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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended August 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
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FOUNTAIN OIL INCORPORATED
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(Name of small business issuer in its charter)
Delaware 91-0881481
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Broadfield Blvd., Suite 200, Houston, Texas 77084-5163
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (281) 492-6992
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Securities Registered Under Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
None None
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Securities Registered Under Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year ended August 31, 1996 were
$35,177.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of October 31, 1996, was $108,381,104.
The number of shares outstanding of registrant's Common Stock on October 31,
1996 was 18,751,821.
DOCUMENTS INCORPORATED BY REFERENCE. None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE BACKGROUND
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Fountain Oil Incorporated ("Fountain" and, together with its consolidated
subsidiaries and predecessors, the "Company") is a Delaware corporation formed
in 1994. Its predecessor was incorporated in Oklahoma in 1980 and operated as
an exploration and production company until 1988, when it shifted its focus to
the application of a patented and proprietary method for heating of heavy and
paraffinic oils with an electric current (the "EEOR Process"). The EEOR Process
remained the Company's principal business through December 1994.
In August 1994, a new management group with experience in the
international oil and gas industry became involved with the Company, and
beginning in 1995 the Company shifted its principal activities into the
acquisition and development of interests in a portfolio of oil and gas
properties with a production history, including engaging in such activities
through joint venture, stock ownership, production sharing, working interest,
and other arrangements. The Company has also recently changed its strategy with
respect to the EEOR Process from selling equipment and services to third parties
to using that proprietary technology as a competitive advantage to obtain
interests in, and assuming successful commercialization to exploit,
underdeveloped heavy and paraffinic oil fields.
OIL AND GAS
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Strategy
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The Company's primary focus is the acquisition of ownership interests in
existing oil and gas fields that indicate a potential for increased production
through rehabilitation of the properties. In addition to petroleum production
potential, the Company, in evaluating prospective properties, looks for, among
other characteristics, convenient access to oil and gas transportation and
marketing systems and the existence of an infrastructure for oil and gas
production. Fields meeting the Company's requirements have been found in
countries that in the past have lacked the technical expertise or economic
resources to exploit such fields effectively. Oil and gas ventures in such
countries are typically structured through joint ownership arrangements with the
state oil company or other local interests. The Company is now involved at
various stages in four projects in Eastern Europe, including the Russian
Federation - one in the Republic of Adygea, Russian Federation, two in Ukraine
and one in Albania. Of these four projects, licenses have been granted in three.
The Company typically acquires its interests in oil and gas properties
through interests in joint ventures, partially owned corporate and other
entities, and joint operating arrangements. While it normally seeks to be the
operator of substantial oil and gas projects in which it has an interest, the
Company has acquired and expects to continue to acquire interests representing
50% or less of the equity in various oil and gas projects. Accordingly, based on
the characteristics of particular ventures, certain of the activities in which
the Company has an interest may be conducted through unconsolidated entities.
The Company's interest in the assets and liabilities of unconsolidated entities
is reflected on the Company's consolidated balance sheet on a net basis as
investment in oil and gas ventures; the Company's share of revenue, other income
and expenses of unconsolidated entities is reported in the Company's
consolidated statement of operations as income or loss from equity investment in
oil and gas ventures; and the Company's interest in the cash flow of
unconsolidated entities is reported in the Company's consolidated statement of
cash flows as distributions from or investment in and advance to oil and gas
ventures. The Company will report the same stockholders' equity on net income or
loss whether it accounts for various oil and gas ventures using the equity
method or on a consolidated basis.
In addition to fields requiring rehabilitation, the Company seeks oil and
gas properties which it believes it and possible associates can operate more
effectively than some other operators. This perceived advantage could arise out
of relatively lower overhead or through the application of modern production
techniques, including
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enhanced oil recovery techniques such as, if successfully commercialized, the
Company's proprietary EEOR Process.
VENTURES IN EASTERN EUROPE
--------------------------
Lelyaky Field, Pryluki Region, Ukraine
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Project Structure
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Fountain holds a 90% interest in UK-RAN Oil Corporation, a Canadian
corporation, which in turn owns 45% of the equity of Kashtan
Petroleum, Ltd. (KPLtd.), a Ukrainian joint venture formed to work over and
develop the Lelyaky oil field in the Pryluki region of central Ukraine. This
provides the Company with an effective 40.5% ownership interest. Ukranafta, the
Ukrainian state oil company ("Ukranafta"), owns the other 55% of KPLtd. The
Company treats KPLtd. as an unconsolidated entity and will account for it using
the equity method of accounting.
In May 1996, KPLtd. received a license granting it the exclusive right for
twenty years to develop and produce oil and gas from a 67 square kilometer
("km/2/") portion of the Lelyaky field and the exclusive right for five years to
engage in exploration activities in 326 km/2 /surrounding the production area.
KPLtd. would have rights to commercialize any discoveries arising out of its
exploration activities in that area. (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 Part II. Item 6 under "Forward
Looking Statements.") Ukranafta retains rights to net "base production,"
representing a projection of what the Lelyaky field would produce in the future,
based on the physical plant and technical processes in use at the time of
license grant, on a declining basis through 2008. (FLS) KPLtd. will be entitled
to all incremental production above that declining base. (FLS) After all
production costs, taxes and other expenses of KPLtd. are covered, the owners of
KPLtd. will share its profit, if any, in proportion to their ownership
interests. (FLS) The Company is responsible for arranging financing for the
Lelyaky field project, and KPLtd. and the Company are negotiating an arrangement
under which the Company would have responsibility for providing commercial,
technical and management services with respect to the Lelyaky field project.
(FLS) No assurance can be given that such negotiations will be successfully
concluded or that an arrangement will be consummated.
The Company has agreed to invest a minimum of $4,000,000 in the Lelyaky
field project through KPLtd., none of which had yet been invested at August 31,
1996. At that date, the Company had capitalized acquisition costs relating to
the Lelyaky project aggregating approximately $2,200,000. In October 1996, the
Company effectively guaranteed a $4,000,000 credit facility for KPLtd., and the
Company may find it necessary or advisable to provide additional credit support
for KPLtd. in the future.
Development Plan
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The Lelyaky field was discovered in 1964, and production commenced there
in 1966. It is a large light oil field that has a production drive mechanism
from an underlying aquifer. Out of an original estimate of 750 million barrels
of oil ("MMBL") in place, a reported 386 MMBL have been produced. Current
production is approximately 670 barrels of oil per day ("BOPD") from the 35
wells still producing out of a total of 173 wells drilled. The Company
believes, based on available data from well logs and the production history,
that the recovery from many of the wells has been inferior due to insufficient
cementing and inadequate perforation, leading to severe water production
problems.
The development plan contemplates an initial phase expected to last
approximately ten months and to consist primarily of the workover and
recompletion of 12 existing wells, using Western completion techniques. (FLS)
The initial phase is designed to generate data for the study of wells and
formations, as well as to permit early cash flow. (FLS) Recompletion work is
scheduled to commence by January 1997. (FLS) The Company estimates that the
initial phase of the Lelyaky field project will require financing, on a net
basis, of approximately
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$6,000,000, which assumes a cash flow from initial phase production of
approximately $6,000,000. (FLS) No assurance can be given that such financing or
initial phase cash flow will be available.
Based on data developed during the initial program, KPLtd. will adopt a
full field development plan. (FLS) On the basis of present expectations and
assuming positive results from the initial phase, the development plan could
entail the drilling of approximately 30 new wells, employing Western equipment
and completion techniques. (FLS)
Marketing Arrangement
---------------------
KPLtd. is required initially to offer to sell the oil it produces in the
Ukraine to an authorized state agency at Ukrainian market prices. (FLS) If
such a sale does not occur, KPLtd. can sell the oil in the Ukrainian market or
can have its crude oil refined in the Ukraine and then sell refined products in
that country. (FLS) Over the past few years, Ukrainian crude oil prices have
been approaching world market prices, and if this trend continues, the company
expects that the prices obtained through such sales in the Ukraine will not be
significantly below world market prices. (FLS) Gas is to be sold at prices
established by the Government of the Ukraine or, if gas pricing becomes market
driven, at prevailing market prices. (FLS) If the oil or gas cannot be sold in
the Ukraine, KPLtd. may export it. (FLS)
Gorisht-Kocul Field, Albania
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Project Structure
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Fountain and Sh.A. Albpetrol, the Albanian state oil company
("Albpetrol"), have formed a joint venture's financing (the "ALBJV"), in which
each has a 50% interest, to rehabilitate and develop the Gorisht-Kocul oil field
in Albania, which is located approximately 35 kilometers east of the Adriatic
port of Vlora. The ALBJV joint venture's financing arrangements have not yet
been sufficiently defined to permit a determination regarding whether the
Company will proportionately consolidate ALBJV or will treat it as an
unconsolidated entity and account for it under the equity method of accounting.
The ALBJV holds a twenty-five year production license covering
approximately 16.5 km/2/ constituting the Gorisht-Kocul oil field. Albpetrol
retains rights to base production, representing a projection of the net value of
what the Gorisht-Kocul field would produce in the future, based on the physical
plant and technical processes in use at the time of license grant, on a
declining basis through 2011. (FLS) ALBJV will be entitled to all incremental
production above that declining base. (FLS)
The Company has been named operator of the Gorisht-Kocul field and has
responsibility for implementing the development plan and arranging financing for
the project. (FLS) The Company may utilize up to 80% of the incremental
production to pay for project operating costs. (FLS) Any shortfall in recovery
of operating costs may be carried forward and recovered from the 80% of
incremental production available for operating costs in any subsequent period.
(FLS) Albpetrol is entitled to take the base production and Albpetrol and
the Company may each take its 50% share of net incremental production after
operating costs either in kind or, following sale by ALBJV, in cash based on
world market prices. (FLS)
The Company has agreed to invest a minimum of $1,000,000 in the Gorisht-
Kocul field project through ALBJV, none of which had yet been invested at August
31, 1996. At that date, the Company had capitalized acquisition costs relating
to the Gorisht-Kocul project aggregating approximately $518,000.
Development Plan
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Production at the Gorisht-Kocul field commenced in 1966. The field, which
contains relatively heavy oil, has reportedly produced approximately 69 MMBL to
date. Current production is approximately 1,100 BOPD from the 160 wells still
producing out of a total of 300 wells drilled. Initial production from these
wells is reported to have ranged between 187 and 630 BOPD. Historically, wells
in the Gorisht-Kocul field have been completed
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open hole, with no completion equipment utilized. The Company believes, based on
available data, that the decline in productivity has been caused by water coning
and natural depletion.
The development plan contemplates an initial phase which is expected to
continue through July 1997. (FLS) This phase will include the drilling of two
new wells, with drilling scheduled to commence during the first quarter of
calendar year 1997. (FLS) These wells will initially be drilled vertically for
collection of reservoir data, and logging services, such as formation micro
scanning, are expected to be utilized to investigate the fracture systems
direction, fracture densities and conductivities. (FLS) After the data
collection program has been concluded, the wells will be plugged and redrilled
as horizontal wells, which will be logged and completed for an extensive
production testing program. (FLS) The Company estimates that the initial phase
of the Gorisht-Kocul field project will require financing, on a net basis, of
approximately $6,000,000, which assumes a minimal cash flow from initial phase
production. (FLS) No assurance can be given that such financing or initial
phase cash flow will be available.
Based on data developed during the initial phase, ALBJV will adopt a full
field development plan. (FLS) On the basis of present expectations and assuming
positive results from the initial phase, the development plan could entail up to
80 horizontal sections in old and new wells, probably utilizing multilaterals
with several horizontal sections emanating from one common wellbore. (FLS) If
the Company proceeds through ALBJV with the development of the Gorisht-Kocul
field beyond the initial phase, the Company will be required to provide
Albpetrol with equipment having a value of $500,000. (FLS)
Marketing Arrangements
----------------------
The incremental production from the Gorisht-Kocul field attributable to
the reimbursement of operating costs or the Company's 50% share of net
incremental production may be (i) exported and sold on the open market, (ii)
sold to Albpetrol at prices equal to world market prices less 6% or (iii)
refined by Albpetrol on a "most favored customer" basis and then sold in the
open market. (FLS) The export option would require the rehabilitation by
Albpetrol of the pipeline from Gorisht-Kocul to Vlora, and pending such
rehabilitation, Albpetrol has agreed to purchase all production from the
Gorisht-Kocul field. (FLS)
Maykop Field, Republic of Adygea, Russian Federation
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Project Structure
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The Company owns 37% of the issued and outstanding stock of Intergas JSC,
a Russian joint stock company ("Intergas"). Other shareholders of Intergas
include the Republic of Adygea (Russian Federation) and Mostransgas Gas
Transmission and Supply Enterprise JSC ("Mostransgas"), an affiliate of Gasprom
which is the largest gas distribution group in Russia. The Company treats
Intergas as an unconsolidated subsidiary and will account for it using the
equity method of accounting.
In 1994, Intergas was granted an exclusive twenty-five year exploration
and production license covering the 12,500 acre Maykop gas condensate field in
the Republic of Adygea, Russian Federation, located approximately 185 kilometers
from the Black Sea.
Intergas has designated the Company to be operator of the Maykop field,
with responsibility for implementing the development plan and arranging
financing for the project. (FLS) As of November 1996, the Company was
assembling and testing in Texas two drilling rigs and related equipment, which
had been recorded on its books as of August 31, 1996 at approximately
$5,819,000, which the Company expects to ship to Adygea for use in the Maykop
field project. (FLS) Delivery of the rigs and related equipment to Intergas in
Adygea will complete the Company's required charter capital contribution to
Intergas, and the value in excess of the remaining required charter capital
contribution will be treated as a loan by the Company to Intergas. (FLS) At
August 31, 1996, the Company had capitalized acquisition costs relating to the
Maykop project aggregating approximately $2,780,000.
Development Plan
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The Maykop field was discovered in 1958 and commercial production
commenced in 1966. The field has reportedly produced over two trillion cubic
feet of natural gas to date. In 1995, daily production was reported to have
been approximately two million cubic feet of gas per day.
The development plan contemplates an initial phase with an expected
duration of approximately nine months. This phase will commence, upon the
arrival in Adygea of the rigs and related equipment to be shipped by the
Company, with the drilling of two new wells to assess the flow of primary gas
production. (FLS) Sites have been selected and prepared for the drilling of
the two wells. In order to increase production, certain existing but non-
producing wells may be concurrently recompleted and stimulated. (FLS) A
delineation well to assess a possible extension of the field is planned after
the first two wells are drilled. (FLS) The Company estimates that the initial
phase of the Maykop field project will require financing, on a net basis, of
approximately $4,000,000, which assumes a cash flow from initial phase
production of approximately $2,500,000. (FLS) No assurance can be given that
such financing or initial phase cash flow will be available.
Based on data developed during the initial phase, Intergas will adopt a
full development plan for the Maykop field. On the basis of present expectations
and assuming positive results from the initial phase, the development plan could
entail the drilling of a substantial number of new production wells which would
gradually replace existing producing wells. (FLS) On that assumption, some 35
new wells could be in production by the end of 1999. (FLS)
Marketing Arrangement
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Intergas and Mostransgas have entered into an arrangement under which
Mostransgas would purchase all gas produced from the Maykop field for at least
the initial ten years of Intergas production. (FLS) During the first three
years of this arrangement, the price for the gas would be the then prevailing
Ruble equivalent of $1.03 per thousand cubic feet, including VAT, at the
wellhead. (FLS) In the event the official industrial wholesale price for
natural gas (expressed in U.S. dollar equivalents) is increased by government
action above that prevailing in April 1996, the pricing may be adjusted to
reflect a proportional increase. (FLS) After the initial three-year period,
the price of the gas shall be renegotiated based on then prevailing gas prices
in the Russian Federation. (FLS)
Intergas is negotiating an arrangement for the sale of gas condensate from
the Maykop field. It is contemplated that the arrangement will provide for the
sale of condensate at prices related to an international market index. (FLS)
No assurances can be given that these or any other negotiations for the sale of
the gas condensate will be successful.
Stynawske Field, Western Region, Ukraine (previously referred to as the
Boryslaw Field)
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In November 1996, the Company entered into a joint venture agreement with
Ukranafta for the development of the 6,000 acre Stynawske field. The Company
will have a 45% interest in the joint venture, with Ukranafta having the
remaining 55% interest. (FLS) After the formal registration of the joint venture
company in Ukraine, a production license must be obtained before development
activities can commence. (FLS) The Company presently anticipates that the
license could be received during the first half of calendar year 1997. (FLS) At
August 31, 1996, the Company had capitalized acquisition costs relating to the
Stynawske project aggregating approximately $1,321,000. The financing
arrangements for the joint venture formed for the development of the Stynawske
field have not yet been sufficiently defined to permit a determination regarding
whether the Company will proportionately consolidate this joint venture or will
treat it as an unconsolidated entity and account for it using the equity method
of accounting.
The Stynawske field is a relatively tight sandstone reservoir containing
light oil. The production from the field commenced in 1967 but was stopped
after a few years of production due to environmental considerations. The field
is located underneath the main water supply for Western Ukraine, and leakage
from producing wells some twenty years ago threatened pollution of this aquifer.
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The preliminary field development plan for the rehabilitation of the
Stynawske field is based on deviated drilling, in which the drilling sites for
the wells would be located a safe distance from the water supply and the wells
would enter the reservoir at an angle avoiding the aquifer. (FLS) Additional
measures would be taken with the drilling mud and otherwise to protect the
environmental integrity of the project. (FLS) Gas injection to maintain the
reservoir pressure will be considered at a later stage. (FLS) The development
plan for the Stynawske field has not yet been formulated and will depend upon
data developed during an initial phase, which is expected to include the
drilling of a new well and the workover of an existing well. (FLS)
Risks Associated with Eastern European Ventures
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While all oil and gas development and production activities are subject to
uncertainties inherent in the oil and gas industry, the projects in
Eastern Europe described above in which the Company has an interest are, in
addition, subject to certain specific risks, including the following. The forms
of government and the economic institutions in the countries in which the
projects are located have been established relatively recently and, accordingly,
may be subject to a greater risk of change and the risk of greater change than
may be the case with respect to governments and economies that have been in
existence for longer periods of time. (FLS) The government is an important
participant in the establishment of the arrangements defining each project, and
there is a risk that a future government may seek to alter project arrangements.
(FLS) The infrastructures, labor pools, sources of supply, and legal and social
institutions in these areas may not be equivalent to those normally found in
connection with projects in North America. (FLS)
Payment for any oil and gas sold in Albania, the Russian Federation and
Ukraine is likely to be in local currencies. (FLS) While such currencies are
now generally freely convertible into United States dollars, there is no
assurance that such convertibility will continue throughout the period the
Company is involved in projects in such countries. Even where convertibility is
available, applicable exchange rates may not reflect a parity in purchasing
power. (FLS) Fluctuations of exchange rates could result in a devaluation of
foreign currencies being held by the entities operating such projects in excess
of their obligations denominated in such currencies. (FLS) In addition,
countries in which the oil and gas ventures in which the Company has interests
operate may impose various restrictions on the transfer of currency into or out
of such countries, which could affect the ability of the Company to repatriate
its investment or its share of distributable earnings, if any. (FLS)
The Company expects that the Lelyaky, Gorisht-Kocul, Maykop and, if a
license is granted, Stynawske projects will commence with an initial phase of
the development plan for the applicable oil or gas field. (FLS) Among the
purposes of the initial phase of the development plans are the generation of
additional data regarding the geology and production characteristics of the
respective fields, testing the premises of the tentative development plans for
the fields, refining such development plans, and generally seeking confirmation
of the commercial feasibility of the respective projects. (FLS) While the staged
approach to project development is designed to mitigate investment risk and
optimize hydrocarbon recovery there can be no assurance that such approach will
have that effect. (FLS) No assurance can be given that such projects will be
determined to be commercially feasible, that the development of such projects
will produce oil and gas in commercial quantities, or that any oil and gas
produced will be sold for a profit.
The Company generally has the obligation to arrange financing for the
Eastern European oil and gas ventures in which it has an interest. (FLS) The
Company anticipates financing the net development costs of such ventures with
funds made available through a combination of its present cash position, equity
financing by the Company, and debt financing either by the Company or the
entities through which such ventures are organized. (FLS) Debt financing will be
sought from both international development agencies, such as the European Bank
for Reconstruction and Development, and conventional lenders. (FLS) To the
extent that loans are taken in the entities through which the oil and gas
ventures are organized, it is likely that the Company will be required to
guarantee or otherwise provide credit enhancements with respect to all or a
portion of such loans, at least until such ventures demonstrate economic self-
sufficiency. (FLS) There can be no assurance that the Company or such ventures
will be able to arrange the financing necessary to develop the projects being
undertaken by such ventures or to support the corporate and other activities of
the Company or that such equity or debt financing as is available will be on
terms that are attractive or acceptable to the Company or such ventures or that
are deemed to be in the best interests of the Company's stockholders or the
participants, including the
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Company, in such ventures. (FLS) In order to produce oil and gas in sufficient
quantities and to market such oil and gas at sufficient prices to provide
positive cash flow to the Company, venture development efforts, including those
conducted through unconsolidated subsidiaries of the Company, must be
successful. (FLS) The consolidated financial statements of the Company do not
give effect to any impairment in the value of the Company's investment in oil
and gas ventures or other adjustments that would be necessary if financing
cannot be arranged for the development of such ventures or if such ventures are
unable to achieve profitable operations. (FLS) The Company's consolidated
financial statements have been prepared under the assumption of a going
concern. Failure to arrange such financing on reasonable terms or failure of
such ventures to achieve profitability would have a material adverse effect on
the results of operations, financial condition including realization of assets,
cash flows and prospects of the Company and ultimately its ability to continue
as a going concern. (FLS)
At August 31, 1996, the Company had capitalized costs relating to the
acquisition of interests in oil and gas ventures in Eastern Europe aggregating
approximately $7,177,387. A determination that one or more of the ventures is
not commercially feasible would result in an impairment of the assets associated
with such ventures, which could have a material adverse effect upon the
Company's financial condition or results of operations. (FLS)
No assurance can be given that any or all negotiations required in
connection with the Company's oil and gas ventures will be satisfactorily
concluded; that negotiated arrangements will be implemented; or that all
governmental and quasi-governmental licenses, registrations and approvals
required for the projects will be granted or, if granted, will not be revoked.
(FLS)
PROPERTIES AND VENTURES IN NORTH AMERICA
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Rocksprings Field, Edwards County, West Texas
---------------------------------------------
As of August 31, 1996, the Company had a 37.5 % working interest before
payout and a 33.3% working interest after payout in 5,902 undeveloped gross
acres under lease. Two wells have been drilled by the group in which the
Company is a working interest participant. The first well is not producing, and
the second of the two wells is producing insignificant amounts of gas from the
Canyon Sand interval. An additional well drilled by a previous operator has not
been recompleted and tested as originally intended. An additional 611 acres
have been farmed-out to an operator that has indicated an intention to drill a
new well on the farmed-out acreage. (FLS) The future plans for the Rocksprings
Field will be determined on the basis of a review of production results and test
evaluations from the new well expected to be drilled during the first quarter of
calendar 1997. (FLS)
Skiff Sawtooth Field, Alberta, Canada
-------------------------------------
The Company has a 50% working interest in oil and gas leases covering
approximately 320 undeveloped acres adjacent to a producing field. Recent
drilling by the offset operator has shown that the producing formation thins in
the general direction of the Company's leasehold. The Company has not yet been
involved in any drilling in the Skiff Sawtooth Field.
Inverness Unit, Alberta, Canada
-------------------------------
Effective September 1, 1995, Neutrino Resources, Inc., an Alberta
corporation, acquired one-half of the shares of a Canadian subsidiary of the
Company, Focan Ltd., in exchange for a 10% working interest in an Alberta
producing waterflood unit. The Company participated in the drilling of three
new horizontal re-entry wells in the unit and completion of one of those wells.
The unit is currently producing 550 barrels per day, in which the Company has an
effective 5% interest. The Company treats Focan Ltd. as an unconsolidated
subsidiary and accounts for it using the equity method of accounting.
COMPETITION
-----------
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The oil and gas industry is composed of a large number of competitors
ranging from some of the world's largest multinational companies to very small
private entities. Many of these competitors have much greater financial,
technical and other resources than the Company. In the competition to acquire
oil and gas properties, the Company relies substantially on the relationships
its officers and directors have developed in the international oil and gas
industry, as well as the Company's size which enables it to consider projects
that would be deemed to be too small for consideration by many larger
competitors. The loss of a significant portion of its management group could
have a material adverse affect on the results of operations and prospects of the
Company.
TECHNOLOGY FOR ENHANCED PRODUCTION OF HEAVY OIL
-----------------------------------------------
EEOR Process
------------
Heavy oil resources are often located in shallow reservoirs with low
reservoir temperatures. Heavy oil is very viscous at moderate temperatures and
normally needs to be heated in order to flow easily. The Company, together with
Illinois Institute of Technology Research Institution ("IITRI"), had developed
since the mid-1980's, a technology for thermal stimulation of oil wells by
electric heating called Electrically Enhanced Oil Recovery ("EEOR"). The Company
has exclusive rights to the technology through an agreement with IITRI, as well
as through owned patents.
The Company believes that its patent position is important in connection
with maintaining its competitive position relating to the EEOR Process. The
IITRI license agreement covers two United States patents that expire in 2002.
The Company holds directly eight United States patents with expiration dates
ranging from 2004 to 2009 and has three United States patent applications
pending. In addition, there are seventeen issued foreign patents, expiring 2005
to 2014, and eighteen foreign patent applications currently pending based on the
technology embodied in the United States patents and patent applications.
Several pilot projects involving the EEOR Process have been implemented
the past 10 years. While pilot projects results have varied, they suggest the
validity of the EEOR Technology and its ability to increase the production rates
by a factor of two or more. (FLS) Recent emphasis has been on improving
equipment reliability. A new generation of equipment is being developed. To-
date, the Company has not achieved commercial success with this technology. The
Company is currently developing plans for the possible installation of the EEOR
Process in horizontal wells and multi-well (full field) developments. (FLS) No
assurance can be given that the Company will be successful in so extending the
application of the EEOR Process.
The potential advantages of the EEOR technology include improved
production rates, energy efficiency, environmental acceptibility, absence of
practical depth limits, suitability for extremely cold climates, preventing or
removing paraffin buildup, and counteracting or removing hydrate formation.
(FLS)
Management believes that the EEOR technology could provide the Company
with a competitive advantage in negotiating for heavy oil participations,
particularly in Eastern Europe. (FLS) In North America, large heavy oil reserves
are lying idle because present owners have not found economic ways to develop
them, and this may represent opportunities for the Company to take over or farm-
in to such fields on reasonable terms and to make production economic through
the use of EEOR technology. (FLS) The Company has therefore determined to use
its EEOR technology principally as a competitive advantage to acquire and, if
successfully commercialized, to develop heavy oil reserves. (FLS)
The Company's ability to develop the EEOR technology is dependent upon its
ability to raise capital in addition to that needed for its oil and gas
properties and ventures.
Competition
-----------
The principal competition of the EEOR Process is a process based upon
injecting steam into wells to heat oil reservoirs. The steam process can heat
thicker zones faster and can heat larger volumes of a reservoir than the EEOR
Process. The steam process works best in thick, widespread formations but may
not be effective in various reservoirs by reason of factors such as climate,
depth, thickness, permeability variations, faulting, low
9
<PAGE>
porosity and incompatibility of fresh water with reservoir constituents. The
EEOR Process does not appear to be limited by such conditions.
The EEOR Process has significant environmental advantages over the steam
process. The steam process utilizes substantial quantities of pure water in
producing the steam, and then steam condensate polluted with salt and petroleum
constituents, some of which may be carcinogenic, is returned with the oil and
must be recycled or disposed. The EEOR Process neither utilizes fresh water nor
produces condensate. The energy generated for the EEOR Process can normally be
generated in a central facility with better pollution control measures than
those available onsite where energy for the steam process is normally produced,
and the EEOR Process is normally more energy efficient. Environmental
considerations are generally more important with respect to projects in the more
highly developed countries, such as the United States, Canada and Western
Europe.
The principal dimensions of competition for reservoir heating systems are
the relative effectiveness, reliability and cost-effectiveness of the competing
systems; the environmental impact of the competing processes; and the ability of
the competing suppliers to respond to customers' needs in a timely fashion. To
date, the Company has not been successful in establishing the EEOR Process as a
commercially accepted method of thermal stimulation.
EMPLOYEES
---------
As of October 31, 1996, the Company had thirty-one full time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not have complete ownership of any real property. The
Company leases office space in Calgary, Houston, Maidenhead, England and Asker,
Norway under leases having remaining terms varying from twenty-four to one
hundred eight months. See "Item 1. Description of Business" regarding the
Company's interest in oil and gas properties and ventures.
Since September 1, 1995, the beginning of the Company's most recent fiscal
year, neither the Company nor any of its unconsolidated entities has filed with
or included in reports to any Federal authority or agency any estimates of
total, proved net oil or gas reserves. During the past three fiscal years, the
Company and its unconsolidated entities have not had any substantial production
of oil and gas.
The Company did not drill any exploratory wells or development wells in
fiscal 1994. In fiscal 1995, the Company participated in the drilling of three
gross wells (1.3 net wells), two of which were exploratory and located in the
Rocksprings Field in Edwards County, Texas, and one of which was dry and located
in Evangeline Parish, Louisiana. Of the two Rocksprings wells, one has been
completed and is producing 20 MCF per day while the other has been abandoned as
a non-producer. The Louisiana well was abandoned as a dry hole. In 1996, the
Company participated in the drilling of one gross well in West Mexia which was
later abandoned.
In fiscal 1996, three gross horizontal re-entry wells were added to the
Inverness Unit in Canada, in which an unconsolidated subsidiary of the Company
has an interest. One Inverness well was put on production with approximately 60
BOPD, of which the Company's share is 5%. A second Inverness well was
abandoned, and the third well is awaiting completion. Average sales price and
production costs for the Inverness Unit were $18.94 and $12.07, respectively.
As of August 31, 1996, the Inverness Unit had 37 productive oil wells, 1.85 net
wells, 23,360 gross developed acres and 1,168 net developed acres.
As of November 27, 1996, the Company has no drilling operations underway.
ITEM 3. LEGAL PROCEEDINGS
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The Company is not a party to, nor is any of its property subject to, any
legal proceedings, except claims for damages made by the Company involving non-
material amounts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended August 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Fountain's Common Stock is currently traded and has since April 6, 1995
been traded on the Nasdaq National Market System under the symbol "GUSH." It is
also listed and traded on the Oslo Stock Exchange under the symbol "FOO." The
Company's Common Stock was traded on the Nasdaq OTC Electronic Bulletin Board
under the symbol "EORI" until April 5, 1995.
High and low bid prices reported for the period through April 5, 1995 are
from the OTC Electronic Bulletin Board records and reflect inter-dealer prices,
without retail mark-up, mark-downs, or commissions, and may not necessarily
represent actual transactions. Prices reported for the periods beginning April
6, 1995 are from the Nasdaq Stock Market and reflect trade prices.
During December 1994, the Company effected a 1-for-25 reverse split of the
Company's Common Stock. Figures for the periods prior to the effective date of
the reverse stock split have been restated to give effect to the reverse stock
split.
BY FISCAL QUARTER IN THE
FISCAL YEAR ENDED COMMON STOCK
AUGUST 31, 1996 HIGH LOW
------------------------------ ------------
QUARTER ENDED:
November 30, 1995 $6.06 $3.38
February 29, 1996 5.53 3.09
May 31, 1996 5.38 2.81
August 31, 1996 6.56 4.88
BY FISCAL QUARTER IN THE
FISCAL YEAR ENDED COMMON STOCK
AUGUST 31, 1995 HIGH LOW
------------------------------ ------------
QUARTER ENDED:
November 30, 1994 $4.65 $3.38
February 29, 1995 6.75 2.25
May 31, 1995 7.38 4.19
August 31, 1995 7.00 5.19
On August 31, 1996 the number of holders of record of the Common Stock of
the Company was approximately 3,400. The Company has not paid any dividends to
its shareholders. It is the Company's present policy to retain any earnings for
working capital purposes, and accordingly the Company does not expect to pay any
dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
11
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LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
---------------------------------------------------------------
As of August 31, 1996, the Company had current assets of $17,985,554, of
which $17,329,237 was in the form of cash and cash equivalents, and current
liabilities of $1,060,201, leaving the Company with working capital of
$16,925,353. Total stockholders' equity as of August 31, 1996 was $30,504,990.
This compares to current assets of $5,290,601, cash and cash equivalents of
$4,791,645, current liabilities of $1,102,432, working capital of $4,188,169 and
stockholders' equity of $9,607,890 as of August 31, 1995. The increase in cash
and cash equivalents, working capital and stockholders' equity is attributable
primarily to an equity offering that was completed in the fourth quarter of
fiscal 1996. In June 1996, the Company issued and sold 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 net proceeds of
approximately $21,000,000, after reduction for commissions and other expenses
totaling approximately $1,500,000, were recorded as an increase to stockholders'
equity.
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 $3,346,723 after commissions and expenses. The
Debentures were 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. At August 31, 1996, $3,450,000 principal
amount of the Debentures had been converted into 997,324 shares of Common Stock,
resulting in an increase to stockholders' equity of $3,138,838. By October 31,
1996, all of the Debentures had been converted into an aggregate of 1,056,449
shares of Common Stock.
At August 31, 1996, the Company had outstanding stock purchase warrants
expiring on various dates in 1997 entitling the holders thereof to purchase an
aggregate 4,884,754 shares of the Company's Common Stock at various prices. All
but 14,286 of these warrants could 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 outstanding at
August 31, 1996 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:
Outstanding Warrants at August 31, 1996
Exercise Number of Shares Expiration Call Maximum
Price Issuable Date Price Proceeds
- - --------------------------------------------------------------------------------
$ 1.50 486,668 11/3/97 $5.00 $ 730,002
$ 1.75 14,286 6/30/97 --- 25,001
$ 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
--------- ----------
4,884,754 $26,031,983
- - --------------------------------------------------------------------------------
From September 1, 1996 through October 31, 1996, a total of 1,304,086
warrants were exercised for a total of $6,062,981, which has been added to
stockholders' equity. Of the warrants exercised, 1,139,800 had an exercise
price of $5.10, 14,286 had an exercise price of $1.75, and 150,000 had an
exercise price of $1.50. No assurances can be given that any of the remaining
stock purchase warrants will be exercised or that the Company will realize any
portion of the maximum proceeds therefor. (FLS)
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<PAGE>
During fiscal 1996, the Company acquired a 37% ownership interest in
Intergas JSC ("Intergas"), a closed private joint stock company incorporated in
Russia having rights to develop the 12,500 acre Maykop gas condensate field in
the Republic of Adygea, Russian Federation. In connection with the acquisition
of its ownership interest in Intergas, the Company became obligated to pay a
maximum of $800,000 in cash and 1,000,000 shares of Common Stock. Of such
consideration, 300,000 shares of the Company's Common Stock with a fair market
value of $1,668,750 were issued in June 1996, concurrently with a negotiated
increase in its investment in Intergas from 31% to 37%. The payment of the
balance of the consideration remains subject to the satisfaction of various
conditions related to the performance of the Maykop field project. Intergas is
an unconsolidated subsidiary of the Company, and the Company accounts for it
using the equity method of accounting. The Company acquired a portion of its
interest in Intergas through the acquisition of Gastron International Limited, a
British Virgin Islands corporation ("Gastron"). In connection therewith, the
Company also acquired for the same consideration two drilling rigs and related
equipment, which it intends to transfer to Intergas, and assumed various
liabilities of Gastron related to the rigs and equipment, including a $2,450,000
loan payable to the Company, which was outstanding on August 31, 1995, which has
been eliminated in consolidation.
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 Lelyaky field in the Pryluki region of Central Ukraine. The joint
venture has been registered, and the production license was issued on 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.
The Company has paid the $611,000 in cash and has issued 150,000 shares of
Common Stock. These shares were valued at market price on the date of issuance,
or $684,375, which is included in the investment in oil and gas ventures related
to the Lelyaky field project. Conditions for the issuance of an additional
250,000 shares were satisfied during the fourth quarter of fiscal 1996, but the
shares have not yet been issued. The issuance of the remaining 750,000 shares
remains subject to the satisfaction of various conditions related to the
performance of the Lelyaky field project. The Company treats Kashtan Petroleum,
Ltd. as an unconsolidated entity and accounts for it using the equity method of
accounting.
The Company has outstanding obligations with respect to the acquisition
and development of oil and gas properties and ventures in which it has interests
that require or may require the Company to expend funds and to issue shares of
its Common Stock. Some of these obligations are subject to the satisfaction of
various conditions related to, among other things, achievement of specified
project performance standards. At both August 31 and October 31, 1996, the
Company had unconditional obligations regarding the development of oil and gas
properties and ventures amounting to $5,000,000, as well as the unconditional
obligation to issue 250,000 shares of Common Stock. At those dates, additional
commitments conditioned on formalization of project relationships, project
performance and other matters involved $1,800,000 and 2,000,000 shares of Common
Stock. During November 1996, conditions to the payment of $500,000 and the
issuance of 175,000 shares were satisfied, making those obligations
unconditional. As the Company undertakes additional projects and develops
current projects, significant additional obligations are expected to be
incurred. (FLS)
Developing the oil and gas properties and ventures in which the Company
has or expects to acquire an interest, which are described in "Item 1.
Description of Business," is expected, based on preliminary development plans,
to require a net cash outlay from the Company in the range of $30,000,000 to
$40,000,000 during the sixteen-month period ending December 31, 1997, which
amount does not include anticipated cash outlays for general and administrative
expenses and new oil and gas properties and ventures or any anticipated cash
flows from production. (FLS) No assurance can be given that such anticipated
cash flows will be available or that the required net cash outlay will not be
greater. The Company has some flexibility in postponing or reducing the cash
outlay by revising project programs or delaying specific activities. (FLS) The
Company anticipates financing the net development costs of such properties and
ventures with funds made available through a combination of its present cash
position, equity financing by the Company, and debt financing either by the
Company or the entities through which such ventures are organized. (FLS) Debt
financing will be sought from both international development agencies, such as
the European Bank for Reconstruction and Development, and conventional lenders.
(FLS) To the extent loans are taken in the entities through which the oil
13
<PAGE>
and gas ventures are organized, it is likely that the Company will be required
to guarantee or otherwise provide credit enhancements with respect to all or a
portion of such loans, at least until such ventures demonstrate economic self-
sufficiency. (FLS) There can be no assurance that the Company or such ventures
will be able to arrange the financing necessary to develop the projects being
undertaken by the Company and such ventures or to support the corporate and
other activities of the Company or that such equity or debt financing as is
available will be on terms that are attractive or acceptable to the Company or
such ventures or that are deemed to be in the best interests of the Company's
stockholders or the participants, including the Company, in such ventures. (FLS)
In order to produce oil and gas in sufficient quantities and to market such oil
and gas at sufficient prices to provide positive cash flow to the Company, oil
and gas projects in which the Company has interests, including those conducted
through unconsolidated entities, must be successfully developed. (FLS) The
consolidated financial statements of the Company do not give effect to any
impairment in the value of the Company's investment in oil and gas ventures or
other adjustments that would be necessary if financing cannot be arranged for
the development of such ventures or if such ventures are unable to achieve
profitable operations. (FLS) The Company's consolidated financial statements
have been prepared under the assumption of a going concern. Failure to arrange
such financing on reasonable terms or failure of such ventures to achieve
profitability would have a material adverse effect on the results of operations,
financial condition including realization of assets, cash flows and prospects of
the Company and ultimately its ability to continue as a going concern. (FLS)
As of August 31, 1996, the Company had net investments totaling $7,177,387
in oil and gas properties and ventures, including unconsolidated entities. Of
this amount, $6,782,953 relates to the projects in Eastern Europe. The
comparable amounts for August 31, 1995 were $1,909,890 and $1,358,205,
respectively.
During 1996, the Company expended $3,728,770 for drilling rigs and related
equipment which the Company expects to transfer to Intergas, which will be
accounted for as an investment in and advance to an oil and gas venture. (FLS)
See Note 3 of Notes to Consolidated Financial Statements. In addition, the
Company in 1996 had cash expenditures of $2,800,775 related to its oil and gas
properties and ventures, including $262,584 for the projects in the United
States and Canada, and $2,538,191 for the projects in Eastern Europe.
Realization of these investments is dependent upon obtaining the additional
capital, as described above, and ultimately on the development, production and
sale of adequate quantities of oil and gas. (FLS)
Cash used in operations was $5,145,951 in fiscal 1996 versus $1,958,078 in
fiscal 1995. The increase is cash used in operations is due principally to the
higher activity level associated with the Company's oil and gas properties and
ventures, primarily those in Eastern Europe. While the Company expects certain
ventures to generate operating cash flows from oil and gas production commencing
in calendar 1997, such cash flows are not expected to cover the capital
requirements of these ventures. (FLS) In the absence of distributions from these
ventures, which are not expected through calendar 1997, the Company does not
expect to have operating cash flows sufficient to fund general and
administrative expenses through calendar 1997. (FLS) No assurances can be given
that such operating cash flows to the ventures will be generated.
RESULTS OF OPERATIONS
---------------------
The Company recorded operating revenue of $35,177 during the year ended
August 31, 1996 compared with $625,457 for the same period last year. The
decrease in revenue resulted from a decline in sale of EEOR equipment. The
Company decided not to market the EEOR technology to third parties but rather to
use the technology primarily as a competitive advantage to secure new heavy oil
interests and, assuming successful commercialization, to optimize production and
reserves from such interests. (FLS) Consequently while all $625,457 of 1995
revenue related to EEOR technology, only $8,615 of 1996 revenue was associated
with the EEOR technology. Most 1996 revenue was related to a modest amount of
oil and gas production from an overriding royalty interest held by the Company
relating to property in Alberta, Canada. The Company is making substantial
investments in oil and gas ventures, particularly those located in Eastern
Europe. (FLS) No assurances can be given that such investment will result in
income from operations or that the Company will employ the EEOR technology.
(FLS)
The operating loss for the year ended August 31, 1996 amounted to
$5,639,689 compared with $7,882,920 for the comparable period last year. The
reduction in the operating loss is attributable primarily to
14
<PAGE>
non-recurring 1995 expense items relating to the impairment of patent rights and
certain other assets written off at the end of fiscal 1995, the amortization of
those patent rights during 1995, and 1995 financial public relations expenses
paid primarily by the issuance of Common Stock, partially offset by higher 1996
direct project costs of $1,267,555 and general and administrative expense (other
than those related to financial public relations) associated with the
development of an organization and infrastructure for the Company's oil and gas
activities.
General and administrative expenses for the year ended August 31, 1996
amounted to $3,853,972 compared to $4,012,510 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 substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe. As the Company's oil and gas activities increase,
the Company expects its organization to grow and its general and administrative
expense to increase. (FLS)
Depreciation, depletion, and amortization expense decreased from
$1,156,772 in fiscal 1995, to $77,253 for fiscal 1996. 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 fiscal 1996, the Company recognized an impairment of $419,835 on
its oil and gas properties as a result of applying the full cost ceiling
limitation. Of this amount, $268,972 relates to the Company's investment in the
Rocksprings project in West Texas. The Rocksprings field has only produced
insignificant amounts of gas from one of the two wells in which the Company
participated. Last year, the Company recognized $608,181 of impairment expense
on the same project. As of August 31, 1996, the Company had a $257,407
unevaluated oil and gas property on its balance sheet related to the Rocksprings
project. The remaining 1996 expense associated with impairment of oil and gas
properties relates to the Company's 50% working interest in the West Mexia
field, which involved a now abandoned experimental well to test new technology
for determining the remaining predictable oil between wells and in wells that
had become early water producers.
During 1996, the Company recorded a loss of $182,020 from the sale of
certain drilling equipment. Interest income increased to $332,071 for the year
ended August 31, 1996 from $251,276 in the prior year due to higher average cash
investments. Interest expense increased to $220,965 for the year ended August
31, 1996 from $28,475 in the prior year due to the amortization of financing
costs and interest related to the 8% Convertible Subordinated Debentures.
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 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 December 31, 1996, the Company
will select the method under which it will measure stock-based compensation
cost pursuant to SFAS No. 123.
The Company may be exposed to the risk of foreign currency exchange losses
in connection with its foreign operations. Such losses would be the result of
holding net monetary assets (cash and receivables in excess of payables)
denominated in foreign currencies during periods of a strengthening U.S. dollar.
The Company does not speculate in foreign currencies or presently maintain
significant foreign currency cash balances. The Company expects that operations
conducted through certain oil and gas ventures in which the Company has
interests, including unconsolidated entities, will be based principally on the
local currencies in the countries in which operations are conducted, including
Albania, the Russian Federation and Ukraine. (FLS) The Company may
15
<PAGE>
receive dividends or distribution in such currencies, and there is no assurance
that the Company will be able to convert such currencies into U.S. dollars or
that exchange losses related to these operations will not occur. (FLS)
FORWARD LOOKING STATEMENTS
--------------------------
The forward looking statements contained in this Item 6 and elsewhere in
this Form 10-KSB 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 such forward looking statements 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 equity financing to the Company or 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, the competition for funds and an evaluation of specific Company
projects. 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.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive. Accordingly,
estimates related to the Company's properties are subject to change as
additional information becomes available. Most of the Company's interests in oil
and gas ventures are located in Eastern European countries. Operations in those
countries are subject to certain additional risks relating to, among other
things, enforceability of contracts, currency convertibility and
transferability, unexpected changes in tax rates, availability of trained
personnel, availability of equipment and services and other factors that could
significantly change the economics of production. Production estimates are
subject to revision as prices and costs change. Production, 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.
16
<PAGE>
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.
See Item 1. "Description of Business - Oil and Gas - Risks Associated with
Eastern European Ventures" for a further discussion of risks, uncertainties and
other factors that could cause actual results to differ materially from the
results anticipated in forward looking statements relating to, directly or
indirectly, the projects in Eastern Europe in which the Company has interests.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements required to be filed in this Report begin at
Page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
With the expansion of the Company's business, the Board of Directors
determined on September 8, 1994 that it would be appropriate to engage a firm
with worldwide capabilities as the principal accountant to audit the Company's
financial statements and accordingly dismissed Cross and Robinson as such
principal accountant. Cross and Robinson's reports on the financial statements
of the Company for the fiscal years ended October 31, 1993 and 1992 contained an
explanatory paragraph describing an uncertainty about the Company's ability to
continue as a going concern. There were no disagreements between the Company
and the former principal accountant in the period since the beginning of fiscal
1992 through the interim period ended September 8, 1994, on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of the former
principal accountant, would have caused it to make a reference to the subject
matter thereof in connection with its reports. On September 13, 1994, the
Company engaged Coopers & Lybrand L.L.P. as the principal accountant to audit
its financial statements.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
-----------------------------------------------
Name Age Position
- - ------------------------ --- --------------------
Robert A. Halpin (1) 61 Chairman of the Board
Oistein Nyberg 54 Director, President and
Chief Executive Officer
Einar Bandlien 48 Director and Executive Vice President,
Business Development
Nils N. Trulsvik 47 Director, Executive Vice President
and Chief Operating Officer
Stanley D. Heckman (1) 57 Director
Eugene J. Meyers 62 Director
Arild Boe 48 Executive Vice President, Asset
Management Oil & Gas
Arnfin Haavik 53 Executive Vice President and
Chief Financial Officer
Svein E. Johansen 52 Executive Vice President, Heavy
Oil Assets
Gary J. Plisga 53 Executive Vice President, Operations
Ravinder S. Sierra 44 Vice President, Operations
EOR International Inc.(Key Employee)
___________________
(1) Member of Audit and Compensation Committees.
ROBERT A. HALPIN was elected a Director on March 4, 1995 and Chairman of
the Board on November 14, 1995. Mr. Halpin has long experience in the oil and
gas industry. From 1989 to his retirement September 1993, he served as Vice
President for International Exploration and Production with Petro-Canada. In
October 1993, Mr. Halpin became President of Halpin Energy Resources Ltd., a
firm he formed to provide advisory services to energy companies with emphasis on
international petroleum projects.
OISTEIN NYBERG was elected a Director on March 4, 1995 and President and
Chief Executive Officer effective March 9, 1995. From January 1984 to March
1995, Mr. Nyberg was Managing Director of Smedvig Technology A/S, a Norwegian
technology company, of which he was one of the founders. Among other services,
Smedvig provides consulting services within the areas of reservoir evaluation,
production drilling and well control.
EINAR BANDLIEN was elected a Director on August 17, 1994, Senior Vice
President of Business Development on December 15, 1994 and Executive Vice
President of Business Development on November 14, 1995. Mr. Bandlien is a
petroleum expert with extensive experience in exploration and petroleum resource
management. Prior to joining the Company, he held various positions with Nopec
a.s., a Norwegian petroleum consultant group of companies of which he was a
founder, including Director of International Activities from 1987 to 1991 and
Chairman from 1990 to 1993. He was a Special Advisor to Nopec from 1993 to
1994. Mr. Bandlien also served as Executive Secretary of the Norwegian
Petroleum Resource Management Alliance from 1991 to 1993.
NILS N. TRULSVIK was elected a Director on August 17, 1994. He has served
the Company as Executive Vice President from September 8, 1994 until November
21, 1994; as President and Chief Executive Officer from November 21, 1994 to
March 9, 1995; and as Executive Vice President since March 9, 1995. Mr.
Trulsvik is a petroleum explorationist with extensive experience in petroleum
exploration and development throughout the world. Prior to joining the Company,
he held various positions with Nopec a.s., a Norwegian petroleum consultant
18
<PAGE>
group of companies of which he was a founder, including Managing Director from
1987 to 1993 and Special Advisor from 1993 to August 1994.
STANLEY D. HECKMAN was elected a Director on March 4, 1995. For more than
the past five years, Mr. Heckman has been the owner of JSB Services Corp., a
company whose primary business is in real estate development and investments.
EUGENE J. MEYERS was elected a Director on January 3, 1994 and served as
Chairman of the Board from January 3, 1994 to November 14, 1995. He served as
Chief Executive Officer from August 16, 1994 until November 21, 1994 and as
President from September 8, 1994 to November 21, 1994. Mr. Meyers is also
President and owner of GSM Financial Corporation. Through such company and
other companies, Mr. Meyers has been involved in real estate development and
investments for the past 30 years.
ARILD BOE was elected Senior Vice President, Project Development on August
1, 1995 and Executive Vice President, International Production on November 14,
1995. From 1992 to August 1995, Mr. Boe served as Managing Director of Petec
A/S, a Norwegian reservoir engineering consulting company. During 1991 he was
Managing Director of IPAC A/S, a Norwegian company involved in the development
and sales of petroleum-related software. During 1990, Mr. Boe was Commercial
Director of Smedvig Technology A/S.
ARNFIN HAAVIK was elected Executive Vice President and Chief Financial
Officer on February 1, 1995. From 1981 to 1992, he served as Vice President of
Finance with Nopec a.s., of which he was one of the founders. From 1992 until
the fall of 1994, Mr. Haavik was the Managing Director of Nopec UK Limited,
London. From the fall of 1994 until he joined the Company, he served as
Managing Director of Petroleum Geo Services UK Ltd., London.
SVEIN E. JOHANSEN was elected Executive Vice President, EOR Technology on
December 15, 1994. From 1981 until 1992, he held various positions with Nopec
a.s., of which he was one of the founders, including Managing Director from 1981
to 1987, and Managing Director of Nopec UK Limited, London from 1989 to 1992.
From 1992 and until joining the Company in 1994, he served as Managing Director
of PGS Reservoir Services a.s., a subsidiary of Petroleum Geo Services A/S,
Oslo, Norway.
GARY J. PLISGA was elected an Executive Vice President of the Company,
with responsibility for oil and gas activity in the Americas, effective January
16, 1995. He provided consulting services to the Company from October 1994 to
January 1995. From 1991 to 1994, Mr. Plisga was employed by BPX Colombia, the
exploration and production subsidiary of British Petroleum in Colombia, as
Production Superintendent and as Field Manager for the Cusiana Field. During
1990 and 1991, he was Production Manager South for Tex/Con Oil and Gas Company.
RAVINDER S. SIERRA was elected Vice President, Operations of the Company's
subsidiary, EOR International Inc. on December 15, 1994. Mr. Sierra first
joined EOR International Inc. in November 1990 as Senior Project Engineer. Mr.
Sierra has over 16 years experience in the international oil and gas industry.
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers serve at the
pleasure of the directors, subject to the provisions of employment agreements,
if any.
19
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF CERTAIN EXECUTIVE OFFICERS
------------------------------------------
The following table shows all compensation (stated in U.S. dollars)
paid or accrued by the Company and its subsidiaries during the years ended
August 31, 1994, August 31, 1995 and August 31, 1996 to certain executive
officers of the Company (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------- --------------------------
Securities
Other Annual Underlying All Other
Name and Compensation Options/ Compensation
Principal Position Year Salary ($) ($) SARs (#) ($)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Oistein Nyberg 1996 154,104 63,933 (1) --- 21,965 (7)
(1) 1995 113,246 24,199 (1) --- 6,125 (7)
1994 --- --- 44,000 (6) ---
Nils N. Trulsvik 1996 161,241 9,029 --- 8,635 (7)
(2) 1995 147,754 (2) --- --- 6,344 (7)
1994 --- --- 60,000 (6) ---
Arnfin Haavik 1996 154,560 34,560 (3) --- 21,259 (7)
(3) 1995 92,685 24,234 (3) --- 6,279 (7)
1994 --- --- 36,000 (6) ---
Gary J. Plisga 1996 150,300 --- --- 15,613 (7)
(4) 1995 104,777 (4) --- --- 6,556 (7)
1994 --- --- ---
Arild Boe 1996 149,380 --- --- 8,780 (7)
(5) 1995 22,125 --- --- ---
1994 --- --- 28,000 (6) ---
</TABLE>
___________________
(1) Mr. Nyberg was elected President/CEO on March 9, 1995. Other annual
compensation paid in fiscal 1995 includes $11,899 as a housing allowance
and $7,738 in childrens' school fees. Other annual compensation paid in
fiscal 1996 includes $35,223 as a housing allowance and $20,457 in
childrens' school fees.
(2) Mr. Trulsvik served as Executive Vice President from September 8, 1994 to
November 21, 1994; as President/CEO from November 21, 1994 to March 9,
1995 and as Executive Vice President since March 9, 1995. Mr. Trulsvik's
salary in fiscal 1995 includes $33,722 as the value of 10,900 shares
received in lieu of cash compensation.
(3) Mr. Haavik was elected Executive Vice President/Chief Financial Officer on
February 1, 1995. Other annual compensation paid in fiscal years 1995 and
1996 includes $20,505 and $31,038, respectively, as a housing allowance.
(4) Mr. Plisga was elected Executive Vice President, Americas on January 16,
1995. Mr. Plisga's salary in fiscal 1995 includes $25,610 paid for
consulting services provided by him in fiscal 1995 before his employment
by the Company.
20
<PAGE>
(5) Mr. Boe served as Senior Vice President from August 1, 1995 to November
14, 1995. He currently serves as Executive Vice President Asset Management
Oil and Gas.
(6) Options were granted in August 1994. The options expire August 16, 1999
and are exercisable only while the holder renders services to the Company
as an officer, director, employee, consultant or advisor or within six
months after the holder ceases to render such services.
(7) Represents the Company's contributions or accruals to individual
retirement/pension plans.
FISCAL YEAR END OPTION VALUES
Shown below is information regarding the value of unexercised stock
purchase warrants and options (referred to as "options" in the following table)
held by the Named Officers as of August 31, 1996. No options were granted to,
or exercised by, the Named Officers in fiscal year 1996.
Number of Shares Value of Unexercised In-the-
Underlying Unexercised Money Options at Fiscal
Name Options Year End (1)
Held at Fiscal Year End
- - ------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ -------------- ------------ --------------
Oistein Nyberg 44,000 0 $220,000 $0
Nils N. Trulsvik 60,000 0 300,000 0
Arnfin Haavik 36,000 0 180,000 0
Gary J. Plisga 0 0 0 0
Arild Boe 28,000 0 140,000 0
_________________
(1) Represents the difference between the market value on August 31, 1996 and
the exercise price.
COMPENSATION OF DIRECTORS
-------------------------
Robert A. Halpin is compensated for his services as Chairman of the Board
and member of Board committees pursuant to an agreement which provides for an
annual fee of $37,500 plus $1,000 per day for each day of service in excess of
55 days per year. The Company provides Mr. Halpin with an office at the
Company's offices located in Calgary, Alberta, Canada, and reimburses Mr. Halpin
his out-of-pocket expenses in connection with services on behalf of the Company,
including travel and related expenses for his wife if Mr. Halpin is required to
be outside of Calgary for more than two weeks. The Company also from time to
time uses the consulting services of Halpin Energy Resources, Ltd., which is
controlled by Mr. Halpin, in the area of petroleum projects, for which such
company is compensated at its customary rates.
The Company pays non-employee Directors other than the Chairman of the
Board fees at the rate of $14,000 per year and $3,000 per year for service on
committees of the Board of Directors. The Company also pays a fee of $1,000 per
day, other than a day on which the Board meets, for each day spent by a non-
employee Director on the business of Board committees which exceeds one day per
year with respect to the Compensation Committee and three days per year with
respect to the Audit Committee and the Petroleum Committee. The Company also
pays ordinary out-of pocket expenses for attending Board and Committee meetings.
The Company provides for automatic grants of non-qualified options to
non-employee Directors pursuant to the 1995 Long Term Incentive Plan. Pursuant
to the Plan, a non-qualified option to purchase 7,500 shares of Common Stock is
granted automatically to each non-employee Director on each of (i) the date of
each Meeting of Stockholders at which a non-employee is elected or re-elected as
a Director and (ii) the date a non-employee is first elected as a Director, if
not at a Meeting of Stockholders. In addition, a non-employee Director
21
<PAGE>
will automatically be granted a non-qualified Option to purchase 7,500 shares of
Common Stock on each date on which such non-employee Director is elected or re-
elected by the Board of Directors as Chairman of the Board of Directors. The
exercise price of each option is equal to 100% of the fair market value of the
Common Stock on the date the option is granted. Each option is 100% vested six
months after the date of the grant. Options expire on the first to occur of
three years from the date of grant or the first anniversary of the date the
Director ceases to be a Director for any reason.
Since January 1, 1996, Eugene Meyers, a non-employee Director, has
provided financial relations consulting services to the Company at the rate of
$15,000 per year for 22 days of service, and thereafter at the rate of $100 per
hour ($1,000 maximum per day). He is also reimbursed his out-of-pocket expenses
for such services.
The following table shows payments made to non-employee Directors, or
their affiliates, for the year ended August 31, 1996:
Directors Consulting Options
Name Fees Payments Granted
------------------------------------------------
Robert Halpin $22,027 $11,000 15,000
Stanley Heckman 13,381 --- 7,500
Eugene Meyers 9,333 10,000 7,500
The options were granted on February 12, 1996 at an exercise price of $3.84375
expiring on February 11, 1999 and were 100% vested at August 12, 1996.
EMPLOYMENT CONTRACTS
--------------------
The Company has entered into Employment Contracts with each of its
executive officers. The Employment Contracts with Oistein Nyberg, Nils
Trulsvik, Arnfin Haavik, Gary Plisga and Arild Boe may be terminated by either
party on six months written notice. The contracts provide for an annual salary
of approximately $150,000 US (denominated in local currency in the country in
which the officer is headquartered) which is subject to renegotiations at the
end of each fiscal year. In addition, beginning April 1, 1995, each person
receives an allowance equal to 12.5% of his base salary which is used to provide
minimum life and disability insurance coverage for each such person. The
remainder of such allowance may be used by each person for additional life,
medical or accident insurance and to fund individual pension/retirement plans.
The Company reserves the right to review the 12.5% allowance every three years.
Each person is also entitled to receive up to a full year's salary in the event
he is unable to provide services due to sickness or injury. The Employment
Contracts for Messrs. Nyberg and Haavik also provide for, among other things,
housing allowances and, in the case of Mr. Nyberg, payment of childrens' school
fees.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 31, 1996 with
respect to beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than 5% of the Company's
stock, by each director and Named Officer of the Company and by all directors
and executive officers of the Company as a group.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- - ----------------------------------- --------------------- -----------------
Eugene J. Meyers 540,228 (1) 2.87%
Nils N. Trulsvik 202,900 (2) 1.08%
Einar Bandlien 179,968 (3) *
Oistein Nyberg 176,000 (4) *
Arnfin Haavik 163,000 (5) *
Arild Boe 160,000 (6) *
Stanley D. Heckman 108,293 (7) *
Robert A. Halpin 27,000 (8) *
Gary J. Plisga 8,300 *
All executive officers and
directors as a group (10 persons) 1,748,850 (9) 9.07%
______________________
* Less than 1%.
(1) Includes 66,667 shares underlying presently exercisable warrants and 7,500
shares underlying presently exercisable options.
(2) Includes 8,000 shares owned by two sons (as to which beneficial ownership
is disclaimed), 44,000 shares underlying presently exercisable warrants and
60,000 shares underlying presently exercisable options.
(3) Includes 44,000 shares underlying presently exercisable warrants and 44,000
shares underlying presently exercisable options.
(4) Includes 44,000 shares underlying presently exercisable warrants and 44,000
shares underlying presently exercisable options.
(5) Includes 44,000 shares underlying presently exercisable warrants and 36,000
shares underlying presently exercisable options.
(6) Includes 44,000 shares underlying presently exercisable warrants and 28,000
shares underlying presently exercisable options.
(7) Includes 7,500 shares underlying presently exercisable options.
(8) Includes 15,000 shares underlying presently exercisable options.
(9) See Notes 1-8; also includes 183,161 issued shares held by executive
officers not named in the foregoing table.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
--- --------
Management Contracts, Compensation Plans and
Arrangements are identified by an asterisk (*)
2(1) Agreement Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International
Limited dated August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and
Purchase of All the Issued Share Capital of
Gastron International Limited dated November 3,
1995 by and among Ribalta Holdings, Inc. as Vendor
and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995 Form 8-K).
3(1) Registrant's Certificate of Incorporation and
amendments thereto (Incorporated herein by
reference from December 16, 1994 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by
reference from December 16, 1994 Form 8-K).
4 Form of 8% Convertible Subordinated Debenture
(Incorporated herein by reference from February
29, 1996 Form 10-QSB).
10(1) License Agreement among IIT Research Institute,
ORS Corporation and Uentech Corporation dated
October 27, 1986 (Incorporated herein by reference
from October 31, 1986 Form 10-K, filed by
Electromagnetic Oil Recovery, Inc., the Company's
predecessor).
10(2) Amendment to Revised Single Well Technology
License Agreement Dated October 27, 1986
(Incorporated herein by reference from August 31,
1995 Form 10-KSB).
*10(3) Securities Compensation Plan (Incorporated herein
by reference from August 31, 1994 Form 10-KSB,
filed by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(4) Form of Certificate for Common Stock Purchase
Warrants issued pursuant to the Securities
Compensation Plan (Incorporated herein by
reference from Form S-8 Registration Statement,
File No. 33-82944 filed on August 17, 1994, filed
by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(5) Form of Option Agreement for options granted to
certain persons, including Directors (Incorporated
herein by reference from August 31, 1994 Form
10-KSB, filed by Electromagnetic Oil Recovery,
Inc., the Company's predecessor).
*10(6) Form of Certificate for Common Stock Purchase
Warrants issued to certain investors in August
1994, including Directors (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed
by Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
24
<PAGE>
*10(7) Employment Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(8) Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(9) Employment Agreement between Fountain Oil
Incorporated and Einar H. Bandlien (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(10) Employment Agreement between Fountain Oil
Incorporated and Arnfin Haavik (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(11) Employment Agreement between Fountain Oil
Incorporated and Svein E. Johansen (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(12) Employment Agreement between Fountain Oil
Incorporated and Arild Boe (Incorporated herein by
reference from August 31, 1995 Form 10-KSB).
*10(13) Employment Agreement between Fountain Oil
Incorporated and Gary J. Plisga (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(15) Employment Agreement between Fountain Oil
Incorporated and Ravinder S. Sierra (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(16) Employment Agreement between Fountain Oil
Incorporated and Susan E. Palmer (Incorporated
herein by reference from August 31, 1995 Form 10-KSB).
*10(17) 1995 Long-Term Incentive Plan (Incorporated herein
by reference from February 29, 1996 Form 10-QSB).
*10(18) Form of Option Agreement for Non-Qualified Options
granted to Non-Employee Directors.
*10(19) Fee Agreement between Fountain Oil Incorporated
and Robert A. Halpin.
*10(20) Fee Agreement between Fountain Oil Incorporated
and Eugene J. Meyers.
16 Letter Regarding Change in Certifying Accountants
(Incorporated herein by reference from September
8, 1994 Form 8-K, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
21 List of Subsidiaries.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K:
--- --------------------
During the fourth quarter, the Company filed a Form 8-K dated June 5,
1996 reporting Item 5. Other Events, regarding the sale of securities
in an offshore private placement.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN OIL INCORPORATED
(Registrant)
By: /s/Oistein Nyberg Date: November 27, 1996
-----------------------------
Oistein Nyberg, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/Oistein Nyberg Date: November 27, 1996
---------------------------------------
Oistein Nyberg, Director, President and
Chief Executive Officer
By: /s/Arnfin Haavik Date: November 27, 1996
-------------------------------------------
Arnfin Haavik, Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Darrell M. Keller Date: November 27, 1996
------------------------------------------
Darrell M. Keller, Principal Financial and
Accounting Officer
By: /s/Robert A. Halpin Date: November 27, 1996
----------------------------------
Robert A. Halpin
Chairman of the Board of Directors
By: /s/Einar H. Bandlien Date: November 27, 1996
---------------------------
Einar H. Bandlien, Director
By: /s/Stanley D. Heckman Date: November 27, 1996
----------------------------
Stanley D. Heckman, Director
By: /s/Eugene J. Meyers Date: November 27, 1996
--------------------------
Eugene J. Meyers, Director
By: /s/Nils N. Trulsvik Date: November 27, 1996
--------------------------
Nils N. Trulsvik, Director
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Fountain Oil Incorporated:
We have audited the accompanying consolidated balance sheet of
Fountain Oil Incorporated and subsidiaries (the "Company") as of August 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended August 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company as of August 31, 1996, and the consolidated results of
its operations and its cash flows for the years ended August 31, 1996 and 1995,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 4 to the consolidated financial statements, the Company will
require substantial capital in order to finance the development of its oil and
gas interests. In addition, the Company and its oil and gas ventures must
produce and market oil and gas in sufficient quantities and at sufficient prices
to provide positive cash flow to the Company. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 4 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
COOPERS & LYBRAND L.L.P.
Houston, Texas
November 22, 1996
F-1
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED BALANCE SHEET
As of August 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $ 17,329,237
Accounts receivable, net 851
Accounts receivable - affiliated entities 7,210
Other current assets 648,256
------------
Total current assets 17,985,554
Property and equipment, net 6,577,565
Oil and gas properties, net, full cost
method (including $257,407 unevaluated) 394,434
Investments in and advances to oil and
gas ventures 6,782,953
Notes receivable 190,186
Other assets 157,849
------------
TOTAL ASSETS $ 32,088,541
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable $ 731,532
Accrued liabilities 297,513
Notes payable 31,156
------------
Total current liabilities 1,060,201
Minority interest in subsidiaries 223,350
8% Convertible subordinated debentures 300,000
Commitments and contingencies (Note 8) ---
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: 17,376,610
shares issued and outstanding 1,737,661
Capital in excess of par value 55,190,072
Accumulated deficit (26,422,743)
------------
Total stockholders' equity 30,504,990
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,088,541
============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended August 31,
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Operating Revenues:
Power unit rentals $ 1,894 $ 50,504
Equipment sales --- 464,044
Consulting income 6,721 110,909
Oil and gas production 26,562 ---
----------- -----------
Total revenues 35,177 625,457
----------- -----------
Operating expenses:
Cost of sales 31,991 479,224
Lease operating expense 10,988 ---
Direct project costs 1,267,555 ---
General and administrative 3,853,972 4,012,510
Depreciation and amortization 77,253 1,156,772
Loss from investments in
unconsolidated entities 13,272 ---
Impairment of oil & gas properties 419,835 608,181
Employee stock compensation --- 152,038
Impairment of inventory --- 57,602
Impairment of property and equipment --- 175,450
Impairment of intangibles --- 1,866,600
----------- -----------
Total operating expenses 5,674,866 8,508,377
----------- -----------
Operating loss (5,639,689) (7,882,920)
----------- -----------
Other (expense) income:
Interest income 332,071 251,276
Interest expense (220,965) (28,475)
Other 12,551 89,108
Loss on disposition of equipment (182,020) ---
----------- -----------
Total other (expense) income (58,363) 311,909
----------- -----------
Net loss before income tax provision (5,698,052) (7,571,011)
Income tax expense --- (28,600)
----------- -----------
Net loss $(5,698,052) $(7,599,611)
=========== ===========
Loss per common share $ (. 46) $ (.91)
=========== ===========
Weighted average number of common
shares outstanding 12,495,137 8,341,783
========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended August 31,
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number of Additional Total
Shares Paid-In Accumulated Stockholders'
Issued Par Value Capital Deficit Equity
----------------------------------------------------------------------------
BALANCE, AUGUST 31,
<S> <C> <C> <C> <C> <C>
1994 5,974,310 $ 597,431 $16,708,442 $(13,125,080) $ 4,180,793
Sale of common stock,
net of offering expenses
of $1,033,118 3,958,998 395,900 10,900,930 --- 11,296,830
Issuance of common
stock as employee
compensation and
for other obligations 900,755 90,075 1,639,803 --- 1,729,878
Net loss --- --- --- (7,599,611) (7,599,611)
---------- ---------- ----------- ------------- -----------
BALANCE, AUGUST 31,
1995 10,834,063 $1,083,406 $29,249,175 $(20,724,691) $ 9,607,890
Sale of common stock,
net of offering expenses
of $1,539,646 5,000,000 500,000 20,460,354 --- 20,960,354
Issuance of common stock for purchase
of interests in oil and gas ventures 450,000 45,000 2,308,125 --- 2,353,125
Issuance of common stock upon conversion
of debentures 997,324 99,733 3,039,105 --- 3,138,838
Issuance of common stock upon exercise
of warrants and options 95,223 9,522 133,313 --- 142,835
Net loss --- --- --- (5,698,052) (5,698,052)
---------- ---------- ----------- ------------- -----------
BALANCE, AUGUST 31,
1996 17,376,610 $1,737,661 $55,190,072 $(26,422,743) $30,504,990
========== ========== =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended August 31,
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(5,698,052) $(7,599,611)
Depreciation and amortization 77,253 1,156,772
Amortization of debt issuance costs 71,166 ---
Gain on settlement of liabilities --- (58,230)
Loss on disposition of equipment 182,020 ---
Loss in investments in unconsolidated
entities 13,272 ---
Impairment of inventory --- 57,602
Impairment of property and equipment --- 175,450
Impairment of intangibles --- 1,866,600
Impairment of oil and gas properties 419,835 608,181
Issuance of common stock for
services and expenses --- 1,482,664
Other --- ---
Changes in assets and liabilities:
Accounts receivable 53,905 65,977
Other assets (211,222) (325,289)
Accounts payable 62,638 394,784
Accrued liabilities (116,766) 217,022
----------- -----------
Net cash used in operating activities (5,145,951) (1,958,078)
----------- -----------
Investing activities:
Investments in oil and gas properties (262,584) (2,458,596)
Investments in and advances to
oil and gas ventures (2,538,191) ---
Capital expenditures (3,728,770) (404,822)
Proceeds from disposition of assets 104,000 ---
Issuance of notes receivable (135,186) (2,980,000)
----------- -----------
Net cash used in investing activities (6,560,731) (5,843,418)
----------- -----------
Financing activities:
Proceeds from issuance of debentures
net of expenses 3,346,723 ---
Proceeds from sales of common stock,
net of expenses 21,103,189 11,296,830
Proceeds from issuance of short-term
borrowings 4,848,476 47,813
Principal payments on short-term
borrowings (5,054,114) (271,563)
----------- -----------
Net cash provided by financing
activities 24,244,274 11,073,080
----------- -----------
Net increase in cash and cash
equivalents 12,537,592 3,271,584
Cash and cash equivalents,
beginning of year 4,791,645 1,520,061
----------- -----------
Cash and cash equivalents, end of year $17,329,237 $ 4,791,645
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS - The principal activities of Fountain Oil
Incorporated and its consolidated subsidiaries (collectively the "Company")
are directed towards the acquisition of interests in and development of oil
and gas fields that indicate the potential for increased production through
rehabilitation and utilization of modern production techniques and enhanced
oil recovery processes, including if successfully commercialized the
Company's proprietary method for heating paraffinic and heavy oil with
electric current. The Company typically acquires its interests in oil and
gas properties through interests in joint ventures, partially owned
corporate and other entities, and joint operating arrangements. While it
normally seeks to be the operator of substantial oil and gas projects in
which it has an interest, the Company has acquired and expects to continue
to acquire interests representing 50% or less of the equity in various oil
and gas projects. Accordingly, certain of the activities in which the
Company has an interest will be conducted through unconsolidated entities.
The Company has recently acquired less than majority interests in entities
developing or seeking to develop oil and gas properties in Eastern Europe
including the Russian Federation, at least some of which will be accounted
for as unconsolidated entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts
of Fountain Oil Incorporated and its majority owned subsidiaries. The
majority owned subsidiaries are Electromagnetic Oil Recovery International
Inc., Fountain Oil Adygea Incorporated, Fountain Oil Boryslaw Incorporated,
Fountain Oil Production Incorporated, Fountain Oil Services Ltd., Fountain
Oil Ukraine Ltd., Fountain Oil U.S., Inc., Gastron International Limited,
Uentech Corporation and UK-RAN Oil Corporation. All significant
intercompany transactions and accounts have been eliminated. The
investments of the Company and its majority owned subsidiaries in certain
oil and gas joint ventures are proportionately consolidated.
INVESTMENTS - Investments in less than majority-owned subsidiaries and
certain other less than majority owned entities, including certain joint
ventures, are accounted for using the equity method of accounting.
QUASI-REORGANIZATION - The Board of Directors of the Company approved a
quasi-reorganization effective October 31, 1988. As a result of the quasi-
reorganization, the accumulated deficit of $39,952,292 was eliminated
against capital in excess of par value.
CHANGE IN FISCAL YEAR - In September 1996, the Company's Board of Directors
approved a change in the Company's fiscal year end from August 31 to
December 31 effective September 1996, in order to conform to the calendar
year accounting which is required for most of the significant oil and gas
projects in which the Company participates.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION - During the fourth quarter, the Company reclassified
certain amounts from revenue and expenses to loss from equity investments
in unconsolidated entities.
F-6
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, revenue and expenses for each of the first three quarters in
the year ended August 31, 1996 have been reduced by $29,871 and $14,414,
$34,869 and $34,912, and $41,248 and $38,884, respectively. There was no
effect on income from operations or net income as a result of this
reclassification.
CASH AND CASH EQUIVALENTS - The Company considers short-term, highly liquid
investments with maturities of three months or less at the time of purchase
to be cash equivalents.
INVENTORY - Inventory consists primarily of pipe, coating materials and
other supplies used in the application of patented electrically enhanced
oil recovery ("EEOR") technology and is stated at the lower of cost or
market using the average cost method and presented in other current assets.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost.
Expenditures for major renewals and betterments, which extend the original
estimated economic useful lives of applicable assets, are capitalized.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. The cost and related accumulated depreciation of assets sold or
retired are removed from the accounts and any gain or loss thereon is
reflected in operations. Depreciation of property and equipment is
computed using the straight-line method over the estimated useful lives of
the assets ranging from three to ten years.
OIL AND GAS PROPERTIES - The Company and the unconsolidated entities
for which it accounts on the equity method account for oil and gas
properties and interests under the full cost method. Under this accounting
method, costs, including a portion of internal costs, associated with
property acquisition and exploration for and development of oil and gas
reserves are capitalized within cost centers established on a country-by-
country basis. Capitalized costs within a cost center, as well as the
estimated future expenditures to develop proved reserves and estimated net
costs of dismantlement and abandonment, are amortized using the unit-of-
production method based on estimated proved oil and gas reserves. All costs
relating to production activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are limited
to an amount (the ceiling limitation) equal to (a) the present value
(discounted at 10%) of estimated future net revenues from the projected
production of proved oil and gas reserves, calculated at prices in effect
as of the balance sheet date (with consideration of price changes only to
the extent provided by fixed and determinable contractual arrangements),
plus (b) the lower of cost or estimated fair value of unproved and
unevaluated properties, less (c) income tax effects related to differences
in the book and tax basis of the oil and gas properties.
REVENUE RECOGNITION - The Company recognizes revenues when goods have been
delivered, when services have been performed, or when hydrocarbons have
been produced and delivered.
FOREIGN CURRENCY TRANSLATION - The U.S. dollar is the functional currency
for all of the Company's operations. Accordingly, all monetary assets and
liabilities denominated in foreign currency are translated into U.S.
dollars at the rate of exchange in effect at the balance sheet date and the
resulting unrealized translation gains or losses are reflected in the
statement of operations. Nonmonetary assets are translated at historical
exchange rates. Revenue and expense items (excluding depreciation and
amortization which are translated at the same rates as the related assets)
are translated at the average rate of exchange for the year. Foreign
currency translation
F-7
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts recorded in operations for the years ended August 31, 1996 and
August 31, 1995 were not material.
INCOME TAXES - The Company follows the provisions of Statement of Financial
Standard No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement and the tax bases of assets and liabilities using enacted rates
in effect for the year in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of " ("SFAS 121"). SFAS 121 requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard in the fourth quarter of fiscal
1995 had no effect on the Company's financial statements. The Company
reviews all of its long-lived assets, except for its oil and gas
properties, for impairment in accordance with SFAS 121. Prior to the end
of fiscal 1996, all long-lived assets including intangible assets, other
than oil and gas properties, were reviewed for impairment by comparing the
carrying value of such assets to future expected net cash flows. The
Company evaluates its oil and gas properties and its carrying value of
investments in unconsolidated entities conducting oil and gas operations in
accordance with the full cost ceiling limitation.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment and the related accumulated depreciation at August
31, 1996 included the following:
Accumulated
Cost Depreciation Net
----------------------------------------
EEOR Equipment $ 504,085 $(268,011) $ 236,074
EEOR Construction-in-progress 60,764 --- 60,764
Oil & gas related equipment 5,818,871 --- 5,818,871
Office furniture, fixtures and
equipment and other 759,448 (297,592) 461,856
---------- --------- ----------
PROPERTY AND EQUIPMENT, NET $7,143,168 $(565,603) $6,577,565
========== ========= ==========
Oil and gas related equipment represents new or reconditioned drilling rigs
and related equipment which the Company expects to ship to the Republic of
Adygea, Russian Federation, for transfer to Intergas JSC, an unconsolidated
subsidiary in which the Company holds a 37% interest. Such equipment is
not being depreciated. Included within the net book value of $5,818,871 is
$1,800,000 which the Company, upon the acquisition of Gastron International
Limited ("Gastron") in October 1995, originally recorded as a receivable
from Mostransgas Gas Transmission and Supply Enterprise ("Mostransgas"), a
Russian joint stock company and co-shareholder in Intergas JSC. This
receivable represented amounts originally due from Mostransgas to partially
reimburse
F-8
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company for costs incurred in connection with the acquisition
of two drilling rigs and related equipment which were to have represented a
joint capital contribution by the Company and Mostransgas to Intergas JSC.
As a result of subsequent negotiations, Mostransgas will make its
$1,800,000 capital contribution directly to Intergas JSC. Accordingly, the
Company reclassified the receivable to equipment. The Company will
transfer the equipment to Intergas JSC, and the equipment will be
reclassified as investments in and advances to unconsolidated entities.
The transaction has no effect on the Company's statement of operations.
4. OIL AND GAS PROPERTIES AND INVESTMENTS
The Company has acquired interests in oil and gas properties through joint
ventures, partially owned corporate and other entities, and joint operating
arrangements. A summary of the Company's oil and gas interests is as
follows:
OIL AND GAS PROPERTIES
------------------------------
United States and Canada
Proved properties $ 1,165,043
Unproved properties 257,407
Less: accumulated depreciation, depletion,
amortization and impairment (1,028,016)
-----------
TOTAL OIL AND GAS PROPERTIES, NET $ 394,434
===========
During the fiscal year ended August 31, 1996, the Company recognized an
impairment of $419,835 on its oil and gas properties as a result of
applying the full cost ceiling limitation. The impairment related to the
Rocksprings Field and the West Mexia projects in the United States.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties for the United States and Canada at
August 31, 1996 were $257,407, all of which relates to the Rocksprings
Field. These represent leasehold costs, which were incurred in fiscal 1995,
and will be evaluated on the basis of a review of production results and
test evaluations from a new well expected to be drilled in the first
quarter of calendar 1997. The Company believes that these unevaluated
properties will be substantially evaluated at that time.
INVESTMENTS IN AND ADVANCES TO OIL AND GAS VENTURES
---------------------------------------------------
Ukraine - Lelyaky Field, Pryluki Region
through 45% ownership of Kashtan Petroleum Ltd. $2,163,564
Adygea, Russian Federation - Maykop Field
through 37% ownership in Intergas JSC 2,780,263
Canada - Inverness Unit
through 50% ownership in Focan Ltd. ---
Albania - Gorisht Kocul Field
through 50% ownership of joint venture 517,885
Ukraine-Stynawske Field, Boryslaw
through 45% ownership of joint venture 1,321,241
----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $6,782,953
==========
F-9
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's interests in Kashtan Petroleum Ltd., Intergas JSC and Focan
Ltd. are accounted for using the equity method. The financing arrangement
in the joint ventures that will operate the Gorisht-Kocul and Stynawske
fields have not been sufficiently defined to determine whether those
entities will be accounted for using the equity method or proportionately
consolidated.
The costs shown for the Lelyaky Field and the Maykop Field include
$684,375 and $1,668,750, respectively, representing the market value of
shares issued in connection with the acquisition of interests in Kashtan
Petroleum Ltd. and Intergas JSC.
None of the Company's oil and gas interests outside of the United States
and Canada are being amortized, pending evaluation of initial drilling
results. The Company believes the properties of those ventures will be
substantially evaluated during calendar 1997. There were no material
operations or assets of unconsolidated entities (other than unevaluated
properties) at August 31, 1996. Accordingly, no separate financial
information has been presented.
The development through calendar 1997 of the oil and gas properties owned
through investments in oil and gas joint ventures, according to the present
plan, assumes the availability of substantial additional funds from
external sources. Less than projected funding from external sources will
result in a slower phasing of the development of some of the properties,
reducing the early investment requirements but delaying the anticipated
production build up. The Company has principal responsibility for
arranging such financing. 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
properties, equity financing by the Company or otherwise, so that delays
will not be experienced as a result of a shortage of financial resources.
There can be no assurance, however, that the Company will be able to
arrange such financing or that such financing as is available will be on
terms that are attractive or acceptable to the Company or such entities or
are deemed to be in the best interests of the Company and its shareholders.
Ultimate realization of the cost of the Company's oil and gas properties
and investments in oil and gas ventures is dependent upon, among other
factors, achieving significant increases in production from existing
levels, production of oil and gas at costs that provide acceptable margins,
reasonable levels of taxation from local authorities and the ability to
market oil and gas produced at or near world prices. The Company has plans
for each of the ventures listed above to achieve levels of production and
profits sufficient to recover its costs. However, if one or more of the
above factors, or other factors, are different than anticipated, the
Company may not recover its costs. The Company will be entitled to
distributions from the various ventures in accordance with the terms of the
respective venture arrangements.
The ability of the Company to pursue its growth strategy successfully and
continue as a going concern depends upon generating funds from external
sources. In addition, the Company's development efforts through its
investments in oil and gas ventures must be successful in order for these
ventures to produce and market oil and gas in sufficient quantities and at
sufficient prices to provide positive cash flow to the Company. The
consolidated financial statements of the Company do not give effect to any
impairment in the value of the Company's investment in oil and gas ventures
or other adjustments that would be necessary if financing cannot be
arranged for the development of such ventures or if such ventures are
unable to achieve profitable operations. The Company's consolidated
financial statements have been prepared under the assumption of a going
concern. Failure to arrange such financing on reasonable terms or failure
of such ventures to achieve profitability would have a material adverse
effect on the results of operations, financial condition including
realization of assets, cash flows and prospects of the Company and
ultimately its ability to continue as a going concern.
F-10
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED LIABILITIES
Accrued liabilities at August 31, 1996 included the following:
Interest $ 4,000
Property and other taxes 12,083
Other 72,147
Compensation, including related taxes 209,283
--------
ACCRUED LIABILITIES $297,513
========
6. NOTES PAYABLE
Notes payable consisted of two notes as follows:
1) $47,813 note payable to an insurance company dated March 2, 1996, with
interest at 7.25% payable monthly, due December 2, 1996. The outstanding
balance on this note is $21,250. The fair value of the debt at August 31,
1996 approximates book value.
2) $89,140 note payable to an insurance company dated December 4, 1995,
with interest at 7.86% payable monthly, due September 3, 1996. The
outstanding balance on this note is $9,906. The fair value of the debt at
August 31, 1996 approximates book value.
7. 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 $3,346,723 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 Company's Common Stock is issuable upon conversion of
each $1,000,000 principal amount of the Debentures. At August 31, 1996,
$3,450,000 principal amount of the Debentures had been converted into
997,324 shares of Common Stock, leaving $300,000 principal amount of the
Debentures outstanding and 95,803 shares of Common Stock reserved for
possible issuance upon conversion of Debentures as of that date.
8. COMMITMENTS AND CONTINGENCIES
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES - The
Company has obligations, absolute and contingent, and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing its oil and gas properties and ventures. At August 31, 1996,
the Company had unconditional obligations regarding the acquisition and
development of its oil and gas properties and ventures amounting to
$5,000,000, as well as the unconditional obligation to issue
250,000 shares of its Common Stock. In addition, the Company had contingent
obligations relating to the acquisition and development of its oil and gas
properties and ventures amounting to $1,800,000, as well as the contingent
obligation to issue an aggregate of 2,000,000 shares of its Common Stock.
The contingent obligations are subject to the satisfaction
F-11
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of various conditions related to, among other things, the achievement of
specified project performance standards.
As the Company develops current projects and undertakes additional
projects, significant additional obligations are expected to be incurred.
LEASE COMMITMENTS - The Company leases office space under non-cancelable
operating lease agreements. The leases have remaining terms ranging up to
nine years, some of which may be renewed at the Company's option. Rental
expense for 1996 and 1995 was $186,444 and $119,133, respectively.
Future minimum rental payments for the Company's lease obligations as of
August 31, 1996, are as follows:
1997 $ 342,866
1998 374,862
1999 299,212
2000 253,527
2001 257,321
Later years 653,829
----------
$2,181,617
==========
9. CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
cash equivalents. The Company had temporary cash investments on deposit at
major financial institutions, some of which were in excess of government
insured limits. At August 31, 1996 and 1995, the Company had approximately
$14,000,000 and $2,000,000 on deposit in two and one such institutions,
respectively.
10. STOCKHOLDERS' EQUITY
On February 12, 1996, at an Annual Meeting of Shareholders, the
shareholders of the Company approved an increase in the number of
authorized shares of Common Stock from 25,000,000 to 50,000,000 having
$0.10 par value per share. The number of authorized shares of preferred
stock of 5,000,000 also having a par value of $0.10 remained unchanged. As
of August 31, 1996, 17,376,610 shares of Common Stock were issued and
outstanding. No shares of preferred stock have been issued.
During fiscal 1995 and 1996, the following transactions regarding the
Company's Common Stock and warrants and options to purchase the Company's
Common Stock were consummated pursuant to authorization by the Company's
Board of Directors or duly constituted committees thereof.
1995
. The following are included in the sales or retirement of Common Stock:
.. The issuance of 20,000 shares at a price of $0.25 per share in a
warrant exercise.
F-12
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
.. The issuance to investors of 3,244,000 shares and warrants
exercisable at $6.00 per share to purchase 3,244,000 shares, for
aggregate proceeds of $10,320,882 net of $1,033,118 of related
offering costs.
.. The issuance of 480,780 shares at a price of $1.50 per share,
200,000 shares at a price of $1.125 per share and 14,286 shares
at a price of $1.75 per share in a series of warrant exercises.
.. The retirement of 68 shares recorded at an aggregate of
$223.14 to reflect the payment of cash for fractional shares in
connection with the December 1994 reverse stock split.
. The following are included in the issuance of Common Stock as employee
compensation:
.. The adjustment to capital in excess of par in the amount of $4,275
related to shares received by three employees for stock issued at
below par.
.. The issuance of 23,479 shares at a price of $3.09 per share,
4,000 shares at a price of $4.38 per share, and 10,000 shares at
a price of $5.77 per share to employees resulting in aggregate
compensation of $147,763.
. The issuance of 790,000 restricted shares at a value of $1.64 per share
for financial consulting services to be performed over two years
amounting to $1,296,000, of which $1,134,875 was expensed in 1995 and
the balance of $161,125 was expensed during fiscal 1996.
. The issuance of 4,706 shares at a price of $4.25 per share for legal
services in the amount of $20,000.
. The issuance of 28,570 shares and warrants exercisable at $1.75 per
share to purchase 28,572 shares upon conversion of notes payable in an
aggregate principal amount of $50,000.
. The issuance of warrants exercisable at $5.10 per share to purchase
1,139,800 shares to firms that participated in the distribution of the
Company's securities .
. The issuance of 30,000 shares at a price of $5.88 per share for
consulting services in the amount of $176,250.
. The issuance of 10,000 restricted shares at a price of $3.56 per share
along with a cash payment of $60,000 for a paid-up license.
No options were exercised during the fiscal year ended August 31, 1995.
F-13
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996
. The issuance to investors of 5,000,000 shares for aggregate proceeds of
$20,960,354 net of $1,539,646 of related offering costs.
. The following are included in the issuance of Common Stock for purchase
of interests in or related to oil and gas ventures:
.. The issuance of 150,000 shares at a price of $4.5625 per share,
along with other consideration, in exchange for 10% of the equity
of UK-RAN Oil Corporation and 33% of the equity of UK-RAN Energy
Corporation
.. The issuance of 300,000 shares at a price of $5.5625 per share in
exchange for 6% of the equity of Intergas JSC, a joint stock
company incorporated in the Russian Federation.
. The following are included in the issuance of Common Stock upon
conversion of debentures:
.. The issuance of 997,324 shares in a series of conversions of an
aggregate of $3,450,000 principal amount of debentures convertible
at fluctuating prices based on 82 1/2% of market price at the time
of conversion.
.. The adjustment to capital in excess of par in the amount of
$311,088 related to deferred costs incurred in the issuance of
debentures.
. The following are included in the issuance of Common Stock upon warrant
and option exercises:
.. The issuance of 52,000 shares at a price of $1.50 per share in a
series of option exercises.
.. The issuance of 43,223 shares at a price of $1.50 per share in a
series of warrant exercises.
. The issuance of options exercisable at $3.8375 per share to purchase
30,000 shares were granted to non-employee directors at February 12,
1996 pursuant to the Company's 1995 Long-Term Incentive Plan. See Note
15 to Consolidated Financial Statements.
F-14
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes warrants and options outstanding to purchase the
Company's Common Stock:
AUGUST 31, 1996 Warrants Price Exp. Date Options Price Exp. Date
- - --------------------------------------------------------------------------------
Directors and officers 330,667 $1.50 11/3/97 212,000 $1.50 8/16/99
14,286 $1.75 6/30/97 30,000 $3.84 2/11/99
--------- -------
344,953 242,000
Stockholders, 156,001 $1.50 11/3/97 136,000 $1.50 8/16/99
employees and others 1,139,800 $5.10 2/28/97
3,244,000 $6.00 2/28/97
--------- -------
4,539,801 136,000
Total outstanding 4,884,754 378,000
--------- -------
Shares exercisable 4,884,754 342,000
--------- -------
AUGUST 31, 1995 Warrants Price Exp. Date Options Price Exp. Date
- - --------------------------------------------------------------------------------
Directors and officers 330,667 $1.50 11/3/97 264,000 $1.50 8/16/99
14,286 $1.75 6/30/97
--------- -------
344,953 264,000
Stockholders, 199,224 $1.50 11/3/97 136,000 $1.50 8/16/99
employees and others 1,139,800 $5.10 2/28/97
3,244,000 $6.00 2/28/97
--------- -------
4,583,024 136,000
Total outstanding 4,927,977 400,000
--------- -------
Shares exercisable 4,927,977 344,000
--------- -------
11. NET LOSS PER COMMON SHARE
Net loss per common share for the fiscal years ended August 31, 1996 and
August 31, 1995 was based on the weighted average number of common shares
outstanding. The weighted average number of shares used was 12,495,137 and
8,341,783, respectively.
12. INCOME TAXES
The Company follows the provisions of Statement of Financial Standard
No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this method,
deferred income taxes are recorded to reflect
F-15
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the tax consequences in future years of differences between the tax bases
of assets and their financial reporting amounts at each year end. Valuation
allowances are established, when appropriate in accordance with SFAS 109,
to reduce deferred tax assets to the amount expected to be realized. Due to
the implementation of the quasi-reorganization as of October 31, 1988,
future reductions of the valuation allowance relating to those deferred tax
assets existing at the date of the quasi-reorganization, if any, will be
allocated to capital in excess of par value.
The Company and its domestic subsidiaries file U.S. consolidated income tax
returns. No benefit for U.S. income taxes have been recorded in these
financial statements because of the Company's inability to recognize
deferred tax assets under provisions of SFAS 109. The provision for income
taxes for fiscal year end 1995 consisted of taxes applicable to foreign
operations.
A reconciliation of the differences between income taxes computed at the
U.S. federal statutory rate (34%) and the Company's reported provision for
income taxes is as follows:
1996 1995
---------------------------
Income tax expense (benefit) at
statutory rate $(1,937,337) $(2,574,144)
Benefit of losses not recognized 1,927,408 2,566,836
Foreign tax provision --- 28,600
Other, net 9,929 7,308
----------- -----------
Provision for income taxes $ 0 $ 28,600
=========== ===========
Effective tax rate (0%) (0.4%)
The components of the deferred tax assets as of August 31 were as follows:
1996
----------
Total net operating loss carry-
forwards $ 19,077,324
Less: Limitation (10,441,324)
------------
Net operating loss carryforwards 8,636,000
------------
Canadian net operating loss
carryforwards 1,300,000
Patent rights and related equipment 1,588,341
Bad debt allowance 35,776
Foreign tax credits 28,600
------------
11,588,717
Valuation allowance (11,588,717)
------------
Net deferred tax asset
recognized in balance sheet $ ---
============
On August 1, 1991, and subsequently on August 17, 1994, the Company
experienced changes in the Company's ownership as defined in Section 382 of
the Internal Revenue Code ("IRC"). The effect of these changes in ownership
is to limit the utilization of certain existing net operating loss
carryforwards for income tax purposes to approximately $1,375,000 per year
on cumulative basis. As a result, only approximately $25,400,000 of the
total U.S. net operating loss carryforwards of the Company will be
available for utilization. The net operating loss carryforwards expire from
1996 to 2006. Approximately $6,300,000 of this amount was incurred
subsequent to the 1994 ownership change and therefore as of August 31, 1996
are not subject to the IRC Section 382 limitation.
At August 31, 1996, the Company has net operating loss carryforwards of
$47,409,776. In addition, there are $8,700,000 in federal net operating
F-16
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
loss carryforwards subject to the separate return limitation rules. The net
operating loss carryforwards limited under the separate return limitation
rules may only be offset against the separate income of the respective
subsidiaries. The Company has also generated approximately $3,800,000 of
Canadian net operating loss carryforwards. The Canadian net operating loss
carryforwards are subject to limitations similar to IRC Section 382.
The Company's available NOL carryforwards may be used to offset future
taxable income, if any. The Company may experience further limitations on
the utilization of net operating loss carryforwards and other tax benefits
as a result of additional changes in ownership.
The Company also has investment tax credit carryovers of $84,334 which
begin to expire in 1996.
13. GEOGRAPHIC SEGMENTS
During fiscal 1996, the Company operated through one business segment, oil
and gas exploration and production, reflecting its decision to use the EEOR
technology primarily internally as a competitive advantage to obtain and
exploit interests in heavy oil fields and not to pursue external sales of
goods and services related to the EEOR technology. Accordingly, 1996
revenues were minimal. In 1995, EEOR was reported as a separate business
segment, and the 1995 EEOR revenues related to contracts with two separate
customers in Canada and China.
IDENTIFIABLE ASSETS
United States
1996 $ 15,944,811
1995 4,998,632
--------------------------------------------
Canada
1996 642,451
1995 476,017
--------------------------------------------
Eastern Europe
1996 15,501,279
1995 5,230,673
--------------------------------------------
Other
1996 ---
1995 5,000
--------------------------------------------
TOTAL IDENTIFIABLE ASSETS
1996 $ 32,088,541 (1)
1995 $ 10,710,322 (1)
--------------------------------------------
(1) Includes cash and cash equivalents and other assets not specifically
related to oil and gas acquisition and development.
F-17
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The percentage of operating revenues generated by geographic areas for oil
and gas acquisition and development is recapped below:
United States
1996 10%
1995 0%
--------------------------------------------
Canada
1996 90%
1995 0%
--------------------------------------------
14. SUPPLEMENTAL CASH FLOW INFORMATION AND
NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the fiscal
years ended 1996 and 1995:
1996 1995
----------- -----------
Supplemental disclosures of cash flow
information:
Interest paid during the year $ 145,799 $ 28,474
========== ==========
Supplemental schedule of non-cash
activities:
Acquisition of equipment and common
stock of subsidiary in exchange for
long-term notes receivable $2,980,000 ---
========== ==========
Issuance of Common Stock upon
conversion of debentures and
notes, respectively $3,138,838 $ 50,000
========== ==========
Issuance of Common Stock in
connection with investments in
oil and gas ventures $2,353,125 $ ---
========== ==========
Issuance of Common Stock in
connection with compensation
earned and third party services
provided $ --- $1,729,878
========== ==========
Accruals recorded applicable to
investment in oil and gas ventures $ --- $ 59,475
========== ==========
15. LONG-TERM INCENTIVE PLAN
The 1995 Long-Term Incentive Plan (the "Plan") adopted by the Company in
fiscal year 1996 reserved 1,500,000 shares of the Company's Common Stock.
The purpose of the Plan is to further the interest of the Company by
enabling employees, directors, consultants and advisors of the Company to
acquire a proprietary interest in the Company by ownership of its stock
through the exercise of stock options and stock appreciation rights granted
under the Plan. Stock options granted under the Plan may be either
incentive stock options ("Incentive Options") or non-qualified stock
options ("Non-Qualified Options"). Options expire
F-18
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on such date as is determined by the stock compensation committee except
that incentive stock options may expire no later than 10 years from the
date of grant. Pursuant to the Plan, a specified number of Non-Qualified
Options exercisable at the then market price are granted annually to non-
employee directors of the Company and are 100% vested six months from the
date of grant. For the year ended August 31, 1996, 30,000 Non-Qualified
Options were granted to these non-employee directors at an exercise price
of $3.84, all of which were outstanding and exercisable at August 31, 1996.
Stock appreciation rights entitle the holder to receive payment in cash
and/or Common Stock equal in value to the excess of the fair market value
of the Common Stock on the date of exercise over the exercise price of the
stock appreciation right. The exercise price and vesting schedule of stock
appreciation rights are determined at the date of grant. No stock
appreciation rights had been granted as of August 31, 1996.
16. SUBSEQUENT EVENTS - UNAUDITED
During September and October 1996, 1,304,086 warrants were exercised for
aggregate proceeds to the Company of $6,062,981, which the Company has
recorded as additional equity. Of the warrants exercised, 1,139,800 had an
exercise price of $5.10, 14,286 had an exercise price of $1.75, and 150,000
had an exercise price of $1.50.
In October 1996, the Company pledged $4,400,000 to collateralize a bank
letter of credit issued to guarantee a $4,000,000 credit facility granted
by a bank in Ukraine to Kashtan Petroleum Ltd., the entity operating the
Lelyaky Field, Ukraine, in which the Company has a 45% interest.
In November 1996, the Company entered into a joint venture with Ukranafta,
the Ukraine state oil company, for the development of the Stynawske field.
The Company will have a 45% interest in the joint venture. With the
signing of the joint venture agreement, the Company became obligated to pay
$500,000 and to issue 175,000 shares of the Company's Common Stock which
had been previously reflected as contingent obligations. The issuance of
an additional 375,000 shares remains as a conditional commitment subject to
the project achieving production level targets.
F-19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
- - --------------------------- ------------------------------------------- ------
<S> <C> <C>
2(1) Agreement Relating to the Sale and
Purchase of All the Issued Share Capital
of Gastron International Limited dated
August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995
Form 8-K).
2(2) Supplemental Agreement Relating to the
Sale and Purchase of All the Issued Share
Capital of Gastron International Limited
dated November 3, 1995 by and among
Ribalta Holdings, Inc. as Vendor and
Fountain Oil Incorporated as Purchaser,
and John Richard Tate as Warrantor
(Incorporated herein by reference from
October 19, 1995 Form 8-K).
3(1) Registrant's Certificate of Incorporation
and amendments thereto (Incorporated
herein by reference from December 16, 1994
Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein
by reference from December 16, 1994 Form
8-K).
4 Form of 8% Convertible Subordinated
Debenture (Incorporated herein by
reference from February 29, 1996 Form
10-QSB).
10(1) License Agreement among IIT Research
Institute, ORS Corporation and Uentech
Corporation dated October 27, 1986
(Incorporated herein by reference from
October 31, 1986 Form 10-K, filed by
Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
10(2) Amendment to Revised Single Well
Technology License Agreement Dated October
27, 1986 (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*10(3) Securities Compensation Plan (Incorporated
herein by reference from August 31, 1994
Form 10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
*10(4) Form of Certificate for Common Stock
Purchase Warrants issued pursuant to the
Securities Compensation Plan (Incorporated
herein by reference from Form S-8
Registration Statement, File No. 33-82944
filed on August 17, 1994, filed by
Electromagnetic Oil Recovery, Inc., the
Company's predecessor).
*10(5) Form of Option Agreement for options
granted to certain persons, including
Directors (Incorporated herein by
reference from August 31, 1994 Form
10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
*10(6) Form of Certificate for Common Stock
Purchase Warrants issued to certain
investors in August 1994, including
Directors (Incorporated herein by
reference from August 31, 1994 Form
10-KSB, filed by Electromagnetic Oil
Recovery, Inc., the Company's predecessor).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*10(7) Employment Agreement between Fountain Oil
Incorporated and Oistein Nyberg
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(8) Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(9) Employment Agreement between Fountain Oil
Incorporated and Einar H. Bandlien
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(10) Employment Agreement between Fountain Oil
Incorporated and Arnfin Haavik
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(11) Employment Agreement between Fountain Oil
Incorporated and Svein E. Johansen
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(12) Employment Agreement between Fountain Oil
Incorporated and Arild Boe (Incorporated
herein by reference from August 31, 1995
Form 10-KSB).
*10(13) Employment Agreement between Fountain Oil
Incorporated and Gary J. Plisga
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(15) Employment Agreement between Fountain Oil
Incorporated and Ravinder S. Sierra
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(16) Employment Agreement between Fountain Oil
Incorporated and Susan E. Palmer
(Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
*10(17) 1995 Long-Term Incentive Plan
(Incorporated herein by reference from
February 29, 1996 Form 10-QSB).
*10(18) Form of Option Agreement for Non-Qualified X
Options granted to Non-Employee Directors.
*10(19) Fee Agreement between Fountain Oil X
Incorporated and Robert A. Halpin.
*10(20) Fee Agreement between Fountain Oil X
Incorporated and Eugene J. Meyers.
16 Letter Regarding Change in Certifying
Accountants (Incorporated herein by
reference from September 8, 1994 Form 8-K,
filed by Electromagnetic Oil Recovery,
Inc., the Company's predecessor).
21 List of Subsidiaries. X
23 Consent of Coopers & Lybrand L.L.P. X
27 Financial Data Schedule. X
</TABLE>
<PAGE>
Exhibit 10(18)
FORM OF
NONQUALIFIED STOCK OPTION AGREEMENT
This Nonqualified Stock Option Agreement is made and entered into this as
of the Date of Grant set forth below, by and between Fountain Oil Incorporated
("Fountain Oil") and the Participant identified below to document the grant to
the Participant of the following nonqualified stock options to purchase shares
of the common stock of Fountain Oil ("Stock Options"), on the terms and
conditions set forth in this Agreement and the 1995 Long-Term Incentive Plan
(the "Plan").
1. Stock Option Information:
Name of Participant: ________________________________________
Date of Grant: ______________________________________________
No. of Shares Subject to Stock Option: ______________________
Exercise Price Per Share: ___________________________________
Expiration Date: ____________________________________________
Vesting Schedule: ___________________________________________
2. The Stock Options are granted pursuant to the Plan with respect to the
authorized but unissued shares of common stock of Fountain Oil. The Stock
Options are not qualified as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, as amended.
3. The Stock Options shall be exercisable in accordance with the terms of
the Vesting Schedule set forth in Paragraph 1 hereof.
4. Except as provided in the Plan, the Stock Options are exercisable only
by the Participant and shall not be assignable or transferable other than
by will or the laws of descent and distributions.
5. The Participant agrees to comply with all laws, rules, and regulations
applicable to the grant and exercise of the Stock Options and the sale or
other disposition of the common stock of Fountain Oil received pursuant to
the exercise of the Stock Options.
6. Other terms and conditions applicable to the Stock Options are set
forth in the Plan. In the event of any conflict between the provisions of
this Agreement and the Plan, the Plan shall govern. A copy of the Plan is
available for inspection at Fountain Oil's executive offices and a copy may
be obtained by Participant on request addressed to the Corporate Secretary
of Fountain Oil.
IN WITNESS WHEREOF, each of the parties has executed this Nonqualified
Stock Option Agreement and the Participant agrees to the terms and conditions
hereof.
FOUNTAIN OIL INCORPORATED PARTICIPANT
By: ____________________________ By: _______________________________
(signature) (signature)
Its:____________________________
<PAGE>
Exhibit 10(19)
Robert A. Halpin
Halpin Energy Resources Ltd.
8907 Baylor Crescent SW
Calgary, Alberta T2V 3N5
Canada
15. November 1995
Subject: Appointment to Chairman of the Board of Fountain Oil Incorporated,
Delaware USA.
As the result of you being appointed as chairman of the board in the board
meeting 14 November 1995, you will be compensated based on a fee of
US $ 37500 (US Dollar thirtyseventhousandfivehundred)
The fee is based on 25% of normal working days per year of 220, and of which you
will allocated to Fountain Oil 55 working days per year.
On request from the company of additional services, this will be compensated
based on a day-rate of $ 1000 per day.
You will participate in the company share option program in the accordance with
the board approvals.
An office will be made available for your use at all times in the companies
premises in Calgary.
The company will compensate for all out of pocket expenses related to the
company business. If assignments or the job require presence in locations
outside Calgary for more than two weeks at the time, the company will compensate
you for your wife's travel and out of pocket expenses.
The company will assign you one major credit card and telecom card to be used
for company expenses.
<PAGE>
The normal duties expected from you as Chairman of the company is,
- Give input to the preparation of the board meetings to the President & CEO
- Chair the board meetings
- Perform presentations of the company to investors, prospective new
investors or partners in projects, with special emphasis on the Americas.
- Assist by giving advice in operational matters where the company is
operator or partner.
- Actively follow the development in the industry, and alert the management
of possibilities and future strategies.
- Duties are required by regulatory bodies.
We hope the terms are satisfactory, and look forward to good and beneficiary
relationship in the future for the company.
Sincerely yours,
/s/Oistein Nyberg
- - -----------------
Oistein Nyberg
President & CEO
Acceptance of offer
/s/ Robert A. Halpin
--------------------
Robert A. Halpin
<PAGE>
Exhibit 10(20)
Mr. Eugene J. Meyers
3907 Ocean Front Walk
Marina del Ray
California 90292-5913
1 February 1996
Dear Gene:
Subject: Support to Fountain Oil Incorporated in the area of financial relation
and advisory function to the executive management of Fountain Oil
Incorporated.
For work related to the above subject, the company request the support from you
on a regular basis with a fixed compensation of
US $ 15000,- (US Dollar fifteenthousand only)
The fee is based on 10% of normal working days per year of 220, and of which you
will allocated to Fountain Oil 22 working days per year.
On request from the company of additional services, this will be compensated
based on an hourly rate of $ 100,-, maximum $1000,- per day.
You will participate in the company share option program in the accordance with
the board approvals.
The company will compensate for all out of pocket expenses related to the
company business. expenses.
The normal duties expected from you in this assignment:
- Follow up on stock-broker relations in the Americas
- Follow up and advice on contact to the financial community in the
Americas.
- Advice on and shareholder communication in the Americas.
<PAGE>
For these tasks and other activities that fall outside the retainer as specified
above will be coordinated with the Executive Vice President and Deputy to the
President and CEO.
All other support will be discussed with respective Executive for execution.
We hope the terms are satisfactory, and look forward to good and beneficiary
relationship in the future for the company.
Sincerely yours,
/s/Oistein Nyberg
- - -----------------
Oistein Nyberg
President & CEO
Acceptance of offer
/s/ Eugene J. Meyers
--------------------
Eugene J. Meyers
<PAGE>
Exhibit 21
FOUNTAIN OIL INCORPORATED
LIST OF SUBSIDIARIES
As of October 31, 1996
Name Jurisdiction of Incorporation
- - ----------------------------------------------- -----------------------------
Electromagnetic Oil Recovery International, Inc. Alberta, Canada
Fountain Oil Adygea Incorporated Delaware
Fountain Oil Boryslaw Incorporated Delaware
Fountain Oil Cyprus Limited Cyprus
Fountain Oil Production Incorporated Delaware
Fountain Oil Services Ltd. Bermuda
Fountain Oil Ukraine Ltd. Alberta, Canada
Fountain Oil U.S., Inc. Oklahoma
Gastron International Ltd. British Virgin Islands
Uentech Corporation Oklahoma
UK-RAN Oil Corporation Alberta, Canada
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Fountain Oil Incorporated on Form S-8, as amended in Post-Effective Amendment
No. 1 (File No. 33-82944) and registration statement on Form S-8 (File No. 333-
02651) of our report which includes a paragraph regarding the Company's ability
to continue as a going concern, dated November 22, 1996, on our audits of the
consolidated financial statements of Fountain Oil Incorporated as of August 31,
1996, and for the years ended August 31, 1996, and 1995 which report is included
in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Houston, Texas
November 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 17,329,237
<SECURITIES> 0
<RECEIVABLES> 8,061
<ALLOWANCES> 0
<INVENTORY> 18,373
<CURRENT-ASSETS> 17,985,554
<PP&E> 7,143,168
<DEPRECIATION> 565,603
<TOTAL-ASSETS> 32,088,541
<CURRENT-LIABILITIES> 1,060,201
<BONDS> 300,000
0
0
<COMMON> 1,737,661
<OTHER-SE> 28,767,329
<TOTAL-LIABILITY-AND-EQUITY> 32,088,541
<SALES> 0
<TOTAL-REVENUES> 35,177
<CGS> 31,991
<TOTAL-COSTS> 42,979
<OTHER-EXPENSES> 1,777,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,965
<INCOME-PRETAX> (5,698,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,698,052)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> 0
</TABLE>
