<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO _______________
COMMISSION FILE NUMBER 0-9147
----------------
CANARGO ENERGY CORPORATION
- --------------------------------------------------------------------------------
(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)
1580, 727 - 7th Avenue SW, Calgary, Alberta, Canada T2P 0Z5
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
403-777-1185
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
Indicate by check whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
The number of shares of Registrant's common stock outstanding on October 31,
1998 was 13,163,843.
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited
--------------------------------------------
SEPTEMBER 30, December 31,
1998 1997
--------------------------------------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,091,216 $ 14,164,177
Restricted cash --- 9,700,000
Accounts receivable 454,422 ---
Advances to operator 1,764,305 ---
Inventory 170,405 ---
Other current assets 344,534 761,904
------------ ------------
Total current assets 8,824,882 24,626,081
Property and equipment, net 7,161,187 5,942,273
Oil and gas properties, net, full cost method
(including unevaluated amounts of
$11,451,363 and $324,500, respectively) 26,729,009 1,478,974
Investment in and advances to
oil and gas ventures, net 5,361,531 5,386,707
------------ ------------
TOTAL ASSETS $ 48,076,609 $ 37,434,035
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 460,916 $ 328,171
Due to affiliated entity 338,728 ---
Accrued liabilities 1,308,187 10,326,608
------------ ------------
Total current liabilities 2,107,831 10,654,779
------------ ------------
Long-term debt 895,500 ---
Minority interest in subsidiaries 3,384,503 ---
------------ ------------
Total liabilities 6,387,834 10,654,779
------------ ------------
Stockholders' Equity:
Preferred stock --- ---
Common stock,
11,223,744 shares issued and outstanding;
9,970,900 additional shares issuable without 2,119,464 2,244,749
receipt of further consideration
Capital in excess of par value 101,865,441 82,040,156
Accumulated deficit since October 31, 1988 (62,296,130) (57,505,649)
------------ ------------
Total stockholders' equity 41,688,775 26,779,256
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,076,609 $ 37,434,035
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited Unaudited
-------------------------------- ---------------------------------
Three Months Ended Nine Months Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
1998 1997 1998 1997
-------------------------------- ----------------------------------
Operating Revenues:
<S> <C> <C> <C> <C>
Oil and gas production $ 375,502 $ 63,158 $ 508,018 $ 172,818
Other (28) --- 11,972 ---
----------- ----------- ----------- ------------
375,474 63,158 519,990 172,818
----------- ----------- ----------- ------------
Operating Expenses:
Lease operating expense 299,636 48,696 477,263 116,746
Cost of sales --- --- 10,891 ---
Other direct project cost 227,961 420,656 1,012,445 814,509
General and administrative 517,069 569,444 2,720,932 2,716,823
Depreciation, depletion and
amortization 100,949 80,483 261,420 158,111
Equity loss in unconsolidated
subsidiaries 16,848 1,646,587 152,225 3,011,369
Writedown of oil and gas
properties --- --- 900,000 ---
----------- ----------- ----------- ------------
1,162,463 2,765,866 5,535,176 6,817,558
----------- ----------- ----------- ------------
OPERATING LOSS 786,989 2,702,708 5,015,186 6,644,740
----------- ----------- ----------- ------------
Other Income (Expense):
Interest, net (1,590) 417,083 241,209 1,117,363
Other income (expense) (46,232) (27,153) (42,232) (68,460)
Loss on disposition
of equipment --- (43,824) (27,698) (265,617)
----------- ----------- ----------- ------------
TOTAL OTHER INCOME (EXPENSE) (47,822) 346,106 171,279 783,286
----------- ----------- ----------- ------------
Minority interest in loss of
consolidated subsidiary 53,426 106,946 53,426 186,390
----------- ----------- ----------- ------------
NET LOSS $ 781,385 $ 2,249,656 $ 4,790,481 $ 5,675,064
=========== =========== =========== ============
Weighted average number of
common shares issued and
issuable without receipt of
additional consideration 19,677,333 11,223,744 14,072,572 11,200,757
----------- ----------- ----------- ------------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.04) $ (0.20) $ (0.34) $ (0.51)
=========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
---------------------------------------------
Nine Months Ended
SEPTEMBER 30, September 30,
1998 1997
---------------------------------------------
Operating activities:
<S> <C> <C>
Net loss $ (4,790,481) $ (5,675,064)
Loss on disposition of equipment 27,698 265,617
Equity loss in unconsolidated subsidiaries 152,225 3,011,369
Minority interest in loss of consolidated subsidiary (53,426) (186,390)
Depreciation, depletion and amortization 261,420 158,111
Writedown of oil and gas properties 900,000 ---
Changes in assets and liabilities:
Accounts receivable 423,048 (194,004)
Advances to operator (523,610)
Inventory (150,000)
Other current assets 440,881 (838,317)
Accounts payable (1,915,108) (288,117)
Accrued liabilities (9,018,421) (509,586)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (14,245,774) (4,256,381)
------------ ------------
Investing activities:
Restricted cash 9,700,000 (4,300,000)
Acquisition costs (1,214,948) ---
Investments in oil and gas properties (1,224,145) (997,479)
Purchase of property and equipment (1,896,493) (907,275)
Proceeds from disposition of assets --- 232,638
Investments in and advances to oil and gas ventures (127,049) (4,386,669)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,237,365 (10,358,785)
------------ ------------
Financing activities:
Cash acquired 935,448 ---
Proceeds from exercise of options --- 156,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 935,448 156,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,072,961) (14,459,166)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,164,177 31,424,064
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,091,216 $ 16,964,898
========== ============
Non cash investing and financing activities:
Issuance of common stock in connection with
investments in oil and gas ventures $ --- $ 1,060,937
============ ============
Common stock issuable in connection with
acquisition of subsidiary $ 19,700,000 $ ---
============ ============
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
<PAGE>
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
(1) Basis of Presentation - The interim consolidated condensed financial
statements and notes thereto of CanArgo Energy Corporation and its
subsidiaries (collectively, the Company) have been prepared by management
without audit. In the opinion of management, the consolidated condensed
financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for
the interim period. The accompanying consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Report on
Form 10-K/A for the year ended December 31, 1997 filed with the Securities
and Exchange Commission.
On July 15, 1998 the Company filed with the Delaware Secretary of State
amendments to its Certificate of Incorporation to effect a one-for-two
reverse split of the shares of the Company's Common Stock (the "Reverse
Split") and to change the Company's name from Fountain Oil Incorporated to
CanArgo Energy Corporation. The reverse split has been reflected
retroactively in the accompanying financial statements.
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.
(2) Business Combination
--------------------
On July 15, 1998, the Company completed the acquisition of all of the
common stock of CanArgo Energy Inc. ("CEI") for Common Stock consideration
valued at $19,700,000. CEI is an oil and gas exploration, development and
production company whose principal operations are located in the Republic
of Georgia. On completion of the acquisition, CEI became a
5
<PAGE>
subsidiary of the Company, and each previously outstanding share of CEI
Common Stock was converted into the right to receive 0.8 shares (1.6 shares
pre-Reverse Split) of the Company's Common Stock, giving the former
shareholders of CEI the right to receive approximately 47% of the Company's
Common Stock. In addition, the former management of CEI now hold a majority
of the Company's senior management positions.
Under purchase accounting, CEI's results have been included in the
Company's consolidated financial statements since the date of acquisition.
The following pro forma statements of operations give effect to the
business combination as if such business combination had occurred on
January 1, 1997; however, as CEI commenced operations in June of 1997,
the pro forma financial statements of operations have been adjusted to
reflect the results of operations of Ninotsminda Oil Company Limited
("NOC"), a 55.9% subsidiary of CEI and now the Company, from January 1,
1997 to June 30, 1997. The historical results of operations have been
adjusted to reflect (i) revenues and expenses attributable to the
Ninotsminda Field and (ii) the difference between the properties,
historical depletion, depreciation and amortization and such expenses
calculated based on the value allocated to the acquired assets. Management
does not believe the pro forma amounts are indicative of the results of
operations that would have been reported had the business combination
occurred prior to January 1, 1997 or that may be reported in the future.
PRO FORMA
----------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
9/30/98 9/30/97
----------- -----------
Revenues $ 1,512,942 $ 2,557,818
Operating expenses 7,559,880 9,260,908
----------- -----------
Operating loss 6,046,938 6,703,090
Other income (loss) 200,962 699,686
Minority interest in loss of
unconsolidated subsidiary 320,848 219,232
----------- -----------
Net loss $ 5,525,128 $ 5,784,172
----------- -----------
Basic and diluted net loss
per common share $ (0.39) $ (0.52)
=========== ===========
The business combination will result in the issuance of 9,970,900 shares of
the Company's Common Stock without receipt of additional consideration by
the Company. Giving effect to the issuance of such shares, the number of
shares of the Company's Common Stock outstanding as of September 30, 1998
would be 21,194,644.
(3) Restricted Cash
---------------
In April 1998, restricted cash totaling $8,567,000, which supported letters
of credit issued to assure repayment of borrowings under a bank line of
credit established by Kashtan Petroleum Ltd. ("Kashtan") which operates the
Lelyaki Field project, was applied to repay such bank borrowings and
related interest. The remaining portion of the restricted cash, totaling
$783,000, was released to the Company free of restrictions in May 1998.
In January 1998, $350,000 of restricted cash, which had been used to
collateralize a bank letter of credit relating to the Gorisht-Kocul Field
project, was released.
6
<PAGE>
(4) Property and Equipment, Net
---------------------------
Property and equipment, net of accumulated depreciation and impairment at
September 30, 1998 and December 31, 1997 included the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1998 1997
--------------------------------------------------------------------------------------------
ACCUMULATED
COST DEPRECIATION IMPAIRMENT NET NET
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Electrically enhanced oil
recovery ("EEOR")
equipment $ 562,953 $ (290,885) $ --- $ 272,068 $ 278,044
Oil and gas related
equipment 9,473,968 --- (2,843,997) 6,629,971 5,504,312
Office furniture, fixtures
and equipment and other 1,072,699 (458,634) (354,917) 259,148 159,917
------------ ---------- ------------ ----------- -----------
PROPERTY AND EQUIPMENT $ 11,109,620 $ (749,519) $ (3,198,914) $ 7,161,187 $ 5,942,273
============ ========== ============ =========== ===========
</TABLE>
Oil and gas related equipment includes new or refurbished drilling rigs and
related equipment, substantially all of which the Company now intends to
mobilize in the Republic of Georgia. Much of the equipment was originally
planned to be used in the Maykop Field, Republic of Adygea, Russian
Federation, but following extended delays in resolving operating
arrangements with the entity developing that project, the Company recorded
an impairment of $2,844,000 at December 31, 1997, which represented the
difference between the book value of the rigs and related equipment and
their estimated fair value.
(5) Oil and Gas Properties, Net
---------------------------
The Company has acquired interests in oil and gas properties through joint
ventures and joint operating arrangements. A summary of the Company's oil
and gas properties at September 30, 1998 and December 31, 1997 is set
out below:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1998 1997
--------------------------------------------------------------------------------------------
REPUBLIC OF
GEORGIA CANADA USA OTHER TOTAL TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved properties $ 15,120,327 $ 1,475,593 $ 1,174,734 $ --- $ 17,770,654 $ 2,650,327
Unproved properties 10,887,576 324,500 --- 239,287 11,451,363 324,500
Less: accumulated
depletion and impairment (105,000) (1,213,274) (1,174,734) --- (2,493,008) (1,495,853)
------------ ----------- ----------- --------- ------------ -----------
TOTAL OIL AND GAS
PROPERTIES, NET $ 25,902,903 $ 586,819 $ --- $ 239,287 $ 26,729,009 $ 1,478,974
============ =========== =========== ========= ============ ===========
</TABLE>
Oil and gas properties obtained in connection with the acquisition of CEI
includes $15,120,000 of properties in the full cost pool and $10,888,000 of
unevaluated properties. The Ninotsminda Field includes seven producing
wells and since February 1996 has been operated under the terms of a
production sharing contract ("PSC") between NOC and the Republic of Georgia
represented by the state oil company, Georgian Oil. Unproved properties in
the Republic of Georgia include other license areas within the Ninotsminda
PSC as well as an other exploration area referred to as the Nazvrevi block
operated under the terms of a PSC between the Company's wholly owned
subsidiary, CanArgo Nazvrevi Limited, and the Republic of Georgia.
7
<PAGE>
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 EEOR
equipment. The Sylvan Lake project includes a total of four producing
wells. During the nine months ended September 30, 1998, the Company
recognized writedowns aggregating $900,000 on its oil and gas properties in
the Sylvan Lake project as a result of a decline of heavy oil prices and
the application of the quarterly full cost ceiling test. The writedowns
relate to proved properties.
Unproved properties and associated costs not currently being amortized
and included in oil and gas properties were $11,451,000 and $324,500 at
September 30, 1998 and December 31, 1997 respectively, $324,500 of which
relates to the Sylvan Lake Field. The Sylvan Lake Field is expected to be
evaluated over the next 15 months, and if no proved reserves are added,
those properties could result in additional impairment. All other unproved
properties are expected to be evaluated over the next five years.
(6) Investments in and Advances to Oil and Gas Ventures
---------------------------------------------------
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 net investment in and advances to oil and gas ventures as
of September 30, 1998 and December 31, 1997 is set out below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------------------
<S> <C> <C>
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw Oil
Company $ 5,361,531 $ 5,386,707
Ukraine - Lelyaki Field, Pryluki Region
Through an effective 40.5% ownership of
Kashtan Petroleum Ltd. --- ---
Adygea, Russian Federation - Maykop Field
Through 37% ownership in Intergas JSC --- ---
Albania - Gorisht-Kocul Field
Through 50% ownership of joint venture --- ---
----------- -----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS VENTURES, NET OF EQUITY LOSS
AND IMPAIRMENT $ 5,361,531 $ 5,386,707
=========== ===========
</TABLE>
As of September 30, 1998, the Company had remaining net investments in and
advances to oil and gas ventures totaling $5,362,000, all of which relate
to Boryslaw Oil Company ("BOC"), the entity holding the license to develop
the Stynawske Field, for which development operations have not yet begun.
Included are advances to BOC totaling $1,635,000 at September 30, 1998 and
$1,508,000 at December 31, 1997. Such advances may be recoverable only from
future revenue of or payments from future participants in the venture, if
any.
Based on its analysis of initial Lelyaki Field development efforts
completed in the fourth quarter of 1997, the Company concluded that the
Lelyaki Field would not support a successful commercial development. As a
result, the Company recorded an impairment
8
<PAGE>
charge totaling $9,108,000. 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 any operations
of Kashtan.
Because of extended delays in resolving operating arrangements and other
matters associated with Intergas JSC ("Intergas"), the entity developing
the Maykop Field project, 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 any
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 suspended
development activities. Due to the extended period that the force majeure
condition has continued and 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. At September 30, 1998, the force majeure condition remained in
effect.
The Company's investments in and advances to oil and gas ventures are
essentially unevaluated properties. At September 30, 1998 and December 31,
1997, there were no material operations or assets (other than unevaluated
properties) of entities being accounted for using the equity method.
Accordingly, no other separate financial information has been presented.
(7) Due to Affiliated Entity
------------------------
The loan from Terrenex Acquisition Corporation of $339,000 is due on demand
and is non-interest bearing.
(8) Accrued Liabilities
-------------------
Accrued liabilities at September 30, 1998 and December 31, 1997 included
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Compensation, including related taxes $ 53,780 $ 337,767
Professional fees 236,037 276,500
Termination costs --- 405,833
Effective guarantee of Kashtan obligations --- 8,280,000
Close down costs - Kashtan project 149,182 690,622
Management fees 142,000 ---
Taxes 61,000 ---
Interest 198,484 ---
Contingent charges 445,417 ---
Oilfield related equipment 10,000 268,000
Other 12,287 67,886
----------- ------------
$ 1,308,187 $ 10,326,608
=========== ============
</TABLE>
9
<PAGE>
At September 30, 1998 the contingent charges consists of charges for goods
and services billed to NOC by its non-controlling shareholder which have
not yet been agreed to by NOC.
At September 30, 1998 management fees consists of charges for services
provided to NOC by its non-controlling shareholder.
(9) Long Term Debt
--------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Advance $220,500 $ ---
Loan 675,000 ---
-------- -------
$895,500 $ ---
======== =======
The advances, made by NOC's non-controlling shareholder to NOC, bears no
interest unless it is not repaid by June 30, 2000, at which time it would
begin to bear interest at 15% per anum until repayment.
The loan from NOC's non-controlling shareholder to NOC bears interest at a
rate of 10% per anum and is repayable out of surplus funds of NOC as and
when available.
(10) Stockholders' Equity
--------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER OF
SHARES ADDITIONAL TOTAL
ISSUED AND PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL DEFICIT EQUITY
----------- ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 22,447,489 $ 2,244,749 $ 82,040,156 $ (57,505,649) $ 26,779,256
Net loss --- --- --- (4,790,481) (4,790,481)
---------- ----------- ------------- ------------- ------------
22,447,489 $ 2,244,749 $ 82,040,156 $ (62,296,130) $ 21,988,775
One-for-two reverse split
of the shares of the
Company's Common Stock
(July 15, 1998) (11,223,745) (1,122,375) 1,122,375 --- ---
Shares issuable without
payment of additional
consideration 9,970,900 997,090 18,702,910 --- 19,700,000
---------- ----------- ------------- ------------- ------------
BALANCE, SEPTEMBER 30, 1998 21,194,644 $ 2,119,464 $ 101,865,441 $ (62,296,130) $ 41,688,775
---------- ----------- ------------- ------------- ------------
</TABLE>
10
<PAGE>
The business combination will result in the issuance of 9,970,900 shares of
the Company's Common Stock determined as follows:
<TABLE>
<CAPTION>
COMMON STOCK RESERVED FOR ISSUANCE TO
CEI SECURITY HOLDERS (POST 1:2 REVERSE SPLIT) # OF SHARES
-------------------------------------------------------------------------------- ----------------
<S> <C>
Exchangeable Shares issued by CEI 8,543,014
Special Warrants issued by CEI 1,427,886
----------------
TOTAL CEI EXCHANGEABLE SHARES ISSUED AND
RESERVED AS OF SEPTEMBER 30, 1998 9,970,900
----------------
</TABLE>
The Exchangeable Shares are securities issued by CEI that are exchangeable
generally at the option of the holders for shares of the Company's Common
Stock on a share-for-share basis and entitle the holders to dividends and
other rights economically equivalent to those to which holders of the
Company's Common Stock are entitled. Through contractual arrangements,
holders of Exchangeable Shares have the right to direct votes at meetings
of stockholders of the Company commensurate with the number of shares of
the Company's Common Stock such holders, respectively, have the right to
receive upon exchange of the Exchangeable Shares. As a result of such
contractual arrangements, the Exchangeable Shares represent the same
rights to dividends and rights upon liquidation and generally have the
same voting rights as shares of the Company's Company Stock.
PREFERRED STOCK
---------------
The accompanying financial statements do not give effect to the issuance of
one hundred shares (the "Preferred Shares") of Series Voting Preferred
Stock to the Montreal Trust Company of Canada (the "Trustee") under the
Voting, Support and Exchange Trust Agreement entered into among the
Company, CEI and the Trustee. The Preferred Shares embody the right to (i)
the voting power of the holders of unexchanged Exchangeable Shares
following the exchange thereof for shares of the Company's Common Stock and
(ii) the right to receive an aggregate of $100 upon redemption at the rate
of $1.00 per Preferred Share following the exchange of all outstanding
Exchangeable Shares.
The Preferred Shares will be stripped of their voting power proportionately
as Exchangeable Shares are exchanged for shares of the Company's Common
Stock. When fully divested of voting rights through the exchange of all
Exchangeable Shares, the Preferred Shares can be redeemed by the Company
for nominal consideration. Thus, the Preferred Shares do not have substance
for accounting purposes.
OPTIONS
-------
On August 17, 1994, options to purchase 200,000 shares (400,000 shares pre-
Reverse Split) 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 $3.00 and
are only exercisable at the time or within six months after services are
rendered by such individuals. 88,000 of the options remained outstanding at
September 30, 1998, all of which expire August 16, 1999.
11
<PAGE>
Pursuant to the 1995 Long-Term Incentive Plan (the "1995 Plan") adopted by
the Company in February 1996, 750,000 shares (1,500,000 shares pre-Reverse
Split) of the Company's Common Stock have been authorized for possible
issuance 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 September 30,
1998. The exercise price and vesting schedule of stock appreciation rights
are determined at the date of grant. 544,500 of the options remained
outstanding at September 30, 1998.
Pursuant to the terms of an Amended and Restated Combination Agreement
between the Company and CEI (the "Combination Agreement"), on July 15, 1998
each stock option granted under CEI's Stock Option Plan ("CEI Plan") to
purchase a CEI Common Share was converted into an option to purchase 0.8
shares of the Company's Common Stock. Pursuant to the CEI Plan, which has
been adopted by the Company, a total of 988,000 shares of the Company's
Common Stock have been authorized for issuance under the CEI Plan of which
848,000 options were outstanding at September 30, 1998. Stock options
granted under the CEI Plan expire on such date as is determined by the
committee administering the CEI Plan, except that the term of stock options
may not exceed 10 years from the date of grant.
The purpose of the Company's Stock Option Plans is to further the interest
of the Company by enabling officers, directors, employees, consultants and
advisors of the Company to acquire an interest in the Company by ownership
of its stock through the exercise of stock options granted under its
various Stock Option Plans.
12
<PAGE>
A summary of the status of stock options granted under the 1994 Plan, the
1995 Plan and the CEI Plan, restated to give effect to the Reverse Split,
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 0 200,000 $ 3.00
1995 Plan Authorization 750,000
Options:
Granted at market (15,000) 15,000 $ 7.68
Exercised -- (26,000) $ 3.00
-----------------------------------
BALANCE AT AUGUST 31, 1996 735,000 189,000 $ 3.38
Options:
Granted at market (190,750) 190,750 $ 14.50
Granted at a premium (222,500) 222,500 $ 17.98
Exercised -- (6,000) $ 3.00
-----------------------------------
BALANCE AT DECEMBER 31, 1996 321,750 596,250 $ 12.38
Options:
Granted at market (18,500) 18,500 $ 8.90
Granted at a premium (77,500) 77,500 $ 10.54
Exercised -- (52,000) $ 3.00
Canceled 63,084 (63,084) $ 14.54
-----------------------------------
BALANCE AT DECEMBER 31, 1997 288,834 577,166 $ 12.64
CEI Plan Authorization 988,000
Outstanding CEI Plan
Options (848,000) 848,000 $ 1.85
Options:
Granted at market (447,500) 447,500 $ 1.25
Canceled 364,166 (364,166) $ 15.75
Canceled -- (28,000) $ 3.00
-----------------------------------
BALANCE AT SEPTEMBER 30, 1998 345,500 1,480,500 $ 2.43
===================================
</TABLE>
WARRANTS
--------
Pursuant to the terms of the Combination Agreement, holders of CEI Stock
Purchase Warrants have the right to purchase CEI Exchangeable Shares which
are exchangeable generally at the option of the holder for shares of the
Company's Common Stock on a share-for-share basis. As of September 30,
1998, a total of 1,097,511 CEI Stock Purchase Warrants were outstanding. A
summary of the CEI Stock Purchase Warrants is as follows:
NUMBER EXERCISE PRICE IN
OF WARRANTS CANADIAN DOLLARS EXPIRATION DATE
------------- ------------------- -----------------
164,008 C$ 2.75 April 30, 1999
32,000 C$ 2.875 July 31, 1999
901,503 C$ 3.25 November 1, 1999
-------------
1,097,511
=============
13
<PAGE>
(11) Net Loss Per Common Share
-------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128 Earnings Per
Share. Basic and diluted net loss per common share for the periods ended
September 30, 1998 and September 30, 1997 are based on the weighted average
number of common shares outstanding during those periods. The weighted
average numbers of shares issued and issuable without receipt of additional
consideration for the nine month periods ended September 30, 1998 and 1997
is 14,072,572 and 11,200,757, respectively. The weighted average number of
common shares outstanding includes 8,543,014 and 0 Exchangeable Shares
issued in connection with the Transaction, respectively, and excludes
1,480,500 and 603,250 shares issuable upon exercise of options,
respectively, because they are anti-dilutive.
(12) 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 September 30, 1998 and December 31, 1997,
the Company had the contingent obligation to issue an aggregate of 187,500
shares (after giving effect to the Reverse Split) 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 any operations of
Kashtan or Intergas.
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. The Company has been advised that Intergas and
another shareholder of Intergas are considering asserting such claims.
LEGAL PROCEEDINGS AND POTENTIAL CLAIMS - On February 20, 1998, Zhoda
Corporation ("Zhoda"), which sold to the Company most of the Company's
interest in UK-RAN Oil Corporation ("UK-RAN") through which the Company
holds its interest in Kashtan, filed suit against the Company and two of
its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleged that Zhoda was, on several theories, wrongfully
deprived of the value of the UK-RAN shares it transferred to the Company or
the contingent consideration it might have received under its agreement
with the Company. Among the theories of Zhoda's complaint were breach of
contract, breach of fiduciary duty and duty of good faith and fair dealing,
fraud and constructive fraud, fraud in the inducement, negligent
misrepresentation, civil conspiracy, breach of trust, unjust enrichment and
rescission. Zhoda sought damages in excess of $7.5 million, redelivery of
the UK-RAN shares transferred to the Company, fees, expenses and costs and
any further relief to which it may be entitled. The Harris County District
Court issued an order staying the litigation initiated by Zhoda in its
entirety and indicating that the Court would dismiss the action if the
parties did not commence arbitration in New York, New York. On July 10,
1998, a request for arbitration was filed by Zhoda with the International
Chamber of Commerce ("ICC"). On July 17, 1998, the Harris County District
Court issued an order retaining the case and directing that the arbitration
be held and concluded by April 16, 1999. On August 31, 1998 the Company
filed an answer and counterclaim to the request for arbitration of Zhoda
with the ICC. On November 4, 1998 a reply to the Company's answer and
counterclaim was filed by Zhoda with the ICC.
14
<PAGE>
On March 24, 1998, the Company and two consolidated subsidiaries filed an
action against Zhoda in the Court of Queen's Bench of Alberta, Judicial
Centre of Calgary, in which the Company seeks to recover $190,000, plus
interest thereon, which the Company asserts is owing by Zhoda pursuant to
promissory notes and loan agreements. On March 31, 1998, Zhoda filed an
answer and counterclaims against the Company and its two subsidiaries,
asserting essentially the same claims as were asserted in the Texas action
described in the previous paragraph, with the exception that claims
asserted in the Texas suit based on fraud and civil conspiracy were not
included in the Alberta counterclaims. On the basis of its counterclaims,
Zhoda seeks damages estimated to be at least Canadian $10,500,000,
redelivery of the UK-RAN shares transferred to the Company, interest, costs
and such further relief as the court may deem just.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to the
Company the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed suit
against the Company and one of its consolidated subsidiaries in the Third
Judicial District Court of Salt Lake County, Utah. In its complaint,
Ribalta alleges breach by the Company 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 the Company pursuant to the contract,
including the shares of Gastron and any property transferred by Gastron,
or, alternatively, damages equal to the value of such benefits, as well as
fees, costs and such other relief as the court deems proper. As of
November 7, 1998, the Company and its subsidiary had not been served with
the complaint in the action.
Management is unable to estimate the range that such potential claims, if
any, might total. However, if any claims which have been or in the future
are asserted were determined to be valid, they could have a material
adverse effect on the financial position, results of operations and cash
flows of the Company. Any claims relating to oil and gas ventures may be
adjudicated in host country forums under host country law.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Qualifying Statement With Respect To Forward-Looking Information
- ----------------------------------------------------------------
The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward looking statements. Such forward
looking statements are based upon the current expectations of the Company and
speak only as of the date made. These forward looking statements involve risks,
uncertainties and other factors. The factors discussed below under "Forward
Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q are
among those factors that in some cases have affected the Company's historic
results and could cause actual results in the future to differ significantly
from the results anticipated in forward looking statements made in this
Quarterly Report on Form 10-Q, future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made by authorized officers of the Company. When used in this Quarterly Report
on Form 10-Q, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe," "hope," "may" and similar expressions, as well as "will," "shall" and
other indications of future tense, are intended to identify forward looking
statements.
General Development of Business
- -------------------------------
CanArgo Energy Inc., a wholly-owned subsidiary of the Company ("CEI"),
conducts its business in Eastern Europe and Asia through a wholly-owned
operating subsidiary, CanArgo Limited, a Guernsey company. CanArgo Limited has
two active second-tier subsidiaries. The first is Ninotsminda Oil Company
Limited ("NOC"), 55.9% of the equity of which is owned by CanArgo Limited. NOC
is a Cypriot company engaged in the exploration and development of oil and gas
properties in the Republic of Georgia. NOC operates under the terms of a
production sharing contract ("PSC") signed on February 15, 1996 between NOC and
the Republic of Georgia represented by the state oil company, Georgian Oil. The
second is CanArgo (Nazvrevi) Ltd., a wholly owned subsidiary of CanArgo Limited,
which has entered into a further production sharing contract with Georgian Oil
in respect of the Nazvrevi prospect in Georgia. In addition, CEI holds a 50%
interest in CanArgo Power Corporation ("CPC"), which is pursuing an independent
power generation pilot project associated with the Ninotsminda project.
The license areas covered by the PSC held by NOC include the
Ninotsminda Field, the West Rustavi Field and the Manavi prospect. Production
from the Ninotsminda Field commenced in the early part of 1996. Under the terms
of the PSC, Georgian Oil has a right to receive in kind "determined oil" (an
amount based upon agreed oil reserves at the time the PSC was executed),
amounting to approximately, 740, 542, 280 and 93 Barrels of Oil Per Day
("BOPD"), during 1998, 1999, 2000 and 2001 respectively. Up to a maximum of 50%
of production revenues from the field in any given year, net of determined oil,
is applied to recover NOC's accumulated capital, operating costs and agreed
administrative costs ("cost recovery oil"). The balance of production revenues
from the field in any given year, net of determined oil and cost recovery oil,
is shared on the basis of 70% to Georgian Oil and 30% to NOC ("profit oil").
Once cumulative production from well N96 (which was completed in October 1997)
reaches 200,000 barrels, NOC is required to pay Georgia Makoil $500,000 from
cost recovery oil and 1.5% of profit oil (i.e. 1.5% of 30%). Georgia Makoil
assigned its rights in respect of the Ninotsminda Field to NOC in consideration,
in part, for the royalty interest described above.
16
<PAGE>
The current operator of the license areas is a local contract service
company, Georgian British Oil Company ("GBOC"). GBOC is staffed with local
personnel obtained from Georgian Oil who have experience with the Ninotsminda
and the adjacent Samgori fields. Under the terms of the PSC, NOC may change the
operator with the consent of Georgian Oil.
The PSC held by CanArgo (Nazvrevi) Ltd. covers the Nazvrevi and Block
XIII areas of East Georgia, adjacent to the Ninotsminda and West Rustavi fields.
The area is a large (2,100 square kilometer) exploration area adjacent to
existing infrastructure. Under the terms of the PSC, all capital and operating
costs will be paid by CanArgo (Nazvrevi) Ltd. Fifty percent of production
revenues in any given year will be applied to recovery of CanArgo (Nazvrevi)
Ltd's accumulated capital and operating costs. The remaining 50% will be shared
on a 50/50 basis between CanArgo (Nazvrevi) Ltd. and Georgian Oil until such
time as CanArgo (Nazvrevi) Ltd.'s capital and operating costs have been
recovered. Thereafter, 70% of production revenues in such year will be paid to
Georgian Oil and 30% to CanArgo (Nazvrevi) Ltd. Work commitments under the PSC
are to spend $1,000,000 by the end of 1999. In September 1998, the Company
farmed out a portion of its interest in this area in exchange for participation
in a seismic survey. The seismic survey consisting of the acquisition of
approximately 170 kilometers of seismic data is currently underway at an
expected cost, net to the Company of $575,000. This will fully satisfy the work
commitments for this license.
In addition to its oil and gas exploration and development projects in
Georgia, CEI holds a 50% interest in CPC. CPC is planning to install and operate
a 3.0 Megawatt gas fired power generator. The intention of the Company is to
utilize gas from the Ninotsminda Field to fuel the plant and to sell the
produced electricity to the Ninotsminda project and other local purchasers. If
successful, the Company believes the facility would be the first private
regional electricity company in the Republic of Georgia.
In September 1998 the Company reached agreement to acquire an equity
interest in an oil refinery near Tblisi in the Republic of Georgia. The
refinery currently produces naptha, diesel and fuel oil, and the product stream
is to be further diversified to include kerosene and jet fuel. The Company's
$1,860,000 investment is to be funded over a five month period, from September
1998 to January 1999, for which the Company will receive a 24% interest in the
entity owning the refinery. NOC is under no obligation to sell oil to the
refinery and it continues to develop sales within the regional export market.
Liquidity, Capital Resources, and Changes in Financial Condition
- ----------------------------------------------------------------
During the fourth quarter of 1997, the Company commenced a program to
preserve its financial resources by reducing general and administrative expenses
and limiting its investments in and advances to oil and gas ventures and
properties in which it holds interests, while it explored and pursued strategic
alternatives with the assistance of investment advisors. As a result of its
consideration of strategic alternatives, on February 2, 1998 the Company entered
into an agreement with CEI contemplating a series of transactions (collectively
the "Transaction") to effect a business combination involving CEI and the
Company. The Transaction was consummated on July 15, 1998, and as a result CEI
became a subsidiary of the Company, each previously outstanding CEI Common Share
was converted into the right to receive 0.8 share of Company Common Stock, which
provided the former holders of CEI securities with the right to receive
approximately 47% of the Company's Common Stock, and the management of CEI
succeeded to a majority of the senior management positions in the Company. Under
the succeeding management the program to reduce expenses
17
<PAGE>
and limit investment and advances in oil and gas ventures without prospects for
early cash flow has continued. The Company continues to incur general and
administrative costs and project costs which were committed to prior to the
Transaction. The Company expects that the ongoing costs from the restructuring
of the Company will finally be eliminated by July, 1999. In connection with the
Transaction, the Company on July 15, 1998 filed amendments to its Certificate of
Incorporation effecting a one-for-two reverse stock split and changing the
Company's name from Fountain Oil Incorporated to CanArgo Energy Corporation.
Capital expenditures by NOC in 1998 are currently projected to be
approximately $7,350,000 of which $3,990,000 has been spent at September 30,
1998. Current development plans for the Ninotsminda Field in 1999 include the
drilling of a minimum of three development wells plus five major workovers of
existing wells for a total budgeted cost of $8,415,000. As a considerable amount
of infrastructure has been put in place for the Ninotsminda Field by Georgian
Oil, subsequent increases in oil production are not expected to increase
infrastructure costs substantially. No assurance can be given, however, that
NOC's development plan will increase production or that operating revenues will
exceed operating expenses.
As of September 30, 1998, the Company had working capital of
$6,717,000, compared to working capital of $13,971,000 as of December 31, 1997.
The $7,254,000 decrease in working capital from December 31, 1997 to
September 30, 1998 reflects principally expenditures on 1998 acquisition costs
relating to the Transaction, restructuring costs associated with the program to
reduce overall costs, operating activities, including general and administrative
expenses and direct project costs, and capital expenditures relating to the
Ninotsminda Field in the Republic of Georgia. The decrease in cash and cash
equivalents was partially offset by an increase in accounts receivable.
Cash and cash equivalents decreased $8,073,000 from $14,164,000 at
December 31, 1997 to $6,091,000 at September 30, 1998, primarily as a result of
expenditures on operating activities and activities relating to the Transaction.
Cash and cash equivalents include cash held by NOC of $1,495,000 which the
Company has the limited ability to withdraw. The general and administrative
expenses of $2,721,000, direct project costs of $1,012,000, acquisition costs of
$1,215,000, and investment in property, plant and equipment of $1,896,000 and
oil and gas property of $1,224,000 incurred during the first nine months of 1998
all involved principally cash items. The use of cash to fund expenditures was
partially offset by the release of restrictions that had applied to $1,133,000
of the Company's previously restricted cash.
These cash balances are not sufficient to cover the Company's working
capital requirements and capital expenditure plans during the remainder of 1998
and through 1999. To avoid cutbacks to the Company's capital expenditure plans,
the Company is seeking the funds necessary to cover its working capital and
capital expenditure plans. Potential sources of funds include project
financing, additional equity and joint ventures with other companies. Based on
continuing discussions with major stockholders, investment bankers, potential
partners and other oil companies, the Company believes that such required funds
will be available. However, there is no assurance that such funds will be
available, and if available, will be offered on attractive or acceptable terms.
In October 1998, the International Finance Corporation ("IFC") approved, subject
to the execution of definitive legal documentation, a $6,000,000 convertible
loan to NOC. The Company is not obligated to provide additional capital to any
of its projects with the exception of its share of a $2,000,000 shareholders
supporting loan to NOC upon completion of IFC financing. However there is no
assurance that the non-controlling shareholder in NOC will contribute its share
of the shareholder supporting loan, in which case the Company maybe required to
source additional capital to meet the IFC's funding requirements.
18
<PAGE>
Accounts receivable increased from nil at December 31, 1997, when the
minimal amount of accounts receivable were classified within other current
assets, to $454,000 at September 30, 1998, primarily as a result of $120,000
relating to oil revenue. In addition, $92,000 of receivables which had
previously been included within other current assets were reclassified as
accounts receivable at September 30, 1998.
Advances to operator increased from nil at December 31, 1997 to
$1,764,000 at September 30, 1998 as a result of advances to GBOC, the operator
for the Ninotsminda Field.
Inventory increased from nil at December 31, 1997 to $170,000 at
September 30, 1998 as result of placing oil produced at the Ninotsminda Field in
storage.
Other current assets decreased from $762,000 at December 31, 1997 to
$345,000 at September 30, 1998, primarily as a result of the collection of
$234,000 on claims that had been included within other current assets, the
amortization of prepaid expenses amounting to $264,000, and the reclassification
of remaining receivables during that nine month period, partly offset by the
prepayment of insurance premiums amounting to $155,000 in the third quarter of
1998.
The $8,547,000 decrease in current liabilities during the nine months
ended September 30, 1998 is primarily attributable to a $9,018,000 decrease in
accrued liabilities, which in turn is primarily attributable to payment of
various liabilities accrued at December 31, 1997 relating to the payment of bank
debt and related interest incurred by Kashtan Petroleum Ltd. ("Kashtan"), the
entity operating the Lelyaki Field project, Lelyaki Field project closedown
costs, employee termination costs and payment for oilfield equipment; partly
offset by increased accounts payable due to the Company's acquisition of CEI .
Property and equipment, net, increased from $5,942,000 at December 31,
1997 to $7,161,000 at September 30, 1998, primarily as a result of the Company's
acquisition of CEI.
Oil and gas properties, net increased from $1,479,000 at December 31,
1997 to $26,729,000 at September 30, 1998 primarily as a result of the Company's
acquisition of CEI. The effect of the acquisition was partly offset by
writedowns of the Company's oil and gas properties associated with the Sylvan
Lake project aggregating $900,000 as a result of a decline of heavy oil prices
during the first nine months of 1998 and the application of the quarterly full
cost ceiling test.
Investments in and advances to oil and gas ventures, net decreased
during the nine month period ended September 30, 1998 from $5,387,000 at
December 31, 1997 to $5,362,000 at September 30, 1998. The decrease reflects the
Company's equity in the loss of Boryslaw Oil Company ("BOC"), the entity
developing the Stynawske Field project, for the first nine months of 1998, which
was partly offset by the Company's advances to BOC in the first nine months of
1998.
The balance of $5,387,000 as of December 31, 1997 and $5,362,000 as of
September 30, 1998 in investments in and advances to oil and gas ventures, net,
relates solely to BOC and the Stynawske Field project. The Company has the
responsibility for arranging financing for this venture and, unless third-party
financing can be arranged, the Company might have to supply the capital to
finance operations until the venture generates positive cash flow,
19
<PAGE>
which would 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 the Company, which would cause such net
investment balances to increase. Such investments at the initial stages of
development 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 the Company 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.
The Company is aware that its recent stock price does not meet the
minimum bid price requirements of the NASDAQ National Market. The Company
believes, based on its net book value of $1.97 per share, recent business
progress and improving market conditions, that the current situation should be
temporary. Nevertheless, the Company is corresponding with the NASDAQ National
Market and is prepared to be proactive in protecting shareholder liquidity.
As a result of the Company's suspension of activities relating to
Kashtan, Intergas JSC ("Intergas"), the entity developing the Maykop Field
project, 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. The Company has been advised that Intergas and another
shareholder of Intergas are considering asserting such claims. The Company
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 Company's financial position, result of
operations and cash flows. Any such claims may be adjudicated in host country
forums under host country law.
The Company has contingent obligations and may incur additional
obligations, absolute or contingent, with respect to the acquisition and
development of oil and gas properties and ventures in which it has interests
that require or may require the Company to expend funds and to issue shares of
its Common Stock. The Company believes that it has no further obligation to fund
any operations of Kashtan or Intergas. At September 30, 1998, the Company had
contingent obligations, subject to the satisfaction of conditions relating to
the achievement of specified Stynawske Field project performance standards,
involving 187,500 shares (after giving effect to the one-for-two reverse split).
As the Company develops current projects and undertakes other projects,
significant additional obligations may be incurred.
Development of the oil and gas properties and ventures in which the
Company has interests involves multi-year efforts and substantial cash
expenditures. Full development of the Company's oil and gas properties and
ventures will require the availability of substantial additional financing from
external sources. The Company also intends where opportunities exist to farm-
out portions of its interests in oil and gas properties and ventures to entities
that can provide 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 interest of the Company, such
entities and their respective stockholders or participants
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
20
<PAGE>
and gas at sufficient prices to provide positive cash flow to the Company, which
is dependent upon, among other factors, achieving significant production at
costs that provide acceptable margins, reasonable levels of taxation from local
authorities, and the ability to market the oil and gas produced at or near world
prices. In addition, the Company must mobilize drilling equipment and personnel
to initiate drilling, completion and production activities. The Company has
plans to mobilize resources and achieve levels of production and profits
sufficient to recover its carrying value. However, if one or more of the above
factors, or other factors, are different than anticipated, these plans may not
be realized, and the Company may not recover its carrying value. The Company
will be entitled to distributions from the various properties and ventures in
which it participates in accordance with the arrangements governing the
respective properties and ventures.
The $339,000 due to affiliated entity at September 30, 1998 relates to
a loan from Terrenex Acquisition Corporation. Long term debt at September 30,
1998 of $896,000 relates to a loan and an advance to NOC from NOC's non-
controlling shareholder. Minority interest in subsidiaries at September 30, 1998
of $3,385,000 relates to the 44.1% interest of the non-controlling shareholder
in NOC.
Results of Operations
- ---------------------
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. The Company's interest in the
assets and liabilities of unconsolidated entities is reflected on the Company's
consolidated balance sheet on a net basis as investment in and advances to oil
and gas ventures; the Company's share of revenue, other income and expenses of
unconsolidated entities is reported in the Company's consolidated statement of
operations as income or loss from equity investment in oil and gas ventures; and
the Company's interest in the cash flow of unconsolidated entities is reported
in the Company'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. The Company 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.
Nine month periods ended September 30, 1998 and 1997:
The Company recorded operating revenue of $520,000 during the nine
month period ended September 30, 1998 compared with $173,000 for the nine month
period ended September 30, 1997. Revenue of $331,000 in the nine month period
ended September 30, 1998 related to oil production of 151,000 barrels ("bbls")
gross (54,600 bbls net to NOC) from the Ninotsminda Field subsequent to the
Transaction less net production placed in storage of 34,500 bbls. and revenue of
$177,000 related to oil production from the Sylvan Lake property in Alberta,
Canada. Revenue for the nine month period ended September 30, 1997 primarily
related to oil production from the Sylvan Lake property. Net sales from the
Ninotsminda Field before prior months' oil price adjustments averaged $11.50 per
barrel. The Company also recorded a nominal amount of revenue during nine month
period ended September 30, 1998 from the sale of electrically enhanced oil
recovery ("EEOR") equipment; there was no revenue from the sale of EEOR
equipment for the nine month period ended September 30, 1997.
21
<PAGE>
The operating loss for the nine month period ended September 30, 1998
amounted to $5,015,000, compared with $6,645,000 for the nine month period ended
September 30, 1997. Lease operating expenses increased to $477,000 during the
nine month period ended September 30, 1998, as compared to $117,000 for the nine
month period ended September 30, 1997, primarily as a result of the inclusion
of expenses related to the Company's interest in the Ninotsminda Field
subsequent to the Transaction. Direct project costs increased to $1,012,000
from $815,000 for the nine month period ended September 30, 1997, reflecting
activity related to the Ninotsminda Field subsequent to the Transaction and to
BOC and the winding down of certain oil and gas ventures. The increase in
depreciation, depletion and amortization expense from $158,000 for the nine
month period ended September 30, 1997 to $261,000 during the nine month period
ended September 30, 1998 is attributable principally to depletion subsequent to
the Transaction related to the Company's acquisition of the Ninotsminda Field
and increased production of oil from the Sylvan Lake property. The loss from
investments in unconsolidated subsidiaries decreased to $152,000 during the nine
month period ended September 30, 1998, from $3,011,000 for the nine month period
ended September 30, 1997, as a result of the substantially lower level of
activity in the unconsolidated subsidiaries in the first nine months of 1998,
reflecting the impairment of most venture assets during 1997. During the nine
month period ended September 30, 1998, the Company wrotedown its oil and gas
properties in the Sylvan Lake project by an aggregate $900,000 as a result of a
substantial decline of heavy oil prices and the application of the quarterly
full cost ceiling test. There was no comparable writedown during the first nine
months of 1997. If oil prices decline further, the Company may experience
additional writedowns.
Although lease operating expenses exceeded revenue for the Sylvan Lake
property for the first nine months of 1998, the Company does not believe that
such expenses will continue to exceed revenue because expenses during the nine
month period ended September 30, 1998 included non-recurring costs. In addition,
prices for heavy oil were depressed during the first nine months of 1998,
resulting in decreased revenue per unit produced. No assurance can be given,
however, that prices for heavy oil will improve or that operating revenue will
exceed lease operating expenses from the Sylvan Lake property or other
properties in future periods.
The Company recorded net other income of $171,000 for the nine month
period ended September 30, 1998, as compared to $783,000 during the nine month
period ended September 30, 1997. The principal reason for the decrease is the
Company's 1998 payment of interest expense on behalf of Kashtan. This was
partially offset by a loss that the Company recorded on the disposition of
miscellaneous equipment and property amounting to $266,000 in the first nine
months of 1997; the comparable loss incurred in the first nine months of 1998
was $28,000.
The net loss of $4,790,000, or $0.34 per share, during the nine month
period ended September 30, 1998 compares to a net loss of $5,675,000, or $.51
per share, for the nine month period ended September 30, 1997.
Three month periods ended September 30, 1998 and 1997:
The Company recorded operating revenue of $375,000 during the three
month period ended September 30, 1998, compared with $63,000 for the three month
period ended September 30, 1997. Revenue of $331,000 in the three month period
ended September 30, 1998 related to oil production of 151,000 bbls. gross
(54,600 bbls. net to NOC) from the Ninotsminda Field subsequent to the
Transaction less net production placed in storage of 34,500 bbls. and
22
<PAGE>
revenue of $44,000 related to oil production from the Sylvan Lake property in
Alberta, Canada. Revenue for the quarter ended September 30, 1997 primarily
related to oil production from the Sylvan Lake property. Net sales from the
Ninotsminda Field before prior months oil price adjustments averaged $11.50 per
barrel.
The operating loss for the three month period ended September 30, 1998
amounted to $787,000, compared with $2,703,000 for the three month period ended
September 30, 1997. Lease operating expenses increased to $300,000 during the
three month period ended September 30, 1998, as compared to $49,000 for the
three month period ended September 30, 1997, primarily as a result of the
Company's acquisition of the Ninotsminda Field and as a result of greater unit
production from the Sylvan Lake property in the third quarter of 1998. Direct
project costs decreased to $228,000 from $421,000 for the three month period
ended September 30, 1997, primarily reflecting reduced activity with respect to
the Company's projects that predated the Transaction, partially offset by
activity related to the Ninotsminda Field. The increase in depreciation,
depletion and amortization expense from $80,000 for the three month period ended
September 30, 1997 to $101,000 during the three month period ended September 30,
1998 is attributable principally to depletion associated with production of oil
from Ninotsminda Field subsequent to the Transaction, partially offset by a
reduced charge for depreciation due to disposal of office equipment. The loss
from investments in unconsolidated subsidiaries decreased to $17,000 during the
three month period ended September 30, 1998, as compared to $1,647,000 for the
three month period ended September 30, 1997, as a result of the substantially
lower level of activity in the unconsolidated subsidiaries in the third quarter
of 1998, reflecting the impairment of most venture assets during 1997.
Although lease operating expenses for the Sylvan Lake property
exceeded revenue for the third quarter of 1998, the Company does not believe
that such expenses will continue to exceed revenue because expenses during the
three month period ended September 30, 1998, included non-recurring costs. In
addition, prices for heavy oil were depressed during the third quarter of 1998
resulting in decreased revenue per unit produced due to the decline in heavy oil
prices. No assurance can be given, however, that prices for heavy oil will
improve or that operating revenue will exceed lease operating expenses from the
Sylvan Lake property or other properties in future periods.
The Company recorded net other expense of $48,000 for the three month
period ended September 30, 1998, as compared to net other income of $346,000
during the three month period ended September 30, 1997. The principal reason for
the decrease is the reduced amount of interest earned due to the Company's lower
total of cash and cash equivalents and restricted cash in the third quarter of
1998, partially offset by a loss that the Company recorded in 1997 from the
disposition of miscellaneous equipment and property amounting to $44,000 in the
third quarter of 1997; there was no comparable loss in the third quarter of
1998.
The net loss of $781,000, or $0.04 per share, during the three month
period ended September 30, 1998 compares to a net loss of $2,250,000, or $.20
per share, for the three month period ended September 30, 1997.
Year 2000 Compliance
- --------------------
The Year 2000 problem is the result of computer programs being written
using two digits to define the applicable year. If not corrected, any programs
or equipment that have time sensitive components could fail or create erroneous
results. The Company has completed
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a preliminary review of its existing systems and has upgraded its accounting
information systems to software that purports to be Year 2000 compliant. The
majority of other software and hardware currently used by the Company is
believed to be Year 2000 compliant and the cost of converting any non-compliant
systems is not expected to be material to the Company's financial condition.
Although the Company does not expect to incur significant additional
expenditures to address Year 2000 issues, there can be no assurance that this
will be the case.
The Company currently has limited information concerning the Year 2000
compliance status of its suppliers of goods and services including the status of
its contract operator in the Republic of Georgia. The company intends to
initiate formal communications with all of its significant suppliers with
respect to such persons' Year 2000 compliance and status. Should remedial
efforts be required, the inability of the Company or its principal suppliers to
become Year 2000 compliant in a timely manner could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. Should it become apparent that significant remedial action is
required by the Company's suppliers, a contingency plan will be developed by
January 31, 1999.
New Accounting Standards
- ------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information and in 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 130
became effective on January 1, 1998; however, the Company had no comprehensive
income other than net income. SFAS No. 131 and SFAS No. 133 will be adopted in
the annual financial statements for 1998 and 1999, respectively, and based on
present circumstances would not have any material effect on the Company's
financial statements.
Forward Looking Statements
- --------------------------
The forward looking statements contained in this Item 2 and elsewhere
in this Quarterly Report on Form 10-Q are subject to various risks,
uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward looking statements.
Included among the important risks, uncertainties and other factors are those
hereinafter discussed.
Few of such forward looking statements deal with matters that are
within the unilateral control of the Company. Joint venture, acquisition,
financing and other agreements and arrangements must be negotiated with
independent third parties and, in some cases, must be approved by governmental
agencies. Such third parties generally have interests that do not coincide with
those of the Company and may conflict with the Company's interests. Unless the
Company and such third parties are able to compromise their respective
objectives in a mutually acceptable manner, agreements and arrangements will not
be consummated. Operating entities in various foreign jurisdictions must be
registered by governmental agencies, and production licenses for development of
oil and gas fields in various foreign jurisdictions must be granted by
governmental agencies. These governmental agencies generally have broad
discretion in determining whether to take or approve various actions and
matters. In addition, the policies and practices of governmental agencies may be
affected or altered by political, economic and other events occurring either
within their own countries or in a broader international context. The Company
does not have a majority of the equity in BOC, the entity that is the licensed
developer
24
<PAGE>
of the Stynawske Field project, even though the Company may be the designated
operator of the oil or gas field. Thus, the concurrence of co-venturers may be
required for various actions. Other parties influencing the timing of events may
have priorities that differ from those of the Company, even if they generally
share the Company's objectives. Suppliers may not update their computer systems
to be Year 2000 compliant and may misreport the status of their compliance to
the Company. Systems that the Company believe to be Year 2000 compliant may in
fact be non-compliant. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet effective.
25
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PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
On February 20, 1998, Zhoda Corporation ("Zhoda"), which sold to the
Company most of the Company's interest in UK-RAN, filed suit against the Company
and two of its consolidated subsidiaries in the District Court of Harris County,
Texas. Zhoda alleged under several theories that Zhoda was wrongfully deprived
of the value of the UK-RAN shares it transferred to the Company or the
contingent consideration it might have received under its agreement with the
Company. Among the theories of Zhoda's complaint were breach of contract, breach
of fiduciary duty and duty of good faith and fair dealing, fraud and
constructive fraud, fraud in the inducement, negligent misrepresentation, civil
conspiracy, breach of trust, unjust enrichment and rescission. Zhoda sought
damages in excess of $7,500,000, redelivery of the UK-RAN shares transferred to
the Company, fees, expenses and costs and any further relief to which it may be
entitled. An outcome of this proceeding that is unfavorable to the Company could
have a material adverse impact on the Company's financial condition and results
of operations. The Harris County District Court issued an order staying the
litigation initiated by Zhoda in its entirety and indicating that the Court
would dismiss the action if the parties did not commence arbitration in New
York, New York. On July 10, 1998, a request for arbitration was filed by Zhoda
with the International Chamber of Commerce. On July 17, 1998, the Harris County
District Court issued an order retaining the case and directing that the
arbitration be held and concluded by April 16, 1999. On August 31, 1998 the
Company filed an answer and counterclaim to the request for arbitration of Zhoda
with the ICC. On November 4, 1998 a reply to the Company's answer and
counterclaim was filed by Zhoda with the ICC. Orest Senkiw, who was a Vice
President of the Company from February 4, 1997 to December 1, 1997, and his wife
and adult children indirectly beneficially own in the aggregate 10.3% of the
outstanding stock of Zhoda.
On March 24, 1998, the Company and two consolidated subsidiaries filed
an action against Zhoda in the Court of Queen's Bench of Alberta, Judicial
Centre of Calgary, in which the Company seeks to recover $190,000, plus interest
thereon, which the Company asserts is owing by Zhoda pursuant to promissory
notes and loan agreements. On March 31, 1998, Zhoda filed an answer and
counterclaims against the Company and its two subsidiaries, asserting
essentially the same claims as were asserted in the Texas action described in
the previous paragraph, with the exception that claims asserted in the Texas
suit based on fraud and civil conspiracy were not included in the Alberta
counterclaims. On the basis of its counterclaims, Zhoda seeks damages estimated
to be at least Canadian $10,500,000, redelivery of the UK-RAN shares transferred
to the Company, interest, costs and such further relief as the court may deem
just. An outcome of this proceeding that is unfavorable to the Company could
have a material adverse impact on the Company's financial condition and results
of operations.
On March 9, 1998, Ribalta Holdings, Inc. ("Ribalta"), which sold to
the Company the outstanding capital of Gastron International Limited
("Gastron"), which in turn owned 31% of the capital of Intergas, filed suit
against the Company and one of its consolidated subsidiaries in the Third
Judicial District Court of Salt Lake County, Utah. In its complaint, Ribalta
alleges breach by the Company 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 the Company pursuant to the contract, including the shares
of Gastron and any property transferred by Gastron, or, alternatively, damages
equal to
26
<PAGE>
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 the
Company Common Stock, and the Company believes that as a result of the failure
of conditions precedent to the payment of consideration no consideration is
payable under that contract. As of November 6, 1998, the Company and its
subsidiary had not been served with the complaint in the action. An outcome of
this proceeding unfavorable to the Company could have a material adverse impact
on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on July 8, 1998.
Stockholders voted (1) to approve the issuance of 100 shares of Series Voting
Preferred Stock and up to 24,448,860 shares of Common Stock, as then
constituted, pursuant to the terms of an Amended and Restated Combination
Agreement with CanArgo Energy Inc., dated as of February 2, 1998 (the "Stock
Issuance Proposal"), (2) to approve an amendment to the Certificate of
Incorporation to change the Company's name from "Fountain Oil Incorporated" to
"CanArgo Energy Corporation" (the "Name Change") and (3) to approve an amendment
to the Certificate of Incorporation to effect a 1-for-2 reverse stock split of
the outstanding Common Stock (the "Reverse Stock Split"). On the Record Date,
May 22, 1998, there were 22,447,489 shares of Common Stock outstanding.
With respect to the Stock Issuance Proposal, the tabulation of votes
was 13,179,218 voted in favor, 2,428,545 shares voted against, 43,764 shares
abstained and 6,282,123 shares as broker non-votes.
With respect to the Name Change, the tabulation of votes was
19,475,036 voted in favor, 2,419,060 shares voted against, 39,554 shares
abstained and no broker non-votes.
With respect to the Reverse Stock Split, the tabulation of votes was
15,387,952 voted in favor, 328,912 shares voted against, 51,060 shares abstained
and 6,165,726 shares as broker non-votes.
No other matters were submitted to a vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*)
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited
dated August 10, 1995 by and among Ribalta Holdings,
Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from October 19, 1995
Form 8-K).
27
<PAGE>
2(2) Supplemental Agreement Relating to the Sale and
Purchase of All the Issued Share Capital of Gastron
International Limited dated November 3, 1995 by and
among Ribalta Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as
Warrantor (Incorporated herein by reference from
October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International
Limited dated May 29, 1996 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated
as Purchaser, and John Richard Tate as Warrantor
(Incorporated herein by reference from June 30, 1997
Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management
Services Pty, Ltd., A.C.N. 005 506 123 and Fountain Oil
Incorporated dated May 16, 1995 (Incorporated herein by
reference from December 31, 1997 Form 10-K).
2(5) Amended and Restated Combination Agreement between
Fountain Oil Incorporated and CanArgo Energy Inc. dated
as of February 2, 1998 (Incorporated herein by
reference from Form S-3 Registration Statement, File
No. 333-48287 filed on June 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from
Form S-3 Registration Statement, File No. 333-48287
filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and
amendments thereto (Incorporated herein by reference
from July 15, 1998 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., Fountain'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).
28
<PAGE>
*10(3) Securities Compensation Plan (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., Fountain's
predecessor).
*10(4) Form of Certificate for Common Stock Purchase Warrants
issued pursuant to the Securities Compensation Plan
(Incorporated herein by reference from Form S-8
Registration Statement, File No. 33-82944 filed on
August 17, 1994, filed by Electromagnetic Oil Recovery,
Inc., Fountain'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., Fountain'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., Fountain's predecessor).
*10(7) Management Services Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated herein by
reference from June 30, 1997 Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated herein
by reference from December 31, 1997 Form 10-K).
*10(9) Employment Agreement between Fountain Oil Incorporated
and Einar H. Bandlien (Incorporated herein by reference
from August 31, 1995 Form 10-KSB).
*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).
29
<PAGE>
*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 and Restated 1995 Long-Term Incentive Plan.
*10(19) Fee Agreement dated November 15, 1995 between Fountain
Oil Incorporated and Robert A. Halpin (Incorporated
herein by reference from August 31, 1996 Form 10-KSB).
*10(20) Fee Agreement between Fountain Oil Incorporated and
Eugene J. Meyers (Incorporated herein by reference from
August 31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10, 1996 between
Fountain Oil Incorporated and Robert A. Halpin
(Incorporated herein by reference from December 31,
1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil Incorporated
and Whitfield Fitzpatrick (Incorporated herein by
reference from March 31, 1997 Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil
Services Incorporated and Orest Senkiw (Incorporated
herein by reference from March 31, 1997 Form 10-Q).
*10(24) Employment Agreement between Fountain Oil Incorporated
and Alfred Kjemperud (Incorporated herein by reference
from March 31, 1997 Form 10-Q).
*10(25) Employment Agreement between Fountain Oil Norway AS and
Rune Falstad (Incorporated herein by reference from
December 31, 1997 Form 10-K).
*10(26) Management Services Agreement between Trident Petroleum
Inc. and Fountain Oil Boryslaw Limited (Incorporated
herein by reference from December 31, 1997 Form 10-K).
*10(27) Amended and Restated CanArgo Energy Inc. Stock Option
Plan.
*10(28) Workorder between CanArgo Energy Inc. and Nils N.
Trulsvik as Consultant.
*10(29) Workorder between CanArgo Energy Inc. and Einar H.
Bandlien as Consultant.
*10(30) Consultancy Agreement between CanArgo Energy
Corporation and Fincom AS, Norway.
30
<PAGE>
*10(31) Employment Contract between CanArgo Energy Inc. and
Anthony J. Potter.
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
On July 7, 1998, the Company filed a Form 8-K dated July 7, 1998
reporting Item 5. Other Events and Item 7. Financial Statements,
Pro Forma Financial Information and Exhibits, regarding the
rejection of Bargo Acquisition Corporation proposal.
On July 24, 1998, the Company filed a Form 8-K dated July 15,
1998 reporting Item 1. Changes in Control of Registrant, Item 2.
Acquisition or Disposition of Assets, Item 5. Other Events and
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits, regarding (i) a changed in the directors of the Company
in connection with (ii) the acquisition of all of the common
shares of CanArgo Oil and Gas Inc., formerly known as CanArgo
Energy Inc. and (iii) amendments to the Company's Certificate of
Incorporation (1) to change the Company's name from Fountain Oil
Incorporated to CanArgo Energy Corporation and (2) to effect a
one-for-two reverse stock split.
31
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: November 10, 1998 By:/s/ Michael Binnion
----------------------------------------
Michael Binnion
President and Chief Financial Officer
32
<PAGE>
EXHIBIT INDEX
FILED WITH
EXHIBIT THIS
NUMBER EXHIBIT REPORT
2(1) Agreement Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International
Limited dated August 10, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil
Incorporated as Purchaser, and John Richard Tate as
Warrantor (Incorporated herein by reference from
October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and
Purchase of All the Issued Share Capital of Gastron
International Limited dated November 3, 1995 by and
among Ribalta Holdings, Inc. as Vendor and Fountain
Oil Incorporated as Purchaser, and John Richard
Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase
of All the Issued Share Capital of Gastron
International Limited dated May 29, 1996 by and
among Ribalta Holdings, Inc. as Vendor and Fountain
Oil Incorporated as Purchaser, and John Richard Tate
as Warrantor (Incorporated herein by reference from
June 30, 1997 Form 10-Q).
2(4) Memorandum of Agreement between Fielden Management
Services Pty, Ltd., A.C.N. 005 506 123 and Fountain
Oil Incorporated dated May 16, 1995 (Incorporated
herein by reference from December 31, 1997 Form 10-K).
2(5) Amended and Restated Combination Agreement between
Fountain Oil Incorporated and CanArgo Energy Inc.
dated as of February 2, 1998 (Incorporated herein
by reference from Form S-3 Registration Statement,
File No. 333-48287 filed on June 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement
(Incorporated herein by reference as Annex G from
Form S-3 Registration Statement, File No. 333-48287
filed on June 9, 1998).
3(1) Registrant's Certificate of Incorporation and
amendments thereto (Incorporated herein by reference
from July 15, 1998 Form 8-K).
1
<PAGE>
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., Fountain'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., Fountain's
predecessor).
*10(4) Form of Certificate for Common Stock Purchase
Warrants issued pursuant to the Securities
Compensation Plan (Incorporated herein by reference
from Form S-8 Registration Statement, File
No. 33-82944 filed on August 17, 1994, filed by
Electromagnetic Oil Recovery, Inc., Fountain'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., Fountain'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., Fountain's
predecessor).
*10(7) Management Services Agreement between Fountain Oil
Incorporated and Oistein Nyberg (Incorporated herein
by reference from June 30, 1997 Form 10-Q).
*10(8) Restated Employment Agreement between Fountain Oil
Incorporated and Nils N. Trulsvik (Incorporated
herein by reference from December 31, 1997
Form 10-K).
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*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 and Restated 1995 Long-Term Incentive Plan. X
*10(19) Fee Agreement dated November 15, 1995 between
Fountain Oil Incorporated and Robert A. Halpin
(Incorporated herein by reference from August 31,
1996 Form 10-KSB).
*10(20) Fee Agreement between Fountain Oil Incorporated and
Eugene J. Meyers (Incorporated herein by reference
from August 31, 1996 Form 10-KSB).
*10(21) Amended Fee Agreement dated December 10, 1996
between Fountain Oil Incorporated and Robert A.
Halpin (Incorporated herein by reference from
December 31, 1996 Form 10-K).
*10(22) Employment Agreement between Fountain Oil
Incorporated and Whitfield Fitzpatrick
(Incorporated herein by reference from March 31,
1997 Form 10-Q).
*10(23) Management Services Agreement between Fountain Oil
Services Incorporated and Orest Senkiw (Incorporated
herein by reference from March 31, 1997 Form 10-Q).
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*10(24) Employment Agreement between Fountain Oil
Incorporated and Alfred Kjemperud (Incorporated
herein by reference from March 31, 1997 Form 10-Q).
*10(25) Employment Agreement between Fountain Oil Norway AS
and Rune Falstad (Incorporated herein by reference
from December 31, 1997 Form 10-K).
*10(26) Management Services Agreement between Trident
Petroleum Inc. and Fountain Oil Boryslaw Limited
(Incorporated herein by reference from December 31,
1997 Form 10-K).
*10(27) Amended and Restated CanArgo Energy Inc. Stock
Option Plan. X
*10(28) Workorder between CanArgo Energy Inc. and Nils N.
Trulsvik as Consultant. X
*10(29) Workorder between CanArgo Energy Inc. and Einar H.
Bandlien as Consultant. X
*10(30) Consultancy Agreement between CanArgo Energy
Corporation and Fincom AS, Norway. X
*10(31) Employment Contract between CanArgo Energy Inc. and
Anthony J. Potter. X
27 Financial Data Schedule (EDGAR filing only). X
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Exhibit 10(17)
CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
(EFFECTIVE NOVEMBER 14, 1995)
(AMENDED AND RESTATED AS OF JULY 15, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. PURPOSE 1
2. DEFINITIONS 1
(a) "Award" 1
(b) "Award Agreement" 1
(c) "Board" 1
(d) "Code" 1
(e) "Committee" 1
(f) "Common Stock" 1
(g) "Compensation Committee" 1
(h) "Corporation" 1
(i) "Director" 1
(j) "Employee" 2
(k) "Exchange Act" 2
(l) "Exercise Price" 2
(m) "Fair Market Value" 2
(n) "For Cause" 2
(o) "Incentive Stock Option" 3
(p) "Non-qualified Stock Option" 3
(q) "Option" 3
(r) "Participant" 3
(s) "Plan" 3
(t) "Purchase Price" 3
(u) "Pyramiding" 3
(v) "Reload" 3
(w) "Share" 3
(x) "Stock Appreciation Right" 3
(y) "Subsidiary" 4
(z) "Ten Percent Stockholder" 4
(aa) "Total and Permanent Disability" 4
(bb) "Vest" or "Vesting" 4
(cc) "Voting Power" 4
3. EFFECTIVE DATE 4
4. ADMINISTRATION 5
(a) Administration by the Board or the Committee 5
(b) The Committee 5
(c) Powers of the Committee 5
(d) Committee's Interpretation of the Plan 6
5. PARTICIPATION 6
(a) Eligibility for Participation 6
(b) Eligibility for Awards 6
</TABLE>
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<TABLE>
<S> <C>
6. SHARES OF STOCK OF THE CORPORATION 7
(a) Shares Subject to This Plan 7
(b) Adjustment of Shares 7
(c) Awards Not to Exceed Shares Available 7
7. TERMS AND CONDITIONS OF OPTIONS 7
(a) Eligibility for Incentive Stock Options 7
(b) Award Agreements 8
(c) Number of Shares Covered by an Option 8
(d) Exercise of Options 8
(e) Vesting of Options 8
(f) Term and Expiration of Options 8
(g) Exercise Price 9
(h) Medium and Time of Payment of Purchase Price 9
(i) Nontransferability of Options 9
(j) Termination of Employee, Director, Independent Contractor or Consultant
Status for Any Reason Other Than Death, Total and Permanent Disability
or For Cause 9
(k) Death of Participant 10
(l) Total and Permanent Disability of Participant 10
(m) Termination For Cause 11
(n) Rights as a Stockholder 11
(o) Modification, Extension, and Renewal of Options 11
(p) Other Provisions 12
(q) No Disqualification of Incentive Stock Options 12
(r) Limitation on Incentive Stock Options 12
8. STOCK APPRECIATION RIGHTS 12
(a) Stock Appreciation Right Award Agreements 12
(b) Number of Shares Covered by a Stock Appreciation Right 12
(c) Stock Appreciation Rights Issued and Exercised Without Payment of
Consideration 13
(d) Exercise of Stock Appreciation Rights 13
(e) Vesting of Stock Appreciation Rights 13
(f) Term and Expiration of Stock Appreciation Rights 13
(g) Exercise and Settlement of a Stock Appreciation Right 14
(h) Nontransferability of Stock Appreciation Rights 14
(i) Termination of Employee, Director, Independent Contractor or Consultant
Status for any Reason Other Than Death, Total and Permanent Disability or
For Cause 14
(j) Death of Participant 14
(k) Total and Permanent Disability of Participant 15
(l) Termination For Cause 15
(m) Rights as a Stockholder 15
</TABLE>
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<TABLE>
<S> <C>
(n) Modification, Extension, and Renewal of Stock Appreciation Rights 15
(o) Other Provisions 16
9. TERM OF PLAN 16
10. RECAPITALIZATION, DISSOLUTION, AND CHANGE OF CONTROL 16
(a) Recapitalization 16
(b) Dissolution, Merger, Consolidation, or Sale or Lease of Assets 16
(c) Determination by the Committee 17
(d) Limitation on Rights of Participants 17
(e) No Limitation on Rights of Corporation 17
11. SECURITIES LAW REQUIREMENTS 17
(a) Legality of Issuance 17
(b) Restrictions on Transfer; Representations of Participant; Legends 17
(c) Registration or Qualification of Securities 18
(d) Exchange of Certificates 18
12. EXERCISE OF UNVESTED OPTIONS 18
(a) Purpose of Section 12 18
(b) Exercise of Non-Vested Awards and Issuance of Restricted Stock 19
13. AMENDMENT OF THE PLAN 19
14. PAYMENT FOR SHARE PURCHASES 20
15. APPLICATION OF FUNDS 21
16. APPROVAL OF SHAREHOLDERS 21
17. WITHHOLDING OF TAXES 21
(a) General 21
(b) Stock Withholding 21
18. RIGHTS AS AN EMPLOYEE, DIRECTOR, INDEPENDENT CONTRACTOR OR CONSULTANT 22
19. INSPECTION OF RECORDS 22
</TABLE>
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CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
1. PURPOSE.
This Plan is intended to provide employees and directors of CanArgo Energy
Corporation ("Corporation") and advisors and consultants rendering services to
the Corporation (collectively "Participants") an opportunity to acquire an
equity interest in the Corporation. The Corporation intends to use the Plan to
attract and retain Participants' services, motivate Participants to increase the
Corporation's value, and have flexibility in compensating Participants.
The Plan allows the Corporation to reward Participants with (i) options to
purchase shares of common stock of the Corporation, and (ii) stock appreciation
rights with respect to shares of common stock of the Corporation. All awards
shall be subject to the terms and conditions provided in this Plan.
2. DEFINITIONS.
(a) "Award" shall mean any award granted under the Plan, including any
Option or Stock Appreciation Right.
(b) "Award Agreement" shall mean, with respect to each Award granted to a
Participant, the signed written agreement between the Corporation and the
Participant setting forth the terms and conditions of the Award.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the committee appointed by the Board in
accordance with Section 4(a) to administer the Plan, or the Board, if it
administers the Plan as provided in Section 4(a).
(f) "Common Stock" shall mean the voting common stock of the Corporation.
(g) "Compensation Committee" shall mean the Compensation Committee
appointed by the Board.
(h) "Corporation" shall mean CanArgo Energy Corporation (formerly Fountain
Oil Incorporated).
(i) "Director" shall mean a member of the Board.
(j) "Employee" shall mean any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations thereunder, by the
Corporation or any Subsidiary.
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The Committee shall be responsible for determining when an Employee's period of
employment is deemed to be continued during an approved leave of absence.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Exercise Price" shall mean:
(i) With respect to an Option, the price per Share at which the Option
may be exercised, as determined by the Committee and as specified in the
Participant's Award Agreement; or
(ii) With respect to a Stock Appreciation Right, the price per Share
which is the base price for determining the future value of the Stock
Appreciation Right, as determined by the Committee and as specified in the
Participant's Award Agreement.
(m) "Fair Market Value" shall mean the value of each Share determined as of
any specified date as follows:
(i) If the Shares are traded on any recognized United States
securities exchange, the value per Share shall be the closing price of the
Common Stock on the business day immediately preceding such specified date (or,
if there are no sales on that day the last preceding day on which there was a
sale) on the principal exchange on which the Common Stock is traded;
(ii) If the Shares are not traded on any United States securities
exchange but are traded on any formal over-the-counter quotation system in
general use in the United States, the value per Share shall be the mean between
the closing bid and asked quotations of the Common Stock on the business day
immediately preceding such specified date (or, if there are no such quotations
on that day, the last preceding day on which there were such quotations) on the
principal system on which the Common Stock is traded; or
(iii) If neither Paragraph (i) nor (ii) applies, the value per Share
shall be determined by the Committee in good faith and based on uniform
principles consistently applied. Such determination shall be conclusive and
binding on all persons.
(n) "For Cause" shall mean the termination of a Participant's status with
the Corporation as an Employee, Director, advisor or consultant for any of the
following reasons, as determined by the Committee:
(i) The Participant commits a violation of any law, a breach of any
fiduciary duty or an act of dishonesty, fraud, misrepresentation or moral
turpitude which may have a material detrimental impact on the Corporation's
business or prevent the Participant from effectively performing his or her
duties as an Employee, Director, advisor or consultant for the Corporation; or
(ii) The Participant, as determined in the sole discretion of the
Committee, willfully and habitually neglects to perform the duties which the
Participant is required to
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<PAGE>
perform for the Corporation or performs such duties other than in good faith and
the Participant fails to correct such conduct within ten (10) days following the
Corporation's delivery to the Participant of a written notice describing such
conduct; or
(iii) The Committee determines that the reason for terminating the
Participant's status with the Corporation constitutes "for cause" under the
Corporation's policies or under any contract between the Participant and the
Corporation.
(o) "Incentive Stock Option" shall mean an Option of the type which is
described in Section 422(b) of the Code.
(p) "Non-qualified Stock Option" shall mean an Option which is not of the
type described in Section 422(b) or 423(b) of the Code.
(q) "Option" shall mean any Option which is granted pursuant to the Plan to
purchase Shares of Common Stock, whether granted as an Incentive Stock Option or
as a Non-qualified Stock Option.
(r) "Participant" shall mean any individual to whom an Award has been
granted under the Plan, and such term shall include where appropriate the duly
appointed conservator or other legal representative of a mentally incompetent
Participant and the allowable transferee of a deceased Participant as provided
Sections 7(i) and/or 8(h).
(s) "Plan" shall mean this CanArgo Energy Corporation 1995 Long-Term
Incentive Plan, as amended. The Plan is effective November 14, 1995.
(t) "Purchase Price" shall mean, at any specified time, the Exercise Price
of an Option to purchase one Share times the number of Shares subject to such
Option being exercised.
(u) "Pyramiding" shall mean, if the Committee in its sole discretion
permits, a Participant's payment, in whole or in part, of the Exercise Price of
an Option made by exchanging a Share or Share(s) of Common Stock that the
Participant had acquired pursuant to the exercise of another Option during the
preceding six months (under this Plan or any other plan or program of the
Corporation) or had otherwise acquired from the Corporation during the preceding
six months without paying full consideration for such Share(s).
(v) "Reload" shall mean the grant of new Options to a Participant who
exercises an Option with previously acquired Shares, with the number of new
Options being equal to the number of Shares the Participant submits to the
Corporation to pay for Options just exercised.
(w) "Share" shall mean one authorized share of Common Stock.
(x) "Stock Appreciation Right" shall mean a right issued to a Participant
to receive all or any portion of the future appreciation in the Fair Market
Value of one Share of Common Stock over the Exercise Price of such right. A
Stock Appreciation Right may be settled in cash or Shares in accordance with the
terms and conditions set forth in Section 8.
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(y) "Subsidiary" shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation if, at the time
of granting an Option, each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of the voting power in
one of the other corporations in such chain.
(z) "Ten Percent Stockholder" shall mean, for purposes of granting
Incentive Stock Options, any person who owns stock of the Corporation possessing
more than 10% of the combined voting power of all classes of outstanding stock
of the Corporation or any Subsidiary. For purposes of determining whether a
person is a Ten Percent Stockholder:
(i) A person shall be considered the owner of stock that is owned,
directly or indirectly, by or for his or her brothers or sisters, spouse,
ancestors, and lineal descendants;
(ii) Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionally
by or for its shareholders, partners or beneficiaries, respectively; and
(iii) The term "outstanding stock" shall include all shares of stock
actually issued and outstanding, but shall not include any shares of stock
subject to stock options.
(aa) "Total and Permanent Disability" shall mean with respect to a
Participant who is either an Employee or Director:
(i) The mental or physical disability, either occupational or non-
occupational in cause, which satisfies the definition of "total disability" in
the disability policy or plan provided by the Corporation covering the
Participant; or
(ii) If no such policy or plan is then covering the Participant, the
mental or physical disability which, in the opinion of the Committee, on the
basis of medical evidence satisfactory to it, prevents the Participant from
indefinitely performing the principal duties of the position the Participant
performed when the disability commenced.
(bb) "Vest" or "Vesting" shall mean the date, event or act prior to which
an Award, in whole or in part, is not exercisable, and as a consequence of which
the Award, in whole or in part, becomes exercisable for the first time.
(cc) "Voting Power" shall mean the total combined rights to cast votes at
elections for members of the Corporation's Board of Directors.
3. EFFECTIVE DATE.
The Plan was adopted by the Corporation effective November 14, 1995,
subject to the approval of the Corporation's shareholders in accordance with
Section 16.
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4. ADMINISTRATION.
(a) Administration by the Board or the Committee.
The Board may appoint a Committee of not less than two Directors,
which may be the Compensation Committee or another Committee, to administer the
Plan. In the event the Board elects to administer the Plan, the Board shall
have the powers and authority otherwise delegated to the Committee in this Plan
and all acts to be performed by the Committee under this Plan shall be performed
by the Board.
(b) The Committee.
The Committee shall hold meetings at such times and places as it may
determine. For a Committee meeting, if the Committee has two members, both
members must be present to constitute a quorum, and if the Committee has three
or more members, a majority of the Committee shall constitute a quorum. Acts by
a majority of the members present at a meeting at which a quorum is present and
acts approved in writing by all the members of the Committee shall constitute
valid acts of the Committee.
(c) Powers of the Committee.
On behalf of the Corporation and subject to the provisions of the
Plan, the Committee shall have the authority and discretion to:
(i) Prescribe, amend and rescind rules and regulations relating to the
Plan;
(ii) Select Participants to receive Awards;
(iii) Determine the form and terms of Awards;
(iv) Determine the number of Shares or other consideration subject to
Awards;
(v) Determine whether Awards will be granted singly, in combination or
in tandem with, in replacement of, or as alternatives to, other Awards under the
Plan or any other incentive or compensation plan of the Corporation;
(vi) Construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(vii) Correct any defect or omission, or reconcile any inconsistency
in the Plan, any Award or any Award Agreement;
(viii) Determine whether an Award has been earned and/or Vested;
(ix) Determine whether a Participant who is either an Employee or a
Director has incurred a Total and Permanent Disability;
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<PAGE>
(x) Accelerate or, with the consent of the Participant, defer the
Vesting of any Award and/or the exercise date of any Award;
(xi) Determine if a period of service performed by a consultant, an
advisor or a Director is "continuous" for purposes of the Plan;
(xii) Determine whether a Participant's status with the Corporation
as an Employee, Director, advisor, or consultant has been terminated For Cause;
(xiii) Authorize any person to execute on behalf of the Corporation
any instrument required to effectuate the grant of an Award as made by the
Committee;
(xiv) With the consent of the Participant, reprice, cancel and
reissue, or otherwise adjust the terms of an Award previously issued to the
Participant;
(xv) Determine, upon review of relevant information, the Fair Market
Value of the Common Stock ; and
(xvi) Make all other determinations deemed necessary or advisable for
the administration of the Plan.
(d) Committee's Interpretation of the Plan.
The Committee's interpretation and construction of any provision of
the Plan, of any Award granted under the Plan, or of any Award Agreement shall
be final and binding on all persons claiming an interest in an Award granted or
issued under the Plan. No member of the Committee nor any Director shall be
liable for any action or determination made in good faith with respect to the
Plan, and the Corporation shall indemnify and defend a member of the Committee
to the fullest extent provided by law.
5. PARTICIPATION
(a) Eligibility for Participation. Subject to the conditions of Section
5(b), all Employees, Directors, consultants, and advisors of the Corporation are
eligible to be selected as Participants by the Committee, in its discretion;
provided however, that any Director who is not also an Employee shall
participate only in the "Outside Directors Sub-Plan" which has been adopted
under this Plan for such outside Directors, as such Sub-Plan may be amended from
time-to-time. The Committee's determination of an individual's eligibility for
participation shall be final.
(b) Eligibility for Awards. The Committee has the authority, in its
discretion, to grant Awards to Participants. A Participant may be granted more
than one Award under the Plan.
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6. SHARES OF STOCK OF THE CORPORATION.
(a) Shares Subject to This Plan.
Awards which are granted or issued under this Plan shall be with
respect to the authorized but unissued or reacquired Shares of the Corporation's
Common Stock. The aggregate number of Shares which may be issued upon the
exercise of Options and/or which may be utilized with respect to Stock
Appreciation Rights settled in cash or in Shares under this Plan shall not
exceed seven hundred fifty thousand (750,000) Shares, subject to adjustment
under Section 10.
(b) Adjustment of Shares.
In the event of an adjustment described in Section 10, then (i) the
number of Shares reserved for issuance under the Plan, (ii) the Exercise Prices
of and number of Shares subject to outstanding Options, (iii) the Exercise Price
of and number of Shares with respect to which there are outstanding Stock
Appreciation Rights, and (iv) any other factor pertaining to outstanding Awards
shall be duly and proportionately adjusted, subject to any required action by
the Board or the shareholders of the Corporation and compliance with applicable
securities laws; provided, however, that fractions of a Share shall not be
issued but shall either be paid in cash at Fair Market Value or shall be rounded
up to the nearest Share, as determined by the Committee; and provided, further,
that the Exercise Price of any Option may not be decreased to below the par
value, if any, of the Shares.
(c) Awards Not to Exceed Shares Available.
The number of Shares subject to Awards which have been granted under
this Plan at any time during the Plan's term shall not, in the aggregate at any
time, exceed the number of Shares authorized for issuance under the Plan. The
number of Shares subject to a Stock Appreciation Right that is settled in cash
shall count as Shares issued under the Plan and shall not again be available for
grant or issuance under the Plan. The number of Shares subject to an Award
which expires, is canceled, is forfeited or is terminated for any reason, shall
again be available for issuance under the Plan.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) Eligibility for Incentive Stock Options.
(i) Subject to Section 7(a)(ii), Incentive Stock Options may be
granted only to Employees (irrespective of whether an Employee is also a
Director). Advisors, consultants and Directors who are not also Employees are
not eligible to be awarded Incentive Stock Options.
(ii) Any Employee who is a Ten Percent Stockholder is eligible to be
granted an Incentive Stock Option only if: (A) the Exercise Price of each Share
subject to such Incentive Stock Option, when granted, is equal to or exceeds
110% of the Fair Market Value of a Share; and (B) the term of the Incentive
Stock Option does not exceed five years.
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(b) Stock Option Award Agreements.
Each Option shall be evidenced by a written Award Agreement which
shall set forth the terms and conditions pertaining to such Option, provided
that all such terms shall be subject to and consistent with this Plan.
(c) Number of Shares Covered by an Option.
Each Option Award Agreement shall state the number of Shares for which
the Option is exercisable, subject to adjustment of such Shares pursuant to
Section 10.
(d) Exercise of Options.
Only a Participant may exercise an Option, and the Participant may
exercise an Option only on or after the date on which the Option Vests, as
provided in Section 7(e) below, and only on or before the date on which the term
of the Option expires, as provided in Section 7(f) below.
(e) Vesting of Options.
Each Award Agreement shall include a Vesting schedule describing the
date, event or act upon which an Option shall Vest, in whole or in part, with
respect to all or a specified portion of the Shares covered by such Option. The
condition shall not impose upon the Corporation any obligation to retain the
Participant in its employ for any period.
(f) Term and Expiration of Options.
Subject to Section 7(q), except as otherwise specifically provided in
a Participant's Award Agreement, the term of an Option shall expire on the first
to occur of the following events:
(i) The tenth anniversary of the date the Option was granted
(substituting "fifth anniversary" for "tenth anniversary" for an Incentive Stock
Option granted to a Ten Percent Stockholder);
(ii) The date determined under Section 7(j)(ii) for a Participant who
ceases to be an Employee, Director, advisor, or consultant of the Corporation
for any reason, other than by reason of death, Total and Permanent Disability or
For Cause;
(iii) The date determined under Section 7(k) for a Participant who
ceases to be an Employee, Director, advisor or consultant of the Corporation by
reason of the Participant's death;
(iv) The date determined under Section 7(l) for a Participant who
ceases to be an Employee or Director of the Corporation by reason of the
Participant's Total and Permanent Disability;
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<PAGE>
(v) The date determined under Section 7(m) for a Participant who
ceases to be an Employee, Director, advisor or consultant For Cause;
(vi) On the effective date of a transaction described in Section
10(b); or
(vii) The expiration date specified in the Award Agreement pertaining
to the Option.
(g) Exercise Price.
Each Award Agreement shall state the Exercise Price for the Shares to
which the Option pertains, subject to the following conditions:
(i) The Exercise Price of an Incentive Stock Option shall not be less
than 100% of the Fair Market Value of the Shares on the date the Option is
granted (substituting "110%" for "100%" for any Incentive Stock Option granted
to a Ten Percent Stockholder); and
(ii) Notwithstanding Section 7(g)(i) above, the Exercise Price of an
Option may not be below the par value, if any, of the Shares.
(h) Medium and Time of Payment of Purchase Price.
A Participant may exercise an Option by delivering notice to the
Corporation. A Participant exercising an Option shall pay the Purchase Price
for the Shares to which such exercise pertains in full in cash (in U.S. dollars)
as a condition of such exercise, unless the Committee in its discretion allows
the Participant to pay the Purchase Price in a manner allowed under Section 14,
so long as the sum of cash so paid and such other consideration equals the
Purchase Price. The sequential exercise of an Option through Pyramiding is
specifically allowable under the Plan, subject to the consent of the Committee,
in its discretion. The granting of Reload Options is also allowable under the
Plan, subject to the consent of the Committee, in its discretion.
(i) Nontransferability of Options.
An Option granted to a Participant shall, during the lifetime of the
Participant, be exercisable only by the Participant and shall not be assignable
or transferable. In the event of the Participant's death, an Option is
transferable by the Participant only by will or the laws of descent and
distribution.
(j) Termination of Employee, Director, Advisor or Consultant Status for Any
Reason Other Than Death, Total and Permanent Disability or For Cause.
(i) For purposes of this Section 7(j), Employee, Director, advisor or
consultant status will be treated as continuing intact while the Participant is
an Employee, Director, advisor or consultant or is on military leave, sick leave
or other bona fide leave of absence, as determined by the Committee, in its
discretion in accordance with Sections 2(j) or 4(c)(xi). The preceding sentence
notwithstanding, for determinations pertaining to Incentive
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<PAGE>
Stock Options, Employee status shall be deemed to terminate on the date that a
Participant is no longer eligible to receive an Incentive Stock Option pursuant
to Section 7(a).
(ii) If a Participant ceases to be an Employee, Director, advisor or
consultant for any reason other than death, Total and Permanent Disability or
For Cause, then: (A) the Participant's Options which are not Vested at the time
that the Participant ceases to be an Employee, Director, advisor or consultant
shall be forfeited; and (B) the Participant's Options which are Vested at the
time the Participant ceases to be an Employee, Director, advisor or consultant
shall expire at 12:00 Midnight on the 30th day following the date that the
Participant ceases to be an Employee, Director, advisor or consultant (but not
beyond the date that the term of the Option would earlier have expired pursuant
to Section 7(f)), subject to the following:
(A) Pursuant to Section 4(c)(iii), the Committee may provide in a
Director's Award Agreement that a longer specified period may be substituted for
the thirty-day period described above;
(B) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the thirty-day expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Options shall expire at
12:00 Midnight on the last day of such extension; and
(C) Any unexercised Incentive Stock Option shall in any event expire
at 12:00 Midnight on the three month anniversary of the date the Participant
ceases to be an Employee.
(k) Death of Participant.
If a Participant dies while an Employee, Director, advisor or
consultant, any Option granted to the Participant may be exercised, to the
extent it was Vested on the date of the Participant's death or became Vested as
a result of the Participant's death, at any time within six (6) months after the
Participant's death (but not beyond the date that the term of the Option would
earlier have expired pursuant to Section 7(f) had the Participant's death not
occurred), subject to the following:
(i) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the six-month expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Options shall expire at
12:00 Midnight on the last day of such extension; and
(ii) Any unexercised Incentive Stock Option shall in any event expire
at 12:00 Midnight on the one year anniversary of the Participant's death.
(l) Total and Permanent Disability of Participant.
If a Participant ceases to be an Employee or Director as a consequence
of Total and Permanent Disability, any Option granted to the Participant may be
exercised, to the extent it was Vested on the date that the Participant ceased
to be an Employee or Director or became
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Vested as a result of Participant's Total and Permanent Disability, at any time
within six (6) months after such date (but not beyond the date that the term of
the Option would earlier have expired pursuant to 7(f) had the Participant's
Total and Permanent Disability not occurred), subject to the following:
(i) Pursuant to Section 7(o), the Committee may, in its sole
discretion, grant an extension of the six-month expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that any unexercised Option shall expire at
12:00 Midnight on the last day of such extension; and
(ii) Any unexercised Incentive Stock Option shall expire at 12:00
Midnight on the one year anniversary of the date the Participant ceases to be an
Employee by reason of Total and Permanent Disability.
(m) Termination For Cause.
If a Participant ceases to be an Employee, Director, advisor or
consultant For Cause, any Vested Option granted to the Participant may be
exercised no later than 12:00 Midnight on the date such termination For Cause
occurs.
(n) Rights as a Stockholder.
A Participant shall have no rights as a stockholder of the Corporation
with respect to any Shares for which an Option is exercisable or has been
exercised until the date a stock certificate for such Shares is issued to the
Participant. No adjustment shall be made for dividends (ordinary or
extraordinary or whether in currency, securities, or other property),
distributions, or other rights for which the record date is prior to the date
such stock certificate is issued.
(o) Modification, Extension, and Renewal of Options.
Within the limitations of the Plan, the Committee may, in its
discretion, modify, extend or renew any outstanding Option or accept the
cancellation of outstanding Options for the granting of a new Option in
substitution therefore. Notwithstanding the preceding sentence, no modification
of an Option shall:
(i) Without the consent of the Participant, alter or impair any rights
or obligations under any Option previously granted or cause an Incentive Stock
Option previously granted to fail to satisfy all the conditions required to
qualify as an Incentive Stock Option; or
(ii) Exceed or otherwise violate any limitation set forth in this
Section 7.
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(p) Other Provisions.
An Award Agreement may contain such other provisions as the Committee
in its discretion deems advisable which are not inconsistent with the terms of
the Plan, including but not limited to:
(i) Restrictions on the exercise of the Option;
(ii) Submission by the Participant of such forms and documents as the
Committee may require; and/or
(iii) Procedures to facilitate the payment of the Exercise Price of
an Option under any method allowable under Section 14.
(q) No Disqualification of Incentive Stock Options.
Notwithstanding any other provision of the Plan, the Plan shall not be
interpreted, amended or altered, nor shall any discretion or authority granted
under the Plan be exercised, so as to disqualify the Plan under Section 422 of
the Code or, without the consent of the Participant affected, disqualify any
Incentive Stock Option under Section 422 of the Code (except as provided in
Section 7(r)).
(r) Limitation on Incentive Stock Options.
The aggregate Fair Market Value (determined with respect to each
Incentive Stock Option as of such Incentive Stock Option's date of grant) of all
Shares with respect to which a Participant's Incentive Stock Options become
Vested during any calendar year (under the Plan and under other incentive stock
option plans of the Corporation, if any) shall not exceed US$100,000. Any
purported Incentive Stock Options in excess of such limitation shall be
recharacterized as Non-qualified Stock Options.
8. STOCK APPRECIATION RIGHTS.
(a) Stock Appreciation Right Award Agreements.
Each Stock Appreciation Right shall be evidenced by a written Award
Agreement which shall set forth the terms and conditions pertaining to such
Stock Appreciation Right, provided that all such terms shall be subject to and
consistent with this Plan.
(b) Number of Shares Covered by a Stock Appreciation Right.
Each Stock Appreciation Right Award Agreement shall state the number
of Shares to which it pertains and the Exercise Price which is the basis for
determining future appreciation, subject to adjustment pursuant to Section 10.
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(c) Stock Appreciation Rights Issued and Exercised Without Payment of
Consideration.
A Stock Appreciation Right shall be issued to and exercised by a
Participant without payment by the Participant of any consideration.
(d) Exercise of Stock Appreciation Rights.
Only a Participant may exercise a Stock Appreciation Right, and the
Participant may exercise a Stock Appreciation Right only on or after the date on
which the Stock Appreciation Right vests, as provided in Section 8(e), below,
and only on or before the date on which the Stock Appreciation Right expires, as
provided in Section 8(f) below.
(e) Vesting of Stock Appreciation Rights.
Each Award Agreement shall include a Vesting schedule describing the
date, event or act upon which the Stock Appreciation Right to which it pertains
Vests, in whole or in part. This condition shall not impose upon the
Corporation any obligation to retain the Participant in its employ for any
period.
(f) Term and Expiration of Stock Appreciation Rights.
Except as otherwise specifically provided in a Participant's Award
Agreement, the term of a Stock Appreciation Right shall expire on the first to
occur of the following events:
(i) The tenth anniversary of the date the Right was granted;
(ii) The date determined under Section 8(i)(ii) for a Participant who
ceases to be an Employee, Director, advisor or consultant for any reason, other
than by reason of death, Total and Permanent Disability or For Cause;
(iii) The date determined under Section 8(j) for a Participant who
ceases to be an Employee, Director, advisor or consultant of the Corporation by
reason of the Participant's death;
(iv) The date determined under Section 8(k) for a Participant who
ceases to be an Employee or Director of the Corporation by reason of the
Participant's Total and Permanent Disability;
(v) The date determined under Section 8(l) for a Participant who
ceases to be an Employee, Director, advisor or consultant For Cause;
(vi) On the effective date of a transaction described in Section
10(b); or
(vii) The expiration date specified in the Award Agreement pertaining
to the Stock Appreciation Right.
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(g) Exercise and Settlement of a Stock Appreciation Right.
A Participant may exercise a Vested Stock Appreciation Right by
delivering notice to the Corporation. The Stock Appreciation Right may be
settled in the form of cash (either in a lump sum payment or in installments),
whole Shares, or a combination thereof, as the Award Agreement prescribes.
(h) Nontransferability of Stock Appreciation Rights.
A Stock Appreciation Right granted to a Participant shall, during the
lifetime of the Participant, be exercisable only by the Participant and shall
not be assignable or transferable. In the event of the Participant's death, a
Stock Appreciation Right is transferable by the Participant only by will or the
laws of descent and distribution.
(i) Termination of Employee, Director, Advisor or Consultant Status for any
Reason Other Than Death, Total and Permanent Disability or For Cause.
(i) For purposes if this Section 8(i)(i), Employee, Director, advisor
or consultant status will be treated as continuing intact while the Participant
is an Employee, Director, advisor or consultant or is on military leave, sick
leave or other bona fide leave of absence, as determined by the Committee, in
its discretion in accordance with Sections 2(j) or 4(c)(xi).
(ii) If a Participant ceases to be an Employee, Director, advisor or
consultant for any reason other than death, Total and Permanent Disability or
For Cause, then: (A) the Participant's Stock Appreciation Rights which are not
Vested at the time that the Participant ceases to be an Employee, Director,
advisor or consultant shall be forfeited; and (B) the Participant's Stock
Appreciation Rights which are Vested at the time the Participant ceases to be an
Employee, Director, advisor or consultant shall expire at 12:00 Midnight on the
30th day following the date that the Participant ceases to be an Employee,
Director, advisor or consultant (but not beyond the date that the term of the
Stock Appreciation Right would earlier have expired pursuant to Section 8(f),
subject to the following:
(A) Pursuant to Section 4(c)(iii), the Committee may provide in a
Director's Award Agreement that a longer specified period may be substituted for
the thirty-day period described above; and
(B) Pursuant to Section 8(n), the Committee may, in its sole
discretion, grant an extension of the thirty-day expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Stock Appreciation Rights
shall expire at 12:00 Midnight on the last day of such extension.
(j) Death of Participant.
If a Participant dies while an Employee, Director, advisor or
consultant, any Stock Appreciation Right granted to the Participant may be
exercised, to the extent it was Vested on the
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date of the Participant's death or became Vested as a consequence of the
Participant's death, at any time within six (6) months after the Participant's
death (but not beyond the date that the term of the Stock Appreciation Right
would earlier have expired pursuant to Section 8(f) had the Participant's death
not occurred), provided that pursuant to Section 8(n), the Committee may, in its
sole discretion, grant an extension of the six-month expiration period described
above in order to favor a Participant, provided that such extension shall be
made in writing and shall provide that all unexercised Stock Appreciation Rights
shall expire at 12:00 Midnight on the last day of such extension.
(k) Total and Permanent Disability of Participant.
If a Participant ceases to be an Employee or Director as a consequence
of Total and Permanent Disability, any Stock Appreciation Right granted to the
Participant may be exercised, to the extent it was Vested on the date that the
Participant ceased to be an Employee or Director or became Vested as a
consequence of the Participant's Total and Permanent Disability, at any time
within six (6) months after such date (but not beyond the date that the term of
the Stock Appreciation Right would earlier have expired pursuant to 8(f) had the
Participant's Total and Permanent Disability not occurred), provided that
pursuant to Section 8(n), the Committee may, in its sole discretion, grant an
extension of the six-month expiration period described above in order to favor a
Participant, provided that such extension shall be made in writing and shall
provide that any unexercised Option shall expire at 12:00 Midnight on the last
day of such extension.
(l) Termination For Cause.
If a Participant ceases to be an Employee, Director, advisor or
consultant For Cause, any Vested Stock Appreciation Right granted to the
Participant may be exercised no later than 12:00 Midnight on the date such
termination For Cause occurs.
(m) Rights as a Stockholder.
A Participant shall have no rights as a shareholder of the Corporation
with respect to any Shares to which a Stock Appreciation Right pertains, except
for Stock Appreciation Rights settled in Shares and then not until the date a
stock certificate for such Shares is issued to the Participant. No adjustment
shall be made for dividends (ordinary or extraordinary or whether in currency,
securities, or other property), distributions, or other rights for which the
record date is prior to the date such stock certificate is issued.
(n) Modification, Extension, and Renewal of Stock Appreciation Rights.
Within the limitations of the Plan, the Committee may, in its
discretion, modify, extend or renew any outstanding Stock Appreciation Right or
accept the cancellation of an outstanding Stock Appreciation Right for the
granting of a new Stock Appreciation Right in substitution therefore.
Notwithstanding the preceding sentence, no modification of a Stock Appreciation
Right shall, without the consent of the Participant, alter or impair any rights
or obligations under any Stock Appreciation Right previously granted.
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(o) Other Provisions.
An Award Agreement may contain such other provisions as the Committee
in its discretion deems advisable which are not inconsistent with the terms of
the Plan, including but not limited to:
(i) Restrictions on the exercise of the Stock Appreciation Right;
and/or
(ii) Submission by the Participant of such forms and documents as the
Committee may require.
9. TERM OF PLAN.
Awards may be granted pursuant to the Plan through the period ending
on November 13, 2005. All Awards which are outstanding on such date shall
remain in effect until they are exercised or expire by their terms. The Plan
shall expire for all purposes on November 13, 2015. The Board is authorized to
extend the Plan for an additional term at any time; however, no Incentive Stock
Options may be granted under the Plan during a term resulting from such
extension unless the extension is approved by the stockholders of the
Corporation within one year of such extension.
10. RECAPITALIZATION, DISSOLUTION, AND CHANGE OF CONTROL.
(a) Recapitalization.
Notwithstanding any other provision of the Plan to the contrary, but
subject to any required action by the stockholders of the Corporation and
compliance with any applicable securities laws, the Committee shall make any
adjustments to the class and/or number of Shares covered by the Plan, the number
of Shares for which each outstanding Award pertains, the Exercise Price of an
Option, the Exercise Price of a Stock Appreciation Right, and/or any other
aspect of this Plan to prevent the dilution or enlargement of the rights of
Participants under this Plan in connection with any increase or decrease in the
number of issued Shares resulting from the payment of a Common Stock dividend,
stock split, reverse stock split, recapitalization, combination, or
reclassification or any other event which results in an increase or decrease in
the number of issued Shares without receipt of adequate consideration by the
Corporation (as determined by the Committee).
(b) Dissolution, Merger, Consolidation, or Sale or Lease of Assets.
Upon the (i) dissolution or liquidation of the Corporation, (ii)
merger of consolidation of the Corporation with another corporation or other
entity pursuant to which the Corporation is not the surviving entity, (iii) sale
or lease of all or substantially all the business assets of the Corporation, or
(iv) the sale of more than 80% of the outstanding Common Stock of the
Corporation, unless the surviving or acquiring corporation or entity agrees to
assume outstanding Awards, each Award granted hereunder shall expire as of the
effective date of such transaction; provided, however, that the Committee may,
in its discretion, give written notice of such event to any Participant who
shall then have the right to exercise his or her Vested Awards
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prior to the effective date of such transaction, subject to earlier expiration
pursuant to Sections 7 or 8 (as applicable).
(c) Determination by the Committee.
All adjustments described in this Section 10 shall be made by the
Committee in its discretion, and such determination shall be conclusive and
binding on all persons.
(d) Limitation on Rights of Participants.
Except as expressly provided in this Section 10, no Participant shall
have any rights by reason of any reorganization, dissolution, change of control,
merger or acquisition. Any issuance by the Corporation of Awards shall not
affect, and no adjustment by reason thereof shall be made with respect to, any
Awards previously issued under the Plan.
(e) No Limitation on Rights of Corporation.
The grant of an Award pursuant to the Plan shall not affect in any way
the right or power of the Corporation to make adjustments, reclassifications,
reorganizations, or changes of its capital or business structure, or to merge or
consolidate, or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
11. SECURITIES LAW REQUIREMENTS.
(a) Legality of Issuance.
No Share shall be issued upon the exercise of any Award unless and
until the Committee has determined that:
(i) The Corporation and the Participant have taken all actions
required to register the Shares under the Securities Act of 1933, as amended
(the "Act"), or to perfect an exemption from registration requirements of the
Act, or to determine that the registration requirements of the Act do not apply
to such exercise;
(ii) Any applicable listing requirement of any stock exchange on which
the Share is listed has been satisfied; and
(iii) Any other applicable provision of state, federal or foreign law
has been satisfied.
(b) Restrictions on Transfer; Representations of Participant; Legends.
Regardless of whether the offering and sale of Shares under the Plan
have been registered under the Act or have been registered or qualified under
the securities laws of any state, the Corporation may impose restrictions upon
the sale, pledge, or other transfer of such Shares (including the placement of
appropriate legends on stock certificates) if, in the judgment of the
Corporation and its counsel, such restrictions are necessary or desirable to
achieve
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compliance with the provisions of the Act, the securities laws of any state, or
any other law. If the offering and/or sale of Shares under the Plan is not
registered under the Act and the Corporation determines that the registration
requirements of the Act apply but an exemption is available which requires an
investment representation or other representation, the Participant shall be
required, as a condition to acquiring such Shares, to represent that such Shares
are being acquired for investment, and not with a view to the sale or
distribution thereof, except in compliance with the Act, and to make such other
representations as are deemed necessary or appropriate by the Corporation and
its counsel. Stock certificates evidencing Shares acquired pursuant to an
unregistered transaction to which the Act applies shall bear a restrictive
legend substantially in the following form and such other restrictive legends as
are required or deemed advisable under the Plan or the provisions of any
applicable law:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
("ACT"). THEY MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE UNLESS A
REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN
THE OPINION OF COUNSEL FOR THE ISSUER EITHER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT OR THE
REGISTRATION PROVISIONS OF THE ACT DO NOT APPLY TO SUCH PROPOSED TRANSFER.
Any determination by the Corporation and its counsel in connection with any of
the matters set forth in this Section 11 shall be conclusive and binding on all
persons.
(c) Registration or Qualification of Securities.
The Corporation may, but shall not be obligated to, register or
qualify the offering or sale of Shares under the Act or any other applicable
law.
(d) Exchange of Certificates.
If, in the opinion of the Corporation and its counsel, any legend
placed on a stock certificate representing Shares issued pursuant to the Plan is
no longer required, the Participant or the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
12. EXERCISE OF UNVESTED OPTIONS.
(a) Purpose of Section 12.
This Section 12 is intended to apply for the benefit of a Participant
prior to the time Shares held by the Participant are freely transferable under
applicable federal and state securities laws without the Participant holding the
Shares for a minimum period of time (such as the holding period requirement of
Rule 144 adopted by the Securities and Exchange Commission under the Act). It
provides that a Participant with a non-Vested Award may commence this holding
period for the Shares subject to the Award by exercising the non-Vested Award
and receiving Shares of restricted stock which will Vest on the same date as the
Award would have
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Vested. Any restricted stock issued under this Section 12 for non-vested Awards
which expire pursuant to Section 7 or Section 8, as applicable, shall be
reconveyed to the Corporation at the Exercise Price, if any, paid by the
Participant to the Corporation to acquire such Shares (in cash and/or in Shares
as paid by the Participant), subject, however, to complying with any legal
requirement relating to the Corporation's ability to repurchase its own
securities. In this way, the Participant is able to begin the holding period for
the Shares prior to the date the Award would have Vested.
(b) Exercise of Unvested Awards and Issuance of Restricted Stock.
The Committee, in its sole discretion may:
(i) Grant any Participant the right to exercise any Award prior to the
Vesting of such Award, provided that the Shares issued upon such exercise shall
remain subject to Vesting, as restricted stock, at the same rate as under the
Award so exercised; and/or
(ii) Require the Corporation and the Participant to establish an
escrow arrangement to facilitate the re-transfer to the Corporation of any
Shares of restricted stock which are not Vested and are to be reconveyed, on or
before the applicable date described in Section 7 or 8, as applicable, for
determining the expiration of the Award pursuant to which such Shares were
issued under this Section 12.
13. AMENDMENT OF THE PLAN.
The Committee may, from time to time, terminate, suspend or discontinue the
Plan, in whole or in part, or revise or amend it in any respect whatsoever
including, but not limited to, the adoption of any amendment deemed necessary or
advisable to qualify the Awards under rules and regulations promulgated by the
Securities and Exchange Commission with respect to Employees who are subject to
the provisions of Section 16 of the Exchange Act, or to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any Award
granted under the Plan, with or without approval of the stockholders of the
Corporation, but if any such action is taken without the approval of the
Corporation's stockholders, no such revision or amendment shall:
(a) Increase the number of Shares subject to the Plan, other than any
increase pursuant to Section 10;
(b) Change the designation of the class of persons eligible to receive
Incentive Stock Options; or
(c) Amend this Section 13 to defeat its purpose.
No amendment, termination or modification of the Plan shall, without the consent
of a Participant, adversely affect the Participant with respect to any Award
previously granted to the Participant.
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14. PAYMENT FOR SHARE PURCHASES.
Payment of the Purchase Price for any Shares purchased pursuant to the Plan
may be made in cash (in U.S. dollars) or, where expressly approved for the
Participant by the Committee, in its discretion, and where permitted by law:
(a) By check;
(b) By cancellation of indebtedness of the Corporation to the Participant;
(c) By surrender of Shares that either: (A) have been owned by Participant
for more than six months (unless the Committee permits a Participant to exercise
an Option by Pyramiding, in which event the six months holding period shall not
apply) and have been "paid for" within the meaning of SEC Rule 144 (and, if such
shares were purchased from the Corporation by use of a promissory note, such
note has been fully paid with respect to such Shares); or (B) were obtained by
Participant in the public market;
(d) By tender of a full recourse promissory note having such terms as may
be approved by the Committee and bearing interest at a rate sufficient to avoid
imputation of income under Sections 483 and 1274 of the Code; provided, however,
that Participants who are not Employees shall not be entitled to purchase Shares
with a promissory note unless the note is adequately secured by collateral other
than the Shares; provided, further, that the portion of the Purchase Price equal
to the par value of the Shares, if any, must be paid in cash if required by
state law;
(e) By waiver of compensation due or accrued to Participant for services
rendered;
(f) With respect only to purchases upon exercise of an Option, and provided
that a public market for the Corporation's stock exists:
(i) Through a "same day sale" commitment from the Participant and a
broker-dealer that is a member of the National Association of Securities Dealers
(an "NASD Dealer") whereby the Participant irrevocably elects to exercise the
Option and to sell a portion of the Shares so purchased to pay for the Exercise
Price, and whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Corporation; or
(ii) Through a "margin" commitment from the Participant and an NASD
Dealer whereby the Participant irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Corporation; or
(iii) By any combination of the foregoing.
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15. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Common Stock
pursuant to the exercise of an Option shall be used for general corporate
purposes.
16. APPROVAL OF SHAREHOLDERS.
The Plan shall be subject to approval by the affirmative vote of the
holders of a majority of the outstanding shares present and entitled to vote at
the first annual meeting of shareholders of the Corporation following the
adoption of the Plan by the Board, and in no event later than
November 13, 1996. Prior to such approval, Options and/or Stock Appreciation
Rights may be granted but may not be exercised or settled. Pursuant to Section
13, certain amendments shall also be subject to approval by the Corporation's
shareholders.
17. WITHHOLDING OF TAXES.
(a) General.
Whenever Shares are to be issued under the Plan, the Corporation may
require the Participant to remit to the Corporation an amount sufficient to
satisfy foreign, federal, state and local withholding tax requirements prior to
the delivery of any certificate or certificates for such Shares. Whenever,
under the Plan, payments in satisfaction of Stock Appreciation Rights are to be
made in cash, such payment shall be net of an amount sufficient to satisfy
foreign, federal, state, and local withholding tax requirements.
(b) Stock Withholding.
When, under applicable tax laws, a Participant incurs tax liability in
connection with the exercise of any Option or the exercise of a Stock
Appreciation Right that is settled in Shares that is subject to tax withholding
and the Participant is obligated to pay the Corporation the amount required to
be withheld, the Committee may at its sole discretion allow the Participant to
satisfy the minimum withholding tax obligation by electing to have the
Corporation withhold from the Shares to be issued the specific number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date"). All elections by a Participant to have Shares withheld for
this purpose shall be made in writing in a form acceptable to the Committee and
shall be subject to the following restrictions:
(i) The election must be made on or prior to the applicable Tax Date;
(ii) Once made, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election is made;
(iii) All elections shall be subject to the consent or disapproval of
the Committee; and
(iv) In the event that the Tax Date is deferred until six months after
the delivery of Shares under Section 83(b) of the Code, the Participant shall
receive the full number of Shares with respect to which the exercise occurs, but
(A) such Participant shall be
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unconditionally obligated to tender back to the Corporation the proper number of
Shares on the Tax Date, and (B) the Committee may require the Corporation and
the Participant to establish an escrow arrangement to facilitate the re-transfer
of such re-tendered Shares to the Corporation.
18. RIGHTS AS AN EMPLOYEE, DIRECTOR, ADVISOR OR CONSULTANT.
The Plan shall not be construed to give any individual the right to remain
in the employ of the Corporation (or a Subsidiary) or to affect the right of the
Corporation (or such Subsidiary) to terminate such individual's status as an
Employee, Director, advisor or consultant at any time, with or without cause.
The grant of an Award shall not entitle the Participant to, or disqualify the
Participant from, participation in the grant of any other Award under the Plan
or participation in any other plan maintained by the Corporation.
19. INSPECTION OF RECORDS.
Copies of the Plan, records reflecting each Participant's Awards and any
other documents and records which a Participant is entitled by law to inspect
shall be open to inspection by the Participant and his or her duly authorized
representative at the office of the Corporation at any reasonable business hour
upon reasonable advance notice from the Participant.
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CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
SUB-PLAN FOR UNITED KINGDOM PARTICIPANTS
(EFFECTIVE NOVEMBER 14, 1995)
(AMENDED AND RESTATED AS OF JULY 15, 1998)
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CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
SUB-PLAN FOR UNITED KINGDOM PARTICIPANTS
1. PURPOSE.
This Sub-Plan for United Kingdom Participants (the "United Kingdom Sub-
Plan") is established under the CanArgo Energy Corporation 1995 Long-Term
Incentive Plan (the "Plan"). This Sub-Plan sets forth special terms and
restrictions which apply to all Stock Options granted to a covered Participant
who, on the date the Award is granted, is a "United Kingdom Participant," as
defined as in Section 2(a) of this Sub-Plan. The Corporation has adopted this
Sub-Plan to provide United Kingdom Participants an opportunity to be granted
Stock Option(s) under the Plan which qualify for favorable tax treatment under
current Inland Revenue provisions.
All Stock Options granted pursuant to this Sub-Plan shall be subject to the
terms and conditions provided in the Plan and in this Sub-Plan; provided,
however that except as otherwise specifically provided or as the context
otherwise requires, the terms and conditions of this Sub-Plan shall govern in
the event of a conflict with the terms and conditions of the Plan.
2. DEFINITIONS.
Capitalized terms shall have the meanings set forth in Section 2 of the
Plan, and the following additional terms shall have the meanings specified
below:
(a) "United Kingdom Participant" shall mean a Participant who, on the date
a Stock Option is granted to the Participant, is domiciled in the United
Kingdom, is subject to taxation under Inland Revenue provisions as an "employee
resident" or an "ordinarily resident" individual, as such terms are defined for
Inland Revenue purposes, and elects to be covered by this Sub-Plan with respect
to such Stock Option.
(b) "United Kingdom Sub-Plan" shall mean this Sub-Plan covering Awards
granted to United Kingdom Participants, as amended.
3. EFFECTIVE DATE.
This United Kingdom Sub-Plan was adopted by the Board effective November
14, 1995, as part of and subject to the terms of the Plan.
4. ADMINISTRATION.
This United Kingdom Sub-Plan shall be administered in accordance with
Section 4 of the Plan.
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5. COVERAGE OF THE UNITED KINGDOM SUB-PLAN.
The terms and conditions of this United Kingdom Sub-Plan shall apply only
to United Kingdom Participants who consent in writing to such coverage. A
United Kingdom Participant shall provide such written consent in the Award
Agreement issued with respect to the Award governed by this Sub-Plan, and such
consent shall be irrevocable with respect to such Award, except as specifically
authorized by the Committee in its discretion.
6. MAXIMUM TERM FOR STOCK OPTIONS.
All Stock Options which are granted to the United Kingdom Participants and
which are covered by this Sub-Plan shall have a maximum term which in no event
exceeds seven years from the date of the grant of such Stock Options. This
restriction shall be set forth in the Award Agreements issued with respect to
such Stock Options.
7. AMENDMENTS.
The Committee may amend the terms of this United Kingdom Sub-Plan at such
time or times as it deems advisable. If the Committee determines that any
amendment may be applied retroactively or prospectively to an outstanding Stock
Option subject to the terms of this Sub-Plan, the Committee shall first obtain
the written consent of a United Kingdom Participant prior to applying such
amendment to a Stock Option previously issued to such Participant.
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CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
AUTOMATIC GRANT SUB-PLAN FOR OUTSIDE DIRECTORS
(EFFECTIVE NOVEMBER 14, 1995)
(AMENDED AND RESTATED AS OF JULY 15, 1998)
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CANARGO ENERGY CORPORATION
1995 LONG-TERM INCENTIVE PLAN
AUTOMATIC GRANT SUB-PLAN FOR OUTSIDE DIRECTORS
1. PURPOSE.
This Automatic Grant Sub-Plan for Outside Directors (the "Outside Directors
Sub-Plan") is established under the CanArgo Energy Corporation 1995 Long-Term
Incentive Plan (the "Plan") to provide each non-Employee Director of the
Corporation (an "Outside Director") an opportunity to be granted Non-qualified
Stock Options under the Plan. The Corporation has adopted this Sub-Plan to
attract and retain qualified Outside Directors and to motivate Outside Directors
to increase the Corporation's value.
All Non-qualified Stock Options granted pursuant to this Sub-Plan shall be
subject to the terms and conditions provided in the Plan and in this Sub-Plan;
provided, however, that except as otherwise specifically provided or as the
context otherwise requires, the terms and conditions of this Sub-Plan shall
govern in the event of a conflict with the terms and conditions of the Plan.
2. DEFINITIONS.
Capitalized terms shall have the meanings set forth in Section 2 of the
Plan, and the following additional terms shall have the meanings specified
below:
(a) "Outside Director" shall mean a Director who is not an Employee of the
Corporation or any Subsidiary.
(b) "Outside Directors Sub-Plan" shall mean this Automatic Grant Sub-Plan
for Outside Directors, as amended.
3. EFFECTIVE DATE.
The Outside Directors Sub-Plan was adopted by the Board effective November
14, 1995.
4. ADMINISTRATION.
The Outside Directors Sub-Plan shall be administered by the Board in
accordance with Section 4 of the Plan.
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5. PARTICIPATION.
(a) Eligibility for Participation. Only Outside Directors shall
participate in this Sub-Plan. The Board's determination of an individual's
eligibility for participation shall be final and binding.
(b) Commencement of Participation. An Outside Director shall commence
participation in this Sub-Plan on the date elected or appointed as a Director
(or, for Outside Directors on the effective date of this Sub-Plan, the date re-
elected as a Director). A Director who is an Employee at election or
appointment and who thereafter ceases to be an Employee (thereby becoming an
Outside Director) shall commence participation in this Sub-Plan on the date the
Director is next reelected or reappointed as a Director.
(c) Termination of Participation. An Outside Director's participation in
this Sub-Plan shall terminate on the earlier of (i) the date the Outside
Director ceases to serve as a Director for any reason, or (ii) on the date the
Outside Director becomes an Employee.
6. AUTOMATIC GRANT OF NON-QUALIFIED STOCK OPTIONS TO OUTSIDE DIRECTORS.
(a) Automatic Grant of Non-qualified Stock Options.
Non-qualified Stock Options shall be granted to Outside Directors on
such date(s) and in such amounts as specified in Section 6(b), at an Exercise
Price determined pursuant to Section 6(c), and subject to such terms as set
forth in Section 6(d).
(b) Dates of Grant and Number of Options Granted.
(i) Three thousand seven hundred fifty (3,750) Non-qualified Stock
Options shall be granted to each Outside Director on the date the Outside
Director is first elected or appointed to the Board (or the date re-elected to
the Board with respect to those Directors who are Outside Directors on the
effective date of this Sub-Plan);
(ii) Thereafter, three thousand seven hundred fifty (3,750) Non-
qualified Stock Options shall be granted to each Outside Director on the date of
each meeting of the shareholders of the Corporation at which such Outside
Director is elected or re-elected, with such grant to be effective immediately
following the adjournment of such meeting; and
(iii) An additional three thousand seven hundred fifty (3,750) Non-
qualified Stock Options shall be granted to an Outside Director on the day after
the annual meeting of shareholders (or special meeting in lieu of an annual
meeting at which all directors are elected) of the Corporation if on such date
he or she is (y) then serving as Chairman of the Board or (z) then serving as
Vice Chairman of the Board and the Chairman of the Board is an Employee.
Provided, however, that no Outside Director shall receive more than one
grant pursuant to each of clause (ii) and (iii) in any fiscal year and, provided
further, that if in any fiscal year the Corporation does not hold a meeting of
shareholders which results in the grant of the Options provided for in clauses
(ii) and (iii), then the Options provided for by each of clause (ii) and (iii)
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shall be granted on the last day of such fiscal year to the Outside Directors
then serving in the applicable capacities as of such date.
(c) Exercise Price.
The Exercise Price of each Non-qualified Stock Option granted pursuant
to this Sub-Plan shall be equal to 100% of the Fair Market Value of the Shares
on the date the Option is granted.
(d) Term and Vesting of the Non-qualified Stock Options.
Each Non-qualified Stock Option granted pursuant to this Sub-Plan
shall be governed by the following terms:
(i) The term of each Option shall expire on the first to occur of (A)
the third anniversary of the date the Option was granted, or (B) the first
anniversary of the date the Outside Director ceased to serve as a Director for
any reason;
(ii) Each Option shall become one hundred percent (100%) vested on the
six month anniversary of the date the Option was granted; and
(iii) An Outside Director may exercise a Vested Non-qualified Stock
Option at any time but not beyond the date that the term of the Option expires
as provided above.
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Exhibit 10(27)
AMENDED AND RESTATED
CANARGO ENERGY INC. STOCK OPTION PLAN
ARTICLE 1
PURPOSE OF PLAN
1.1 The purpose of the Plan is to assist employees and consultants of the
Corporation and its Subsidiaries to participate in the growth and
development of the Corporation and its Subsidiaries by providing such
persons with the opportunity, through share options, to acquire an
increased proprietary interest in the Corporation.
ARTICLE 2
DEFINED TERMS
Where used herein, the following terms shall have the following
meanings, respectively:
2.1 "Board" means the board of directors of the Corporation;
2.2 "Business Day" means any day, other than a Saturday or a Sunday, on
which the Nasdaq National Market is open for trading;
2.3 "Compensation Committee" shall have the meaning attributed thereto in
Article 3 hereof and shall refer to the Board if the Plan is then
being administered by the Board rather than by the Compensation
Committee;
2.4 "Corporation" means CanArgo Energy Corporation, a Delaware
corporation, and includes any successor corporation thereto;
2.5 "Eligible Person" means a full-time employee or consultant who
provides bona fide services not in connection with any sale of
securities or capital-raising transaction of the Corporation or any
Subsidiary (including a director of any Subsidiary) who is not an
officer or director of the Corporation;
2.6 "Market Price" at any date in respect of Shares shall be the closing
price of such Shares on the Nasdaq National Market System (or, if such
shares are not then listed and posted for trading on the Nasdaq
National Market System, on such stock exchange or formal quotation
system on which such Shares are listed and posted for trading as may
be selected for such purpose by the Compensation Committee) on the
last Business Day preceding the date on which the Option is approved
by the Compensation Committee. In the event that such Shares did not
trade on such Business Day, the Market Price shall be the average of
the bid and ask prices in respect of such Shares at the close of
trading on such date. In the event that such Shares are not listed and
posted for trading on any stock exchange or formal quotation system,
the Market Price in respect thereof shall be the fair
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market value of such Shares as determined by the Compensation
Committee in its sole discretion;
2.7 "Option" means an option to purchase Shares granted under the Plan;
2.8 "Option Price" means the price per share at which Shares may be
purchased under the Option, as the same may be adjusted from time to
time in accordance with Article 7 hereof;
2.9 "Optionee" means a person to whom an Option has been granted;
2.10 "Plan" means the Amended and Restated CanArgo Energy Inc. Stock Option
Plan, as embodied herein, as the same may be amended or varied from
time to time;
2.11 "Shares" means the common stock of the Corporation, or, in the event
of an adjustment contemplated by Article 8 hereof, such other shares
or securities to which an Optionee may be entitled upon the exercise
of an Option as a result of such adjustment;
2.12 "Subsidiary" means any corporation that is a 50% or more owned
subsidiary of the Corporation.
ARTICLE 3
ADMINISTRATION OF THE PLAN
3.1 The Plan shall be administered either by the Board or by a
Compensation Committee (the "Compensation Committee") appointed by the
Board and consisting of not less than two non-employee directors of
the Board. The members of the Compensation Committee shall serve at
the pleasure of the Board and vacancies occurring in the Compensation
Committee shall be filled by the Board.
3.2 The Compensation Committee shall select one of its members as its
Chairman and shall hold its meetings at such time and place as it
shall deem advisable. A majority of the members of the Compensation
Committee shall constitute a quorum and all actions of the
Compensation Committee shall be taken by a majority of the members
present at any meeting. Any action of the Compensation Committee may
be taken by an instrument or instruments in writing signed by all the
members of the Compensation Committee, and any action so taken shall
be as effective as if it had been passed by a majority of the votes
cast by the members of the Compensation Committee present at a meeting
of such member, duly called and held.
3.3 The Compensation Committee shall have the power, where consistent with
the general purpose and intent of the Plan and subject to the specific
provisions of the Plan:
(a) to establish policies and to adopt rules and regulations for
carrying out the purposes, provisions and administration of the
Plan;
(b) to interpret and construe the Plan and to determine all questions
arising out of the Plan and any Option granted pursuant to the
Plan, and any such interpretation,
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construction or termination made by the Compensation Committee shall
be final, binding and conclusive for all purposes;
(c) to determine to which Eligible Persons Options are to be granted and
to grant such Options;
(d) to determine the number of Shares covered by each Option;
(e) to determine the Option Price;
(f) to determine the time or times when Options will be granted and
exercisable;
(g) to determine if the Shares that are subject to an Option will be
subject to any restrictions upon the exercise of such Option;
(h) with the consent of the Optionee, to reprice, cancel and reissue, or
otherwise amend the terms of an outstanding Option;
(i) to prescribe the form of the instrument relating to the grant,
exercise and other terms of Options; and
(j) to make all other determinations deemed necessary or advisable for the
administration of the Plan.
ARTICLE 4
SHARES SUBJECT TO PLAN
4.1 Options may be granted in respect of authorized and unissued Shares,
provided that the aggregate number of Shares reserved for issuance under
this Plan, subject to adjustment or increase of such number pursuant to the
provisions of Article 8 hereof, is 988,000. Shares in respect of which
Options are not exercised shall be available for subsequent Options under
the Plan. No fractional shares may be purchased or issued under the Plan.
ARTICLE 5
ELIGIBILITY, GRANT AND TERMS OF OPTIONS
5.1 Options may be granted only to Eliglble Persons.
5.2 Subject to the terms of the Plan, the number of Shares subject to each
Option, the Option Price, the expiration date of each Option, the extent to
which each option is exercisable from time to time during the term of the
Option and other terms and conditions relating to each such Option shall be
determined by the Compensation Committee.
5.3 The Option Price on Shares that are the subject of any Option shall in no
circumstances be lower than the Market Price of the Shares at the date of
the grant of the Option.
5.4 In no event may the term of an Option exceed ten years from the date of the
grant of the Option.
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5.5 During his lifetime, an Option is personal to the Optionee and is non-
asssignable. In the event of an Optionee's death, an Option is
transferable only by will or the laws of descent and distribution.
ARTICLE 6
TERMINATION OF EMPLOYMENT; DEATH
6.1 Subject to any express resolution passed by the Compensation Committee with
respect to an Option, an Option, and all rights to purchase Shares pursuant
thereto, shall expire and terminate immediately upon the Optionee ceasing
to be an Eligible Person due to termination by the Corporation or a
Subsidiary for cause.
6.2 If, before the expiry of an Option in accordance with the terms thereof,
the Optionee ceases to be an Eligible Person for any reason whatsoever
other than termination for cause, but including termination by reason of
the death of the Optionee, such Option may, subject to the terms thereof
and any other terms of the Plan, be exercised, if the Optionee is deceased,
by the legal personal representative(s) of the estate of the Optionee, no
longer than during the first three months following the death of the
Optionee, or if he is alive, by the Optionee, no longer than within three
months of the date he ceases to be an Eligible Person (but in either case
prior to the expiry of the Option in accordance with the terms thereof),
but only to the extent that the Optionee was entitled to exercise such
Option at the date he ceases to be an Eligible Person.
6.3 Options shall not be affected by any change in the position of the Optionee
where the Optionee continues to be an Eligible Person without interruption
of service.
ARTICLE 7
EXERCISE OF OPTIONS
7.1 Subject to the provisions of the Plan, an Option may be exercised from time
to time by delivery to the Corporation at its registered office of a
written notice of exercise addressed to the Secretary of the Corporation
specifying the number of Shares with respect to which the Option is being
exercised and accompanied by payment in full of the Option Price of the
Shares to be purchased. Certificates for such Shares shall be issued and
delivered to the Optionee within a reasonable time following the receipt of
such notice and payment.
7.2 Notwithstanding any of the provisions contained in the Plan or in any
Option, the Corporation's obligation to issue Shares to an Optionee
pursuant to the exercise of an Option shall be subject to:
(a) completion of such registration or other qualification of such Shares
or obtaining approval of such governmental authority as the
Corporation shall determine to be necessary or advisable in
connection with the authorization, issuance or sale thereof;
(b) the admission of such Shares to listing on any stock exchange on which
the Shares may then be listed; and
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(c) the receipt from the Optionee of such representations, agreements and
undertakings, including as to future dealings in such Shares, as the
Corporation or its counsel determines to be necessary or advisable in
order to safeguard against the violation of the securities laws of any
jurisdiction.
In this connection the Corporation shall, to the extent necessary, take all
reasonable steps to obtain such approvals, registrations and qualifications
as may be necessary for the issuance of such Shares in compliance with
applicable securities laws and for the listing of such Shares on any stock
exchange on which the Shares are then listed.
ARTICLE 8
CERTAIN ADJUSTMENTS
8.1 Appropriate adjustments in the number of Shares subject to the Plan, and as
regards Options granted or to be granted, in the number of Shares optioned
and in the Option Price, shall be made by the Compensation Committee to
give effect to adjustments in the number of Shares of the Corporation
resulting from subdivisions, consolidations or reclassifications of the
Shares of the Corporation, the payment of stock dividends by the
Corporation (other than dividends in the ordinary course) or other relevant
changes in the capital stock of the Corporation.
8.2 Upon the (i) dissolution or liquidation of the Corporation, (ii) merger
or consolidation of the Corporation with another corporation or other
entity pursuant to which the Corporation is not the surviving entity, (iii)
sale or lease of all or substantially all the business assets of the
Corporation, or (iv) the sale of more than 80% of the outstanding Common
Stock of the Corporation, unless the surviving or acquiring corporation or
entity agrees to assume outstanding Options, each Option granted hereunder
shall expire as of the effective date of such transactions; provided,
however, that the Compensation Committee may, in its discretion, give
written notice of such event to any Optionee who shall have the right to
exercise his vested Options prior to the effective date of such
transaction, subject to earlier expiration pursuant to Sections 5 or 6 (as
applicable).
ARTICLE 9
AMENDMENT OR DISCONTINUANCE OF PLAN
9.1 The Board may amend or discontinue the Plan at any time; provided,
however, that no such amendment may increase the maximum number of Shares
that may be optioned under the Plan, change the manner of determining the
minimum Option price or, without the consent of the Optionee, alter or
impair any Option previously granted to an Optionee under the Plan.
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 The holder of an Option shall not have any rights as a shareholder of
the Corporation with respect to any of the Shares covered by such Option
until such holder shall have exercised such Option in accordance with the
terms of the Plan (including tendering
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payment in full of the Option Price of the Shares in respect of which the
Option is being exercised) and the Corporation shall issue such Shares to
the Optionee in accordance with the terms of the Plan in those
circumstances.
10.2 Nothing in the Plan or any Option shall confer upon any Optionee any
right to continue in the employ of the Corporation or any Subsidiary or
affect in any way the right of the Corporation or any Subsidiary to
terminate his employment at any time; nor shall anything in the Plan or any
Option be deemed or construed to constitute an agreement, or an expression
of intent, on the part of the Corporation or any Subsidiary to extend the
employment of any Optionee beyond the time that he would normally be
retired pursuant to the provisions of any present or future retirement plan
of the Corporation or any Subsidiary or any present or future retirement
policy of the Corporation or any Subsidiary, or beyond the time at which he
would otherwise be retired pursuant to the provisions of any contract of
employment with the Corporation or any Subsidiary.
10.3 References herein to any gender include all genders.
ARTICLE 11
ADOPTION OF THE PLAN
11.1 This Plan was adopted by the Corporation by action of the Board of
Directors on September 29, 1998. All Options outstanding under the Plan as
of July 15, 1998 were assumed by the Corporation pursuant to the terms of
an Amended and Restated Combination Agreement between the Corporation
(formerly Fountain Oil Incorporated) and CanArgo Energy Inc. dated as of
February 2, 1998, which was approved by the Corporation's stockholders on
July 8, 1998.
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Exhibit 10(28)
WORKORDER
CanArgo Energy Inc.
(CanArgo)
to
Nils N. Trulsvik
(The Consultant)
INTRODUCTION
This workorder made on the 1 August 1998, is between CanArgo and the Consultant.
The workorder is covered by the General Conditions for Consultants entered by
the two parties.
SCOPE OF WORK
The scope of work for the Consultant is:
- Various
The Consultant will report to:
- David Robson
The Assignment is 0% of a full time job, i.e. 0 hours per month, on average,
within the defined time period.
PERIOD
No initial period
TERMS
The Consultant will be paid a daily fee of US$1200,-. The rate includes all
normal office expenses the Consultant may have, except for travel, accommodation
& other expenses as given below.
PAYMENT
CanArgo will pay the Consultant based on invoice and time sheets approved by
project leader as specified in General Condition for Consultants. Payment is
due 10 working days after receipt of invoice.
TRAVEL, ACCOMODATION & OTHER EXPENSES
Travel, accommodation and courier and other agreed out of pocket expenses
related to the above work will be covered by CanArgo according to General
Conditions for Consultants.
TAXES
The Consultant is responsible for his own taxes.
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INSURANCE
The Consultant will himself pay for the insurances and social security which are
necessary during his consultancy work period for CanArgo, except for Life & AD&D
in areas of particular high risk.
DISPUTES
The agreement shall be governed by the laws of Norway.
CANARGO ENERGY INC.
/s/ Mike Binnion
Date:
FOR THE CONSULTANT:
/s/ Svein E. Johansen
Date: May 29, 1998
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Exhibit 10(29)
WORKORDER
CanArgo Energy Inc.
(CanArgo)
to
Einar H. Bandlien
(The Consultant)
INTRODUCTION
This workorder made on the 1 August 1998, is between CanArgo and the Consultant.
The workorder is covered by the General Conditions for Consultants entered by
the two parties.
SCOPE OF WORK
The scope of work for the Consultant is:
- Evaluate oil & gas opportunities in East Europe and Africa
The Consultant will report to:
- David Robson
The Assignment is 50% of a full time job, i.e. on average 80 hours per month,
and a total of 480 hours, within the defined time period.
PERIOD
1 August 1998 - 1 February 1999.
TERMS
The Consultant will be paid a daily fee of $7000,-. The rate includes all
normal office expenses the Consultant may have, except for travel, accommodation
& other expenses as given below.
PAYMENT
CanArgo will pay the Consultant based on invoice and time sheets approved by
project leader as specified in General Condition for Consultants. Payment is
due 10 working days after receipt of invoice.
TRAVEL, ACCOMODATION & OTHER EXPENSES
Travel, accommodation and courier and other agreed out of pocket expenses
related to the above work will be covered by CanArgo according to General
Conditions for Consultants.
TAXES
The Consultant is responsible for his own taxes.
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INSURANCE
The Consultant will himself pay for the insurances and social security which are
necessary during his consultancy work period for CanArgo, except for Life & AD&D
in areas of particular high risk.
DISPUTES
The agreement shall be governed by the laws of Norway.
CANARGO ENERGY INC.
/s/ Mike Binnion
Date:
FOR THE CONSULTANT:
/s/ Svein E. Johansen
Date: May 29, 1998
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Exhibit 10(30)
CONSULTANCY AGREEMENT
This Consultancy Agreement is made as of January 29, 1998 by and between CanArgo
Energy Corporation and Fincom AS, Norway represented by Rune Falstad. This
agreement is only valid if the business combination between Fountain Oil Inc.
and CanArgo Energy Inc. is closed.
ENGAGEMENT
For and during the term, and subject to the terms and conditions hereinafter set
forth, the Consultant hereby agrees to perform Investor Relations and Norwegian
financial regulatory requirements relating to IR and other related duties to be
determined.
TERM
The terms of this agreement shall commence on August 1, 1998 and shall terminate
and shall be binding for both parties for the first six months and thereafter
there is a 90 days notice period.
COMPENSATION
The following compensation shall be provided for the consultant:
CanArgo Energy Corporation shall pay a monthly fee of USD 7000 based on 50% time
spent by Rune Falstad to perform the duties specified by CanArgo Energy
Corporation. In addition CanArgo will pay variable expenses to perform the
duties such as travelexpenses, overseas calls and misc.entertainment expenses
based on approved budget.
CanArgo Energy Corporation intend to, based on Board Approval, to issue 50,000
share options to Rune Falstad as soon as practicable and possible but in no
event later than the start of this contract. The terms and vesting provisions
of the share option program will be based on best price allowable but subject to
approval by the Board of Directors.
Oslo, January 29, 1998
/s/ Rune Falstad /s/ Michael Binnion
Rune Falstad Michael Binnion,
Designate Co-
Chairman
and CFO
CanArgo Energy
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Exhibit 10(31)
EMPLOYMENT CONTRACT
This Agreement made with an effective date of May 1, 1998
BETWEEN:
CANARGO ENERGY INC., a corporation incorporated under the laws of Alberta
(hereinafter called the "Corporation")
and
ANTHONY J. POTTER, of the City of Calgary, in the Province of Alberta
(hereinafter called the "Employee")
WHEREAS the Corporation wishes to secure the employment of the Employee as its
Vice-President Finance and Group Controller.
AND WHEREAS the Employee wished and is willing to be employed as the
Corporation's Vice-President Finance and Group Controller in accordance with the
terms and conditions of this Agreement (the "Agreement").
NOW THEREFORE in consideration of the premises and of the other mutual covenants
and agreements contained in this Agreement, the parties covenant and agree with
each other as follows:
1. The Corporation agrees to employ the Employee and the Employee agrees to
remain in the employment of the Corporation, however, either party may
terminate this Agreement at any time for whatever reason. In the event of
such termination, the Employee shall be entitled to the termination
allowance payments provided for in paragraph 6 hereto.
2. The Employee shall reside in Calgary, Alberta. In such employment his
duties shall be in relation to the ongoing financial operations of the
Corporation and its personnel but shall also include those matters more
specifically determined by the Chief Financial Officer/Finance Director and
from time to time by the President and Board of Directors of the
Corporation. The Employee will devote all of his knowledge, skill and energy
to the performance of his duties in a diligent and efficient manner and will
not engage in any other business, profession or occupation which would
conflict with the provision of his duties, either directly or indirectly,
without the prior written consent of either the Chief Financial
Officer/Finance Director, President or Board of Directors of the
Corporation.
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3. The Corporation herein irrevocably covenants and agrees to indemnify and
save harmless the Employee from and against any and all loss, costs,
charges, claims, demands, and liabilities directly or indirectly suffered,
sustained or incurred by the Employee, including any amount paid to settle
an action or satisfy a judgement, by reason of the Employee acting as an
officer of the Corporation. The provisions of this indemnity shall remain in
force and effect notwithstanding any act or omission of the Employee.
The Corporation agrees that the provisions of the preceding paragraph and
the covenants provided therein shall enure to the benefit of the Employee
and his heirs, administrators, executors and assigns and shall be binding
upon the Corporation and its successors and assigns.
4. The Employee shall be compensated as follows:
a. subject to any and all necessary withholdings and deductions for Canada
Pension Plan, income taxes and the like, the Employee shall be paid in
equal monthly instalments:
i. for the first four months from the effective date of this
Agreement, a salary of $80,000 per year;
ii. for the next eight months from the effective date of this
Agreement, a salary of $90,000 per year;
iii. at the first anniversary of this Agreement, a salary of $97,500
per year;
iv. for subsequent years, an amount to be reviewed at least annually,
and;
b. the Employee shall be reimbursed for any and all money advanced in
connection within his employment for reasonable and necessary expenses
incurred by him on behalf of the Corporation and;
c. four (4) weeks paid vacation per year to be taken at such times as the
parties hereto may mutually agree upon. Any vacation entitlement for a
given year not taken by the Employee cannot be carried forward and;
d. CICA and ICAA membership dues to be paid by the Corporation;
e. the Employee shall, be included in any and all plans and policies
providing benefits to the officers and employees of the Corporation
which plans shall include group family medical, disability, dental and
life insurance and;
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f. the Employee shall participate in an Stock Option plan of the
Corporation. As at the effective date of this agreement, the Employee
shall be granted options to purchase 110,000 common shares of CanArgo
Energy Inc. at an exercise price of $2.20 per share, such options to
vest over three years to the benefit of the Employee.
g. the Employee shall participate in any other incentive plan if and when
such a plan, if any, is established.
h. the Employee shall be reimbursed for a parking spot.
5. Upon the termination of this Agreement, the Employee shall immediately
deliver to the Corporation possession of all property of the Corporation
which the Employee then has possession of or control over.
6. The Employee's employment with the Corporation may be terminated at any
time by the Employee or the Corporation with reasonable notice. The
Corporation and Employee also covenant and agree with each other that if
the Employee's employment is terminated by the Corporation:
a. without reasonable notice, the Employee shall be entitled to a one
time payment equal to the greater of: (i) one months compensation for
each year or part year that he has been employed by the Corporation
and (ii) three times the monthly compensation payable to him in the
month of termination.
b. or its successor within one year from the date of a change in or
acquisition of majority voting control of the Corporation (other than
the proposed combination with Fountain Oil Incorporated), the Employee
shall be entitled (subject to approval by the Board of Directors of
the Corporation) to a one time payment equal to six times the monthly
compensation payable to him in the month of termination plus one
months compensation for each year or part year that he has been
employed by the Corporation.
7. The employee hereby covenants that he shall not at any time, either
directly or indirectly, disclose to any person, firm or corporation, any
material documentation or information whatsoever which in any manner
concerns, affects or relates to any existing, proposed or contemplated
interest, opportunities or properties of the Corporation unless it is
required to enable him to fulfil his duties and responsibilities hereunder.
8. The terms of this Agreement shall be treated as confidential information by
the Corporation and Employee.
9. This Agreement may not be modified or amended except by instrument in
writing signed by the parties hereto. All notices under this Agreement
shall be in writing and shall be deemed to be duly given only if personally
delivered.
10. This Agreement shall be governed by the laws of the Province of Alberta.
3
<PAGE>
11. Any words contained in this Agreement which import the singular number
include, where the context requires, the plural number and any words
contained in this Agreement which import the masculine gender shall include
the female gender.
WHEREAS the Corporation has caused this Agreement to be executed by its officers
thereunto duly authorized and the Employee has hereunto set his hand as of April
24, 1998.
/s/ Michael Binnion /s/ Anthony J. Potter
CANARGO ENERGY INC. ANTHONY J. POTTER
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,091,216
<SECURITIES> 0
<RECEIVABLES> 454,422
<ALLOWANCES> 0
<INVENTORY> 170,405
<CURRENT-ASSETS> 8,824,882
<PP&E> 11,109,620
<DEPRECIATION> 749,519
<TOTAL-ASSETS> 48,076,609
<CURRENT-LIABILITIES> 2,107,831
<BONDS> 0
0
0
<COMMON> 2,119,464
<OTHER-SE> 39,569,311
<TOTAL-LIABILITY-AND-EQUITY> 48,076,609
<SALES> 11,972
<TOTAL-REVENUES> 519,990
<CGS> 10,891
<TOTAL-COSTS> 477,263
<OTHER-EXPENSES> 2,326,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429,243
<INCOME-PRETAX> (4,790,481)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,790,481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,790,481)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
