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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______
2. Net Worth Consideration - As of 5-31-95,
on an unaudited 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.
FEND
- Securities Expert Witness
Telephone:
(310)641-0377
FAX: (310)649-3663
Email: fendmase@ca.rr.com
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