permits and agreements are now in-place for start-
up of the pilot phase of the project. The pilot phase will include the drilling
of one or more horizontal wells, test production, reservoir evaluation and
detailed planning for the optimum development of the field. (FLS) The present
field development program anticipates the drilling of 50 new horizontal wells.
(FLS)
A joint venture agreement with Ukrnafta for the development of the
Stynawske (Boryslaw) Field in Western Ukraine is being negotiated. After a joint
venture company is registered in Ukraine, a production license must be obtained
before development activities can commence. The Company presently anticipates
that such registration will be effected and the license received during the
second half of calendar 1996. (FLS)
The Company's investment in property and equipment increased by
approximately $970,000 during the nine month period ended May 31, 1996. This
increase is primarily due to the capitalized costs associated with the drilling
rigs and related equipment which the Company expects to ship to the Republic of
Adygea, Russian Federation.
While the discussion of various events and their timing in the
preceding paragraphs represents management's assessment at the present time, no
assurances can be given regarding the occurrence or timing of any of these
events.
12
<PAGE>
The Company has adopted an aggressive growth strategy which, if fully
implemented, will require substantial capital commitments during the remainder
of fiscal 1996 and beyond. (FLS) Developing the oil and gas projects in which
the Company has acquired or expects to acquire an interest is expected by the
Company to require a net cash outlay from the Company of approximately $13
million from June 1996 through the end of calendar 1996. (FLS) Additional cash
outlays will be required thereafter. (FLS) This estimate is based upon the
Company's expectations regarding various projects indicated above, and no
assurance can be given that those expectations will be met.
The development of all the present projects through 1997 according to
the present plan assumes additional funds from external sources. A lesser level
of funding from external sources than that presently contemplated will result in
a slower development of one or more of the various projects, slowing the
investment requirements but delaying the production build up. (FLS) The
Company's management believes that it will be able to access external sources of
funds through debt financing by the company or the joint ventures or other
entities that are developing the projects, or otherwise, so that no delays will
be experienced as a result of a shortage of financial resources. (FLS)
The Company currently has outstanding stock purchase warrants
expiring on various dates in 1997 entitling the holders thereof to purchase an
aggregate 4,927,977 shares of the Company's Common Stock at specified prices.
All but 14,286 of these warrants may be called for redemption by the Company if
the market price of the Company's Common Stock equals or exceeds specified price
levels for indicated periods and, if not exercised by the holders thereof
following the call, may be redeemed by the Company for nominal consideration.
The prices at which the various series of stock purchase warrants are
exercisable, number of shares of Common Stock that may be purchased through
exercise of each such series, expiration date of each such series, market price
(if any) that must be achieved in order to permit the Company to call the series
for redemption, and the maximum proceeds to the Company that could be generated
through the exercise of all warrants in the series prior to redemption or
expiration are shown in the following table:
<TABLE>
<CAPTION>
Exercise Number of Shares Expiration Call Maximum
Price Issuable Date Price Proceeds
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1.50 529,891 11/3/97 $5.00 $ 794,837
$ 1.75 14,286 6/30/97 --- 25,000
$ 5.10 1,139,800 2/28/97 $6.10 5,812,980
$ 6.00 3,244,000 2/28/97 $7.00 19,464,000
--------- -----------
4,927,977 $26,096,817
- --------------------------------------------------------------
</TABLE>
No assurances can be given that any of these stock purchase warrants will be
exercised or that the Company will realize any or any substantial portion of
such maximum proceeds. (FLS)
Results of Operations
The Company recorded operating revenue of approximately $50,000
during the quarter ended May 31, 1996, as compared with operating revenue of
approximately $78,000 for the same period last year. The revenue in the current
quarter is attributable primarily to a modest amount of oil and gas production
and primarily reflects the Company's effective 5% interest in the
13
<PAGE>
approximately 420 barrels per day of oil production from the Inverness Field in
the Swan Hills producing area in Alberta, Canada. Revenue during the quarter
ended May 31, 1995, arose exclusively from the sale and rental of equipment
related to the Company's electrically enhanced oil recovery technology
(the "EEOR Technology"). Operating revenue for the nine months ended May 31,
1996 amounted to approximately $130,000 compared to approximately $610,000 for
the same period last year. The revenue in the current year is primarily
attributable to the Company's interest in the Inverness Field, while revenue in
the comparable period last year arose from the EEOR Technology. Since the
Company has decided to use the EEOR Technology primarily as a tool to obtain
interests in heavy oil fields and not to pursue external sales of goods and
services related to the EEOR Technology, the Company does not anticipate any
significant revenues from the EEOR Technology in the near future.
General and administrative expense decreased from approximately
$1,212,000 for the quarter ended May 31, 1995 to approximately $806,000 for the
quarter ended May 31, 1996. This decrease reflects lower charges for external
services and travel in the 1996 quarter, implementing management's cost
containment efforts designed to conserve cash during the third quarter of fiscal
1996. General and administrative expenses for the nine months ended May 31, 1996
amounted to approximately $3,115,000 compared to approximately $2,734,000 for
the same period last year. For the 1995 period, general and administrative costs
included a substantial charge for external services fees for financial public
relations activities of a non-recurring nature. The decrease in the 1996
financial public relations expense has been more than offset by increases in
salaries and other administrative costs related to the build-up of staff
associated with the increased oil and gas activities. The Company expects to add
personnel as its oil and gas projects develop further.
Depreciation, depletion, and amortization expense dropped from
approximately $235,000 in the quarter ended May 31, 1995, to approximately
$101,000 for the quarter ended May 31, 1996. The comparable year-to-date figures
reflect approximately $256,000 for the nine months ended May 31, 1996, compared
to approximately $865,000 for the same period last year. This reduction is
attributable primarily to the recognition at August 31, 1995 of the impairment
of intangible assets on which amortization had been charged at the rate of
approximately $223,000 per quarter during fiscal 1995.
During the quarter ended May 31, 1996, the Company recognized an
impairment of approximately $36,000 on its oil and gas properties as a result of
applying the full cost ceiling test. For the nine months ended May 31, 1996, the
Company recognized an impairment of approximately $269,000 on its oil and gas
properties relating to the Company's investment in the Rocksprings project in
West Texas. No such expense was recorded in the comparable 1995 periods.
During the quarter ended May 31, 1996, the Company incurred net
interest expense of approximately $110,000 compared to net interest income of
approximately $96,000 during the comparable period last year. The comparable
nine month figures reflect $120,000 in net interest expense for the period ended
May 31, 1996, compared to $90,000 in net interest income for the same period
last year. The net interest expense for the most recent periods relates
primarily to the Company's 8% Convertible Subordinated Debentures, while the
Company had no outstanding interest-bearing debt during the corresponding period
last year.
14
<PAGE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which sets forth accounting
and disclosure requirements for stock-based compensation arrangements. The new
statement encourages, but does not require, companies to measure stock-based
compensation cost using a fair-value method, rather that the intrinsic-value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Companies choosing to continue to measure stock-based compensation using the
intrinsic-value method must disclose on a pro forma basis net income and net
income per share using the fair-value method were used. Prior to the effective
date of SFAS No. 123 in fiscal 1997, the Company will select the method under
which it will measure stock-based compensation cost.
Forward Looking Statements
The forward looking statements contained in this Item 2 are subject
to various risks, uncertainties and other factors that could cause actual
results to differ materially from the results anticipated in such forward
looking statements. Included among the important risks, uncertainties and other
factors are those hereinafter discussed.
Few of the forward looking statements in this Item 2 deal with
matters that are within the unilateral control of the Company. Joint venture,
acquisition, financing and other agreements and arrangements must be negotiated
with independent third parties and, in some cases, must be approved by
governmental agencies. Such third parties generally have interests that do not
coincide with those of the Company and may conflict with the Company's
interests. Unless the Company and such third parties are able to compromise
their respective objectives in a mutually acceptable manner, agreements and
arrangements will not be consummated. Operating entities in various foreign
jurisdictions must be registered by governmental agencies, and production
licenses for development of oil and gas fields in various foreign jurisdictions
must be granted by governmental agencies. These governmental agencies generally
have broad discretion in determining whether to take or approve various actions
and matters. In addition, the policies and practices of governmental agencies
may be affected or altered by political, economic and other events occurring
either within their own countries or in a broader international context. It is
anticipated that the Company will not have a majority of the equity in the
entity that would be the licensed developer of any of the projects that the
Company is presently pursuing in Eastern Europe, even though the Company may be
the designated operator of the oil or gas field. Thus, the concurrence of co-
venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of the Company, even
if they generally share the Company's objectives. As a result of all of the
foregoing, among other matters, the forward looking statements regarding the
occurrence and timing of future events may well anticipate results that will not
be realized.
The availability of debt financing to the Company and the joint
venture or other entities that are developing the projects is affected by, among
other things, world economic conditions, international relations, the stability
and policies of various governments, fluctuations in the price of oil and gas
and the outlook for the oil and gas industry, and the competition for funds.
Rising interest rates might affect the feasibility of debt financing that is
offered. Potential investors and lenders will be influenced by their evaluations
of the Company and its projects and comparisons with alternative investment
opportunities. The Company's ability to finance all of its present oil and gas
projects according to present plans is dependent upon obtaining additional
funding.
15
<PAGE>
The development of oil and gas properties is subject to substantial
risks. Expectations regarding reserves, even if estimated by independent
petroleum engineers, may prove to be unrealized. Reserves, even if present, may
not be recoverable in the amount and at the rate anticipated and may not be
recoverable in commercial quantities or on an economically feasible basis. World
and local prices for oil and gas can fluctuate significantly, and a reduction in
the revenue realizable from the sale of production can affect the economic
feasibility of an oil and gas project. World and local political, economic and
other conditions could affect the Company's ability to proceed with or to
effectively operate projects in various foreign countries.
Demands by or expectations of governments, co-venturers, customers
and others may affect the Company's strategy regarding the various projects.
Failure to meet such demands or expectations could adversely affect the
Company's participation in such projects or its ability to obtain or maintain
necessary licenses and other approvals.
16
<PAGE>
PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
17
<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: July 15, 1996 By: /s/ Arnfin Haavik
____________________________
Arnfin Haavik
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
27 Financial Data Schedule (EDGAR filing only) X
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 4,993,818
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,908,983
<PP&E> 4,720,319
<DEPRECIATION> 544,962
<TOTAL-ASSETS> 39,943,867
<CURRENT-LIABILITIES> 8,771,960
<BONDS> 1,550,000
0
0
<COMMON> 1,669,800
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 39,943,867
<SALES> 0
<TOTAL-REVENUES> 49,703
<CGS> 0
<TOTAL-COSTS> 40,178
<OTHER-EXPENSES> 136,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,566
<INCOME-PRETAX> (1,023,794)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,023,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,023,794)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
