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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED _____________________________
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from September 1, 1996 to December 31, 1996
Commission File Number 0-9147
FOUNTAIN OIL INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 91-0881481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 BROADFIELD BLVD., SUITE 100
HOUSTON, TEXAS 77084
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 492-6992
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment
to this Form 10-K.
[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of February 28, 1997, was $111,670,690.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $0.10 par value,
22,411,489 shares outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement in connection with the 1997 Annual Meeting of
Stockholders are incorporated into Part III of this Report.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Fountain Oil Incorporated ("Fountain" and, together with its predecessors
and their consolidated subsidiaries, 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 represented the basis for 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 changed its strategy with respect to
the EEOR Process from selling equipment and services to third parties to using
that proprietary technology to obtain interests in and, assuming successful
commercialization, to exploit underdeveloped heavy and paraffinic oil fields.
The Company has elected to change its fiscal year from August 31 to
December 31, 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. As a result, the Company is filing this transition report on Form
10-K for the four month transition period from September 1, 1996 to December 31,
1996.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS; FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
See Note 16 of the Notes to Consolidated Financial Statements for
information regarding revenues, operating losses, and identifiable assets
attributable to the Company's industry segments and geographic areas for the
four month period ended December 31, 1996, the years ended August 31, 1996 and
1995, and the ten month period ended August 31, 1994.
NARRATIVE DESCRIPTION OF BUSINESS
PRINCIPAL PRODUCTS AND SERVICES
The Company's principal activities involve the acquisition of interests in
and development of oil and gas fields. The Company's primary focus is the
acquisition of ownership interests in existing oil and gas fields with a
productive history 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 EEOR Process. The Company looks for, among other characteristics in
addition to petroleum production potential, 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. In addition, the Company has interests in several small oil and gas
properties or ventures in Canada and the United States, some of which have
produced and are producing modest amounts of light crude oil, heavy crude oil
and natural gas. The Company anticipates that its principal products from its
existing ventures and properties will be light crude oil, natural gas, natural
gas condensate and heavy crude oil.
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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 oil and gas ventures.
Interests acquired in certain joint ventures, partnerships and production
sharing, working interest and other arrangements are proportionately
consolidated. The Company will report the same stockholders' equity and 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 partners 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 enhanced oil recovery techniques such as, if successfully
commercialized, the Company's proprietary EEOR Process.
VENTURES IN EASTERN EUROPE
Lelyaky Field, Pryluki Region, Ukraine
Project Structure
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.
("Kashtan"), 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 Kashtan.
In May 1996, Kashtan received a license granting it the exclusive right
for twenty years to develop and produce oil and gas from a 67 square kilometer
("km2") portion of the Lelyaky field and the exclusive right for five years to
engage in exploration activities in 327 km2 surrounding the production area.
Kashtan 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) Kashtan will be
entitled to all incremental production above that declining base. (FLS) After
all production costs, taxes and other expenses of Kashtan are covered, the
owners of Kashtan 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 which may entail direct financing, cash collateral
or other credit supports. (FLS) Kashtan and the Company have negotiated an
arrangement under which the Company would have responsibility for providing
commercial, technical and management services with respect to the Lelyaky field
project. (FLS)
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In October 1996, the Company through a $4,400,000 cash deposit effectively
guaranteed a $4,000,000 credit facility for Kashtan, of which Kashtan had drawn
down $1,400,000 as of December 31, 1996. The Company is seeking to increase the
guarantee to $10,000,000 and may find it necessary or advisable to provide
additional credit support for Kashtan in the future. At December 31, 1996,
August 31, 1996, and August 31, 1995 the Company had capitalized acquisition
costs relating to the Lelyaky project aggregating approximately $2,400,000,
$2,200,000, and $44,500 respectively.
Development Plan
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. A reported 386 million barrels of oil ("MMBL") have
been produced from the Lelyaky field. 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 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 commenced in March 1997 and
is expected to be completed during 1997. (FLS) The Company estimates that the
initial phase will require capital and operating expenditures of approximately
$13,000,000 in 1997 of which a portion is anticipated to be provided from
production and sale of Lelyaky field oil. (FLS)
Based on data developed during the initial program, Kashtan 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
Kashtan 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, Kashtan 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) Natural 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, Kashtan may export it. (FLS) Distribution of the crude
oil produced from the Lelyaky field is expected to be effected through existing
distribution systems which the Company believes are currently adequate.
Gorisht-Kocul Field, Albania
Project Structure
Fountain and Sh.A. Albpetrol, the Albanian state oil company
("Albpetrol"), have formed a joint venture (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 holds a twenty-five year production license covering
approximately 16.5 km2 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)
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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, which may cause the Company to finance ALBJV directly or to
guarantee, collateralize or provide other forms of credit support for ALBJV
borrowings. (FLS) The Company may utilize up to 80% of the incremental
production to pay for project operating costs and capital expenditures and to
repay borrowings. (FLS) Any shortfall in recovery of such costs may be carried
forward and recovered from the 80% of incremental production available for such
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)
At December 31, 1996, August 31, 1996, and August 31, 1995, the Company
had capitalized acquisition costs relating to ALBJV aggregating approximately
$1,327,000, $518,000, and $197,000, respectively.
Development Plan
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 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 that will include the
drilling of two new wells. (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)
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)
In March 1997, the Company declared the political unrest in Albania to be
a force majeure and ALBJV suspended activities related to the development of the
Gorisht-Kocul field as a result thereof. The suspension is expected to remain in
effect until conditions in Albania permit the safe and efficient transportation
of equipment and personnel to the Gorisht-Kocul field and safe operating
conditions prevail. (FLS) At the time of suspension, neither the Company nor
ALBJV had any drilling equipment or expatriate personnel in Albania. The Company
estimates that the initial phase will require capital and operating expenditures
of approximately $7,000,000. (FLS) Due to the suspension of activities, the
timing of these expenditures is uncertain.
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) Distribution of the crude oil produced from the
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Gorisht-Kocul field is expected to be effected through existing distribution
systems which the Company believes are currently adequate.
Maykop Field, Republic of Adygea, Russian Federation
Project Structure
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.
In 1994, Intergas was granted an exclusive twenty-five year exploration
and production license covering specified zones in 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) In December 1996, the Company shipped two
drilling rigs and related equipment, which had been recorded on the books as of
December 31, 1996 at approximately $6,957,000 and which are intended to be
transferred to Intergas. When it was learned that certain corporate formalities
had not been completed by Intergas, the Company diverted the shipment to Cyprus
where it remains in bonded storage pending completion of discussions with the
management and other shareholders of Intergas regarding such corporate
formalities and operating arrangements. (FLS) No assurances can be given that
the discussions or other actions will result in the resolution of these matters
and the delivery of the rigs and related equipment to Intergas.
Delivery of the rigs and related equipment to Intergas in Adygea would
complete the Company's required charter capital contribution to Intergas, and
the value in excess of the remaining required charter capital contribution would
be treated as a loan by the Company to Intergas. (FLS) At December 31, 1996,
August 31, 1996, and August 31, 1995, the Company had capitalized acquisition
costs and advances relating to the Maykop project aggregating approximately
$4,400,000, $2,780,000 and $175,000 respectively, exclusive of the drilling rigs
and related equipment.
Development Plan
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, following the
arrival in Adygea of the rigs and related equipment being 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)
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)
The Company estimates that the initial phase will require capital and operating
expenditures of approximately $5,000,000. (FLS) Due to the pending completion
of discussions with the management and other shareholders of Intergas, the
timing of these expenditures is uncertain.
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) The natural gas produced from
the Maykop field is expected to be collected by Intergas and delivered to
Mostransgas at the Maykop field. Intergas is seeking 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 arrangements
for the sale of gas condensate will be made. Distribution of the gas
condensate produced from the Maykop field is expected to be effected through
existing distribution systems which the Company believes are currently adequate.
Stynawske Field, Western Region, Ukraine (previously referred to as the
Boryslaw Field)
In November 1996, the Company entered into a joint venture arrangement
with Ukranafta for the development of the 6,000 acre Stynawske field, in Western
Ukraine near the city of Stryy. The Company will have a 45% interest in the
joint venture, with Ukranafta having the remaining 55% interest. (FLS) With
the formal registration of Boryslaw Oil Company, the joint venture company, in
December 1996, obtaining the production license is the principal task that must
be accomplished 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 December 31, 1996, August 31, 1996, and August
31, 1995, the Company had capitalized acquisition costs relating to the
Stynawske project aggregating approximately $1,656,000, $1,321,000 and $942,000
respectively.
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.
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 and marketing arrangements for the Stynawske field have 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. (FLS) Assuming a production
license is issued by June, the Company anticipates spending approximately
$11,000,000 in capital and operating expenditures on the project in 1997, a
portion of which may be provided from production and sale of Stynawske field
oil. (FLS)
Risks Associated with Eastern European Ventures
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) More permits and approvals
may be required for Eastern
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European entities and projects than for North American entities and projects;
the procedures for obtaining such permits and approvals may be more cumbersome;
and officials may have more discretion in acting on application and requests. As
noted above, the Company delayed the delivery of equipment to the Russian
Federation and has suspended operations in Albania.
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 Company's oil and gas ventures 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, including cash collateral,
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 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 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)
The Company has made advances to its various Eastern European oil and gas
ventures for capital and operating expenditures. Such advances, which are
classified as investments in and advances to oil and gas ventures are
recoverable from future revenue of the ventures. The Company has generally
negotiated agreements with its venture partners to provide for priority
distributions to the Company to repay these advances. (FLS) No assurance can be
given that such distributions will be adequate to recover such advances.
At December 31, 1996, the Company had net capitalized costs relating to
the acquisition of interests in oil and gas ventures in Eastern Europe
aggregating approximately $8,400,000. A determination that one or more of the
ventures is not commercially feasible would result in an impairment of the
assets associated with such
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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
Rocksprings Field, Edwards County, West Texas
As of December 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 completed during the second quarter
of 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 an average of 428 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.
Sylvan Lake Area, Alberta, Canada
In January 1997, the Company purchased a 60% interest in a heavy oil
property in the Sylvan Lake Area in Alberta, Canada, from Amoil Resources Inc.,
effective from December 20, 1996. The Company paid approximately $980,000 for
its interest in the property, and also committed to drill one pilot well in
which the Company's electrically enhanced oil recovery equipment would be
installed. In January 1997, the Company's share of production from the field was
approximately 1,150 barrels, coming from two wells, with a third well
temporarily shut in. The Company estimates spending approximately $1,800,000
on capital and operating expenditures for the Sylvan Lake property in 1997, of
which a portion is anticipated to be provided from production and sale of oil
from this property. (FLS)
COMPETITION
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
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<PAGE>
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"), has been
developing 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 Company 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
during the past 10 years. While pilot projects results have varied, the Company
believes they suggest the validity of the EEOR technology and its ability in
appropriate circumstances to increase the production rates by a factor of two or
more. (FLS) Recent emphasis has been on improving equipment reliability, and 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 acceptability, 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) As a
first step to implement this strategy, the Company has acquired a 60% share in a
heavy oil property in the Sylvan Lake Area in Alberta, Canada, and intends to
install the technology in a well in this field. (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
10
<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.
PRINCIPAL MARKETS
The anticipated principal markets for oil and gas produced by the
Company's Eastern European ventures are discussed, for each venture
respectively, under "Principal Products and Services". The principal market for
crude oil produced in North America is refiners located in proximity to the
place of production, and the principal market for natural gas produced in North
America is gas pipeline operators with pipeline facilities located in proximity
to the place of production.
METHODS OF DISTRIBUTION
The anticipated methods of distribution for oil and gas produced by the
Company's Eastern European ventures are discussed, for each venture
respectively, under "Marketing Arrangements". In North America crude oil is
generally distributed through pipeline facilities located in proximity to the
place of production or trucked. Natural gas is normally delivered to the
pipeline operator through a transmission line from the place of production to a
junction in the operator's pipeline, where volumes are metered.
LICENSES, CONCESSIONS AND PATENTS
All of the Eastern European ventures will be operating pursuant to a
license or concession granted by governmental authorities. Each of the licenses
imposes various requirements upon the licensee, and the failure to satisfy such
requirements could result in the termination or cancellation of the license or
concession. In addition, as sovereign agencies, the governmental authorities
that have granted or that the Company expects will grant such licenses or
concessions may have greater power than private parties to terminate licenses or
concessions arbitrarily. Loss of one or more of the licenses or concessions to
operate the Eastern European ventures could have a material adverse effect upon
the financial condition, results of operations and prospects of the Company.
The Company believes that the patents it owns or has the exclusive
licenses to exploit could be important to the acquisition of interests in and to
the development of heavy oil fields. 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.
11
<PAGE>
ENVIRONMENTAL MATTERS
The development of oil and gas fields and the production of hydrocarbons
inherently involve environmental risks. These risks can be minimized, but not
eliminated, through use of various engineering and other technological methods,
and the Company intends to employ such methods to industry standards. (FLS)
The potential environmental problems are enhanced when the oil and gas
development and production activities involve the rehabilitation of fields where
the practices and technologies employed in the past have not embodied the
highest standards then in effect. It is the policy of the Company to attempt to
deal with this situation by conducting an environmental audit before assuming
responsibility for operations of an oil or gas field and arranging for the prior
operator to accept liability for any environmental problems existing when the
Company, or a venture in which it is interested, accepts responsibility for the
field. The Company does not anticipate any material capital expenditures for
environmental control facilities during 1997, 1998 or the foreseeable future.
The Company's business is subject to certain Federal, state and local laws
and regulations relating to the exploration for and the development, production
and transportation of oil and natural gas, as well as environmental and safety
matters. Many of these laws and regulations have become more stringent in recent
years, often imposing greater liability on a larger number of potentially
responsible parties. Because the requirements imposed by such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance with these requirements or their effect on its
operations.
EMPLOYEES
As of February 28, 1997, the Company had thirty-five full time employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age as of February 28, 1997, and office or offices currently
held by each of the executive officers of the Company are as follows:
Name Age Office or Offices
- ---- --- -----------------
Oistein Nyberg 54 Chairman of the Board
Nils N. Trulsvik 47 President and Chief Executive Officer
Einar Bandlien 49 Executive Vice President
Arild Boe 49 Executive Vice President
Arnfin Haavik 53 Executive Vice President and Chief Financial Officer
Svein Johansen 52 Executive Vice President
Alfred Kjemperud 43 Senior Vice President
Orest Senkiw 49 Vice President
Oistein Nyberg was elected Director on March 4, 1995 and served as
President and Chief Executive Officer from March 9, 1995 to February 4, 1997
when he was elected Chairman of the Board. 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.
Nils N. Trulsvik serves as President and Chief Executive Officer since
February 4, 1997. He also was elected a Director of the Company on August 17,
1994 and 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 from March
9, 1995 to February 4, 1997. 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
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<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.
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.
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. Mr. Boe is also a director of RESLAB, a
company providing laboratory services to the oil and gas industry.
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.
Alfred Kjemperud was elected Senior Vice President of Technology on
February 4, 1997. He has served in the Company's management since September 1,
1996. From 1995 to 1996, he served as Marketing Manager for Geomatic Services, a
Norwegian Offshore Technology Company. From 1991 to 1995, he served as General
Manager for Petec A/S, a Norwegian reservoir engineering consulting company.
Orest Senkiw was elected Vice President on February 4, 1997. Since 1993,
he has been chief engineer of UK-RAN Oil Corporation, a Canadian corporation
that is now a subsidiary of the Company. From 1992 to 1993, he was self-employed
as a consulting engineer for the petroleum industry.
Officers serve at the pleasure of the Board of Directors.
ITEM 2. PROPERTIES
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 to one hundred
eight months. See "Item 1. Description of Business" for a description of
principal oil and gas properties in which the Company has an interest.
13
<PAGE>
Since September 1, 1995, the beginning of the Company's most recent full
fiscal year, neither the Company nor any entities for which it accounts using
the equity method 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
the ten months ended August 31, 1994. In the year ended August 31, 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 the year ended August 31,
1996, the Company participated in the drilling of one gross well in West Mexia
which was later abandoned. In the four months ended December 31, 1996, the
Company did not drill any exploratory wells or development wells. The Company
started drilling activity in the Lelyaky field in March 1997.
In the year ended August 31, 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 as of December 31, 1996 for the
Inverness Unit were $18.05 per barrel and $9.35 per barrel, respectively. As of
December 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
material legal proceedings.
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 four month period ended December 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.
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<PAGE>
FOR THE FOUR-MONTH
PERIOD ENDED COMMON STOCK
DECEMBER 31, 1996 HIGH LOW
- ------------------------ -----------------
FISCAL QUARTER ENDED:
November 30, 1996 $7.50 $5.88
ONE MONTH ENDED:
December 31, 1996 $7.38 $6.50
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 28, 1995 6.75 2.25
May 31, 1995 7.38 4.19
August 31, 1995 7.00 5.19
On December 27, 1996, the registered holder of stock purchase warrants
(the "Warrants") issued in August 1994, having an original expiration date of
November 3, 1997, and entitling the holder thereof to purchase 14,223 shares of
the Company's Common Stock at an exercise price of $1.50 per share, exercised
the Warrants, and in connection therewith the Company issued and sold an
aggregate of 14,223 shares of its Common Stock, par value $0.10 per share (the
"Warrant Shares"). The Warrant Shares were sold to the registered holder of the
Warrants. No underwriters were involved in the transaction. Each of the
Warrant Shares was sold for One Dollar and Fifty Cents ($1.50) in cash
consideration, and the Company received aggregate proceeds of $21,334.50 in
connection with the exercise of the Warrants.
The offer and sale of the Warrant Shares was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), under
Section 4(2) of the Act as a transaction by an issuer not involving a public
offering. The purchaser of the Warrant Shares represented to the Registrant,
among other things, that he was acquiring the Warrant Shares for his own
account; that he was acquiring the Warrant Shares for investment and not with a
view towards the distribution thereof; and that he would not sell the Warrant
Shares without registration under the Act or an applicable exemption from such
registration requirement. The certificate representing the Warrant Shares has a
restrictive legend endorsed thereon reflecting the restrictions on
transferability arising out of the foregoing matters, and the Company has issued
"stop transfer" instructions to its transfer agent with respect to the Warrant
Shares.
On December 31, 1996 the number of holders of record of the Common Stock
of the Company was approximately 4,358. 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data reflect the historical results of operations and
selected balance sheet items of the Company and should be read in conjunction
with Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements included in
Item 8 "Financial Statements and Supplementary Data" herein.
<TABLE>
<CAPTION>
FOUR TWELVE TWELVE TEN TWELVE TWELVE
Reported in $1,000 except MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
for per common share ENDED ENDED ENDED ENDED ENDED ENDED
amounts 12/31/96 8/31/96 8/31/95 8/31/94 10/31/93 10/31/92
---------- --------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL PERFORMANCE
Total revenue $ 17 $ 35 $ 625 $ 3 $ 190 $ 1,070
Operating loss (2,983) (5,640) (7,882) (1,466) (1,547) (3,240)
Other income (expense) 361 (854) 312 (366) 252 57
Net loss (2,604) (6,494) (7,600) (1,832) (1,295) (3,183)
Net loss per common share (0.14) (0.52) (0.91) (0.45) (0.22) (0.81)
Total assets 55,375 32,089 10,710 4,944 4,528 5,919
Notes payable & long-term
debt --- 300 --- 163 158 151
Stockholders' equity 53,245 30,505 9,608 4,181 3,707 4,965
Cash dividends per common
share --- --- --- --- --- ---
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
As of December 31, 1996, the Company had current assets of $32,305,515, of
which $31,424,064 was in the form of cash and cash equivalents, and current
liabilities of $1,924,410, leaving the Company with working capital of
$30,381,105. This compares to current assets of $17,985,554, cash and cash
equivalents of $17,329,237, current liabilities of $1,060,201 and working
capital of $16,925,353 as of August 31, 1996 and current assets of $5,290,601,
cash and cash equivalents of $4,791,645, current liabilities of $1,102,432 and
working capital of $4,188,169 as of August 31, 1995. The increase in current
assets, cash and cash equivalents and working capital from August 31, 1995
through December 31, 1996 is attributable primarily to issuance and sale of
equity securities by the Company for cash, partially offset by investments in
oil and gas ventures and operating losses.
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. An expense of $795,500 relating to the
discount feature of the Debentures was recognized during fiscal year ended
August 31, 1996 recorded against capital in excess of par. All of the Debentures
were converted during 1996, into an aggregate of 1,056,449 shares of Common
Stock.
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 were approximately
$20,960,000, after reduction for commissions and other expenses totaling
approximately $1,500,000.
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<PAGE>
During the four months ended December 31, 1996, the Company received
approximately $25,000,000 as a result of the exercise of outstanding stock
purchase warrants that resulted in the issuance of 4,720,754 shares of Common
Stock. As the Company entered 1997, no further stock purchase warrants issued
by the Company remained outstanding.
The increase in current assets, cash and cash equivalents and working
capital from August 31, 1995 to August 31, 1996 reflects principally the
aggregate proceeds of approximately $24,307,000 from the issuance and sale of
the 5,000,000 shares of Common Stock in June 1996 and the Debentures in the
quarter ended February 29, 1996, partially offset by (i) net cash of
approximately $5,146,000 used in operating activities during the year ended
August 31, 1996 representing primarily the Company's net loss for that period,
(ii) capital expenditures of approximately $3,729,000 for drilling rigs and
related equipment which the Company expects to transfer to Intergas, which upon
transfer will be accounted for as an investment in and advance to an oil and gas
venture, and (iii) approximately $2,645,000 which represented investments in and
advances to oil and gas ventures accounted for using the equity method.
In addition, the aforementioned cash proceeds were partially offset during
the four month period ended December 31, 1996 by (i) $5,400,000 of cash which
was restricted to collateralize letters of credit issued for the benefit of oil
and gas ventures accounted for using the equity method, (ii) approximately
$3,108,000 for investments in and advances to such oil and gas ventures, (iii)
capital expenditures of approximately $1,228,000 for drilling rigs and related
equipment which the Company expects to transfer to Intergas, and (iv)
approximately $1,230,000 used in operating activities during the four months
ended December 31, 1996 principally representing the cash portion of the
Company's net loss for that period.
During the year ended August 31, 1996, the Company acquired a 37%
ownership interest in 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. 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 two drilling
rigs and related equipment for an original cost of approximately $2,732,000,
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 and which had been
eliminated in consolidation as of August 31, 1996.
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, 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
and the issuance of 1,150,000 shares of Common Stock. The Company has paid the
$611,000, partially through cancellation of indebtedness, 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.
Notes receivable dropped from $2,980,000 at August 31, 1995 to
approximately $190,000 at both August 31 and December 31, 1996 as a result of
the Company's acquisition during the year ended August 31, 1996 of (i) all of
the outstanding stock of Gastron which at the time of acquisition was the
obligor on a $2,450,000 note payable to the Company, with that obligation being
eliminated upon consolidation following the acquisition, and
17
<PAGE>
(ii) 90% of the outstanding stock of UK-RAN, with a portion of the consideration
for that acquisition taking the form of the cancellation of a $450,000 note
payable to the Company by the seller of the UK-RAN stock.
Property and equipment, net increased from approximately $530,000 at
August 31, 1995 to $6,578,000 at August 31, 1996 and then to $7,766,000 at
December 31, 1996, reflecting the acquisition of two drilling rigs and related
equipment as part of the acquisition of Gastron during the fiscal year ended
August 31, 1996 and the improvement of the acquired rigs and equipment and the
acquisition of additional equipment through December 31, 1996. The Company
intends to transfer the rigs and related equipment to Intergas for use in the
Maykop field project in the Republic of Adygea, Russian Federation, after
certain corporate formalities and operating arrangements are completed. (FLS)
They were shipped from the United States at the end of December 1996, and no
material additions to the rigs and related equipment are expected. (FLS) Upon
transfer to Intergas, the rigs and related equipment would be reclassified as
investments in and advances to oil and gas ventures. (FLS) No assurance can be
given that such corporate formalities and operating arrangements will be
completed or that the rigs and equipment will be transferred to Intergas.
Investments in and advances to oil and gas ventures - net increased from
approximately $1,358,000 at August 31, 1995 to $6,876,000 at August 31, 1996 and
$8,568,000 at December 31, 1996, reflecting the Company's increasing involvement
in projects in Eastern Europe. During the fiscal year ended August 31, 1996,
the Company completed its acquisition of stock in Intergas and UK-RAN, which
effectively represented acquisitions of interests in the Maykop and Lelyaky
field projects, respectively. During the same period, the Company entered into
a joint venture to rehabilitate and develop the Gorisht-Kocul field, and during
the four months ended December 31, 1996, the Company entered into a joint
venture to develop the Stynawske field. During the initial operating periods,
the Company expects the ventures operating each of these fields to record
losses, which alone would have the effect of reducing investments in and
advances to oil and gas ventures while increasing operating and net losses.
(FLS) Since the Company has the responsibility for arranging financing for
these ventures, unless third-party financing can be arranged, the Company will
be required to supply the capital to finance operations until each venture
generates positive cash flow, which will have the effect of increasing
investments in and advances to oil and gas ventures. (FLS) The amount of such
advances may be greater than the amount of the operating losses recognized by
the Company, which would cause such investment balances to increase. As such
investments are essentially unevaluated oil and gas properties, such costs may
not be recovered if the ventures are not successful. (FLS) No assurance can be
given that the Company will either be able to arrange third-party financing for
such ventures or have sufficient resources to fund the capital and operating
needs of the ventures.
Other assets increased from approximately $171,000 at August 31, 1996 to
$886,000 at December 31, 1996, primarily as a result of deposits placed by the
Company on items related to oil and gas ventures. There were no other assets
recorded at August 31, 1995.
Accrued liabilities fluctuated from approximately $414,000 at August 31,
1995 to $298,000 at August 31, 1996 and $1,124,000 at December 31, 1996,
principally reflecting the accrual of salaries and related employment taxes and
professional fees at August 31, 1995 and 1996. At December 31, 1996, similar
items along with transportation charges associated with shipping the drilling
rigs and related equipment for the Maykop project were accrued.
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 August 31, 1995, the Company had obligations
conditioned on the formalization of project relationships, project performance
and other matters involving $500,000 and 550,000 shares of Common Stock. During
the fiscal year ended August 31, 1996, these conditional obligations remained in
effect, and the Company incurred additional unconditional obligations regarding
the development of oil and gas properties and ventures involving $5,000,000 and
250,000 shares of Common Stock and conditional obligations involving an
additional $1,300,000 and 1,450,000 shares of Common Stock. During the four
months ended December 31, 1996, the Company entered into a joint venture with
Ukranafta, the Ukraine
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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 375,000 shares remains as a conditional
commitment subject to the Stynawske project achieving production level targets,
and the Company did not incur any additional unconditional obligations regarding
the development of oil and gas properties and ventures. Thus, at December 31,
1996, the Company had unconditional obligations regarding the acquisition and
development of its oil and gas projects and ventures amounting to $5,500,000, of
which $4,000,000 is being satisfied through the collateralization of letters of
credit guaranteeing obligations of Kashtan, as well as the unconditional
obligation to issue 425,000 shares of its Common Stock. Subsequent to December
31, 1996, the Company paid $500,000 and issued 175,000 shares of its Common
Stock in satisfaction of unconditional obligations existing on December 31,
1996. On that date, the Company also had contingent obligations relating to the
acquisition and development of its oil and gas properties and ventures amounting
to $1,300,000 and 1,825,000 shares of Common Stock. As the Company undertakes
additional projects and develops current projects, significant additional
obligations are expected to be incurred. (FLS)
Stockholders' equity increased from approximately $9,608,000 at August 31,
1995 to $30,505,000 and $53,245,000 at August 31 and December 31, 1996,
respectively, as a result of the Company's issuance and sale of equity
securities, partially offset principally by operating losses.
Development of 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," involves a multi-year effort. The Company has
estimated, based on preliminary development plans, that development of such oil
and gas properties and ventures will entail a cash expenditure in the range of
$28,000,000 to $36,000,000 during 1997, which amounts do not take into account
anticipated cash outlays for general and administrative expense, costs
associated with any new oil and gas properties and ventures, or any anticipated
cash flows that might be generated from production by the properties and
ventures. (FLS) No assurance can be given that such anticipated production and
cash flows will occur or that the required cash outlays will not be greater.
The Company has some flexibility in postponing or reducing net cash outlays by
revising project programs or delaying specific activities. (FLS)
The Company had working capital of approximately $30,381,000 at December
31, 1996 and at that date had an additional $5,400,000 of restricted cash that
was pledged to collateralize developmental expenditures by various oil and gas
ventures. While the Company believes that it has the resources, including
anticipated cash flows from production by some of the oil and gas properties
and ventures, to fund all planned development of oil and gas properties and
ventures through 1997, continued development beyond 1997 assumes the
availability of substantial additional funds from external sources. (FLS) Less
than projected funding from external sources and cash flows from production will
result in a slower phasing of the development of some or all of the properties
and ventures, reducing the early investment requirements but delaying the
anticipated production build up. (FLS)
The Company generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has an
interest. The Company believes that it will be able to access external sources
of funds to finance the net development costs of such properties and ventures
through a combination of debt financing by the Company or the joint ventures or
other entities that are developing the oil and gas properties, equity financing
by the Company or otherwise, so that delays will not be experienced as a result
of a shortage of financial resources. (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 oil and gas ventures have been
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, however, that the Company or any such entity
will be able to arrange the financing necessary to develop the projects being
undertaken 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 entities or are deemed to be in
the best interest of the Company and its stockholders or the participants,
including the Company, in such entities. (FLS)
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As of December 31 and August 31, 1996 and August 31, 1995, the Company had
net investments in oil and gas properties and ventures totaling approximately
$8,827,000, $7,164,000 and $1,910,000, respectively. Of these amounts,
approximately $8,463,000, $6,783,000 and $1,358,000, respectively, relate to the
ventures in Eastern Europe. Ultimate realization of the cost of the Company's
oil and gas properties and ventures will require production of oil and gas in
sufficient quantities and marketing such oil and gas at sufficient prices to
provide positive cash flow to the Company, which 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 the oil and
gas produced at or near world prices. The Company has plans for each of its
Eastern European ventures 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, these plans may not be realized, and
the Company may not recover its costs. (FLS) The Company will be entitled to
distributions from the various ventures in accordance with the arrangements
governing the respective ventures. (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
properties and ventures or other adjustments that would be necessary if
financing cannot be arranged for the development of such properties and ventures
or if they 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 properties and ventures to achieve profitability would have a material
adverse effect on the financial position, including realization of assets,
results of operations, cash flows and prospects of the Company and ultimately
its ability to continue as a going concern. (FLS)
Cash used in operations for the four month periods ended December 31, 1996
and 1995 was $1,229,845 and $1,967,624, respectively. The decrease in cash used
in operations is due principally to increases in accounts payable and accrued
liabilities in the 1996 period as contrasted to decreases in those liability
accounts during the 1995 period.
Cash used in operations for the years ended August 31, 1996 and 1995 was
$5,145,951 and $1,958,078, respectively. The increase in cash used in operations
was due principally to an increase in direct project cost of approximately
$1,268,000 associated with the increased activity level involving the Company's
oil and gas properties and ventures, primarily those in Eastern Europe, and a
decrease in revenues of approximately $600,000.
While the Company expects certain ventures to generate operating cash
flows from oil and gas production commencing in 1997, such cash flows, if any,
are not expected to cover the cash requirements of these ventures or the
Company. (FLS)
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 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 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)
RESULTS OF OPERATIONS
Four Months Ended December 31, 1996 Compared With Four Months Ended December 31,
1995
The Company recorded an operating loss of $2,983,367 during the four month
period ended December 31, 1996 compared with $1,470,152 for the same period last
year. The increased loss resulted from an increase in approximately $1,355,000
of equity loss from investments in unconsolidated subsidiaries primarily
associated with
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the activities of the oil and gas ventures in Eastern Europe in which the
Company has interests.
General and administrative expenses for the four month period ended
December 31, 1996 amounted to $1,281,821 reflecting a modest decrease from the
$1,303,048 for the comparable period last year. For the 1995 period, general and
administrative costs included a substantial charge for external services for
public relations activities of a non-recurring nature. The decrease in 1996 for
such 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) General and administrative expense is net of
$1,220,000 and $320,000 capitalized in 1996 and 1995, respectively.
Interest income increased to $423,681 for the four month period ended
December 31, 1996 from $54,992 in the comparable period for the prior year due
to higher average cash investments. Interest expense increased to $12,744 for
the four month period ended December 31, 1996 from $3,006 in the comparable
period for the prior year due to the amortization of financing costs and
interest related to the 8% Convertible Subordinated Debentures and financing of
insurance premiums.
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards 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 than the
intrinsic-value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25. See Notes 1 and 18 of Notes to Consolidated Financial Statements for
information regarding the Company's stock-based compensation plans. In February
1997, the FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128") and Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure ("SFAS 129"). SFAS
128 specifies the computation of earnings per share, and SFAS 129 specifies the
presentation and disclosure requirements about an entity's capital structure.
Both SFAS 128 and SFAS 129 shall be adopted in the fourth quarter of 1997 with
restatement back to January 1, 1997. The initial adoption of SFAS 128 is
not expected to have a material effect on the Company's earnings per share as
disclosed.
Twelve Months Ended August 31, 1996 Compared With Twelve Months Ended August 31,
1995
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 assurance can be given that such investment will result in
income from operations or that the Company will successfully 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 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
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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 $1,016,465 for the year ended August
31, 1996 from $28,475 in the prior year due to the amortization of financing
costs, discount and interest related to the 8% Convertible Subordinated
Debentures.
Twelve Months Ended August 31, 1995 Compared With Ten Months Ended August 31,
1994
In September 1994, the Company's Board of Directors approved a change in
the Company's fiscal year end from October 31 to August 31. Comparisons made
are for a twelve-month period for the fiscal year ended August 31, 1995 and a
ten-month period for the fiscal year ended August 31, 1994.
The Company recorded operating revenue of $625,457 during the year ended
August 31, 1995. For the ten month period ended August 31, 1994, operating
revenues amounted to $3,613. All revenue relates to sales and rentals of and
services related to electrically enhanced oil recovery equipment.
The operating loss for the year ended August 31, 1995 amounted to
$7,882,920. For the ten months ended August 31, 1994, the operating loss was
$1,466,345.
General and administrative expense for fiscal 1995 amounted to $4,012,510
compared to $372,777 for the ten months ended August 31, 1994. This increase
reflects the build-up of an organization and infrastructure for the Company's
oil and gas activities. Included in fiscal 1995 general and administrative
expense is $1,843,397 related to external services. Approximately 62% of
fiscal 1995 expense for external services represents fees for financial public
relations activities which to a large extent are of a non-recurring nature and
which have been paid primarily by the issuance of Common Stock.
Of the total depreciation and amortization costs of $1,156,772 reported
for the year ended August 31, 1995, $892,411 represents amortization of
intangible assets. The intangible assets consisted of patent rights for the
Company's electrically enhanced oil recovery technology which would have had a
net value of $1,866,600 at August 31, 1995. Due to the termination of a pilot
project conducted in Canada during fiscal 1994 and 1995 and the lack of new
contracts associated with the EEOR Process during fiscal 1995, the Company
determined that the recoverability of the carrying value of the patent rights
was uncertain and accordingly recognized a $1,866,600 impairment of the
intangible assets associated with the EEOR Process. The Company intends to
continue its
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efforts to commercialize the EEOR Process. Depreciation and amortization expense
for the ten months ended August 31, 1994 was $868,423 which principally
represents amortization of intangible assets.
The Company also recorded a 1995 year-end charge to income of $608,181
based on impairment of assets related to the first well drilled in the
Rocksprings, West Texas project and the dry hole drilled in Evangeline Parish,
Louisiana. At August 31, 1995, the Company had not established that the first
Rocksprings well would be productive, after attempts to achieve sustained
production from the Holman sands were unsuccessful
At the end of fiscal 1995, the Company also made a charge to impairment of
assets of $175,450 related to existing heating equipment which became obsolete
because of the Company's recent technical advances. In addition, the Company
recorded a 1995 year-end charge to income of $57,602 based on impairment of
assets related to the write down of inventory to its estimated net realizable
value.
As of August 31, 1995, the Company had capitalized $1,909,890 related to
oil and gas projects. Of the capitalized amount, $1,358,205 relates to projects
in Eastern Europe and $551,685 to oil and gas properties in the United States.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 7 and elsewhere in
this Form 10-K 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
23
<PAGE>
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.
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be filed in this Report begin at Page
F-1 of this Report.
ITEM 9. 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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As permitted by General Instruction G, the information called for by this
item with respect to the Company's directors and with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after the end of the last
fiscal year. Information with respect to the Company's executive officers is set
forth in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
As permitted by General Instruction G, the information called for by this
item is incorporated by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A within 120 days after the end of the last
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As permitted by General Instruction G, the information called for by this
item is incorporated by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A within 120 days after the end of the last
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As permitted by General Instruction G, the information called for by this
item is incorporated by reference from the Company's definitive proxy statement
to be filed pursuant to Regulation 14A within 120 days after the end of the last
fiscal year.
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PART IV
ITEM 14. 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
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).
*10(7) Employment Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated
herein by reference from August 31, 1995 Form
10-KSB).
26
<PAGE>
*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(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(19) Fee Agreement dated November 15, 1995 between
Fountain Oil Incorporated and Robert A. Halpin
(Incorporated herein by reference from August 31,
1996 Form 10-KSB).
*10(20) Fee Agreement between Fountain Oil Incorporated
and Eugene J. Meyers (Incorporated herein by
reference from August 31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10, 1996
between Fountain Oil Incorporated and Robert A.
Halpin.
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.
27
<PAGE>
(B) REPORTS ON FORM 8-K:
During the four month period ended December 31, 1996, the Company filed
the following current reports on Form 8-K:
1. Form 8-K dated September 17, 1996 reporting Item 8. Change in Fiscal Year,
regarding a change in fiscal year to December 31.
2. Form 8-K dated October 2, 1996 reporting Item 5. Other Events, regarding the
sale of securities pursuant to exercise of outstanding warrants.
3. Form 8-K dated November 27, 1996, reporting Item 9. Issuance of Securities
Pursuant to Regulations S, regarding the sale of securities pursuant to
exercise of outstanding warrants.
4. Form 8-K dated December 31, 1996, reporting Item 5. Other Events, regarding
the sale of securities pursuant to exercise of outstanding warrants.
5. Form 8-K/A dated December 13, 1996, amending Form 8-K dated December 31,
1996, reporting Item 9. Issuance of Securities Pursuant to Regulation S,
filed to conform with new reporting requirements.
28
<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/Nils N. Trulsvik Date: March 24, 1997
--------------------------------------------
Nils N. Trulsvik, 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/Nils N. Trulsvik Date: March 24, 1997
--------------------------------------------
Nils N. Trulsvik, Director, President and
Chief Executive Officer
By: /s/Arnfin Haavik Date: March 24, 1997
--------------------------------------------
Arnfin Haavik, Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Darrell M. Keller Date: March 24, 1997
--------------------------------------------
Darrell M. Keller, Principal Financial and
Accounting Officer
By: /s/Oistein Nyberg Date: March 24, 1997
--------------------------------------------
Oistein Nyberg
Chairman of the Board
By: /s/Robert A. Halpin Date: March 24, 1997
--------------------------------------------
Robert A. Halpin
Vice Chairman of the Board of Directors
By: -------------------------------------------- Date: March 24, 1997
Einar H. Bandlien, Director
By: /s/Stanley D. Heckman Date: March 24, 1997
--------------------------------------------
Stanley D. Heckman, Director
By: /s/Eugene J. Meyers Date: March 24, 1997
--------------------------------------------
Eugene J. Meyers, Director
29
<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 December 31, 1996,
August 31, 1996 and August 31, 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for the four month period ended
December 31, 1996, the years ended August 31, 1996 and 1995 and the ten month
period ended August 31, 1994. 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 December 31, 1996, August 31, 1996 and August 31, 1995 and the
consolidated results of their operations and their cash flows for the four month
period ended December 31, 1996, the years ended August 31, 1996 and 1995 and the
ten month period ended August 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
consolidated statement of operations for the year ended August 31, 1996 has
been restated.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 6 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 6 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
March 28, 1997
F-1
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED BALANCE SHEET
As of December 31, 1996, August 31, 1996 and August 31, 1995
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 31,424,064 $ 17,329,237 $ 4,791,645
Accounts receivable, net 849 851 44,020
Accounts receivable - affiliated entities 259,040 7,210 ---
Other current assets 621,562 648,256 454,936
------------- ------------- ------------
Total current assets 32,305,515 17,985,554 5,290,601
Restricted cash 5,400,000 --- ---
Notes receivable 190,186 190,186 2,980,000
Property and equipment, net 7,766,479 6,577,565 529,831
Oil and gas properties, net, full cost method
(including unevaluated amounts of $257,407,
$257,407 & $357,533, respectively) 259,338 287,788 551,685
Investments in and advances to oil and gas
ventures - net 8,567,563 6,876,327 1,358,205
Other assets 885,980 171,121 ---
------------- ------------- -------------
TOTAL ASSETS $ 55,375,061 $ 32,088,541 $ 10,710,322
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 799,985 $ 731,532 $ 666,903
Accrued liabilities 1,124,425 297,513 414,279
Notes payable --- 31,156 21,250
------------- ------------- -------------
Total current liabilities 1,924,410 1,060,201 1,102,432
Minority interest in subsidiaries 205,380 223,350 ---
8% Convertible subordinated debentures --- 300,000 ---
Commitments and contingencies (Note 11) --- --- ---
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:
22,168,489, 17,376,610, and
10,834,063 shares issued
and outstanding respectively 2,216,849 1,737,661 1,083,406
Capital in excess of par value 80,055,620 55,985,572 29,249,175
Accumulated deficit (29,027,198) (27,218,243) (20,724,691)
------------- ------------- -------------
Total stockholders' equity 53,245,271 30,504,990 9,607,890
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,375,061 $ 32,088,541 $ 10,710,322
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Unaudited
Operating Revenues:
Power unit rentals $ --- $ 1,908
Oil and gas sales 16,980 6,440
----------- -----------
TOTAL REVENUES 16,980 8,348
----------- -----------
Operating expenses:
Cost of sales 4,052 4,581
Lease operating expenses 1,550 2,536
Direct project costs 314,100 120,268
General and administrative 1,281,821 1,303,048
Depreciation and amortization 39,578 43,643
Loss from investments in
unconsolidated subsidiaries 1,359,246 4,424
----------- -----------
TOTAL OPERATING EXPENSES 3,000,347 1,478,500
----------- -----------
OPERATING LOSS (2,983,367) (1,470,152)
----------- -----------
Other (expense) income:
Interest income 423,681 54,992
Interest expense (12,744) (3,006)
Other (49,995) (24,016)
----------- -----------
TOTAL OTHER (EXPENSE) INCOME 360,942 27,970
----------- -----------
Minority interest in loss of
consolidated subsidiary 17,970 ---
----------- -----------
Net loss before income tax provision (2,604,455) (1,442,182)
Income tax expense --- ---
----------- -----------
NET LOSS $(2,604,455) $(1,442,182)
----------- -----------
NET LOSS PER COMMON SHARE $ (.14) $ (.13)
----------- -----------
Weighted average number of common
shares outstanding 18,696,212 10,834,063
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended August 31, 1996 and 1995
and the Ten Month Period Ended August 31, 1994
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Months
August 31, August 31, Ended
1996 1995 August 31, 1994
-------------- ------------- ----------------
(RESTATED)
<S> <C> <C> <C>
Operating Revenues:
Power unit rentals $ 1,894 $ 50,504 $ 200
Equipment sales --- 464,044 3,413
Consulting income 6,721 110,909 ---
Oil and gas sales 26,562 --- ---
----------- ----------- -----------
TOTAL REVENUES 35,177 625,457 3,613
----------- ----------- -----------
Operating expenses:
Cost of sales 31,991 479,224 1,200
Lease operating expenses 10,988 --- ---
Direct project costs 1,267,555 --- ---
General and administrative 3,853,972 4,012,510 372,777
Depreciation and amortization 77,253 1,156,772 868,423
Loss from investments in
unconsolidated subsidiaries 13,272 --- ---
Impairment of oil & gas properties 419,835 608,181 ---
Employee stock compensation --- 152,038 150,000
Impairment of inventory --- 57,602 77,558
Impairment of property and equipment --- 175,450 ---
Impairment of intangibles --- 1,866,600 ---
----------- ----------- -----------
TOTAL OPERATING EXPENSES 5,674,866 8,508,377 1,469,958
----------- ----------- -----------
OPERATING LOSS (5,639,689) (7,882,920) (1,466,345)
----------- ----------- -----------
Other (expense) income:
Interest income 332,071 251,276 1,543
Interest expense (1,016,465) (28,475) (46,850)
Other 12,551 89,108 (7,348)
Loss on disposition of equipment/assets (182,020) --- (313,502)
----------- ----------- -----------
TOTAL OTHER (EXPENSE) INCOME (853,863) 311,909 (366,157)
----------- ----------- -----------
Net loss before income tax provision (6,493,552) (7,571,011) (1,832,502)
Income tax expense --- (28,600) ---
----------- ----------- -----------
NET LOSS $(6,493,552) $(7,599,611) $(1,832,502)
----------- ----------- -----------
NET LOSS PER COMMON SHARE $ (.52) $(.91) $(.45)
----------- ----------- -----------
Weighted average number of common
shares outstanding 12,495,137 8,341,783 4,108,200
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period October 31, 1993 through December 31, 1996
<TABLE>
<CAPTION>
Common Stock
--------------------------
Number of Additional Total
Shares Paid-In Accumulated Stockholders'
Issued Par Value Capital Deficit Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31,
1993 3,638,276 $ 363,828 $14,630,884 $(11,287,545) $ 3,707,167
Purchase of
treasury stock (63,901) (6,390) 2,795 --- (3,595)
Contribution of
treasury stock (421,906) (42,191) 42,191 --- ---
Sale of common stock
and treasury stock,
net of expenses of
offering of $262,413 2,472,952 247,295 1,749,961 --- 1,997,256
Issuance of common
stock as employee
compensation and
for settlement of
obligations 348,889 34,889 282,611 --- 317,500
Other --- --- --- (5,033) (5,033)
Net loss --- --- --- (1,832,502) (1,832,502)
---------- ---------- ----------- ------------- -----------
BALANCE, AUGUST 31,
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
</TABLE>
Continued
F-5
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period October 31, 1993 through December 31, 1996
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number of Additional Total
Shares Paid-In Accumulated Stockholders'
Issued Par Value Capital Deficit Equity
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 3,834,605 --- 3,934,338
Issuance of common
stock upon exercise
of warrants and options 95,223 9,522 133,313 --- 142,835
Net loss --- --- --- (6,493,552) (6,493,552)
---------- ---------- ----------- ------------- -----------
BALANCE, AUGUST 31
1996 17,376,610 $1,737,661 $55,985,572 $(27,218,243) $30,504,990
========== ========== =========== ============= ===========
Issuance of common
stock upon conversion
of debentures 59,125 5,913 274,481 --- 280,394
Issuance of common
stock upon exercise of
warrants and options 4,732,754 473,275 24,591,067 --- 25,064,342
Net loss --- --- --- (2,604,455) (2,604,455)
---------- ---------- ----------- ------------- -----------
BALANCE, DECEMBER 31
1996 22,168,489 $2,216,849 $80,851,120 $(29,822,698) $53,245,271
========== ========== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
Unaudited
<S> <C> <C>
Operating activities:
Net loss $(2,604,455) $(1,442,182)
Depreciation and amortization 39,578 43,643
Amortization of debt issuance costs 1,375 ---
Loss in investments in unconsolidated
subsidiaries 1,359,246 4,424
Minority interest in loss of
unconsolidated subsidiary (17,970) ---
Changes in assets and liabilities:
Accounts receivable (251,828) (114,236)
Other assets 26,687 88,344
Accounts payable 68,453 (305,580)
Accrued liabilities 149,069 (242,037)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,229,845) (1,967,624)
----------- -----------
Investing activities:
Restricted cash (5,400,000) ---
Investments in oil and gas properties 28,450 55,151
Investments in and advances to oil and
gas ventures (3,108,472) (1,369,767)
Capital expenditures (1,228,492) (801,961)
Proceeds from disposition of assets --- (73,900)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (9,708,514) (2,190,477)
----------- -----------
Financing activities:
Proceeds from exercise of warrants and
options 25,064,342 ---
Proceeds from issuance of short-term
borrowings --- 122,153
Principal payments on short-term
borrowings (31,156) (25,108)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 25,033,186 97,045
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 14,094,827 (4,061,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 17,329,237 4,791,645
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $31,424,064 $ 730,589
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended August 31, 1996 and 1995
and the Ten Month Period Ended August 31, 1994
<TABLE>
<CAPTION>
Year Ended Year Ended Ten Months
August 31, August 31, Ended
1996 1995 August 31, 1994
-------------- ------------- ----------------
<S> <C> <C> <C>
Operating activities:
Net loss $(6,493,552) $(7,599,611) $(1,832,502)
Depreciation and amortization 77,253 1,156,772 868,423
Amortization of debt issuance costs
and discount 866,666 --- ---
Gain on settlement of liabilities --- (58,230) ---
Loss on disposition of equipment/assets 182,020 --- 313,502
Loss in investments in unconsolidated
subsidiaries 13,272 --- ---
Impairment of inventory --- 57,602 77,558
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
& expenses --- 1,482,664 167,500
Other --- --- 4,064
Changes in assets and liabilities:
Accounts receivable 53,905 65,977 (108,340)
Other assets (211,222) (325,289) (85,585)
Accounts payable 62,638 394,784 83,501
Accrued liabilities (116,766) 217,022 8,635
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,145,951) (1,958,078) (503,244)
----------- ----------- -----------
Investing activities:
Investments in oil and gas properties (155,938) (2,458,596) ---
Investments in and advances to oil and
gas ventures (2,644,837) --- ---
Capital expenditures (3,728,770) (404,822) (15,432)
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) (15,432)
----------- ----------- -----------
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 1,997,256
Proceeds from issuance of short-term
borrowings 4,848,476 47,813 200,000
Principal payments on short-term
borrowings (5,054,114) (271,563) (195,000)
Purchase of treasury stock --- --- (3,595)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 24,244,274 11,073,080 1,998,661
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 12,537,592 3,271,584 1,479,985
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 4,791,645 1,520,061 40,076
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $17,329,237 $ 4,791,645 $ 1,520,061
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<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")
involve the acquisition of interests in and development of oil and gas
fields with a production history 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 acquired less than majority
interests in entities developing or seeking to develop oil and gas
properties in Eastern Europe including the Russian Federation. Following
clarification of financial and other characteristics of these entities,
some or all of them may be accounted for as unconsolidated subsidiaries.
The Company has elected to change its fiscal year from August 31 to
December 31, 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. Accordingly, the accompanying consolidated financial
statements include information for the four month transition period ended
December 31, 1996. The comparable statements of operations and cash flows
for the four month period ended December 31, 1995 and all related footnote
disclosures are unaudited. Such unaudited information includes all
adjustments necessary for a fair statement of the results of operations and
cash flows. Results for the four month period may not be indicative of
results for the full year.
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 Company's
investments in certain oil and gas ventures are proportionately
consolidated. Investments in less than majority-owned corporations and
corporate-like entities 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 of the date of the
quasi-reorganization, the accumulated deficit of $39,952,292 was eliminated
against capital in excess of par value.
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.
F-9
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATION - Certain items in the consolidated financial statements
have been reclassified to conform to the current year presentation. There
was no effect on net loss as a result of these reclassifications.
CASH AND CASH EQUIVALENTS - The Company considers unrestricted short-term,
highly liquid investments with maturities of three months or less at the
time of purchase to be cash equivalents.
INVESTMENTS - The Company's investments in cash equivalents are classified
as held to maturity and are carried at amortized cost which approximates
fair value due to their short-term nature.
INVENTORY - Inventory consists primarily of pipe, coating materials and
other supplies used in the application of patented electrically enhanced
oil recovery ("EEOR") technology, stated at the lower of cost or market
using the average cost method, and is included 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 using 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
operations. Nonmonetary assets are translated at historical exchange
rates. Revenue and expense items
F-10
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 amounts recorded in operations
for the four month periods ended December 31, 1996 and 1995, the years
ended August 31, 1996 and 1995, and the ten month period ended August 31,
1994 were not material.
INCOME TAXES - The Company follows the provisions of Statement of Financial
Accounting Standards 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
statements 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 years in which the differences are expected to reverse.
Valuation allowances are established, when appropriate, 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 ("FASB") issued Statement of Financial Accounting Standards
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 the
fiscal year ended August 31, 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 assets, for impairment in accordance with SFAS 121. Prior
to the adoption of SFAS 121, 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.
STOCK-BASED COMPENSATION PLANS - In October 1995, the FASB issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") 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 than the intrinsic-
value method prescribed by Accounting Principles Board Opinion No. 25 ("APB
Opinion 25"). The Company has adopted only the disclosure requirements of
SFAS 123 and has elected to continue to record stock-based compensation
expense using the intrinsic-value approach prescribed by APB Opinion 25.
Accordingly, the Company computes compensation cost for each employee stock
option granted as the amount by which the quoted market price of the
Company's Common Stock on the date of grant exceeds the amount the employee
must pay to acquire the stock. The amount of compensation costs, if any,
is charged to operations over the vesting period.
RECENTLY ISSUED PRONOUNCEMENTS - In February 1997, the FASB issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS 129"). SFAS 128
specifies the computation of earnings per share, and SFAS 129 specifies the
presentation and disclosure requirements about an entity's capital
structure. Both SFAS 128 and SFAS 129 shall be adopted in the fourth
quarter of 1997 with restatement back to January 1, 1997. The initial
adoption of
F-11
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these standards are not expected to have a material effect on the Company's
earnings per share as disclosed.
3. RESTRICTED CASH
The Company has 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. ("Kashtan"), the entity operating the
Lelyaky Field, Ukraine, in which the Company has an effective 40.5%
ownership. This credit facility is to be utilized by Kashtan to pay its
operating costs, including repayment of costs advanced by the Company on
behalf of Kashtan and originally recorded by the Company as receivables
from Kashtan. The Company has also pledged an additional $1,000,000 to
collateralize another bank letter of credit to guarantee obligations of
certain oil and gas ventures in which the Company has an interest. In
January 1997, the Company pledged an additional $1,000,000 to collateralize
another bank letter of credit to guarantee obligations of certain oil and
gas ventures in which the Company has an interest, increasing the
restricted cash to $6,400,000.
4. ACCOUNTS RECEIVABLE - AFFILIATED ENTITIES
Of the $259,040 recorded as accounts receivable - affiliated entities
at December 31, 1996, approximately $223,000 represented project expenses
paid by the Company on behalf of, and to be reimbursed by, Kashtan.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment and the related accumulated depreciation at December
31, 1996 included the following:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
-----------------------------------------
<S> <C> <C> <C>
EEOR equipment $ 504,085 $(273,673) $ 230,412
EEOR construction-in-progress 60,764 --- 60,764
Oil & gas related equipment 6,956,709 --- 6,956,709
Office furniture, fixtures and
equipment and other 850,031 (331,437) 518,594
---------- --------- ----------
PROPERTY AND EQUIPMENT, NET $8,371,589 $(605,110) $7,766,479
========== ========= ==========
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
========== ========= ==========
</TABLE>
F-12
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment and the related accumulated depreciation at
August 31, 1995 included the following:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---------------------------------------
<S> <C> <C> <C>
EEOR equipment $ 426,030 $(322,010) $104,020
EEOR construction-in-progress 125,794 --- 125,794
Oil & gas related equipment --- --- ---
Office furniture, fixtures and
equipment and other 511,376 (211,359) 300,017
---------- --------- --------
PROPERTY AND EQUIPMENT, NET $1,063,200 $(533,369) $529,831
========== ========= ========
</TABLE>
Oil and gas related equipment represents new or refurbished drilling
rigs and related equipment which the Company expects to transfer to
Intergas JSC ("Intergas"), an entity in which the Company holds a 37%
interest, to use in the Maykop Field, Republic of Adygea, Russian
Federation. Such equipment has not yet been placed in service and
therefore is not being depreciated. Upon the Company's transfer of the
equipment to Intergas, the equipment will be reclassified as investments in
and advances to oil and gas ventures and will have no effect on the
Company's statement of operations.
6. OIL AND GAS PROPERTIES AND INVESTMENTS
The Company has acquired interests in oil and gas properties through joint
ventures, partially owned corporate and other partially owned entities, and
joint operating arrangements. A summary of the Company's oil and gas
interests as of December 31, 1996, August 31, 1996 and August 31, 1995 are
set out below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OIL AND GAS PROPERTIES 12/31/96 8/31/96 8/31/95
- -------------------------------------------------------------------------------
United States and Canada
Proved properties $ 1,029,947 $ 1,058,397 $ 802,333
Unproved properties 257,407 257,407 357,533
Less: accumulated depreciation,
depletion, amortization and
impairment (1,028,016) (1,028,016) (608,181)
----------- ----------- ---------
TOTAL OIL AND GAS PROPERTIES, NET $ 259,338 $ 287,788 $ 551,685
=========== =========== =========
</TABLE>
During the fiscal years ended August 31, 1996 and August 31, 1995, the
Company recognized an impairment of $419,835 and $608,181, respectively, on
its oil and gas properties as a result of applying the full cost ceiling
limitation. For the fiscal year ended August 31, 1996, the impairment
related to the Rocksprings Field and the West Mexia projects in the United
States. For the fiscal year ended August 31, 1995, the impairment related
to the Rocksprings Field and Evangeline Parish projects in the United
States. No impairment of oil and gas properties was recognized during the
four month period ended December 31, 1996. Unevaluated properties and
associated costs not currently being amortized and included in oil and gas
properties in the United States and Canada at December 31, 1996, August 31,
1996 and August 31, 1995 were $257,407, $257,407 and $357,533 respectively,
substantially all of which relate 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
F-13
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
second quarter of 1997. The Company believes that these unevaluated
properties will be substantially evaluated, and either depletion will
commence or the properties will be impaired at that time.
<TABLE>
<S> <C> <C> <C>
INVESTMENTS IN AND ADVANCES TO OIL AND 12/31/96 8/31/96 8/31/95
GAS VENTURES
- ----------------------------------------------------------------------------------
Ukraine - Lelyaky Field, Pryluki Region
through an effective 40.5%
ownership of Kashtan $ 2,398,566 $2,163,564 $ 44,515
Petroleum Ltd.
Adygea, Russian Federation - Maykop
Field through 37% ownership in
Intergas JSC 4,439,213 2,780,263 174,564
Canada - Inverness Unit
through 50% ownership in Focan Ltd. 106,646 106,646 ---
Albania - Gorisht-Kocul Field
through 50% ownership of the joint
venture 1,326,581 517,885 196,944
Ukraine - Stynawske Field, Boryslaw
through 45% ownership of Boryslaw
Oil Company 1,655,803 1,321,241 942,182
----------- ---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $ 9,926,809 $6,889,599 $1,358,205
=========== ========== ==========
EQUITY IN PROFIT (LOSS) OF OIL AND GAS
VENTURES 12 /31/96 8/31/96 8/31/95
- ----------------------------------------------------------------------------------
Ukraine - Lelyaky Field, Pryluki Region $ (355,684) $ --- $ ---
Adygea, Russian Federation - Maykop
Field (601,366) --- ---
Canada - Inverness Unit (2,407) (13,272) ---
Albania - Gorisht-Kocul Field (399,789) --- ---
Ukraine - Stynawske Field, Boryslaw --- --- ---
----------- ---------- ----------
TOTAL EQUITY IN PROFIT (LOSS) OF OIL
AND GAS VENTURES $(1,359,246) $ (13,272) $ ---
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES, NET OF EQUITY LOSS $ 8,567,563 $6,876,327 $1,358,205
=========== ========== ==========
</TABLE>
The Company has made advances to its various, oil and gas ventures
totaling $2,424,891 at December 31, 1996. Such advances which are
classified as investments in and advances to oil and gas ventures, are only
recoverable from future revenue of the ventures.
The Company's interest in Focan Ltd. is accounted for using the equity
method. Pending clarification of financial and other characteristics of
the entities through which the Lelyaky, Maykop, Gorisht-Kocul and Stynawske
field ventures will operate, such ventures are being accounted for using
the equity method rather than proportionate consolidation.
The cost of investments in the Lelyaky Field, the Maykop Field and the
Stynawske Field ventures as of December 31, 1996 include $684,375,
$1,668,750 and $176,250, respectively, representing the market value of
shares issued in connection with the acquisition of interests in Kashtan
Petroleum Ltd., Intergas JSC and Boryslaw Oil Company.
None of the Company's oil and gas interests outside of the United States
and Canada held by the above entities are being amortized, pending
evaluation. At December 31, 1996, there were no material operations or
assets (other than unevaluated properties) of entities being accounted for
using the equity method. Accordingly, no separate financial information
has been presented.
The development of the oil and gas properties owned through investments in
oil and gas ventures involves a multi-year effort. The Company had working
capital of $30,381,105 at December 31, 1996 and at that date had an
additional $5,400,000 of restricted cash that was pledged to collateralize
developmental expenditures by various oil and gas ventures. While the
Company believes that it has the resources to fund all planned development
of these properties through the end of 1997, continued development beyond
1997 assumes the availability of substantial additional funds from external
sources. Less than projected funding from external sources and cash flows
from production will result in a slower phasing of the development of some
of the properties and ventures, reducing the early investment requirements
but delaying the anticipated production build-up.
F-14
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has an
interest. The Company's management believes that it will be able to access
external sources of funds to finance the net development costs of such
properties and ventures through a combination of debt financing by the
Company or the joint ventures or other entities that are developing the oil
and gas 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 or any such
entity will be able to arrange financing or that the financing necessary to
develop the projects being undertaken 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 entities or are deemed to be in the best interests of the Company
and its stockholders or the participants, including the Company, in such
entities.
As of December 31 and August 31, 1996 and August 31, 1995, the Company had
net investments in oil and gas properties and ventures totaling
approximately $8,827,000, $7,164,000 and $1,910,000, respectively. Of these
amounts, approximately $8,463,000, $6,783,000 and $1,358,000, respectively,
relate to the ventures in Eastern Europe. Ultimate realization of the cost
of the Company's oil and gas properties and ventures will require
production of oil and gas in sufficient quantities and marketing such oil
and gas at sufficient prices to provide positive cash flow to the Company,
which 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 the oil and gas produced at or
near world prices. The Company has plans for each of its Eastern European
ventures 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, these plans may not be realized, and the
Company may not recover its costs. The Company will be entitled to
distributions from the various ventures in accordance with the arrangements
governing the respective ventures. In addition, the Company must mobilize
drilling equipment and personnel to initiate drilling, completion and
production activities. The Company delayed shipping its drilling equipment
into the Russian Federation in connection with its arrangements for the
Maykop field as a result of a failure by Intergas to complete some
corporate formalities, and the Company in March 1997 declared a force
majeure and suspended operations in the Gorisht-Kocul field in Albania as a
result of political unrest in that country. These factors are beyond the
Company's control but could have a material impact on the timing of future
cash flows or the Company's ability to recover some or all of its
investments in those projects.
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
properties and ventures or other adjustments that would be necessary if
financing cannot be arranged for the development of such properties and
ventures or if they 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 properties and ventures to achieve
profitability would have a material adverse effect on the financial
position, including realization of assets, results of operations, cash
flows and prospects of the Company and ultimately its ability to continue
as a going concern.
7. NOTES RECEIVABLE
The Company's notes receivable at December 31, 1996, and August 31, 1996
consisted of the following:
Notes receivable of $190,186 due from the entity from which the Company
acquired an interest in Kashtan in April 1996.
The Company's notes receivable at August 31, 1995 consisted of the
following:
A $2,450,000 note receivable due from Gastron International Limited, which
the Company at August 31, 1995 was proposing to acquire, that was applied
in October 1995 against the purchase price of that company.
F-15
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes receivable of $530,000 due from the entity from which the Company at
August 31, 1995 was proposing to acquire an effective 36% interest in the
Lelyaky field venture, $450,000 of which was applied in April 1996 against
the purchase price of that interest.
8. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996, August 31, 1996 and August 31,
1995 included the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12/31/96 8/31/96 8/31/95
-----------------------------------
Compensation, including related taxes $ 225,409 $209,283 $213,885
Professional fees 104,150 --- 53,324
Rig transportation charges 677,843 --- ---
Other 117,023 88,230 147,070
---------- -------- --------
$1,124,425 $297,513 $414,279
========== ======== ========
</TABLE>
9. NOTES PAYABLE
There were no notes payable outstanding as of December 31, 1996. Notes
payable as of August 31, 1996 consisted of the following:
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 of this note at August 31, 1996 was $21,250, which approximated the
fair value of the debt at that date.
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 of this note at August 31, 1996 was $9,906, which
approximated the fair value of the debt at that date.
Notes payable as of August 31, 1995 consisted of the following:
1) $47,813 note payable to an insurance company dated March 3, 1995 with
interest at 7.25% payable monthly, due December 4, 1995. The outstanding
balance of this note at August 31, 1994 was $21,250, which approximated the
fair value of the debt at that date.
10. 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 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. A
maximum of 309,500 shares of the Company's Common Stock was 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. During the four months ended December
31, 1996, the remaining $300,000 principal amount of Debentures was
converted into 59,125 shares of Common Stock.
In accordance with Securities and Exchange Commission guidance published
in early 1997, the August 31, 1996 consolidated statement of operations was
restated to reflect a $795,500 charge related to the discount feature of
the Debentures. The discount was amortized from the date of issuance to the
earliest conversion dates.
F-16
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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 December 31, 1996,
the Company had unconditional obligations regarding the acquisition and
development of its oil and gas properties and ventures amounting to
$5,500,000, of which $4,000,000 is being satisfied through the
collateralization of a letter of credit guaranteeing a Kashtan line of
credit (see Note 3 of Notes to Consolidated Financial Statements), as well
as the unconditional obligation to issue 425,000 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 $1,300,000, as well as the contingent obligation to issue an
aggregate of 1,825,000 shares of its Common Stock. The contingent
obligations are subject to the satisfaction of various conditions related
to, among other things, the achievement of specified project performance
standards. Subsequent to December 31, 1996, the Company issued 175,000
shares of its Common Stock and paid $500,000, satisfying unconditional
obligations which were outstanding at December 31, 1996.
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 the four months ended December 31, 1996, the fiscal years ended
August 31, 1996 and 1995, and the ten month period ended August 31, 1994
was $87,872, $186,444, $119,133 and $9,285, respectively.
Future minimum rental payments for the Company's lease obligations as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
12/31/96
----------
1997 $ 406,784
1998 360,662
1999 277,409
2000 253,820
2001 250,586
Later years 569,895
----------
$2,119,156
==========
</TABLE>
12. CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
cash equivalents and advances to oil and gas ventures (see Note 6). The
Company has temporary cash on deposit at major financial institutions, some
of which are in excess of government insured limits. At December 31, 1996
and August 31, 1996 and 1995, the company had approximately $27,000,000,
$14,000,000 and $2,000,000 on deposit in four, two and one such
institutions, respectively.
F-17
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 per share remained
unchanged. As of December 31, 1996, 22,168,489 shares of Common Stock were
issued and outstanding. No shares of preferred stock have been issued.
During the ten-month period ended August 31, 1994, the years ended August
31, 1995 and 1996, and the four-month period ended December 31, 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.
TEN MONTH PERIOD ENDED AUGUST 31, 1994
. The repurchase of 63,901 shares at a price of $0.0625 per share by the
Company from certain shareholders.
. The return to the Company without consideration of 421,906 shares by
certain shareholders.
. The following are included in sales of common stock:
.. The issuance of 66,000 shares at an effective price of $0.25 per
share to an investor.
.. The issuance of 700,000 shares at a price of $0.3575 per share to
investors, 485,807 of which shares were from treasury stock.
.. The issuance of 3,685 shares at a price of $0.4375 per share in a
warrant exercise.
.. The issuance of 30,822 shares at a price of $0.25 per share in a
warrant exercise.
.. The issuance to investors of 1,644,000 shares and warrants
exercisable at $1.50 per share to purchase 822,000 shares for
aggregate proceeds of $1,619,087 net of $230,413 of related
offering costs.
.. The issuance of 28,444 shares and warrants exercisable at $1.50
per share to purchase 14,223 shares for legal services related to
equity financing efforts in the amount of $32,000.
.. The adjustment to capital in excess of par in the amount of
$102,351 related to cash received for stock sold at below par in
1993.
F-18
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. The issuance of 200,000 shares and warrants exercisable at $1.50
per share to purchase 100,000 shares upon conversion of notes payable
in an aggregate principal amount of $150,000.
. The issuance of 133,333 shares and warrants exercisable at $1.50 per
share to purchase 66,667 shares to an employee as compensation in the
amount of $150,000.
. The issuance of 15,556 shares and warrants exercisable at $1.50 per
share to purchase 7,778 shares in payment of legal services rendered
in the amount of $17,500.
. The issuance of warrants exercisable at $1.125 per share to purchase
200,000 shares to a firm for financial advisory and investment banking
services.
. The issuance of warrants exercisable at $1.75 per share to purchase an
aggregate of 28,572 shares to two shareholders in connection with
their lending the Company an aggregate of $50,000 represented by
convertible notes payable by the Company.
. The issuance of options exercisable at $1.50 per share to purchase
400,000 shares to various individuals who, at August 31, 1994, were
serving or were expected in the future to serve the Company as
officers, directors, employees, consultants and advisors.
FISCAL YEAR ENDED AUGUST 31, 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.
.. 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.
F-19
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
.. 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.
FISCAL YEAR ENDED AUGUST 31, 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 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:
F-20
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
.. The issuance of 997,324 shares in a series of conversions of an
aggregate of $3,450,000 principal amount of debentures
convertible at various 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 and $795,500 related to the discount feature of the
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
18 to Consolidated Financial Statements.
FOUR MONTH PERIOD ENDED DECEMBER 31, 1996
. The following are included in the issuance of Common Stock upon
conversion of debentures:
.. The issuance of 59,125 shares upon conversion of $300,000
principal amount of debentures convertible at 82 1/2% of market
price at the time of conversion.
.. The adjustment to capital in excess of par in the amount of
$19,599 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 12,000 shares at a price of $1.50 per share in a
series of option exercises.
.. The issuance of 486,668 shares at a price of $1.50 per share in a
series of warrant exercises.
.. The issuance of 14,286 shares at a price of $1.75 per share in a
warrant exercise.
.. The issuance of 1,139,800 shares at a price of $5.10 per share in
a series of warrant exercises.
.. The issuance of 3,080,000 shares at a price of $6.00 per share in
a series of warrant exercises.
F-21
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. The issuance of options exercisable at $7.25 per share to purchase
381,000 shares were granted to employees at December 31, 1996 pursuant
to the Company's 1995 Long-Term Incentive Plan. See Note 18 to
Consolidated Financial Statements.
. The issuance of options exercisable at $8.99 per share to purchase
445,000 shares were granted to employees at December 31, 1996 pursuant
to the Company's 1995 Long-Term Incentive Plan. See Note 18 to
Consolidated Financial Statements.
The following table summarizes outstanding warrants to purchase the
Company's Common Stock, all of which were exercisable:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
OUTSTANDING AT : WARRANTS PRICE DATE
- ----------------------------------------------------------------------
<S> <C> <C> <C>
OCTOBER 31, 1993 81,853 $ .25 - $75 7/11/94 to 8/1/95
Issued 1,239,240 $1.125 - $1.75 6/30/97 to 11/3/97
Exercised (34,507) $ .25 - $.4375 7/11/94 to 7/11/99
Expired (14,899) $ 5 - $75 7/11/94 to 8/1/94
Canceled (12,444) $ 5 - $75 7/11/94 to 8/1/94
----------
AUGUST 31, 1994 1,259,243 $ .25 - $1.75 8/1/95 to 11/3/97
==========
Issued 4,383,800 $ 5.10 - $6.00 2/28/97
Exercised (715,066) $ .25 - $1.75 8/1/95 to 11/3/97
----------
AUGUST 31, 1995 4,927,977 $ 1.50 - $6.00 2/28/97 to 11/3/97
==========
Exercised (43,223) $ 1.50 11/3/97
----------
AUGUST 31, 1996 4,884,754 $ 1.50 - $6.00 2/28/97 to 11/3/97
==========
Exercised (4,720,754) $ 1.50 - $6.00 2/28/97 to 11/3/97
Redeemed (164,000) $ 6.00 2/28/97 to 11/3/97
----------
DECEMBER 31, 1996 0
==========
</TABLE>
During the four month period ended December 31, 1996, an aggregate of
4,383,800 warrants were called for redemption by the Company. If the
average closing price of the Company's Common Stock exceeded $6.10 and
$7.00 per share for 10 consecutive trading days, upon election of the
Company and notice to the warrant holders the holders of 1,139,800 warrants
and 3,244,000 warrants, respectively, were required either to exercise
their warrants within a specified period or to have the warrants
redeemed by the Company for a nominal redemption price. All but 164,000 of
the 4,383,800 warrants called for redemption were exercised during the four
month period ended December 31, 1996; the 164,000 warrants were redeemed.
During the same period, an additional 500,954 warrants were also exercised
by their holders. As a result, there were no outstanding warrants at the
end of the period.
F-22
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NET LOSS PER COMMON SHARE
Net loss per common share for the four month periods ended December 31,
1996 and December 31, 1995 and 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
18,696,212 and 10,834,063, and 12,495,137 and 8,341,783, respectively.
15. INCOME TAXES
The Company and its domestic subsidiaries file U.S. consolidated
income tax returns. No benefit for U.S. income taxes has been recorded in
these consolidated financial statements because of the Company's inability
to recognize deferred tax assets under provisions of SFAS 109. 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 provision for income taxes for the
year ended August 31, 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:
<TABLE>
<CAPTION>
FOUR MONTH FOUR MONTH TEN MONTH
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1994
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax benefit at
statutory rate $(885,515) $(490,342) $ (2,207,808) $ (2,574,144) $ (623,051)
Benefit of losses not
recognized 876,629 490,342 2,197,879 2,566,836 617,709
Foreign tax provision --- --- --- 28,600 ---
Other, net 8,886 --- 9,929 7,308 5,342
--------- --------- ------------ ------------ ------------
Provision for
income taxes $ 0 $ 0 $ 0 $ 28,600 $ 0
--------- --------- ------------ ------------ ------------
Effective tax rate 0% 0% 0% 0.4% 0%
The components of the deferred tax assets as of December 31, 1996 and August 31, 1996 and 1995 were as follows:
DECEMBER 31, 1996 AUGUST 31, 1996 AUGUST 31, 1995
----------------------------------------------------------
Net operating loss carryforwards 9,520,000 8,906,000 7,276,823
Canadian net operating loss carryforwards 1,300,000 1,300,000 1,108,000
Patent rights and related equipment 975,803 1,282,072 1,588,341
Bad debt allowance 35,776 35,776 35,776
Foreign tax credits 28,600 28,600 28,600
------------ ------------ ------------
11,860,179 11,552,448 10,037,540
Valuation allowance (11,860,179) (11,552,448) (10,037,540)
------------ ------------ ------------
Net deferred tax asset recognized in balance sheet $ --- $ --- $ ---
------------ ------------ ------------
</TABLE>
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
F-23
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a cumulative basis. As a result, only
approximately $17,700,000 of the total U.S. net operating loss
carryforwards of the Company that occurred prior to the change in ownership
will be available for utilization. Approximately $10,300,000 of tax net
operating loss carryforwards was incurred subsequent to the 1994 ownership
change and therefore as of December 31, 1996 are not subject to the IRC
Section 382 limitation. The net operating loss carryforwards expire from
1997 to 2010.
In addition, there are $8,700,000 in federal net operating loss
carryforwards which expire from 1999 to 2003 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, prior to their expiration. 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 $72,812 which
begin to expire in 1997.
16. SEGMENTS
During the four months ended December 31, 1996 and the fiscal year ended
August 31, 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. Since oil and gas
exploration and production activities were at a preliminary stage, revenues
for the periods ended August 31 and December 31, 1996 were minimal. For
the fiscal year ended August 31, 1995 and for the ten month period
ended August 31, 1994, EEOR activities were reported as a separate business
segment. For the fiscal year ended August 31, 1995 EEOR revenues related
to contracts with one customer in Canada and China.
Operating Revenue for the four month period ended December 31, 1996, the
fiscal years ended August 31, 1996 and 1995 and the ten month period ended
August 31, 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
12/31/96 8/31/96 8/31/95 8/31/94
------------------------------------------
OIL & GAS ACQUISITION & DEVELOPMENT
United States $ --- $ 2,624 $ --- $ ---
Canada 16,980 23,938 --- ---
--------- -------- -------- --------
TOTAL $ 16,980 $ 26,562 $ 0 $ 0
--------- -------- -------- --------
EEOR PROCESS SALES AND SERVICE
United States $ --- $ --- $ --- $ 3,413
Canada --- 8,615 255,457 ---
China --- --- 370,000 ---
Other --- --- --- 200
--------- -------- -------- --------
TOTAL $ 0 $ 8,615 $625,457 $ 3,613
--------- -------- -------- --------
</TABLE>
F-24
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Profit (Loss) for the four month period ended December 31, 1996,
the fiscal years ended August 31, 1996 and 1995 and the ten month period
ended August 31, 1994 were as follows:
<TABLE>
<CAPTION>
12/31/96 8/31/96 8/31/95 8/31/94
-----------------------------------------------------------
<S> <C> <C> <C> <C>
OIL & GAS ACQUISITION & DEVELOPMENT
United States $ --- $ (3,262) $ (608,822) $ ---
Canada 15,430 18,836 --- ---
Eastern Europe (2,994,745) (5,624,406) (3,961,622) ---
----------- ----------- ----------- -----------
TOTAL $ (2,979,315) $(5,608,832) $(4,570,444) $ ---
----------- ----------- ----------- ------------
EEOR PROCESS SALES AND SERVICE
United States $ --- $ --- $ (25) $ (1,191,050)
Canada (4,052) (30,857) (3,411,070) (229,999)
China --- --- 116,915 ---
Other --- --- (18,296) (45,296)
----------- ----------- ----------- -----------
TOTAL $ (4,052) $ (30,857) $(3,312,476) $ (1,466,345)
----------- ----------- ----------- -----------
</TABLE>
The Company's loss from investments in unconsolidated subsidiaries
primarily pertains to operations in Eastern Europe.
Identifiable Assets as of December 31, 1996 and as of August 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
12/31/96 8/31/96 8/31/95
------------------------------------------
<S> <C> <C> <C>
CORPORATE(1)
United States $ 7,580,219 $10,239,148 $ 4,228,216
Canada --- --- ---
Western Europe 29,049,022 7,517,066 3,872,468
----------- ----------- -----------
TOTAL $36,629,241 $17,756,214 $ 8,100,684
----------- ----------- -----------
OIL & GAS ACQUISITION & DEVELOPMENT
United States $ 6,786,714 $ 5,705,663 $ 770,416
Canada 831,930 642,451 19,815
Eastern Europe 11,127,176 7,984,213 1,358,205
Other --- --- 5,000
----------- ----------- -----------
TOTAL $18,745,820 $14,332,327 $ 2,153,436
----------- ----------- -----------
EEOR PROCESS SALES AND SERVICE
Canada $ --- $ --- $ 456,202
------------ ------------ -----------
TOTAL $ --- $ --- $ 456,202
------------ ------------ -----------
IDENTIFIABLE ASSETS - TOTAL $55,375,061 $32,088,541 $10,710,322
=========== =========== ===========
</TABLE>
(1) Principally cash and cash equivalents.
The percentage of operating revenues for the four month period ended
December 31, 1996, the fiscal years ended August 31, 1996 and 1995 and the
ten month period ended August 31, 1994 are as follows:
<TABLE>
<CAPTION>
12/31/96 8/31/96 8/31/95 8/31/94
----------------------------------------
<S> <C> <C> <C> <C>
OIL & GAS ACQUISITION & DEVELOPMENT
United States --- 10% --- ---
Canada 100% 90% --- ---
EEOR PROCESS SALES AND SERVICE
Canada --- 100% 41% 94%
China --- --- 59% 6%
</TABLE>
F-25
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUPPLEMENTAL CASH FLOW INFORMATION AND
NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the four
month periods ended December 31, 1996 and 1995, the fiscal years ended
August 31, 1996 and 1995, and the ten month period ended August 31, 1994:
<TABLE>
<CAPTION>
All amounts in $1,000
12/31/96 8/31/96 12/31/95 8/31/95 8/31/94
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid during the year $ 17 $ 146 $ 3 $ 28 $ 47
--------- -------- --------- -------- --------
Supplemental schedule of non-cash
activities:
Acquisition of common stock of
subsidiaries resulting in elimination
upon consolidation of notes
receivable of $2,450,000 (8/31/96 &
12/31/95) and cancellation of $530,000
(8/31/96) $ --- $ 2,980 $ 2,450 $ --- $ ---
--------- -------- --------- -------- --------
Issuance of Common Stock upon
conversion of debentures (12/31/96 &
8/31/96) and notes (8/31/95 & 8/31/94) $ 280 $ 3,934 $ --- $ 50 $ 150
--------- -------- --------- -------- --------
Issuance of Common Stock in connection
with investments in oil and gas
ventures $ --- $ 2,353 $ --- $ --- $ ---
--------- -------- --------- -------- --------
Issuance of Common Stock in connection
with compensation earned and third
party services provided $ --- $ --- $ --- $ 1,730 $ 18
--------- -------- --------- -------- --------
Issuance of Common Stock in connection
with services related to equity
financing $ --- $ --- $ --- $ --- $ 32
--------- -------- --------- -------- --------
Accruals recorded applicable to
investments in oil and gas ventures
and property & equipment $ 678 $ --- $ --- $ 59 $ ---
--------- -------- --------- -------- --------
</TABLE>
18. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 400,000 shares of the Company's
Common Stock were issued to various individuals who were serving or were
expected in the future to serve the Company as officers, directors,
employees, consultants and advisors (the "1994 Plan"). The options are
exercisable at an exercise price of $1.50 and are only exercisable at the
time or within six months after services are rendered by such individuals.
All of these options expire August 16, 1999.
F-26
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by
the Company in February 1996, 1,500,000 shares of the Company's Common
Stock have been reserved for possible issuance. The purpose of the 1995
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 1995 Plan.
Stock options granted under the 1995 Plan may be either incentive stock
options or non-qualified stock options. Options expire on such date as is
determined by the committee administering the 1995 Plan, except that
incentive stock options may expire no later than 10 years from the date of
grant. Pursuant to the 1995 Plan, a specified number of stock options
exercisable at the then market price are granted annually to non-employee
directors of the Company, which become 100% vested six months from the date
of grant. 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 a specified number of shares of 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. In 1996, the Company granted a total of
856,500 stock options under the 1995 Plan all of which were granted at or
above market price at the time of grant. No stock appreciation rights had
been granted as of December 31, 1996.
A summary of the status of stock options granted under the 1994 and 1995
Plans is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUABLE
SHARES UNDER WEIGHTED
AVAILABLE OUTSTANDING AVERAGE
FOR ISSUE OPTIONS EXERCISE PRICE
----------------------------------------------------
<S> <C> <C> <C>
Balance at October 31, 1993 0 0
Options:
Granted at a premium --- 400,000 $1.50
-----------------------------------
Balance at August 31, 1994 0 400,000
Balance at August 31, 1995 0 400,000
1995 Plan Reserve 1,500,000
Options:
Granted at market (30,000) 30,000 $3.84
Exercised --- (52,000) $1.50
-----------------------------------
Balance at August 31, 1996 1,470,000 378,000 $1.69
Options:
Granted at market (381,500) 381,500 $7.25
Granted at a premium (445,000) 445,000 $8.99
Exercised --- (12,000) $1.50
-----------------------------------
Balance at December 31, 1996 643,500 1,192,500 $6.19
-----------------------------------
</TABLE>
F-27
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The shares issuable upon exercise of vested options and the corresponding
weighted average exercise price are as follows :
<TABLE>
<CAPTION>
SHARES
ISSUABLE
UNDER WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE PRICE
--------------------------------------------------
<S> <C> <C>
Total exercisable:
August 31, 1994 104,000 $1.50
August 31, 1995 344,000 $1.50
August 31, 1996 342,000 $1.71
December 31, 1996 330,000 $1.71
</TABLE>
The weighted average fair value of options granted at market was $3.65 and
$1.01 for the four month period ended December 31, 1996 and the fiscal year
ended August 31, 1996, respectively. The weighted average fair value of
options granted at a premium was $1.73 for the four month period ended
December 31, 1996; no options were granted at a premium for the fiscal year
ended August 31, 1996. The weighted average fair value of all options
granted during the four month period ended December 31, 1996 and the fiscal
year ended August 31, 1996 was $2.52 and $1.01, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OF SHARES AVERAGE WEIGHTED OF SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 TERM EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.50 to $7.00 366,000 2.58 $1.69 330,000 $1.71
$7.01 to $8.99 826,500 4.97 $8.19 0
- -------------- --------- -------
$1.50 to $8.99 1,192,500 330,000
--------- -------
</TABLE>
As discussed in Note 1 under "Stock-Based Compensation Plans," the Company
accounts for its stock-based compensation plans under APB Opinion 25.
Accordingly, no compensation cost has been recognized for those stock
options with exercise prices equal to or greater than the market price of
the stock on the date of grant. Under SFAS 123, compensation cost is
measured at the grant date based on the fair value of the awards and is
recognized over the service period, which is usually the vesting period.
The fair value of each stock option granted by the Company was calculated
using the Black-Scholes option-pricing model applying the following
weighted-average assumptions for all periods presented: dividend yield of
0.00%; risk-free interest rates are different for each grant and range from
4.79% to 6.16%; the average expected lives of options of 3.1 years; and
volatility of 49.0% for all grants.
There would not have been a material effect on net loss or net loss per
common share had the compensation cost for the Company's stock-based
compensation plans been determined based on
F-28
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair values at the grant dates consistent with the method set forth in SFAS
123. This effect is not likely to be representative of future pro forma
amounts because of the exclusion of costs of grants before 1995 and the
addition of awards to be granted in future years.
F-29
<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 X
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(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(19) Fee Agreement dated November 15, 1995
between Fountain Oil Incorporated and
Robert A. Halpin (Incorporated herein by
reference from August 31, 1996 Form
10-KSB).
*10(20) Fee Agreement between Fountain Oil
Incorporated and Eugene J. Meyers
(Incorporated herein by reference from
August 31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10,
1996 between Fountain Oil Incorporated and X
Robert A. Halpin.
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 3(2)
BYLAWS
OF
FOUNTAIN OIL INCORPORATED
A DELAWARE CORPORATION
(As Amended Through February 4, 1997)
ARTICLE I
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders shall be
held at such place either within or without the State of Delaware as shall be
designated from time to time by the board of directors or stated in the notice
of the meeting.
Section 2. Annual Meeting. Annual meetings of stockholders shall be
as designated from time to time by the board of directors (which shall be in the
case of the first annual meeting not more than thirteen (13) months after the
organization of the corporation and in the case of all other annual meetings, no
more than thirteen (13) months after the date of the prior annual meeting) and
stated in the notice of the meeting, at which they shall elect by a plurality
vote a board of directors, and transact such other business as may properly be
brought before the meeting.
Section 3. Notice of Annual Meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 4. Stockholder List. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
<PAGE>
Section 5. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the chairman of the board, the
president or the secretary and shall be called by the chairman of the board, the
president or the secretary at the request in writing of a majority of the board
of directors, or at the request in writing of stockholders owning 25% or more of
the entire capital stock of the corporation issued and outstanding and entitled
to vote. Such request shall state the purpose or purposes of the proposed
meeting.
Section 6. Notice of Special Meetings. Written notice of a special
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days before the date of the meeting, to each stockholder
entitled to vote at such meeting.
Section 7. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 8. Voting and Proxies. When a quorum is present at any
meeting, except with respect to the election of directors, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Directors shall be elected by a plurality of the votes cast. Unless otherwise
provided in the certificate of incorporation, each stockholder shall be entitled
to one vote for each share of the capital stock having voting power held by such
stockholder. Each stockholder entitled to vote may vote in person or by a proxy
granted in accordance with Delaware law, but no proxy shall be voted on after
three years from its date, unless the proxy provides for a longer period.
Section 9. Conduct of Meeting . At every meeting of stockholders, the
chairman of the board of directors, or, if a chairman has not been appointed or
is absent, the president, or, if the president is absent, the most senior vice
president present, or in the absence of any such officer, a chairman of the
meeting chosen by a majority in interest of the stockholders entitled to vote,
present in person or by proxy, shall act as chairman. The secretary, or, in his
absence, the person appointed by the chairman of the meeting, shall act as
secretary of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting. Unless and to the extent
<PAGE>
determined by the board of directors or the chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with rules of
parliamentary procedure.
Section 10. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors, or if they do not do so, the chairman of
the meeting, shall appoint one or more inspectors to act at the meeting and make
a written report thereof. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
The inspectors shall: (1) ascertain the number of shares outstanding and the
voting power of each; (2) determine the shares represented at a meeting and the
validity of proxies and ballots; (3) count all votes and ballots; (4) determine
and retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors; and (5) certify their determination
of the number of shares represented at the meeting, and their count of all votes
and ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors.
The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting. No ballot, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the inspectors after the closing of the
polls unless the Court of Chancery upon application by a stockholder shall
determine otherwise.
This Section 10 shall not apply to the corporation if it does not have
a class of voting stock that is: (1) listed on a national securities exchange;
(2) authorized for quotation on an inter-dealer quotation system of a registered
national securities association; or (3) held of record by more than 2,000
stockholders.
Section 11. Written Consent. Unless otherwise provided in the
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE II
DIRECTORS
Section 1. Number and Term of Office. The number of directors which
shall constitute the whole board shall be not less than three (3) nor more than
nine (9) until changed by amendment to the certificate of incorporation or by a
bylaw amending this Section duly adopted by the stockholders entitled to vote or
by the board of directors. The exact number of directors shall be fixed from
time to time, within the limits specified herein or in the certificate of
incorporation, by a bylaw or amendment thereof duly adopted by the stockholders
or the board of directors.
<PAGE>
Subject to the foregoing provisions for changing the number of directors, the
number of directors of the corporation is fixed at six (6). The directors shall
be elected at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. A vacancy in the board of directors shall be
deemed to exist under this Section in the case of the death, resignation or
removal of any director and no decrease in the number of directors shall shorten
the term of any incumbent director.
Section 3. Powers. The business and affairs of the corporation shall
be managed by or under the direction of its board of directors which may
exercise all such powers of the corporation and do all such lawful acts and
things as are not by statute or by the certificate of incorporation or by these
bylaws directed or required to be exercised or done by the stockholders.
Section 4. Regular Meetings. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board.
Section 5. Special Meetings. Special meetings of the board of
directors for any purpose or purposes may be called at any time by one-third of
the directors then in office (rounded up to the nearest whole number) or by the
chairman of the board, the president or the secretary. Notice of the time and
place of special meetings shall be given orally or in writing, by telephone,
facsimile, telegraph or telex, during normal business hours, at least forty-
eight (48) hours before the date and time of the meeting; or if in writing to
each director by first class mail, charges prepaid, at least five (5) days, or
by air courier, charges prepaid, at least three (3) days, before the date of the
meeting. A notice need not specify the purpose of any regular or special
meeting of the board of directors.
Section 6. Quorum. At all meetings of the board a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a. majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 7. Written Consent. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
<PAGE>
Section 8. Participation in Meetings by Conference Telephone. Unless
otherwise restricted by the certificate of incorporation or these bylaws,
members of the board of directors, or any committee designated by the board of
directors, may participate in a meeting of the board of directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
Section 9. Committees of the Board of Directors. The board of
directors may, by resolution passed by a majority of the whole board, designate
one or more committees, each committee to consist of one or more of the
directors of the corporation. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the board of directors. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
Section 10. Compensation Of Directors. Unless otherwise restricted
by the certificate of incorporation or these bylaws, the board of directors
shall have the authority to fix the compensation of directors. No such
compensation shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings or serving on such committees.
Section 11. Removal Of Directors. Unless otherwise restricted by the
certificate of incorporation or by law, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
shares entitled to vote at an election of directors.
ARTICLE III
NOTICES
<PAGE>
Section 1. Notices. Whenever, under the provisions of the statutes or
of the certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given in the manner set
forth in Section 5 of Article 11 of these bylaws.
Section 2. Waiver. Whenever any notice is required to be given under
the provisions of the statutes or of the certificate of incorporation or of
these bylaws, a waiver thereof, in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the corporation shall be chosen
by the Board of Directors and shall be a Chairman of the Board of Directors (who
must be a director), a President, a Chief Executive Officer, a Chief Financial
Officer, and a Secretary. The Board of Directors, in its discretion, may also
choose a Vice Chairman of the Board of Directors (who must be a director), one
or more Vice Presidents, a Treasurer and other officers. Any number of offices
may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these Bylaws. The officers of the corporation
need not be stockholders of the corporation nor, except in the case of the
Chairman of the Board of Directors and the Vice Chairman of the Board of
Directors, need such officers be directors of the corporation.
Section 2. Election. The Board of Directors shall elect the officers
of the corporation, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors; and all officers of the corporation shall hold
office until their successors are elected and qualified, or until their earlier
resignation or removal. Any officer may be removed at any time by the Board of
Directors. Any vacancy occurring or existing in any office of the corporation
may be filled by the Board of Directors. The salaries of all executive officers
of the corporation shall be fixed by the Board of Directors or a duly
constituted committee of the Board of Directors to which such authority is
delegated.
Section 3. Chairman of the Board of Directors. The Chairman of the
Board of Directors shall preside at all meetings of the stockholders and of the
Board of Directors. The Chairman of the Board of Directors shall have such
other powers and duties as may be assigned to him or her or prescribed for such
office from time to time by the Board of Directors.
<PAGE>
Section 4. Vice Chairman of the Board of Directors. The Vice
Chairman of the Board of Directors shall, in the absence of the Chairman of the
Board of Directors, preside at all meetings of the stockholders and of the Board
of Directors and shall have such other powers and duties as may be assigned to
him or her or prescribed for such office from time to time by the Board of
Directors.
Section 5. Chief Executive Officer. The Chief Executive Officer of
the corporation shall have general supervision, direction and control of the
business and affairs of the corporation. The Chief Executive Officer shall have
such other powers and duties as may be assigned to him or her or prescribed for
such office from time to time by the Board of Directors. Except as otherwise
provided in these Bylaws or as delegated by the Chief Executive Officer, all
other officers of the corporation shall report to the Chief Executive Officer.
Section 6. President. The President shall be the Chief Operating
Officer of the corporation and, as such, shall have the general powers and
duties of management associated with the day-to-day operations of the
corporation and shall have such other powers and duties as may be assigned to
him or her or prescribed for such office from time to time by the Board of
Directors or the Chief Executive Officer, if the President is not then serving
as such.
Section 7. Vice Presidents. Each Vice President shall have such
powers and duties as may be assigned to him or her from time to time by the
Board of Directors or the Chief Executive Officer. Any Vice President may be
designated by the Board as an Executive Vice President, Senior Vice President,
Assistant Vice President or any other classification of Vice President.
Section 8. Chief Financial Officer. The Chief Financial Officer
shall have the general powers and duties of management associated with the
general supervision, direction and control of the financial affairs of the
corporation, including financial planning and budgeting and accounting for the
conduct of the corporation's operations, and such other powers and duties as may
be assigned to him or her or prescribed for such office from time to time by the
Board of Directors or the Chief Executive Officer. In the absence of a
Treasurer, the Chief Financial Officer shall perform the duties of the
Treasurer.
Section 9. Secretary. The Secretary shall keep minutes of all
meetings of the Board of Directors, committees of the Board of Directors and
stockholders of the corporation and any action taken by the Board of Directors
or stockholders other than in a meeting. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall have such other powers and duties as may be
assigned to him or her or prescribed for such office by the Board of Directors
or the Chief Executive Officer. If the Secretary shall be unable or shall
refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, then the Board of Directors or the
Chairman of the Board of Directors or the Vice Chairman of the Board of
Directors or the President may choose another officer to cause such notice to be
given. The Secretary shall have custody of the seal of the corporation, and the
Secretary or any Assistant Secretary, if there is one, shall
<PAGE>
have authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the corporation and
to attest the affixing by his or her signature.
Section 10. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors or the Chief Executive Officer, taking proper
vouchers for such disbursements, and shall render to the Chief Executive
Officer, the Chief Financial Officer and the Board of Directors, when requested,
an accounting of all his transactions as Treasurer and of the financial
condition of the corporation. The Treasurer shall have such other powers and
duties as may be assigned to him or her or prescribed for such office from time
to time by the Board of Directors, the Chief Executive Officer or the Chief
Financial Officer. The Treasurer shall report to the Chief Executive Officer
and to the Chief Financial Officer.
Section 11. Other Officers. The Board of Directors may designate
such other offices and elect such other officers and prescribe for such offices
and assign to such officers such powers and duties as the Board of Directors may
from time to time deem appropriate. The Chief Executive Officer may also assign
to such officers such powers and duties as the Chief Executive Officer deems
appropriate. The Board of Directors may delegate to the Chief Executive Officer
of the corporation the power to choose and to prescribe the respective powers
and duties of other officers who are not executive officers of the corporation,
such as Assistant Secretaries and Assistant Treasurers.
ARTICLE V
STOCK
Section 1. Certificates of Stock. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the chairman of the board, the chief executive officer, the
president or a vice-president and the treasurer or an assistant treasurer or the
secretary or an assistant secretary of the corporation, certifying the number of
shares owned by him in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified. Upon the declaration of any dividend
upon fully paid shares, the corporation shall declare a dividend on partly paid
shares of the same class, but only upon the basis of the percentage of the
consideration actually paid thereon.
<PAGE>
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise required by law, in lieu of the foregoing requirements, there may be
set forth on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 2. Facsimile Signatures. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Transfer of Stock. Transfers of stock shall be made only
upon the transfer books of the corporation kept at an office of the corporation
or by transfer agents designated to transfer shares of the stock of the
corporation. Except where a certificate is issued in accordance with Section 4
of this Article V, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of
the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the board of directors may
establish concerning proof of such loss, theft or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the board of directors may establish.
Section 6. Record Date. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
ARTICLE VI
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
<PAGE>
Section 1. Right to Indemnification. The corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person who was or is made or
is threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, against all liability and loss suffered and expenses reasonably incurred
by such person in connection therewith. The corporation shall indemnify a
person in connection with a proceeding initiated by such person only if the
proceeding was authorized by the board of directors of the corporation. The
corporation may provide indemnification to employees and agents of the
corporation with the same scope and effect as the indemnification and
advancement of expenses provided in this Article.
Section 2. Payment of Expenses. The corporation shall pay the
expenses incurred by a director or officer of the corporation in defending any
proceeding in advance of its final disposition, provided, however, that the
payment of expenses incurred by a director or officer in his capacity as a
director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the director or officer to repay
all amounts advanced if it should be ultimately determined that the director or
officer is not entitled to be indemnified under this Article or otherwise.
Section 3. Right to Bring Suit. If a claim for indemnification or
payment of expenses under this Article by a director or officer of the
corporation is not paid in full within 30 days after a written claim therefor
has been received by the corporation the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or payment of expenses under
applicable law.
Section 4. Rights Not Exclusive. The rights conferred on any person
by this Article shall not be exclusive of any other rights which such person may
have or hereafter acquire under any statute, provision of the corporation's
certificate of incorporation, these bylaws, agreement, vote of stockholders or
disinterested directors or otherwise. The corporation shall have the authority
to enter into such agreements as the board of directors deems appropriate for
the indemnification of present or future directors, officers, employees and
agents of the corporation in connection with their service to the corporation or
any other corporation, partnership, joint venture, trust or other enterprise,
including any employee benefit plan, to which such person is providing services
at the request of the corporation.
Section 5. Effect or Modification. Any repeal or modification of the
foregoing provisions of this Article shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
<PAGE>
Section 6. Successors. The rights conferred on any person by this
Article shall continue as to a person who has ceased to be a director, officer,
employee or agent of the corporation and shall inure to the benefit of such
person's heirs, executors and administrators.
Section 7. Definition of Corporation. For purposes of this Article,
reference to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
ARTICLE VII
AMENDMENTS
These bylaws may be altered, amended or repealed or new bylaws may be
adopted by the stockholders or, if provided in the certificate of incorporation,
by the board of directors. If the power to adopt, amend or repeal bylaws is
conferred upon the board of directors by the certificate of incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
<PAGE>
Exhibit 10(21)
The following describes the compensation arrangement between Fountain Oil
Incorporated (the "Company") and Robert A. Halpin as of December 10, 1996:
Fee of $45,000 based upon 30% of normal working days per year of 220 days, of
which Mr. Halpin will allocate 66 working days per year. In addition,
additional services provided by request of the Company will be compensated based
on a day-rate of $1,000 per day.
<PAGE>
Exhibit 21
FOUNTAIN OIL INCORPORATED
LIST OF SUBSIDIARIES
As of February 28, 1997
Name Jurisdiction of Incorporation
- ------------------------------------------------ -----------------------------
Electromagnetic Oil Recovery International, Inc. Alberta, Canada
Fountain Oil Adygea Incorporated Delaware
Fountain Oil Boryslaw Incorporated Delaware
Fountain Oil Boryslaw 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 March 28, 1997, on our audits of
the consolidated financial statements of Fountain Oil Incorporated as of
December 31, 1996, August 31, 1996 and August 31, 1995, and for the four month
period ended December 31, 1996, the years ended August 31, 1996 and 1995 and the
ten month period ended August 31, 1994, which report is included in this Annual
Report on Form 10-K.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 28, 1997
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<PAGE>
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<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,424,064
<SECURITIES> 0
<RECEIVABLES> 259,889
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<DEPRECIATION> 605,110
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<CURRENT-LIABILITIES> 1,924,410
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0
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<COMMON> 2,216,849
<OTHER-SE> 51,028,422
<TOTAL-LIABILITY-AND-EQUITY> 55,375,061
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<TOTAL-REVENUES> 16,980
<CGS> 4,052
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