FEND Securities Expert Witness
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3106493663 fendmase@ca.rr.com FEND Securities Expert Witness
Mason Alan Dinehart III Arbitrator - FEND Securities Expert Witness

SCORECARD

COMMON STOCK OFFERING SCORECARD

 

Name of offering - FOUNTAIN OIL INC. 8-K 5-16-95, 10-QSB 5-31-95

 

Com. Stk. $.1O par value - On 5-31-95, there were 10,428,731shs. of reg. common stock issued & outstanding among 2,208 shareholders. The Company, prior to 4-6-95 traded on the NASDAQ OTC Elec. Bulletin Bd. As of 4-6-95, Fountain Oil traded on the NASDAQ NMS under the market symbol GUSH. Also a secondary listing of the Co.’s shares began trading on May 15,1995 in Norway on the Oslo Stock Exchange. As of 5-31-95, the Co. had 35 employees. The Co. maintains Hq. In Houston, Tx., with offices in Oslo, London and Calgary.

 

Officers - Oistein Nyberg, Pres. & CEO, Arnfin Haavik, EVP & CFO, Einar Bandlien, Sr. V.P.Bus. Devt. & Director, Svein E. Johansen, EVP , Nils N. Trulsvik, EVP Int’l. and Director, Gary Plisga, EFP, America, Arild Boe, SVP, Project Dev’t., Ravinder Sierra, V.P. Operations and Robert Case, V.P. Acquisitions/Corporate Administrations.

 

Description - The Co. was formed based on its proprietary thermal stimulation process for increasing heavy oil production. The Co. (formerly Electromagnetic Oil Recovery, Inc.) embarked in 1994 on a program of acquiring and developing oil and gas properties. A 1-for-25-reverse stock split was effected in conjunction with the Co.’s name change in Dec. 1994. The Co.’s thermal stimulation process (the EOR process) involves the use of electrical energy to heat reservoir fluids near the wellbore to reduce viscosity and thereby enhance heavy oil production rates and recoveries. Fountain is the exclusive worldwide licensee of the patents and technology owned by MIT Research Institute relating to the EOR process. According to the Strain Consulting report dated 10-13-95, "Fountain was essentially a shell company until approximately one year ago (late 1994), when the current management raised significant capital with the share offering (Co. netted $10,321,000). The Co. is in the initial stages of investing those funds so that returns from those investments in terms of operating cash are generally at least 2 years away.

 

1. Company Experience - The company commenced current operations in October ‘94, commensurate with its name change and new ownership. 5 mos!

 

                                              Score _____1______

audited basis, the Co. had a net worth of $13,087,955. The accum. deficit since 10-31-88 was $16,449,449. According to the Stain Consulting Report dated 10-13-95, "The current chairman of the board stated in the 1994 annual report that the Co. entered fiscal 1994 (10-31) with a major working capital deficit, no active projects, a single director and what seemed to be insurmountable obstacles".

 

                                              Score _____3_______

 

 3. History of Earnings - For the nine months ended 5-31-95( unaudited) the Co. suffered an operating loss of $3.5 million compared to $1.1 million for the same period in 1994. The Co.’s net loss was $3.4 million for the 9 mos. Ending 5-31-95 compared to $1.1 million for the same period in 1994.

 

        FYE(8-31)          1993               1994              1995

        EBIT                   ($1.3MM)       ($1.2MM)       ($5.1MM)

        Net Inc.               ($1.3MM)       ($1.8MM)       ($7.6MM)

        EPS                    -$2.57             -$0.36            -$0.91

        Ret. on Assets     N/A            -36.7              -71.0

        Cash flow           -0.2              -1.0                 N/A

 

                                              Score _____1______

 

4. Litigation/Regulations - Significant litigation from the predecessor Co. Electromagnetic Oil Recovery, Inc. v. Fireman’s Fund Ins. Co., is pending in the Court of Queen’s Bench of Alberta, Judicial District of Calgary (reported in the Co.’s Form 10-QSB for the quarter ended 2-28-95). The world oil prices are very much dependent on OPEC’s strategy and their willingness to limit their production, especially in the near future when the non-OPEC countries continue to increase their production capacity. The demand elasticity of the oil market is limited in the short-term and the oil price is consequently sensitive to variations on the supply side of the equation. In the long term, the oil market is sensitive to a major price increase as a result of alternative sources. About 77% of the world oil reserves are controlled by OPEC countries, where the political climate is unstable. As a result the oil prices are volatile which represent a significant risk to oil companies. Increased dependence on OPEC-production capacity and the related political instability can in the long-term increase the focus on developing heavy oil prospects.

 

                                              Score _____2______

 

5. History of Trading/Liquidity - NASDAQ NMS - GUSH

 

        Fiscal Year 1995       Price          Volume (Mo. Ave.)

        2nd Quarter            $5.50          15,000

        3rd Quarter             $5.40          14,000

        4th Quarter             $4.00          14,000

Note the stock ranged from a low of 3 1/8 to a high of 6 ¾!

 

        Fiscal Year 1996

        1st Quarter              $4.40          30,000 (Mo. Ave.)

        2nd Quarter             $6.00          15,000

        3rd Quarter              $6.30          24,000

        4th Quarter              $7.00          12,000

        Fiscal Year 1997      Price          Volume (Mo. Ave.)

        1st Quarter              $4.70          5,000

        2nd Quarter             $4.60          2,500

        3rd Quarter              $3.00          14,000

        4th Quarter              $1.00          7,000

        Fiscal Year 1998

        1st Quarter              $.80           5,000 (Mo. Ave.)

        2nd Quarter             $.68           5,000

 

While liquidity is moderate, volume is low and the wide spreads in the stock prices reflect strong volatility between 1995 and 1998 i.e. from $ .68 - $7.00

 

                                      Score _____2______

 

6. Leverage - Total Debt was only $450,000 on an unaudited basis as of 5-31-95. However, the company has outstanding obligations with respect to the oil and gas projects it is pursuing that require the Co. to expend funds and to issue shares upon satisfaction of certain conditions. In general, these conditions arise under contracts and include conditions related to the formalization of project relationships or based on the achievement of specified performance standards. At 5-31-95, commitments not conditioned on performance amounted to $1.3. million and 205,000 shares of the co.’s common stock. As current and future projects mature and are developed, significant additional obligations may be incurred, i.e. Texas, Albania and Russia and Ukraine. .

 

                                      Score ______ 3_______

 

7. Financing- The Co. has large debt coverage, currently.

 

                                      Score ______ 4_______

 

8. Assumptions - As of 5-15-95, the Co. had defined a set of financial objectives for its planning purposes. These objectives were as follows:

 

  • Net proven reserves of 140 million barrels of oil equivalent within 5 years.
  • Production in 5 years: 10,000 barrels of oil equivalent per day.
  • An anticipated internal rate of return higher than 25% on projects undertaken.
  • An anticipated operating profit margin higher than 20% on projects undertaken.

 

A number of assumptions underlie these objectives, including relatively stable industry conditions and oil and gas prices and the availability of both equity and debt financing for the Co. on reasonable terms when needed.

 

The implementation of a business plan and the achievement of financial objectives are inherently uncertain, particularly when they relate to newly established activities as is the case with the company. NO ASSURANCE CAN BE GIVEN THAT THE CO WILL BE ABLE TO ACHIEVE OR WILL MAINTAIN AS ITS OBJECTIVES ALL OR ANY OF THE FOREGOING FINANCIAL OBJECTIVES. Petroleum development activities have commenced in the Rocksprings, Texas gas project, which involves some 9.000 acres under lease and option. One well has been drilled and although logs indicate the presence of gas reservoirs, attempts to achieve sustained production from the main producing zone, the Holman sands, have thus far been unsuccessful. No attempt has yet been made to produce from the other gas-bearing sands in this well. A second well is scheduled to be drilled before the fiscal year end (8-31),and results will help to determine the work program to attempt production from the first well. The Co. has a 37.5% working interest, before payout, in the Rocksprings project. In April 1995, Fountain Oil signed a Letter of Intent with the national oil company Albpetrol in Albania. The joint-venture is based on a production sharing agreement. Fountain Oil will receive a 50% share of their contribution to incremental production in the Gorisht-Kocul field. The joint-venture agreement with Albpetrol remains to be signed and approval by the Albanian Government is expected within the next 3 months. On 8-8-95, Fountain Oil announced that it signed an accord to refurbish an oilfield in central Ukraine with up to 70 million barrels of recoverable reserves. In May the Co. announced an accord with Ukraine National Oil co. to develop four oil fields in western Ukraine. Pres. Nyberg also said that Fountain has an agreement in Russia to develop a natural gas field in conjunction with Russian partner Gazprom. The field has a gas pipeline running through it and at least 495 billion cubic feet of proved reserves. From a management effectiveness standpoint, the following financial ratios apply:

 

1994 -1998                         Co.           Sector    Industry       S&P 500

Ret. on Assets 5yr Ave.      -38.64        5.74      7.88             3.15

Ret. on Inv’t. 5yr Ave.        -44.24        13.03     7.04             21.45

 

In August, 1995, Prudential Securities was a Principal in purchase and sale transactions involving Fountain Oil. In September of 1995, Prudential Securities became a Financial Advisor for Fountain Oil. In July, 1996, Prudential indeed became a market maker for Fountain Oil. This placed Pru. in a strong conflict of interest position with respect to objectively advising clients on buying and selling stock in the Co.

 

                                      Score _____2______

 

9. Percentage of Supply to Demand - The Co. competes with companies that have greater name recognition than the Co., and which also possess substantially greater financial resources and more extensive experience than the Co. Other U.S. companies that use 3D-seismic extensively are Nuevo Energy, Howell corp. Benton Oil and Gas and Texas Meridian of which Texas Meridian (AMEX) is considered the market leader. That Co. employs its own geologists and geophysicists and today has proven reserves of 595,815 barrels of oil/condensate and 16,335 mmcf gas. The Co. has positive earnings, unlike Fountain Oil. The comparison to the Sector and Industry in #8 hardly makes Fountain Oil all that appealing. Finally, the assumptions of oil prices @ U.S. $18/barrel are high and unrealistic. Most companies are projecting @ $15.00/barrel.

 

Score _____2______

 

10. Risk Factors - 1. Lack of Co. experience 2. Lack of management experience. 3. No payment of dividends and none expected. 4. Intense competition. 5. Past negative operating results, earnings and working capital. . 6. Volatility of stock price. 7. Risk of oil and gas business. 8. Uncertainty/volatility of oil & gas prices. 9. History of operating losses. 10. Uninsured losses. 11. Dependence on key personnel. 12. Dependence on OPEC (Controls 77% of world oil reserves). 13. Unrealistic projections.

 

                                      Score _____2______

                                      Total __22 out of 50 = 44%

 

A minimum of 70% is required for due diligence consideration - 35 points.

 

 

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