<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 MARCH 31, 1998
[ ] 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
- ----------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1400 Broadfield Blvd., Suite 100, Houston, Texas 77084-5163
- ----------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
281-492-6992
- ----------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
- ----------------------------------------------------------------------------
(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 April 30, 1998 was
22,447,489.
<PAGE>
PART I - FINANCIAL INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
---------------------------------------------------
MARCH 31, December 31, 1997
1998
---------------------------------------------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,315,171 $ 14,164,177
Restricted cash 9,350,000 9,700,000
Other current assets 589,589 761,904
----------------------- ------------------------
Total current assets 21,254,760 24,626,081
Restricted cash 550,000 ---
Property and equipment, net 5,906,427 5,942,273
Oil and gas properties, net, full cost method 672,221 1,478,974
(including unevaluated amounts of $324,500
and $324,500, respectively)
Investments in and advances to
oil and gas ventures, net 5,295,276 5,386,707
----------------------- ------------------------
Total Assets $ 33,678,684 $ 37,434,035
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 163,336 $ 328,171
Accrued liabilities 9,554,209 10,326,608
----------------------- ------------------------
Total current liabilities 9,717,545 10,654,779
Stockholders' Equity:
Preferred stock --- ---
Common stock 2,244,749 2,244,749
Capital in excess of par value 82,040,156 82,040,156
Accumulated deficit since October 31, 1988 (60,323,766) (57,505,649)
----------------------- ------------------------
Total stockholders' equity 23,961,139 26,779,256
----------------------- ------------------------
Total Liabilities and Stockholders' Equity $ 33,678,684 $ 37,434,035
======================= ========================
</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
MARCH 31, March 31,
1998 1997
----------------------------------------------------
<S> <C> <C>
Operating Revenues:
Oil & gas production $ 80,614 $ 31,916
----------------------- ------------------------
80,614 31,916
----------------------- ------------------------
Operating Expenses:
Lease operating expense 99,517 13,980
Direct project costs 539,406 172,297
General and administrative 1,457,352 1,383,627
Depreciation, depletion and amortization 117,824 27,201
Loss from investments in unconsolidated
subsidiaries 91,431 648,788
Writedown of oil and gas properties 800,000 ---
----------------------- ------------------------
3,105,530 2,245,893
----------------------- ------------------------
Operating Loss 3,024,916 2,213,977
----------------------- ------------------------
Other Income (Expense):
Interest, net 203,574 311,151
Other income 3,225 37,774
Loss on disposition of equipment --- (136,944)
----------------------- ------------------------
Total other income (expense) 206,799 211,981
----------------------- ------------------------
Minority interest in loss of consolidated
subsidiary --- 40,826
----------------------- ------------------------
Net Loss $ (2,818,117) $ (1,961,170)
======================= ========================
Weighted average number of
common shares outstanding 22,447,489 22,327,233
----------------------- ------------------------
Net Loss Per Common Share--Basic $ (.13) $ (.09)
----------------------- ------------------------
Net Loss Per Common Share--Diluted $ (.13) $ (.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
MARCH 31, March 31,
1998 1997
-------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (2,818,117) $ (1,961,170)
Loss on disposition of equipment --- 136,944
Equity loss in unconsolidated subsidiaries 91,431 648,788
Minority interest in loss of consolidated subsidiary --- (40,826)
Depreciation, depletion and amortization 117,824 27,201
Writedown of oil and gas properties 800,000 ---
Changes in assets and liabilities:
Accounts receivable --- (305,030)
Other current assets 172,315 (343,948)
Accounts payable (164,835) 99,893
Accrued liabilities (772,399) (562,498)
-------------------- -----------------------
NET CASH USED IN OPERATING ACTIVITIES (2,573,781) (2,300,646)
-------------------- -----------------------
Investing activities:
Restricted cash (200,000) (1,000,000)
Investments in oil and gas properties (73,904) (750,012)
Purchase of property and equipment (1,321) (843,561)
Proceeds from disposition of assets --- 42,750
Investments in and advances to oil and gas ventures --- (1,446,734)
-------------------- -----------------------
NET CASH USED IN INVESTING ACTIVITIES (275,225) (3,997,557)
-------------------- -----------------------
Financing activities:
Proceeds from exercise of options --- 102,000
-------------------- -----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES --- 102,000
-------------------- -----------------------
Net decrease in cash and cash equivalents (2,849,006) (6,196,203)
Cash and cash equivalents, beginning of period 14,164,177 31,424,064
-------------------- -----------------------
Cash and cash equivalents, end of period $ 11,315,171 $ 25,227,861
==================== =======================
Non cash investing and financing activities:
Issuance of common stock in connection with
investments in oil and gas ventures $ --- $ 1,060,937
==================== =======================
</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 MARCH 31, 1998 AND MARCH 31, 1997 (UNAUDITED)
(1) General
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. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
On February 2, 1998, the Company entered into a Combination Agreement with
CanArgo Energy Inc. ("CanArgo") pursuant to which CanArgo would become a
subsidiary of the Company and each of the outstanding CanArgo Common Shares
would be converted into the right to receive 1.6 shares of the Company's
Common Stock. Consummation of the business combination is subject to
satisfaction of a number of conditions, including approvals by the
stockholders of the Company and the shareholders of CanArgo. It is expected
that following the business combination the former shareholders of CanArgo
would have the right to receive approximately 47% of the Company's Common
Stock. The business combination could result in a change in the Company's
ownership as defined in Section 382 of the Internal Revenue Code. Upon
consummation of the business combination, current management of CanArgo
will hold a majority of the Company's senior management positions.
Participation in ventures having corporate characteristics in which the
Company's equity interest is 50% or less is accounted for using the equity
method. This applies to the Company's participation in four ventures in
Eastern Europe.
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.
5
<PAGE>
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. During the quarter
ended March 31, 1998, the Company recognized a writedown of $800,000 on its
oil and gas properties in the Sylvan Lake project as a result of a
substantial decline of heavy oil prices and the application of the
quarterly full cost ceiling test. The writedown related to proved
properties.
Recently Issued Pronouncements - In 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No.130, Reporting Comprehensive Income and SFAS No.131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 130 became
effective on January 1, 1998, however the Company had no comprehensive
income other than net income. SFAS No. 131 will be adopted in the annual
financial statements for 1998 and will not have any material effect on the
Company's financial statements.
(2) Restricted Cash
As of March 31, 1998, the Company has pledged an aggregate of $9,900,000 to
collateralize bank letters of credit, of which $550,000 is classified as a
long term asset. The short term portion of restricted cash, totaling
$9,350,000, supports letters of credit, issued to assure repayment of
borrowings under a line of credit established by Kashtan Petroleum Ltd.
("Kashtan"), which operates the Lelyaki Field project, under which
principal of $8,150,000 was outstanding both at December 31, 1997 and March
31, 1998. Kashtan has utilized such borrowings to pay Lelyaki Field
project operating costs, including repayment of costs advanced by the
Company on behalf of Kashtan. Based on its analysis of initial Lelyaki
Field development efforts, the Company has concluded that the Lelyaki Field
will not support a successful commercial development. As a result, the
Company has written off any remaining investments relating to the Lelyaki
Field project and has accrued liabilities of $8,414,000 and $8,280,000 at
March 31, 1998 and December 31, 1997, respectively, with respect to Kashtan
indebtedness supported by the Company's restricted cash deposits. These
liabilities are included within accrued liabilities on the Company's
balance sheets as of March 31, 1998 and December 31, 1997 respectively.
In April 1998, the Company applied $8,567,000 of restricted cash to repay
bank borrowings and related interest by Kashtan under the line of credit
established by Kashtan.
In January 1998, $350,000 of restricted cash, which had been used to
collateralize a bank letter of credit relating to the Gorisht-Kocul Field
project, was released.
6
<PAGE>
In March 1998, the Company pledged $550,000 to collateralize a bank letter
of credit being used to assure repayment of borrowings under a line of
credit established by Boryslaw Oil Company, which operates the Stynawske
Field project. Boryslaw Oil Company will utilize such borrowings to pay
Stynawske Field project costs, including repayment of costs advanced by the
Company on behalf of Boryslaw Oil Company.
If beneficiaries of such collateralized bank letters of credit were to draw
on the letters of credit as a result of non-performance by ventures of
their obligations to the beneficiaries or otherwise, the banks would, in
turn, draw against the restricted cash to reimburse themselves for amounts
paid on the letters of credit.
(3) Oil and Gas Properties and Investments
OIL AND GAS PROPERTIES
The Company has acquired interests in oil and gas properties through joint
ventures and joint operating arrangements. A summary of the Company's oil
and gas properties as of March 31, 1998 and December 31, 1997 are set out
below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
OIL AND GAS PROPERTIES 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Proved properties $ 2,724,231 $ 2,650,327
Unproved properties 324,500 324,500
Less: accumulated depreciation, depletion,
amortization and impairment (2,376,510) (1,495,853)
----------- -----------
TOTAL OIL AND GAS PROPERTIES, NET $ 672,221 $ 1,478,974
----------- -----------
</TABLE>
During the fiscal year ended December 31, 1997, the Company recognized an
impairment of $257,407, on its oil and gas properties as a result of
applying the full cost ceiling limitation. The impairment related to a
previously unproved property.
During the first quarter of 1997, the Company purchased a 60% interest in a
heavy oil property in the Sylvan Lake area in Alberta, Canada for
approximately $1,009,000. One new well was successfully drilled during the
1997 third quarter, and was prepared for installation of the Company's
electrically enhanced oil recovery ("EEOR") equipment. The Sylvan Lake
project includes a total of four producing wells. During the quarter
ended March 31, 1998, the Company recognized a writedown of $800,000 on its
oil and gas properties in the Sylvan Lake project as a result of a
substantial decline of heavy oil prices and the application of the
quarterly full cost ceiling test. The writedown related to proved
properties.
Unproved properties and associated costs not currently being amortized and
included in oil and gas properties in Canada were $324,500 at both March
31, 1998 and December 31, 1997, substantially all of which relates to the
Sylvan Lake Field. Such properties are expected to be evaluated over the
next 21 months, and if no proved reserves are added, those properties could
result in additional impairment.
INVESTMENTS
The Company has acquired interests in oil and gas ventures through less
than majority interests in corporate and corporate-like entities. A summary
of the Company's oil and gas ventures as of March 31, 1998 and December 31,
1997 is set out below:
<TABLE>
<CAPTION>
INVESTMENTS IN AND ADVANCES TO MARCH 31, DECEMBER 31,
OIL AND GAS VENTURES 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ukraine--Lelyaki Field, Pryluki Region
through an effective 40.5% ownership of
Kashtan Petroleum Ltd. $ 2,435,725 $ 2,435,725
Adygea, Russian Federation - Maykop Field
through 37% ownership in Intergas JSC 6,710,874 6,710,874
Albania--Gorisht-Kocul Field
through 50% ownership of joint venture 2,202,922 2,202,922
Ukraine--Stynawske Field, Boryslaw
through 45% ownership of Boryslaw Oil
Company 5,800,407 5,800,407
--------------------- -----------------------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $ 17,149,928 $ 17,149,928
--------------------- -----------------------
EQUITY IN LOSS OF OIL AND GAS VENTURES
- ------------------------------------------------------------
Ukraine--Lelyaki Field, Pryluki Region $ (2,435,725) $ (2,435,725)
Adygea, Russian Federation - Maykop Field (1,452,510) (1,452,510)
Albania--Gorisht-Kocul Field (833,191) (833,191)
Ukraine--Stynawske Field, Boryslaw (505,131) (413,700)
-------------------- -----------------------
Total Equity in Loss of Oil and Gas Ventures $ (5,226,557) $ (5,135,126)
-------------------- -----------------------
Impairment--Maykop Field $ (5,258,364) $ (5,258,364)
Impairment--Gorisht-Kocul Field (1,369,731) (1,369,731)
-------------------- -----------------------
Total Impairment $ (6,628,095) $ (6,628,095)
-------------------- -----------------------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES, NET OF EQUITY LOSS
AND IMPAIRMENT $ 5,295,276 $ 5,386,707
==================== =======================
</TABLE>
7
<PAGE>
Based on its analysis of initial Lelyaki Field development efforts
completed in the fourth quarter of 1997, the Company concluded that the
Lelyaki Field will not support a successful commercial development. As a
result, the Company recorded an impairment charge totaling $9,108,000. The
impairment charge consisted of $137,000 which represented the carrying
value of an investment related to Kashtan, $8,280,000 of debt and accrued
interest of Kashtan on which Kashtan has defaulted and which was
effectively guaranteed by the Company through restricted cash deposits, and
$691,000 of estimated liabilities for severance and related costs
associated with closing down Kashtan's operations. Such costs are expected
to be paid during 1998. In addition, the Company recognized a loss in 1997
of $2,080,000 reflecting its equity in the loss of Kashtan.
Because it has experienced extended delays in resolving operating
arrangements and other matters associated with Intergas JSC ("Intergas"),
the entity developing the Maykop Field project, including completion of
corporate formalities, the Company has concluded that under present
circumstances it cannot pursue commercial activities and develop the Maykop
Field through Intergas. As a result, the Company during the fourth quarter
of 1997 recorded an impairment for the entire amount of its investment in
and advances to Intergas of $5,258,000. In addition, the Company recognized
a loss in 1997 of $851,000, reflecting its equity in the loss of Intergas.
In March 1997, the Company declared the political unrest in Albania to be a
force majeure with respect to the Gorisht-Kocul project, and development
activities related thereto have been suspended since the declaration. In
light of the extended period that the force majeure condition has continued
and in the absence of any indication of an imminent termination of that
condition, the Company during the fourth quarter of 1997 recorded an
impairment for the entire amount of its investment in and advances to the
Gorisht-Kocul joint venture of $1,370,000. The Company also recognized a
$433,000 loss in 1997 as its equity in the loss of that joint venture.
In addition to it's equity investment, the Company has made advances to
Boryslaw Oil Company totaling $1,508,000 at March 31, 1998 and December 31,
1997, which are included within investments in and advances to oil and gas
ventures. Such advances may be recoverable only from future revenue of or
payments from future participants in the venture.
Since none of the Company's oil and gas interests outside of Canada are
being amortized, the Company's investments in and advances to oil and gas
ventures are essentially unevaluated properties. At March 31, 1998 and
December 31, 1997, 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.
8
<PAGE>
As a result of the events described above relating to Kashtan, Intergas and
the Gorisht-Kocul joint venture, the Company may be subject to contingent
liabilities in the form of claims from those ventures and other
participants therein. Fountain has been advised that Intergas and another
shareholder of Intergas are considering asserting such claims. Management
is unable to estimate the range that such claims, if any, might total.
However, if any claims were determined to be valid, they could have a
material adverse effect on the financial position, results of operations
and cash flows of the Company. Any such claims may be adjudicated in host
country forums under host country law.
Development of the oil and gas properties and ventures in which the Company
has interests involves multi-year efforts and substantial cash
expenditures. The Company had working capital of $11,537,000 at March 31,
1998, which it considered inadequate to proceed with full implementation of
its program of developing its principal oil and gas properties and
ventures. Full development of these properties and ventures would require
the availability of substantial funds from external sources. The Company
believes that its ability to access external financing is dependent upon
the successful completion of a business combination with, or the farm-out
of a significant portion of its interest in Boryslaw Oil Company and
possibly other projects to, an entity that can provide or attract such
financing. The Company generally has the principal responsibility for
arranging financing for the oil and gas properties and ventures in which it
has an interest. There can be no assurance, however, that the Company or
the entities that are developing the oil and gas properties and ventures
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 financing as is available will be on terms that are
attractive or acceptable to or are deemed to be in the best interests of
the Company, such entities or their respective stockholders or
participants.
As of March 31, 1998, the Company had remaining net investments in and
advances to oil and gas ventures totaling $5,295,000 which relate solely to
Boryslaw Oil Company, the entity holding the license to develop the
Stynawske Field, for which development operations have not yet begun.
Ultimate realization of the carrying value 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 production 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.
In addition, the Company must mobilize drilling equipment and personnel to
initiate drilling, completion and production activities. The Company has
plans to mobilize resources and achieve levels of production and profits
sufficient to recover its carrying value. 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 carrying
value. The Company will be entitled to distributions from the various
properties and ventures in accordance with the arrangements governing the
respective properties and ventures.
9
<PAGE>
The consolidated financial statements of the Company do not give effect to
any additional 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.
(4) Accrued Liabilities
Accrued liabilities at March 31, 1998 and December 31, 1997 included the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Compensation, including related taxes $ 301,550 $ 337,767
Professional fees 276,478 276,500
Termination costs 131,222 405,833
Effective guarantee of Kashtan 8,414,000 8,280,000
obligations
(Notes 2 and 3)
Close down costs--Kashtan project 327,005 690,622
(Note 3)
Oilfield related equipment 90,000 268,000
Other 13,954 67,886
--------- ----------
$9,554,209 $10,326,608
--------- ----------
</TABLE>
The accrual for termination costs represents the amount of costs for
employees receiving contractually required termination notices during the
fourth quarter of 1997. The costs involved represent salaries and related
taxes and have been reflected as general and administrative expenses. The
accrual includes the termination costs for 11 employees, who were located
in the Company's offices in Calgary, Alberta, and Asker, Norway. Such costs
are expected to be paid during 1998.
(5) Net Loss Per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings Per
Share. Basic and diluted net loss per common share for the periods ended
March 31, 1998 and March 31, 1997 were based on the weighted average
number of common shares outstanding during those periods. The weighted
average numbers of shares used were 22,447,489 and 22,327,233,
respectively.
10
<PAGE>
(6) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES - The
Company has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil and
gas properties and ventures. At December 31, 1997, the Company had the
contingent obligation to issue an aggregate of 375,000 shares of its Common
Stock, subject to the satisfaction of conditions related to the achievement
of specified performance standards by the Stynawske Field project.
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS - On February 20, 1998, Zhoda
Corporation ("Zhoda"), which sold to Fountain most of Fountain's interest
in UK-RAN Oil Corporation ("UK-RAN") through which Fountain holds its
interest in Kashtan, filed suit against Fountain and two of its
consolidated subsidiaries in the District Court of Harris County, Texas.
Zhoda alleged that Zhoda was, on several theories, wrongfully deprived of
the value of the UK-RAN shares it transferred to Fountain or the contingent
consideration it might have received under its agreement with Fountain.
Among the theories of Zhoda's complaint were breach of contract, breach of
fiduciary duty and duty of good faith and fair dealing, fraud and
constructive fraud, fraud in the inducement, negligent misrepresentation,
civil conspiracy, breach of trust, unjust enrichment and rescission. Zhoda
sought damages in excess of $7.5 million, redelivery of the UK-RAN shares
transferred to Fountain, fees, expenses and costs and any further relief to
which it may be entitled. On April 8, 1998, the Harris County District
Court issued an order staying the litigation initiated by Zhoda in its
entirety and indicating that the Court would dismiss the action if the
parties do not commence arbitration in New York, New York on or before June
30, 1998.
On March 24, 1998, Fountain and two consolidated subsidiaries filed an
action against Zhoda in the Court of Queen's Bench of Alberta, Judicial
Centre of Calgary, in which the Company seeks to recover $190,000, plus
interest thereon, which the Company asserts is owing by Zhoda pursuant to
promissory notes and loan agreements. On March 31, 1998, Zhoda filed an
answer and counterclaims against Fountain and its two subsidiaries,
asserting essentially the same claims as were asserted in the Texas action
described in the previous paragraph, with the exception that claims
asserted in the Texas suit based on fraud and civil conspiracy were not
included in the Alberta counterclaims. On the basis of its counterclaims,
Zhoda seeks damages estimated to be at least $10,500,000 (which would
appear to be stated in Canadian dollars), redelivery of the UK-RAN shares
transferred to the Company, interest, costs and such further relief as the
court may deem just.
11
<PAGE>
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to
Fountain the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed suit
against Fountain and one of its consolidated subsidiaries in the Third
Judicial District Court of Salt Lake County, Utah. In its complaint,
Ribalta alleges breach by Fountain of the contract governing the sale of
the outstanding capital of Gastron and failure of a condition in that
contract that should have resulted in its termination. Ribalta seeks the
return of all benefits conferred on Fountain pursuant to the contract,
including the shares of Gastron and any property transferred by Gastron,
or, alternatively, damages equal to the value of such benefits, as well as
fees, costs and such other relief as the court deems proper. As of May 8,
1998, Fountain and its subsidiary had not been served with the complaint in
the action.
The entity that sold to Fountain certain rights related to the Stynawske
Field project has indicated to Fountain that it is considering an action
seeking the contingent consideration payable with respect to that sale on
the grounds that the Transaction or other action by or inaction of Fountain
has unreasonably delayed or will unreasonably delay the satisfaction of the
conditions precedent to the issuance of such contingent consideration.
As a result of the events associated with the impairment of Fountain's
investment in and advances to and other assets related to Kashtan, Intergas
and the Gorisht-Kocul joint venture, the Company may be subject to
contingent liabilities in the form of claims from those ventures and other
participants therein. Fountain has been advised that Intergas and another
shareholder of Intergas are considering asserting such claims. Management
is unable to estimate the range that such potential claims, if any, might
total. However, if any claims which have been or in the future are
asserted were determined to be valid, they could have a material adverse
effect on the financial position, results of operations and cash flows of
the Company. Any such claims may be adjudicated in host country forums
under host country law.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Qualifying Statement With Respect To Forward-Looking Information
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward looking statements. Such forward
looking statements are based upon the current expectations of Fountain and speak
only as of the date made. These forward looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward
Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q are
among those factors that in some cases have affected Fountain's historic results
and could cause actual results in the future to differ significantly from the
results anticipated in forward looking statements made in this Quarterly Report
on Form 10-Q, future filings by Fountain with the Securities and Exchange
Commission, in Fountain's press releases and in oral statements made by
authorized officers of Fountain. When used in this Quarterly Report on Form 10-
Q, the words "estimate," "project," "anticipate," "expect," "intend," "believe,"
"hope," "may" and similar expressions, as well as "will," "shall" and other
indications of future tense, are intended to identify forward looking
statements.
Liquidity, Capital Resources, and Changes in Financial Condition
As of March 31, 1998, Fountain had current assets of $21,255,000, of which
$11,315,000 was in the form of cash and cash equivalents and $9,350,000 was in
the form of restricted cash, and current liabilities of $9,718,000, leaving
Fountain with working capital of $11,537,000. This compares to current assets
of $24,626,000, cash and cash equivalents of $14,164,000, restricted cash of
$9,700,000, current liabilities of $10,655,000 and working capital of
$13,971,000 as of December 31, 1997.
The $2,849,000 decrease in cash and cash equivalents from December 31, 1997
through March 31, 1998 is attributable primarily to $2,574,000 of cash used in
1998 operating activities, including $1,457,000 of general and administrative
expenses that were largely cash items, and $275,000 used in 1998 investing
activities, primarily consisting of a $200,000 net increase of restricted cash
deposits collateralizing letters of credit issued by banks to guarantee
repayment of obligations by oil and gas ventures. Other current assets decreased
from $762,000 at December 31, 1997 to $590,000 at March 31, 1998, primarily as a
result of the collection of an outstanding receivable for $150,000.
During the fourth quarter of 1997, Fountain commenced a program to
preserve its financial resources by reducing general and administrative expenses
and limiting its investments in and advances to oil and gas ventures and
properties in which it holds interests, while it explored and pursued strategic
alternatives with the assistance of investment advisors. As a result of its
consideration of strategic alternatives, on February 2, 1998, Fountain entered
into a Combination Agreement (as amended and restated, the "Combination
Agreement") with CanArgo Energy Inc. ("CanArgo"). Pursuant to the Combination
Agreement, CanArgo and Fountain would engage in a series of transactions
(collectively the "Transaction") whereby CanArgo would become a subsidiary of
Fountain and each of the outstanding CanArgo Common Shares would be converted
into the right to receive 1.6 shares of Fountain Common Stock. Consummation of
the business combination is subject to satisfaction of a number of conditions,
including approval of the business combination by the stockholders of both
CanArgo and
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Fountain. Following the business combination, it is contemplated that the former
shareholders of CanArgo would have the right to receive approximately 47% of
Fountain's Common Stock, that current management of CanArgo would occupy most of
Fountain's senior management positions and that current directors of CanArgo
would constitute a majority of the Fountain Board of Directors.
As part of its program to preserve financial resources, Fountain has
terminated or delivered termination notices to most of its employees. Most of
those terminated are expected to cease employment by July 31, 1998. The rate at
which Fountain utilizes cash in the ordinary conduct of business is expected to
decrease substantially during 1998 as compared to 1997, at least prior to the
consummation of the Transaction. Cash expenses associated with the Transaction,
principally fees to financial advisors and legal counsel, are however expected
to amount to approximately $1,000,000, most of which will be incurred prior to
the consummation of the Transaction. The sharp reduction in Fountain's
workforce will make it significantly more difficult for Fountain to function as
an independent entity if the Transaction does not occur.
The $937,000 decrease in current liabilities during the first quarter of
1998 is attributable to a $772,000 decrease in accrued liabilities, which in
turn is primarily attributable to payment of various liabilities accrued at
December 31, 1997 relating to closing down the Lelyaki project, termination
costs and payment for oilfield equipment.
At December 31, 1997, Fountain had placed a total of $9,700,000 in
restricted deposit accounts to collateralize letters of credit used for the
benefit of oil and gas ventures in which Fountain holds interests. Based on
Fountain's expectation that the restricted cash would be either applied to
satisfy accrued liabilities or released from restrictions during the twelve
months following December 31, 1997, restricted cash was classified as a current
asset as of December 31, 1997. As of March 31, 1998 the short term portion of
the restricted cash decreased to $9,350,000, due to release of restricted cash
supporting a letter of credit guaranteeing payment to a contractor for the
Gorisht-Kocul project in Albania.
The short term portion of restricted cash at March 31, 1998 supported
letters of credit issued to assure repayment of borrowings under a bank line of
credit established by Kashtan Petroleum Ltd. ("Kashtan"), which operates the
Lelyaki Field project. In April 1998, the Company applied $8,567,000 of
restricted cash to repay the bank borrowings and associated interest, $8,414,000
of which had been accrued at March 31, 1998.
In March 1998, the Company placed an additional $550,000 in a restricted
deposit account to collateralize letters of credit for the benefit of Boryslaw
Oil Company, which is developing the Stynawske Field project. This part of
restricted cash has been classified as a long term asset.
Oil and gas properties, net declined from $1,479,000 at December 31, 1997
to $672,000 at March 31, 1998 primarily as a result of an $800,000 writedown of
the Company's oil and gas properties in the Sylvan Lake project as a result of a
substantial decline during the quarter of heavy oil prices and the application
of the quarterly full cost ceiling test.
Investments in and advances to oil and gas ventures, net decreased during
the quarter ended March 31, 1998 from $5,387,000 at December 31, 1997 to
$5,295,000 at March 31, 1998. The decrease reflects the equity loss for the
first quarter of 1998 from Boryslaw Oil Company, which holds the Company's
interest in the Stynawske Field project.
Based on its analysis of the results of the initial development efforts in
the Lelyaki Field project, Fountain concluded that the Lelyaki Field will not
support a successful commercial development. As a result, Fountain recorded in
1997 an impairment charge totaling $9,108,000.
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<PAGE>
The impairment charge consisted of $137,000 representing the carrying value of
an investment related to Kashtan, $8,280,000 of debt and accrued interest of
Kashtan on which Kashtan has defaulted and which was effectively guaranteed by
Fountain through restricted cash deposits, and $691,000 of estimated liabilities
for severance and related costs associated with closing down Kashtan's
operation.
Because it has experienced extended delays in resolving operating
arrangements and other matters associated with Intergas JSC ("Intergas"), the
entity developing the Maykop Field project, including completion of corporate
formalities, Fountain concluded that under present circumstances it cannot
effectively pursue commercial activities and develop the Maykop Field through
Intergas. As a result, Fountain recorded during the fourth quarter of 1997 an
impairment of $5,258,000 for the entire amount of its investment in and advances
to Intergas. In addition, in recognition that drilling rigs and related
equipment originally intended for use in the Maykop Field are expected to be
employed for applications other than those for which they were specifically
intended, Fountain wrote those rigs and equipment down to their estimated fair
value.
In March 1997, Fountain declared the political unrest in Albania to be a
force majeure with respect to the Gorisht-Kocul project, and development efforts
there have been suspended since the declaration. In light of the extended
period that the force majeure condition has continued and the absence of any
indication of an imminent termination of that condition, Fountain recognized at
December 31, 1997 a $1,370,000 impairment of oil and gas ventures, writing off
its net investment in and advances to the joint venture developing the Gorisht-
Kocul Field.
As a result of the events described above relating to Kashtan,
Intergas and the Gorisht-Kocul joint venture, Fountain may be subject to
contingent liabilities in the form of claims from those ventures and other
participants therein. Fountain has been advised that Intergas and another
shareholder of Intergas are considering asserting such claims. Fountain
management is unable to estimate the range that such claims, if any, might
total. However, if any claims were determined to be valid, they could have a
material adverse effect on Fountain's financial position, result of operations
and cash flows. Any such claims may be adjudicated in host country forums under
host country law.
The balance of $5,387,000 as of December 31, 1997 and $5,295,000 as of
March 31, 1998 in investments in and advances to oil and gas ventures, net,
relates solely to Boryslaw Oil Company ("BOC"), the entity holding the license
to develop the Stynawske Field. Fountain has the responsibility of arranging
financing for this venture and, unless third-party financing can be arranged,
Fountain might have to supply the capital to finance operations until the
venture generates positive cash flow, which will have the effect of increasing
investments in and advances to oil and gas ventures. The amount of such
advances may be greater than the amount of the operating losses recognized by
Fountain, which would cause such net investment balances to increase. Such
investments are essentially unevaluated oil and gas properties, and such costs
may not be recovered if the venture is not successful. No assurance can be
given that Fountain will either be able to arrange third-party financing for
such venture or have sufficient resources to fund the capital and operating
needs of the venture or that the venture will be successful.
Fountain has contingent obligations and may incur additional obligations,
absolute and contingent, with respect to acquiring and developing oil and gas
properties and ventures.
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These obligations are subject to the satisfaction of conditions related to
achievement of specified project performance standards. At March 31, 1998,
Fountain had contingent obligations involving 375,000 shares which relate to
development of the Stynawske Field project. As Fountain develops current
projects and undertakes other projects, significant additional obligations may
be incurred.
Development of the oil and gas properties and ventures in which Fountain
has interests involves multi-year efforts and substantial cash expenditures.
Fountain had working capital of approximately $11,537,000 and $13,971,000 at
March 31, 1998 and December 31, 1997, respectively, which it considered
inadequate to proceed with full implementation of its program of developing its
principal oil and gas properties and ventures. Full development of Fountain's
oil and gas properties and ventures will require the availability of substantial
additional funds from external sources. Fountain believes that its ability to
access external financing is dependent upon the successful completion of a
business combination with, or the farm-out of a significant portion of its
interest in BOC and possibly other properties and ventures to, an entity that
can provide or attract such financing. Fountain generally has the principal
responsibility for arranging financing for the oil and gas properties and
ventures in which it has an interest. There can be no assurance, however, that
Fountain or the entities that are developing the oil and gas properties and
ventures will be able to arrange the financing necessary to develop the projects
being undertaken or to support the corporate and other activities of Fountain or
that such financing as is available will be on terms that are attractive or
acceptable to or are deemed to be in the best interest of Fountain, such
entities and their respective stockholders or participants.
As of March 31, 1998 and December 31, 1997, Fountain had net investments
in oil and gas properties and ventures totaling approximately $5,967,000 and
$6,866,000, respectively. Of these amounts, $5,295,000 and $5,387,000,
respectively, relate to BOC. Ultimate realization of the carrying value of
Fountain'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 Fountain, which is dependent upon, among
other factors, achieving significant production 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. In addition,
Fountain must mobilize drilling equipment and personnel to initiate drilling,
completion and production activities. Fountain has plans to mobilize resources
and achieve levels of production and profits sufficient to recover its carrying
value. However, if one or more of the above factors, or other factors, are
different than anticipated, these plans may not be realized, and Fountain may
not recover its carrying value. Fountain will be entitled to distributions from
the various properties and ventures in accordance with the arrangements
governing the respective properties and ventures.
In 1997, Fountain implemented new computer information systems, which
Fountain believes are Year 2000 compliant. Although Fountain does not expect to
incur additional expenditures to address Year 2000 issues, there can be no
assurance that this will be the case. Additionally, the ability of third
parties with whom Fountain transacts business to adequately address their Year
2000 issues is outside of Fountain's control. There can be no assurance that
the failure of Fountain or such third parties to adequately address their
respective Year 2000 issues will not have a material adverse effect on
Fountain's business, financial condition, results of operations or cash flows.
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Results of Operations
Fountain has typically acquired its interests in oil and gas properties
through interests in joint ventures, partially owned corporate and other
entities and joint operating arrangements. While it has normally sought to be
the operator of substantial oil and gas projects in which it has an interest,
Fountain has generally acquired interests representing 50% or less of the equity
in various oil and gas projects. Accordingly, most of the activities in which
Fountain has an interest are conducted through unconsolidated entities.
Fountain's interest in the assets and liabilities of unconsolidated entities is
reflected on Fountain's consolidated balance sheet on a net basis as investment
in and advances to oil and gas ventures; Fountain's share of revenue, other
income and expenses of unconsolidated entities is reported in Fountain's
consolidated statement of operations as income or loss from equity investment in
oil and gas ventures; and Fountain's interest in the cash flow of unconsolidated
entities is reported in Fountain's consolidated statement of cash flows as
distributions from or investment in or advances to oil and gas ventures.
Interests acquired in certain joint ventures, partnerships and production
sharing, working interest and other arrangements are proportionately
consolidated. Fountain 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.
Fountain recorded operating revenue of $81,000 during the quarter ended
March 31, 1998 compared with $32,000 for the quarter ended March 31, 1997.
Revenue in both quarters was related to a modest amount of oil production from
the Sylvan Lake property in Alberta, Canada in which Fountain has an interest.
The operating loss for the quarter ended March 31, 1998 amounted to
$3,025,000, compared with $2,214,000 for the quarter ended March 31, 1997. Lease
operating expenses which in the first quarter of 1998 related primarily to the
Sylvan Lake property increased to $100,000 during the quarter ended March 31,
1998, as compared to $14,000 for the quarter ended March 31, 1997, primarily as
a result of a greater level of operating activity in the first quarter of 1998.
Direct project costs increased $367,000 from $172,000 for the quarter ended
March 31, 1997, reflecting activity related to BOC and winding down activities
related to other oil and gas ventures. General and administrative expense
increased to $1,457,000 during the quarter ended March 31, 1998 from $1,384,000
for the quarter ended March 31, 1997, primarily as a result of expenses related
to the Transaction partially offset by reduced salaries and other employee-
related costs resulting from the termination of the majority of employees. The
increase in depreciation, depletion and amortization expense from $27,000 for
the quarter ended March 31, 1997 to $118,000 during the quarter ended March 31,
1998 is attributable principally to the increased production of oil. The loss
from investments in unconsolidated subsidiaries decreased to $91,000 during the
quarter ended March 31, 1998, as compared to $649,000 for the quarter ended
March 31, 1997, as a result of lower activity in the unconsolidated subsidiaries
in the first quarter of 1998. During the quarter ended March 31, 1998, Fountain
recognized an $800,000 writedown on its oil and gas properties in the Sylvan
Lake project as a result of a substantial decline of heavy oil prices and the
application of the quarterly full cost ceiling test. There was no comparable
writedown during the first quarter of 1997.
Although lease operating expenses exceeded revenue for the first quarter of
1998, Fountain does not believe that such expenses will continue to exceed
revenue because expenses during the quarter ended March 31, 1998, included non
recurring costs. In addition, prices for heavy oil were depressed during the
first quarter of 1998 resulting in a writedown of $800,000 on Fountain's proved
oil and gas properties in the Sylvan Lake project due to the decline in heavy
oil prices and the application of the quarterly full cost ceiling limitation.
The full cost ceiling limitation is equal to (a) the present value (discounted
at 10%) of 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,
and must be applied each quarter. No assurance can be given, however, that
prices for heavy oil will improve or that operating revenue will exceed lease
operating expenses from the Sylvan Lake property in future periods.
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<PAGE>
Fountain recorded total other income of $207,000 for the quarter ended March
31, 1998, as compared to $212,000 during the quarter ended March 31, 1997. The
principal reason for the decrease is Fountain's accrual of liability for
interest owing by Kashtan on bank borrowings, which is partially offset by a
loss that Fountain recorded from the sale of miscellaneous equipment and
property amounting to $137,000 in the first quarter of 1997; no comparable loss
was incurred in the first quarter of 1998.
The net loss of $2,818,000, or $.13 per share, during the quarter ended March
31, 1998 compares to a net loss of $1,961,000, or $.09 per share, for the
quarter ended March 31, 1997.
Forward Looking Statements
The forward looking statements contained in this Item 2 and elsewhere in this
Quarterly Report on Form 10-Q 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. The Company does not have a
majority of the equity in the entity that is the licensed developer of the
Stynawske Field project, 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.
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The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive.
Accordingly, estimates related to the Company's properties are subject to change
as additional information becomes available. Most of the Company's interests in
oil and gas ventures are located in Eastern European countries. Operations in
those countries are subject to certain additional risks relating to, among other
things, enforceability of contracts, currency convertibility and
transferability, unexpected changes in tax rates, availability of trained
personnel, availability of equipment and services and other factors that could
significantly change the economics of production. Production estimates are
subject to revision as prices and costs change. Production, even if present,
may not be recoverable in the amount and at the rate anticipated and may not be
recoverable in commercial quantities or on an economically feasible basis.
World and local prices for oil and gas can fluctuate significantly, and a
reduction in the revenue realizable from the sale of production can affect the
economic feasibility of an oil and gas project. World and local political,
economic and other conditions could affect the Company's ability to proceed with
or to effectively operate projects in various foreign countries.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet effective.
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PART II - OTHER INFORMATION
FOUNTAIN OIL INCORPORATED AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
On February 20, 1998, Zhoda Corporation ("Zhoda"), which sold to
Fountain most of Fountain's interest in UK-RAN, filed suit against Fountain and
two of its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleged under several theories that Zhoda was wrongfully deprived
of the value of the UK-RAN shares it transferred to Fountain or the contingent
consideration it might have received under its agreement with Fountain. Among
the theories of Zhoda's complaint were breach of contract, breach of fiduciary
duty and duty of good faith and fair dealing, fraud and constructive fraud,
fraud in the inducement, negligent misrepresentation, civil conspiracy, breach
of trust, unjust enrichment and rescission. Zhoda sought damages in excess of
$7,500,000, redelivery of the UK-RAN shares transferred to Fountain, fees,
expenses and costs and any further relief to which it may be entitled. On April
8, 1998, the Harris County District Court issued an order staying the litigation
initiated by Zhoda in its entirety and indicating that the Court would dismiss
the action if the parties do not commence arbitration in New York, New York on
or before June 30, 1998. Orest Senkiw, who was a Vice President of Fountain from
February 4, 1997 to December 1, 1997, and his wife and adult children indirectly
beneficially own in the aggregate 10.3% of the outstanding stock of Zhoda.
On March 24, 1998, Fountain and two consolidated subsidiaries filed an
action against Zhoda in the Court of Queen's Bench of Alberta, Judicial Centre
of Calgary, in which the Company seeks to recover $190,000, plus interest
thereon, which the Company asserts is owing by Zhoda pursuant to promissory
notes and loan agreements. On March 31, 1998, Zhoda filed an answer and
counterclaims against Fountain and its two subsidiaries, asserting essentially
the same claims as were asserted in the Texas action described in the previous
paragraph, with the exception that claims asserted in the Texas suit based on
fraud and civil conspiracy were not included in the Alberta counterclaims. On
the basis of its counterclaims, Zhoda seeks damages estimated to be at least
$10,500,000 (which would appear to be stated in Canadian dollars), redelivery of
the UK-RAN shares transferred to the Company, interest, costs and such further
relief as the court may deem just.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to
Fountain the outstanding capital of Gastron International Limited ("Gastron"),
which in turn owned 31% of the capital of Intergas, filed suit against Fountain
and one of its consolidated subsidiaries in the Third Judicial District Court of
Salt Lake County, Utah. In its complaint, Ribalta alleges breach by Fountain of
the contract governing the sale of the outstanding capital of Gastron and
failure of a condition in that contract that should have resulted in its
termination. Ribalta seeks the return of all benefits conferred on Fountain
pursuant to the contract, including the shares of Gastron and any property
transferred by Gastron, or, alternatively, damages equal to the value of such
benefits, as well as fees, costs and such other relief as the court deems
proper. As of May 8, 1998, Fountain and its subsidiary had not been served with
the complaint in the action.
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ITEM 6. 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).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
May 29, 1996 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 June 30,
1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services
Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated
dated May 16, 1995 (Incorporated herein by reference from
December 31, 1997 Form 10-K).
2(5) Amended and Restated Combination Agreement between Fountain
Oil Incorporated and CanArgo Energy Inc. dated as of February
2, 1998 (Incorporated herein by reference from Form S-3
Registration Statement, File No. 333-48287 filed on March 19,
1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from December 16,
1994 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from
December 31, 1996, Form 10-K).
4 Form of 8% Convertible Subordinated Debenture (Incorporated
herein by reference from February 29, 1996 Form 10-QSB).
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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) Management Services Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated herein by
reference from June 30, 1997 Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated herein by
reference from December 31, 1997 Form 10-K).
*10(9) Employment Agreement between Fountain Oil Incorporated and
Einar H. Bandlien (Incorporated herein by reference from
August 31, 1995 Form 10-KSB).
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*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) Amended 1995 Long-Term Incentive Plan (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
*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 (Incorporated herein by
reference from December 31, 1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil Incorporated and
Whitfield Fitzpatrick (Incorporated herein by reference from
March 31, 1997 Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil Services
Incorporated and Orest Senkiw (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
*10(24) Employment Agreement between Fountain Oil Incorporated and
Alfred Kjemperud (Incorporated herein by reference from March
31, 1997 Form 10-Q).
23
<PAGE>
*10(25) Employment Agreement between Fountain Oil Norway AS and Rune
Falstad (Incorporated herein by reference from December 31,
1997 Form 10-K).
*10(26) Management Services Agreement between Trident Petroleum Inc.
and Fountain Oil Boryslaw Limited (Incorporated herein by
reference from December 31, 1997 Form 10-K).
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
On January 27, 1998, the Company filed a Form 8-K dated January 27,
1998 reporting Item 5. Other Events, regarding the signing of a letter
of intent with CanArgo Energy Inc. under which a business combination
involving the two companies would be effected.
24
<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: May 15, 1998 By: /s/Rune Falstad
-------------------------
Rune Falstad
Vice President and
Acting Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
------- ------- ----------
<C> <S> <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).
2(3) Supplemental Deed Relating to the Sale and Purchase of All the Issued
Share Capital of Gastron International Limited dated May 29, 1996 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 June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management Services Pty,
Ltd., A.C.N. 005 506 123 and Fountain Oil Incorporated dated May 16,
1995 (Incorporated herein by reference from December 31, 1997 Form
10-K).
2(5) Amended and Restated Combination Agreement between Fountain Oil
Incorporated and CanArgo Energy Inc. dated as of February 2, 1998
(Incorporated herein by reference from Form S-3 Registration
Statement, File No. 333-48287 filed on March 19, 1998).
3(1) Registrant's Certificate of Incorporation and amendments thereto
(Incorporated herein by reference from December 16, 1994 Form 8-K).
3(2) Registrant's Bylaws (Incorporated herein by reference from December
31, 1996, Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
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) Management Services Agreement between Fountain Oil Incorporated and
Oistein Nyberg (Incorporated herein by reference from June 30, 1997
Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil Incorporated and
Nils N. Trulsvik (Incorporated herein by reference from December 31,
1997 Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
*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) Amended 1995 Long-Term Incentive Plan (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
*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 (Incorporated herein by reference
from December 31, 1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil Incorporated and Whitfield
Fitzpatrick (Incorporated herein by reference from March 31, 1997
Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil Services
Incorporated and Orest Senkiw (Incorporated herein by reference from
March 31, 1997 Form 10-Q).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
*10(24) Employment Agreement between Fountain Oil Incorporated and Alfred
Kjemperud (Incorporated herein by reference from March 31, 1997 Form
10-Q).
*10(25) Employment Agreement between Fountain Oil Norway AS and Rune Falstad
(Incorporated herein by reference from December 31, 1997 Form 10-K).
*10(26) Management Services Agreement between Trident Petroleum Inc. and
Fountain Oil Boryslaw Limited (Incorporated herein by reference from
December 31, 1997 Form 10-K).
27 Financial Data Schedule (EDGAR filing only) X
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,315,171
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 34,756
<CURRENT-ASSETS> 21,254,760
<PP&E> 9,926,846
<DEPRECIATION> 776,422
<TOTAL-ASSETS> 33,678,684
<CURRENT-LIABILITIES> 9,717,545
<BONDS> 0
0
0
<COMMON> 2,244,749
<OTHER-SE> 21,716,390
<TOTAL-LIABILITY-AND-EQUITY> 33,678,684
<SALES> 0
<TOTAL-REVENUES> 80,614
<CGS> 0
<TOTAL-COSTS> 1,438,923
<OTHER-EXPENSES> 209,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,980
<INCOME-PRETAX> (2,818,117)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,818,117)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,818,117)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
