<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED NOVEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0-9147
-----------------
FOUNTAIN OIL INCORPORATED
- ------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1400 Broadfield Blvd.,
Suite 100, Houston, Texas 77084-5163
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
281-492-6992
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(ISSUER'S TELEPHONE NUMBER)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of issuer's common stock on December 31,
1996 was 22,168,489.
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------
NOVEMBER 30, August 31,
1996 1996
----------------- ---------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,737,692 $ 17,329,237
Trade accounts receivable, net 862 851
Accounts receivables - affiliated
entities 310,624 7,210
Other current assets 625,620 648,256
------------ ------------
Total current assets 14,674,798 17,985,554
Restricted cash 5,400,000 ---
Notes receivable 190,186 190,186
Property and equipment, net 7,983,667 6,577,565
Oil and gas properties, net, full cost
method
(including $257,407 unevaluated) 365,984 394,434
Investment in and advances to
oil and gas ventures 7,642,700 6,782,953
Other assets 624,508 157,849
------------ ------------
TOTAL ASSETS $ 36,881,843 $ 32,088,541
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 652,501 $ 731,532
Accrued liabilities 335,355 297,513
Note payable 5,313 31,156
------------ ------------
Total current liabilities 993,169 1,060,201
8% Convertible subordinated debentures --- 300,000
Minority interest 196,747 223,350
Stockholders' Equity:
Preferred stock --- ---
Common stock 1,885,160 1,737,661
Capital in excess of par value 61,553,614 55,190,072
Accumulated deficit since October 31,
1988 (27,746,847) (26,422,743)
------------ ------------
Total stockholders' equity 35,691,927 30,504,990
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 36,881,843 $ 32,088,541
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Unaudited
---------------------------------------------
Three Months Ended
NOVEMBER 30, 1996 November 30, 1995
---------------------------------------------
<S> <C> <C>
Operating Revenues:
Power unit rentals $ --- $ 1,913
Oil & gas production 18,080 4,389
----------- -----------
18,080 6,302
----------- -----------
Operating Expenses:
Lease operating expense --- ---
Cost of sales 4,067 ---
Direct project costs 231,761 ---
General and administrative 857,039 1,077,735
Depreciation, depletion and
amortization 28,450 18,314
Loss (earnings) from investments in
unconsolidated subsidiaries 536,057 (15,457)
----------- -----------
1,657,374 1,080,592
----------- -----------
OPERATING LOSS 1,639,294 1,074,290
----------- -----------
Other Income (Expense):
Interest, net 291,427 47,743
Other income (expense) (2,840) 2,697
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 288,587 50,440
----------- -----------
Minority interest in loss of
consolidated subsidiary 26,603 ---
----------- -----------
NET LOSS $(1,324,104) $(1,023,850)
----------- -----------
Weighted average number of
common shares outstanding 18,234,533 10,834,063
----------- -----------
NET LOSS PER COMMON SHARE $ (0.07) $ (0.09)
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
---------------------------------------
Three Months Ended
NOVEMBER 30, 1996 November 30, 1995
---------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(1,324,104) $(1,023,850)
Equity loss in unconsolidated
subsidiaries 536,057 ---
Minority interest in loss of
consolidated subsidiary (26,603) ---
Depreciation, depletion and
amortization 28,451 18,314
Amortization of issuance costs 1,375 ---
Changes in assets and liabilities:
Increase in accounts receivable (303,425) (72,939)
Decrease (increase) in other
assets 22,636 (228,696)
Decrease in accounts payable (79,031) (217,681)
Increase (decrease) in accrued
liabilities 37,842 (94,009)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,106,802) (1,618,861)
----------- -----------
Investing activities:
Restricted cash (5,400,000) ---
Capital expenditures (1,406,103) (736,778)
Investment in oil and gas ventures &
other assets (1,883,437) (1,002,682)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (8,689,540) (1,739,460)
----------- -----------
Financing activities:
Cash provided by stock sale/warrant
exercise,net 6,230,640 ---
Payments on notes payable (25,843) (10,625)
Payments on account payable - related
party --- (3,580)
Proceeds from issuance of note payable --- 83,828
Proceeds from issuance of account
payable - related party --- 38,325
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,204,797 107,948
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (3,591,545) (3,250,373)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 17,329,237 4,791,645
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,737,692 $ 1,541,272
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
(1) Nature of Operations
--------------------
The principal activities of Fountain Oil Incorporated and its consolidated
subsidiaries (collectively the "Company") are directed towards the
acquisition of interests in and development of oil and gas fields that
indicate the potential for increased production through rehabilitation and
utilization of modern production techniques and enhanced oil recovery
processes, including, if successfully commercialized, the Company's
proprietary method ("EEOR") for heating paraffinic and heavy oil with
electric current. The Company typically acquires its interests in oil and
gas properties through interests in joint ventures, partially owned
corporate and other entities, and joint operating arrangements. While it
normally seeks to be the operator of substantial oil and gas projects in
which it has an interest, the Company has acquired and expects to continue
to acquire interests representing 50% or less of the equity in various oil
and gas projects. Accordingly, certain of the activities in which the
Company has an interest will be conducted through unconsolidated entities.
The Company has recently acquired less than majority interests in entities
developing or seeking to develop oil and gas properties in Eastern Europe
including the Russian Federation, at least some of which will be accounted
for as unconsolidated entities.
The consolidated condensed financial statements of the Company included
herein have been prepared by the Company, without audit. In the opinion of
management, the consolidated condensed financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the results for the interim period. The consolidated
condensed balance sheet for the fiscal year ended August 31, 1996 was
derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. Certain
reclassifications were made to the prior year periods to conform to the
current period presentation. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1996 filed with the
Securities and Exchange Commission.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which sets forth accounting
and disclosure requirements for stock-based compensation arrangements. The
new statement encourages, but does not require, companies to measure stock-
based compensation cost using a fair-value method, rather than the
intrinsic-value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25. The Company will continue to measure stock-based
compensation using the intrinsic-value method and will disclose on a pro
forma basis net income (loss) and net income (loss) per share using the
fair-value method.
5
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(2) Restricted Cash
---------------
In October 1996, a $4,000,000 credit facility was granted by a bank in
Ukraine to Kashtan Petroleum, Ltd., ("Kashtan") to be used to pay the
operating costs of the venture including costs advanced by the Company on
behalf of Kashtan and recorded by the Company as receivables from Kashtan
Petroleum, Ltd., the entity operating the Lelyaky Field, Ukraine, in which
the Company has an effective 40.5% ownership. The Company pledged
$4,400,000 to collateralize a bank letter of credit issued to guarantee
this credit facility. In addition, in November 1996, the Company pledged
$1,000,000 to collateralize another bank letter of credit facility.
(3) Accounts Receivables - Affiliated Entities
------------------------------------------
Of the $310,624 recorded as accounts receivables - affiliated entities at
November 30, 1996, approximately $265,000 represented project expenses paid
by the Company on behalf of, and to be reimbursed by, Kashtan. See Note 10
of Notes to Unaudited Consolidated Condensed Financial Statements.
(4) Property and Equipment
----------------------
Property and equipment and the related accumulated depreciation at November
30, 1996 and August 31, 1996 included the following:
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1996 1996
-------------------- ------------
<S> <C> <C>
EEOR Equipment $ 504,085 $ 504,085
EEOR Construction in progress 60,764 60,764
Oil & gas related equipment 7,201,097 5,818,871
Office furniture, fixtures, equipment
and other 811,774 759,448
Accumulated depreciation (594,053) (565,603)
-------------------- ------------
Net book value $7,983,667 $6,577,565
-------------------- ------------
</TABLE>
Oil and gas related equipment represents new or reconditioned drilling rigs
and related equipment which the Company shipped on December 31, 1996 to the
Republic of Adygea, Russian Federation, for transfer to Intergas JSC, an
unconsolidated subsidiary in which the Company holds a 37% interest. Such
equipment is not being depreciated as the assets have not yet been placed
in service. See Note 5 of Notes to Unaudited Consolidated Condensed
Financial Statements.
(5) Investment in and Advances to Oil and Gas Ventures
--------------------------------------------------
The Company capitalized certain costs associated with its proposed or
completed acquisition of interests in oil and gas properties through joint
ventures, corporations and other entities through which the development of
oil and gas projects will be implemented. The Company's policy is to
capitalize the direct costs of these acquisitions, including cash paid and
the fair market value of shares issued in connection with such
acquisitions, as well as the portion of management salaries, consulting
fees and other expenses relating directly to the acquisition of such
interests.
6
<PAGE>
The Company has entered into agreements with various entities in which it
has an interest pursuant to which such entities are obligated to reimburse
the Company for advances made on behalf of such entities. Repayment of
advances is generally subject to revenue being generated by the entities,
and such reimbursable amounts are included within the Company's investments
in and advances to oil and gas ventures, unless the venture has
demonstrated the ability to repay the advances within twelve months in
which case such amounts are recorded as accounts receivable-affiliated
entities. The amounts recorded at November 30, 1996 and August 31, 1996 as
investments in and advances to oil and gas ventures are as follows:
<TABLE>
<CAPTION>
INVESTMENTS IN AND ADVANCES TO NOVEMBER 30, AUGUST 31,
OIL AND GAS VENTURES 1996 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Ukraine - Lelyaky Field, Pryluki Region
through an effective 40.5% ownership
of Kashtan Petroleum Ltd. $2,482,278 $2,163,564
Adygea, Russian Federation - Maykop
Field through 37% ownership in Intergas JSC 3,025,083 2,780,263
Albania - Gorisht-Kocul Field
through 50% ownership of joint
venture 666,058 517,885
Canada - Inverness Unit
through 50% ownership in Focan Ltd. --- ---
Ukraine - Stynawske Field, Boryslaw
through 45% ownership of Boryslaw
Petroleum Ltd. 1,469,281 1,321,241
---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $7,642,700 $6,782,953
---------- ----------
</TABLE>
The Company's interests in Kashtan Petroleum Ltd., Intergas JSC, Focan
Ltd. and Boryslaw Petroleum Ltd. are accounted for using the equity method
of accounting. The financing arrangements in the entity that will operate
the Gorisht-Kocul field have not been sufficiently defined to determine
whether that entity will be accounted for using the equity method of
accounting or proportionately consolidated.
The investment shown for the Lelyaky Field, the Maykop Field and the
Stynawske Field 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 Petroleum Ltd.
None of the Company's oil and gas interests outside of the United States
and Canada are being amortized, pending evaluation of initial drilling
results. The Company believes the properties of those ventures will be
substantially evaluated during calendar 1997. There were no material
operations or assets of unconsolidated entities (other than unevaluated
properties) at November 30, 1996. 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's working
capital at November 30, 1996, amounting to $13,681,629, was substantially
augmented by the proceeds from the exercise of stock purchase warrants
during December 1996. See Note 10 of Notes to Unaudited Consolidated
Condensed Financial Statements. While the Company believes
7
<PAGE>
that it has the resources to fund all planned development of these
properties through the end of calendar 1997, continued development beyond
calendar 1997 assumes the availability of substantial additional funds from
external sources. Less than projected funding from external sources will
result in a slower phasing of the development of some of the properties,
reducing the early investment requirements but delaying the anticipated
production build up. The Company has principal responsibility for arranging
such financing. The Company's management believes that it will be able to
access external sources of funds through debt financing by the Company or
the joint ventures or other entities that are developing the properties,
equity financing by the Company or otherwise, so that delays will not be
experienced as a result of a shortage of financial resources. There can be
no assurance, however, that the Company will be able to arrange such
financing or that such financing as is available will be on terms that are
attractive or acceptable to the Company or such entities or are deemed to
be in the best interests of the Company and its shareholders. Ultimate
realization of the cost of the Company's oil and gas properties and
investments in and advances to oil and gas ventures is dependent upon,
among other factors, achieving significant increases in production from
existing levels, production of oil and gas at costs that provide acceptable
margins, reasonable levels of taxation from local authorities and the
ability to market oil and gas produced at or near world prices. The Company
has plans for each of the ventures listed above to achieve levels of
production and profits sufficient to recover its costs. However, if one or
more of the above factors, or other factors, are different than
anticipated, the Company may not recover its costs. The Company will be
entitled to distributions from the various ventures in accordance with the
terms of the respective venture arrangements.
The Company's development efforts through its investments in oil and gas
ventures must be successful in order for these ventures to produce and
market oil and gas in sufficient quantities and at sufficient prices to
provide positive cash flow to the Company. In addition, the ability of the
Company to pursue its long-term growth strategy successfully and continue
as a going concern depends upon generating funds from external sources.
The consolidated financial statements of the Company do not give effect to
any adjustments that would be necessary if such ventures are unable to
achieve profitable operations or if financing cannot be arranged for
continued development of such ventures.
(6) Convertible Subordinated Debentures
-----------------------------------
During the quarter ended November 30, 1996, the holders of the $300,000
principal amount of the Company's 8% Convertible Subordinated Debentures
due December 31, 1997 that remained outstanding at August 31, 1996
converted those Debentures into 59,125 shares of Common Stock.
(7) Stockholders' Equity
--------------------
During the quarter ended November 30, 1996, the Company issued 1,139,800
shares of Common Stock upon the exercise of all outstanding stock purchase
warrants entitling the holders thereof to purchase shares of Common Stock
at the exercise price of $5.10 per share and received approximately
$5,813,000 of gross proceeds in connection therewith. In addition, the
Company issued an aggregate of 276,064 shares of Common Stock upon exercise
of other outstanding warrants and options and in connection therewith
received approximately $418,000 of gross proceeds. During that quarter,
the Company also issued
8
<PAGE>
59,125 shares of Common Stock upon conversion of $300,000 principal amount
of 8% Convertible Subordinated Debentures. See Note 6 of Notes to Unaudited
Consolidated Condensed Financial Statements.
(8) Net Loss Per Common Share
-------------------------
Net loss per common share for the periods presented is based on the
weighted average number of common shares outstanding.
(9) Commitments and Contingencies
-----------------------------
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 November 30,
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
collaterization of a letter of credit guaranteeing a Kashtan line of credit
(see Note 2 of Notes to Unaudited Consolidated Condensed 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.
As the Company develops current projects and undertakes additional
projects, significant additional obligations are expected to be incurred.
(10) Subsequent Events
-----------------
In December 1996, the Company entered into an agreement in principle to
purchase a 60% interest in a heavy oil property in the Sylvan Lake Area in
Alberta, Canada, from Amoil Petroleums, Inc. Completion of the proposed
acquisition is subject to negotiation and execution of definitive
acquisition and operating agreements and is expected to occur during the
first quarter of calendar year 1997. Pursuant to the agreement in
principle, the Company would pay approximately $980,000 for its interest in
the property, as well as drill one pilot well in which the Company's
electrically enhanced oil recovery equipment would be installed.
On November 29, 1996, the Company called for redemption a series of Stock
Purchase Warrants entitling the holders thereof to purchase shares of
Common Stock at an exercise price of $6.00 per share and in connection
therewith fixed December 31, 1996 as the redemption date. During December
1996, holders exercised 3,080,000 of the 3,244,000 warrants previously
outstanding, and as a result the Company received gross proceeds of
$18,480,000. After the redemption date, the 164,000 warrants in this
series that were not exercised represent the right to receive the
redemption price of $0.01 per warrant, or an aggregate of $1,640. During
December 1996, warrants to purchase 236,890 shares of Common Stock at an
exercise price of $1.50 per share were also exercised. At December 31,
1996, no warrants to purchase Company stock were outstanding.
9
<PAGE>
In December 1996, Kashtan repaid approximately $800,000 to the Company,
including $265,000 recorded as accounts receivable - affiliated entities at
November 30, 1996 as well as approximately $535,000 that had been
previously recorded as advances to Kashtan.
On December 31, 1996, the Compensation Committee of the Company's Board of
Directors granted stock options under the 1995 Long-Term Incentive Plan to
officers, other employees and a consultant to purchase 826,500 shares of
Common Stock. The Options have exercise prices no less than $7.25 per
share, the closing price for the Company's Common Stock on December 30,
1996, and vest over periods of up to three years.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity, Capital Resources, and Changes in Financial Condition
----------------------------------------------------------------
During the quarter ended November 30, 1996, the Company received
approximately $5,813,000 of gross proceeds in connection with the exercise of
1,139,800 stock purchase warrants entitling the holders thereof to purchase
shares of Common Stock at the exercise price of $5.10 per share. This infusion
of cash was more than offset during the quarter by (i) the deposit of $5,400,000
of cash in restricted accounts collateralizing letter of credit facilities being
provided by banks, (ii) purchases of property and equipment of approximately
$1,400,000, (iii) investments in and advances to oil and gas ventures of
approximately $1,400,000, and (iv) net cash used in operations of approximately
$1,100,000 reflecting primarily cash items associated with general and
administrative expense and direct project costs. Principally as a result, cash
and cash equivalents decreased from approximately $17,300,000 at August 31, 1996
to approximately $13,700,000 at November 30, 1996.
Accounts receivables - affiliated entities increased approximately
$300,000 during the quarter ended November 30, 1996 principally as a result of
the Company paying project related expenses on behalf of Kashtan Petroleum, Ltd.
("Kashtan"), the entity operating the Lelyaky Field, Ukraine, in which the
Company has an effective 40.5% ownership. During the quarter ended November 30,
1996, Kashtan arranged a $4,000,000 credit facility, guaranteed by a bank letter
of credit which in turn is collateralized by Company funds, to be used to fund
Kashtan's operations. In December 1996, Kashtan repaid approximately $800,000
to the Company, including $265,000 recorded as accounts receivable - affiliated
entities at November 30, 1996 as well as approximately $535,000 that had been
previously recorded as advances to Kashtan.
The Company's working capital decrease during the three month period
ended November 30, 1996 from approximately $16,900,000 at August 31, 1996 to
approximately $13,700,000 at November 30, 1996 reflects primarily the decrease
in cash and cash equivalents.
During the three months ended November 30, 1996, the Company placed
$5,400,000 of cash in restricted deposit accounts with banks providing letters
of credit at the request of the Company. Of such amount, $4,400,000
collateralized a letter of credit that guarantees a $4,000,000 credit facility
granted by a bank in Ukraine to Kashtan.
Property and equipment, net, increased by approximately $1,400,000
during the quarter ended November 30, 1996, principally as a result of additions
to the drilling rigs and related equipment which were shipped at the end of
December 1996 and are in transit to the Republic of Adygea, Russian Federation,
for transfer to Intergas JSC, an unconsolidated subsidiary developing the Maykop
field in which the Company holds a 37% interest. Upon transfer to Intergas JSC,
the rigs and equipment will be reclassified as investments in and advances to
oil and gas ventures. (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 under "Forward Looking Statements.") The
substantial expenditures that the Company has been making with respect to these
rigs and equipment are not expected to continue beyond December 1996. (FLS)
11
<PAGE>
Investments in and advances to oil and gas ventures were approximately
$1,400,000 during the quarter ended November 30, 1996 as the Company continued
to fund projects in Eastern Europe, including the Russian Federation. Increases
were recorded during the quarter in the Company's investment in and advances to
the ventures developing the Lelyaky field, Ukraine, the Maykop field, Republic
of Adygea, and the Gorisht-Kocul field, Albania, in which the Company has a 50%
interest, and seeking to develop the Stynawske field, Western region, Ukraine in
which the Company has a 45% interest. These investments and advances were
partially offset by losses during the quarter from investments in unconsolidated
subsidiaries of approximately $536,000.
Other assets increased approximately $470,000 during the three months
ended November 30, 1996, primarily reflecting deposits made in connection with
an order for tubing for use in oil and gas ventures and the proposed acquisition
of a 60% interest in a heavy oil property in the Sylvan Lake Area in Alberta,
Canada. Completion of the proposed acquisition is subject to negotiation and
execution of definitive acquisition and operating agreements and is expected to
occur during the first quarter of calendar 1997. (FLS) Pursuant to the
agreement in principle, the Company would pay approximately $980,000 for its
interest in the property, as well as drill one pilot well in which Fountain's
electrically enhanced oil recovery equipment would be installed. (FLS)
The Company has outstanding obligations with respect to the
acquisition and development of other 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, 1996, the
Company had unconditional obligations regarding the development of oil and gas
properties and ventures amounting to $5,000,000, as well as the unconditional
obligation to issue 250,000 shares of Common Stock. At that date, additional
commitments conditioned on formalization of project relationships, project
performance and other matters involved $1,800,000 and 2,000,000 shares of Common
Stock. During the quarter ending November 30, 1996, conditions to the payment
of an additional $500,000 and the issuance of an additional 175,000 shares were
satisfied, making those obligations unconditional. Of the $5,500,000 of
unconditional obligations regarding the development of oil and gas properties
and ventures at November 30, 1996, $4,000,000 is being satisfied through the
collaterization of a letter of credit guaranteeing a Kashtan line of credit (see
Note 2 of Notes to Unaudited Consolidated Condensed Financial Statements). As
the Company undertakes additional projects and develops current projects,
significant additional obligations are expected to be incurred. (FLS)
Developing the oil and gas properties and ventures in which the
Company has or expects to acquire an interest is expected, based on preliminary
development plans, to require a cash outlay from the Company in the range of
$28,000,000 to $36,000,000 during the thirteen-month period ending December 31,
1997, which amount does not include either anticipated cash outlays for general
and administrative expenses and new oil and gas properties and ventures or
anticipated cash flows from production. (FLS) The Company expects to revise
the preliminary development plan for each oil and gas project based upon the
results of the initial phase of development for such project. (FLS) No
assurance can be given that the anticipated cash flows from production will be
available or that the required cash outlay will not be greater. The
12
<PAGE>
Company has some flexibility in postponing or reducing the cash outlay by
revising project programs or delaying specific activities. (FLS)
The development of the oil and gas properties owned through
investments in oil and gas ventures involves a multi-year effort. (FLS) The
Company's working capital at November 30, 1996, amounting to $13,681,629, was
substantially augmented by approximately $18,800,000 of proceeds from the
exercise of stock purchase warrants during December 1996. See Note 10 of Notes
to Unaudited Consolidated Condensed Financial Statements. While the Company
believes that it has the resources to fund all planned development of these
properties through the end of calendar 1997, continued development beyond
calendar 1997 assumes the availability of substantial additional funds from
external sources. (FLS) The Company anticipates financing the net development
costs of such properties and ventures in subsequent periods with funds made
available through a combination of its present cash position, debt financing
either by the Company or the entities through which such ventures are organized,
and equity financing by the Company. (FLS) Debt financing will be sought from
both international development agencies, such as the European Bank for
Reconstruction and Development, and conventional lenders. (FLS) To the extent
loans are taken in the entities through which the oil and gas ventures are
organized, it is likely that the Company will be required to guarantee or
otherwise provide credit enhancements with respect to all or a portion of such
loans, at least until such ventures demonstrate economic self-sufficiency.
(FLS) There can be no assurance that the Company or such ventures will be able
to arrange the financing necessary to develop the projects being undertaken by
the Company and such ventures or to support the corporate and other activities
of the Company or that such equity or debt financing as is available will be on
terms that are attractive or acceptable to the Company or such ventures or that
are deemed to be in the best interests of the Company's stockholders or the
participants, including the Company, in such ventures. (FLS) In order to
produce oil and gas in sufficient quantities and to market such oil and gas at
sufficient prices to provide positive cash flow to the Company, oil and gas
projects in which the Company has interests, including those conducted through
unconsolidated entities, must be successfully developed. (FLS) The
consolidated condensed 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 condensed financial
statements have been prepared under the assumption of a going concern. Failure
to arrange such financing on reasonable terms or failure of such ventures to
achieve profitability would have a material adverse effect on the results of
operations, financial condition including realization of assets, cash flows and
prospects of the Company and ultimately its ability to continue as a going
concern. (FLS)
As of August 31, 1996, the Company had net investments totaling
$7,177,387 in oil and gas properties and ventures, including unconsolidated
entities. Of this amount, $6,782,953 relates to the projects in Eastern Europe.
During the quarter ended November 30, 1996, the Company recognized a charge to
earnings for its share of equity loss in the various oil and gas ventures
accounted for under the equity method of accounting of approximately $540,000
and made cash expenditures associated with these ventures of approximately
$1,400,000. As of November 30, 1996, the Company had net investments in and
advances to oil and gas properties and ventures of $8,008,684, of which
$7,642,700 related to projects in Eastern Europe. Realization of these
investments is dependent upon obtaining additional capital and ultimately on the
development, production and sale of adequate quantities of oil and gas. (FLS)
13
<PAGE>
As the oil and gas ventures in which the Company has interests
approach and initiate active operations, it is anticipated that the rate at
which the Company makes investments in and advances to such ventures will
increase. (FLS) Equipment for the recompletion of twelve existing wells in the
Lelyaky field in Ukraine is being mobilized by the drilling contractor and will
be transported to the Lelyaky field upon receipt of necessary approvals from
Ukrainian customs officials. (FLS) The Company now anticipates that drilling
activities in the Lelyaky field will commence during the first quarter of
calendar 1997. (FLS) The Company has shipped two drilling rigs and related
equipment, which are in transit, to the Republic of Adygea, Russian Federation,
for transfer to Intergas JSC for use in the Maykop field. Drilling operations
in the Maykop field are anticipated to commence during the second quarter of
calendar 1997. (FLS) Negotiations are in progress with a drilling contractor
regarding the Gorisht-Kocul field in Albania, and the Company expects drilling
to commence there during the first quarter of calendar 1997. (FLS) Boryslaw
Petroleum Ltd., a Ukrainian joint venture company in which the Company has a 45%
interest, is negotiating the production license for the Stynawske field in
Ukraine, and it is presently anticipated by the Company that a license will be
granted during the second quarter of calendar 1997. (FLS)
At November 30, 1996, the Company had outstanding warrants to purchase
3,244,000 shares of Common Stock at $6.00 per share and warrants to purchase
236,890 shares of Common Stock at $1.50 per share. All of these warrants, other
than 164,000 warrants exercisable at $6.00 per share, were exercised during
December 1996, and as a result of a call for redemption the 164,000 warrants
that were not exercised were transformed on December 31, 1996 into the right to
receive a redemption price of $0.01 per warrant, or an aggregate of $1,640.
During December 1996, the Company received gross proceeds of approximately
$18,800,000 from warrant exercises. At December 31, 1996, no warrants to
purchase Company stock were outstanding.
Results of Operations
---------------------
The Company recorded operating revenue of approximately $18,000 during
the quarter ended November 30, 1996, as compared with operating revenue of
approximately $6,300 for the same period last year. The revenue in both
quarters is attributable primarily to a modest amount of oil and gas production.
Direct project cost for the three month period ended November 30, 1996
amounted to approximately $232,000. These costs are expected to increase during
the development and initial phases of the various oil and gas ventures. (FLS)
As these ventures mature, a substantial portion of direct project costs will be
borne by the entities developing the respective projects. (FLS) During the
comparable 1995 quarter, the Company did not incur direct project costs because
it was then in the process of acquiring interests in oil and gas ventures.
General and administrative expense decreased from approximately
$1,100,000 for the quarter ended November 30, 1995 to approximately $860,000 for
the quarter ended November 30, 1996. This decrease is largely attributable to
the allocation to the various oil and gas ventures of personnel, travel and
associated overhead expenses attributable to the oil and gas projects being
undertaken by such ventures. In the quarter ended November 30, 1995, such
expenses were included within the Company's general and administrative expenses.
Although the Company is continuing to increase its staff, the Company will
continue to allocate appropriate
14
<PAGE>
costs to the various oil and gas ventures and accordingly does not expect its
general and administrative expenses to increase in parallel with personnel
growth. (FLS)
Loss from investments in unconsolidated subsidiaries of approximately
$540,000 was recognized during the quarter ended November 30, 1996. This amount
represents the Company's proportionate share of the results of operations of
unconsolidated subsidiaries and entities. The losses generated from these
operations was largely a result of general and administrative expenses incurred
by such entities in preparing for the commencement of operations. As these
ventures are still in the initial development stage, no operating revenues have
been received. As the ventures complete the initial development phase and place
production on line, the Company expects the ventures to recognize revenues that
will eventually offset the cost of operations. (FLS) During the three month
period ended November 30, 1995 no equity loss from unconsolidated subsidiaries
was recognized.
During the quarter ended November 30, 1996, the Company received net
interest income of approximately $291,000, compared to net interest income of
approximately $48,000 during the comparable period last year. The increase in
net interest income for the current period relates primarily to the higher
average cash balances reflecting the Company's financing activities.
Other Items
-----------
The Company may be exposed to the risk of foreign currency exchange
losses in connection with its foreign operations. (FLS) Such losses would be
the result of holding net monetary assets (cash and receivables in excess of
payables) denominated in foreign currencies during periods of a strengthening
U.S. dollar. The Company does not speculate in foreign currencies or presently
maintain significant foreign currency cash balances. The Company expects that
operations conducted through certain oil and gas ventures in which the Company
has interests, including unconsolidated entities, will be based principally on
the local currencies in the countries in which operations are conducted,
including Albania, the Russian Federation and Ukraine. (FLS) The Company may
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)
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which sets forth accounting
and disclosure requirements for stock-based compensation arrangements. The new
statement encourages, but does not require, companies to measure stock-based
compensation cost using a fair-value method, rather than the intrinsic-value
method prescribed by Accounting Principles Board ("APB") Opinion No. 25. The
Company will continue to measure stock-based compensation using the intrinsic-
value method and will disclose on a pro forma basis net income (loss) and net
income (loss) per share using the fair-value method.
15
<PAGE>
Forward Looking Statements
--------------------------
The forward looking statements contained in this Item 2 are subject to
various risks, uncertainties and other factors that could cause actual results
to differ materially from the results anticipated in such forward looking
statements. Included among the important risks, uncertainties and other factors
are those hereinafter discussed.
Few of such forward looking statements deal with matters that are
within the unilateral control of the Company. Joint venture, acquisition,
financing and other agreements and arrangements must be negotiated with
independent third parties and, in some cases, must be approved by governmental
agencies. Such third parties generally have interests that do not coincide with
those of the Company and may conflict with the Company's interests. Unless the
Company and such third parties are able to compromise their respective
objectives in a mutually acceptable manner, agreements and arrangements will not
be consummated. Operating entities in various foreign jurisdictions must be
registered by governmental agencies, and production licenses for development of
oil and gas fields in various foreign jurisdictions must be granted by
governmental agencies. These governmental agencies generally have broad
discretion in determining whether to take or approve various actions and
matters. In addition, the policies and practices of governmental agencies may
be affected or altered by political, economic and other events occurring either
within their own countries or in a broader international context. It is
anticipated that the Company will not have a majority of the equity in the
entity that would be the licensed developer of any of the projects that the
Company is presently pursuing in Eastern Europe, even though the Company may be
the designated operator of the oil or gas field. Thus, the concurrence of co-
venturers may be required for various actions. Other parties influencing the
timing of events may have priorities that differ from those of the Company, even
if they generally share the Company's objectives. As a result of all of the
foregoing, among other matters, the forward looking statements regarding the
occurrence and timing of future events may well anticipate results that will not
be realized.
The availability of equity financing to the Company or debt financing
to the Company and the joint venture or other entities that are developing the
projects is affected by, among other things, world economic conditions,
international relations, the stability and policies of various governments,
fluctuations in the price of oil and gas and the outlook for the oil and gas
industry, the competition for funds and an evaluation of specific Company
projects. Rising interest rates might affect the feasibility of debt financing
that is offered. Potential investors and lenders will be influenced by their
evaluations of the Company and its projects and comparisons with alternative
investment opportunities. The Company's ability to finance all of its present
oil and gas projects according to present plans is dependent upon obtaining
additional funding.
The development of oil and gas properties is subject to substantial
risks. Expectations regarding production, even if estimated by independent
petroleum engineers, may prove to be unrealized. There are many uncertainties
inherent in estimating production quantities and in projecting future production
rates and the timing and amount of future development expenditures. Estimates
of properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive.
Accordingly, estimates related to the Company's properties are subject to change
as additional information becomes available. Most of the Company's interests in
oil and gas ventures are located in Eastern European countries. Operations in
those countries are subject to certain additional risks relating to, among other
things, enforceability of contracts, currency convertibility and
transferability,
16
<PAGE>
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.
17
<PAGE>
PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES
(c) On October 29, 1996, the registered holder of stock purchase
warrants (the "Warrants") issued in July 1994, having an original
expiration date of June 30, 1997, and entitling the holder
thereof to purchase 14,286 shares of the Company's Common Stock
at an exercise price of $1.75 per share, exercised the Warrants,
and in connection therewith the Company issued and sold an
aggregate of 14,286 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 Seventy-Five
Cents ($1.75) in cash consideration, and the Company received
aggregate proceeds of $25,000.50 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.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
The Company filed a Form 8-K (Item 8. Change in Fiscal Year) on
September 17, 1996 reporting a change in fiscal year to
December 31.
The Company filed a Form 8-K (Item 5. Other Events) on October 2,
1996 reporting the issuance of an aggregate of 1,139,800 shares
of its Common Stock upon the exercise of Stock Purchase Warrants
entitling the Holders thereof to purchase shares of the Company's
Common Stock at an exercise price of $5.10 per share.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN OIL INCORPORATED
Date: January 14, 1997 By: /s/ Arnfin Haavik
-----------------
Arnfin Haavik
Executive Vice President and
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
- --------- ------- -----------
27 Financial Data Schedule (EDGAR filing only) X
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 13,737,692
<SECURITIES> 0
<RECEIVABLES> 311,486
<ALLOWANCES> 0
<INVENTORY> 18,625
<CURRENT-ASSETS> 14,674,798
<PP&E> 8,577,720
<DEPRECIATION> 594,053
<TOTAL-ASSETS> 36,881,843
<CURRENT-LIABILITIES> 993,169
<BONDS> 0
0
0
<COMMON> 1,885,160
<OTHER-SE> 33,806,767
<TOTAL-LIABILITY-AND-EQUITY> 36,881,843
<SALES> 0
<TOTAL-REVENUES> 18,080
<CGS> 0
<TOTAL-COSTS> 4,067
<OTHER-EXPENSES> 796,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,149
<INCOME-PRETAX> (1,350,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,324,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,324,104)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
