<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
Commission File Number 0-9147
FOUNTAIN OIL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 91-0881481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 BROADFIELD BLVD., SUITE 100
HOUSTON, TEXAS 77084
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (281) 492-6992
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, par value $0.10 per share
-------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of December 31, 1997, was $19,636,794.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: Common Stock, $0.10 par
value, 22,447,489 shares outstanding as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Fountain Oil Incorporated (together with its predecessor, its consolidated
subsidiaries and entities for which it accounts on the equity method, except
where the context otherwise requires, "Fountain" or the "Company") is a Delaware
corporation formed in 1994. Its predecessor was incorporated in Oklahoma in
1980 and operated as an oil and gas exploration and production company until
1988, when it shifted its focus to the application of its electrically enhanced
oil recovery ("EEOR") process for heating reservoirs of heavy or paraffinic oil
utilizing electric current. The EEOR process represented the basis for
Fountain's principal business from 1988 through December 1994. See "Technology
for Enhanced Production of Heavy Oil -- EEOR Process."
In August 1994, a new management group with experience in the
international oil and gas industry became involved with Fountain, and beginning
in 1995 Fountain shifted its principal activities to the acquisition and
development of interests in a portfolio of oil and gas properties with a
production history, including engaging in such activities through joint venture,
stock ownership, production sharing, working interest, and other arrangements.
In a series of private placements in 1994, 1995 and 1996, Fountain raised equity
capital to finance its operations.
At January 31, 1998, Fountain had cash and cash equivalents of
approximately US$12,500,000, which it considers inadequate to proceed with its
program of acquiring and developing oil and gas properties. During 1997, the
initial development of the Lelyaky Field, the first substantial oil and gas
venture in which Fountain had an interest to be developed, failed to produce
commercial quantities of oil. In the fall of 1997, following the announcement
of the disappointing initial results from the Lelyaky Field in Ukraine, Fountain
undertook a program to preserve its financial resources by limiting its
investments in and advances to oil and gas ventures and properties in which it
holds interests and reducing its general and administrative expenses, which has
resulted in the termination or delivery of contractually required notices
preceding termination to three-quarters of Fountain's employees, and engaged
investment bankers to advise it regarding the strategic alternatives available
to it.
As a result of examining various strategic alternatives with its
investment bankers, Fountain, on February 2, 1998, 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 by the stockholders of both CanArgo and 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.
Fountain's principal activities during the past three years have involved
the acquisition of interests in and development of oil and gas fields.
Fountain's primary focus has been the acquisition of ownership interests in
existing oil and gas fields with a productive history that indicate the
potential for increased production through rehabilitation and utilization of
modern production techniques and enhanced oil recovery processes. Fountain has
looked for, among other characteristics in addition to petroleum production
potential, convenient access to oil and gas transportation and marketing systems
and the existence of an infrastructure for oil and gas production. Fields
meeting Fountain's requirements have been found in countries that in the past
have lacked the technical expertise or economic resources to exploit such fields
effectively. Oil and gas ventures in such countries are typically structured
through joint ownership arrangements with the state oil company or other local
interests. Fountain established a position in four projects in Eastern Europe,
including the Russian Federation - one in the Republic of Adygea, Russian
Federation, two in Ukraine and one in Albania. Production and, in some cases,
exploration licenses have been granted in regard to all four projects. During
1997, Fountain recorded losses associated with the impairment of
2
<PAGE>
three of those four projects. Fountain also has interests in small oil and gas
properties in Canada, some of which have produced and are producing modest
amounts of crude oil. Fountain's principal product from its existing ventures
and properties is crude oil.
VENTURES IN EASTERN EUROPE
Stynawske Field, Western Region, Ukraine
In November 1996, Fountain entered into a joint venture arrangement with
the Ukrainian state oil company ("Ukranafta") for the development of the 6,000
acre Stynawske Field, located in Western Ukraine near the city of Stryy.
Fountain has a 45% interest in the joint venture, with Ukranafta holding the
remaining 55% interest. The formal registration of the joint venture company,
Boryslaw Oil Company ("BOC"), occurred in December 1996, and BOC received a
production license for the Stynawske Field in June 1997. At December 31, 1997
and 1996, Fountain's net investment in and advances to BOC amounted to
approximately US$5,387,000 and US$1,656,000, respectively.
The Stynawske Field is a relatively tight sandstone reservoir containing
light oil. The production from the field commenced in 1967 but was
substantially terminated after a few years of production due to environmental
considerations. The field is located underneath the main water supply for
Western Ukraine, and leakage from producing wells some 20 years ago threatened
pollution of this aquifer. Four wells that are located away from the water
supply have been allowed to continue production. Ukranafta retains rights to
base production, representing a projection of the net value of what the
Stynawske Field would produce in the future, based on the physical plant and
technical processes in use at the time of license grant, on a declining basis
through 2011. BOC will be entitled to all incremental production above that
declining base.
The preliminary field development for the rehabilitation of the Stynawske
Field is based on deviated drilling, in which the drilling sites for the wells
would be located a safe distance from the water supply and the wells would enter
the reservoir at angles avoiding the aquifer. Additional measures would be
taken with the drilling mud and otherwise to protect the environmental integrity
of the project. Gas injection to maintain reservoir pressure will be
considered. The full field development plan and marketing arrangements for the
Stynawske Field have not yet been formulated and will depend upon data developed
during an initial phase. In anticipation of the initial phase development, BOC
is proceeding with an environmental audit of the Stynawske Field, the technical
and economic evaluation of the project and the selection and preparation of
drilling sites.
Fountain is actively seeking arrangements with other oil and gas
production companies under which, through farm-out arrangements, one or more
such companies would acquire a portion of Fountain's interest in BOC and would
assume no less than a proportionate share of the historic and future financial
responsibilities for the Stynawske Field project associated with such interest
in BOC.
Lelyaky Field, Pryluki Region, Ukraine
Fountain holds a 90% interest in UK-RAN Oil Corporation ("UK-RAN"), which
in turn owns 45% of the equity of Kashtan Petroleum, Ltd. ("Kashtan"), the
Ukrainian joint venture company developing the Lelyaky Field, providing Fountain
with an effective 40.5% ownership interest in Kashtan. Ukranafta owns the other
55% of Kashtan. In May 1996, Kashtan received a 20 year oil and gas production
license for a 67 square kilometer ("km/2/") portion of the Lelyaky Field, as
well as a five year exploration license for 327 km/2/ surrounding the production
area. Ukranafta retained rights to net "base production," representing a
projection of what the Lelyaky Field would produce in the future, based on the
physical plant and technical processes in use at the time of license grant, on a
declining basis through 2008. Kashtan would be entitled to all incremental
production above that declining base, with all production costs, taxes and other
expenses of Kashtan to be covered before the owners of Kashtan would share its
profit, if any, in proportion to their ownership interests.
Fountain has been responsible for arranging financing for the Lelyaky
Field project, which has involved both direct investment in and advances to
Kashtan and credit support through the pledge of cash collateral. Through
3
<PAGE>
December 31, 1997, Fountain had made gross investments in and advances to
Kashtan aggregating US$2,436,000. In addition, at December 31, 1997, Fountain
had pledged a total of US$9,350,000 to collateralize indirectly a US$8,500,000
credit facility for Kashtan, on which Kashtan had drawn down US$8,150,000. At
December 31, 1997, Fountain had also pledged an additional US$350,000 to
collateralize a letter of credit to guarantee payment to a Kashtan contractor,
and the contractor has since been paid.
During 1997, Kashtan reentered nine wells in the Lelyaky Field for
purposes of recompletion, resulting in three productive and six unproductive
wells. The three producing Lelyaky Field wells have shown an aggregate average
production of approximately 120 barrels of oil per day. Originally, Kashtan had
planned to work over twelve wells in the initial phase of its field development
plan and then prepare a full field development plan. The disappointing results
from the initial nine wells caused Kashtan to suspend its workover operations
and to analyze the results of the initial development efforts in order to assess
the feasibility of developing the Lelyaky Field.
Based on its analysis of the initial development efforts including
consultation with independent petroleum engineers, Fountain has concluded that
the Lelyaky Field will not support a successful commercial development. On the
basis of that conclusion, Fountain has advised Kashtan that Fountain will not
provide any additional financial support for Kashtan and has recorded a 1997
impairment charge totaling $9,108,000. The impairment charge consisted of
US$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 or is expected to default 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
operations.
Kashtan continues to produce a modest amount of oil from the recompleted
wells, which is sold in the Ukrainian market.
Gorisht-Kocul Field, Albania
Fountain and Sh.A. Albpetrol, the Albanian state oil company
("Albpetrol"), formed a joint venture ("ALBJV"), in which each has a 50%
interest, to rehabilitate and develop the Gorisht-Kocul Field. ALBJV was
granted a 25 year production license covering approximately 16.5 km/2/
constituting the Gorisht-Kocul Field. Albpetrol retained rights to base
production, representing a projection of the net value of what the Gorisht-Kocul
Field would produce in the future, based on the physical plant and technical
processes in use at the time of license grant, on a declining basis through
2011. ALBJV would be entitled to all incremental production above that
declining base.
Fountain was named operator of the Gorisht-Kocul Field, with
responsibility for implementing the development plan and arranging financing for
the project, which could involve financing ALBJV directly or guaranteeing,
collateralizing or providing other forms of credit support for ALBJV borrowings.
Up to 80% of the incremental production could be utilized to pay for project
operating costs and capital expenditures and to repay borrowings. Any shortfall
in recovery of such costs and other items in any period could be carried forward
and recovered from the 80% of incremental production available for such costs in
any subsequent period. The venturers could take base production and their
respective shares of net incremental production, after operating costs, capital
expenditures and debt repayment, either in kind or, following sale by ALBJV, in
cash based on world market prices.
Production at the Gorisht-Kocul Field commenced in 1966. The field, which
contains relatively heavy oil, has reportedly produced approximately 69 MMBbls
to date. 1996 production was approximately 1,100 BOPD from the 160 wells then
still producing out of a total of 300 wells drilled. Initial production from
these wells is reported to have ranged between 187 and 630 BOPD. Historically,
wells in the Gorisht-Kocul Field have been completed open hole, with no
completion equipment utilized. Fountain believes, based on available data, that
the decline in productivity has been caused by water coning and natural
depletion.
In March 1997, Fountain declared the political unrest in Albania to be a
force majeure, and ALBJV suspended activities related to the development of the
Gorisht-Kocul Field as a result thereof. The suspension continues, and the
level of production has reportedly declined somewhat during the suspension. In
light of the
4
<PAGE>
extended period that the force majeure condition has continued and in the
absence of any indication of an imminent termination of that condition, Fountain
recorded during the fourth quarter of 1997 an impairment for the entire amount
of its investment in and advances to ALBJV of $1,370,000. Fountain also
recognized a $433,000 loss in 1997, as Fountain's equity in the loss of ALBJV.
Maykop Field, Adygea
Fountain holds 37% of the issued and outstanding stock of Intergas JSC, a
Russian joint stock company ("Intergas"). Other shareholders of Intergas
include the Republic of Adygea, Mostransgas Gas Transmission and Supply
Enterprise JSC ("Mostransgas"), an affiliate of Gasprom which is the largest gas
distribution group in Russia, and Petrogas JSC, a private Russian company. In
1994, Intergas was granted an exclusive 25 year exploration and production
license covering specified zones in the 12,500 acre Maykop gas condensate field
in Adygea located approximately 185 kilometers from the Black Sea.
The Maykop Field was discovered in 1958 and commercial production
commenced in 1966. The field has reportedly produced over two trillion cubic
feet of natural gas to date. In 1995, daily production was reported to have
been approximately 2,000,000 cubic feet of gas per day.
The development plan contemplated an initial phase that would have
commenced with the drilling of two new wells to assess the flow of primary gas
production and the possible concurrent recompletion and stimulation of certain
existing but non-producing wells in order to increase production. A delineation
well to assess a possible extension of the field was planned after the first two
wells were drilled. Based on data developed during the initial phase, Intergas
would have adopted a full development plan for the Maykop Field. In December
1996, Fountain shipped two drilling rigs and related equipment, which were
intended to be transferred to Intergas for use in the initial phase of the
Maykop Field development. When Intergas did not complete certain corporate
formalities believed by Fountain to be necessary for the efficient and
economical importation of the rigs and equipment into Adygea, Fountain diverted
the shipment to Cyprus where it remains in bonded storage. Throughout 1997,
Fountain continued to experience delays and difficulty in resolving operating
arrangements and other matters relating to Intergas, including completion of
corporate formalities and regularization of its corporate affairs. The very
extended period during which it has been dealing with these matters has caused
Fountain to conclude 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 for
the entire amount of its investment in and advances to Intergas of US$5,258,000.
In addition Fountain recognized a loss in 1997 of US$851,000, reflecting
Fountain's equity in the loss of Intergas. Fountain believes that it has no
further obligation to fund any operations of Intergas.
With the rigs and equipment now expected to be employed for applications
other than the specific applications for which they were originally intended,
Fountain recorded an impairment of $2,844,000 at December 31, 1997, which
represents the difference between the book value of rigs and equipment and their
estimated fair value. Fountain has had discussions with CanArgo regarding
CanArgo's possible future use of some of the rigs and equipment.
Risks Associated with Fountain's Eastern European Ventures
While all oil and gas development and production activities are subject to
uncertainties inherent in the oil and gas industry, projects in Eastern Europe
are subject to certain additional specific risks. The forms of government and
the economic institutions in most Eastern European countries have been
established relatively recently and, accordingly, may be subject to a greater
risk of change and the risk of greater change than may be the case with respect
to governments and economies that have been in existence for longer periods of
time. Generally, the government is an important participant in the
establishment of the arrangements defining a project, and there is a risk that a
future government may seek to alter project arrangements. The infrastructures,
labor pools, sources of supply, and legal and social institutions in Eastern
European countries may not be equivalent to those normally found in connection
with projects in North America, which may result in a lower level of
predictability and a higher risk of frustration of expectations. More permits
and approvals may be required for Eastern European entities and
5
<PAGE>
projects than for North American entities and projects. The procedures for
obtaining such permits and approvals may be more cumbersome, and officials may
have more discretion in acting on application and requests.
Payment for any oil and gas sold in Eastern European countries may be in
local currencies. While such currencies are now generally freely convertible
into United States dollars, there is no assurance that such convertibility will
continue throughout the period Fountain is involved in projects in such
countries. Even where convertibility is available, applicable exchange rates
may not reflect a parity in purchasing power. Fluctuations of exchange rates
could result in a devaluation of foreign currencies being held by the entities
operating such projects in excess of their obligations denominated in such
currencies. In addition, Eastern European countries may impose various
restrictions on the transfer of currency into or out of such countries, which
could affect the ability of a Western operator to repatriate its investment or
its share of distributable earnings, if any.
Fountain expects that its Stynawske Field project will commence with an
initial phase of the development plan. Among the purposes of the initial phase
of the development plans are the generation of additional data regarding the
geology and production characteristics of the field, testing the premises of the
tentative development plans for the field, refining such development plan, and
generally seeking confirmation of the commercial feasibility of the project.
While the staged approach to project development is designed to mitigate
investment risk and optimize hydrocarbon recovery, there can be no assurance
that such approach will have that effect. No assurance can be given that the
Stynawske Field project will be determined to be commercially feasible, that the
development of such project will produce oil and gas in commercial quantities,
or that any oil and gas produced will be sold for a profit. 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 Fountain, the exploration and
development efforts of any oil and gas ventures in which it has an interest must
be successful.
Fountain has the responsibility for arranging financing for the Stynawske
Field venture, subject to the approval of the BOC board. Fountain hopes to
finance the net development costs of such venture with funds made available
through a combination of its present cash position and equity or debt financing
either by Fountain or other companies acquiring a portion of Fountain's interest
in the Stynawske Field ("Farm-Out Partners"), if any, or by BOC. Debt financing
may be sought from both international development agencies, such as the European
Bank for Reconstruction and Development, and conventional lenders. To the
extent that loans are incurred by BOC, it is likely that Fountain and its Farm-
Out Partners, if any, will be required to guarantee or otherwise provide credit
enhancements, including cash collateral, with respect to all or a portion of
such loans, at least until such venture demonstrates economic self-sufficiency.
There can be no assurance that Fountain and its Farm-Out Partners, if any, or
BOC will be able to arrange the financing necessary to develop the Stynawske
Field project or that such equity or debt financing as is available will be on
terms that are attractive or acceptable to Fountain and its Farm-Out Partners or
BOC or that are deemed to be in their respective best interests.
The consolidated financial statements of Fountain do not give effect to
any further impairment in the value of Fountain's investment in oil and gas
ventures and properties or other adjustments that would be necessary if
financing cannot be arranged for the development of such ventures and properties
or if such ventures and properties are unable to achieve profitable operations.
Fountain's consolidated financial statements have been prepared under the
assumption of a going concern. Failure to arrange such financing on reasonable
terms or failure of such ventures and properties 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 Fountain and
ultimately its ability to continue as a going concern.
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
ALBJV, Fountain may be subject to contingent liabilities in the form of claims
from Kashtan, Intergas or ALBJV or from 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 made, might total. However, if one or more such
claims were asserted and determined to be valid, they could have a material
adverse effect on Fountain's financial position, results of operations and cash
flows. Such claims may be adjudicated in the host country forum under host
country laws.
6
<PAGE>
Fountain has made advances and may make additional advances to BOC and
other Eastern European oil and gas ventures for capital and operating
expenditures. Advances previously made to Kashtan, Intergas and ALBJV
have been either lost through Fountain's equity in the operating losses of such
venture or impairment. Advances, which are classified as investments in and
advances to oil and gas ventures, are generally recoverable only from future
revenue of the ventures. Fountain has generally negotiated agreements with its
venture partners to provide for priority distributions to repay these advances.
No assurance can be given that such distributions will be adequate to recover
such advances.
No assurance can be given that any or all negotiations required in
connection with Fountain's oil and gas ventures and properties will be
satisfactorily concluded; that negotiated arrangements will be implemented; or
that all governmental and quasi-governmental licenses, registrations and
approvals required for the projects will be granted or, if granted, will not be
revoked.
PROPERTIES AND VENTURES IN NORTH AMERICA
Sylvan Lake Area, Alberta, Canada
In January 1997, Fountain purchased a 60% interest in a 2,080 acre heavy
oil property in the Sylvan Lake area in Alberta, Canada, from Amoil Resources
Inc., effective from December 20, 1996. Fountain paid approximately
US$1,009,000 for its interest in the property, and also undertook to drill one
pilot well in which Fountain's electrically enhanced oil recovery equipment
would be installed. That well was drilled during the third quarter of 1997 and
is producing. The EEOR equipment is expected to be installed during the second
half of 1998. During 1997, Fountain's share of production from the field was
approximately 16,500 bbls, and during December 1997, Fountain's share of
production averaged 71 BOPD.
Frog Lake Area, Alberta, Canada
Fountain has two relatively insubstantial interests in producing oil and
gas projects in the Frog Lake area of Alberta, Canada. Fountain holds a 15%
working interest in the Beaver Dam project covering 640 acres. One well was
completed during the third quarter of l997, which was producing at the rate of
20 BOPD at 1997 year-end. The operator is planning to drill additional wells in
1998.
Fountain also holds 15% of a 7.5% overriding royalty interest in
approximately 2,600 acres known as the Bear Trap project. During 1997, Fountain
received approximately US$27,000 with respect to its royalty interest.
Skiff Sawtooth Field, Alberta, Canada
Fountain has a 50% working interest in oil and gas leases covering
approximately 320 undeveloped acres adjacent to a producing field. Recent
drilling by the offset operator has shown that the producing formation thins in
the general direction of Fountain's leasehold. Fountain has not yet been
involved in any drilling in the Skiff Sawtooth Field.
Rocksprings Field, Edwards County, West Texas
Fountain has a 37.5% working interest before payout and a 33.3% working
interest after payout in 1,799 undeveloped gross acres under lease. Two wells
have been drilled by the group in which Fountain is a working interest
participant. The first well was non-producing, and the second of the two wells
produced insignificant amounts of gas. In December 1997, Fountain recognized
the impairment of its remaining investment in the Rocksprings Field, resulting
in a US$257,000 impairment loss.
COMPETITION
The oil and gas industry is highly competitive. Fountain encounters
competition from other oil and gas companies in all areas of operations,
including the acquisition of producing properties. Fountain's competitors
7
<PAGE>
include integrated oil and natural gas companies and numerous independent oil
and gas companies, individuals and drilling and income programs. Many of these
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than Fountain and which, in many
instances, have been engaged in the energy business for a much longer time than
Fountain. Such competitors may be able to develop better information and
provide better analysis of available information, to pay more for productive oil
and natural gas properties and exploratory prospects and to define, evaluate,
bid for and purchase a greater number of properties and prospects than
Fountain's financial or human resources permit. In the competition to acquire
oil and gas properties, Fountain has relied substantially on the relationships
its officers and directors have developed in the international oil and gas
industry, which has been or will be significantly reduced as a result of the
termination of employment of various officers. Fountain management believes
that Fountain's relatively small size has enabled it to consider projects that
would be deemed to be too small for consideration by many larger competitors.
TECHNOLOGY FOR ENHANCED PRODUCTION OF HEAVY OIL
EEOR Process
Heavy oil resources are often located in shallow reservoirs with low
reservoir temperatures. Heavy oil is very viscous at moderate temperatures and
normally needs to be heated in order to flow easily. Fountain, together with
Illinois Institute of Technology Research Institution ("IITRI"), has developed
since the mid-1980's a technology for EEOR. Fountain has exclusive rights to
the technology through an agreement with IITRI, as well as through Fountain
owned patents. Fountain believes that its patent position is important in
connection with maintaining its competitive position relating to the EEOR
Process. See "--Licenses, Concessions and Patents."
Several pilot projects involving the EEOR Process have been implemented
during the past ten years. While pilot projects results have varied, Fountain
believes they suggest the validity of the EEOR technology and its ability in
appropriate circumstances to increase the production rates by a factor of two or
more. Recent emphasis has been on improving equipment reliability. To date,
Fountain has not achieved commercial success with this technology, and no
assurance can be given that Fountain will be successful in commercializing the
EEOR Process.
The potential advantages of the EEOR technology include improved
production rates, energy efficiency, environmental acceptability, absence of
practical depth limits, suitability for extremely cold climates, preventing or
removing paraffin buildup, and counteracting or removing hydrate formation.
Management believes that the EEOR technology could provide Fountain with a
competitive advantage in negotiating for heavy oil participations, particularly
in Eastern Europe. In North America, large heavy oil reserves are lying idle
because present owners have not found economic ways to develop them, and this
may represent opportunities for Fountain to obtain interests in such fields on
reasonable terms and to make production economic through the use of the EEOR
technology. Fountain therefore determined to use EEOR's technology principally
as a competitive advantage to acquire and, if successfully commercialized, to
develop heavy oil reserves. As a first step to implement this strategy,
Fountain has acquired a 60% share in a heavy oil property in the Sylvan Lake
Area in Alberta, Canada, and intends to install the technology in a well in this
field.
Fountain's ability to develop the EEOR technology is dependent upon its
ability to raise capital in addition to that needed for its oil and gas
properties and ventures.
Competition
The principal competition of the EEOR Process is a process based upon
injecting steam into wells to heat oil reservoirs. The steam process can heat
thicker zones faster and can heat larger volumes of a reservoir than the EEOR
Process. The steam process works best in thick, widespread formations but may
not be effective in various reservoirs by reason of factors such as climate,
depth, thickness, permeability variations, faulting, low porosity and
incompatibility of fresh water with reservoir constituents. The EEOR Process
does not appear to be limited by such conditions.
8
<PAGE>
The EEOR Process has significant environmental advantages over the steam
process. The steam process utilizes substantial quantities of pure water in
producing the steam, and then steam condensate polluted with salt and petroleum
constituents, some of which may be carcinogenic, is returned with the oil and
must be recycled or disposed. The EEOR Process neither utilizes fresh water nor
produces condensate. The energy generated for the EEOR Process can normally be
generated in a central facility with better pollution control measures than
those available onsite where energy for the steam process is normally produced,
and the EEOR Process is normally more energy efficient. Environmental
considerations are generally more important with respect to projects in the more
highly developed countries, such as the United States, Canada and Western
Europe.
The principal dimensions of competition for reservoir heating systems are
the relative effectiveness, reliability and cost-effectiveness of the competing
systems, the environmental impact of the competing processes, and the ability of
the competing suppliers to respond to customers' needs in a timely fashion. To
date, Fountain has not been successful in establishing the EEOR Process as a
commercially accepted method of thermal stimulation.
PRINCIPAL MARKETS
The principal market for crude oil produced in North America is refiners
located in proximity to the place of production.
METHODS OF DISTRIBUTION
In North America crude oil generally is either distributed through
pipeline facilities located in proximity to the place of production or trucked.
LICENSES, CONCESSIONS AND PATENTS
BOC will be operating pursuant to a license or concession granted by
Ukrainian governmental authorities. The license imposes various requirements
upon the licensee, and the failure to satisfy such requirements could result in
the termination or cancellation of the license or concession. In addition, as
sovereign agencies, the governmental authorities that have granted such licenses
or concessions may have greater power than private parties to terminate licenses
or concessions arbitrarily. Loss of the license to operate the Stynawske Field
could have a material adverse effect upon the financial condition, results of
operations and prospects of Fountain.
Fountain believes that the patents it owns or has the exclusive licenses
to exploit could be important to the acquisition of interests in and to the
development of heavy oil fields. The IITRI license agreement covers one United
States patent that expires in 2002. Fountain holds directly twelve United
States patents with expiration dates ranging from 2004 to 2015. In addition,
there are eighteen issued foreign patents, expiring 2005 to 2014, and sixteen
foreign patent applications currently pending based on the technology embodied
in the United States patents and patent applications.
ENVIRONMENTAL MATTERS
The development of oil and gas fields and the production of hydrocarbons
inherently involve environmental risks. These risks can be minimized, but not
eliminated, through use of various engineering and other technological methods,
and Fountain intends to employ such methods to industry standards. The
potential environmental problems are enhanced when the oil and gas development
and production activities involve the rehabilitation of fields where the
practices and technologies employed in the past have not embodied the highest
standards then in effect. It is the policy of Fountain to attempt to deal with
this situation by conducting an environmental audit before assuming
responsibility for operations of an oil or gas field and arranging for the prior
operator to accept liability for any environmental problems existing when
Fountain, or a venture in which it is interested, accepts responsibility for the
field. Fountain does not anticipate any material capital expenditures for
environmental control facilities during 1998, 1999 or the foreseeable future.
9
<PAGE>
Fountain's business is subject to certain national, provincial, state and
local laws and regulations relating to the exploration for and the development,
production and transportation of oil and natural gas, as well as environmental
and safety matters. Although many of these laws and regulations have become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties, Fountain believes it has complied with these
laws and regulations. Because the requirements imposed by such laws and
regulations are frequently changed, Fountain is unable to predict the ultimate
cost of compliance with these requirements or their effect on its
operations.
EMPLOYEES
As of January 31, 1998, Fountain had 34 full time employees, of whom 23
had received contractually required or other notifications that their employment
would be terminated no later than July 31, 1998.
ITEM 2. PROPERTIES
Fountain does not have complete ownership of any real property. Fountain
leases office space in Calgary, Houston, Maidenhead, England and Asker, Norway
under leases having remaining terms varying from eight to ninety-six months.
Fountain has subleased its Maidenhead and Calgary offices, with CanArgo being
the sublessee of the Calgary office, and intends to attempt to sublease
additional office space. See "General Development of Business," "Ventures in
Eastern Europe" and "Properties and Ventures in North America" for a description
of the principal oil and gas properties in which Fountain has an interest.
Since January 1, 1997, the beginning of Fountain's most recent full fiscal
year, neither Fountain nor any entities for which it accounts using the equity
method has filed with or included in reports to any Federal authority or agency
any estimates of total, proved net oil or gas reserves. During the past three
fiscal years, Fountain and its unconsolidated entities have not had any
substantial production of oil and gas.
In the year ended August 31, 1995, Fountain participated in the drilling
of three gross wells (1.3 net wells), two of which were exploratory and located
in the Rocksprings Field in Edwards County, Texas, and one of which was dry and
located in Evangeline Parish, Louisiana. Of the two Rocksprings wells, one was
completed and produced 20 MCF per day while the other was abandoned as a non-
producer. The Louisiana well was abandoned as a dry hole. In the year ended
August 31, 1996, Fountain participated in the drilling of one gross well in West
Mexia which was later abandoned. In the four months ended December 31, 1996,
Fountain did not drill any exploratory wells or development wells. In the year
ended December 31, 1997, Fountain participated in the drilling of two gross
wells (0.75 net wells), both of which were developmental. One of the wells, in
which Fountain has a 60% interest, was drilled in the Sylvan Lake Field,
Alberta, Canada and was completed in October 1997. It initially produced at the
rate of 160 BOPD and by year-end was producing at a rate of 40 BOPD. The second
well which was drilled in the Beaver Dam Field, Alberta, Canada, in which
Fountain has a 15% interest, and was also completed in October 1997. It
initially produced at the rate of 70 BOPD and by year-end was producing at a
rate of 20 BOPD.
In the year ended December 31, 1997, the Sylvan Lake Field produced 25,048
barrels from four wells, and Fountain's share of production was 16,470 barrels,
or an average of 45 BOPD. As of December 31, 1997, three wells were producing,
and Fountain's share of production in December was 71 BOPD from these wells.
During 1997, the average Sylvan Lake sales price was approximately US$106 per
m/3/, the average Sylvan Lake production cost was approximately US$75 per m/3/,
and the average Sylvan Lake royalties were approximately US$9.50 per m/3/. As of
December 31, 1997, the Sylvan Lake Field had 3 productive oil wells, 640 gross
developed acres and 1,440 gross undeveloped acres. Net to Fountain were 1.8 net
wells, 384 net developed acres and 864 net undeveloped acres.
In the year ended December 31, 1997, the first well in the Beaver Dam
project was put on production, with initial production in November. As of
December 31, 1997, Fountain's share of production from this well was 3 BOPD. As
of December 31, 1997, gross developed acreage was 80 acres and gross undeveloped
acreage was 560 acres. Net to Fountain were 0.15 net well, 12 net developed
acres and 84 net undeveloped acres.
10
<PAGE>
In the year ended December 31, 1997, there was no activity in the Skiff
Sawtooth Field in Alberta, Canada, which consists of 320 gross undeveloped
acres. Net acreage to Fountain as of December 31, 1997 was 160 net undeveloped
acres.
In the year ended August 31, 1996, three gross horizontal re-entry wells
were added to the Inverness Unit in Canada, in which a then unconsolidated
subsidiary of Fountain, Focan Ltd. ("Focan"), had an interest. One Inverness
well was put on production with approximately 60 BOPD, of which Fountain's share
was 5%. A second Inverness well was abandoned, and the third well was awaiting
completion. Average sales price and production costs as of December 31, 1996
for the Inverness Unit were US$18.05 per barrel and US$9.35 per barrel,
respectively. As of December 31, 1996, the Inverness Unit had 37 productive oil
wells, 1.85 net wells, 23,360 gross developed acres and 1,168 net developed
acres. During 1997, Focan redeemed the 50% of its outstanding shares not owned
by Fountain through the distribution of Focan's interest in the Inverness Unit.
In the year ended December 31, 1997, nine gross wells (3.6 net wells) in
the Lelyaky Field project, in which an unconsolidated subsidiary of Fountain has
an interest, were reentered for the purpose of recompletion. Three gross wells
(1.2 net wells) were productive, showing an average aggregate production of
approximately 120 BOPD, of which Fountain's share is 40.5%, or approximately 49
BOPD. Average sales price and production cost as of December 31, 1997 for the
Lelyaky Field project were US$131.20 per metric ton and approximately US$25.00
per metric ton, respectively. As of December 31, 1997, Lelyaky Field gross
developed property was 67.32 km/2/, of which 27.26 km/2/ were net to Fountain.
ITEM 3. 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 alleges 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 are 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 seeks 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. An
outcome of this proceeding unfavorable to Fountain could have a material adverse
impact on Fountain's financial condition and results of operations. 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. See Item 13. "Certain
Relationships and Related Transactions."
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. Under that contract, as amended, the maximum consideration to which
Ribalta might have been entitled was $800,000 and 700,000 shares of Fountain
Common Stock, and Fountain believes that as a result of the failure of
conditions precedent to the payment of consideration no consideration is payable
under that contract. An outcome of this proceeding that is unfavorable to
Fountain could have a material adverse impact on Fountain's financial condition
and results of operations.
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 proposed Transaction with CanArgo 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. An
outcome of this dispute that is unfavorable to Fountain could have a material
adverse impact on Fountain's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the year ended December 31, 1997.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Fountain's Common Stock is currently traded and has since April 6, 1995
been traded on the Nasdaq National Market System under the symbol "GUSH." It is
also listed and traded on the Oslo Stock Exchange under the symbol "FOU."
Prices reported are from The Nasdaq Stock Market and reflect trade prices.
<TABLE>
<CAPTION>
By Fiscal Quarter in the
Year Ended Common Stock
December 31, 1997 High Low
----------------------------- ----------------------------
<S> <C> <C>
Quarter Ended:
March 31, 1997 $7.13 $4.38
June 30, 1997 5.06 3.91
September 30, 1997 4.56 2.42
December 31, 1997 3.50 0.59
For the Four-Month
Period Ended Common Stock
December 31, 1996 High Low
----------------------------- ----------------------------
Fiscal Quarter Ended:
November 30, 1996 $7.50 $5.88
One Month Ended:
December 31, 1996 $7.38 $6.50
By Fiscal Quarter in the
Fiscal Year Ended Common Stock
August 31, 1996 High Low
---------------------------- ----------------------------
Quarter Ended:
November 30, 1995 $6.06 $3.38
February 29, 1996 5.53 3.09
May 31, 1996 5.38 2.81
August 31, 1996 6.56 4.88
</TABLE>
On December 31, 1997 the number of holders of record of the Common Stock
of the Company was approximately 4,277. The Company has not paid any dividends
to its shareholders. It is the Company's present policy to retain any earnings
for working capital purposes, and accordingly the Company does not expect to pay
any dividends in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data reflect the historical results of operations and
selected balance sheet items of the Company and should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements included in
Item 8. "Financial Statements and Supplementary Data" herein.
<TABLE>
<CAPTION>
Twelve Four Twelve Twelve Ten Twelve
Reported in $1,000 except Months Months Months Months Months Months
for per common share Ended Ended Ended Ended Ended Ended
amounts 12/31/97 12/31/96 8/31/96 8/31/95 8/31/94 10/31/93
---------- ---------- --------- --------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Performance
Total revenue $ 313 $ 17 $ 35 $ 625 $ 3 $ 190
Operating loss (29,090) (2,983) (5,640) (7,882) (1,466) (1,547)
Other income (expense) 1,202 361 (854) 312 (366) 252
Net loss (27,683) (2,604) (6,494) (7,600) (1,832) (1,295)
Net loss per common share--
basic (1.24) (0.14) (0.52) (0.91) (0.45) (0.22)
Net loss per common share--
diluted (1.24) (0.14) (0.52) (0.91) (0.45) (0.22)
Working capital (deficit) 13,971 30,382 16,926 4,188 1,145 (446)
Total assets 37,434 55,375 32,089 10,710 4,944 4,528
Notes payable & long-term
debt --- --- 300 --- 163 158
Stockholders' equity 26,779 53,245 30,505 9,608 4,181 3,707
Cash dividends per common
share --- --- --- --- --- ---
</TABLE>
13
<PAGE>
ITEM 7. 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," in Item 1. "Business--Ventures in Eastern Europe--Risks
Associated with Fountain's Eastern European Ventures," and elsewhere in this
Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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
Annual Report on Form 10-K, 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
December 31, 1997 Compared to December 31, 1996
As of December 31, 1997, Fountain had current assets of US$24,626,000, of
which US$14,164,000 was in the form of cash and cash equivalents and
US$9,700,000 was in the form of restricted cash, and current liabilities of
US$10,655,000, leaving Fountain with working capital of US$13,971,000. This
compares to current assets of US$32,306,000, cash and cash equivalents of
US$31,424,000, current liabilities of US$1,924,000 and working capital of
US$30,382,000 as of December 31, 1996.
The decrease in cash and cash equivalents from December 31, 1996 through
December 31, 1997 is attributable primarily to US$13,240,000 of cash used in
1997 investing activities, primarily US$7,599,000 of investments in and advances
to oil and gas properties and ventures and an additional US$4,300,000 of
restricted cash deposits collateralizing letters of credit issued by banks to
guarantee repayment of obligations by oil and gas ventures, and US$4,176,000 of
cash utilized in 1997 operating activities, including US$3,903,000 of general
and administrative expenses that were largely cash items. The decrease in
current assets attributable to the reduction in cash and cash equivalents was
partially offset by the classification of US$9,700,000 of restricted cash at
December 31, 1997 as a current asset in light of Fountain's expectation that the
restricted cash would be either applied to satisfy accrued liabilities or
released from restrictions during 1998. Other current assets increased from
US$622,000 at December 31, 1996 to US$762,000 at December 31, 1997 primarily as
a result of a US$256,000 increase in prepaid expenses, largely relating to lease
and consulting obligations, and a US$69,000 increase in miscellaneous
receivables, substantially offset by a US$200,000 reduction in inventory.
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, Fountain entered into the Combination
Agreement in February 1998. Consummation of the Transaction with CanArgo is
subject to the satisfaction of a number of conditions, including approval of the
business combination by the stockholders of CanArgo and Fountain.
As part of its program to preserve financial resources, Fountain has
terminated or delivered termination notices to approximately three-quarters of
its employees, each of whom is 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
14
<PAGE>
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 US$8,730,000 increase in current liabilities is attributable to a
US$9,202,000 increase in accrued liabilities, which in turn is based primarily
on an US$8,970,000 accrual associated with the impairment of the Lelyaky Field
oil and gas venture. The accrual includes US$8,280,000 of debt and accrued
interest of Kashtan, on which Kashtan has defaulted or is expected to default
and which was effectively guaranteed by Fountain through restricted cash
deposits of US$9,350,000, and US$691,000 of estimated liabilities for severance
and related costs associated with closing down Kashtan operations. Such costs
are expected to be paid during 1998.
In 1997, Fountain placed an additional US$4,300,000 in a restricted
deposit account to collateralize letters of credit used for the benefit of oil
and gas ventures in which Fountain holds interests, increasing the balance from
US$5,400,000 at December 31, 1996 to US$9,700,000 at December 31, 1997. 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.
Notes receivable of US$190,000 as of December 31, 1996 representing
obligations of an entity that had sold to Fountain shares of UK-RAN, the
subsidiary through which Fountain holds its interest in Kashtan, were written
off during 1997 to reflect doubtful collectability.
Property and equipment decreased US$1,824,000 during 1997, from
US$7,766,000 at December 31, 1996 to US$5,942,000 at December 31, 1997.
Drilling rigs and related equipment originally intended for use in the Maykop
Field project, with a carrying value of US$6,957,000 at December 31, 1996
represented substantially all of the property and equipment at the end of both
1996 and 1997. Fountain shipped the rigs and equipment from the United States
in December 1996, but when Intergas, the entity developing the Maykop Field,
failed to complete various corporate formalities believed by Fountain to be
necessary for the efficient and economical importation of the rigs and equipment
into Adygea, the shipment was diverted to Cyprus where the rigs and equipment
remain in bonded storage. During 1997, an additional US$1,392,000 was invested
in the drilling rigs and related equipment, particularly in the equipment
category. Because of the very substantial delays it has experienced in
resolving operating arrangements and other matters relating to Intergas,
Fountain has concluded that under present circumstances it cannot effectively
pursue commercial activities including the development of the Maykop Field
through Intergas. Since the drilling rigs and related equipment are expected to
be employed for applications other than those for which they were specifically
intended, Fountain has written down the carrying value of the rigs and equipment
by US$2,844,000 to US$5,504,000 at December 31, 1997.
Oil and gas properties, net, increased US$1,220,000 in 1997, from
US$259,000 at December 31, 1996 to US$1,479,000 at December 31, 1997. During
1997, Fountain acquired a majority interest in a heavy oil field located at
Sylvan Lake, Alberta, Canada for US$1,009,000. In the same year, Fountain
recorded capitalized development costs, primarily related to the Sylvan Lake
property, amounting to US$679,000. The 1997 additions to oil and gas
properties, net, were partially offset by unit-of-production amortization
expenses of US$211,000 and the impairment of the remaining carrying value of the
Rocksprings property, amounting to US$257,000. Fountain expects during the
second half of 1998 to install EEOR equipment in the Sylvan Lake well drilled
during 1997. This equipment is designed to provide thermal stimulation to the
heavy oil reservoir by heating it electrically and is expected to cost
approximately US$150,000.
Investments in and advances to oil and gas ventures - net decreased during
1997 from US$8,568,000 at December 31, 1996 to US$5,387,000 at December 31,
1997. Total investments in and advances to oil and gas ventures during 1997
aggregated US$7,223,000, of which US$4,145,000 (including Fountain Common Stock
having a value of US$1,061,000 issued in connection with the acquisition of an
interest in the Stynawske Field project) was directed to the Stynawske Field
project, US$2,272,000 was directed to the Maykop Field project, US$876,000 was
directed to the Gorisht-Kocul Field project, and US$37,000 was directed to the
Lelyaky Field
15
<PAGE>
project, which was funded during 1997 primarily through a bank line of credit
supported by restricted cash deposits made by Fountain. Investments in and
advances to the Stynawske Field project will be the only significant investments
in and advances to oil and gas ventures anticipated during 1998 prior to the
consummation of the Transaction.
During 1997, Fountain for varying reasons recognized impairment losses
related to the Lelyaky Field, Maykop Field and Gorisht-Kocul Field projects.
Impairment of oil and gas ventures aggregated US$15,736,000, which is in
addition to aggregate losses of US$3,365,000 recorded in 1997 with respect to
Fountain's equity in the losses of Kashtan, Intergas and the Gorisht-Kocul joint
venture which operate those three projects, respectively. A loss of US$414,000
was also recorded in 1997 with respect to Fountain's equity in the loss of
Boryslaw Oil Company which operates the Stynawske Field.
Based on its analysis of the results of the initial development efforts in
the Lelyaky Field project, Fountain concluded that the Lelyaky Field will not
support a successful commercial development. As a result, Fountain recorded an
impairment charge totaling US$9,108,000. The impairment charge consisted of
US$137,000 representing the carrying value of an investment related to Kashtan,
US$8,280,000 of debt and accrued interest of Kashtan on which Kashtan has
defaulted or is expected to default and which was effectively guaranteed by
Fountain through restricted cash deposits, and US$691,000 of estimated
liabilities for severance and related costs associated with closing down
Kashtan's operation. Such costs are expected to be paid in 1998. In addition,
Fountain recognized a loss in 1997 of US$2,080,000 reflecting its equity in the
loss of Kashtan.
Because it has experienced extended delays in resolving operating
arrangements and other Intergas matters including completion of corporate
formalities, Fountain has 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 US$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. During 1997, Fountain also recognized a US$851,000 loss
with respect to its equity in the loss of Intergas.
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. Such claims
may be adjudicated in the host country forum under host country law.
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 US$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. During 1997, Fountain also recognized a US$433,000 loss as its
equity in the loss of that joint venture.
The remaining balance of US$5,387,000 in investment in and advances to oil
and gas ventures net at December 31, 1997 relates solely to Boryslaw Oil
Company, 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.
Other assets decreased from approximately from US$886,000 at December 31,
1996 to nil at December 31, 1997 primarily as a result of the application during
1997 of deposits placed by Fountain related to oil and gas properties and
ventures that were outstanding at December 31, 1996 and the write-off in 1997 of
Fountain's US$137,000 investment in the entity that held a minority interest in
UK-RAN, the subsidiary through which Fountain held its interest in Kashtan. The
write-off of the investment is reflected in the Consolidated Statement of
Operations as impairment of oil and gas ventures.
16
<PAGE>
Accounts payable decreased from US$800,000 at December 31, 1996 to
US$328,000 at December 31, 1997, primarily as a result of the substantial
reduction in project activity during the fourth quarter of 1997, as Fountain
focused considerable attention on cash conservation.
Accrued liabilities increased US$9,202,000 during 1997, primarily as a
result of accruals associated with the impairment of the Lelyaky Field project.
Stockholders' equity decreased US$26,466,000 in 1997 from US$53,245,000 at
December 31, 1996 to US$26,779,000, primarily as a result of the US$27,683,000
net loss reported by Fountain for 1997, offset to a minor degree by issuances of
Common Stock, primarily in connection with the acquisition of an interest in an
oil and gas venture, which added US$1,217,000 to stockholders' equity.
Fountain has had and continues to have outstanding obligations with
respect to the acquisition and development of oil and gas properties and
ventures in which it has interests that require or may require Fountain to
expend funds and to issue shares of its Common Stock. These obligations are
subject to the satisfaction of various conditions related to, among other
things, achievement of specified project performance standards. At December 31,
1996, Fountain had unconditional obligations regarding the acquisition and
development of its oil and gas projects and ventures amounting to US$5,500,000,
of which US$4,000,000 was being satisfied through the collateralization of
letters of credit guaranteeing obligations of Kashtan, as well as the
unconditional obligation to issue 425,000 shares of its Common Stock. During
1997, Fountain effectively discharged its obligations regarding the US$5,500,000
by, among other things, accruing for its obligation with respect to its
effective guaranty of Kashtan's indebtedness to a bank, and issued 175,000
shares of its Common Stock in satisfaction of unconditional obligations existing
on December 31, 1996. As the result of the occurrence of a condition subsequent,
Fountain's obligation to issue the other 250,000 shares was terminated in 1997.
On December 31, 1996, Fountain also had contingent obligations relating to the
acquisition and development of its oil and gas properties and ventures amounting
to US$1,300,000 and 1,825,000 shares of Common Stock. As of December 31, 1997,
the conditions that would have required the payment of US$1,300,000 and the
issuance of 1,450,000 shares of Common Stock could no longer be met or have
become remote, so those conditional obligations were eliminated. Since no
additional conditional or unconditional obligations to expend funds or issue
shares in connection with the acquisition and development of oil and gas
properties and ventures were incurred in 1997, at December 31, 1997 Fountain had
contingent obligations involving 375,000 shares which relate to development of
the Stynawske Field project. Those contingent obligations are conditioned on the
achievement of specified performance standards by the Stynawske Field project.
While Fountain believes that the Stynawske Field project will meet such
performance standards and that such shares will therefore be issued, no
assurances can be given that the performance standards will be met. If such
shares are issued, the issuance will be accounted for as an additional
investment by Fountain in BOC, based upon the fair market value of the shares at
the time of issuance. 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 US$13,971,000 at December 31,
1997, 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.
17
<PAGE>
As of December 31, 1997 and 1996, Fountain had net investments in oil and
gas properties and ventures totaling approximately US$6,866,000 and
US$8,827,000, respectively. Of these amounts, US$5,387,000 and US$8,463,000,
respectively, relate to ventures in Eastern Europe. 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.
December 31, 1996 Compared to August 31, 1996
As of December 31, 1996, Fountain had current assets of US$32,306,000, of
which US$31,424,000 was in the form of cash and cash equivalents, and current
liabilities of US$1,924,000, leaving Fountain with working capital of
US$30,382,000. This compares to current assets of US$17,986,000, cash and cash
equivalents of US$17,329,000, current liabilities of US$1,060,000 and working
capital of US$16,926,000 as of August 31, 1996. The increase in current assets,
cash and cash equivalents and working capital from August 31, 1996 through
December 31, 1996 was attributable primarily to issuance and sale of Fountain
Common Stock for cash upon exercise of stock purchase warrants, partially offset
by investments in oil and gas ventures and operating losses.
During the four months ended December 31, 1996, Fountain received
approximately US$25,000,000 as a result of the exercise of outstanding stock
purchase warrants that resulted in the issuance of 4,720,754 shares of Fountain
Common Stock. As Fountain entered 1997, no further stock purchase warrants
issued by Fountain remained outstanding.
The cash proceeds from the exercise of the stock purchase warrants were
partially offset during the four month period ended December 31, 1996 by (i)
US$5,400,000 of cash which was restricted to collateralize letters of credit
issued for the benefit of oil and gas ventures accounted for using the equity
method, (ii) US$3,108,000 for investments in and advances to such oil and gas
ventures, (iii) capital expenditures of US$1,228,000 on drilling rigs and
related equipment which Fountain had expected to transfer to Intergas, and (iv)
US$1,230,000 used in operating activities during the four months ended December
31, 1996 principally representing the cash portion of Fountain's net loss for
that period.
Property and equipment, net increased from US$6,578,000 at August 31, 1996
to US$7,766,000 at December 31, 1996, reflecting the improvement of rigs and
equipment acquired along with Fountain's principal interest in Intergas and the
acquisition of additional equipment through December 31, 1996.
Investments in and advances to oil and gas ventures net increased from
US$6,876,000 at August 31, 1996 to US$8,568,000 at December 31, 1996, reflecting
Fountain's increasing involvement in projects in Eastern Europe. During the
four months ended December 31, 1996, Fountain entered into a joint venture to
develop the Stynawske Field.
18
<PAGE>
Other assets increased from US$171,000 at August 31, 1996 to US$886,000 at
December 31, 1996, primarily as a result of deposits placed by Fountain on items
related to oil and gas ventures.
Accrued liabilities increased from US$298,000 at August 31, 1996 to
US$1,124,000 at December 31, 1996. Accrued liabilities principally reflected
the accrual of salaries and related employment taxes and professional fees, and,
at December 31, 1996, transportation charges associated with shipping drilling
rigs and related equipment that were eventually placed in bonded storage in
Cyprus.
Stockholders' equity increased from US$30,505,000 at August 31, 1996 to
US$53,245,000 at December 31, 1996, as a result of Fountain's issuance and sale
of equity securities, partially offset principally by operating losses.
As of December 31 and August 31, 1996, Fountain had net investments in oil
and gas properties and ventures totaling US$8,827,000 and US$7,164,000,
respectively. Of these amounts, approximately US$8,463,000 and US$6,783,000,
respectively, related to the ventures in Eastern Europe. Ultimate realization
of the cost 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 increases in
production from existing levels, production of oil and gas at costs that provide
acceptable margins, reasonable levels of taxation from local authorities, and
the ability to market the oil and gas produced at or near world prices.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended August 31, 1996
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 US$313,000 during the year ended
December 31, 1997 compared with US$35,000 for the year ended August 31, 1996.
Revenue in both years was related to a modest amount of oil and gas production
from property in Alberta, Canada in which Fountain has interests. The 1997
production was generated primarily at the Sylvan Lake property in which Fountain
acquired an interest in 1997.
The operating loss for the year ended December 31, 1997 amounted to
US$29,090,000, compared with US$5,640,000 for the year ended August 31, 1996.
The increase in the operating loss is attributable primarily to the impairment
of oil and gas ventures, oil and gas properties, and property and equipment and
other assets which aggregated US$19,424,000 in 1997, as well as a US$3,778,000
loss representing Fountain's equity in the loss of oil and gas ventures. There
were no comparable impairment charges in fiscal 1996, and in that year,
Fountain's equity in the loss of oil and gas ventures was US$13,000.
Lease operating expenses increased to US$200,000 in 1997, as compared to
US$11,000 in fiscal 1996, primarily as a result of Fountain's acquisition of an
interest in the Sylvan Lake property in early 1997. 1997 direct
19
<PAGE>
project costs increased US$485,000 from the US$1,268,000 experienced during the
fiscal year ended August 31, 1996, reflecting principally the higher level of
project activity and the inability of Fountain to recoup from Kashtan certain
expenses related to the Lelyaky Field project incurred during December 1997.
General and administrative expenses in the years ended December 31, 1997 and
August 31, 1996 were comparable. General and administrative expense are expected
to decrease during 1998, at least prior to the consummation of the Transaction.
The increase in depreciation and amortization expense from US$77,000 in the year
ended August 31, 1996 to US$345,000 in the year ended December 31, 1997 is
attributable principally to the increased production of oil.
During the year ended December 31, 1997, Fountain recognized an aggregate
of US$19,237,000 in losses as a result of the impairment of long-lived assets,
as compared to an impairment loss of US$420,000 for the year ended August 31,
1996. Impairment of the ventures operating the Lelyaky, Maykop and Gorisht-
Kocul Field projects resulted in a combined loss of US$15,736,000. The
impairment of drilling rigs and related equipment originally intended to be
utilized in the Maykop Field project and certain office furniture, fixtures and
equipment resulted in a loss of US$3,244,000. The remaining investment in the
Rocksprings property, which was carried in Fountain's December 31, 1996 balance
sheet as a US$257,000 unevaluated oil and gas property was recognized as
impaired in 1997. The remaining assets impaired during 1997 were notes
receivable from the entity that sold to Fountain its principal interest in
Kashtan, as to which there were doubts regarding collectability.
In 1997, Fountain recorded total other income of US$1,202,000, as compared
to total other expense of US$854,000 in the year ended August 31, 1996.
Interest income increased to US$1,615,000 for the year ended December 31, 1997
from US$332,000 for the year ended August 31, 1996 due to higher average cash
and cash equivalent investments. Interest expense decreased from US$1,016,000
for the year ended August 31, 1996, when Fountain recorded amortization of
financing costs, discount and interest related to the 8% Convertible
Subordinated Fountain Debentures, to US$69,000 for calendar 1997. In both 1997
and fiscal 1996, Fountain recorded losses from the sale of miscellaneous
equipment and property amounting to US$271,000 and US$182,000, respectively.
The net loss of US$27,683,000, or US$1.24 per share, in 1997 compares to a
net loss of US$6,494,000, or US$.52 per share, in the fiscal year ended August
31, 1996. The disproportionate losses per share are attributable to Fountain's
issuance of additional shares subsequent to August 31, 1996, resulting in a
substantially higher weighted average number of common shares outstanding during
the year ended December 31, 1997.
Four Months Ended December 31, 1996 Compared With Four Months Ended
December 31, 1995
Fountain recorded an operating loss of US$2,983,000 during the four month
period ended December 31, 1996 compared with US$1,470,000 for the same 1995
period. The increased loss resulted from an increase of approximately
US$1,357,000 of equity loss from investments in unconsolidated subsidiaries
primarily associated with the activities of the oil and gas ventures in Eastern
Europe in which Fountain has interests.
General and administrative expenses for the four month period ended
December 31, 1996 amounted to US$1,282,000 reflecting a modest decrease from the
US$1,303,000 for the comparable 1995 period. For the 1995 period, general and
administrative costs included a charge for external services for public
relations activities of a non-recurring nature. The decrease in the 1996 period
for such expense was substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe. General and administrative expense is net of
US$1,220,000 and US$320,000 capitalized pursuant to full cost accounting rules
during the four month period ended December 31, 1996 and 1995, respectively.
Interest income increased to US$424,000 for the four month period ended
December 31, 1996 from US$55,000 in the comparable period for the prior year due
to higher average cash investments. Interest expense increased to US$13,000 for
the four month period ended December 31, 1996 from US$3,000 in the comparable
period for the prior year due to the amortization of financing costs and
interest related to the Fountain Debentures and financing of insurance premiums.
20
<PAGE>
Twelve Months Ended August 31, 1996 Compared With Twelve Months Ended
August 31, 1995
Fountain recorded operating revenue of US$35,000 during the year ended
August 31, 1996 compared with US$625,000 for the year ended August 31, 1995.
The decrease in revenue resulted from a decline in sale of EEOR equipment.
Fountain decided not to market the EEOR technology to third parties but rather
to use the technology primarily as a competitive advantage to secure new heavy
oil interests and, assuming successful commercialization, to optimize production
and reserves from such interests. Consequently while all US$625,000 of 1995
revenue related to EEOR technology, only US$9,000 of 1996 revenue was associated
with the EEOR technology. Most 1996 revenue was related to a modest amount of
oil and gas production from an overriding royalty interest held by Fountain
relating to property in Alberta, Canada.
The operating loss for the year ended August 31, 1996 amounted to
US$5,640,000 compared with US$7,883,000 for the year ended August 31, 1995. The
reduction in the operating loss was attributable primarily to non-recurring 1995
expense items relating to the impairment of patent rights and certain other
assets written off at the end of fiscal 1995, the amortization of those patent
rights during 1995, and 1995 financial public relations expenses paid primarily
by the issuance of Fountain Common Stock, partially offset by higher 1996 direct
project costs of US$1,268,000 and general and administrative expense (other than
those related to financial public relations) associated with the development of
an organization and infrastructure for Fountain's oil and gas activities.
General and administrative expenses for the year ended August 31, 1996
amounted to US$3,854,000 compared to US$4,013,000 for the year ended August 31,
1995. For the 1995 period, general and administrative costs included a
substantial charge for external services fees for financial public relations
activities of a non-recurring nature. The decrease in the 1996 financial public
relations expense was substantially offset by increases in salaries and other
administrative costs related to the build-up of staff associated with the
projects in Eastern Europe.
Depreciation, depletion, and amortization expense decreased from
US$1,157,000 in fiscal 1995, to US$77,000 for fiscal 1996. This reduction was
attributable primarily to the recognition at August 31, 1995 of the impairment
of intangible assets on which amortization had been charged at the rate of
approximately US$223,000 per quarter during fiscal 1995.
During fiscal 1996, Fountain recognized an impairment of US$420,000 on its
oil and gas properties as a result of applying the full cost ceiling limitation.
Of this amount, US$269,000 related to Fountain's investment in the Rocksprings
project in West Texas. As of August 31, 1996, the Rocksprings field had only
produced insignificant amounts of gas from one of the two wells in which
Fountain participated. During fiscal year 1995, Fountain recognized US$608,000
of impairment expense on the same project. As of August 31, 1996, Fountain had
a US$257,000 unevaluated oil and gas property on its balance sheet related to
the Rocksprings project. The remaining 1996 expense associated with impairment
of oil and gas properties related to Fountain's 50% working interest in the West
Mexia field, which involved a now abandoned experimental well to test new
technology for determining the remaining predictable oil between wells and in
wells that had become early water producers.
During 1996, Fountain recorded a loss of US$182,000 from the sale of
certain drilling equipment. Interest income increased to US$332,000 for the
year ended August 31, 1996 from US$251,000 in the prior year due to higher
average cash investments. Interest expense increased to US$1,016,000 for the
year ended August 31, 1996 from US$28,000 in the prior year due to the
amortization of financing costs, discount and interest related to the Fountain
Debentures.
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this Item 7 and elsewhere in
this Form 10-K are subject to various risks, uncertainties and other factors
that could cause actual results to differ materially from the results
anticipated in such forward looking statements. Included among the important
risks, uncertainties and other factors are those hereinafter discussed.
21
<PAGE>
Few of such forward looking statements deal with matters that are within
the unilateral control of the Company. Joint venture, acquisition, financing
and other agreements and arrangements must be negotiated with independent third
parties and, in some cases, must be approved by governmental agencies. Such
third parties generally have interests that do not coincide with those of the
Company and may conflict with the Company's interests. Unless the Company and
such third parties are able to compromise their respective objectives in a
mutually acceptable manner, agreements and arrangements will not be consummated.
Operating entities in various foreign jurisdictions must be registered by
governmental agencies, and production licenses for development of oil and gas
fields in various foreign jurisdictions must be granted by governmental
agencies. These governmental agencies generally have broad discretion in
determining whether to take or approve various actions and matters. In
addition, the policies and practices of governmental agencies may be affected or
altered by political, economic and other events occurring either within their
own countries or in a broader international context. It is anticipated that the
Company will not have a majority of the equity in the entity that would be the
licensed developer of any of the projects that the Company is presently pursuing
in Eastern Europe, even though the Company may be the designated operator of the
oil or gas field. Thus, the concurrence of co-venturers may be required for
various actions. Other parties influencing the timing of events may have
priorities that differ from those of the Company, even if they generally share
the Company's objectives. As a result of all of the foregoing, among other
matters, the forward looking statements regarding the occurrence and timing of
future events may well anticipate results that will not be realized.
The availability of equity financing to the Company or debt financing to
the Company and the joint venture or other entities that are developing the
projects is affected by, among other things, world economic conditions,
international relations, the stability and policies of various governments,
fluctuations in the price of oil and gas and the outlook for the oil and gas
industry, the competition for funds and an evaluation of specific Company
projects. Rising interest rates might affect the feasibility of debt financing
that is offered. Potential investors and lenders will be influenced by their
evaluations of the Company and its projects and comparisons with alternative
investment opportunities. The Company's ability to finance all of its present
oil and gas projects according to present plans is dependent upon obtaining
additional funding.
The development of oil and gas properties is subject to substantial risks.
Expectations regarding production, even if estimated by independent petroleum
engineers, may prove to be unrealized. There are many uncertainties inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future development expenditures. Estimates of
properties in full production are more reliable than production estimates for
new discoveries and other properties that are not fully productive.
Accordingly, estimates related to the Company's properties are subject to change
as additional information becomes available. Most of the Company's interests in
oil and gas ventures are located in Eastern European countries. Operations in
those countries are subject to certain additional risks relating to, among other
things, enforceability of contracts, currency convertibility and
transferability, unexpected changes in tax rates, availability of trained
personnel, availability of equipment and services and other factors that could
significantly change the economics of production. Production estimates are
subject to revision as prices and costs change. Production, even if present,
may not be recoverable in the amount and at the rate anticipated and may not be
recoverable in commercial quantities or on an economically feasible basis.
World and local prices for oil and gas can fluctuate significantly, and a
reduction in the revenue realizable from the sale of production can affect the
economic feasibility of an oil and gas project. World and local political,
economic and other conditions could affect the Company's ability to proceed with
or to effectively operate projects in various foreign countries.
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.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet effective.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required to be filed in this Report begin at
Page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements between the Company and its
principal accountants during the two most recent fiscal years.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Office or Offices
- ---- --- -----------------
<S> <C> <C>
Oistein Nyberg 55 Chairman of the Board
Robert A. Halpin (1) 62 Vice Chairman of the Board
Nils N. Trulsvik 49 Director, President and Chief Executive Officer
Einar Bandlien 50 Director, Executive Vice President
Stanley D. Heckman (1) 58 Director
Eugene J. Meyers 63 Director
Svein Johansen 53 Executive Vice President
Alfred Kjemperud 44 Senior Vice President
Rune Falstad 45 Vice President and Acting Chief Financial Officer
Ravinder Sierra 45 Vice President, EOR International Inc. (Significant Employee)
</TABLE>
- -----------
(1) Member of Audit and Compensation Committees
OISTEIN NYBERG was elected Director on March 4, 1995 and served as
President and Chief Executive Officer from March 9, 1995 to February 4, 1997
when he was elected Chairman of the Board. From January 1984 to March 1995, Mr.
Nyberg was Managing Director of Smedvig Technology A/S, a Norwegian technology
company, of which he was one of the founders. Among other services, Smedvig
provides consulting services within the areas of reservoir evaluation,
production drilling and well control.
ROBERT A. HALPIN was elected a Director on March 4, 1995 and served as
Chairman of the Board from November 14, 1995 to February 4, 1997 when he was
elected Vice Chairman of the Board. Mr. Halpin has long experience in the oil
and gas industry. From 1989 to his retirement September 1993, he served as Vice
President for International Exploration and Production with Petro-Canada. In
October 1993, Mr. Halpin became President of Halpin Energy Resources Ltd., a
firm he formed to provide advisory services to energy companies with emphasis on
international petroleum projects.
NILS N. TRULSVIK has served as President and Chief Executive Officer since
February 4, 1997. He was elected a Director of the Company on August 17, 1994.
He has served the Company as Executive Vice President from September 8, 1994
until November 21, 1994; as President and Chief Executive Officer from November
21, 1994 to March 9, 1995; and as Executive Vice President from March 9, 1995 to
February 4, 1997. Mr. Trulsvik is a petroleum explorationist with extensive
experience in petroleum exploration and development throughout the world. Prior
to joining the Company, he held various positions with Nopec a.s., a Norwegian
petroleum consultant group of companies of which he was a founder, including
Managing Director from 1987 to 1993 and Special Advisor from 1993 to August
1994.
EINAR BANDLIEN was elected a Director on August 17, 1994, Senior Vice
President of Business Development on December 15, 1994 and Executive Vice
President of Business Development on November 14, 1995. Mr. Bandlien is a
petroleum expert with extensive experience in exploration and petroleum resource
management. Prior to joining the Company, he held various positions with Nopec
a.s., a Norwegian petroleum consultant group of companies of which he was a
founder, including Director of International Activities from 1987 to 1991 and
Chairman from 1990 to 1993. He was a Special Advisor to Nopec from 1993 to
1994. Mr. Bandlien also served as Executive Secretary of the Norwegian
Petroleum Resource Management Alliance from 1991 to 1993.
STANLEY D. HECKMAN was elected a Director on March 4, 1995. For more than
the past five years, Mr. Heckman has been the owner of JSB Services Corp., a
company whose primary business is in real estate development and investments.
24
<PAGE>
EUGENE J. MEYERS was elected a Director on January 3, 1994 and served as
Chairman of the Board from January 3, 1994 to November 14, 1995. He served as
Chief Executive Officer from August 16, 1994 until November 21, 1994 and as
President from September 8, 1994 to November 21, 1994. Mr. Meyers is also
President and owner of GSM Financial Corporation. Through such company and
other companies, Mr. Meyers has been involved in real estate development and
investments for the past 30 years.
SVEIN E. JOHANSEN was elected Executive Vice President on December 15,
1994. From 1981 until 1992, he held various positions with Nopec a.s., of which
he was one of the founders, including Managing Director from 1981 to 1987, and
Managing Director of Nopec UK Limited, London from 1989 to 1992. From 1992 and
until joining the Company in 1994, he served as Managing Director of PGS
Reservoir Services a.s., a subsidiary of Petroleum Geo Services A/S, Oslo,
Norway. Mr. Johansen resigned as an officer on March 13, 1998.
ALFRED KJEMPERUD was elected Senior Vice President on February 4, 1997.
He has served in the Company's management since September 1, 1996. From 1995 to
1996, he served as Marketing Manager for Geomatic Services, a Norwegian offshore
technology company. From 1991 to 1995, he served as General Manager for Petec
A/S, a Norwegian reservoir engineering consulting company.
RUNE FALSTAD was elected Vice President on June 3, 1997 and has been
serving as acting Chief Financial Officer since December 8, 1997. From March
1995 to March 1997, he served as Executive Vice President, Systems &
Contracting, for Unitorgroup, an international ship service company listed on
the Oslo Stock Exchange. From 1988 to 1995, Mr. Falstad served as Financial
Director for the same company.
RAVINDER S. SIERRA was elected Vice President of the Company's subsidiary,
EOR International Inc., on December 15, 1994. Mr. Sierra first joined EOR
International Inc. in November 1990 as Senior Project Engineer. Mr. Sierra has
over 16 years experience in the international oil and gas industry.
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers serve at the
pleasure of the directors, subject to the provisions of employment agreements,
if any.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During fiscal 1997, Nicholas G. Dobrotwir, a former Vice President, filed
a Form 3 which understated his share holdings by 25 shares. Such Form 3 was
subsequently amended. In making this disclosure, the Company has relied solely
on written representation of its directors and executive officers and copies of
the reports they have filed pursuant to Section 16(a) of the Securities Exchange
Act of 1934.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all compensation paid or accrued by the Company
and its subsidiaries during the fiscal years ended August 31, 1995 and August
31, 1996, the four month period ended December 31, 1996 and the year ended
December 31, 1997 to certain executive officers of the Company (the "Named
Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Year Compensation Options/SARs Compensation (9)
Principal Position Ended Salary ($) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nils N. Trulsvik 12/97 140,333 --- --- 6,653
(1) 12/96* 51,834 --- 100,000 5,679
8/96 161,241 --- --- 8,635
8/95 147,754 --- --- 6,344
Oistein Nyberg 12/97 147,442 106,373(2) --- 18,890
(2) 12/96* 53,425 48,994 100,000 6,801
8/96 154,104 83,151 --- 21,965
8/95 113,246 24,199 --- 6,125
Arnfin Haavik 12/97 159,795 --- --- 88,029(3)
(3) 12/96* 54,893 9,070 100,000 6,801
8/96 154,560 34,560 --- 21,259
8/95 92,685 24,234 --- 6,279
Arild Boe 12/97 138,464 22,808(4) --- 75,792(4)
(4) 12/96* 51,833 --- 100,000 5,679
8/96 149,380 --- --- 8,780
8/95 22,125 --- --- ---
Svein Johansen 12/97 138,351 --- --- 6,448
(5) 12/96* 51,833 --- 100,000 5,679
8/96 134,722 --- --- 7,254
8/95 81,667 --- --- 4,307
Einar Bandlien 12/97 136,218 --- --- 6,333
(6) 12/96* 51,833 --- 100,000 5,679
8/96 121,054 --- --- 6,086
8/95 85,587 --- --- 4,307
Alfred Kjemperud 12/97 101,296 --- 10,000 5,014
(7) 12/96* 38,875 --- 20,000 2,342
Nicholas Dobrotwir 12/97 211,563 14,131(8) --- ---
(8)
</TABLE>
- --------------------------
* Four month period ended December 31, 1996.
26
<PAGE>
(1) Mr. Trulsvik has served as President and Chief Executive Officer since
February 4, 1997; as Executive Vice President from March 9, 1995 to
February 4, 1997 and as President and Chief Executive Officer from November
21, 1994 to March 9, 1995.
(2) Mr. Nyberg has served as Chairman of the Board since February 4, 1997 and
as President and Chief Executive Officer from March 9, 1995 to February 4,
1997. Other annual compensation paid in the year ended December 31, 1997
includes $75,312 as a housing allowance and $26,104 in childrens' school
fees.
(3) Mr. Haavik resigned as Executive Vice President and Chief Financial Officer
on December 1, 1997. All other compensation includes $68,926 accrued in
fiscal year 1997 which is payable through May 1998 in connection with the
termination of Mr. Haavik's employment contract. (See "Employment
Contracts.")
(4) Mr. Boe resigned as Executive Vice President on December 1, 1997. Other
annual compensation paid in the year ended December 31, 1997 includes
$14,331 as a housing allowing and $6,416 of which was part of an allowance
applied to pay personal taxes. All other compensation includes $68,926
accrued in fiscal year 1997 which is payable through May 1998 in connection
with the termination of Mr. Boe's employment contract. (See "Employment
Contracts.")
(5) Mr. Johansen resigned as Executive Vice President on March 13, 1998.
(6) Mr. Bandlien has served as Executive Vice President since November 14, 1995
and as Senior Vice President from December 14, 1994 to November 14, 1995.
(7) Mr. Kjemperud has served Senior Vice President since February 4, 1997 and
as a member of management since September 1, 1996.
(8) Mr. Dobrotwir served as Vice President from September 16, 1997 until
January 26, 1998. Included within 1997 salary are payments made for
consulting services rendered to the Company during 1997, pursuant to
contracts the Company had with Fielden Management Services Pty. Ltd. (of
which Mr. Dobrotwir was President and Chief Executive Officer until April
30, 1997) and with Trident Petroleum Inc. (See Item 13. "Certain
Relationships and Related Transactions.") Other annual compensation paid
in the year ended December 31, 1997 includes $12,800 as relocation costs
also paid under the contract with Trident Petroleum Inc.
(9) The balance of any amounts not described in Notes 3 and 4 represent the
Company's contributions to or accruals with respect to individual
retirement and pension plans.
27
<PAGE>
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to Exercise Grant Date
Options Employees or Base Expiration Present Value (2)
Name Granted (1) in FY 12/97 Price Date Per Share Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nils N. Trulsvik 0 0% $ 0 --- $ 0 $ 0
Oistein Nyberg 0 0% $ 0 --- $ 0 $ 0
Arnfin Haavik 0 0% $ 0 --- $ 0 $ 0
Arild Boe 0 0% $ 0 --- $ 0 $ 0
Svein Johansen 0 0% $ 0 --- $ 0 $ 0
Einar Bandlien 0 0% $ 0 --- $ 0 $ 0
Alfred Kjemperud 10,000 6.17% $5.27 7/29/99 $.92 $9,225
Nicholas Dobrotwir 0 0% $ 0 --- $ 0 $ 0
</TABLE>
- ----------
(1) The options granted to Mr. Kjemperud are exercisable only from June 29, 1999
through the expiration date of July 29, 1999, and were granted at an
exercise price equal to 124% of the fair market value of the Company's
Common Stock on the date of grant. Pursuant to the terms of the 1995 Long-
Term Incentive Plan, the Compensation Committee may, subject to Plan limits,
modify the terms of outstanding options, including the exercise price and
vesting schedule thereof.
(2) These values were derived using the Black-Scholes option pricing model
applying the following assumptions: dividend yield of 0%; volatility of
44.7%; 6.08% risk-free interest rate and a 2.05-year expected term. These
values are not intended to forecast future appreciation of the Company's
stock price. The actual value, if any, that an executive officer may
realize from his options (assuming that they are exercised) will depend
solely on the increase in the market price of the shares acquired through
option exercises over the exercise price, measured when the shares are sold.
OPTION EXERCISES AND VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Options
Held at Fiscal Value of Unexercised In-the-Money
Year End Options at Fiscal Year End (1)
-----------------------------------------------------------------------
Shares
Acquired Value Exercisable Unexercisable
Name on Exercise Realized Exercisable Unexercisable ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nils N. Trulsvik --- --- 60,000 100,000 0 0
Oistein Nyberg --- --- 77,333 66,667 0 0
Arnfin Haavik 36,000 $54,000 33,333 66,667 0 0
Arild Boe --- --- 28,000 100,000 0 0
Svein Johansen --- --- 0 100,000 0 0
Einar Bandlien --- --- 44,000 100,000 0 0
Alfred Kjemperud --- --- 0 30,000 0 0
Nicholas Dobrotwir --- --- 0 0 0 0
</TABLE>
- ----------
(1) Represents the difference between the market value on December 31, 1997 and
the exercise price. All options had an exercise price in excess of $0.94,
market value at December 31, 1997.
28
<PAGE>
DIRECTORS' COMPENSATION
The Company pays non-employee Directors (other than Mr. Halpin) fees at
the rate of $14,000 per year plus a fee of $3,000 per year for each committee on
which such non-employee Director serves. The Company also pays a fee of $1,000
per day, other than a day on which the Board meets, for each day spent by a non-
employee Director on the business of Board committees which exceeds one day per
year with respect to the Compensation Committee and three days per year with
respect to the Audit Committee and the Petroleum Committee. The Company also
reimburses ordinary out-of-pocket expenses for attending Board and Committee
meetings.
Robert A. Halpin was compensated for his services as Chairman and Vice
Chairman of the Board and member of Board committees pursuant to an agreement
which provides for an annual fee of $45,000 plus $1,000 per day for each day of
service in excess of 66 days per year. The Company provides Mr. Halpin with an
office at the Company's offices located in Calgary, Alberta, Canada, and
reimburses Mr. Halpin for his out-of-pocket expenses in connection with services
on behalf of the Company, including travel and related expenses for his wife if
Mr. Halpin is required to be outside of Calgary for more than two consecutive
weeks on Company business. The Company also from time to time uses the
consulting services of Halpin Energy Resources, Ltd., which is controlled by Mr.
Halpin, in the area of petroleum projects, for which such company is compensated
at its customary rates.
The Company provides automatic grants of non-qualified options to non-
employee directors pursuant to the 1995 Long-Term Incentive Plan. Pursuant to
the Plan, a non-qualified option to purchase 7,500 shares of Common Stock is
granted automatically to each non-employee director on each of (i) the date of
each meeting of stockholders at which such non-employee is elected or re-elected
as a director or, if in any fiscal year directors are not elected at a meeting
of stockholders, on the last date of such fiscal year and (ii) the date such
non-employee is first elected as a director, if not at a meeting of
stockholders. In addition, a non-employee director will automatically be
granted a non-qualified Option to purchase 7,500 shares of Common Stock on each
date on which such non-employee director is elected or re-elected by the Board
of Directors as Chairman of the Board of Directors, or, if the Chairman of the
Board is then an employee of the Company, as Vice Chairman of the Board of
Directors. The exercise price of each option is equal to 100% of the fair
market value of the Common Stock on the date of grant. Each option so granted
is 100% vested six months after the date of grant. Options expire on the first
to occur of three years from the date of grant or the first anniversary of the
date the director ceases to be a director for any reason. Non-employee
directors are not eligible to receive other options pursuant to the 1995 Long-
Term Incentive Plan.
Since January 1, 1996, Eugene Meyers, a non-employee director, has
provided financial relations consulting services to the Company at the rate of
$15,000 per year for 22 days of service, and thereafter at the rate of $100 per
hour ($1,000 maximum per day). The Company also reimburses him for his out-of-
pocket expenses associated with such services.
The following table shows the compensation paid to non-employee Directors,
including their respective affiliates, during the year ended December 31, 1997:
<TABLE>
<CAPTION>
Directors Fees and
Other Consulting Options Granted
Name Compensation Payments
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert Halpin $45,000 $ 0 15,000
Stanley Heckman 20,000 0 7,500
Eugene Meyers 14,000 15,000(1) 7,500
</TABLE>
- ------------
(1) In addition, at December 31, 1997, the Company was obligated to pay an
additional $35,600 to Mr. Meyers with respect to services rendered during 1997.
The options were granted on June 3, 1997 at an exercise price of $4.50, expire
on June 2, 2000, and were 100% vested at December 3, 1997.
29
<PAGE>
EMPLOYMENT CONTRACTS
The Company has entered into Employment Contracts with each of its
executive officers. The Employment Contracts with Nils Trulsvik, Oistein
Nyberg, Arnfin Haavik, Arild Boe, Svein Johansen, Einar Bandlien and Alfred
Kjemperud may be terminated by either party on either three or six months
written notice. The Employment Contracts with Oistein Nyberg and Nicholas
Dobrotwir may be terminated only on six months notice after one year from the
date the agreements were executed, which in the case of Mr. Nyberg is April 25,
1997 and in the case of Mr. Dobrotwir is May 1, 1997. Mr. Trulsvik's agreement
has been amended to terminate by its terms on July 31, 1998. The contracts
provide for an annual salary of approximately US$150,000, except in the case of
Mr. Kjemperud whose annual salary is approximately US$100,000, (denominated in
local currency in the country in which the officer is located) which is subject
to renegotiation at the end of each fiscal year. In addition, each person
receives an allowance equal to 12.5% of his base salary, a portion of which is
used to provide minimum life and disability insurance coverage for each such
person. The remainder of such allowance may be used by each person for
additional life, medical or accident insurance and to fund individual pension
and retirement plans. The Company reserves the right to review the 12.5%
allowance every three years. Each person is also entitled to receive up to a
full year's salary in the event he is unable to provide services due to sickness
or injury. The Employment Contracts for Messrs. Nyberg and Haavik also provide
for, among other things, housing allowances and, in the case of Mr. Nyberg,
payment of childrens' school fees. Mr. Haavik's and Mr. Boe's contracts were
terminated by the Company on six-months notice on December 1, 1997. Mr.
Johansen's contract was terminated by the Company on six-months notice on
January 30, 1998. Messrs. Haavik, Boe and Johansen will continue to provide
services to the Company throughout the notice period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Robert A.
Halpin and Stanley D. Heckman, neither of whom is an employee of the Company.
In lieu of directors fees generally paid to non-employee Directors, Mr. Halpin
was compensated for his services as Chairman and Vice Chairman of the Board
pursuant to a separate agreement. The Company also from time to time uses the
consulting services of Halpin Energy Resources, Ltd., which is controlled by Mr.
Halpin. (See "Directors' Compensation.")
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1998 with
respect to beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than 5% of the Company's
stock, by each director and Named Officer of the Company and by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Independent Oilfield
St. James House
New St. James Place
St. Helier, Jersey JE48WH
Channel Islands 1,780,000 7.93%
Eugene J. Meyers 547,728 (1) 2.44%
Oistein Nyberg 209,333 (2) *
Einar Bandlien 205,968 (3) *
Svein Johansen (11) 203,161 *
Nils N. Trulsvik 207,400 (4) *
Nick Dobrotwir 175,025 (5) *
Arnfin Haavik (12) 246,333 (6) 1.10%
Arild Boe (12) 160,000 (7) *
Stanley D. Heckman 115,793 (8) *
Robert A. Halpin 42,000 (9) *
Alfred Kjemperud 0 *
All executive officers and 1,552,383 (10) 6.84%
directors as a group (9 persons)
</TABLE>
- --------------------------
* Less than 1%.
(1) Includes 15,000 shares underlying presently exercisable options.
(2) Includes 77,333 shares underlying presently exercisable options.
(3) Includes 44,000 shares underlying presently exercisable options.
(4) Includes 60,000 shares underlying presently exercisable options.
(5) Includes 175,000 shares indirectly beneficially owned through Fielden
Petroleum Developments Inc. Mr. Dobrotwir resigned as an executive
officer on January 26, 1998.
(6) Includes 33,333 shares underlying presently exercisable options.
(7) Includes 28,000 shares underlying presently exercisable options.
(8) Includes 15,000 shares underlying presently exercisable options.
(9) Includes 30,000 shares underlying presently exercisable options.
(10) See Notes 1-4 and 6-9; also includes 21,000 issued shares held by
executive officers not named in the foregoing table.
(11) Resigned as an executive officer on March 13, 1998.
(12) Resigned as executive officers on December 1, 1997.
POTENTIAL CHANGES IN CONTROL
On February 2, 1998, Fountain entered into the Combination Agreement with
CanArgo, pursuant to which CanArgo would become a subsidiary of Fountain and
each outstanding CanArgo Common Share would be converted into the right to
receive 1.6 shares of Fountain Common Stock. Following the consummation of the
business combination involving CanArgo and Fountain, it is expected that the
former holders of CanArgo Common Shares 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. Consummation of the business combination is
31
<PAGE>
subject to the satisfaction of a number of conditions, including approval by the
stockholders of both CanArgo and Fountain.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Memorandum of Agreement dated May 16, 1995 between Fielden
Management Services Pty, Ltd. ("Fielden") and Fountain, under which the Company
acquired its interest in the Stynawske Field, in the first quarter of 1997
Fountain paid $500,000 and issued 175,000 shares of its Common Stock to Fielden
based upon the signing of a joint venture agreement between Ukrnafta and the
Company to develop and operate the Stynawske Field project. Mr. Nicholas G.
Dobrotwir has indirect beneficial ownership of the 175,000 shares of the
Company's Common Stock owned by Fielden. Under the agreement, Fielden has the
contingent right to receive up to an additional 375,000 shares of the Company's
Common Stock subject to the satisfaction of conditions related to the
achievement of specified performance standards by the Stynawske Field project.
During the year ended December 31, 1997, the Company paid consulting fees
and expenses to Fielden related to the Stynawske Field project. Until his
resignation May 5, 1997, Mr. Nicholas G. Dobrotwir was the President and Chief
Executive Officer of Fielden. Mr. Dobrotwir's services as a consultant were
provided to the Company through Fielden for the period of January 1997 through
April 1997. For the period after April 30, 1997, Mr. Dobrotwir's services were
provided pursuant to a Management Services Agreement between Trident Petroleum
Inc. and Fountain Oil Boryslaw Ltd. The Company paid a total of $288,065.20 to
Fielden during the year ended December 31, 1997, of which $111,562.50 related to
consultant services provided by Mr. Dobrotwir, and paid $100,000 to Trident
Petroleum Inc. for Mr. Dobrotwir's services (See Item 10. "Executive
Compensation.")
Mr. Dobrotwir was elected Vice President of the Company on September 16,
1997 and is the Company executive with the principal operating responsibilities
for the Stynawske Field project. On January 26, 1998, he resigned as an officer
of the Company, but continues with the operating responsibilities for the
Stynawske Field project.
On April 26, 1996, pursuant to an Amended and Restated Share Exchange
Agreement of that date between Zhoda and Fountain Oil Ukraine Ltd. ("FOU"),
Zhoda transferred to FOU shares representing 80% of the outstanding equity of
UK-RAN. Through UK-RAN's ownership of a 45% equity interest in Kashtan, the
shares transferred by Zhoda represent an effective 36% ownership interest in
Kashtan and the Lelyaky Field project. In consideration for the transfer, FOU
assumed a $450,000 obligation owed by Zhoda to the Company and issued to Zhoda
1,000,000 special non-voting common shares of FOU (the "Special Shares") which,
under certain circumstances relating to the receipt by Kashtan of a license to
develop the Lelyaky Field, production from the Lelyaky Field and payment of
dividends by Kashtan, might have been exchanged on a share-for-share basis for
shares of the Common Stock of the Company. The Company believes that all of
Zhoda's rights to exchange Special Shares terminated during 1997 as a result of
the failure of time related conditions precedent and subsequent. Zhoda has
filed suit in which it, among other things, challenges that conclusion. See
Item 3. "Legal Proceedings." Following the expiration of the exchange rights,
FOU may redeem any then outstanding Special Shares at a price equal to one-half
of one cent ($.005) per Special Share.
As of December 31, 1997, Zhoda was indebted to the Company in the
principal amount of $186,611.
Orest Senkiw, served as a Vice President of the Company from February 4,
1997 to December 1, 1997. Mr. Senkiw, his wife and his two adult children each
owns 25% of a corporation that holds 10.3% of the outstanding shares of Zhoda.
Mr. Senkiw is the Company executive who, during 1997, had the principal
operating responsibilities for the Lelyaky Field project.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited
dated August 10, 1995 by and among Ribalta Holdings, Inc.
as Vendor and Fountain Oil Incorporated as Purchaser, and
John Richard Tate as Warrantor (Incorporated herein by
reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase
of All the Issued Share Capital of Gastron International
Limited dated November 3, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995
Form 8-K).
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.
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).
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).
33
<PAGE>
*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.
*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).
34
<PAGE>
*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).
*10(25) Employment Agreement between Fountain Oil Norway AS and
Rune Falstad.
*10(26) Management Services Agreement between Trident Petroleum
Inc. and Fountain Oil Boryslaw Limited.
16 Letter Regarding Change in Certifying Accountants
(Incorporated herein by reference from September 8, 1994
Form 8-K, filed by Electromagnetic Oil Recovery, Inc.,
the Company's predecessor).
21 List of Subsidiaries.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K:
During the year ended December 31, 1997, the Company filed the following
current reports on Form 8-K:
1. Form 8-K dated January 7, 1997, reporting Item 9. Sale of Equity
Securities Pursuant to Regulation S, regarding the sale of securities
pursuant to exercise of outstanding options.
2. Form 8-K dated February 11, 1997, reporting Item 9. Sale of Equity
Securities Pursuant to Regulation S, regarding the sale of securities
pursuant to the issue of shares in connection with the development of
an oil and gas field.
3. Form 8-K dated May 19, 1997, reporting Item 9. Sale of Equity
Securities Pursuant to Regulations S, regarding the sale of securities
pursuant to exercise of outstanding options.
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUNTAIN OIL INCORPORATED
(Registrant)
By: /s/Nils N. Trulsvik Date: June 11, 1998
---------------------
Nils N. Trulsvik, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/Nils N. Trulsvik Date: June 11, 1998
-----------------------------------
Nils N. Trulsvik, Director, President and
Chief Executive Officer
By: /s/Rune Falstad Date: June 11, 1998
------------------------------------
Rune Falstad, Vice President and
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Oistein Nyberg Date: June 11, 1998
-----------------------------------
Oistein Nyberg
Chairman of the Board
By: /s/Robert A. Halpin Date: June 11, 1998
-----------------------------------
Robert A. Halpin
Vice Chairman of the Board of Directors
By: /s/Einar H. Bandlien Date: June 11, 1998
-----------------------------------
Einar H. Bandlien, Director
By: /s/Stanley D. Heckman Date: June 11, 1998
-----------------------------------
Stanley D. Heckman, Director
By: /s/Eugene J. Meyers Date: June 11, 1998
-----------------------------------
Eugene J. Meyers, Director
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Fountain Oil Incorporated:
We have audited the accompanying consolidated balance sheets of Fountain
Oil Incorporated and subsidiaries (the "Company") as of December 31, 1997 and
1996 and August 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997 and
August 31, 1996 and 1995 and the four month period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1997 and 1996 and August 31, 1996 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and August 31, 1996 and 1995 and the four month period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Notes 3 and 6 to the consolidated financial statements, the Company
will require substantial capital in order to finance the development of its oil
and gas interests. In addition, the Company and its oil and gas ventures must
produce and market oil and gas in sufficient quantities and at sufficient prices
to provide positive cash flow to the Company. As a result, there is substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 6 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 9, 1998, except for the sixth
paragraph of Note 6, as to which the
date is June 8, 1998.
F-1
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED BALANCE SHEET
As of December 31, 1997, December 31, 1996, and August 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, December 31, August 31,
1997 1996 1996
-------------- ---------------- ----------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 14,164,177 $ 31,424,064 $ 17,329,237
Accounts receivable - affiliated entities -- 259,040 7,210
Restricted cash 9,700,000 -- --
Other current assets 761,904 622,411 649,107
-------------- ---------------- ----------------
Total current assets 24,626,081 32,305,515 17,985,554
Restricted cash -- 5,400,000 --
Notes receivable -- 190,186 190,186
Property and equipment, net 5,942,273 7,766,479 6,577,565
Oil and gas properties, net, full cost method
(including unevaluated amounts of $324,500,
$257,407 & $257,407, respectively) 1,478,974 259,338 287,788
Investments in and advances to oil and gas
ventures - net 5,386,707 8,567,563 6,876,327
Other assets -- 885,980 171,121
-------------- ---------------- ----------------
TOTAL ASSETS 37,434,035 55,375,061 32,088,541
============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 328,171 $ 799,985 $ 731,532
Accrued liabilities 10,326,608 1,124,425 297,513
Notes payable -- -- 31,156
-------------- ---------------- ----------------
Total current liabilities $ 10,654,779 $ 1,924,410 $ 1,060,201
8% Convertible subordinated debentures -- -- 300,000
Minority interest in subsidiaries -- 205,380 223,350
Commitments and contingencies (Notes 6 and 9) -- -- --
Stockholders' equity:
Preferred stock, par value $0.10 per share,
5,000,000 shares authorized: no shares
Issued or outstanding -- -- --
Common Stock, par value $0.10 per share,
50,000,000 shares authorized: 22,447,489,
22,168,489, and 17,376,610 shares issued
and outstanding respectively 2,244,749 2,216,849 1,737,661
Capital in excess of par value 82,040,156 80,851,120 55,985,572
Accumulated deficit (57,505,649) (29,822,698) (27,218,243)
-------------- ---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY $ 26,779,256 $ 53,245,271 $ 30,504,990
-------------- ---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,434,035 $ 55,375,061 $ 32,088,541
============== ================ ================
The accompanying notes are an integral part of the consolidation financial statements
</TABLE>
F-2
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 1997 and August 31, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- -------------- ----------------
<S> <C> <C> <C>
Operating Revenues:
Oil and gas sales $ 313,301 $ 26,562 $ --
Other -- 8,615 625,457
---------------- -------------- ----------------
TOTAL REVENUES 313,301 35,177 625,457
---------------- -------------- ----------------
OPERATING EXPENSES:
Cost of sales -- 31,991 479,224
Lease operating expenses 200,321 10,988 --
Direct project costs 1,753,166 1,267,555 --
General and administrative 3,903,446 3,853,972 4,012,510
Loss from investments in unconsolidated
subsidiaries 3,778,287 13,272 --
Depreciation, depletion and amortization 344,666 77,253 1,156,772
Employee stock compensation -- -- 152,038
Impairment of notes receivable 186,611 -- --
Impairment property and equipment 3,243,997 -- 175,450
Impairment of intangibles and other assets -- -- 1,924,202
Impairment of oil and gas properties 257,407 419,835 608,181
Impairment of oil and gas ventures 15,735,592 -- --
---------------- -------------- ----------------
TOTAL OPERATING EXPENSES 29,403,493 5,674,866 8,508,377
---------------- -------------- ----------------
OPERATING LOSS (29,090,192) (5,639,689) (7,882,920)
---------------- -------------- ----------------
Other (expense) income:
Interest income 1,615,066 332,071 251,276
Interest expense (69,286) (1,016,465) (28,475)
Other (72,714) 12,551 89,108
Loss on disposition of equipment and property (271,205) (182,020) --
---------------- -------------- ----------------
TOTAL OTHER (EXPENSE) INCOME 1,201,861 (853,863) 311,909
---------------- -------------- ----------------
Net loss before income tax expense (27,888,331) (6,493,552) (7,571,011)
Income tax expense -- -- (28,600)
---------------- -------------- ----------------
NET LOSS BEFORE MINORITY INTEREST (27,888,331) (6,493,552) (7,599,611)
Minority interest in loss of consolidated subsidiary 205,380 -- --
NET LOSS $ (27,682,951) $ (6,493,552) $ (7,599,611)
---------------- -------------- ----------------
NET LOSS PER COMMON SHARE - BASIC $ (1.24) $ (.52) $ (.91)
---------------- -------------- ----------------
NET LOSS PER COMMON SHARE - DILUTED $ (1.24) $ (.52) $ (.91)
---------------- -------------- ----------------
Weighted average number of common
shares outstanding 22,413,013 12,495,137 8,341,783
---------------- -------------- ----------------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-3
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS - continued
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
Unaudited
<S> <C> <C>
Operating Revenues:
Oil and gas sales $ 16,980 $ 6,440
Other income -- 1,908
---------------- ----------------
TOTAL REVENUES 16,980 8,348
---------------- ----------------
Operating expenses:
Cost of sales 4,052 4,581
Lease operating expenses 1,550 2,536
Direct project costs 314,100 120,268
General and administrative 1,281,821 1,303,048
Loss from investments in unconsolidated subsidiaries 1,359,246 4,424
Depreciation, depletion and amortization 39,578 43,643
---------------- ----------------
TOTAL OPERATING EXPENSES 3,000,347 1,478,500
---------------- ----------------
OPERATING LOSS (2,983,367) (1,470,152)
---------------- ----------------
Other (expense) income:
Interest income 423,681 54,992
Interest expense (12,744) (3,006)
Other (49,995) (24,016)
---------------- ----------------
TOTAL OTHER (EXPENSE) INCOME 360,942 27,970
---------------- ----------------
Net loss before income tax expense (2,622,425) (1,442,182)
Income tax expense -- --
---------------- ----------------
NET LOSS BEFORE MINORITY INTEREST (2,622,425) (1,442,182)
Minority interest in loss of consolidated subsidiary 17,970 --
---------------- ----------------
NET LOSS $ (2,604,455) $ (1,442,182)
---------------- ----------------
NET LOSS PER COMMON SHARE - BASIC $ (.14) $ (.13)
---------------- ----------------
NET LOSS PER COMMON SHARE - DILUTED $ (.14) $ (.13)
---------------- ----------------
Weighted average number of common
shares outstanding 18,696,212 10,834,063
---------------- ----------------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-4
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period August 31, 1994 through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1994 5,974,310 $ 597,431 $16,708,442 $(13,125,080) $ 4,180,793
Sale of common stock,
net of offering expenses
of $1,033,118 3,958,998 395,900 10,900,930 -- 11,296,830
Issuance of common
stock as employee
compensation and
for other obligations 900,755 90,075 1,639,803 -- 1,729,878
Net loss -- -- -- (7,599,611) (7,599,611)
---------- ---------- ----------- ------------ -----------
BALANCE, AUGUST 31, 1995 10,834,063 $1,083,406 $29,249,175 $(20,724,691) $ 9,607,890
---------- ---------- ----------- ------------ -----------
Sale of common stock,
net of offering expenses
of $1,539,646 5,000,000 500,000 20,460,354 -- 20,960,354
Issuance of common
stock for purchase of
interests in oil and
gas ventures 450,000 45,000 2,308,125 -- 2,353,125
Issuance of common stock
upon conversion
of debentures 997,324 99,733 3,834,605 -- 3,934,338
Issuance of common stock
upon exercise of
warrants and options 95,223 9,522 133,313 -- 142,835
Net loss -- -- -- (6,493,552) (6,493,552)
---------- ---------- ----------- ------------ -----------
BALANCE, AUGUST 31, 1996 17,376,610 $1,737,661 $55,985,572 $(27,218,243) $30,504,990
---------- ---------- ----------- ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-5
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - continued
For the Period August 31, 1994 through December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER OF ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED PAR VALUE CAPITAL DEFICIT EQUITY
--------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
upon conversion of
debentures 59,125 5,913 274,481 -- 280,394
Issuance of common stock upon
exercise of warrants and
options 4,732,754 473,275 24,591,067 -- 25,064,342
Net loss -- -- -- (2,604,455) (2,604,455)
---------- ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 22,168,489 $2,216,849 $80,851,120 $(29,822,698) $53,245,271
---------- ---------- ----------- ------------ -----------
Issuance of common stock for
purchase of interest in oil and
gas venture 175,000 17,500 1,043,436 -- 1,060,936
Issuance of common stock
upon exercise of warrants and
options 104,000 10,400 145,600 -- 156,000
Net loss -- -- -- (27,682,951) (27,682,951)
---------- ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 22,447,489 $2,244,749 $82,040,156 $(57,505,649) $ 26,779,256
---------- ---------- ----------- ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-6
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997 and
August 31, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (27,682,951) $ (6,493,552) $ (7,599,611)
Depreciation and amortization 344,666 77,253 1,156,772
Gain on settlement of liabilities -- -- (58,230)
Loss on disposition of equipment and property 271,205 182,020 --
Impairment of notes receivable 186,611 -- --
Impairment of property and equipment 3,243,997 -- 175,450
Impairment of intangibles -- -- 1,924,202
Impairment of oil and gas properties 257,407 419,835 608,181
Impairment of oil and gas ventures 15,735,592 -- --
Issuance of common stock for services and expenses -- -- 1,482,664
Amortization of debt issuance costs and discount -- 866,666 --
Loss in investments in unconsolidated subsidiaries 3,778,287 13,272 --
Minority interest in loss of unconsolidated subsidiary (205,380) -- --
Changes in assets and liabilities:
Accounts receivable 259,040 53,905 65,977
Other assets (139,493) (211,222) (325,289)
Accounts payable (471,814) 62,638 394,784
Accrued liabilities 246,920 (116,766) 217,022
--------------- --------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (4,175,913) (5,145,951) (1,958,078)
--------------- --------------- ----------------
Investing activities:
Restricted cash (4,300,000) -- --
Investments in oil and gas properties (1,318,492) (155,938) (2,458,596)
Investments in and advances to oil and gas ventures (6,280,613) (2,644,837) --
Capital expenditures (1,573,507) (3,728,770) (404,822)
Proceeds from disposition of assets 232,638 104,000 --
Issuance of notes receivable -- (135,186) (2,980,000)
--------------- --------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (13,239,974) (6,560,731) (5,843,418)
--------------- --------------- ----------------
Financing activities:
Proceeds from issuance of debentures, net of expenses -- 3,346,723 --
Proceeds from sales of common stock, net of expenses -- 21,103,189 11,296,830
Proceeds from exercise of options 156,000 -- --
Proceeds from issuance of short-term borrowings -- 4,848,476 47,813
Principal payments on short-term borrowings -- (5,054,114) (271,563)
--------------- --------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 156,000 24,244,274 11,073,080
--------------- --------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,259,887) 12,537,592 3,271,584
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31,424,064 4,791,645 1,520,061
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,164,177 $ 17,329,237 $ 4,791,645
--------------- --------------- ----------------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-7
<PAGE>
FOUNTAIN OIL INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS - continued
For the Four Month Periods Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
Unaudited
<S> <C> <C>
Operating activities:
Net loss $(2,604,455) $(1,442,182)
Depreciation and amortization 39,578 43,643
Amortization of debt issuance costs and discount 1,375 --
Loss in investments in unconsolidated subsidiaries 1,359,246 4,424
Minority interest in loss of unconsolidated subsidiary (17,970) --
Changes in assets and liabilities:
Accounts receivable (251,828) (114,236)
Other assets 26,687 88,344
Accounts payable 68,453 (305,580)
Accrued liabilities 149,069 (242,037)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,229,845) (1,967,624)
----------- -----------
Investing activities:
Restricted cash (5,400,000) --
Investments in and advances to oil and gas ventures (3,108,472) (1,369,767)
Capital expenditures (1,200,042) (746,810)
Proceeds from disposition of assets -- (73,900)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (9,708,514) (2,190,477)
----------- -----------
Financing activities:
Proceeds from exercise of warrants and options 25,064,342 --
Proceeds from issuance of short-term borrowings -- 122,153
Principal payments on short-term borrowings (31,156) (25,108)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,033,186 97,045
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,094,827 (4,061,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,329,237 4,791,645
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $31,424,064 $ 730,589
----------- -----------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-8
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS - The principal activities of Fountain Oil
Incorporated and its consolidated subsidiaries (collectively the "Company")
have involved the acquisition of interests in and development of oil and
gas fields with a productive history that indicate the potential for
increased production through rehabilitation and utilization of modern
production techniques and enhanced oil recovery processes. The Company 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 the Company has acquired interests
representing 50% or less of the equity in various oil and gas projects, it
has generally sought operational responsibility for the substantial oil and
gas projects in which it has interests. Accordingly, certain of the
activities in which the Company has interests are conducted through
unconsolidated entities. The Company has acquired less than majority
interests in entities developing or seeking to develop oil and gas
properties in Eastern Europe including the Russian Federation. These
entities are accounted for as unconsolidated subsidiaries.
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. See Note
13, Income Taxes, of Notes to Consolidated Financial Statements. Upon
consummation of the business combination, current management of CanArgo
will hold a majority of the Company's management positions.
The Company elected to change its fiscal year from August 31 to
December 31 effective December 31, 1996 in order to conform to the calendar
year accounting which is required for most of the significant oil and gas
projects in which the Company participates. Accordingly, the accompanying
consolidated financial statements include information for the four-month
transition period ended December 31, 1996. The comparable statements of
operations and cash flows for the four month period ended December 31, 1995
and all related footnote disclosures are unaudited. Such unaudited
information includes all adjustments necessary in the opinion of the
management of the Company for a fair statement of the results of operations
and cash flows. Results for the four month period may not be indicative of
results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements and notes thereto are
prepared in accordance with U.S. generally accepted accounting principles.
All amounts are in U.S. dollars.
CONSOLIDATION - The consolidated financial statements include the accounts
of Fountain Oil Incorporated and its majority owned subsidiaries. The
majority owned subsidiaries at December 31, 1997 are Electromagnetic Oil
Recovery International Inc., Focan Ltd., Fountain Oil Adygea Incorporated,
Fountain Oil Boryslaw Incorporated, Fountain Oil Boryslaw Ltd., Fountain
Oil Norway AS, Fountain Oil Production Incorporated, Fountain Oil Services
Ltd., Fountain Oil Ukraine Ltd., Fountain Oil U.S. Inc., Gastron
International Limited, Uentech Corporation and UK-RAN Oil Corporation. All
significant intercompany transactions and accounts have been eliminated.
The Company's investments in certain oil and gas ventures are
proportionately consolidated. Investments in less than majority-owned
corporations and corporate-like entities are accounted for using the equity
method of accounting.
QUASI-REORGANIZATION - The Board of Directors of the Company approved a
quasi-reorganization effective October 31, 1988. As of the date of the
quasi-reorganization, the accumulated deficit of $39,952,292 was eliminated
against capital in excess of par value.
F-9
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION - Certain items in the consolidated financial statements
have been reclassified to conform to the current year presentation. There
was no effect on net loss as a result of these reclassifications.
CASH AND CASH EQUIVALENTS - The Company considers unrestricted short-term,
highly liquid investments with maturities of three months or less at the
time of purchase to be cash equivalents.
INVESTMENTS - The Company's investments in cash equivalents are classified
as held to maturity and are carried at amortized cost which approximates
fair value due to their short-term nature.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost unless
the carrying amount is viewed as not recoverable in which case the carrying
value of the assets is reduced to the estimated recoverable amount. See
"Impairment of Long-Lived Assets" below. Expenditures for major renewals
and betterments, which extend the original estimated economic useful lives
of applicable assets, are capitalized. Expenditures for normal repairs and
maintenance are charged to expense as incurred. The cost and related
accumulated depreciation of assets sold or retired are removed from the
accounts and any gain or loss thereon is reflected in operations.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets ranging from three to
ten years.
OIL AND GAS PROPERTIES - The Company and the unconsolidated entities for
which it accounts using the equity method account for oil and gas
properties and interests under the full cost method. Under this accounting
method, costs, including a portion of internal costs associated with
property acquisition and exploration for and development of oil and gas
reserves, are capitalized within cost centers established on a country-by-
country basis. Capitalized costs within a cost center, as well as the
estimated future expenditures to develop proved reserves and estimated net
costs of dismantlement and abandonment, are amortized using the unit-of-
production method based on estimated proved oil and gas reserves. All costs
relating to production activities are charged to expense as incurred.
Capitalized oil and gas property costs, less accumulated depreciation,
depletion and amortization and related deferred income taxes, are limited
to an amount (the ceiling limitation) equal to (a) the present value
(discounted at 10%) of estimated future net revenues from the projected
production of proved oil and gas reserves, calculated at prices in effect
as of the balance sheet date (with consideration of price changes only to
the extent provided by fixed and determinable contractual arrangements),
plus (b) the lower of cost or estimated fair value of unproved and
unevaluated properties, less (c) income tax effects related to differences
in the book and tax basis of the oil and gas properties.
REVENUE RECOGNITION - The Company recognizes revenues when goods have been
delivered, when services have been performed, or when hydrocarbons have
been produced and delivered.
FOREIGN CURRENCY TRANSLATION - The U.S. dollar is the functional currency
for all of the Company's operations. Accordingly, all monetary assets and
liabilities denominated in foreign currency are translated into U.S.
dollars at the rate of exchange in effect at the balance sheet date and the
resulting unrealized translation gains or losses are reflected in
operations. Non-monetary assets are translated at historical exchange
rates. Revenue and expense items (excluding depreciation and amortization
which are translated at the same rates as the related assets) are
translated at the average rate of exchange for the year. Foreign currency
translation amounts recorded in operations for years ended December 31,
1997 and August 31, 1996 and the four months ended December 31, 1996 and
1995 were not material.
F-10
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES - The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires
the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement and the tax bases of assets and liabilities using enacted rates
in effect for the years in which the differences are expected to reverse.
Valuation allowances are established, when appropriate, to reduce deferred
tax assets to the amount expected to be realized.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews all of its long-lived
assets, except for its oil and gas assets, for impairment in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121
Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of. Prior to the adoption of SFAS No. 121, all long-lived assets
including intangible assets, other than oil and gas properties, were
reviewed for impairment by comparing the carrying value of such assets to
future expected net cash flows undiscounted. The Company evaluates its oil
and gas properties and its carrying value of investments in unconsolidated
entities conducting oil and gas operations in accordance with the full cost
ceiling limitation.
STOCK-BASED COMPENSATION PLANS - The Company has adopted only the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, and has elected to continue to record stock-based
compensation expense using the intrinsic-value approach prescribed by
Accounting Principles Board ("APB") Opinion 25. Accordingly, the Company
computes compensation cost for each employee stock option granted as the
amount by which the quoted market price of the Company's Common Stock on
the date of grant exceeds the amount the employee must pay to acquire the
stock. The amount of compensation costs, if any, is charged to operations
over the vesting period.
RECENTLY ISSUED PRONOUNCEMENTS - In 1997, the Financial Accounting
Standards Board issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No.131, Disclosure about Segments of an Enterprise and Related
Information, both of which have been adopted in the fourth quarter of 1997
without having any material effect on the Company's financial statements.
3. GOING CONCERN ASSUMPTION
The Company has incurred recurring operating losses, and its current
operations are not generating positive cash flows. The ability of the
Company to continue as a going concern and to pursue its principal
activities of acquiring interest in and developing oil and gas fields is
highly dependent upon generating funds from external sources and,
ultimately, achieving sufficient positive cash flows from operating
activities.
Without sufficient cash from external sources, the Company's ability to
finance its ongoing operations and continue as a going concern is doubtful.
However, the Company's management believes that it may be able to access
external sources of funds through a merger or other business combination
with another company followed by equity or debt financing by the surviving
entity or by the farm out of interests in certain oil and gas projects.
See Note 6, Oil and Gas Properties and Investments, of Notes to
Consolidated Financial Statements.
The consolidated financial statements do not give effect to any
additional impairment of its investments in oil and gas ventures or other
adjustments which would be necessary should the Company be unable to obtain
sufficient funds from external sources or continue as a going concern.
4. RESTRICTED CASH
Through December 31, 1997 and 1996, the Company has pledged an
aggregate of $9,700,000 and $5,400,000, respectively, to collateralize bank
letters of credit. Letters of credit supported by the restricted cash have
been used primarily to assure repayment of borrowings under a line of
credit established by Kashtan Petroleum Ltd. ("Kashtan"), which operates
the Lelyaki Field project, under which $8,150,000 and
F-11
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,400,000 was outstanding at December 31, 1997 and 1996, respectively.
Kashtan has utilized such borrowings to pay Lelyaki Field project operating
costs, including repayment of costs advanced by the Company on behalf of
Kashtan. 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. 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 a liability of $8,280,000 with
respect to Kashtan indebtedness supported by the Company's restricted cash
deposits. The liability is included within accrued liabilities on the
Company's balance sheet as of December 31, 1997. See Note 6, Oil and Gas
Properties and Investments, of Notes to Consolidated Financial Statements.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment and the related accumulated depreciation at
December 31, 1997 included the following:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
EEOR equipment $ 562,953 $(284,909) $ -- $ 278,044
Oil and gas related equipment 8,348,309 -- (2,843,997) 5,504,312
Office furniture, fixtures and
equipment and other 1,014,263 (454,346) (400,000) 159,917
---------- --------- ----------- ----------
PROPERTY AND EQUIPMENT, NET $9,925,525 $(739,255) $(3,243,997) $5,942,273
---------- --------- ----------- ----------
Property and equipment and the related accumulated depreciation at December 31, 1996
included the following:
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
---------- ------------ ----------- ----------
EEOR equipment $ 504,085 $(273,673) $ -- $ 230,412
EEOR construction-in-progress 60,764 -- -- 60,764
Oil and gas related equipment 6,956,709 -- -- 6,956,709
Office furniture, fixtures and
equipment and other 850,031 (331,437) -- 518,594
---------- --------- ----------- ----------
PROPERTY AND EQUIPMENT, NET $8,371,589 $(605,110) $ -- $7,766,479
Property and equipment and the related accumulated depreciation at August 31, 1996
included the following:
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET
---------- ------------ ----------- ----------
EEOR equipment $ 504,085 $ (268,011) $ -- $ 236,074
EEOR construction-in-progress 60,764 -- -- 60,764
Oil and gas related equipment 5,818,871 -- -- 5,818,871
Office furniture, fixtures and
equipment and other 759,448 (297,592) -- 461,856
---------- --------- ----------- ----------
PROPERTY AND EQUIPMENT, NET $7,143,168 $(565,603) $ -- $6,577,565
---------- --------- ----------- ----------
</TABLE>
Oil and gas related equipment includes new or refurbished drilling
rigs and related equipment including lease and well equipment which the
Company originally planned to transfer to Intergas JSC ("Intergas"), an
entity in which the Company holds a 37% interest, to use in the Maykop
Field, Republic of Adygea, Russian Federation. Such rigs and equipment have
not yet been placed in service and therefore are
F-12
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not being depreciated. Because it has experienced extended delays in
resolving operating arrangements and other Intergas matters including
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 has written off its
investment in and advances to Intergas at December 31, 1997. See Note 6,
Oil and Gas Properties and Investments, of Notes to Consolidated Financial
Statements. Since the rigs and equipment are now expected to be employed
for application other than those for which they were specifically intended,
the Company recorded an impairment of $2,844,000 at December 31, 1997,
which represents the difference between the book value of the rigs and
related equipment and their estimated fair value.
As a result of the Company's decision to close down or significantly
reduce its various corporate offices, the Company recorded an impairment of
$400,000 to reduce the carrying value of furniture, fixtures and equipment
to their estimated fair value.
6. OIL AND GAS PROPERTIES AND INVESTMENTS
Oil and Gas Properties
----------------------
The Company has acquired interests in oil and gas properties through
joint ventures and other joint operating arrangements. A summary of the
Company's oil and gas properties as of December 31, 1997 and 1996 and
August 31, 1996 are set out below:
<TABLE>
<CAPTION>
OIL AND GAS PROPERTIES 12/31/97 12/31/96 8/31/96
---------------------- -------- -------- -------
<S> <C> <C> <C>
United States and Canada
Proved properties $ 2,650,327 $ 1,029,947 $ 1,058,397
Unproved properties 324,500 257,407 257,407
Less: accumulated depreciation, depletion,
amortization and impairment (1,495,853) (1,028,016) (1,028,016)
----------- ----------- -----------
TOTAL OIL AND GAS PROPERTIES,NET $ 1,478,974 $ 259,338 $ 287,788
----------- ----------- -----------
</TABLE>
During the fiscal years ended December 31, 1997 and August 31, 1996,
the Company recognized impairments of $257,407 and $419,835 respectively,
on its oil and gas properties as a result of applying the full cost ceiling
limitation. The impairments related to previously unproved properties.
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.
Unproved properties and associated costs not currently being amortized
and included in oil and gas properties in Canada at December 31, 1997 were
$324,500, substantially all of which relates to the Sylvan Lake Field. Such
properties are expected to be evaluated over the next 24 months, and if no
proved reserves are added, those properties could result in additional
impairment.
F-13
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1997 and
1996 and August 31, 1996 is set out below:
<TABLE>
<CAPTION>
INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES 12/31/97 12/31/96 8/31/96
----------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Ukraine - Lelyaki Field, Pryluki Region
through an effective 40.5% ownership of Kashtan $ 2,435,725 $ 2,398,566 $ 2,163,564
Petroleum Ltd.
Adygea, Russian Federation - Maykop Field
through 37% ownership in Intergas JSC 6,710,874 4,439,213 2,780,263
Canada - Inverness Unit
through 50% ownership in Focan Ltd. -- 106,646 106,646
Albania - Gorisht-Kocul Field
through 50% ownership of the joint venture 2,202,922 1,326,581 517,885
Ukraine - Stynawske Field, Boryslaw
through 45% ownership of Boryslaw Oil
Company 5,800,407 1,655,803 1,321,241
----------- ----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES $17,149,928 $ 9,926,809 $ 6,889,599
----------- ----------- -----------
EQUITY IN PROFIT (LOSS) OF OIL AND GAS VENTURES 12/31/97 12/31/96 8/31/96
----------------------------------------------- ----------- ----------- -----------
Ukraine - Lelyaki Field, Pryluki Region $(2,435,725) $ (355,684) $ --
Adygea, Russian Rederation - Maykop Field (1,452,510) (601,366) --
Canada - Inverness unit -- (2,407) (13,272)
Albania - Gorisht-Kocul Field (833,191) (399,789) --
Ukraine - Stynawske Field, Boryslaw (413,700) -- --
----------- ----------- -----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF
OIL AND GAS VENTURES $(5,135,126) $(1,359,246) $ (13,272)
----------- ----------- -----------
Impairment - Maykop Field $(5,258,364) $ -- $ --
Impairment - Gorisht-Kocul Field (1,369,731) -- --
----------- ----------- -----------
TOTAL IMPAIRMENT $(6,628,095) $ -- $ --
----------- ----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES, NET OF EQUITY LOSS
AND IMPAIRMENT $ 5,386,707 $ 8,567,563 $ 6,876,327
----------- ----------- -----------
</TABLE>
The following supplemental information relates to the Company's
investment in and advances to its two most significant oil and gas ventures:
<TABLE>
<CAPTION>
Four Months
Year Ended Ended Year Ended Year Ended
12/31/97 12/31/96 8/31/96 8/31/95
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Total funding from owners:
Kashtan $ 304,508 $ -- $303,472 $ --
Intergas 2,529,292 609,780 963,949 174,564
Total cash expenditures by the venture:
Kashtan $7,275,440 $ (1) $ (1) $ --
Intergas 2,529,292 609,780 963,949 174,564
Tangible assets and liabilities at
December 31, 1997: Tangible
Assets Liabilities
-------- -----------
Kashtan $ 943,830 $8,315,811(2)
Intergas 26,906 --
</TABLE>
(1) For the period from inception, December 8, 1995 through December 31, 1996,
total cash expenditures by Kashtan amounted to $1,475,254.
(2) See Note 4, Restricted Cash, of Notes to Consolidated Financial Statements
regarding Kashtan's indebtedness supported by the Company's restricted cash
deposits.
During the fourth quarter of 1997, the Company recognized impairment
losses totaling $15,736,000 related to the Lelyaki Field, Maykop Field and
Gorisht-Kocul Field projects. In addition, aggregate losses of $3,365,000
were recorded in 1997 reflecting the Company's equity in the losses of
Kashtan, Intergas and the Gorisht-Kocul joint venture.
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 or is expected to
default 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. The Company believes that it has no further
obligation to fund operations of Kashtan.
F-14
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Because it has experienced extended delays in resolving operating
arrangements and other Intergas matters 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.
The Company believes that it has no further obligation to fund operations
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.
The Company has made advances to Boryslaw Oil Company totaling
$1,508,000 at 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 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.
As a result of the events associated with the impairment of the
Company'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 shareholders 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.
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 $13,971,000 at December
31, 1997, 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 December 31, 1997 the Company had remaining net investments in
oil and gas properties and ventures totalling $6,866,000. Of this amount,
$5,387,000 relates to a venture in Eastern Europe 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
F-15
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997, December 31, 1996 and August
31, 1996 included the following:
<TABLE>
<CAPTION>
12/31/97 12/31/96 8/31/96
----------- ---------- ---------
<S> <C> <C> <C>
Compensation, including related taxes $ 337,767 $ 225,409 $ 209,283
Professional fees 276,500 104,150 --
Termination costs 405,833 -- --
Effective guarantee of Kashtan 8,280,000 -- --
obligations
(Note 6)
Close down costs - Kashtan project 690,622 -- --
(Note 6)
Oilfield related equipment 268,000 677,843 --
Other 67,886 117,023 88,230
----------- ---------- ---------
$10,326,608 $1,124,425 $ 297,513
----------- ---------- ---------
</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 and Asker, Norway. Such costs are
expected to be paid during 1998.
8. CONVERTIBLE SUBORDINATED DEBENTURES
During the quarter ended February 29, 1996, the Company completed an
offering of its 8% Convertible Subordinated Debentures (the "Debentures")
due December 31, 1997. The Company issued $3,750,000 principal amount of
Debentures at par and received net proceeds of $3,346,723 after commissions
and expenses. The Debentures were convertible into shares of the Company's
Common Stock at a price equal to 82 1/2% of the average closing price of
such shares on the five trading days preceding the date of conversion. A
maximum of 309,500 shares of the Company's Common Stock was issuable upon
conversion of each $1,000,000 principal amount of the Debentures. At August
31, 1996, $3,450,000 principal amount of the Debentures had been converted
into 997,324 shares of Common Stock. During the four months ended December
31, 1996, the remaining $300,000 principal amount of Debentures was
converted into 59,125 shares of Common Stock.
F-16
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with Securities and Exchange Commission guidance
published in early 1997, the August 31, 1996 Consolidated Statement of
Operations was restated to reflect a $795,500 charge to interest expense
related to the discount feature of the Debentures. The discount was
amortized from the date of issuance to the earliest conversion dates.
9. 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. The
Company believes that it has no further obligation to fund operations of
Kashtan or Intergas. Also see Note 6, Oil and Gas Properties and
Investments, of Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS - 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 alleges
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 are 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
seeks 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 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.
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 asserted 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.
LEASE COMMITMENTS - The Company leases office space under non-cancellable
operating lease agreements. The leases have remaining terms ranging up to
eight years, some of which may be renewed at the Company's option. Rental
expense for the years ended December 31, 1997 and August 31, 1996 and 1995
and for the four months ended December 31, 1996 was $293,855, $186,444,
$119,133 and $87,872, respectively.
F-17
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental payments for the Company's lease obligations as
of December 31, 1997, are as follows:
1998 $ 388,235
1999 382,688
2000 306,966
2001 165,968
2002 165,968
Later years 331,968
----------
$1,741,793
==========
The Company has sublet office space representing $85,968, $77,000 and
$59,083 of the future minimum rental payments in 1998, 1999 and 2000,
respectively, and expects that it will attempt to sublease a substantial
additional amount of its leased office space.
10. CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
cash equivalents and advances to oil and gas ventures. See Note 6, Oil and
Gas Properties and Investments, of Notes to Consolidated Financial
Statements. The Company has temporary cash on deposit at major financial
institutions, some of which are in excess of government insured limits. At
December 31, 1997, December 31, 1996, and August 31,1996, the Company had
approximately $19,000,000, $27,000,000, and $14,000,000 on deposit in four,
four and two such institutions, respectively.
11. STOCKHOLDERS' EQUITY
On February 12, 1996, at an Annual Meeting of Stockholders, the
stockholders of the Company approved an increase in the number of
authorized shares of Common Stock from 25,000,000 to 50,000,000 having
$0.10 par value per share. The number of authorized shares of preferred
stock of 5,000,000, also having a par value of $0.10 per share, remained
unchanged. As of December 31, 1997, 22,447,489 shares of Common Stock were
issued and outstanding. No shares of preferred stock have been issued.
During the years ended August 31, 1995 and 1996, the four-month period
ended December 31, 1996, and the year ended December 31, 1997, the
following transactions regarding the Company's Common Stock and warrants
and options to purchase the Company's Common Stock were consummated
pursuant to authorization by the Company's Board of Directors or duly
constituted committees thereof.
FISCAL YEAR ENDED AUGUST 31, 1995
. The following are included in the sales or retirement of Common Stock:
.. The issuance of 20,000 shares at a price of $0.25 per share in a
warrant exercise.
.. The issuance to investors of 3,244,000 shares and warrants
exercisable at $6.00 per share to purchase 3,244,000 shares, for
aggregate proceeds of $10,320,882 net of $1,033,118 of related
offering costs.
.. The issuance of 480,780 shares at a price of $1.50 per share,
200,000 shares at a price of $1.125 per share and 14,286 shares
at a price of $1.75 per share in a series of warrant exercises.
.. The retirement of 68 shares recorded at an aggregate of $223.14
to reflect the payment of cash for fractional shares in
connection with the December 1994 reverse stock split.
F-18
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. The following are included in the issuance of Common Stock as employee
compensation:
.. The adjustment to capital in excess of par in the amount of
$4,275 related to shares received by three employees for stock
issued at below par.
.. The issuance of 23,479 shares at a price of $3.09 per share,
4,000 shares at a price of $4.38 per share, and 10,000 shares at
a price of $5.77 per share to employees resulting in aggregate
compensation of $147,763.
. The issuance of 790,000 restricted shares at a value of $1.64 per
share for financial consulting services to be performed over two years
amounting to $1,296,000, of which $1,134,875 was expensed in 1995 and
the balance of $161,125 was expensed during fiscal 1996.
. The issuance of 4,706 shares at a price of $4.25 per share for legal
services in the amount of $20,000.
. The issuance of 28,570 shares and warrants exercisable at $1.75 per
share to purchase 28,572 shares upon conversion of notes payable in an
aggregate principal amount of $50,000.
. The issuance of warrants exercisable at $5.10 per share to purchase
1,139,800 shares to firms that participated in the distribution of the
Company's securities.
. The issuance of 30,000 shares at a price of $5.88 per share for
consulting services in the amount of $176,250.
. The issuance of 10,000 restricted shares at a price of $3.56 per share
along with a cash payment of $60,000 for a paid-up license.
No options were exercised during the fiscal year ended August 31, 1995.
FISCAL YEAR ENDED AUGUST 31, 1996
. The issuance to investors of 5,000,000 shares for aggregate proceeds
of $20,960,354 net of $1,539,646 of related offering costs.
. The following are included in the issuance of Common Stock for
purchase of interests in oil and gas ventures:
.. The issuance of 150,000 shares at a price of $4.5625 per share,
along with other consideration, in exchange for 10% of the equity
of UK-RAN Oil Corporation and 33% of the equity of UK-RAN Energy
Corporation
.. The issuance of 300,000 shares at a price of $5.5625 per share in
exchange for 6% of the equity of Intergas JSC, a joint stock
company incorporated in the Russian Federation.
. The following are included in the issuance of Common Stock upon
conversion of debentures:
.. The issuance of 997,324 shares in a series of conversions of an
aggregate of $3,450,000 principal amount of debentures
convertible at various prices based on 82 1/2% of market price at
the time of conversion.
.. The adjustment to capital in excess of par in the amount of
$311,088 related to deferred costs incurred in the issuance of
debentures and $795,500 related to the discount feature of the
debentures.
F-19
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. The following are included in the issuance of Common Stock upon
warrant and option exercises:
.. The issuance of 52,000 shares at a price of $1.50 per share in a
series of option exercises.
.. The issuance of 43,223 shares at a price of $1.50 per share in a
series of warrant exercises.
. The issuance of options exercisable at $3.8375 per share to purchase
30,000 shares granted to non-employee directors at February 12, 1996
pursuant to the Company's 1995 Long-Term Incentive Plan. See Note 16,
Stock-Based Compensation Plans, of Notes to Consolidated Financial
Statements.
FOUR MONTH PERIOD ENDED DECEMBER 31, 1996
. The following are included in the issuance of Common Stock upon
conversion of debentures:
.. The issuance of 59,125 shares upon conversion of $300,000
principal amount of debentures convertible at 82 1/2% of market
price at the time of conversion.
.. The adjustment to capital in excess of par in the amount of
$19,599 related to deferred costs incurred in the issuance of
debentures.
. The following are included in the issuance of Common Stock upon
warrant and option exercises:
.. The issuance of 12,000 shares at a price of $1.50 per share in a
series of option exercises.
.. The issuance of 486,668 shares at a price of $1.50 per share in a
series of warrant exercises.
.. The issuance of 14,286 shares at a price of $1.75 per share in a
warrant exercise.
.. The issuance of 1,139,800 shares at a price of $5.10 per share in
a series of warrant exercises.
.. The issuance of 3,080,000 shares at a price of $6.00 per share in
a series of warrant exercises.
. The issuance of options exercisable at $7.25 per share to purchase
381,500 shares granted to employees at December 31, 1996 pursuant to
the Company's 1995 Long-Term Incentive Plan. See Note 16, Stock-Based
Compensation Plans, of Notes to Consolidated Financial Statements.
. The issuance of options exercisable at $8.99 per share to purchase
445,000 shares granted to employees at December 31, 1996 pursuant to
the Company's 1995 Long-Term Incentive Plan. See Note 16, Stock-Based
Compensation Plans, of Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1997
. The issuance of 175,000 shares at a price of $6.0625 per share in
connection with the acquisition of an interest in the Stynawske Field,
Ukraine.
. The issuance of 104,000 shares at a price of $1.50 per share in a
series of option exercises.
F-20
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. The issuance of options exercisable at $4.50 per share to purchase
30,000 shares granted to non-employee directors at June 3, 1997
pursuant to the Company's 1995 Long-Term Incentive Plan. See Note 16,
Stock-Based Compensation Plans, of Notes to Consolidated Financial
Statements.
. The issuance of options exercisable at $4.25 per share to purchase
7,000 shares granted to employees at June 30, 1997 pursuant to the
Company's 1995 Long-Term Incentive Plan. See Note 16, Stock-Based
Compensation Plans, of Notes to Consolidated Financial Statements.
. The issuance of options exercisable at $5.27 per share to purchase
155,000 shares granted to employees at June 30, 1997 pursuant to the
Company's 1995 Long-Term Incentive Plan. See Note 16, Stock-Based
Compensation Plans, of Notes to Consolidated Financial Statements.
. The cancellation of options to purchase an aggregate 126,168 shares
which had been granted to employees pursuant to the Company's 1995
Long-Term Incentive Plan. Of the options cancelled, 119,168 were
exercisable at $7.25, 5,000 were exercisable at $8.99, and 2,000 were
exercisable at $4.25. See Note 16, Stock-Based Compensation Plans, of
Notes to Consolidated Financial Statements.
The following table summarizes warrants to purchase the Company's
Common Stock, which were outstanding:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
OUTSTANDING AT: WARRANTS PRICE DATE
-------------- --------- -------- ----------
<S> <C> <C> <C>
AUGUST 31, 1994 1,259,243 $ .25 - $1.75 8/1/95 to 11/3/97
Issued 4,383,800 $5.10 - $6.00 2/28/97
Exercised (715,066) $ .25 - $1.75 8/1/95 to 11/3/97
---------
AUGUST 31, 1995 4,927,977 $1.50 - $6.00 2/28/97 to 11/3/97
---------
Exercised (43,223) $1.50 11/3/97
---------
AUGUST 31, 1996 4,884,754 $1.50 - $6.00 2/28/97 to 11/3/97
---------
Exercised (4,720,754) $1.50 - $6.00 2/28/97 to 11/3/97
Redeemed (164,000) $6.00 2/28/97 to 11/3/97
---------
DECEMBER 31, 1996 0
---------
</TABLE>
During the four month period ended December 31, 1996, an aggregate of
4,383,800 warrants were called for redemption by the Company. If the
average closing price of the Company's Common Stock exceeded $6.10 and
$7.00 per share for 10 consecutive trading days, upon election of the
Company and notice to the warrant holders, the holders of 1,139,800
warrants and 3,244,000 warrants, respectively, were required either to
exercise their warrants within a specified period or to have the warrants
redeemed by the Company for a nominal redemption price. All but 164,000 of
the 4,383,800 warrants called for redemption were exercised during the four
month period ended December 31, 1996; the 164,000 warrants were redeemed.
During the same period, an additional 500,954 warrants were also exercised
by their holders. There were no outstanding warrants at December 31, 1996
and 1997.
12. NET LOSS PER COMMON SHARE
Effective December 31, 1997 the Company adopted SFAS No. 128 Earnings
Per Share, for all periods presented. Basic and diluted net loss per common
share for the years ended December 31, 1997 and August 31, 1996 and 1995
and the four month periods ended December 31, 1996 and 1995 were based on
the weighted average number of common shares outstanding during those
periods. The weighted average number of shares used was 22,413,103,
12,495,137, 8,341,783, 18,696,212 and 10,834,063, respectively. The
Debentures, which were convertible into a maximum of 309,500 shares of the
Company's Common
F-21
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock per $1,000,000 principal amount of the Debentures, were not included
in the computation of diluted net loss per common share for the four month
period ended December 31, 1996 and the fiscal year ended August 31, 1996
because the effect of such inclusion would have been anti-dilutive.
Additionally, options to purchase the Company's Common Stock were
outstanding during the year ended December 31, 1997, the four month period
ended December 31, 1996 and the fiscal years ended August 31, 1996 and 1995
and warrants to purchase the Company's Common Stock were outstanding during
the four month period ended December 31, 1996, and the fiscal years ended
August 31, 1996 and 1995 but were not included in the computation of
diluted net loss per common share because the effect of such inclusion
would have been antidilutive.
13. INCOME TAXES
The Company and its domestic subsidiaries file U.S. consolidated income
tax returns. No benefit for U.S. income taxes has been recorded in these
consolidated financial statements because of the Company's inability to
recognize deferred tax assets under provisions of SFAS 109. Due to the
implementation of the quasi-reorganization as of October 31, 1988, future
reductions of the valuation allowance relating to those deferred tax assets
existing at the date of the quasi-reorganization, if any, will be allocated
to capital in excess of par value. The provision for income taxes for the
year ended August 31, 1995 consisted of taxes applicable to foreign
operations.
A reconciliation of the differences between income taxes computed at
the U.S. federal statutory rate (34%) and the Company's reported provision
for income taxes is as follows:
<TABLE>
<CAPTION>
FOUR MONTH FOUR MONTH
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER DECEMBER AUGUST 31, AUGUST 31,
1997 31, 1996 31, 1995 1996 1995
----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income tax benefit $(9,412,203) $(885,515) $(490,342) $(2,207,808) $(2,574,144)
at statutory rate
Benefit of losses 9,412,203 876,629 490,342 2,197,879 2,566,836
not recognized
Foreign tax -- -- -- -- 28,600
provision
Other, net -- 8,886 -- 9,929 7,308
----------- --------- --------- ----------- -----------
Provision for
income taxes $ 0 $ 0 $ 0 $ 0 $ 28,600
----------- --------- --------- ----------- -----------
Effective tax rate 0% 0% 0% 0% 0.4%
----------- --------- --------- ----------- -----------
</TABLE>
F-22
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred tax assets as of December 31, 1997,
December 31, 1996 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 13,372,000 $ 9,520,000 $ 8,906,000
Foreign net operating loss
carryforwards 4,972,000 1,300,000 1,300,000
Impairments 6,817,000 -- --
Patent rights and related
equipment 225,473 975,803 1,282,072
Bad debt allowance -- 35,776 35,776
Foreign tax credits -- 28,600 28,600
------------ ------------ ------------
25,386,473 11,860,179 11,552,448
Valuation allowance (25,386,473) (11,860,179) (11,552,448)
Net deferred tax asset recognized
in balance sheet $ -- $ -- $ --
------------ ------------ ------------
</TABLE>
On August 1, 1991, and subsequently on August 17, 1994, the Company
experienced changes in the Company's ownership as defined in Section 382 of
the Internal Revenue Code ("IRC"). The effect of these changes in ownership
is to limit the utilization of certain existing net operating loss
carryforwards for income tax purposes to approximately $1,375,000 per year
on a cumulative basis. As of December 31, 1997, total U.S. net operating
loss carryforwards were approximately $39,331,000. Of that amount,
approximately $15,100,000 was incurred subsequent to the ownership change
in 1994, $19,531,000 was incurred prior to 1994 and therefore is subject to
the IRC Section 382 limitation and $4,700,000 is subject to the separate
return limitation rules. See Note 1 of Notes to Consolidated Financial
Statements. The net operating loss carryforwards expire from 1998 to 2012.
The net operating loss carryforwards limited under the separate return
limitation rules may only be offset against the separate income of the
respective subsidiaries. The Company has also generated approximately
$14,161,000 of foreign net operating loss carryforwards. A significant
portion of the foreign net operating loss carryforwards are subject to
limitations similar to IRC Section 382.
The Company's available net operating loss carryforwards may be used
to offset future taxable income, if any, prior to their expiration. The
Company may experience further limitations on the utilization of net
operating loss carryforwards and other tax benefits as a result of
additional changes in ownership.
The Company also has investment tax credit carryovers of $46,546,
which begin to expire in 1998.
14. SEGMENTS
During the year ended December 31, 1997 and the four months ended
December 31, 1996, the Company operated through one business segment, oil
and gas exploration and production, reflecting its decision to use its
electrically enhanced oil recovery ("EEOR") technology primarily internally
as a competitive advantage to obtain and exploit interests in heavy oil
fields and not to pursue external sales of goods and services related to
the EEOR technology. Since oil and gas exploration and production
activities were at a preliminary stage, revenues for the periods ended
December 31, 1997 and 1996 were minimal. For the fiscal years ended August
31, 1996 and 1995, EEOR activities were reported as a separate business
segment. For the fiscal year ended August 31, 1995 EEOR revenues related to
contracts with one customer in each of Canada and China, and for the fiscal
year ended August 31, 1996, EEOR revenues related to a contract with one
customer in Canada.
F-23
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating revenues for the years ended December 31, 1997 and August
31, 1996 and 1995 and the four months ended December 31, 1996 by business
segment and geographical area were as follows:
<TABLE>
<CAPTION>
12/31/97 8/31/96 8/31/95 12/31/96
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
OIL AND GAS ACQUISITION
AND DEVELOPMENT
United States $ -- $ 2,624 $ -- $ --
Canada 313,301 23,938 -- 16,980
------------ ----------- ----------- -----------
TOTAL $ 313,301 $ 26,562 $ 0 $ 16,980
------------ ----------- ----------- -----------
EEOR PROCESS SALES AND SERVICE
United States $ -- $ -- $ -- $ --
Canada -- 8,615 255,457 --
China -- -- 370,000 --
Other -- -- -- --
------------ ----------- ----------- -----------
TOTAL $ 0 $ 8,615 $ 625,457 $ 0
------------ ----------- ----------- -----------
Operating profit (loss) for the years ended December 31, 1997 and August 31, 1996 and 1995 and the four months ended
December 31, 1996 by business segment and geographical area were as follows:
12/31/97 8/31/96 8/31/95 12/31/96
------------ ----------- ----------- -----------
OIL AND GAS ACQUISITION
AND DEVELOPMENT
United States $ (257,407) $ (3,262) $ (608,822) $ --
Canada (97,541) 18,836 -- 11,378
Eastern Europe (24,831,798) (1,770,434) -- (1,712,924)
------------ ----------- ----------- -----------
TOTAL $(25,186,746) $(1,754,860) $ (608,822) $(1,701,546)
------------ ----------- ----------- -----------
EEOR PROCESS SALES AND
SERVICE
United States $ -- $ -- $ (25) $ --
Canada -- (30,857) (3,208,144) --
China -- -- 116,915 --
Other -- -- (18,296) --
------------ ----------- ----------- -----------
$ -- $ (30,857) $(3,109,550) $ --
------------ ----------- ----------- -----------
CORPORATE EXPENSES $ (3,903,446) $(3,853,972) $(4,164,548) $(1,281,821)
------------ ----------- ----------- -----------
TOTAL $(29,090,192) $(5,639,689) $(7,882,920) $(2,983,367)
------------ ----------- ----------- -----------
The Company's loss from investments in unconsolidated subsidiaries pertains primarily to operations in
Eastern Europe.
</TABLE>
F-24
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets as of December 31, 1997 and 1996 and August 31,
1996 by business segment and geographical area were as follows:
12/31/97 12/31/96 8/31/96
----------- ----------- ----------
CORPORATE (1)
United States $ 212,536 $ 7,580,219 $10,239,148
Canada -- -- --
Western Europe 24,263,223 29,049,022 7,517,066
----------- ----------- -----------
TOTAL $24,475,759 $36,629,241 $17,756,214
----------- ----------- -----------
OIL AND GAS ACQUISITION
AND DEVELOPMENT
United States $ -- $ 6,786,714 $ 5,705,663
Canada 2,067,257 831,930 642,451
Eastern Europe 5,386,707 11,127,176 7,984,213
Western Europe 5,504,312 -- --
----------- ----------- -----------
TOTAL $12,958,276 $18,745,820 $14,332,327
----------- ----------- -----------
IDENTIFIABLE ASSETS - TOTAL $37,434,035 $55,375,061 $32,088,541
----------- ----------- -----------
(1) Principally cash and cash equivalents.
The percentage of operating revenues for the years ended December 31,
1997 and August 31, 1996 and 1995 and the four months ended December 31,
1996 by business segment and geographical area are as follows:
12/31/97 8/31/96 8/31/95 12/31/96
OIL AND GAS ACQUISITION -------- ------- ------- --------
AND DEVELOPMENT
United States -- 10% -- --
Canada 100% 90% -- 100%
EEOR PROCESS SALES
AND SERVICE
Canada -- 100% 41% --
China -- -- 59% --
F-25
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL CASH FLOW INFORMATION AND
NONMONETARY TRANSACTIONS
The following represents supplemental cash flow information for the
years ended December 31, 1997, and August 31, 1996 and 1995 and for the
four-month periods ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
All amounts in 000'$
YEARS ENDED 4 MONTHS ENDED
------------------------------ ------------------
<S> <C> <C> <C> <C> <C>
12/31/97 8/31/96 8/31/95 12/31/96 12/31/96
-------- ------- ------- -------- --------
Supplemental disclosures of cash
flow information:
Interest paid during the year $ -- $ 146 $ 28 $ 17 $ 3
------ -------- ------ ------ -------
Supplemental schedule of non-cash
activities:
Acquisition of common stock of
subsidiaries resulting in
elimination upon consolidation and
cancellation of notes receivable
of $2,450,000 and $530,000,
respectively $ -- $ 2,980 $ -- $ -- $ 2,450
------ -------- ------ ------ -------
Issuance of Common Stock upon
conversion of convertible
debentures and notes $ -- $ 3,934 $ 50 $ 280 $ --
------ -------- ------ ------ -------
Issuance of Common Stock in
connection with investments in
oil and gas ventures $1,060 $ 2,353 $ -- $ -- $ --
------ -------- ------ ------ -------
Issuance of Common Stock in
connection with compensation
earned and third party
services provided $ -- $ -- $1,730 $ -- $ --
------ -------- ------ ------ -------
Accruals recorded applicable to
effective guaranty of Kashtan
obligation and Lelyaki Field
close-down costs $8,971 $ -- $ 59 $ 678 $ --
------ -------- ------ ------ -------
</TABLE>
16. STOCK-BASED COMPENSATION PLANS
On August 17, 1994, options to purchase 400,000 shares of the
Company's Common Stock were issued to various individuals who were serving
or were expected in the future to serve the Company as officers, directors,
employees, consultants and advisors (the "1994 Plan"). The options are
exercisable at an exercise price of $1.50 and are only exercisable at the
time or within six months after services are rendered by such individuals.
All of these options expire August 16, 1999.
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan")
adopted by the Company in February 1996, 1,500,000 shares of the Company's
Common Stock have been authorized for possible issuance under the 1995
Plan. The purpose of the 1995 Plan is to further the interest of the
Company by enabling employees, directors, consultants and advisors of the
Company to acquire an interest in the Company by ownership of its stock
through the exercise of stock options and stock appreciation rights
F-26
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
granted under the 1995 Plan. Stock options granted under the 1995 Plan may
be either incentive stock options or non-qualified stock options. Options
expire on such date as is determined by the committee administering the
1995 Plan, except that incentive stock options may expire no later than 10
years from the date of grant. Pursuant to the 1995 Plan, a specified number
of stock options exercisable at the then market price are granted annually
to non-employee directors of the Company, which become 100% vested six
months from the date of grant. Stock appreciation rights entitle the holder
to receive payment in cash or Common Stock equal in value to the excess of
the fair market value of a specified number of shares of Common Stock on
the date of exercise over the exercise price of the stock appreciation
right. No stock appreciation rights have been granted through December 31,
1997. The exercise price and vesting schedule of stock appreciation rights
are determined at the date of grant.
A summary of the status of stock options granted under the 1994 and
1995 Plans is as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE WEIGHTED
SHARES UNDER AVERAGE
AVAILABLE OUTSTANDING EXERCISE
FOR ISSUE OPTIONS PRICE
--------- --------- --------
<S> <C> <C> <C>
BALANCE AT AUGUST 31, 1995 0 400,000
1995 Plan Authorization 1,500,000
Options:
Granted at market (30,000) 30,000 $3.84
Exercised -- (52,000) $1.50
--------- ---------
BALANCE AT AUGUST 31, 1996 1,470,000 378,000 $1.69
Options:
Granted at market (381,500) 381,500 $7.25
Granted at a premium (445,000) 445,000 $8.99
Exercised -- (12,000) $1.50
--------- ---------
BALANCE AT DECEMBER 31, 1996 643,500 1,192,500 $6.19
Options:
Granted at market (37,000) 37,000 $4.45
Granted at a premium (155,000) 155,000 $5.27
Exercised -- (104,000) $1.50
Cancelled 126,168 (126,168) $7.27
--------- ---------
BALANCE AT DECEMBER 31, 1997 577,668 1,154,332 $6.32
--------- ---------
</TABLE>
The shares issuable upon exercise of vested options and the
corresponding weighted average exercise price are as follows:
SHARES
ISSUABLE WEIGHTED
UNDER AVERAGE
EXERCISABLE EXERCISE
OPTIONS PRICE
----------- --------
August 31, 1995 344,000 $1.50
August 31, 1996 342,000 $1.71
December 31, 1996 330,000 $1.71
December 31, 1997 355,664 $3.56
F-27
<PAGE>
FOUNTAIN OIL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options granted at market was
$1.46, $3.65 and $1.01 for the year ended December 31, 1997, the four month
period ended December 31, 1996 and the fiscal year ended August 31, 1996,
respectively. The weighted average fair value of options granted at a
premium was $0.92 and $1.73 for the year ended December 31, 1997 and the
four month period ended December 31, 1996, respectively; no options were
granted at a premium for the fiscal year ended August 31, 1996. The
weighted average fair value of all options granted during the year ended
December 31, 1997, the four month period ended December 31, 1996 and the
fiscal year ended August 31, 1996 was $1.03, $2.52 and $1.01, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER
OF SHARES AVERAGE AVERAGE OF SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 TERM PRICE AT 12/31/97 EXERCISE PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.50 to $3.84 262,000 1.57 $1.77 226,000 $1.81
$3.85 to $5.30 190,000 1.92 $5.12 30,000 $4.50
$5.31 to $8.99 702,332 2.95 $8.34 99,664 $7.25
- -------------- --------- -------
$1.50 to $8.99 1,154,332 355,664
- -------------- --------- -------
</TABLE>
As discussed in Note 2, Summary of Significant Accounting Policies,
under "Stock-Based Compensation Plans," of Notes to Consolidated Financial
Statements, the Company accounts for its stock-based compensation plans
under APB Opinion 25. Accordingly, no compensation cost has been recognized
for those stock options with exercise prices equal to or greater than the
market price of the stock on the date of grant. Under SFAS No. 123,
compensation cost is measured at the grant date based on the fair value of
the awards and is recognized over the service period, which is usually the
vesting period. Had compensation cost for those stock options been
determined consistent with SFAS No. 123, the Company's net loss and net
loss per common share would have been approximately $28,600,000 and $1.28,
respectively, for the fiscal year ended December 31, 1997 and approximately
$6,500,000 and $0.52, respectively, for the year ended August 31, 1996.
Stock options had no effect on net loss for the four months ended December
31, 1996. This effect is not likely to be representative of future pro
forma amounts because of the exclusion of costs of grants before 1995 and
the addition of awards to be granted in future years. The fair value of
each stock option granted by the Company was calculated using the Black-
Scholes option-pricing model applying the following weighted-average
assumptions for the year ended December 31, 1997, the four month period
ended December 31, 1996, and the fiscal year ended August 31, 1996:
dividend yield of 0.00%; risk-free interest rates are different for each
grant and range from 6.08% to 6.36% for the year ended December 31, 1997,
5.79% to 6.16% for the four month period ended December 31, 1996, and
during the fiscal year ended August 31, 1996, only one grant was made with
a risk-free interest rate of 4.79%; the average expected lives of options
of 2.1 years, 3.1 years and 1.5 years, respectively; and volatility of
44.7% for the year ended December 31, 1997 and 49% for the four month
period ended December 31, 1996 and the fiscal year ended August 31, 1996.
F-28
<PAGE>
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
Users of this information should be aware that the process of
estimating quantities of "proved" and "proved developed" natural gas and
crude oil reserves is very complex, requiring significant subjective
decisions in the evaluation of all available geological, engineering and
economic data for each reservoir. The data for a given reservoir may also
change substantially over time as a result of numerous factors including,
but not limited to, additional development activity, evolving production
history and continual reassessment of the viability of production under
varying economic conditions. Consequently, material revisions to existing
reserve estimates occur from time to time. Although every reasonable effort
is made to ensure that reserve estimates reported represent the most
accurate assessments possible, the significance of the subjective decisions
required and variances in available data for various reservoirs make these
estimates generally less precise than other estimates presented in
connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with
reasonable certainty, to be recoverable in future years from known
reservoirs with existing equipment under existing economic and operating
conditions.
Proved developed reserves are proved reserves that can be expected to
be recovered through existing wells with existing equipment and under
existing economic and operating conditions.
No major discovery or other favorable or adverse event subsequent to
December 31, 1997 is believed to have caused a material change in the
estimates of proved or proved developed reserves as of that date.
The following table sets forth the Company's net proved reserves,
including the changes therein, and proved developed reserves (all within
Canada) at December 31, 1997, as estimated by the Company's petroleum
engineering staff:
Oil (Bbls)
----------
December 31, 1996
Purchase of properties 115,500
Revisions of previous estimates (33,000)
Extensions, discoveries and other 267,300
additions
Production (16,000)
----------
December 31, 1997 333,800
----------
PROVED DEVELOPED
December 31, 1997 155,000
----------
F-29
<PAGE>
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
Costs incurred for oil and gas property acquisition, exploration and
development activities for the year ended December 31, 1997, the four
months ended December 31, 1996 and the years ended August 31, 1996 and 1995
are as follows:
1997 Canada
---- ------
Unproved* $ 324,500
Proved 684,500
Exploration --
Development 680,974
----------
Total costs incurred $1,689,974
----------
December 31, 1996 United States
----------------- -------------
Property acquisition:
Unproved* $ 259,338
Proved 0
Exploration --
Development --
----------
Total costs incurred $ 259,338
----------
August 31, 1996 United States
--------------- -------------
Property acquisition:
Unproved* $ 287,788
Proved 0
Exploration --
Development --
----------
Total costs incurred $ 287,788
----------
August 31, 1995 United States
--------------- -------------
Property acquisition:
Unproved* $ 519,304
Proved 32,381
Exploration --
Development --
----------
Total costs incurred $ 551,685
----------
*These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.
F-30
<PAGE>
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
The following information has been developed utilizing procedures
prescribed by SFAS No. 69 Disclosure about Oil and Gas Producing Activities
("SFAS 69") and based on crude oil reserve and production volumes estimated
by the Company's engineering staff. It may be useful for certain
comparative purposes, but should not be solely relied upon in evaluating
the Company or its performance. Further, information contained in the
following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and
selling prices will probably differ from those required to be used in these
calculations; (2) actual rates of production achieved in future years may
vary significantly from the rate of production assumed in the calculations;
(3) selection of a 10% discount rate is arbitrary and may not be reasonable
as a measure of the relative risk inherent in realizing future net oil and
gas revenues; and (4) future net revenues may be subject to different rates
of income taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil prices adjusted for fixed and determinable
escalations to the estimated future production of period-end proven
reserves. Future cash inflows were reduced by estimated future development,
abandonment and production costs based on period-end costs in order to
arrive at net cash flow before tax. Future income tax expenses has been
computed by applying period-end statutory tax rates to aggregate future
pre-tax net cash flows, reduced by the tax basis of the properties involved
and tax carryforwards. Use of a 10% discount rate is required by SFAS
No. 69.
Management does not rely solely upon the following information in
making investment and operating decisions. Such decisions are based upon a
wide range of factors, including estimates of probable as well as proven
reserves and varying price and cost assumptions considered more
representative of a range of possible economic conditions that may be
anticipated.
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves (all within Canada) is as follows:
As of December 31, 1997
-----------------------
Future cash inflows $ 5,469,000
Less related future:
Production costs 2,090,000
Development and abandonment costs 840,000
Income taxes --
------------
Future net cash flows 2,539,000
10% annual discount for estimating timing of cash flows $ 1,296,000
------------
Standardized measure of discounted future net cash flows
before income taxes $ 1,243,000
------------
F-31
<PAGE>
FOUNTAIN OIL INCORPORATED
SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED
A summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved oil and gas reserves (all within
Canada) is as follows:
Year ended
December 31, 1997
-------------------
Beginning of period $ --
Purchase of reserves in place 551,000
Revisions of previous estimates:
Changes in prices and costs 67,000
Changes in quantities (208,000)
Changes in future development costs --
Development costs incurred during the period --
Additions to proved reserves resulting from extensions,
discoveries and improved recovery, less related costs 745,000
Accretion of discount 55,000
Sales of oil and gas, net of production costs (113,000)
Net change in income taxes --
Production timing and other 146,000
----------
Net increase 1,243,000
----------
End of the period $1,243,000
----------
F-32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT FILED WITH
NUMBER EXHIBIT THIS REPORT
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2(1) Agreement Relating to the Sale and Purchase of All the Issued Share
Capital of Gastron International Limited dated August 10, 1995 by
and among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International Limited dated
November 3, 1995 by and among Ribalta Holdings, Inc. as Vendor
and Fountain Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from October 19,
1995 Form 8-K).
2(3) Supplement 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 (filed with original Form 10-K filing on March 30, 1998).
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).
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*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 (filed with original Form 10-K filing on March 30, 1998).
*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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*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).
*10(25) Employment Agreement between Fountain Oil Norway AS and Rune Falstad
(filed with original Form 10-K filing on March 30, 1998).
*10(26) Management Services Agreement between Trident Petroleum Inc. and
Fountain Oil Boryslaw Limited. (filed with original Form 10-K
filing on March 30, 1998).
16 Letter Regarding Change in Certifying Accountants (Incorporated
herein by reference from September 8, 1994 Form 8-K, filed by
Electromagnetic Oil Recovery, Inc., the Company's predecessor).
21 List of Subsidiaries (filed with original Form 10-K filing on
March 30, 1998).
23 Consent of Coopers & Lybrand L.L.P. X
27 Financial Data Schedule (filed with original Form 10-K filing on
March 30, 1998).
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Fountain Oil Incorporated on Form S-8, as amended in Post-Effective Amendment
No. 1 (File No. 33-82944) and the registration statement on Form S-8 (File No.
333-02651) of our report which includes a paragraph regarding the Company's
ability to continue as a going concern, dated March 9, 1998 (except for the
sixth paragraph of Note 6, as to which the date is June 8, 1998), on our audits
of the consolidated financial statements of Fountain Oil Incorporated as of
December 31, 1997, December 31, 1996 and August 31, 1996, and for the year ended
December 31, 1997, the four month period ended December 31, 1996 and the years
ended August 31, 1996 and 1995, which report is included in this Annual Report
on Form 10-K.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 12, 1998
